Brussels, 25 September (Argus) — The UK carbon market will be able to cope with new EU financial rules contained in the Markets in Financial Instruments Directive (MiFID) that will apply to emissions trading, Ice Futures Europe's president and chief operating officer, David Peniket, said today.

The inclusion of emissions trading under MiFID will not create insurmountable problems, Peniket said ahead of a vote tomorrow by the European Parliament's economic affairs committee on the new directive.

"The emissions market will be able to cope with these changes," he said, while speaking at a conference in Brussels. "I can understand why for emissions certificates it has been appropriate to apply this," he added.

But Peniket acknowledged that there will be costs associated with applying the new financial rules to the EU emissions trading scheme (ETS) allowance market. "There is a cost in administration, regulation and compliance around all of that. This is in relation to something that is not created for a financial purpose, but for assisting in combatting climate change," he said.

"The FSA [Financial Services Authority] has put out regulations around who is and is not allowed to trade emissions certificates in the UK, because of [emission certificates being classified as] financial instruments. You have to have the appropriate exemptions," Peniket said.

MiFID, which could enter into force in 2013, will expand financial reporting and transparency requirements to energy and emissions traders. Associated EU legislation, notably the European Market Infrastructure Regulation (Emir), will set transaction clearing requirements and, together with MiFID, allow for position limits.

Emir clearing requirements will lead to higher trading costs, especially if a “low” threshold is set to trigger clearing for non-financial over-the-counter derivatives, Shell chief financial officer Simon Henry said, while speaking at the same conference today.

"It is fairly easy to breach one of the thresholds proposed and then transactions are effectively sent through clearing. That is a direct result of us having a significant physical commodity trading business. It is what we do. We buy and sell oil, gas, carbon and shipping," Henry said.

If multi-sector companies such as Shell go above the trading threshold in one sector, by trading a huge volume of emission certificates for example, they will not only have to clear trading for emissions, but also in other areas such as gas and oil. So breaching one threshold will mean that companies breach all thresholds, Henry said. "In that sense, all transactions go through clearing. This ties up significant amounts of capital that could be used for investment," he said.

Henry also expressed support for a reform of the EU ETS. "We would like to see it strengthened by a number of reforms. This is not necessarily a consensus view within our industry. We support the reform of the ETS, because we are looking at the long-term outcome. Not just for our own industry, but society as a whole," Henry said.

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