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The impact of the new wave of ﬁnancial regulation for European energy markets Luuk Nijman n
School of Public Policy, University College London, London, WC1H 9QU, UK
H I G H L I G H T S
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The European Commission has put forward a set of ﬁnancial legislation to stabilize both ﬁnancial markets and energy prices. This article assesses the impact of this ﬁnancial regulation on energy markets. It shows that the theoretical and empirical effects of key elements in this legislation are ambiguous. It argues that, if enacted, particular market parties such as energy companies should not be exempted. It concludes that this set of legislation will not necessarily bring about the effects the Commission desires.
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Article history: Received 9 November 2011 Accepted 14 May 2012 Available online 31 May 2012 Keywords: Financial legislation Regulation European Union
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As the ﬁnancial and physical markets for energy have increasingly become intertwined, energy trade is also covered by ﬁnancial legislation. The European Commission wishes to strengthen this ﬁnancial regulation of energy trade. It has put forward a set of regulatory proposals aimed at stabilizing ﬁnancial markets and limiting volatility of energy prices. The most noteworthy are EMIR, MAD, REMIT and the revised MiFID. Key elements are transparency, new trading venues, central clearing obligations and mandatory transaction reporting. This article evaluates the likely outcomes for energy markets, given the new incentives for market parties. It argues that although there is no ground to exempt particular energy market participants such as energy companies from ﬁnancial legislation, increased regulation will not necessarily bring about the effects the Commission desires. The causal link between derivatives trading and volatility of energy prices is not known precisely and many of the economic effects of the proposed legislation are theoretically and empirically ambiguous. Moreover, potentially conﬂicting instruments and objectives risk policy inconsistency. & 2012 Elsevier Ltd. All rights reserved.
1. Introduction1 The volatility of energy prices in recent years has generated political pressure to put these price movements under control. Simultaneously, in the aftermath of the ﬁnancial crisis, the European Commission has set itself an ambitious regulatory reform agenda for the ﬁnancial markets. This includes both a strengthening of existing ﬁnancial regulation, as well as several new proposals. As the ﬁnancial and physical markets have become intertwined – EU legislation deﬁnes many energy contracts as ‘ﬁnancial instruments’ – regulation in ﬁnancial markets will affect energy markets too.
Tel.: þ447833025035. E-mail address: firstname.lastname@example.org 1 The author would like to thank the two anonymous reviewers for their time and useful comments that contributed to this paper, as well as Jerry de Leeuw and dr. Geert Reuten who were willing to share their expertise on the subject during the research phase. 0301-4215/$ - see front matter & 2012 Elsevier Ltd. All rights reserved. http://dx.doi.org/10.1016/j.enpol.2012.05.030
Recognizing this interdependence of ﬁnancial and energy markets, the proposed set of ﬁnancial legislation has two objectives. First, it wishes to reduce systemic risk in ﬁnancial markets and avert some of the domino effects that unfolded in the recent crisis. Second, as this ﬁnancial legislation also covers trade in commodity derivatives, it seeks to curb volatility of energy prices. The proposed regulatory package contains a number of requirements for market participants. These range from transaction reporting obligations and enhanced transparency to compulsory central clearing. Such requirements pose new incentives for market parties in their...