ice moves energy futures to us post-mifid ii
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Thursday, 11 January 2018


London’s implementation of the new European regulatory regime MiFiD II claimed its first scalp this week when Intercontinental Exchange ordered hundreds of energy futures contracts to be migrated to the US on Monday, 19th February.


The instruments being moved to the ICE Futures US Exchange from ICE Futures Europe are futures and options on North American oil and natural gas liquids. However, the bulk of turnover between its flagship West Texas Intermediate and Brent Crude and other benchmarks like heating oil and gasoline futures were not part of the shake-up. For those products moving, trading will take place in the US from next month, although clearing will continue in Europe.


The products being switched to the US include those tracking the arbitrage between the WTI and Brent crude, popular with hedge funds as well as energy companies.


The company said in a notice on Wednesday it was migrating the contracts “following the recent growth in demand for execution in certain North American energy contracts in the US”, as well as ICE’s 2017 acquisition of NGX, a North American natural gas, electricity and oil marketplace.


Certainly, ICE is hoping for the switch to be seamless, with the same platform technology being used in the US as in Europe, and instrument codes will remain unchanged.


But it also means that onerous form-filling of every transaction in London can be avoided by traders and will lower the amount of transparency which MiFiD II encourages.


An ICE Europe spokeswoman declined to comment whether WTI and Brent, which for now will continue to be traded out of London, would be kept under review.


The moves come after ICE CEO Jeff Sprecher expressed he was no fan of the new MiFiD II rules. Some market pundits, too, have speculated commercial considerations might be part of the reason for the shake-up, as these align ICE products with those of rival CME which has always traded its portfolio in Chicago although it did close a European hub for other instruments in 2017. MiFiD II may have just been the tipping point for ICE.


A decade ago, Europe introduced MiFiD rules that only affected equities. From 3rd January, Brussels regulators beefed up the regime with a new MiFiD II directive which sets stricter transparency standards on institutions trading on EU-based markets and forces banks to charge for research.


Even upon exiting the European Union in 2019, Britain has vowed to adhere to the new MiFiD II rules, which are considered tougher than the introduction of Dodd-Frank in the US in 2010.


When introduced earlier this month, MiFiD II was heralded as the biggest financial market overhaul since “Big Bang” in 1986 and the first overhaul since the 2007 financial crisis.


But the mouthful directive MiFiD II which runs into 1.7million paragraphs is five times as long as Tolstoy’s War & Peace and has (so far) cost the European industry USD2Bln to comply.

US products turning to another rulebook
US products turning to another rulebook

Already there have been wobbles. On 2nd January, the day before MiFiD II was implemented, volumes in various assets dropped by 40pct versus the same day a year ago as traders were reluctant to trade knowing the deals will settle post-MiFiD II. Volumes that day were at their lowest level since the bubble in 2001.


On implementation day, London followed Frankfurt’s lead and gave extensions to the introduction to various exchanges. Germany’s regulator BaFin give a reprieve from the rules to Eurex, the home of the Bund future. And a few hours later – literally as London markets were opening on 3rd January - UK regulators gave ICE Futures Europe and the London Metal Exchange a 30-month reprieve from some of the rules, just like Germany had done. That takes implementation well passed Britain’s proposed Brexit date of March 2019.


“I was quite surprised by the move from ICE,” Michael van Dulken, Head of Research at Accendo Markets told LiveSquawk.


“Could it be a precursor to move more instruments, or affect other assets? Certainly, some might ask whether the new MiFiD II rules are at risk of suffocating markets,” he added.


Van Dulken said the next victims of MiFiD II could be commodities such as gold or other precious metals moving out of London or elsewhere in Europe. Such actions would also favour non-European entities such as US, Canadian, South African or Australasian operations.


“But I think Brexit could be the next trigger for any further moves in maybe 18 months’ time, so the ICE move is either a one-off or the start of something bigger,” he added. “If it proves non-disruptive there could be more to follow,” he said.


George Matlock – LiveSquawk News

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