The European Parliament has adopted the text of the Regulation on wholesale Energy Market Integrity and Transparency (REMIT, the Regulation) which contains rules that prohibit the use of inside information, require the public disclosure of that inside information and prohibit certain behaviour constituting market manipulation.
In this briefing we set out some background to the measures and highlight the changes made by the Parliament in the adopted text.
- The Regulation prohibits insider trading and market manipulation in relation to wholesale energy products; this now includes supply contracts to certain large consumers.
- The Regulation requires timely public disclosure of inside information; this now extents to information regarding the business or facilities which a market participant, or its parent or a related undertaking, owns, controls or operates, in whole or in part.
- The Council is expected to adopt the Regulation on 10 October 2011; the provisions will come into force in each Member State 20 days after the Regulation is published in the Official Journal.
- Additional reporting obligations regarding transactions and the status of operational assets will apply six months after the Commission has set out more detailed rules through various implementing measures.
- National regulatory authorities (such as Ofgem) must be given enhanced investigatory and enforcement powers within 18 months and penalty rules must be devised and implemented;
- All market participants will need to ensure that appropriate measures are in place regarding the disclosure and use of information between group entities (and related undertakings) to minimise the impact of these measures.
Background to the proposals
Following the publication of proposals to enhance and further integrate Europe’s energy markets (known as the Third Energy Package) in September 2007, the Directorate General for Energy and Transport and the Directorate General for Internal Market and Services issued a joint mandate to the Committee of European Securities Regulators (CESR) and the European Regulators’ Group for Electricity and Gas (ERGEG) seeking advice on issues concerning record keeping and the transparency of trading in electricity and gas and related derivatives.
CESR and ERGEG issued their final report in January 2009. Following the adoption of the Third Energy Package in July 2009, the Directorate General for Energy and Transport sought to develop a proposal for an effective regime specifically designed to oversee the energy markets and maintain market integrity and transparency. A consultation followed, which closed in July 2010, and the draft regulation was released in December 2010 by the Commission (see our e-bulletin dated 15 December 2010).
The text of the Regulation has now been finalised, and will bring into force the new prohibitions without the need for further EU or national implementing measures, save as to applicable penalties and any required extensions to enforcement powers. Further measures are however required at the Commission level before the reporting and registration requirements (Articles 8 and 9) can apply in any Member State.
The reasons for a full scale review of European Energy Market Regulation
The Commission had identified a number of shortcomings in the existing European legislative regime.
The Third Energy Package: The Commission considered that whilst the Third Energy Package implemented a broad range of disclosure obligations for fundamental data, it only addressed traded markets to a restricted extent; the definition of supply undertakings was quite limited and MiFID regulated entities were specifically not covered. The Commission felt that the wholesale market monitoring duty for national energy regulators in the Electricity and Gas Directives was not very strong and did not amount to a clear obligation on the regulators to ensure the integrity of the energy market.
The Market Abuse Directive (MAD): The Commission noted that MAD was designed for the financial markets and accordingly targeted financial instruments admitted to trading on regulated markets. Certain commodity products (eg, physically settled spot market products) were not covered. Generally speaking, commodity derivative products were only covered if they were admitted to trading (or had applied for admission to trading) on a regulated market, or (in the case of the insider dealing offences) had their price or value determined by reference to a product that had been so admitted (or an application made). This meant that MAD did not apply to many over-the-counter (OTC) commodity trades, including spot and forward transactions, which made up the bulk of trading in gas and electricity. The Regulation is intended
Forthcoming proposals for a new regulation to replace MAD, expected in October, may impact on the trading of commodity derivatives that are already subject to the regime, and the disclosure obligations of companies in the energy sector with listed securities. EU ETS emissions allowances seem set to fall within the scope of the market abuse regime, with a tailored definition of inside information, and disclosure obligations for participants in the emissions allowance market.
The Markets in Financial Instruments Directive (MiFID): MiFID aims to provide investor protection and market oversight of the activities of investment firms, including trading in commodity derivatives. The Commission noted that whilst MiFID included requirements to ensure fair and orderly trading and the transparency of trading venues for shares admitted to trading on a regulated market, these pre and post trade transparency obligations did not apply to commodity market derivatives. Specialist commodity derivative market participants could also benefit from two exemptions from MiFID’s application.
MiFID is also under review. New requirements are likely to apply to all trading venues at which commodity derivative contracts are traded, the scope of the exemptions may be tightened, and emissions allowances may be reclassified as financial instruments. The proposals also envisage that regulators should be able to limit the ability of any person or class of persons from entering into a derivative contract in relation to a commodity, both in the case of individual transactions and positions built up over time. The relevant Commission proposals for a new directive and a regulation are expected in October.
Interface with regulation of the Regulations
While the Regulation does not cover the EU Emissions Trading Scheme (EU ETS), Article 1.1 has been amended by the Parliament to specifically require the European Agency for the Cooperation of Energy Regulators (ACER) to take into account the interactions between the EU ETS and wholesale energy markets when monitoring wholesale energy markets. Authorities responsible for overseeing trading in emissions allowances or derivatives relating to emissions allowances and ACER must cooperate and allow each other to access records of transactions (Article 10(3)).
Extension to retail supply contracts for large consumers
The scope of the Regulation has been extended to cover some retail supply contracts of electricity or natural gas. If a final customer has a consumption capacity of over 600GWh per year (in certain cases, aggregating individual plants or sites), then these contracts will be treated as “wholesale energy products” and both the supplier and customer will be “market participants” and will fall within the scope of the Regulation (Article 2(4) and 2(5)) for insider trading, disclosure of inside information, the market manipulation prohibition and the reporting requirements. The amended text does however clarify that only contracts relating to the delivery or transportation of electricity or gas, or derivatives relating to electricity or natural gas produced, traded, delivered or transported, in the Union (and not elsewhere) fall within the definition of “wholesale energy products” for the purpose of the Regulation.
A more detailed definition of inside information
Article 3 of the Regulation sets out the prohibition on insider trading, which is based on the use or selective disclosure of inside information. Article 4 sets out the requirements to publish inside information. For the purposes of the definition of inside information, “information” now specifically means:
- information which is required to be made public in accordance with the Electricity and Gas Regulations (714/2009 and 715/2009) which relate to access to cross-border gas and electricity transmission networks, including the guidelines and network codes adopted pursuant to those Regulations;
- information relating to the capacity and use of facilities for production, storage, consumption or transmission of electricity or natural gas, or the capacity and use of LNG facilities;
- information which is required to be disclosed in accordance with legal or regulatory provisions at Union or national level, market rules and contracts or customs on the relevant wholesale energy market (insofar as this information is likely to have a significant effect on the price of wholesale energy products); and
- other information that a reasonable market participant would be likely to use as part of the basis of its decision to enter into a transaction relating to, or to issue an order to trade in, a wholesale energy product.
This new definition should go some way to assist those trading in wholesale energy products to be able to recognise when they possess inside information and are prohibited from using or selectively disclosing that information under Article 3(1), or have an obligation to publish the information under Article 4(1).
To be inside information the information must also be “of a precise nature”, which it is now deemed to be if “... it indicates a set of circumstances which exists or may reasonably be expected to come into existence, or an event which has occurred or may reasonably be expected to do so, and if it is specific enough to enable a conclusion to be drawn as to the possible effect of that set of circumstances or event on the prices of wholesale energy products”.
Insider information under MAD and MiFID
It is likely that the definition of inside information will be further amended in the context of the MAD and MiFID reviews. An early draft Commission document in relation to the MAD review includes, for instance, a specific definition for EU ETS emission allowances which would include “information of a precise nature, which has not been made public, relating, directly or indirectly”, [to such allowances] “and, which, if it were made public, would be likely to have a significant effect on the prices of such instruments or on the prices of related derivative financial instruments.” The definition of inside information in relation to commodity derivatives may also be extended to incorporate price sensitive information relevant to spot commodity contracts related to commodity derivatives, and notably would include information required to be disclosed under REMIT.
New carve-outs from the prohibition on insider trading
The prohibition on insider trading, which comprises a prohibition on (i) the use of information to trade, (ii) selective disclosure of that information and (iii) recommending or inducing another person to use the information to trade, is now subject to 4 specific exclusions contained in new Articles 3(3) and 3(4):
- the use and inducement prohibitions will not now apply to Transmission System Operators (TSOs, such as National Grid) when purchasing electricity or natural gas “in order to ensure the safe and secure operation of the system”;
- all the three prohibitions- use, selective disclosure and inducement- will not apply to trading by power generators, gas producers or operators of gas storage and LNG facilities where the sole purpose of the transaction is to cover the immediate physical loss resulting from unplanned outages, but only where not to do so would result in the market participant not being able to meet existing contractual obligations or where the action is undertaken “in agreement with the TSO concerned in order to ensure the safe and secure operation of the system”. To rely on this exemption, a report has to be made to both ACER and the national regulatory authority;
- the prohibitions do not apply to a market participant acting under national emergency rules where market mechanisms have been suspended; and
- the prohibitions do not apply to any transaction concluded before a person came into possession of the inside information.
The obligation to publish inside information to the market
Article 4 of the Regulation sets out the requirement to publicly disclose inside information in an effective and timely manner. The requirement has been extended to oblige market participants to publish a great deal more information than previously envisaged. Market participants are now obliged to publish inside information they possess not only in respect of business or facilities which they own or control or for whose operational matters they are responsible for, but also businesses or facilities which its “parent undertaking or related undertaking” owns, controls or operates.
This amendment imposes a much greater burden on market participants; although it will be beneficial to regulators in capturing as much information as possible and in order to effectively monitor the wholesale energy markets.
Market participants will also now be required to justify any delay of public disclosure of inside information.
Under Article 5 of the Regulation any engagement, or attempt to engage in, market manipulation on wholesale energy markets is prohibited. This prohibition is independent of the insider trading prohibition and does not involve the use of inside information. The substance of what constitutes market manipulation is set out in the definitions (Article 2(2)) and includes entering into a transaction which gives, or is likely to give false or misleading signals to the market or otherwise secures or attempts to secure artificial prices, or disseminating information which is likely to give misleading signals. Where a person enters into a transaction which secures or attempts to secure an artificial price for a product, a defence will apply if a person can establish that their reasons for doing so are “legitimate and...conforms to accepted market practices on the wholesale energy market concerned” (Article 2(2)(a)(ii) and 2(3)(a)(ii)). The Parliament has clarified that this defence also applies to the prohibition on attempting to engage in market manipulation.
Article 8 contains the requirements for market participants to notify details of trading activity and the status of operational assets. The text adopted by Parliament sets out the kind of information that must be reported to ACER for the transactional reporting requirements; such as the precise identification of wholesale energy products bought and sold, the price and quantity agreed, the parties to the transaction and the beneficiaries of the transaction and “any other relevant information” (Article 8(1)). However, this requirement is subject to the Commission specifying a list of the contracts and derivatives to which the reporting obligation applies, rules for reporting and an appropriate de minimis threshold, and will not apply to market participants until 6 months until the relevant measures have been made (Article 22). Account must be taken of existing reporting systems.
In addition to transactional reporting, market participants are required to provide and update information relating to the capacity and use of physical assets, including planned and unplanned outages (Article 8(5)). Information must however be collected by ACER and national regulatory authorities from existing sources where possible. Again, this requirement will not apply until 6 months after the Commission has set out rules and thresholds for reporting. In contrast to the Article 4(1) disclosure requirement for inside information, the reporting requirement does not specify whether it extends to assets owned or operated by affiliates and related undertakings, although this may be clarified by the Commission.
The level of detail required for transactional reporting, and the likely scope of the requirement to report on operational assets, will entail a lot of very commercially sensitive information being in the hands of ACER, with further pressure on the agency to ensure the protection and security of such data.
Use and access to information held by the authorities
Pursuant to concerns raised about the safety of commercially sensitive information held by ACER and the national regulatory authorities, ACER’s obligation to ensure the confidentiality, integrity and protection of the information it receives has been enhanced by the Parliament. ACER will now be under a positive obligation to take “all necessary measures” to prevent the misuse and “unauthorised access” to the information held in its systems. This obligation has also been extended to national regulatory authorities, competent financial authorities, national competition authorities, ESMA and other relevant authorities who may be handling or sharing the information.
Registration of market participants
A significant amendment made to the text adopted by Parliament is the introduction of the requirement that market participants who enter into transactions which will be required to be reported to ACER once the Article 8(1) requirements apply, will be required to register with the national regulatory authority in the Member State in which they are established or resident, or if they are not so established or resident in the Union, in a Member State in which they are active, before any such reportable transactions are entered into. The national regulatory authorities are required to set up the register within 3 months of the Commission specifying the reporting rules, leaving a further 3 months for participants to register before the prohibition comes into effect. The national regulatory authority is required to pass on the information held in their national registers to ACER in order that a European register of market participants may be compiled. The register, or parts of it, may be made publicly available, however commercially sensitive information must not be disclosed to the public.
Enforcement and penalties
Member States have 18 months from the date that the Regulation comes into effect to ensure that national regulatory authorities have the investigatory and enforcement powers necessary to enforce the Article 3 and 5 prohibitions and the Article 4 disclosure requirement. The powers go beyond those likely to be held by most national energy regulators and must include the right to demand information from and summon any relevant person, carry out on-site inspections, require the cessation of any practice, request a court to freeze or sequester assets and request a court to impose a temporary prohibition of professional activity (Article 13). The Regulation does not similarly prescribe the investigatory and enforcement powers required to enforce the data collection and registration requirements (Articles 8 and 9).
Article 18 requires Member States to lay down the rules on penalties applicable to infringement of the Regulation (in its entirety) and to take all measures necessary to ensure that they are implemented. The Parliament’s amendmentsto the text now require penalties to not only be effective and proportionate, but also “dissuasive, reflecting the nature, duration and seriousness of the infringement, and the damage caused to consumers and the potential gains from trading on the basis of inside information and market manipulation”. The use of the word “dissuasive” in the text implies that Parliament will expect Member States to inflict hefty penalties (whether by public measures or monetary penalties) on those who do not comply with the Regulation. However, it will be difficult to see how the “damage caused to consumers” can be quantified in terms of monetary penalties. Member States have 18 months to report to the Commission on the penalties regime, but there is no express dispensation from having the penalty regime in place from the time that the Regulation takes effect.
Other changes made by the Parliament
Throughout the amended text adopted by Parliament, there is more of a focus on national authorities (national competition authorities, national market monitoring bodies, national regulators etc.) being involved in the monitoring of the wholesale energy markets at national level and filtering this information back up to EU level; and the monitoring of activities not only within each Member State but activities across borders and different markets to ensure the prevention of market manipulation throughout the EU.
There is also an emphasis on flexibility and the possibility of future changes. The text adopted by the Parliament envisages changes to the Regulation in order to align the definitions and rules within the Regulation with other relevant Union legislation in the fields of financial services and energy in order to ensure that the legislation remains relevant and can adjust according to developments in the wholesale energy market (see for example Article 6(1)).
The European Securities and Markets Board (ESMA) has also been included throughout the text adopted by Parliament as another European authority that must be included at all levels of the consultation, cooperation and monitoring process, bringing yet another body into the frame.
REMIT is likely to be a first step in the attempt to have a co-ordinated system for regulating energy markets, and further changes are expected as part of the MAD and MiFID reviews.
The text of the Regulation adopted by the European Parliament should be the final version of REMIT as it was a compromise text agreed with the Council. Save for the reporting and registration provisions which require further implementing measures to be taken by the Commission and the provisions requiring any necessary extensions to national regulators enforcement powers, the provisions of the Regulation will enter into force 20 days after its publication in the Official Journal of the European Union. Assuming that it is adopted by the Council on 10 October as expected, the Regulation could be published in the Official Journal by mid November, and be in force by December 2011.
Timetable for MAD and MiFID Review
The Commission proposals in relation to MAD and MiFID are expected to be published on 19 October 2011. The legislative process, involving the European parliament and the Council will then commence. The relevant legislative measures could be adopted by summer 2012, although there may be a 2 year period before the measures enter into application.