REMIT: ten years and counting

Abstract

Trading in energy derivatives is subjected to a fragmented regulatory framework which is largely designed for capital markets. Since 2011, a tailor made regime for the energy sector is in place; REMIT. Market participants need to find their way in this diverse set of obligations and prohibitions. This article describes the regulatory paradigm to which market participants need to adhere and the practical impact on trading in energy derivatives. Data reporting obligations, position limits and the prohibition on insider trading, market manipulation and the disclosure of inside information are discussed in more detail. The article concludes that REMIT fills in a regulatory gap, but its existence is not necessarily inevitable to capture energy derivative trading under a supervisory regime which is adapted to the specifics of energy markets.

Notes

1 Regulation (EU) No 1227/2011 of the European Parliament and of the Council of 25 October 2011 on wholesale energy market integrity and transparency entered into force on 28 December 2011. The regulatory core of REMIT consists of prohibitions of market abuse, inside trading and market manipulation and obligations in relation to the publication and reporting of information relating to products traded in wholesale energy markets. Subjected to REMIT are contracts for the supply of electricity or natural gas where delivery takes place in the European Union, contracts relating to the transportation thereof and derivatives relating to such transportation or the production, trading or delivery of electricity and natural gas. Both OTC and derivatives traded on regulated markets are in scope.

2 Derived from: (i) Directives 2009/72 EC of the European Parliament and of the Council of 13 July 2009 concerning common rules for the internal market in electricity and repealing Directive 2003/54/EC; and (ii) Directive 2009/73/EC of the European Parliament and of the Council of 13 July 2009 concerning common rules for the internal market in natural gas and repealing Directive 2003/55/EC, I use the term energy companies for entities which are active in the productions of energy, but also in transmission, distribution and delivery of electricity, gas without being end users.

3 Directive 2003/6/EC of the European Parliament and of the Council of 28 January 2003 on insider dealing and market manipulation (market abuse) and Commission Directive 2004/72/EC of 29 April 2004 implementing Directive 2003/6/EC of the European Parliament and of the Council as regards accepted market practices, the definition of inside information in relation to directives on commodities, the drawing up of list of insiders, the notification of managers’ transactions and the notification of suspicious transactions, replaced by Regulation (EU) No 596/2014 of the European Parliament and of the Council of 16 April 2014 on market abuse (market abuse regulation) and Directive 2003/6/EC of the European Parliament and of the Council and Commission Directives 2003/124/EC, 2003/125/EC and 2004/72/EC and corresponding Directive 2014/57/EU of the European Parliament and of the Council o 16 April 2014 on criminal sanctions for market abuse (market abuse directive).

4 Regulation (EU) No 648/2012 Of The European Parliament and of The Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories and Regulation (EU) 2019/834 of the European Parliament and of the Council of 20 May 2019 amending Regulation (EU) No 648/2012 as regards the clearing obligation, the suspension of the clearing obligation, the reporting requirements, the risk-mitigation techniques for OTC derivative contracts not cleared by a central counterparty, the registration and supervision of trade repositories and the requirements for trade repositories (EMIR Refit).

5 Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU and Regulation (EU) No 600/2014 of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Regulation (EU) No 648/2012. The large volatility in commodity markets formed one of the key reasons to revise MiFID II and increase regulatory oversight. By adopting MiFID II, the EC introduced a market structure which aimed to close loopholes and ensure that trading, wherever appropriate, takes place on regulated markets. See, L Nijman, “The Impact of the New Wave of Financial Regulation for European Energy Markets” (2012) 47 Energy Policy 468–77. (MAD/MAR) and EMIR which refer to financial instruments are updated by way of general repeal in Art. 94 MiFID II and therefore as of 3 January 2018 have to be applied to the wider scope of derivatives and financial instruments as defined in MiFID II.

6 S Pront-van Bommel, “The Development of the European Electricity Market in a Juridical No Man’s Land” in A Dorsman (ed), Financial Aspects in Energy. A European Perspective (Springer, 2011).

7 JC Hull, Options, Futures and Other Derivatives (Essex_: Pearson Education Limited, 2012), 1 and J Biggins, “‘Targeted Touchdown’ and ‘Partial Liftoff’: Post crisis Dispute Resolution in the OTC derivatives Markets and the Challenge or ISDA” (2012) 13(12) German Law Journal 1299.

8 Biggins, supra n 7, p. 1300.

9 Hull, supra n 7, p. 23. Liquidity describes the degree to which an asset or security can be quickly bought or sold in the market without affecting the asset’s price. The importance of liquidity as a prerequisite to market functioning is a basic assumption in the development of financial regulations.

10 When defining a regulatory framework to address trading in derivatives, several questions arise: Which risks do firms hedge? How much do they hedge? How far ahead do they hedge? What determines corporate hedging policy? Should firms hedge at all? “as straightforward as it might appear, these questions are still largely unresolved”, see S Moeller and P MacKay, “The Value of Corporate Risk Management” (2006) SSRN Electronic Journal and “academic guidance is still lacking”, see G Poitras, Commodity Risk Management (Routledge, 2013), 48.

11 JR Macey, “Derivative Instruments; Lessons for the Regulatory State” (1996) 21 Journal of Corporation Law 69–93, https://digitalcommons.law.yale.edu/cgi/viewcontent.cgi?article=2441&context=fss_papers.

12 Examples of exchanges where derivatives are traded include Nordpool, Powernext, the Intercontinental Exchange and the New York Mercantile Exchange. A majority of traded derivatives is conducted by an intermediate party; a broker. A broker usually lays off much or all of the risk of its client-initiated derivatives positions by running a “matched book,” that is, by aiming for offsetting trades, profiting on the differences between bid and offer terms. See also D Duffie, “The Failure Mechanics of Dealer Banks” (2010) 24(1) Journal of Economic Perspectives 51–72.

13 According to Hull, supra n 7, p. 15: Speculation is the activity where a market player takes a position in order to make profit, whilst hedgers want to avoid exposure to adverse market movements in the price of an asset. Speculation is therefore the opposite of hedging: taking upon a risk in order to make profit instead of mitigating a risk with the objective to avoid a loss. Speculation can be a business in itself and the return for speculators is not guaranteed. The in-house professional execution of speculative trading is proprietary trading. The objective of these (in-house) departments is to make money and in planning to do so, they use their working capital.

14 According to Hull, supra n 7, p. 16: Arbitrage is a process whereby market participants profit from price discrepancies. This is done by simultaneously entering into transactions relating to a similar product in two or more markets. Since one trade stands in for the other, arbitrage can be risk free. The possibility to arbitrage only exists if a product is priced differently on different market or if this difference is the result of the difference in currency rates or other variables. Interesting in the process of arbitrage is that there is a short window of opportunity for market participants, since the forces of supply and demand will eventually create a balance between the different markets.

15 Functions may overlap or intertwine. An illustrative example can be found in the decline of Enron, being an energy company transformed into a derivative trader. According to Partnoy, supra n 15, Enron shifted its business model from being an energy company to a derivative trader. It’s decline was based on – amongst others – the risks imposed to the company as a result of derivative trading, such as the use of “prudency” reserves in order to smooth out profits and losses over time and the mismarking of forward curves to hide losses and for traders to receive higher bonuses, see F Partnoy, “Testimony in the Hearings Before the US Senate Committee on Governmental Affairs”, 24 January 2002, https://www.gpo.gov/fdsys/pkg/CHRG-107shrg78614/html/CHRG-107shrg78614.htm.

16 IH Cheng and W Xiong, “Why Do Hedges Trade So Much”, Working Paper Dartmouth College Hanover New Hampshire, Hanover, 2013.

17 D Duffie, “Challenges to a Policy Treatment of Speculative Trading Motivated by Differences in Beliefs” (June 2014) 43(2) Journal of Legal Studies.

18 C Staritz and K Küblböck, “Re-regulation of Commodity Derivative Markets: Critical Assessment of Current Reform Proposals in the EU and the US”, Working Paper, Austrian Foundation for Development Research (ÖFSE), No. 45, 2013 and D Lautier and F Raynaud, “Systemic Risk in Energy Derivative Markets: A Graph-Theory Analysis” (2012) 33(3) The Energy Journal.

19 SE Eisma (red.), Leerboek Effectenrecht (Ars Aequi Libri, 2002), 11. Also, the energy sector in the European Community was nationally segregated and energy itself was regarded as being too bound with national sovereignty and national survival. Talus explains that the system of energy monopolies, which played a role in rebuilding European economies after WWII, had lost its purpose and its political legitimacy (K Talus, EU Energy Law and Policy. A critical Account (Oxford University Press, 2013). Daintith and Hancher stated that: In this Respect that There is No Indication in the Treaty of the European Union that the Basic Range of Rules Should Not be Applicable in the Energy Sector as in All Others Covered by the Treaty. T Daintith and L Hancher, “The Management of Diversity: Community Law as an Instrument of Energy and Other Sectoral Policies” (1984) 4(1) Yearbook of European Law 123–67.

20 As a result of a sector inquiry in the energy market in 2007, the EC concluded that in many consumers’ views, the lack of trust in the functioning of wholesale markets, price formation and wholesale trading mechanisms and market manipulation were the reason for past price increases. (See: European Commission, “DG Competition Report on Energy Sector Inquiry”, Brussels, 10 January 2007, https://ec.europa.eu/competition/sectors/energy/inquiry/index.html). The choice for specific rules for the energy market regarding transparency and market abuse is largely derived from recommendations from regulatory bodies based on consultation documents reflecting opinions of market participants, including exchanges and energy companies (See for example: Committee of European Securities Regulators (“CESR”) and the European Regulators’ Group for Electricity and Gas (“ERGEG”) advice to the European Commission in the context of the Third Energy Package Response to Question F.20 – Market Abuse, CESR 08/739).

21 CF de Larosière, The High Level Group on Financial Supervision in the EU (Report, 2009).

22 R Veil, European Capital Markets Law (Hart Publishing, 2013), 2.

23 C Segré, “The Development of a European Capital Market. Report of a Group of Experts Appointed by the EEC Commission”, November 1966, https://aei.pitt.edu/id/eprint/31823, p. 235: An agency at Community level, to be competent for issues floated within the territory of the Community and to be endowed with powers similar to those of the Securities and Exchange Commission in the United States, the Banking Commission in Belgium or the Bank Control Commissariat in Luxembourg. The Segré report was the basis for a legislative process to remodel capital markets regulation in five phases which took over 50 years to be accomplished. Moloney describes different phases in the European capital legislation (See: N Moloney, EC Securities Regulation (Oxford University Press, 2013), 11.

24 Even though the financial crisis did not start as a result of an increasing trade in derivatives, but as a result of the mortgage crisis and macroeconomic events, government policies, the relaxation of lending standards by financial institutions and failure of regulations, the crisis did provoke an increase in the attention to the deficiencies in the markets where OTC derivatives were traded. Gorton states that the crisis was caused by information problems related to declining house prices, which prevent subprime mortgages from being refinanced (see G Gorton, The Panic of 2007 (NBER, 2020) [online], https://www.nber.org/papers/w14358 [Accessed 2 July 2020]). Because subprime mortgages are financed through a chain of securities and structures, investors could not easily determine the location and extent of the risk. This led to a panic reaction from investors and depositors to withdraw cash according to M Roe, “The Derivatives Market’s Payment Priorities as Financial Crisis Accelerator” (2011) SSRN Electronic Journal. Also, the general opinion that only exchange traded financial instruments were to be regulated was amended and the focus on regulating OTC derivative trading was increased. Carruthers states that the general claim market participants active in foreign exchange transactions in the OTC market were large, sophisticated institutions that knew what they were doing. Yet, several events in the market underscored that OTC derivatives involved considerable risk, even for experts. See B Carruthers, “Diverging d“erivatives: Law, Governance and Modern Financial Markets” (2013) 41(2) Journal of Comparative Economics 386–400. On the increased attention on markets for OTC derivatives, see Hull, supra n 7 and M Kerste, M Gerritsen, J Weda, and B Tieben, “Systemic Risk in the Energy Sector – is There a Need for Financial Regulation?” (2015) 78(C) Energy Policy 22–30.

25 CV Communication of the Commission on European financial supervision, 27 may 2009, COM(2009) 252 final.

26 The core of European capital markets law consists of MAD, EMIR, MiFID II.

27 CESR and ERGEG advice to the European Commission in the context of the Third Energy Package Response to Question F.20 – Market Abuse, CESR 08/739, p. 4. Also, CESR and ERGEG concluded that market integrity was not sufficiently ensured through the current set of rules derived from competition law, general business contract law and certain financial law rules. See also K Talus, EU Energy Law and Policy Issues (Intersentia, 2014), 309.

28 Regulation 596/2014 (MAR), recital 20.

29  M Sokolowski, Regulation in the European Electricity Sector (Routledge, 2016). The First Package on common rules for the internal market in electricity and natural gas introduces measures aimed at opening up the market and shifted the focus from a state oriented to a liberalized market (See also K Talus, Research Handbook on International Energy Law (Edward Elgar Publishing Limited, 2014). First Package: Directive 96/92/EC of the European Parliament and of the Council of 19 December 1996 concerning common rules for the internal market in electricity and Directive 98/30/EC of the European Parliament and of the Council of 22 June 1998 concerning common rules for the internal market in natural gas. The Second Package focused on competition by opening the electricity and gas markets by improving the third party access regime. Second Package: Directive 2003/54/EC of the European Parliament and of the Council of 26 June 2003 concerning common rules for the internal market in electricity and repealing Directive 96/92/EC – Statements made with regard to decommissioning and waste management activities; Directive 2003/55/EC of the European Parliament and of the Council of 26 June 2003 concerning common rules for the internal market in natural gas and repealing Directive 98/30/EC; Regulation (EC) No 1228/2003 of the European Parliament and of the Council of 26 June 2003 on conditions for access to the network for cross-border exchanges in electricity; and Regulation (EC) No 1775/2005 of the European Parliament and of the Council of 28 September 2005 on conditions for access to the natural gas transmission networks.

30 The Third Package Directive 2009/72/EC concerning common rules for the internal market in electricity and repealing Directive 2003/54/EC; Directive 2009/73/EC concerning common rules for the internal market in natural gas and repealing Directive 2003/55/EC; Regulation (EC) 713/2009 of the European Parliament and of the Council of 13 July 2009 establishing an Agency for the Cooperation of Energy Regulators; Regulation (EC) 714/2009 on conditions for access to the network for cross-border exchanges in electricity and repealing Regulation (EC) 1228/2003; and the Regulation (EC) 715/2009 on conditions for access to the natural gas transmission networks and repealing Regulation (EC) 1775/2005. The package was based on the following assumptions: (i) unbundling of network operators from supply or production companies; (ii) strengthening the power and independence of national regulators by granting them the right to use certain regulatory tools; (iii) cooperation between transmission system operators and the creation of a European network for transmission system operators; and (iv) increased power of consumers by providing national regulators with increased powers to enable more transparency.

31 The prospectus directive: Directive 2003/71/EC of the European Parliament and the Council of 4 November 2003 on the prospectus to be published when securities are offered to the public or admitted to trading and amending (Directive 2001/34/EC, OJ L345, 31 December 2003) and the transparency directive (Directive 2004/109/EC of the European Parliament and of the Council of 15 December 2004 on the harmonization of transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market and amending Directive 2001/34/EC, OJ L390, 31 December 2004 were revised and MAD was replaced by the Regulation on insider dealing and market manipulation (market abuse) (Proposal for a Regulation of the European Parliament and of the Council on Insider Dealing and Market Manipulation (market Abuse) of 20 October 2011, COM(2011) 651 final).

32 According to Cameron and Heffron, the justification of this revision was twofold; the financial crisis revealed weaknesses regarding the regulation of derivatives and the increasing complexity of financial instruments required an increased investor protection (see P Cameron and R Heffron, Legal Aspects Of EU Energy Regulation (Oxford University Press, 2016), 19. Also, financial regulators saw the commodity markets as being part of the systemic risk which is faced by banks and similar institutions that trade derivatives and that they therefore seek to bring commodity derivatives within the scope of financial regulation. The EC claimed that reforms were necessary due to market- and technological developments which caused several provisions in MiFID to be outdated and plans for MiFID II emerged.

33 COM(2009) 503 final, art. 3(1).

34 An overlap in supervisory activities of ESMA and ACER exists in several areas, including reporting obligations of derivative transactions.

35 The licensing obligation is far reaching not only because it triggers obligations based on MiFID II, but the license obligation also triggers requirements based on the capital requirements directive which are triggered by a license obligation: Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC and Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012 Text with EEA relevance.

36 The technical criteria to when an activity is ancillary is also specified in regulatory technical standard 20 (https://ec.europa.eu/transparency/regdoc/rep/3/2016/EN/C-2016-7643-F1-EN-MAIN.PDF). Art 2 sub (1)j MiFID II. The calculation methods for establishing when an activity is to be considered ancillary to the main business of a group is specified in regulatory technical standards (Commission Delegated Regulation 2017/592 on the criteria for the ancillary activity exemption (RTS 20)), supplemented by a guidance document from ESMA (ESMA Questions & Answers on MiFID/MiFIR Commodity Derivatives Topics: https://www.esma.europa.eu/sites/default/files/library/esma70-872942901-28_cdtf_qas.pdf) Those calculation methods take into consideration that ancillary activities must constitute a minority of the activities at group level and the size of their trading activity compared to the overall market trading activity in a certain asset class must also be limited. The calculation of the size of the trading activities and capital is based on a simple average of the daily trading activities or estimated capital allocated to such trading activities, during three annual calculation periods that precede the date of calculations.

Another effect on energy companies is the exemption from MiFID II of CO2 emission rights (under Annex 1, part C (6) and (11)) and the so-called “REMIT carve-out”, under which physically settled contracts that are traded on a venue are financial instruments are exempted from the definition of financial instruments: power and gas contracts with delivery in the EU that are traded on an OTF and which must be physically settled (i.e. parties must have “proportionate arrangements” in place to make or take delivery of the underlying commodity, with “unconditional, unrestricted, enforceable obligations” to make or take delivery) are not considered as financial instrument. Replacement of physical delivery with cash settlement in this case is not allowed.

37 B De Bruijne and LM Hiemstra, “MiFID II: sombere vooruitzichten voor energiebedrijven” (2015)Nederlands Tijdschrift voor Energierecht.

38 See for example: Joint Industry Group advocacy paper on the commodity market exemption: Future EU 27 Commodity Markets Exemption under the MiFID II Review, d.d. 12 May 2020, https://www.dai.de/files/dai_usercontent/dokumente/positionspapiere/Future%20Commodity%20Markets%20Exemption_12052020_final_sent.pdf.

39 Such as the requirements based on the capital requirements directive which are triggered by a license obligation: Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC and Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012 Text with EEA relevance

40 Article 9 EMIR.

41 Article 7 and 8 REMIT. Under REMIT, a list of types of transactions is provided that have to be reported to ACER and, in addition, a list of contracts which have to be reported upon request. Specific details of transactions subject to the reporting obligation include price, quantity, parties and beneficiaries (source: Commission Implementing Regulation (EU) No 1348/2014 of 17 December 2014 on data reporting implementing Article 8 (2) and Article 8 (6) of Regulation (EU) No 1227/2011 of the European Parliament and of the Council on wholesale energy market integrity and transparency). Under REMIT, a list of types of transactions is provided that have to be reported to ACER and, in addition, a list of contracts which have to be reported upon request. Specific details of transactions subject to the reporting obligation include price, quantity, parties and beneficiaries (source: Commission Implementing Regulation (EU) No 1348/2014 of 17 December 2014 on data reporting implementing Article 8 (2) and Article 8 (6) of Regulation (EU) No 1227/2011 of the European Parliament and of the Council on wholesale energy market integrity and transparency).

42 Article 8 and 10 MiFIR.

43 EMIR introduces several categories of counterparties with different obligations: financial counterparties (“FC”) as defined under MiFID II, small financial counterparties who belong to a group whose aggregate positions in OTC derivatives are EUR 8 billion or below (“SFC”), non-financial counterparties above the clearing threshold (“NFC+”) and non-financial counterparties under the clearing threshold (“NFC−”).

44 Art 9 EMIR. According to Title VII of EMIR, a trade repository is defined as a legal person that centrally collects and maintains the records of derivatives and EMIR provides for a separate section on requirements for trade repositories regarding organizational arrangements and operational reliability.

45 Market abuse under REMIT is not defined in the same way as in article 102 Treaty on the Functioning of the European Union (see paragraph 2.2.4).

46 The obligation under MiFID II to report transactions and related transparency requirements fall into two categories: (i) general transparency requirements regarding pre- and post-trade disclosure of transaction details; and (ii) transaction reporting obligations relating to a notification obligation of a market participants position to regulators.

47 Article 8 (3) REMIT.

48 LM Hiemstra, “Energy Trading and Its Multiplicity of Supervisors. Effectiveness of Fragmented Supervision and Information Sharing in View of Reporting Obligations for Energy Trading Companies”, TARN Working Paper 4/2020.

49 Article 57 MiFID II.

50 Article 2 MAR.

51 Article 3 REMIT.

52 ESMA Final Report MAR PDF, p. 48, https://www.esma.europa.eu/sites/default/files/library/2015/11/2015-esma-1455_-_final_report_mar_ts.pdf.

53 Article 17 MAR and article 4 REMIT.

54 In November 2015, the Estonian transmission system operator Elering was fined by the Estonian competition authority for a failure to disclose information on maintenance work to a subsea electricity cable in a timely manner. The maintenance work caused an outage and both the maintenance works and the outage itself qualified as “inside information” according to the authority. On 4 April 2016, a regional first instance court in Tallinn declared however that the Estonian TSO did not breach article 4 (1) of REMIT. Even though the court acknowledged that the outage of the maintenance works to the subsea cable qualified as “inside information” according to REMIT, but that Elering did not breach the obligation to disclose this information in a timely manner and that the court takes into consideration that information has been published within 60 min. This case shows that the qualification of information as inside information may depend on details and that energy companies should be ready to act resolute in case of any event such as an outage. The Estonian Competition Authority decision isn’t publicly available for reasons of confidentiality. However, the Estonian Competition Authority did publish a press release on the decision: https://www.konkurentsiamet.ee/index.php?id=27831. The decision of the Harju County Court of 4 April 2016 with number 4-15-10109/10 is only available in Estonian: https://www.riigiteataja.ee/kohtulahendid/detailid.html?id=179359134.

55 Article 16 sub 2 MAR and article 15 REMIT.

56 The European Federation for Energy Traders introduced an electronic trade monitoring system which was launched in September 2017. This system aims to provide market participants with a tool to centrally collect data for EMIR and REMIT and the reuse thereof for MAD/MAR purposes. https://www.efetnet.org/Media/News/Detail/EFETnet-s-plans-for-Market-Abuse-Regulation-MAR-.

57 Article 15 MAR and article 5 REMIT.

58 ACER Guidance on the application of REMIT, last version 17 June 2016, https://www.acer.europa.eu/Official_documents/Other%20documents/4th%20Edition%20ACER%20Guidance%20REMIT.pdf.

59 Spanish Comisión Nacional de los Mercados y la Competencia – Resolución del Consejo – Multa : SNC/DE/0046/14 – Iberdrola Generación SAU d.d. 24 November 2015: https://www.cnmc.es/sites/default/files/757366_10.pdf. The regulator found proven that Iberdrola Generación deliberately increased market prices by reducing electricity supply from hydroelectric plants in a 23 d period. Reference is made to the “Guidance on the application of the definitions set out in Article 2 of Regulation (EU) No 127/2011 of the European Parliament and of the Council of 25 October 2011 on wholesale energy market integrity and transparency”, p. 18 where ACER explains types of practices which could constitute market manipulation as follows: Actions undertaken by persons that artificially cause prices to be at a level not justified by market forces of supply and demand, including actual availability of production, storage or transportation capacity, and demand (“physical withholding”): This is for example the practice where a market participant decides not to offer on the market all the available production, storage or transportation capacity, without justification and with the intention to shift the market price to higher levels, e.g. not offering on the market, without justification, a power plant whose marginal cost is lower than the spot prices, misusing infrastructure, transmission capacities, etc., that would result in abnormal high prices.

60 On 20 February 209, Bundesnetzagentur imposed fines of EUR 150,000 on Uniper Global Commodities SE and of EUR 1,500 and EUR 2,000 on two traders in response to a case of gas market manipulation: https://www.bundesnetzagentur.de/SharedDocs/Pressemitteilungen/EN/2019/20190220_Marktmanipulation.html.

61 On 15 April 2020, OFGEM imposed a fine of £37 million on InterGen (UK) Ltd on energy market abuse: https://www.ofgem.gov.uk/publications-and-updates/finding-intergen-has-breached-article-5-prohibition-market-manipulation-regulation-eu-no-12272011-european-parliament-and-council-25-october-2011-wholesale-energy-market-integrity-and-transparency-remit.

62 Proposal for a Regulation of the European Parliament and of the Council on energy market integrity and transparency, COM/2010/0726_8 December 2010, paragraph 4.3.1.

63 P Mäntysaari, EU Electricity Trade Law. The Legal Tools for Electricity Producers in the Internal Electricity Market (Springer, 2015).

64 More information on the rationale behind financial regulations can be found in objectives of regulation based on pro-cyclicality or counter-cyclical measures as reflected on in the report of the International Center for Monetary and Banking Studies, “The Fundamental Principles of Financial Regulation. Geneva Reports on the World Economy”, June 2009, p. 31, https://www.icmb.ch/ICMB/Publications_files/Geneva%2011.pdf.

65 Rules for network access not only increase the entry level for potential interested parties, they also entail a geographical limit. Such entry barrier may prevent entities of conducting physical trading activities and related financial trading for hedging purposes. However, such limit does not apply to financial markets and the barrier in itself does not prevent parties from being active in trading in commodity derivatives. Another difference between the regulatory frameworks is that financial markets are not bound to borders and are increasingly global, whilst energy markets may have a strong national or regional focus. This could be a consequence of the limited possibilities for physical settlement, which could be bound to specific regions. Lastly, Energy Trading is strongly influenced by environmental concerns.

66 Different commodities may have different price characteristics. For example, electricity cannot be stored on an industrial scale, whilst demand is continuous, but subject to seasonal changes and this results in a high connectivity between market prices and availability, characterized by large but predictable price differences. Natural gas is possible to store, but quite costly. Moreover, both gas and electricity prices are interlinked. Another characteristic is that there is a strong correlation between prices in neighboring countries, since production and consumption are not limited by national boundaries. For the seasonal effects on demand and supply of commodities see also: Hull, supra, n 7, p. 749.

67 Impact Assessment d.d. 8 December 2010, p. 6.

68 Ibid, 20.

69 Ibid, 20.

70 Response of the European Federation of Energy Traders to Public Consultation by the Directorate General for Energy on measures to ensure transparency and integrity of wholesale markets in electricity and gas of 31 May 2010: […] a sub-optimal oversight of energy wholesale markets exists, which hinders further market development. The current regulatory situation does, in particular, not take into account the factual situation that energy wholesale markets are increasingly characterized by a wide range of actors […], cross-border trade, important derivatives markets around markets in underlying energy products and increasing liquidity in energy wholesale trading activities. https://www.efet.org/Cms_Data/Contents/EFET/Media/Documents/Public%20-%20Position%20Papers/EFET_response_to_DG_Energy_Consultation_23072010_final_sent_clean.pdf.

71 Impact Assessment d.d. 8 December 2010.

72 According to Impact Assessment d.d. 8 December 2010 p. 28: “Extension of financial market legislation to cover all relevant energy markets would bring these markets within the financial regulatory framework. This framework, in particular MAD, is designed to establish a genuine single market for financial services. Notwithstanding, the close links between energy markets and some financial markets, the requirements of financial market supervision differ in important ways from energy market oversight. Explicitly extending MAD to cover all energy markets would undermine the focus and effectiveness of MAD. […] It the light of the strong advice from financial and energy regulators, and the distinct scope of MAD, this option was not considered in detail.”

73 When taking these questions one step further, one could dispute about the reasons trading venues should be regulated and the importance of protection of investors against market abuse, promotion of market integrity and protection against systemic risk. See AM Whittaker, “Tackling Systemic Risk on Markets: Barings and Beyond” in F Oditah (ed), The Future for the Global Securities Market. Legal and Regulatory Aspects (Clarendon Press, 1996), 259.

74 Ibid.

75 C Ford and J Kay, “Why Regulate Financial Services” in F Oditah (ed), The Future For The Global Securities Market. Legal and Regulatory Aspects (Clarendon Press, 1996), 154, 148.

76 REMIT has an impact on physical forward contracts for electricity and gas, which fall outside the scope of MiFID II and the calculations for exemptions and – consequently – related rules from EMIR and related capital requirements based on Directive 2013/36 EU and regulation EU 575/2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directive 2006/48 EC and 2006/49/EC and regulation EU 575/2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012. Based on article 498 sub (1) of the regulation, commodity traders are exempted. For FC’s and large NFC’s (with a position taken in speculative OTC derivative contracts which exceeds a threshold of EUR 3 billion), heavier duties regarding, for example, clearing are imposed. Most energy companies stay below this threshold.

77 On 16 February 2017, ACER issued an open letter to market participants indicating its initiative to start an assessment of completeness, accuracy and timely submission of the data received under REMIT. It emphasized that there are many data quality issues regarding reporting. https://www.acer-remit.eu/portal/public-documentation.

78 EMIR, recital 29; MiFID II recital 12.

79 EFET response to EC call for evidence on EU regulatory framework for financial services, 31 January 2016, p. 5, https://www.efet.org/Home/search?key=EFET_response_EC_31012016.

80 See Council of European Energy Regulators response to ESMA Consultation Paper on the Impact of Position Limits and Position Management and on Weekly Position Reports, 20 December 2019, p. 3, https://www.ceer.eu/documents/104400/6509669/C19-MIT-84-003_ESMA+CP_CEER+response_for+publication/12c5d37f-7b46-bfd4-60be-739d68b6aeff.

81 Joint Energy Associations Group response to ESMA Consultation Paper MiFID II review report on position limits and position management of 19 December 2019: https://cdn.eurelectric.org/media/4142/jeag_response_mifid_ii_cp_remit_191220219_final_clean-2019-030-0761-01-e-h-3B13975A.pdf.

82 REMIT, recital 4.

83 A Gentzoglanis, 2013, Derivative regulation and its impact on energy and utility firms, European Energy market 2013 10th conference paper.

84 Interesting in this respect is the view of Garicano and Van Reenen who state that the real problem with market participants is the systemic risk they impose and that proposals to improve transparency and corporate governance are useless. See L Garicano and J Van Reenen, “LSE Centre for Economic Performance: Financial Regulation – Can We Avoid Another Great Recession?” (21 Apr 2010) British Politics and Policy at LSE, Blog Entry: https://eprints.lse.ac.uk/41365/.

85 European Parliament, DG for Internal Policies, “Regulating Agricultural Derivatives Markets”, November 2013, https://www.europarl.europa.eu/RegData/etudes/divers/join/2013/513989/IPOL-AGRI_DV%282013%29513989_EN.pdf.

86 Ford and Kay, supra n 75, p. 54.

Additional information

Notes on contributors

Liebrich M. Hiemstra

Liebrich M. Hiemstra, PhD student, Tilburg Law and Economics Center, University of Tilburg, the Netherlands Senior Legal Counsel Vattenfall N.V., Amsterdam, the Netherlands.