In 2009, the German Securities Trading Act (WpHG) was changed to
extend the pre-existing market manipulation prohibition (which is
based on the EU Directive on Market Abuse) to European emission
allowances (EUAs) that are traded on an exchange in Germany or on a
comparable market in another EU/EEA member state. Engaging in
market manipulation with respect to EUAs has thus become a criminal
offence. The German legislator saw a need to extend the market
manipulation rules to EUAs to protect the market integrity and
operability of the financial markets particularly in light of the
expected increase in the trading of the EUAs and the auction of
EUAs from 2010 onwards.
The amendment is restricted in its scope. EUAs continue to be
excluded from the definition of financial instruments which would
have had more far reaching consequences (insider trading rules,
licensing issues, business conduct rules).
The amendment is relevant for EUAs only and the market manipulation
prohibition does not cover the trading of other "carbon
credits" such as CERs (Certified Emission Reductions) or ERUs
(Emission Reduction Units). Since CERs and ERUs are already being
traded on markets in Europe, it would have made sense to extend the
market manipulation rules to CERs and ERUs analogously. It is not
clear why the legislator was reluctant to include CERs and EURs.
For other regulatory purposes, the German Federal Financial
Supervisory Authority ("BaFin") treats all types of
carbon credits equally. However, such analogy is not possible in
the case of market manipulation rules due to their nature as
criminal law, because under the so called legality principle in
criminal law, analogies which extend the scope of criminal
behaviour are not permitted.
The market manipulation rules only apply to EUAs that are traded on
an exchange in Germany or on a comparable market in the EU/EEA
member states. Since under German law "exchange" is a
defined term and means a MiFID (Markets in Financial Instruments
Directive 2004/39/EC) regulated market, a "comparable
market" can only be interpreted to mean "MiFID regulated
market". There are only few MiFID regulated energy exchanges
in Europe and these are the European Energy Exchange (Germany) and
Nord Pool (Norway). The limited trading venues thus further
restrict the scope of applicability of the amendment. However, this
does not mean that market manipulation on other trading platforms
cannot be criminally pursued, for example as fraud.
It should be noted, though, that not only exchange traded
derivatives in EUAs, but also derivatives which have CERs or ERUs
as underlying assets may qualify as financial instruments and
manipulating the price of such derivatives has been and remains a
The prohibition covers manipulative activities that are committed
or partially committed in Germany and affect the market price in
Germany or on comparable (regulated) market in the EU/EEA member
states. In very general terms, such activities include deceptive
statements, violations of existing disclosure obligations as well
as deceptive market activities which are used to create an
artificial price level. Under a further amendment of the rules, no
proof is required that the activity has had an actual effect on the
price. Since the changes of the German rules are not based on a
European directive, the new prohibition might catch activities
which may be lawful in other EU countries. Whether the prohibition
extends to manipulative activities that are committed abroad that
affect the EUA market price on a German exchange or a non-German
exchange is at least doubtful.
The German market manipulation rules already apply to the
electricity and gas trading and it is consistent with ongoing
regulation efforts that the rules are extended to the EUA market.
However, the German regulation effort is selective and not far
reaching enough to achieve true market transparency. It is not
embedded in a specific manipulation regime for the energy market
which would also encompass insider trading rules and trading on all
Moreover, this further modifies the rules based on the EU Market
Abuse Directive, so that the legal situation in Germany differs in
that respect from other EU jurisdictions. The EU Market Abuse
Directive is now under a scheduled review by the EU Commission and
it is to be expected that EUAs will be covered by the EU Market
Abuse Directive if traded on a MTF (Multilateral Trading System).
Therefore, while market participants will temporarily have to watch
out for national peculiarities in the rules on carbon trading, they
may hope for a greater harmonization at the EU level as part of the
current review process for the Market Abuse Directive.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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