Germany: Germany Extends Market Manipulation Rules to European Emission Allowances

Last Updated: 11 October 2010
Article by Judith E. Hilgers and Manuel Lorenz

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 prohibited activity.

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 platforms.

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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