On 10 October, the EU Council of Ministers adopted the Regulation on Energy Market Integrity and Transparency (REMIT).1 REMIT will prohibit market abuse (insider trading and market manipulation) in physical and over-the-counter financial transactions in wholesale energy markets. It will effectively extend to these transactions the market abuse regime currently applicable to transactions in securities. Extending the European Commission's original proposal, it will now also apply to transactions entered into by end users of gas and electricity with an annual consumption of 600 GWh or more. The key prohibitions are expected to enter into force by December this year. However, a number of elements of the new regime, including data collection and trader registration requirements, and specific enforcement powers for national energy regulators, will come into force at a later date.
The interaction between the sector-specific rules in REMIT and the general rules on insider trading and market manipulation is complex. Essentially REMIT applies a range of obligations, including disclosure and registration requirements, to wholesale energy products,2 namely:
- contracts for the supply of electricity or natural gas where delivery is in the EU;
- derivatives relating to electricity or natural gas produced, traded or delivered in the EU;
- contracts relating to the transportation of electricity or natural gas in the EU;
- derivatives relating to the transportation of electricity or natural gas in the EU.
However, the two key REMIT prohibitions on insider trading and market manipulation do not apply3 to energy derivatives traded on exchanges such as NASDAQ OMX and APX-ENDEX (which according to the Commission in the case of electricity represent only about 16% of total volumes). They remain covered by the market manipulation and insider trading prohibitions in the Market Abuse Directive (MAD)4.
It is also important to note that the wording of the REMIT definitions and prohibitions follows very closely the terms used in MAD and its implementing measures. The intention is that the two regimes should be consistent, and the guidance already produced by the Committee of European Securities Regulators (CESR), now the European Securities and Markets Authority (ESMA) will therefore provide a useful aid to interpreting REMIT. However, the position has been further complicated by the the Commission's proposal for a new Market Abuse Regulation (MAR)5 to replace MAD. The definitions proposed for MAR are very similar, but not identical, to those used in REMIT6. At the same time, the Commission is proposing7 a revision of the Directive on markets in financial instruments (MiFID)8
REMIT does not apply to the EU Emissions Trading Scheme, but ACER's monitoring of wholesale energy markets (see below) must take into account the interactions between the EU ETS and wholesale energy markets. Looking ahead, emission allowances will be classified as financial instruments as part of the review of MiFID, and so will fall within the scope of MAR.
Application to end customers
REMIT applies mainly to transactions in relation to wholesale energy products. However, recognising the impact of energy-intensive end users on wholesale markets, the European Parliament adopted an amendment to the Commission's original proposal, extending REMIT to contracts for the supply and distribution of electricity or natural gas to final customers with a consumption capacity greater than 600 GWh per year.9 In this case, consumption capacity means the capacity of all plants owned by the same economic entity (i.e. at a group level) on markets with interrelated wholesale prices. To illustrate the scale of the requirement, 600 GWh per year corresponds to the consumption of a large cement manufacturer with 6 plants or so.
The first of the REMIT prohibitions is the prohibition of insider trading.10 REMIT prohibits those who possess inside information in relation to a wholesale energy product from 3 types of activity:
- use – using that information by acquiring or disposing of wholesale energy products to which that information relates;
- disclosure – disclosing that information to any other person, unless such disclosure is made in the normal course of the exercise of their employment, profession or duties;
- inducement – recommending or
inducing another person, on the basis of the inside information, to
acquire or dispose of wholesale energy products to which that
The UK Financial Services Authority (FSA), in its Code of Market Conduct, 11 at 1.3.3, provides useful guidance for the purposes of MAD - which should be equally valid for REMIT - on factors that will tend to suggest that a person possessing inside information has not used it as the basis for entering into a transaction.
"(1) if the decision to deal or attempt to deal was made before the person possessed the relevant inside information; or
(2) if the person concerned is dealing to satisfy a legal or regulatory obligation which came into being before he possessed the relevant inside information12; or
(3) if a person is an organisation, if none of the individuals in possession of the inside information:
In the opinion of the FSA, if the inside information is held behind an effective Chinese wall, or similarly effective arrangements, from the individuals who are involved in or who influence the decision to deal, that indicates that the decision to deal by an organisation is not "on the basis of" inside information." This concept is echoed expressly in the proposal for MAR, which provides that a transaction does not amount to insider dealing where a legal person has "effective arrangements" in place to prevent those with inside information from being involved in or influencing any decision.13 This emphasises the importance of an appropriate compliance programme, including arrangements for ensuring that inside information is not passed to those responsible for trading.
The prohibition on insider trading applies to managers, board members, shareholders and those who obtain the information through the exercise of their business activities, as well as those who acquire it through criminal activity or who know or ought to know that it is inside information.14 Where the person possessing the inside information is a legal person such as a company, the prohibition also applies to any individual who takes part in the decision to carry out the transaction on behalf of the legal person.15
In its judgment in Case C-45/08 Spector Photo Group NV v. CBFA, the European Court of Justice held that:
"the fact that a person... in possession of inside information, acquires or disposes of, or tries to acquire or dispose of, for his own account or for the account of a third party, either directly or indirectly, the financial instruments to which that information relates implies that that person has 'used that information' within the meaning of that provision, but without prejudice to the rights of the defence and, in particular, to the right to be able to rebut that presumption."
Spector has given rise to a degree of uncertainty which the MAR proposal has unfortunately not remedied. In any event, however, it should be noted that the scope for revising certain REMIT definitions outlined below extends only to the definition of "inside information" and not to the definition of "insider trading."
There are a number of exceptions to the prohibition.
There is a specific exception to the prohibitions on use and inducement where transmission system operators purchase electricity or natural gas in order to ensure the safe and secure operation of the system in accordance with their obligations under Directives 2009/72 and 2009/73 (the third package Directives).16 So, for example, where a TSO possesses inside information in relation to a constraint on its transmission system, it is not prohibited from using that information in order to acquire the electricity required to resolve that constraint. However, the prohibition on disclosure does apply in these circumstances.
More generally, the prohibition on insider trading does not apply17 to:
- transactions resulting from an agreement concluded, or an order to trade placed, before the person concerned came into possession of inside information;
- transactions entered into by producers or operators of gas storage or LNG import facilities, the sole purpose of which is to cover the immediate physical loss resulting from unplanned outages, where the market participant would otherwise not be able to meet existing contractual obligations or where such action is undertaken in agreement with the transmission system operator(s) concerned in order to ensure safe and secure operation of the system. In such a situation, the relevant information relating to the transactions must be reported to ACER and the national regulatory authority. This reporting obligation is in addition to the general requirement to disclose insider information, outlined below;
- market participants acting under national emergency rules. In this case, the authority competent for emergency planning is required to publish the inside information.
What is "inside information"?
Inside information for the purposes of REMIT means18 information which:
- is of a precise nature (i.e. indicating an actual or reasonably anticipated event or set of circumstances, and which is sufficiently specific 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)19;
- has not been made public;
- relates, directly or indirectly, to one or more wholesale energy products; and
- if it were made public, would be likely to affect significantly the prices of those wholesale energy products.
For these purposes, "information" means20 information which:
- must be made public under Regulations 714/2009 and 715/2009, including guidelines and network codes adopted under those Regulations (so the content of EU network codes is capable of constituting inside information, and acting on the knowledge that a network code will in future prohibit a particular technology or standard could amount to insider trading);
- relates to the capacity and use of facilities for production, storage, consumption or transmission of electricity or natural gas or related to the capacity and use of LNG facilities, including planned or unplanned unavailability of these facilities;
- must be disclosed in accordance with legal or regulatory provisions at EU 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 prices of wholesale energy products; or
- 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 definition of "information" therefore differs from MAD which, in the case of commodity derivatives, states that inside information is information that market users would expect to receive in accordance with accepted market practices. Commission Directive 2004/72, implementing MAD, provides that this is information which is routinely made available to market users or which must be disclosed in accordance with legal or regulatory obligations, market rules, contracts or market customs. Following criticism, particularly by CESR and the European energy regulators' group ERGEG, that the commodity derivatives-specific definition in MAD was difficult to apply, a single definition of inside information is adopted in the proposal for MAR. It specifies, however, that for derivatives which are wholesale energy products, firstly information required to be disclosed under REMIT should be considered inside information, and secondly competent authorities should take into account the specific characteristics of the definitions in REMIT when they apply the Articles in MAR relating to inside information, insider dealing and market manipulation.
The dissemination of information for the purposes of journalism or artistic expression is to be assessed taking into account the rules governing the freedom of the press and freedom of expression in other media, unless the persons concerned derive an advantage or profit from the dissemination, or it is done with the intention of misleading the market as to the supply of, or demand for, or price of wholesale energy products.21
Obligation to publish inside information
Market participants are required to publish "in an effective and timely manner" inside information which they possess in respect of businesses or facilities which they or their group companies own or control or for which they are responsible, either in whole or in part. Disclosure must include information relevant to the capacity and use of facilities for production, storage, consumption or transmission of electricity or natural gas or related to the capacity and use of LNG facilities, including planned or unplanned unavailability of these facilities.22
A market participant may delay the publication of inside information so as not to prejudice its legitimate interests, provided that the omission is not likely to mislead the public and provided that the market participant keeps the information confidential and does not use it in its own trading. It must without delay provide that information, together with a justification for the delay of the public disclosure, to ACER and the national regulatory authority.23 In other words, it must make the disclosure to the authorities while it is still keeping the information confidential from the market. It should be noted that this mandatory notification requirement is more onerous than the corresponding provisions in both MAD, which merely permits Member States to require disclosure to the competent authority and the proposal for MAR, which requires the issuer/market participant to inform the competent authority immediately after the information is disclosed to the public.
Commission guidance under MAD
The Commission's "Level 2" implementing Directive 2003/124,24 in Article 3(1), elaborates on the corresponding provision of MAD, indicating that the "legitimate interests" of the market participant, justifying delayed disclosure, relate to exceptional circumstances such as the following:
Although these MAD examples are clearly directed at insider trading in the context of the issue of securities, they provide a useful illustration of the type of circumstance to which this provision will apply in REMIT.
Where a market participant or its employee or agent discloses inside information, it must ensure simultaneous complete and effective public disclosure of the information. In the event of unintentional disclosure, it must ensure complete and effective public disclosure as soon as possible. These requirements do not apply if the person receiving the information has a duty of confidentiality.25
The publication of inside information, including in aggregated form, in accordance with Regulations 714/2009 or 715/2009, or guidelines or network codes adopted pursuant to those Regulations, will satisfy the disclosure requirements.
Where a transmission system operator has been granted an exemption from publishing certain data under Regulations 714/2009 or 715/2009, the TSO is also exempted from the publication requirement in REMIT. The disclosure requirement is also without prejudice to the right of market participants to delay the disclosure of sensitive information relating to the protection of critical infrastructure pursuant to Directive 2008/114.
REMIT also prohibits any engagement in market manipulation in relation to wholesale energy products.26
Market manipulation means27 entering into any transaction or issuing any order to trade in wholesale products which:
- gives or is likely to give false or misleading
signals as to the supply of, demand for or price of
wholesale energy products;
CESR guidance on false/misleading transactions
CESR's first set of "Level 3" guidance,28 at 4.11, provides the following illustrations of false/misleading transactions in the context of MAD, which can usefully be carried across to REMIT with limited modification:
- secures or attempts to secure, by a person, or persons acting
in collaboration, the price of one or several wholesale
energy products at an artificial level, unless the person
who entered into the transaction or issued the order to trade
establishes that his reasons for doing so are
legitimate and that that transaction or order to trade
conforms to accepted market practices on the
wholesale energy market concerned;
Commission guidance on accepted market practices
Recital 14 of REMIT refers to the definition of AMPs in Article 1(5) of MAD. This is in turn expanded upon in the Commission's "Level 2" guidance in Directive 2004/72,30 which provides at Article 2(1) (a) that competent authorities must take the following factors into account when considering whether a particular action constitutes an AMP:
It will be seen that this falls far short of creating any safe harbours, and provides very little certainty. Recognising this uncertainty, and with a desire to harmonise the regime across Europe, no equivalent provision has been included in the proposal for MAR.
CESR guidance on price positioning
CESR's first set of "Level 3" guidance,31 at 4.12, provides a rather more useful list of examples of practices that do not constitute "accepted market practices" (AMPs):
- employs or attempts to employ a fictitious device or any other
form of deception or contrivance which gives, or is likely to give,
false or misleading signals regarding the supply of, demand for, or
price of wholesale energy products;
CESR guidance on transactions involving fictitious devices/deception
CESR's first set of "Level 3" guidance,32 at 4.13, provides the following examples:
Attempting to manipulate the market is also prohibited.33 This essentially involves entering into any transaction, issuing an order to trade or taking any other action with the intention of manipulating the market in any of the ways outlined above.34
It is also market manipulation to disseminate information through the media, including the internet, or by any other means, which gives, or is likely to give, false or misleading signals as to the supply of, demand for, or price of wholesale energy products, including the dissemination of rumours and false or misleading news, where the disseminating person knew, or ought to have EU & Competition Update 11 known, that the information was false or misleading.35 Disseminating information with the intention of giving false or misleading signals will constitute an attempt to manipulate the market, and is also prohibited.36
The dissemination of information for the purposes of journalism or artistic expression is to be assessed taking into account the rules governing the freedom of the press and freedom of expression in other media, unless the persons concerned derive an advantage or profit from the dissemination, or it is done with the intention of misleading the market as to the supply of, or demand for, or price of wholesale energy products.37
CESR guidance on dissemination of false and misleading information
CESR's first set of "Level 3" guidance,38 at 4.14, provides the following examples:
"This type of market manipulation involves dissemination of false and misleading information without necessarily undertaking any accompanying transaction. This could include creating a misleading impression by failure properly to disclose a price sensitive piece of information which should be disclosed. For example, an issuer with information which would meet the Directive definition of 'inside information' fails properly to disclose that information and the result that the public is likely to be misled.
"Abusive squeeze", capacity withholding and pricing in constrained markets
One of the categories of market manipulation mentioned in the CESR guidance above is "abusive squeeze". This involves "a party or parties with a significant influence over the supply of, or demand for, or delivery mechanisms for [in this case, a wholesale energy product] exploiting a dominant position in order materially to distort the price at which others have to deliver, take delivery or defer delivery of the instrument/product in order to satisfy their obligations." Recital 14 of REMIT similarly gives as an example of market manipulation "conduct... to secure a decisive position over the supply of, or demand for, a wholesale energy product which has, or could have, the effect of fixing, directly or indirectly, prices or creating other unfair trading conditions". There are clearly some similarities between practices that constitute this type of market manipulation and practices that constitute an abuse of a dominant position for the purposes of competition law. A key question for the purposes of REMIT will be to what extent the enforcement authorities are required to establish some degree of market power in order to find market manipulation of this type. They are likely to argue that the reference to a "dominant position" in the CESR guidance, which reflects wording in MAD not found in REMIT, is not to be interpreted as requiring dominance in the competition law sense of the term. Both the European Commission and a number of national competition authorities have investigated suspected abuses of dominance consisting of withholding generation capacity in order to increase prices, either directly, or by forcing the transmission system operator or market operator to purchase electricity on a higher-priced market for balancing or other similar ancillary services.
They have not always succeeded, mainly because of the difficulties involved in establishing that the required elements of an abuse of dominance are present. The Commission, in the press release that it issued upon publication of its initial proposal in December 2010,39 commented that
"Tailor made rules are also needed to take into account energy specific market abuses, such as withholding of energy production from the market to increase prices. Electricity cannot be stored on an industrial scale. It must be produced in the moment it is consumed. This means that market prices are highly sensitive to the availability of generation capacities."
REMIT is therefore likely to offer the Commission and national authorities some advantages over the use of competition law to tackle such practices:
- it may not be necessary to establish dominance to competition law standards – possibly only some degree of "significant influence" over the capacity concerned; and
- crucially, it will be for the market participant to establish that its reasons for securing an "artificial price" are legitimate and that the transaction conforms to accepted market practices on the wholesale energy market concerned.
This is an area where there is an urgent need for guidance, specific to REMIT, as to the interpretation of the various concepts. In particular, greater clarity as to what is meant by AMPs, as outlined above, is vital, and is made even more so by the omission from the proposal for MAR of any provision for AMPs.
Commission's power to update definitions
REMIT gives the Commission the power to adopt delegated acts (i.e. to take implementing measures which are subject to a right of veto in favour of each of the Parliament and the Council), in order to update the definitions of insider trading and market manipulation.40 The power is subject to a number of restrictions:
The definitions that may be updated are those of "inside information", "market manipulation" and "attempted market manipulation" and the method of determining and the threshold (currently 600 GWh per year) of the consumption capacity at which end user transactions are subject to the prohibitions.
The definitions may be updated only for the purposes of ensuring coherence with other relevant EU legislation in the fields of financial services and energy (such as the proposal for MAR) or in order to take into account future developments on wholesale energy markets.41
Any such revisions must take into account42 at least:
- the specific functioning of wholesale energy markets, including the specificities of electricity and gas markets, and the interaction between commodity markets and derivative markets;
- the potential for manipulation across borders, between electricity and gas markets and across commodity markets and derivative markets;
- the potential impact on wholesale energy market prices of actual or planned production, consumption, use of transmission, or use of storage capacity; and
- network codes and framework guidelines adopted in accordance with Regulations 714/2009 and 715/2009.
ACER is also required to publish non-binding guidance on the definitions.43 It is likely that the guidance will adopt many of the illustrations used in the proposal for MAR, the CESR guidance and the Commission's implementing Directives for MAD, although obviously modified to reflect the specificities of the energy market.
Market monitoring, data collection and registration requirements
Reinforcing the prohibitions on market abuse, REMIT provides for market monitoring.44 This will be the responsibility of ACER. ACER will monitor trading activity in order to detect insider trading and market manipulation. In order to do so, it will collect data relating to wholesale energy market transactions. Primary responsibility for providing these data will lie with market participants, but in practice, in the interests of minimising the burden on industry, ACER is expected to receive as much of the information as possible from third parties and existing sources, including markets and other authorities.45
National energy regulators will cooperate at a regional level and with ACER in monitoring energy markets, and will have access to information held by ACER in order to do so. They may also monitor national markets, and Member States may also appoint national competition authorities and/or market monitoring bodies to cooperate with national regulators.46
Market participants will also 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 established or resident within the EU, in a Member State in which they are active. They are required to register with one authority only.
The requirements relating to data collection and registration will not enter fully into force until 6 months after the Commission has issued implementing rules on the data collection requirements.
ACER will establish mechanisms for sharing information with national regulatory authorities, financial authorities, competition authorities, the European Securities and Markets Authority (ESMA) and other relevant authorities, subject to various safeguards in relation to data protection, confidentiality and integrity.47
Duty to notify suspicious transactions
Any person professionally arranging transactions in wholesale energy products who reasonably suspects that a transaction might breach the prohibition on insider trading or market manipulation must notify the national regulatory authority. Such persons must establish effective procedures to identify breaches.48
Enforcement by national regulatory authorities
Responsibility for enforcing the prohibitions on insider trading and market manipulation lies with the national regulatory authorities - the national energy regulators such as Ofgem. Member States must ensure that energy regulators have the investigative and enforcement powers necessary to carry out their functions.49 Depending on the national enforcement tradition, the powers may be enforced directly, in collaboration with other authorities or by application to prosecutors. Powers of investigation will include the usual powers to request information and documents in any form, to carry out on-site investigations, to require the production of communications records, to require the cessation of offending practices, to request a court to freeze assets or to request a court to impose a temporary prohibition of business activities.50 Member States must provide for "effective, dissuasive and proportionate" penalties, reflecting the nature, duration and seriousness of the infringement, the damage caused to consumers and the potential gains from trading on the basis of inside information and market manipulation.51 Implementation of the requirements relating to investigative and enforcement powers must take place within 18 months of entry into force of REMIT.
Member States must also provide for a right of appeal to an independent body.52
When taking enforcement in respect of behaviour which relates both to wholesale energy products and the financial instruments to which MAR will apply, the proposal for MAR provides for cooperation with ACER and the national regulatory authorities of the Member States to ensure a coordinated approach.
As an EU Regulation, REMIT is directly applicable and requires no national implementation (except where it specifically provides - for example in relation to the reinforcement of the powers of national energy regulators). The two prohibitions, of insider trading and market manipulation, are sufficiently clear and unconditional that they will have direct effect for the purposes of EU law, and will give rise to rights that individual and legal persons can enforce against each other. Even before the national regulators are given investigation and enforcement powers, therefore, it would be open to market participants adversely affected by market manipulation and/or insider trading to bring a claim before the courts to seek compensation for any loss suffered, and/or to secure termination of any ongoing infringement.
1 The text adopted by the Council can be found here: http://register.consilium.europa.eu/pdf/en/11/pe00/pe00034.en11.pdf
2 Article 2(4), first paragraph.
3 Article 2(1).
5 The Commission's proposal can be found here: http://ec.europa.eu/internal_market/securities/abuse/index_en.htm
6 See for example the definition of market manipulation, which in MAR includes "entering into a transaction, placing an order to trade or any other behaviour which.....secures, or is likely to secure, the price of one or several financial instruments or a related spot commodity contracts at an abnormal or artificial level" but which in REMIT includes "entering into any transaction or issuing any order to trade in wholesale energy products which...secures or attempts to secure... the price of one or several wholesale energy products at an artificial level..."
8 Directive 2004/39: http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2004:145:0001:0044:EN:PDF
9 Article 2(4), second paragraph and (5).
10 Article 3.
12 Note also that Article 7(8) of the proposal for MAR expressly excludes from the definition of nsider trading "transactions conducted in the discharge of an obligation that has become due to acquire or dispose of financial instruments where that obligation results from an agreement concluded, or is to satisfy a legal or regulatory obligation that arose, before the person concerned possessed inside information".
13 Article 7(7).
14 Article 3(2).
15 Article 3(5).
16 Article 3(3).
17 Article 3(4).
18 Article 2(1).
19 Article 2(1), third paragraph.
20 Article 2(1), second paragraph, (a) to (d).
21 Article 3(6).
22 Article 4(1).
23 Article 4(2).
24 Directive 2003/124: http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2003:339:0070:0072:EN:PDF
25 Article 4(3).
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.