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European Market Abuse Regulation Extended to the Commodities Sector

by Thomas Morgan

The Market Abuse Directive (MAD) was adopted by the European Parliament and the European Council in early 2003, introducing a framework to combat market abuse in the European Union (EU).  On June 2, 2010, the European Commission (EC) announced that MAD would be updated and strengthened, with one of the key objectives being to enhance the regulation of commodity and commodity derivatives markets to deal with insider dealing and market manipulation.  On October 20, 2011, the EC published its provisional drafts of the amended MAD and a new Market Abuse Regulation (MAR).  MAR sets out rules and administrative sanctions in relation to insider dealing and market manipulation (market abuse), while the amended MAD introduces criminal sanctions. The amended MAD and MAR are referred to jointly as MAD II.

In its current form MAD II broadens:

  • the application of the legislation to include financial instruments traded on organised and multilateral trading facilities and any traded over-the-counter (OTC), including spot commodity markets and emissions allowances.
  • the market abuse ban to cover attempted insider trading and attempted market manipulation.
  • the insider dealing restriction to cover amending or cancelling an order, even if this is done to avoid trading on the basis of inside information.
  • the market manipulation prohibition to cover all behaviour, not just entering into orders or transactions, and some high frequency and algorithmic trading strategies.
  • the scope of the legislation by phasing out the defence of behaviour being accepted market practice.

The MAD II package of proposals, like the complementary Markets in Financial Investments Directive proposals published on the same day, will now undergo negotiation by the EC, the European Council and the European Parliament before becoming law.  One of the main discussion points during these negotiations will be the definition of “inside information.” Market participants want the definition to align with the definition of inside information in the regulation on wholesale energy market integrity and transparency (REMIT), thereby ensuring that inside information concerning physical products that are covered by REMIT and inside information concerning commodity derivatives covered by MAD II are regulated in the same way. It is not yet known whether the current definition will be amended accordingly.      

The final form of MAD II is unlikely to enter into force before the end of 2012, but commodities businesses need to start preparing by reviewing all policies and procedures connected to their trading practices.  The implementation of procedures to detect incidents of potential market abuse, and policies for reporting and co-operating with regulators, will serve to minimise corporate and individual sanctions.

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EC to Regulate Market Abuse in Wholesale Power and Natural Gas Transactions

by Thomas Morgan

European Union (EU) Regulation 1227/2011 on wholesale energy market integrity and transparency (REMIT), which came into force on December 28, regulates at an EU-level, the wholesale energy markets.  REMIT seeks to detect and prevent market abuse (or more specifically, market manipulation and insider trading) in the wholesale energy sector.  This is in contrast to the existing European market abuse legislation which applied, almost exclusively, to financial instruments admitted to trade on regulated markets.

REMIT applies to wholesale energy products (WEPs):

  • contracts for the supply of electricity or natural gas delivered in the EU;
  • contracts relating to the transport of electricity or natural gas within the EU; and
  • derivatives of those contracts;

irrespective of where or how they are traded, but does not apply if the consumption capacity of the gas or electricity is less than 600 GWh per year.

REMIT prohibits the manipulation of WEP transactions, and requires energy market participants to publish inside information relating to WEPs and submit details of energy transactions to the European energy regulatory authority, the Agency for the Cooperation of Energy Regulators (ACER).  REMIT also requires ACER, working with National Regulatory Authorities (NRA), to monitor wholesale energy markets and requires energy market participants to register with the NRAs.  Member States, in turn, are charged with ensuring that NRAs have the necessary investigatory powers, which shall be exercised in a proportionate manner.

REMIT extends securities market concepts to the energy sector by prohibiting manipulative transactions and the dissemination of misleading information, and preventing insiders from benefiting from access to information relating to power, natural gas and commodity derivatives markets.  Compliance with REMIT will require market participants to introduce or review information barriers between operational and trading activities and ensure timely public disclosure of relevant information.

Rules are to be promulgated requiring energy traders to report transactions to ACER.  ACER, in turn, will be responsible for monitoring and analysing all trades to verify that the rules are followed, and will instruct NRAs to investigate any incidents of market abuse.

Each NRA must establish a register of market participants.  This,is central to the goal of increased market transparency.  Participants will be required to register with one authority only: in the Member State in which it was established or is resident (if neither applies to the participant, then it must register in a Member State where it is active).  The European Commission will adopt implementing acts defining the scope of trade reporting and registration obligations.  Member States must establish registries of electricity and natural gas traders three months after the adoption of the implementing acts, with transaction reporting requirements coming into force three months later.

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