What are the implications for market participants in the energy industry from July when MAR will apply across the EU? And what do they need to do to ensure compliance with both MAR and REMIT, particularly with regard to monitoring and surveillance and notification of suspicious transactions?
In view of the ESMA Q&A, published on 31 May 2016, it seems that there will be two separate sets of standards that energy trading companies will have to grapple with to ensure compliance with both Regulations.
The ESMA Q&A clarifies that ESMA considers the obligation to detect and identify market abuse and attempted market abuse under Article 16(2) of MAR applies broadly and “persons professionally arranging or executing transactions” (“PPAETs”) include buy side firms, such as investment management firms (AIFS and UCITS managers), as well as firms professionally engaged in trading on own account (proprietary traders), which will include energy trading companies.
By contrast, ACER Guidance Note 1/2015 outlines the concept of “Persons Professionally Arranging Transactions (“PPATs”) and clarifies ACER’s view of the characteristics of PPATs, which are:
- A person – natural or legal
- Professionally – interpreted as ‘engaged in a specified activity as part of one’s normal and regular paid occupation’
- Arranging transactions – an activity that aims to: enable or assist a buyer or a seller in a way that directly brings about a particular wholesale energy transaction; or, provides a facility that facilitates the entering into transactions by a buyer or a seller with a view to transactions in wholesale energy products. Simply providing a means of communication between transacting parties is excluded (eg internet service provider), unless they go beyond that and add value to the transaction.
The Guidance Note provides examples of PPATs which include: energy exchanges; broker platforms/brokers; cross border capacity exchanges/platforms; secondary capacity allocation platforms; TSOs organising gas trades, energy balancing, capacity trading; and sleeves (arranging).
On the basis that energy trading companies do not fall within ACER’s interpretation of PPATs, they are not obliged (in accordance with Article 15 of REMIT) to notify the NRA of any suspicion of a breach of Article 3 or 5 of REMIT or to establish and maintain effective systems and procedures to identify breaches of Article 3 or 5. However, the ESMA Q&A clarifies that the very same parties, who are exempt from the Article 15 obligations of REMIT, will be required to comply with the equivalent obligations under Article 16(2) of MAR.
What then are the practical implications for firms in bringing internal systems and processes up to the level required by MAR? And should there be a distinction in circumstances where only REMIT applies?
In reality it seems that to extract transactions where only REMIT applies and to invoke a different process for that category of transaction would likely be too complex and time consuming for firms to implement. The most straightforward approach therefore is to institute one process that complies with the higher of the two standards (MAR) and follow those systems and procedures for both regimes.
As regards REMIT, there is already provision in place for firms to report suspicious transactions; the ACER template STR form provides tick box options for identification of reporting parties which are a) PPAT, b) NRA or c) others. Further, in many instances, the suspicious transactions that internal surveillance systems will highlight will be the firm’s own trades and, whilst there is no obligation to self-report under REMIT, Ofgem has made it clear in its Procedural Guidelines Statement that it welcomes reports from individuals or companies about their own conduct. Additionally, in its Penalties Statement1 Ofgem has stated that “the Authority attaches significant value to the self-reporting of breaches. However, firms [and individuals] should expect to receive less credit where self-reporting has not occurred promptly on first discovering that a breach has occurred.” This approach is also evident in the 5 step process applied to calculation of penalties as the Authority may increase the penalty (for deterrence) if the likelihood of detection is low, except where the case was brought to the attention of the Authority through self-reporting.
It is clear therefore that there may be an additional benefit to firms implementing the higher of the two standards required in respect of all orders and transactions.
Whilst there isn’t much time left for implementation before 3 July, energy traders may be able to take some comfort from the ESMA Q&A which states that the arrangements, systems and procedures required to comply with Article 16(2) should be “appropriate and proportionate to the scale, size and nature of their business activity.”
1 at paras 6.29, 7.26 and 8.28