REMIT: A whistle stop tour
REMIT: A whistle stop tour
By Aviv Handler
REMIT has been enacted in order to specifically prohibit Market Abuse and the use of Inside Information in the gas and power markets in the EU. It applies to all physical and financial (derivatives) trades, and also includes Liquid Natural Gas (LNG) where the supply is intended for the EU network.
Anyone who executes a trade for delivery inside the EU is subject to the rules, no matter where in the world they are based. In this sense REMIT is distinct from many financial regulations. REMIT is enforced by National Regulatory Authorities, who are local energy regulators. For example, Ofgem enforce REMIT in the GB market using specifically drafted UK regulation which has extended their powers of enforcement (Northern Ireland is covered by the “Utility Regulator”). The entire effort is coordinated on an EU wide basis by ACER, the Agency for the Cooperation of Energy Regulators. REMIT can be considered to have four pillars (see Figure 1):
- Inside Information
- Market Manipulation prohibition
- Market Participant registration
- Data reporting
When REMIT went into force in December 2011, the inside information rules came into effect straight away. Enforcement powers for the market abuse parts of REMIT were to be implemented by each member state by June 2013. Most countries did not make this date, and even now there are a handful of countries who have yet to bring the rules into law.
Market Participant registration and data reporting could only come into force with the adoption of an Implementing Act, which comes from the European Commission. The Act came into force on 7th January 2015. The two reporting deadlines are 9 and 15 months after this date.
Inside Information and Market Manipulation
Under REMIT, it is forbidden to utilise inside information for trading activity except in the case of some narrowly defined exemptions. Inside Information in the context of REMIT includes information related to physical assets. For example a power station outage which has not been published could be considered inside information.
The approach to inside information in the energy world is to publish it as soon as possible, thus putting it into the public domain. REMIT stipulates that such publication should be carried out as soon as possible, except in certain circumstances when it may be delayed. For the time being most asset owners publish their inside information on their web site, or on one of several platforms. The rules around this will be tightened later this year.
REMIT also prohibits actual and attempted market manipulation, which can involve any activity that is considered “abusive”. The act, and also guidance issued by ACER does list some very specific examples, which include techniques such as “marking the close” and “market cornering”. In many cases the types of abuse are similar to the financial markets, although the physical side can make it more complex to detect. For example a market cornering will usually involve manipulating a physical supply and then profiting from a resulting movement on the financial side.
Both inside information and market manipulation attract the heaviest sanctions under most regimes, which under some jurisdictions include criminal sanctions.
REMIT requires all Market Participants to be registered in a central database known as the CEREMP, the Central European Registry for Energy Market Participants. While this database is run by ACER, registration takes place at the local level, with each NRA providing a registration facility. NRAs had a deadline of 17th March 2015 to get their systems up and running.
Registration takes place in two parts: Completing the first results in an “ACER code”, a unique identifier provided to each participant. It also asks for some basic information, including details of certain responsible individuals in the organisation and the ultimate parent. The second stage involves providing more detailed information, such as the company structure as well as who will report.
All registrations must be completed by the start of reporting. In many jurisdictions, it has been compulsory to complete the first stage already. Others do not specify a date. However it has been recommended that all start registration by the 17th June 2015.
Any legal entity that either trades in the market or with covered physical assets must carry out registration, which is free. Certain fields in the register will be made publically available.
Reporting under REMIT – What must be reported, and by when?
REMIT mandates reporting of several types of data, in particular:
- Pre trade data – i.e. orders wherever placed.
- Trade data – spanning both trades executed on an Organised Market Place and also bilateral trades and contracts.
- “Fundamental data” – physical data such as nominations, movements and other actuals.
Any trade in the “wholesale market” and data relating to it must be reported. In general transactions with “end customers” are excluded, unless they have the capability to consume 600 GWh per annum or more. Producers with an installed capacity of 10Mw or less (20Mw for gas) are exempt.
Trades between two entities of the same group, and “balancing” trades do not have to be reported, although such data may be requested by regulators.
Where does the data go?
The data is being collected in order to be stored in ACER’s Regulatory Information System “ARIS” database. Once the data is in the system ACER will be able to run surveillance technology and processes in it, in order to look for market abuse. At the same time copies of each market’s data will be sent to each NRA, who are also responsible for monitoring their own market.
Who should do the reporting and by when?
Reporting under REMIT is divided into trading conducted on an “Organised Market Place” (OMP) and off venue trades. OMPs include exchanges and broker platforms – an official list is published by ACER.
Orders and trades conducted on an OMP must be reported from the 7th October 2015. The Implementing Act states that OMPs “must offer a data reporting agreement” to market participants. Should the agreement be taken up, the OMP must report the relevant data to ACER on behalf of the market participant, although they may charge a fee.
In some cases, using the OMP will be a useful option. There are however three issues that need to be considered:
- Does the OMP have the data? Some fields, such as the beneficiary ID, will somehow have to be given to the OMP.
- Post trade events – On broker platforms modifications and early terminations are usually conducted bilaterally. Such events will need to be reported separately.
- Reconciliation – REMIT requires that market participants ensure that reports are being sent correctly on a periodic basis (al- though day to day responsibility is delegated). Those using several OMPs may find this difficult.
The Registered Reporting Mechanism: RRM.
Market participants are to report data to ACER via intermediaries called RRMs (Registered Reporting Mechanism). These entities will take in data and forward it to ACER in the required format. RRMs need to comply with various requirements, including those around data security and financial stability. They are different from EMIR TRs in that they do not keep a copy of the data, rather acting as a forwarding mechanism. Many RRMs have come to market over the last few months, including some of the EMIR TRs and others.
Bilateral trades need to be sent by Market Participants to ACER via an RRM by 7th April 2016. A “trade” includes any wholesale market contract, which would include long term bilateral agreements such as Power Purchase Agreements and Tolling Agreements. It also includes capacity and transportation trades.
If an OMP is not used for reporting, participants should send the data themselves to ACER, also via an RRM. It is possible for a market participant to become an RRM themselves, so long as they meet the various requirements.
Trades under both EMIR and REMIT
Some trades will be under both EMIR and REMIT, for example financial gas and power derivatives. According to the Implementing Act, a trade reported under EMIR does not have to be reported again under REMIT. Instead, the EMIR TR must send the data it has to ACER. REMIT contains certain fields that are not contained
in EMIR, but for trades under both these do not need to be sent (which means that ACER will not have the fields).
What is a derivative?
When working out whether a trade is in REMIT or EMIR, it is important to bear in mind how a “derivative” is defined in terms of commodity (and energy) trades. MiFID Annex I Section C defines a derivative, and sections 5, 6, 7 and 10 all reference commodities in certain respects. Sections C6 and 7 are of particular note. In general, for now, physical forwards that are traded either on a Regulated Market or a Multilateral Trading Facility are considered derivatives. However, a recent ruling by ESMA will change this, since it brings some off venue trades into scope. Most broker platforms used in energy have a “Non MTF” version running.
MiFID II will also change the above definition. On the one hand, trades executed on an Organised Trading Facility (OTF) will be brought into scope. On the other, a “REMIT carve out” keeps many trades out of scope, as long as they “must be physically settled.”
A detailed look at this on-going issue is beyond the scope of this article.
Like EMIR, REMIT has a back-loading requirement, although it is simpler. If an order or trade is open on one of the reporting dates, there are 3 months in which to backload it. So an OMP trade which is open on 7th October 2015 must be reported by 7th January 2016, and any others open on 7th April 2016 must be reported by 7th July 2016. There is no requirement to report earlier trades.
Fundamental physical data such as nominations, movements and other actuals such as gas in storage need to be reported to ACER. In general, Transmission System Operators (TSOs) and other operators are responsible for reporting such data to ACER, rather than market participants. There are however a few exceptions: For example individual gas positions in storage are to be reported by the market participant, as well as certain aspects of the LNG lifecycle. It is important to check that there are no “gaps” in the reporting chain.
Pulling it all together
To summarise, there are 5 routes via which to send data to ARIS (See Figure 2):
- Via an RRM
- Via an EMIR TR
- Using an Organised market place
- Directly, if registered as an RRM
- Fundamental data: using a System Operator or RRM
Different offerings for reporting
There are several “types” of offering available in order to support compliance. These include:
- OMP offerings – The OMPs themselves must “offer a data reporting agreement”. Most will offer at least one other method to provide the data to the market participant, which may be an upload, or a forward to another service. Some OMPs will act as RRM for any type of data.
- “Full” RRMs – an RRM service which takes any data, whether on or off venue. Some will have arrangements with one or more OMP to take their data without upload by the market participant. Several EMIR TRs are also acting as RRMs.
- Reporting “services” – off site ser vices which combined with another service, such as trading gateways or confirmations that also act as RRMs.
- ETRM Software – most Energy Trading and Risk Management software will have a “REMIT adapter” to one or more RRMs.
- Standalone reporting software – dedicated software installed on site which takes data from different source across the enterprise and routes it to the appropriate destination, be it an RRM, EMIR TR or other.
Market participants need to select the offering, or combination of offerings which suits them best. It is possible to use a combination of offerings. For example. some standalone software works with specific RRMs. Some are combined. Some OMPs work with some services, and some are combined with RRMs. Each situation for each market participant will be different and necessitate a different combination.
Despite the OMP reporting obligation, there is a great deal to do in a short space of time. The second off venue reporting stage is likely to be complex, because of the variety of bilateral deals. It is also important to understand how orders and fundamental data will be reported.
The set of solutions are varied and different, and it is important to choose the right combination for the specific circumstance. Assessments for this should commence as soon as possible.
With the reporting deadlines coming up, it is easy to lose sight of the main purpose of REMIT, which is the prevention of abuse. Making sure that the main rules are compiled with should not be forgotten, especially slice a breach of these attract the severest penalties.
Overall, the usual rule applies: those who are prepared will be able to comply without stress. A last minute solution will lead to higher costs and eventual rework.
This article was first published in edition 4 of Rocket, our magazine. Download available Rocket editions here, and save your up to date address in your profile to receive the latest hard copy editions as they become available.
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