The Regulation on Wholesale Energy Market Integrity and Transparency (REMIT) was introduced in 2011 to stem insider trading and market abuse in European wholesale energy markets, under the realisation that market abuse conducted anywhere within interlinked markets would have a significantly wide impact. With this new regulation – and its corresponding fines – two main questions have arisen that may haunt market participants over the coming years:
- What is market abuse?
- What and when do I have to report?
We know this has been part of the mix for a while, as part and parcel of the market abuse directive (MAD/R), but here’s a prescient reminder of the fight against market abuse in a more specific context.
We will focus on an open letter from the Office of Gas and Electricity Markets (OFGEM) to market participants, published on 8 September, which aims to provide some specific answers to the first question. It was also written to ensure that market participants realise that the regulators are watching.
What is market abuse?
Market manipulation is defined by REMIT in Article 2 as:
a. Anyone who enters into a transaction or issuing an order which gives or is likely to give misleading signals regarding the supply of, demand for, or price of wholesale energy products
b. Anyone who attempts to secure the price of one or many wholesale energy products at an artificial level
c. Anyone who employs or attempts to employ a fictitious device or any other form of deception which gives, or is likely to give, misleading signals regarding the supply of, demand for, or price of wholesale energy products.
The letter also clarifies that market manipulation may happen without any impact on supply, demand or price; and vice versa, therefore, it can occur without the need to have had an intent. There is an embedded warning here that market participants must be careful if they want to avoid breaching REMIT requirements.
A number of practices that are listed by OFGEM as constituting market manipulation are detailed below:
- The act of entering into a series of bids which you do not intend to execute, thus providing a misleading signal of the price/supply of an energy product.
- Small bids ahead of placing large offers, and vice versa. While it could be argued as simply price discovery, OFGEM sincerely discourage an activity they have been noticing in intraday markets whereby participants are placing several small orders at prices which do not reflect market fundamentals, only to then place relatively large orders in the opposite direction when the price has recovered. Again, they stress this is giving false or misleading signals of the price of an energy product and so can be called market manipulation.
- Marking the close. This practice involves deliberately buying or selling wholesale energy products at the close of the market in an attempt to fix the closing price.
- Pre-arranged trading. Trading which takes place on an anonymous exchange but which has been subject of a prior arrangement.
What and when do I have to report?
Market participants were also reminded of their reporting obligations. The first wave of reporting deadlines under REMIT is coming in fast on 7 October. From this date, wholesale energy market participants will be required to report their standard contracts, derivatives and fundamental data to a Registered Reporting Mechanism (RRM), with the whole process being overseen by the agency for the cooperation of energy regulators (ACER). This is just base one, with more reporting requirements coming in six months later on 7 April.
The letter stands as a firm reminder to all market participants of the specifics of market manipulation and reporting obligations, but the main takeaway is more subtle. The regulators are watching! The concluding paragraph seeks to make this message clearer as, having outlined the practices that would be in breach of REMIT’s provisions, OFGEM state that they will act on anything that they believe to be in breach. So it’s important to keep on top of your regulator.
With the upcoming reporting deadline in mind, along with the others still to follow, make sure you keep up to date with the latest MiFID II conversation by joining our LinkedIn group or subscribing to our alerts.