With REMIT rearing its head, EMIR fresh in the memory and MiFID II on the horizon, it’s becoming clear that regulation is now an ever-present in the space. Harry Nota looks at where the industry is today and argues that it’s time to get your data in order
For energy traders, 7 April should have been something of a milestone: it marked precisely six months to the day until REMIT mandates reporting of all Organised Marketplace (OMP) trades, and just 12 until over the counter (OTC) trades are required too.
The industry isn’t as ready for this as some might think, mistakenly assuming that the burden will fall elsewhere. Moreover, there’s a sense of deja vu around EMIR reporting requirements, and MiFID II looms close. So the challenge is not just to get ready for when REMIT hits in six months, but to do so in a way that doesn’t just paper over the cracks until the next regulatory requirement comes along. The only way to do that is to get a grip on the data.
The clock is ticking
From 7th October all energy companies in the EU will need to report to ACER all standard power and gas deals and orders to trade. By ‘standard’ it means any trade or order on an OMP.
Though the deadline is a mere six months away, many energy companies seem to be surprisingly relaxed about the deadline. REMIT includes a key provision that, if requested, brokers and exchanges (the OMPs) must offer to report trades, orders to trade and bids and offers on the energy company’s behalf. This provision has led many to believe that it’s not their problem. They’re wrong.
REMIT isn’t my remit…
The obligation for OMPs to take on reporting is useful – especially for smaller companies who haven’t the resources to even dream of taking it on themselves – however it’s not outsourcing the regulatory obligation.
In the real world, an energy company might trade across several exchange platforms or brokers, meaning potentially dozens of different parties reporting data back to ACER’s central repository. Crucially, there are no universal standards for compiling and reporting the data, meaning these different venues may be supplying very different data sets that aren’t easily comparable. This adds up to a massive headache for an energy company that is trying to keep tabs on what data ACER holds on it – as it must do.
If that sounds daunting but doable, remember then that the picture gets even more complicated another six months from then. On 7 April 2016, in addition to reporting OMP trades, energy companies will have to report the rest of their trades – including complex power purchase agreements (PPAs) and all OTC trades.
This makes the task a lot more complicated. In the case of OTC trades, not only will there be no OMP to take up some of the reporting burden, but the structure of the trades becomes more complex and difficult to standardise. Two energy companies trading bilaterally may report the same trades to ACER in very different ways, making it even harder to reconcile.
It’s unwise then, to sit back and relax in the belief that your exchange and broker partners will take care of it – even if that was true for the October deadline, it isn’t for the April one. What’s needed is a coherent and comprehensive approach to energy trading data that is ready for REMIT implementation at both stages. The market knows this, which is why there will be a lot of third parties out there in the next few months ready to help energy traders ensure REMIT compliance. The temptation is to sign-up, sit back and relax. Again though, that would be a mistake.
History repeats itself
It’s easy to have a short memory when it comes to regulation, but even a cursory glance at recent and upcoming events is enough to show the error of a short regulatory memory span.
It wasn’t all that long ago that the big issue for energy traders was EMIR reporting, and indeed things are far from settled on that front with the results of the recent ESMA consultation on Trade Reporting soon to result in updated Regulatory Technical Standards. It was tough, but the industry got there and could relax, until now.
Now REMIT is causing another panic. And when the dust has settled there will be the small matter of MiFID II to deal with. There have already been (expensive) examples of firms which have invested in best-in-class EMIR compliance and now need to cough up again for REMIT. No doubt history will repeat itself in at least some cases where those that invest heavily in REMIT find themselves having to do so again for MiFID or whatever (inevitably) comes next.
To break the cycle and prepare for REMIT in a way that also takes the sting out of future regulations, companies need to get their data affairs in order. This is a big ask, especially for energy trading outfits where data is spread across a sprawling ecosystem of trading platforms, spreadsheets and data warehouses. However, it’s the only way to manage data in such a way that, whatever reporting requirements are imposed now or in the future, energy traders can comply in a relatively pain-free way.
So, what does the industry need to do right now to get ready for REMIT? It needs to realise that the OMPs will not solve their compliance problems for them, and it needs to invest in doing so themselves – either with in house abilities or via a third party. That’s what needs to happen right now. However, if energy companies want to do so in such a way that they don’t read the same warnings when the next regulation rolls up, they need to go further and get a firm grasp on the common denominator underpinning all reporting requirements – the data.
Harry Nota is Head of Energy, EMEA, at OpenLink
Published in New Power, May 2015.