The UK has voted to leave the EU but until – and probably after – Brexit is accomplished it will not be able to avoid Europe’s regulations intended to keep energy trading transparent and fair. Energy market participants must continue to be vigilant over compliance
J Christine Braamskamp and Philip Morgan of K&L Gates argue that whatever the terms of Brexit, energy market participants must make sure they remain fully compliant with Remit regulations
The Regulation on Wholesale Energy Market Integrity and Transparency (Remit) came into force on 28 December 2011. It has introduced an EU-wide monitoring regime to detect and deter market manipulation and insider trading. Remit provides for a shared compliance responsibility between the Agency for the Cooperation of Energy Regulators (Acer) and national regulatory authorities – Ofgem in GB (the Utility Regulator in Northern Ireland).
Acer and Ofgem have sent strong signals that they are primed to increase the number of investigations into suspected misconduct now they will have access to more data to detect market abuse, resulting in an increased likelihood of civil or criminal sanctions for individuals as well as corporates.
The Remit registration and reporting process applies to all market participants who trade wholesale energy products on any market within the EU. Given the broad scope, Remit is likely to affect non-EU businesses that trade or have operations within the EU – potentially a key point for UK businesses following Brexit implementation.
The registration requirement has led to some confusion among entities that trade these products, particularly among non-EU entities that trade within the EU. Would a non-EU investment adviser entering into a derivatives transaction traded on an EU exchange be required to register as a Remit participant? Generally, the answer is yes. However, if the investment adviser is merely placing orders in exchange-traded derivatives for financial settlement and the executing broker is an exchange member, Acer’s guidance indicates that it would not have to register.
Penalties, liability and enforcement
Ofgem now has the power to take action against those who do not comply with their Remit requirements, including the ability to impose financial penalties, recover losses and raid companies to investigate potential breaches. In September 2015 it noted that market manipulation may occur even if it does not affect supply, demand or price, and that can happen without intent. In addition, the UK has now made it possible for a company (as well as a person) to commit a criminal offence in relation to insider dealing or market manipulation on energy markets.
Companies should protect themselves through compliance training and robust policies and procedures. Consideration will also need to be given to the set-up of trading desks where it may be possible for inside information to pass between purchase and sales, or client and proprietary trading, desks.
Given the lack of enforcement precedent, there is some uncertainty as to how regulators and the courts will interpret and deal with insider dealing and market manipulation offences under Remit.
A useful starting point is the enforcement of similar rules in the USA, which has experienced an unprecedented volume of legislation relating to abuse of wholesale natural gas and electricity markets since the Energy Policy Act of 2005. Since then, the Federal Energy Regulatory Commission (Ferc) has been active, levying more than $640 million in civil penalties and more than $300 million in disgorgement. A major UK high street bank is currently facing a lawsuit in the USA seeking $453 million in fines for alleged manipulation of trades in electricity contracts.
There are grounds to believe that Acer and Ofgem will follow suit, not least because the behaviour prohibited by the US and EU statutes is remarkably similar. Acer has previously highlighted the success of Ferc in imposing multi-million dollar fines in market abuse investigations to justify its focus on effective monitoring in Europe. Acer has also been working with Ferc since before Remit came into force and the two agencies have signed a Memorandum of Understanding on consultation, co-operation and the exchange of information related to the monitoring of wholesale energy markets.
It remains to be seen how the investigation and enforcement of Remit will operate in practice. However, it is clear that this regulatory framework is likely to increase enforcement actions across the industry, including in the UK. The experience in the USA should be seen as a warning sign.
Companies should gauge whether they are caught by Remit, and if so, should implement a higher level of vigilance when trading in wholesale energy products.
They should in particular bear in mind that the enforcement regime now covers reckless, as well as intentional, conduct. It is imperative that companies ensure that appropriate training, policies and procedures are put in place to address these new challenges and mitigate the risk of market abuse.
Companies will need to monitor Ofgem and Acer’s actions in this area carefully and evaluate on a continuing basis whether their reporting activity and disclosure of price-sensitive information is adequate, whether their training and policies remain up to date, and whether their trading activity remains acceptable in the view of the newly equipped regulators.
First published in the September 2016 issue of New Power.
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