On 14 March 2023, the European Commission (“the Commission”) published a package of legislative proposals that will reform European electricity markets and strengthen European wholesale energy markets’ protection against market manipulation. In addition to amendments to Regulation (EU) 2019/943 (the Electricity Regulation) and Directive (EU) 2019/944 (the Electricity Directive) which set the framework for Europe’s internal electricity market, the package of legislative proposals include changes to Regulation (EU) No 1227/2011 on wholesale energy market integrity and transparency (REMIT). This is particularly relevant to participants in European wholesale energy markets as REMIT has not been substantially amended since its application over a decade ago.
Key elements of the proposed REMIT reform
- Expanded REMIT definition of market manipulation: The Commission proposes to amend the current REMIT definition of market manipulation so that it would capture not only entering into any transaction, or issuing any order to trade that might result in manipulation, but also any other behaviour relating to wholesale energy products that may lead to the same effect. It also extends REMIT’s definition of market manipulation to behaviour related to benchmarks.
- Alignment of inside information definition between REMIT and MAR: The Commission proposes to clarify the notion of information “of a precise nature” along the lines of the definition of inside information under Regulation (EU) No 596/2014 on market abuse (“MAR”), including that where inside information concerns a process which occurs in stages, each stage of the process as well as the overall process could constitute inside information. Accordingly, an intermediate step in a protracted process must be deemed inside information, if it satisfies the definition criteria.
- Expansion of “wholesale energy products” definition: The proposed amendments seek to expand the definition of “wholesale energy products” in respect of contracts for the supply of electricity or natural gas. In addition to such contacts where delivery is in the EU, the new definition would capture contracts with potential delivery in the EU (“which may result in delivery in the Union”).
- Authorisation requirement for IIPs and disclosure of inside information: The proposed amendments clarify that is mandatory for market participants to disclose inside information on a dedicated Inside Information Platform (“IIP”) and introduce an authorisation requirement for IIP operators with the Agency for the Cooperation of Energy Regulators (“ACER”). In order to satisfy the authorisation requirements, an IIP would have to have adequate policies and arrangements in place to make public the inside information as close to real time as technically possible, on a reasonable commercial basis. The inside information is to be made available by the IIPs “for all purposes free of charge”. Authorised IIPs will have to have in place appropriate conflicts of interest arrangements, in particular those IIPs who are a market operator or market participant themselves, and to have sound security mechanisms to guarantee the secure handling of inside information. Authorised IIPs will pay supervisory fees to ACER.
- Authorisation requirement for RRMs and REMIT reporting obligation: In accordance with the Commission’s proposal, the operators of Registered Reporting Mechanisms (“RRMs”) would have to be authorised by ACER. Authorised RRMs will have to establish and maintain effective arrangements to manage conflicts of interest, in particular when they are also an organised market place (“OMP”) or market participant themselves. They will also have to have in place sound security mechanisms to guarantee secure handling and transfer of information, and systems that effectively check and manage the quality of transaction reports. Authorised RRMs will pay supervisory fees to ACER. The Commission also proposes to further streamline the REMIT reporting requirements by including an obligation to channel all reporting on behalf of market participants, including transaction reporting, orders to trade and fundamental date, via authorised RRMs.
- Reporting obligation by PPAETs: The Commission proposes to introduce to REMIT a category of “persons professionally arranging and executing transactions” (“PPAETs”) that would replace the existing category of persons professionally arranging transactions. The amendments specify obligations applicable to PPAETs in wholesale energy products, including that such persons should have an obligation to report not only suspicious transactions in breach of the provisions on insider trading and market manipulation, but also those relating to suspicious orders and potential breaches of the obligation to publish inside information. They should also have in place effective arrangements and procedures to identify relevant breaches and guarantees for their employees carrying out surveillance activities for the purpose of REMIT.
- Regulating algorithmic trading in energy markets: The proposed amendments introduce a definition of “algorithmic trading” and “direct electronic access” in respect of wholesale energy products. If and when the proposed amendments are adopted, market participants engaging in algorithmic trading will be required to have in place effective systems and risk controls suitable to the business they operate. This would be designed to ensure that market participants’ trading systems are resilient and have sufficient capacity, are subject to appropriate trading thresholds and limits, and prevent the sending of erroneous orders or otherwise function in a way that may create or contribute to a disorderly market. In addition, such market participants should notify the national regulatory authority (“NRA”) of the Member State in which it engages in algorithmic trading of this fact, and the NRA may require the market participant to provide, on a regular or ad-hoc basis, a description of the nature of its algorithmic trading strategies, details of the trading parameters or limits to which the trading system is subject and the key compliance and risk controls that it has in place. Notification is also required if a market participant provides direct electronic access to an organised marketplace.
- LNG market data reporting: The Commission proposes to add a set of definitions to REMIT in respect of LNG, including a new definition of “LNG trading”, “LNG market data”, “LNG market participant”, “LNG price assessment” and “LNG benchmark”. The proposed amendments also integrate into REMIT the relevant ACER roles and responsibilities concerning LNG price assessments and benchmarks, as recently introduced via Council Regulation (EU) 2022/2576 on better coordination of gas purchases, reliable price benchmarks and exchanges of gas across borders. It also proposes to add new provisions to Commission Implementing Regulation (EU) No 1348/2014 on the reporting of transactions in the wholesale energy market, to include details of required market data on LNG transactions.
- Supervision and enforcement: The proposed amendments to the REMIT supervisory and enforcement framework, which currently has been the responsibility of Member States, seek to facilitate enforcement action against cross-border market abuse by setting out a uniform, EU-level process. This would provide ACER with the competence to conduct investigations into suspected REMIT breaches involving multiple jurisdictions, including the conduct of on-site inspections. In doing so, ACER should be supported by the NRAs.
- Next steps: The proposed amendments to REMIT will now be subject to legislative review by the European Parliament and by the Council. Both co-legislators may propose further substantive amendments to the proposal and the industry will have further opportunities to engage throughout the process. We expect the legislative review process to take approximately 12 months.
How we can help
Our team has extensive experience in advising all types of European, UK and third-country participants in commodity derivative markets, including wholesale energy products and, unlike most other law firms, Norton Rose Fulbright offers a blend of advisory and contentious legal, compliance and government relations skills in one cohesive team. We help clients to prepare for legislative change by closely monitoring the legislative review process, advising on legal and regulatory requirements, as well as on practical aspects of their application from the perspective of operational systems and controls adaptation. We also assist clients with internal investigations and responses to potential enforcement action by the regulatory authorities.