Johannes Kindler

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Transparency TradingAnalysis of energy and
financial regulators

• Johannes Kindler
• Florence Forum 4/5 June 2009

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Analysis Action
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Increasing Importance ofElectricity Trading in
Europe

• Electricity trading is of increasing importance
  within the European energy market
• electricity trading has evolved over time
• trading provides hedging opportunities which are
  important for market participants in order to
  ensure price predictability
• trading plays an important role for the
  integration of renewable energy sources
• is essential for achieving the EU internal market
• ? Fair and orderly trading is crucial for
  achieving the EU internal electricity market.

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Electricity trading in Europe - Background -

• To facilitate fair and orderly trading and to
  enhance confidence in market integrity, adequate
  supervision and regulatory oversight is
  essential
• No Sarbanes-Oxley for energy trading, but what
  needs to be done, must be done!
• Cooperation between regulators is important to
  allow for efficient market oversight
• Energy regulators have in-depth knowledge of the
  functioning of energy markets
• To foster the development of the European
  internal market
• rules for trading need to be harmonised
• transparency requirements need to be further
  developed

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Traded Volumes in Europe 2008 (2007) Electricity

Nord Pool Spot 298 (292) TWh Derivatives 1407
(1060) TWh

• Increasing volumes in electricity trading.
• Trading volume (esp. derivatives trading) exceeds
  total electricity consumption.
• Example Germany
• 1165 TWh derivatives traded via exchange (incl.
  OTC clearing)
• 541 TWh electricity consumption (2007)

Endex Exchange 41 (30) TWh OTC Clearing 78 (52)
TWh
Powernext Spot 51 (44) TWh Derivatives 91 (79)
TWh
EEX Exchange Spot 154 (123) TWh Derivatives
1165 (1150) TWh
Source EEX, Nord Pool, Powernext, APXGroup,
Montel Power News (4/2008)
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Analysis Action
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The joint mandate to CESR / ERGEG

• European Commission issued a joint mandate to
  CESR and ERGEG on 21 December 2007
• Scope technical recommendation under the 3rd
  Package proposals (Article 39 Electricity-Directiv
  e)
• Main questions
• Is financial market regulation sufficient to
  secure integrity of energy markets?
• What extent of transparency does financial and
  physical energy trading need?

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The milestones of thejoint mandate

• Report on the current situation in the
  individual Member States (Fact Finding)
• Market Abuse
• Trading Transparency
• Record Keeping
• Exchange of Information
• CESR/ERGEG received very positive feedback from
  the COM!

Recommendation to COM Sept 08
Recommendation to COM Dec 08
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Market AbuseTailor-made arrangements

• Current financial markets supervision
  arrangements are not sufficient to secure
  adequate integrity in the energy markets.
• Only a small part of energy trading falls under
  MAD
• There is insufficient protection against market
  abuse in the energy market.
• For all electricity and gas products that do not
  fall under MAD (Market Abuse Directive), ERGEG
  and CESR propose tailor-made arrangements in the
  legislation for the energy sector to combat
  market abuse.
• Other interdependent markets (e.g. oil, coal or
  CO2 emission rights) must be taken into account
• Reason Prices on these markets have a direct and
  indirect effect on the price of electricity
  and/or gas.

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Transparency- Status quo -

• In general, trading on the exchange has a high
  degree of transparency
• BUT most transactions take place in bilateral
  trading (over the counter OTC)
• there is less/or even no transparency in
  OTC-transactions
• some OTC-trades are transparent only for traders
  on broker platforms
• purely bilateral transactions are transparent
  only for the contractual parties

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Transparency- Recommendation -

• Traders need European-wide harmonised information
  that can be processed easily
• Different stages of transparency
• Pre-trading transparency (e.g. fundamental data)
  
• Post-trading transparency
• anonymous publication of transactions close to
  real-time (within 15 minutes) and
• aggregate market data at the end of each day

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Record Keeping- Recommendation -

• Transparent description of all transaction
  details(e.g. buyer/seller, volume, price)
• Flexible approach, but minimum content needed
• Flexibility regarding the format, but electronic
  forwarding must be possible
• Extent of record keeping
• Non-investment firms all supply contracts and
  derivatives
• Investment firms only supply contracts that do
  not fall under the Markets in Financial
  Instruments Directive (MiFID)
• ? they are subject to an obligation to keep
  records under the MiFID

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Exchange of Information- Status quo -

• Main feedback of public consultation
• Investment firms must keep records under the
  MiFID - additional obligations should be avoided
• Energy regulators do not have access to data of
  MiFID firms on a regular basis
• Information exchange between financial and energy
  regulators is necessary if market supervision
  should be efficient

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Exchange of Information- Recommendations -

• ERGEG and CESR propose
• To begin an information exchange on an
  individual-case basis and
• to establish this information exchange on a legal
  basis.
• However, an automatic exchange of data under the
  Transaction Reporting Exchange Mechanism is not
  appropriate in the current phase.
• Transaction reporting was not part of the
  mandate

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Next Steps (1)

• Transparency
• Elaboration of detailed transparency requirements
• Should build up on previous work already done by
  ERGEG on transparency and focus on compatibility,
  practicability and suitability for electricity
  and gas trading
• Workshop in Summer 2009 foreseen by ERGEG to
  discuss the detailed requirements with the
  relevant stakeholders
• CEER/ERGEG open for cooperation with CESR and a
  permanent dialogue with market participants

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Next Steps (2)

• Transaction Reporting vs. Record Keeping
• Mandate of the Commission was limited to record
  keeping and missing evidence at this stage
• ERGEG/CESR Advice sensible to reconsider
  Transaction Reporting in connection with a
  potential EU regime for market abuse
• Analysis should take account of the experiences
  made in the US market
• CEER/ERGEG open to analyse this further and give
  sound advice on it

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Next Steps (3)

• Harmonisation and Mutual Recognition of Trading
  Licenses in the EU Energy Markets
• ERGEG will analyse the current situation in the
  different Member States, and
• ERGEG will assess the possibilities and obstacles
  to the creation of a single energy trading
  passport.
• ERGEG will elaborate best practices of
  supervision of energy exchanges and gas hubs.

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• Thank you for your attention!
• www.energy-regulators.eu
• Mark your diary for the World Forum on Energy
  Regulation IV
• October 18-21, 2009
• Athens, Greece
• www.worldforumiv.info