REMIT Implementing Acts: should energy market participants be worried?
Earlier this year we delved into the IT and regulatory intricacies European energy companies will face over the next couple of years as they struggle to understand the energy trading requirements of the Markets in Financial Instruments Directive II (MiFID II).
This time, we are going to take a look at the Regulation on Wholesale Energy Market Integrity and Transparency (REMIT) Implementing Acts, which came into force on January 7th outlining the final guidelines for reporting wholesale energy product transactions in the European Union as required by the European Union.
Market participants are required to provide data concerning wholesale energy market transactions (including order history for standard trades) to ACER, the European Agency for the Cooperation of Energy Regulators which in turn makes the information available to National Regulatory Authorities (NRAs) in the EU for more specific enforcement.
REMIT requires ACER to monitor trading activity in wholesale energy products for the purpose of uncovering and preventing both market manipulation and insider trading.
To allow for such control, ACER launched the REMIT Portal on January 8th. The Portal provides certain key documents as required by REMIT and also brings together all information and applications that market participants need to know as part of the REMIT data reporting requirements. In addition, it allows interested parties to formally self-register as Registered Reporting Mechanisms (RRMs).
Key new rules
Under the Implementing Acts, transactions will need to be reported as follows:
- Within nine months of it coming into force if they are entering into reportable wholesale energy contracts admitted to trading at Organised Market Places or
- Within fifteen months of the Implementing Acts coming into force if they are only entering into other reportable wholesale energy contracts (OTC standard and non-standard supply contracts and transportation contracts). Other fundamental data from transmission system operators (TSOs), LNG system operators (LSOs) and storage system operators (SSOs) should also be reported.
When data is reported via a third party, market participants are not going to be regarded as responsible for failures in the completeness, accuracy and timely submission of the data – responsibility lies with the third party. This is in direct contrast with the EMIR regime where the market participant is ultimately responsible for any information reported on their behalf.
Standard contracts must be reported the working day after the conclusion of the contract or placement of the order at the latest. Non-standard contracts must be reported no later than one month after the conclusion, modification or termination of the contract.
When regimes overlap
The Implementing Acts appear to overlap with other compliance regimes and, on top of that, energy market participants have only three months to register with their national regulatory authorities. A minor panic has ensued, but are traders worrying unnecessarily?
The document defines REMIT’s reporting requirements for energy contracts and derivatives, defining market abuse and prohibitions and applying identical rules to all reporting.
To complicate things however, some contracts subject to REMIT also need to be reported under EMIR and MIFID II. ACER has therefore stipulated that information which has already been reported under MIFID II or EMIR shall be considered to meet any co-existing requirement to report under REMIT.
The allowance does not work in reverse however. If information is reported under REMIT, it may still need to be reported to the appropriate authority under MIFID II and EMIR.
No need to panic – solutions are at hand
The shifting regulatory landscape continues to perplex rule-makers and market participants alike. Uncertainty in the timing and details of these cross-border regulations are causing wholesale energy traders much anxiety over their next steps toward compliance. There is no doubt that REMIT will require a lot of time and effort, at least initially, both in terms of reporting and of increased scrutiny.
There are however alternatives in terms of what companies can do to meet the new requirements and managing the process manually is not one of them. There are electronic reporting and data storage requirements involved in REMIT (and other regulatory regimes) that will quickly overwhelm any approach based on spreadsheets, both economically and technically.
Outsourcing may be an option but comes with its own risks and costs. There is the added overhead of an ongoing contract to manage and how active you are in the energy trading arena will determine your breakpoints financially.
With so much complexity and overlap to manage, automating as much of the reporting function as possible makes business sense.
Automating regulatory processes requires a basic energy trading and risk management (ETRM) system. A good ETRM should be able not only to efficiently execute trades but also to guarantee trade compliance, enhance market intelligence and improve decision-making.
There are several systems out there that can offer basic ETRM functionality but there are a few factors to be considered. Do these systems integrate with your overall enterprise system? Can they be installed quickly and easily, without disruption to your day-to-day operations? Do they incorporate the core features you need to increase revenue, reduce cost, manage risk and comply with mandates?
A good Energy Trading and Risk Management System can generate returns unmatched by nearly any other technology investment for your business, but only if it includes the right ingredients. A good ETRM should enable you to:
- Enhance market intelligence
- Improve decision-making
- Uncover opportunities
- Identify best options
- Enhance your control
- Efficiently execute trades
- Effectively manage physical logistics
- Help enforce company policies
- And ensure trade compliance
If you have to bolt together various separate systems to achieve these combined capabilities, you are probably not looking at the right solution. The fact is, a robust ETRM capability can be achieved without massive customisation, if you have a vendor capable of offering a rich, field-tested solution out-of-the-box; one that provides a flexible, component-based architecture that allows you to scale your solution to fit your needs, now and as your situation evolves.
A shape-shifting software is also a solution for a fluid regulatory environment. There are software vendors with long tenures in the business of risk managing large energy purchases. In light of the new rules, you will want to choose a solution that allows you to upgrade and manage your regulatory compliance process quickly.
Same as with MiFID II, it is also essential to consider factors such as the ability to install software on a captive system and maintain it internally, or to buy a software-as-a-service (SaaS) contract and maintain it virtually in the cloud.
Direct connectivity to trade repositories should also be a key feature, including all necessary regulatory identifiers and formats. The system should be able to streamline your threshold monitoring and facilitate your risk mitigation obligations, including periodic portfolio reconciliations under the newly implemented rules.
REMIT, like any other regulatory regime, poses a formidable challenge. To meet this challenge, first and foremost one should understand what needs to be done to comply. The Implementing Acts have already come into force but there is still plenty of time to study the rules carefully and recognise the implications they have for your company so that an action plan can be laid out accordingly. Data will need to be reported timely and consistently but that does not imply the need for multiple audits and overspending on unnecessary additional resources.
A good starting point would be to make sure your staff is trained and therefore ready and to invest in an automated solution that helps you comply while at the same time eliminating the potential for human error and business risk exposure, creating the conditions for transparency and integrity.
|Rainer Landgraf is Product Manager, EMEA for Allegro Development Corporation. Allegro Development Corporation is a developer of software tools for energy trading and risk management.|