johannes kindler florence forum – 4/5 june 2009 transparency & trading analysis of energy and...

Johannes Kindler

Florence Forum – 4/5 June 2009

Transparency & Trading

Analysis of energy and financial regulators

2Florence Forum – 4/5 June 2009

Analysis

Action


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.


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


Traded Volumes in Europe 2008 (2007) – Electricity

Nord Pool

Spot: 298 (292) TWh

Derivatives: 1407 (1060) TWh

EEX

Exchange Spot: 154 (123) TWh


Powernext

Spot: 51 (44) TWh


Endex

Exchange: 41 (30) TWh

OTC Clearing: 78 (52) TWh

Source: EEX, Nord Pool, Powernext, APXGroup, Montel Power News (4/2008)

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)


Analysis

Action


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-Directive)

• Main questions:

- Is financial market regulation sufficient to secure integrity of energy markets?

- What extent of transparency does financial and physical energy trading need?


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


Market Abuse:Tailor-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.


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


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


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


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


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


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


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


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.


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

johannes kindler florence forum – 4/5 june 2009 transparency & trading analysis of energy and...

Documents

europe electricity trading

derivatives trading

orderly trading

trading volume

physical energy trading

market integrity

eu internal electricity

market participants