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In recent years, market abuse scandals have resulted in massive fines and reputational damage for the financial services industry and sentences for those persons who were involved in professional misconduct. These losses and new regulations, including the Market Abuse Regulation (MAR), mean that market surveillance by National Regulatory Authorities (NRAs) is being enhanced to support mandatory reporting of suspicious transactions or orders.

With the introduction of the European regulation called REMIT (Regulation on wholesale Energy Market Integrity and Transparency), national energy regulators in the European Union, such as The Netherlands Authority for Consumers and Markets (ACM), do now however also look closely at indications with regard to market abuse in the energy markets.

Energy companies and exchanges must comply with all kinds of strict rules, as a result of which improper use of information is prevented. These rules follow from REMIT. Violation of these rules may result in fines being imposed by ACM, which, per violation, can be as much as 10% of a company’s annual turnover.

What is market abuse?

Before energy companies and exchanges can start establishing and maintaining effective arrangements and procedures to identify possible breaches, a good understanding of market abuse is key.

The market abuse prohibitions of REMIT are based on those in MAR, but tailored to the gas and electricity markets. Market abuse means insider dealing and market manipulation, which have become explicitly prohibited with the entry into force of REMIT.

Seven types of behaviour of market abuse

The following seven types of behaviour, as originally stated in Section 118 of the UK Financial Services and Markets Act 2000 (FSMA‟), may amount to market abuse. The first three of which constitute insider trading, the last four constitute market manipulation, including attempted market manipulation:

  1. Insider trading.
  2. Improper disclosure of inside information.
  3. Recommending on the basis of inside information.
  4. False/misleading transactions.
  5. Price positioning.
  6. Transactions involving fictitious devices/deception.
  7. Dissemination of false and misleading information.

Insider trading

When an insider trades, or tries to trade, in wholesale energy products on the basis of inside information relating to that wholesale energy product. The European agency ACER (Agency for the Cooperation of Energy Regulators) considers that the market participant holding inside information is also obliged to refrain from any amendment or selective withdrawal of the order placed (“hands-off approach”) in order to comply with the prohibition of insider trading.

Where an insider improperly discloses inside information to another person, unless such disclosure is made in the normal course of the exercise of their employment, profession or duties.

Where an insider is recommending or inducing, on the basis of inside information, another person to acquire or dispose of wholesale energy products to which that information relates.

Market manipulation

Trading, or placing orders to trade, which gives, or is likely to give, false or misleading signals as to the supply of, demand for, or price of wholesale energy products.

Trading, or placing orders to trade, which secures or attempts to secure, by a person, or persons acting in collaboration, the price of one or several wholesale energy products at an artificial level, unless the person who entered into the transaction or issued the order to trade establishes that his reasons for doing so are legitimate and that that transaction or order to trade conforms to accepted market practices on the wholesale energy market concerned.

Trading, or placing orders to trade, which employs fictitious devices or any other form of deception or contrivance.

Giving out information that conveys a false or misleading impression about a wholesale energy product where the person doing this knows or ought to have known the information to be false or misleading.

In the next part of this blog I will further elaborate on the establishment of effective arrangements and procedures to identify possible breaches of REMIT.

 

© 2017 Pierre Simon