The Regulatory landscape has evolved drastically for all industries in recent years. Digital transformation and new threats to privacy and security has prompted the introduction of new provisions for everything from preventing market manipulation, to protecting inside information.
In the financial derivatives and physical energy wholesale markets, there are various new concerns to manage and monitor. For instance, while electricity and gas are sub-asset classes of a broader family of commodities, they have some unique characteristics which influence the regulations companies must consider in the energy trading sector.
Both electricity and gas are essential to the everyday functioning of businesses and households, and both have unique physical attributes. With the exception of LNG, both natural gas and electricity are grid-bound commodities. This means they are influenced by operational security constraints and the physical limits of their network infrastructure.
Addressing Regulation in the Energy Markets
Ever-evolving economic conditions and geopolitical factors place a consistent spotlight on energy markets. This means trading firms need a robust set of surveillance services, and tools to help with the collection, management, and analysis of data, including communication data.
Regulators are striving to improve the sustainability of both short-term and forward wholesale energy markets to ensure risks are managed, and consumers retain access to energy supplies.
To implement effective communication capturing, normalisation and archiving, energy trading firms need to innovate. CC1, powered by Custodia, is designed to guide companies through their compliance strategies, providing the technology, expertise, and services necessary to adapt to transforming regulatory scrutiny.
Regulatory Considerations Worldwide
The regulatory bodies and directives that govern the energy markets vary from one landscape to the next. Energy trading companies often need to take a broad approach to understanding the requirements in each region of the world. For instance:
In the European Union:
In the European Union, trading in energy derivatives is subject to a fragmented regulatory framework, largely designed for capital markets. REMIT (Regulation on Energy Market Integrity and Transparency) introduced prohibitions against insider training and market abuse previously unaddressed by other regulations.
REMIT specifically targets the wholesale energy market. It prohibits insider trading and market manipulation and mandates extensive reporting and transparency. Under REMIT, firms are required to report detailed information about their transactions to the Agency for the Cooperation of Energy Regulators (ACER), including orders and actual transactions.
Following are the key themes of obligations imposed by the REMIT regulation, including the ‘requirement to record conversations and keep a copy of electronic communications’.
- Transparency: The disclosure of information and transparency of data.
- Monitoring: Sector-specific, comprehensive monitoring for wholesale energy markets.
- Cooperation: Coordination between ACER (EU-wide monitoring) and NRAs (national monitoring, investigation, and enforcement).
In addition to Remit, energy trading is influenced by financial regulations, such as the market abuse directive “EMIR” (European Market Infrastructure Regulations) and MiFID II (Markets in Financial Instruments Directive). The introduction of MiFID II and MiFIR in 2018 identified a majority of electricity derivative contracts and EU ETS emissions allowances as financial instruments.
MAR aims to prevent insider trading, unlawful disclosure of inside information, and market manipulation across all financial markets in the EU. It applies to financial instruments traded on regulated markets, multilateral trading facilities, and organised trading facilities, as well as related derivative contracts.
In the UK
Following the EU-UK withdrawal agreement, EU REMIT remains an important regulation in the UK. However, there are some extra considerations to keep in mind.
The Gas and Electricity Integrity and Transparency amendment regulations in 2019 address deficiencies of the retained EU REMIT in the UK. REMIT SI, for instance, amends the enforcement and investigatory powers of Ofgem, allowing it to apply UK REMIT, rather than EU REMIT, and monitor (instead of ACER) wholesale trading activity in UK markets.
In the United States
The US is the world’s leading energy marketplace, responsible for various commodities such as gas oil, crude, and refined contracts, as well as variety of soft commodities.
Following the 2008 financial crisis, the Dodd-Frank Act emerged as the tool to restore public confidence and enhance market integrity. The Dodd-Frank Act segments regulatory jurisdiction for swaps between the Securities Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC).
The CFTC regulates non-security-based swaps, while the SEC is responsible for security-based swaps. The Federal Energy Regulatory Commission (FERC), oversees energy transactions and wholesale energy markets, imposing specific record retention rules. FERC will often implement investigations when wrongdoings are discovered in energy commodities.
In Singapore (APAC)
Singapore plays a key role as a commodity trading hub for Asia, particularly for oil and gas commodities. The Commodity Trading Act (CTA), the Securities and Futures Act (SFA) and the Financial Advisers Act (FAA), all contain legislation relevant to commodity trading, derivatives trading or advisory services.
Much like the US and EU, the Monetary Authority of Singapore (MAS) aligned its revised OTC derivatives regulatory framework to the G20 and the Financial Stability Board reforms.