REMIT 2 – Is Transaction Surveillance Compulsory?

REMIT 2 introduces many new obligations for market participants, market operators and national regulators, as well as for ACER itself. From the relatively narrow perspective of transaction surveillance, the final rules appear to signal a major increase in regulatory obligations for many, if not most, firms trading in European physical power and gas markets. In this article we focus on the key question – is transaction surveillance a mandatory obligation under REMIT 2 and if so, to which firms does the obligation apply?

Introduction

REMIT 1, which entered into force in 2011, explicitly prohibited market manipulation and insider trading in European wholesale energy markets. Under the original REMIT however only persons professionally arranging transactions, or “PPATs” had an obligation under Article 15 to “establish and maintain effective arrangements and procedures” to identify suspicious behaviour by the users of their platforms. In a major shift in scope REMIT 2 [1] introduces the concept of persons professionally arranging or executing transactions, or “PPAETs”. This seemingly benign addition along with other additions and amendments to the text carries major implications for many firms that previously managed to avoid onerous transaction surveillance obligations under the original rules. Below we delve into these changes in more detail.

Is transaction surveillance compulsory under REMIT 2?

To answer this question, we must delve into some legalese. While this is not legal advice, we attempt to lay out and highlight the relevant REMIT 2 text in a way that helps the reader to reach their own conclusions.

Let’s start with the “Who?”

As mentioned in the Introduction, REMIT 2 introduces the concept of “PPAETs”. This term is formally defined under the Definitions in Article 2 paragraph 8(a) as follows:

person professionally arranging or executing transactions” means a person professionally engaged in the reception and transmission of orders for, or in the execution of transactions in, wholesale energy products”  

The introduction of “executing” significantly expands the scope perimeter from those solely intermediating markets (i.e. PPATs) to include those market participants who are engaged in trading on a professional basis (i.e. PPAETs).

The second major change which impacts the “Who” discussion relates to an amendment to Article 15 which originally dealt with the obligations of PPATs but which now, crucially, also includes PPAETs. Specifically, Article 15(2), introduces the obligations set out below specifically aimed at persons executing transactions (i.e. the “E” in PPAETs):

2. Any person professionally executing transactions under Article 16 of Regulation (EU) No 596/2014 who also executes transactions in wholesale energy products that are not financial instruments, and who reasonably suspects that an order to trade or a transaction, including any cancellation or modification thereof, whether placed on or outside an OMP, could breach Article 3, 4 or 5 of this Regulation, shall notify the Agency and the relevant national regulatory authority without further delay and in any event no later than four weeks from the day on which that person becomes aware of the suspicious event.”

You may notice that this newly added paragraph references Regulation (EU) No 596/2014 [2]. Those who are familiar with financial market regulation will recognise this as being the EU Market Abuse Regulation or “MAR” which prohibits market abuse in financial markets. But why is this referenced by REMIT 2?

It appears that the legislators intend to put surveillance obligations for wholesale energy product on firms that already have surveillance obligations for financial instruments under Article 16 of MAR. That is to say, if a firm trades financial instruments under MAR and wholesales energy products like European physical power and gas, then the firm is in scope of the requirements set out by Article 15(2) of REMIT 2. We will address what this means in the next section below.

Before we do that however, there is a key point related to the above that we should consider further as it may carry significant ramifications for certain categories of physical energy traders. Does any trading that falls under the MAR qualifier push an organisation into scope of Article 15? To illustrate this point by way of an example – if a small physical energy trader decides to execute an interest rate or foreign exchange swap, both of which would be considered financial instruments [3] under MAR, does this automatically mean that the firm is “professionally … executing transactions” under MAR? This is perhaps something for lawyers or ACER to opine on given the potential implications for smaller energy trading firms.

Now let’s look at the “What?”

Having reviewed what factors determine whether Article 15 applies, we now take a closer look at the obligations set out by this Article, as well as the available guidance from ACER. First however, an important caveat: we are at the very early stages of REMIT 2 and ACER is expected to provide fuller guidance in the coming months which will have a significant bearing on the discussion as to what is expected of the market.

So what exactly is expected of firms that are caught in scope of Article 15(2)? To answer this, we first look at Article 15(3), a newly introduced paragraph under REMIT 2:

“3. The persons referred to in paragraphs 1 and 2 shall establish and maintain effective arrangements, systems and procedures to:

(a) identify potential breaches of Article 3, 4 or 5;

(b) guarantee that their employees carrying out surveillance activities for the purpose of this Article are preserved from any conflict of interest and act in an independent manner;

(c) detect and report suspicious orders and transactions.

If the above extract looks familiar it’s because plenty of the text is borrowed from the MAR regulation, with a few extras added for good measure. The paragraph requires that firms professionally executing transaction who fall into scope of Article 15(2) must “establish and maintain effective arrangements, systems and procedures to detect and report suspicious orders and transactions”.  The mention of “surveillance activities” in paragraph (b) removes any doubt that “arrangements, systems and procedures” does in fact mean transaction surveillance. Does this mean then that all firms falling into scope of Article 15(2), regardless of their size or trading portfolio complexity, must apply a common standard when it comes to transaction surveillance? Not quite. “Transaction surveillance” may however manifest itself in many different ways. So what standard should firms apply?

To help answer this question, on 16 April 2024 ACER published an Open Letter [4] containing some initial guidance on this topic. The letter states that “…monitoring obligations by PPAETs pursuant to Article 15 paragraphs 1 and 2 should be reasonable and proportionate and not go beyond publicly available information and the data available to the PPAET”. As is the case with MAR, this opens the question of proportionality rather than a “one size fits all” solution across trading organisations. While this does appear to support a degree of flexibility in terms of what firms implement for surveillance, it also introduces uncertainty for many firms that need to make important investment decisions. Introducing a transaction surveillance programme is not a trivial exercise. It requires investment in technology, people, operational processes and governance – none of which come cheaply.

ACER plan to update their guidance on this topic but based on past experience with other regulators, it seems unlikely that they will provide definitive guidance in this area. In the absence of such clarity, firms are advised to look to their peer group and take a risk-based decision on the question of “reasonable and proportionate”.

Now let’s finish with the “When?”

Finally, we deal with the question of when the obligations set out in Article 15(2) will apply. With REMIT 2’s phased implementation approach, these obligations will apply six months from the regulation’s publication in the EU’s Official Journal – specifically 8 November 2024. By any measure, this gives the market very limited time to prepare. While it seems probable, based on past experience with new regulations, that the national regulators and ACER will allow for a “bedding in” grace period. That said, this is ultimately a risk-based judgement call that must be made by each organisation, and particularly those with no existing transaction surveillance capability.

Conclusion

In summary, it seems reasonably clear that regulators will expect firms which trade physical wholesale energy products and MAR instruments to have a transaction surveillance capability in place. The precise nature of the surveillance capability in terms of coverage and complexity is not entirely clear except to say that it should be “reasonable and proportionate with respect to your organisation’s trading activity, and should only rely on data that is publicly available. This may feel like familiar territory for those involved in similar deliberations in 2016 when MAR entered into force where many energy trading firms were grappling with the question of reasonableness and proportionality. While more guidance may eventually be forthcoming, time is short. Firms, if they have not already, should start planning now.

 

 

[1]https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=OJ:L_202401106

[2]https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32014R0596

[3] As defined by Annex 1, Section C of MiFID 2

[4]https://www.acer.europa.eu/sites/default/files/REMIT/Guidance%20on%20REMIT%20Application/Open%20Letters%20on%20REMIT%20Policy/Open-letter-on-REMIT-revision-implications.pdf

Disclaimer: This blog if for information purposes only and does not constitute legal advice.

 

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