ETRM Vimanyu
1 like189 views
1. Energy trading firms are facing challenges from new EU regulations like MiFID II, EMIR, and REMIT that aim to increase transparency and prevent market manipulation. These regulations require extensive reporting, position limits, and could force some firms to obtain financial licenses. 2. Firms are lobbying regulators to ease some rules, particularly around hedging exemptions and how speculative positions are calculated. Exemptions for intra-company trades and extraterritorial rules are also being requested. 3. Implementing the new rules fully by the deadlines may be difficult due to unclear definitions, quality issues with trade data, and the need for regulatory coordination across countries. Firms may restructure trading operations or move
ETRM Vimanyu
- 1. Energy Trading & Risk management S.No. Date Article Key facts Regulations Trends 1 26-06-15 EU power traders rail against national interventions Different capacity payment schemes leading to arbitrage problem. EU ETS - World's 1st major carbon market. It works on 'cap' and 'trade' principle. Cap decides the maximum limit of emission. Company can receive or buy emission allowance within the cap on a trading platform. Differences in country-wise capacity mechanism is leading to deferred investments in power sector. They are urging for a pan-European scheme. Increased RE is increasing focus towards capacity mechanism Phase-III(2013-2020) - Key points:- Increased RE focus is changing the trading perspective from long to mix of short and intraday trading. Capacity mechanism implementation:- Spain(1996), UK(2014) & France(2016). 1. Single, EU wide cap in lieu of national caps. IT enablement is the key to handle weather data. EU emission trading system(ETS) will incentivize RE. It leads to common carbon system. 2. Auctioning instead of free allocation will be used. Negative prices are guiding the hedging programs. 2 25-06-15 European utilities face perfect storm Marginal cost of RE = 0 The hard hitting conditions like financial crisis after effects and emergence of RE is creating a perfect storm for utilities. Closing/mothballing thermal plants is not leading to price rise. 16GW thermal capacity is closed so far. Increased RE is leading to reduced electricity consumption irrespective of change in GDP. European gas consumption is on fall. Its gas demand was 1460 bcm in 2013 which is same as of 1999. Even gas demand by power generator is reduced by 51 bcm. RE is garnering attention because of its zero marginal cost but utilities are missing out the opportunity because of their late entry and slow RE adoption rate. 4 utilities net income fell by 80% between 2009 and 2014. Europe is even lagging in leveraging the fruits of natural gas(Shale) revolution. Their gas consumption is low. A holistic transformation and better risk management is the only helping hand for all the utilities at risk. 3 18-08-15 Index publishers woes endanger market transparency Price index deals with physical market, future contracts and OTC derivatives. Regulations are tightened after 2008 financial crisis. Price reporting agencies(PRA) which publishes price index to facilitate transparency are facing problems like lack of standardization and limited information access. US bodies( CFTC & FERC) has increased enforcement. 2012- Madrid based International Organization of Securities Commission(IOSCO) published 'Principle for Oil price reporting agencies' This decreased voluntary data submission by participants is caused by strict scrutiny by EU which may result in undesired market manipulation. Cornerstone Research reveals 15% fall in the volume of trades reporting at US gas hub in 2004. 4 29-09-15 Vendors slam 'uncooperative' energy exchanges over Remit Reporting vendors are not getting market data access from exchanges ACER - Agency for the Cooperation of Energy Regulators. It is the Slovenia-based EU agency responsible for Remit. Remit in its undertaking to challenge market manipulation & insider trading has released trade reporting regime. It will be done through RRMs. EFETnet stated 4 exchanges as 'uncooperative' which are as follows:- OMP = Organized market places The problem is arising because participants must verify the submitted data of transactions done on OMPs but 'uncooperative' exchanges are not ready to share these data. So, it is expected to create a defeat situation in the Remit's implementation. 1. APX Remit = Regulation on Wholesale Energy Market Integrity & Transparency 2. EPEX Spot Trade reporting phase:- 3. Ice Futures Europe Phase I - Oct 7, 2015 - Report standard trades( Transactions on OMPs) 4. Nord Pool Spot Phase II - Apr 7, 2016 - Report of non-standard trades( bilateral transactions done outside of OMPs) RRMs= registered Reporting Mechanisms. 27 are approved so far. Trade reporting is done through RRMs which help ACER. Nord pool create IT interface for data access by RRMs 5 19-10-15 Centrica keeps watchful eye on new regulations Regulations are the new risk. EMIR - Energy Market Infrastructure Requirement. It is a body of European legislation for the regulation of over-the-counter derivatives. It was originally adopted on 2012. It forces reporting of derivative contracts and implementation of risk management standards. It established common rules for central counterparties and trade repositories. Aftermath of 2008 crisis came in the form of strict regulations for the market participants. Emir asked firms to centrally clear OTC derivatives trading and post margin against it once the portfolio reaches a threshold. So, firms are adopting more of long term physical contracts instead of financial derivatives to avoid the limit. Banks retrieval from commodity market has reduced the market liquidity. 6 26-10-15 Surveillance of energy markets set to increase All trade data will be monitored by ACER under Remit. ACER will then notify NRA which will take the decisions regarding imposing the sanctions. NRA - National Regulatory Authority Surveillance activity is going to increase. Problems against successful Remit implementation:- Remit provisions:- 1.Prohibition of insider trading, 2. Prohibition of market manipulation, 3. Obligation to publish inside information, 4.Registration of market participants, 5.Reporting obligation, and 6.Market monitoring and enforcement. The mandatory reporting mentioned under Remit cannot give the fruitful result unless underlying problems like data standardization, non-harmonized Remit interpretation and poor data quality are resolved. 1. Lack of standardization in trading data to be reported. Remit came in force in 2011. Some steps in the regards of standardization has been taken by TRUM but it is in its early stage. 2. ACER inability to process all the data. TRUM - Transaction Reporting User Manual Faint demarcation between permitted and unlawful activities along with ambiguous definitions are creating more hurdles. 3. Distinct approach in Remit interpretation by various EU countries. Art-2(2) of Remit defines manipulation as:- - false or misleading orders/transactions - price positioning - fictitious device or deception - dissemination of false or misleading information 4. Data quality 7 02-11-15 Mifid II sparks frantic lobbying push by EU energy firms Non financial firms are electrical utility, Oil & Gas companies, metal traders & industrialists, etc. ESMA- European Securities and Markets Authority. It is an independent EU Authority that contributes to safeguarding the stability of the European Union's financial system by enhancing the protection of investors and promoting stable and orderly financial markets. ESMA in its exercise to fight speculation trading is empowered by Mifid II. It published final draft regulatory technical standard(RTS) describing 'Ancillary exemption test'. Mifid-II - Markets in Financial Instruments Directive . It was adopted by EU on May 2014. It is going to apply from Jan 3, 2017. It inspires to bring more commodity into regulatory scope. These set of rules help in improving the functioning of financial markets making them more efficient, resilient and transparent. EMIR - European Market Infrastructure Regulation This test will set a threshold crossing of which will lead to Mifid licensing of non- financial firms which is a costly issue. Royal Dutch Shell is expecting $30bn capital to meet licensing requirements. Ancillary exemption test proposed by ESMA in its final draft Regulatory Technical Standard(RTS) consist of- In response, firms may either retreat from commodity market or restructure their company into 2 branches, one operating under license and other dealing with hedging activity. Part -I :- Firms are raising the doubt over precision of exemption test in the backdrop of unreliable OTC market data, lack of clarity in instruments to be counted and tight time constraint. Ratio = (Non-hedging activity in commodity derivative/ total activity in commodity derivative) Its higher value represents higher speculation and consequently a lower market share.
- 2. Part- II :- Ratio = (non-hedging activity in a particular commodity by the firm/ total activity in that particular commodity in EU) ESMA published a paper regarding 'Capital Employed test' in place of 'Ancillary exemption test' which was later scrapped. A threshold is set crossing which will lead to compulsion in licensing. Licensed firms must comply with- 1. Capital requirements directive (CRD)-IV - It imposes bank like regulations. 2. They will be considered as financial counterparties under Emir with no hedging exception. 3. Position limits- It must be followed by any firm trading on commodity derivatives. 8 12-11-15 Epex pushes to unite Europe's power markets Challenges against single energy market is lack of product integration. Increased intermittency due to emergence of RE and urge for price reduction is obligating for wider level exchange mergers. EPEX Spot has few achievements in its pocket. Mergers and events by EPEX Spot :- 2010 - French & German Intraday markets get connected 2012 - Market coupling between Czech Power Exchange, Slovakia OKTE & HUPX May 2015 - Epex Spot & APX 2014 - Epex Spot - Coupling of day-ahead markets in Northwest Europe(NWE) region 2017 - Agreements with 7 power exchanges for Europe-wide Intraday market. 9 19-11-15 French regulators defends MIFID-II commodity rules Objective of 'Ancillary Exemption test' is to capture disproportionate speculative trading. ESMA proposal of 'Capital employed test' was criticized because of absence of common accounting standards used in it. Problem of this test is the consideration of total trading as proxy for size without due diligence to the fact that major capital of firms are invested in hard assets. The 'Ancillary Exemption test' is considered to be misleading because of false size parameters and poor Trade Repositories data. OTF enjoys discretion to execution but subjected to pre- transparency and best execution obligation. Mifid provisioned for Organized trading facility(OTF). OTF is to take care of non- regulated activities. New OTF mechanism is creating debatable situation regarding products falling in the scope of regulation. 10 08-12-15 Shell may shift trading to US or Singapore over Mifid II Industry is criticizing Esma's ' Ancillary business exemption test' because of its strict regulations leading to higher cost. Mifid II set to come into force on Jan 3, 2017.(probably) Major firms like Shell are considering restructuring as a tool in the wake of Mifid II arrival. Mifid II is even considered to be more burdensome than US Dodd- Frank Act. Shell may move its trading activities to US or Singapore. Ice futures Singapore can provide a helping hand but it may also create a pitfall of regulatory arbitrage. Atlanta based exchange operator Intercontinental Exchange(ICE) is considering moving its benchmark Brent crude oil futures contracts to New York from London. Restructuring will help in segregating activities into Mifid licensed activities & hedging activities. 11 14-12-15 Stricter EU collateral rules threaten Nordic power market Nordic countries:- Denmark, Finland, Iceland, Norway & Sweden New collateral rules- It is coming into effect from Mar 2016 after 3 years of grace period (since Mar 2013). It restricts bank guarantee to be used as collateral in derivative transactions. New collateral rules will prove to be a costly affair especially for Nordic market where 86% of all collateral comprises of bank guarantees and Deferred Settlement Futures(DSF) is extensively used. Banks collateral is considered to be safe as correlation between energy sector and banking is low which means their chance of defaulting on same time is negligible. As a way out, firms are adopting following ways:- 1. Trading less Collateral cost may account to €128 million across Europe according to European Association of CCP Clearing Houses. 2. Moving towards bilateral market. Collateral cost rise:- +500% in Iberian market & +1000% in Nordic market. 3. Clearing through general clearing member (GCM). 4. Posting collaterals in the form of cash, stocks or bonds. 12 23-12-15 Ending Emir hedge exemption conflicts with Mifid II, forms say Clearing Threshold = $ 3.3 bn in Gross Notional Value. It identify whether a firm is NFC+ or not. NFC+ = Non-financial counterparty plus. These firms must clear all trades. Currently, only non-hedging activities are considered for calculating for the threshold limit. RTS = Regulatory Technical Standards ESMA in its RTS for Mifid II provisioned for hedging exemption but now its proposal to EC is asking to consider all hedging and non-hedging trades towards clearing threshold. It is done to remove complexities associated with hedging exemption. Hedging exemption removal will prove costly for the firms. 13 11-01-16 Energy firms urge EC to ease Emir clearing rules Energy firms are reviewing Emir which is conducted by Europe Commission. Emir came into force in Aug 2012. In the active participation in the review, firms suggestions are as follows:- Emir imposes trade reporting, clearing and risk mitigation obligations. 1. Exclusion of Intragroup activities- NFC = Non financial counterparty It is done so as to get rid of unnecessary multiplicity of transactions. Emir rule regarding NFC+ is :- 2. Extraterritoriality - If GNV of non-hedging activities crosses threshold, then stringent obligations like- clearing of OTC derivative business including hedging, strict reporting and risk management will be imposed. Trade outside EU have to face multiple regulations from multiple territories. Even non-Eu exchanges are considered equivalent to OTC trades and counted for clearing threshold even though these transactions are already cleared. 3. Netting - Netting is allowed against clearing threshold but it is grappling with the faulty criteria for contents to be netted like all must have same type, underlying and maturity status. No smaller time fragmentation of hedging product i.e. cascading is allowed. 4. Emir's reliance on GNV Calculation of all outstanding transaction towards threshold is leading the firms to adopt shorter maturities transactions. 14 28-01-16 Mifid II one-year delay not enough to solve problems, energy industry says EC asked for opinions on Emir rules. Mifid II implementation is facing a bumpy ride as : - Energy firms want to remain outside the onerous system of Mifid II TR - Trade Repositories 1. No definition of financial instruments are confirmed yet. 2. Rules of exemption test is unclear. 3. Business size is posing problem because of lack of quality data from TR and large number of unrecorded OTC bilateral transactions.
- 3. Firms are in confusion over their future strategy. 15 18-02-16 New EU market abuse rules worry energy traders The Mar & the accompanying Directive for Criminal Sanctions on Market Abuse will prohibit insider trading and market manipulation in derivatives markets. Mar (Market Abuse Regulation)- It ask for mandatory disclosure of inside information to spot market. It will become law across the European Union on July 3, 2016. New stricter rules under Mar will seek insider trading and manipulation. Market participants asking to release 'Accepted Market Practices'. Market Abuse Directive(Mad I), 2003 is Mar's precursor. It covers core Regulated Market(RM) whereas Mar will cover RM, MTFs and OTFs. It will shift the industry from voice based OTC to on-exchange and electronic trading. Voice based will remain only for matching buyers & sellers. Problems against its implementation:- Esma is yet to release definition of insider information and its exceptions. Surveillance is the key against manipulation. Firms are adopting technologies like 'Smarts ' by Nasdaq. 1. Regulatory unclearity. Mar scope derived from Mifid I which gets modified after Mifid II implementation. Firms are forced to adopt a cautious approach. 2. Difficulty in identification & situation analysis. 3. Owner of insider information is unknown so there is a need of clear demarcation of responsibilities. 16 24-02-16 EU capital rules for energy traders not as bad as feared- pwc Portfolio risk depends upen counterparty credit risk(CCR). It is representation of counterparty's inability to fulfil its obligations. Mifid II is expected to come on Jan 2018. pwc presents a positive picture of new capital rules like Mifid II and CRD IV. It reports:- Firms under Mifid II must comply with CRD IV which ask parties to set aside regulatory capital according to size and risk-weighting of derivatives portfolio. 1. Capital charge rules may get updated resulting into 40% savings. 2. All intragroup trades merging into same netting arrangement may reduce capital charges by 10%. 3. Collateral should be used. 4. Early bird catches the worm. Traditonal methods to measure CCR:- Traditional CCR measurement methods lack risk sensitivity. So, Basel committee released 'Standardised approach to CCP'(SA-CCP)'. It will be in effect from Jan 1, 2017. 1. Current Exposure method (CEM) 2. Standardised approach(SA) 17 15-03-16 EU position limits pose headaches for national regulators Position limits opposes speculative trading. Mifid II proposed position limits set by Esma. Mifid proposal of position limits is facing difficulties which are- OTC likely to trade on Organized Trading Facility(OTFs). It is created by Mifid II. NCA - National Competent Authority 1. Wide variation in contracts, and Esma's technical standard being reviewed by Europen Commission(EC). A decision will be made in first half of 2016. 2. Tough information gathering related to OTC bilateral contracts. Country specific NCAs are in onus with setting the limits for their country. 18 21-03-16 EC sides with big energy companies in Mifid II spat EC revision sent to Esma is regarding ancillary exemption test, position limits for commodity derivatives and non-equity transparency. EC asked to restore 'capital employed test'. Firms are opposing exemption test as big, capital intensive firms are misclassified as their capital is employed across different assets and units. It must be paid attention that entitiy employs various means to hedge like physical and financial other than commodity derivatives. The final decision by Esma is uncertain. 19 21-04-16 Banks push e-trading of OTC energy derivatives Single Dealer Platform(SDP) - It is a software used in the capital markets to deliver trading and associated services via the web. It integrate information from multiple sources and provide its access via a single user interface. So, it is an integration platform and a delivery platform. Mifid II pre-transparency rules:- Dealers must broadcast prices of OTC trades to all clients. Client interest and regulatory changes are forcing the investment banks to move towards e-trading away from trading by voice method. This e-trading is leading to the use of SDP. But SDP limitation lies in mono dealership which leads to absence of bank competition. Drivers of electronic trading:- Energy derivatives are late in joining SDP because it used to be trade in futures and usage of screen-based tools were in dominance. 1. Client enthusiasm 2. Regulations- (a) US Dodd-Frank Act & EMIR - It ask for reporting OTC trades to repositories at the earliest. (b) Mifid II(from Jan 2018) - it states that price quoting of OTC contracts must be declared to all clients. Banks with their SDPs:- Bank SDP Goldman Sachs Marquee trader Societe Generale SG Markets JP Morgan JP Morgan Markets Screen Based trading tool is the computer based punching of prices and quantities of share. 20 14-04-16 EU energy firms 'working in the dark' on remit reporting Bilateral trades include OTC, structured trades, secondary capacity tradfes and PPAs. Bilateral power & gas trades must now be reported under Remit. Remit in its attempt to detect market abuse and manipulation came out with RRMs but it is grappling with issues like information complexity and lack of standardization. Reporting problems:- Remit reporting II phase (from Apr 7, 2016)- It involves reporting of bilateral trades(OTC versions). Acer, the appointed monitor for any misconduct, has released table with proper classification and standards but evem it is facing guidance problem with table-3 & $. 1. Transactions complexity like multiple moving parts as in contingent optionality clauses Under Remit, firms must report to 'Registered reporting Mechanism'(RRMs) for passing the information which will ultimately reach to regulators. So, reporting is still in the dark. 2. Lack of regulatory guidance from Acer ACER - Agency for the Cooperation of Energy Regulators. It monitors for any misconducts. 3. Lack of standardization Acer transaction table:- Table 1 - Standard OTC trades Table 2 - Supply contracts Table 3 - Primary transport contracts, capacity trades & long term transmission rights Table 4 - Pipeline & secondary capacity trades Extra - Fundamental table 21 28-04-16 Transparency may be hazardous to your wealth Relief in post trade disclosures are applied through exemptions provided by ESMA which are as follows:- Mifid II(Jan 2018) :- Esma's Mifid II disclosure rules regarding transparency is uncertain. Its provision of broadcasting quotes to all clients is pushing banks to form their own SDPs. 1. It is applicable for contracts deemed liquid as of now. 1. Bank commodity desk is imposed with transparency requirements. SDPs are in problem because of speedy algorithmic traders or HFTs. 2. Threshold is set crossing which will lead to no disclosure obligation- 2. Banks will be considered as Systematic Internalisers(SI) in OTC market. Even post-trade disclosures may get ill-affectred by opportunist traders. Esma has put up some exemptions but all these go in vain as liquidity study and threshold level is inappropriate. (a) Large in scale(LIS) SI rules- (b) Size-specific to the investment(SSTI) (i) They must broadcast quote(bids & offers) to all clients. (ii) Price & size of trade must be disclosed after execution. 22 25-04-16 Mifid II transparency rules shake up bank commodity desks HFT - High frequency traders. Their execution speed is high. Mifir & Mifid II - Pre and post trade transparency rules are affecting the banks drastically in following ways:- SI - System Internalisers 1. It imposed pre- and post-trade transparency rule. (a) Banks may be classified as SI. 2. SI - . (b) They will move towards e-trading and so SDPs will emerge.
- 4. Single Dealer Platform(SDP) - It is a web based software used in the capital markets which integrate information and provide its access via a single user interface. Mifid defines it as entities that trade a given product on a "frequent, systematic & substantial" basis, using their own capital. Quote broadcasting rule is expected to face problems from HFTs. (a)SI classification will be based on market share based test. Liquidity analysis seems to be tricky in absence of quality data from repositories. (b) SI must broadcast quotes to all clients so that no differentiated pricing for preferred clients arises. It all result into massive investment and system upgradation. 23 27-04-16 EU benchamrk proposal may hit commodity index publishers Price reporting agencies(PRAs)- They publish spot market indexes. The 3 major PRAs are - Platts, Argus & Icis. EU's new benchmark rules is in response to Libor Scandal. Mifid II definition of 'Supervised Entities' is strangling the data access freedom of PRAs as their benchmark depends upon voluntary contribution from firms. Firms are preferring IOSCO's PRA principles published in Oct 2012. Mifid II - It proposed for contributing firms to be termed as "Supervised entities". It will be decided by Mifid licencing rule as done according to 'Ancillary exemption test'. But fear of crossing 50% threshold and involvement of more firms under Mifid II will lead to lesser contribution from firms. It will drastically result into- Proposed 3 tier hierarchy for financial benchamrks:- 1st and 2nd tier face stict rules:- 1. Less robust and transparent indexes. (i) Critical - referenced by > €500 billion (a) oversight committee 2. PRAs in response may delist few benchmarks. (ii) Significant - referenced by > €50 billion (b) Auditing (iii) Non-significant - referenced by < €50 billion (c) Accountability unit (d) Risk management framework Code of conduct to specify contributor's responsibilities. 24 03-06-16 EU energy firms kept waiting by standoff over Mifid II Firms wanted to stay out of Mifid II. The 'Ancillary exemptiont test' which was a deciding factor in this is in unclear state. EC - Europen Commission A disagreement between Esma & EC regarding the firms' size (main business) with respect to 'Ancillary exemption test' is leading to frustration among EU energy companies as regulatory clarification is getting delayed. Esma refused EC amendments on Regulatory Technical Standard(RTS). ESMA EC * Firm's size should depend on trading activity. * 'Capital employed' should be a supplement only. * 'Capital employed' should be used for size aspect. 25 06-06-16 Beware the hype around analytics Big data analytics use is on rise because- Analytics has transformed once-opaque markets and providing competitive edge but it needs to be supplemented with scepticism. (i)Data surge due to the electronification of energy trading Benefits to energy firms:- (ii)Increased computing power is helping in better modelling and stimulation. 1. Saving on working capital is leading to reduction in Value at risk(VAR). (ii) Increased profit and efficiency can be achieved by inherent assets & contracts. 2. Better hedge portfolio management. (iv) Increased market complexity due to intermittent renewable energy. Ex- Thomson Reuters Eikon, Genscape 26 07-06-16 Esma changes to position limits as 'sensible' Position limit - It is a part of Mifid II. It imposes caps on net position firms can take in exchange traded commodity derivatives and OTC. Esma gave a new hope to firms by revising the position limits in a mix way on the demand by EC but final decision is yet to come. These are- Position limit is covered under RTS 21. (i) Food derivatives were tightened to 2.5% limits. Esma adjusted position limits imposed on commodity under Mifid II Esma's definition of deliverable supply states- substitute grades or types of a commodity that can be delivered in settlement of a commodity derivative contract. (ii) New & illiquid contracts are eased (50% expected). Firms are in advantage that they can offset the 'net off venue' by 'on-venue contracts'. EC - Europen Commission Positon limits is set by National Competent Authoity(NCA). 27 24-06-16 EU energy firms fret over 'massive' impact of CRD IV EBA - European Banking Authority Mifid II - It proposes CRD IV. Mifid II in its requirement of CRD IV will impose heavy obligation for commodity trading firms if they do not qualify for 'Ancillary Exemption test'. EBA's report is a relief for firms owing real assets as their risk was assumed to be less than investment firms. CRD IV is the EU's version of Basel III bank capital rules. It took effect in Jan 2014 but commodity trading firms were exempted at that time. Esma & EC are working with EBA for structuring capital requirements for commodity trading firms. Mifid II will apply to Britain's firms as Brexit departure will take at least 2 years even if Mifid II is taking effect on Jan 2018. 28 23-06-16 European energy regulators step up market surveillance Remit data can identify market abuse. Remit - Europe regulators have ramped up their effort of surveillance and data collection as per guided by remit. RRMs - Registered Reporting Mechanisms 1. It avoid abuse and manipulation in EU physical gas & power market. This surveillance effort is seen by firms as a data flood burden. Acer will be releasing Transaction Reporting User Manual(TRUM) on reporting guidelines. 2. Data transfer flow:- Problems against surveillance:- 1. Data quality especially of non-standard bilateral transactions. 2. Identification of worthy disclosures. 3. Reporting phase:- * 1st - Oct 2015 - Standard trades * 2nd - Apr 7, 2016 - Bilateral trades 29 22-06-16 Shell compliance chief rues'perverse outcome' of Mifid II A way out for energy firms(smart moves):- Mifid II - Inappropriate result of Mifid II can fragment the liquidity and cause regulatory arbitrage. (i) Shift away to lighter regulatory regime. 1. It imply bank-like capital requirements on commodity focussed companies which are unable to pass exemption test. Firms must adopt some smart moves to keep itself away from costly Mifid II regime. (ii) Move towards physical contracts from derivatives. 2. Physically settled contract traded on OTF will not be classified as financial instruments under Mifid II and doesn't count towards threshold. (iii) Shift to other trading venues like EEX which is seeking OTF status. Organized Trading Facility (OTF)- It is any facility or system designed to bring together buying and selling of financial instruments. (iv) Move to non-EU countries as Switzerland. 30 30-06-16 Trade surveillance slow to catch on at energy firms Regulators will carry out surveillance as they are equipped with complete market picture due to trade reporting mechanisms in place. Market Abuse Regulation(Mar)- It aims at enhancing market integrity and investor protection. It provides a defense if the transaction was legitimate and in accordance with market practices accepted by the competent authority which are referred to as ‘Accepted Market Practices’ (AMPs). Esma's regulation to fight market indiscipline came in the form of Mar. Low priority- 84% out of 245 industry professionals surveyed didn't use surveillance in 2016. Esma :- It is stimulating firms to adopt automated trade surveillance system. It will help them to get informed internally on any wrongdoings though currently the adoption pace is slow. Firms with inadequate surveillance will be fined. It released EU Mar and Directive for Criminal Sanctions on market abuse taking effect in EU on July 3, 2016. But it represents a good start by the creation of internal data repository as of now. Problems with existing monitoring by firms:- It is against market manipulation and abuse. (i) These are product specific and not cover across commodities. Mar will apply Remit-type regime to commodity derivatives and spot markets. It impose market surveillance to be carried out by firms. Firms RRMs Regulators + Central repository of ACER
- 5. (ii) They are using in-house solutions and hence lacking in cross- market manipulation. 31 06-07-16 No need to be negative about negative prices Negative price - Lessons:- The phenomenon of negative price should not be seen with cynicism as it is only a rare activity and it guides for a better strategy formulation to enhance efficiency. 1. It is caused due to combination of huge wind & solar influx at the time of low demand and insufficient transmission capacity. (i) Better empower consumer to shift their demand pattern accordingly. 2. It forces the firms to pay for privilege. (ii) Flexibility is important. 3. Germany was the first country to observe it. (iii) It foster grid level storage which can act as a 'round the clock profit machine'.