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Trading Transparency
CESR/ERGEG advice to DG TREN and DG MARKT in
the context of the Third Energy Package
Johannes Kindler, ERGEG Vice President
Florence Forum, 24-25 November 2008
Background
Energy trading has increased strongly in recent years within the
European energy market
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in particular as regards electricity trading (Continental Europe: +45 % trade
at exchanges and OTC 2007-2003),
but also trading of gas has evolved over time (“emerging market”)
…and is of increasing importance as it raises predictability and
stability of prices due to hedging opportunities (financial/physical).
Even though only a moderate portion of electricity trading is
executed over power exchanges
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exchanges constitute economically important price signals to other
segments of energy markets,
and prices have strong impact on OTC and energy derivatives pricing;
the situation is similar to oil markets.
In order to facilitate fair and orderly trading and to enhance
confidence in market integrity, adequate supervision and regulatory
oversight is essential.
Florence Forum, 24-25 November 2008 - CESR/ERGEG advice in context of Third Energy Package
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Traded Volumes in Europe (2006) – Electricity
Trade* Change (%) Trade/
TWh 2005 - 2006 Consumption
Germany
Nordic
UK
Netherlands
France
Italy
Spain
Total
4.227
2.446
656
526
489
209
136
8.709
17%
1%
4%
1%
13%
0%
-47%
7%
7,5
6,3
1,8
4,6
1,0
0,6
0,5
3,5
Electricity trading volume in Europe
increased strongly in absolute terms.
Trading represents about three times total
electricity consumption in Europe.
* OTC trading and trading at exchanges.
Source: E.ON Sales & Trading
Florence Forum, 24-25 November 2008 - CESR/ERGEG advice in context of Third Energy Package
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Traded Volumes in Europe (2007) – Gas (1)
Gas trading is an „emerging market“.
For example in Germany:
• Total consumption (2007): 1.000 TWh
NBP
TTF
7.000 TWh (2006)
60 TWh
• Exchange (EEX) traded: about 5% of
consumption
• OTC traded: about 25% of consumption
Zeebrügge
EGT VP: 73,2 TWh
446,9 TWh
H-Gas Norddeutschland VP: 67 TWh
PEG
GdF Germany: 2,4 TWh
118 TWh
Baumgarten
197,2 TWh
CDG
436 TWh
PSV
71,7 TWh
Source: ENERGIE & MANAGEMENT, 15.2.2008; EEX;
Petroleum Economist, Fundamentals of the World Gas Industry, 2008
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Traded Volumes Germany (2006-2008) – Gas (2)
TWh
Traded volumes (high caloric gas) at the most liquid platforms (OTC, Germany)
20
increasing
volume
15
10
5
0
Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul
06 06 06 06 06 07 07 07 07 07 07 07
Virtual Trading Point EGT
Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun
07 07 07 07 07 08 08 08 08 08 08
Jul Aug
08 08
Virtual Trading Point H-Gas Norddeutschland
Source: EEX; EGT; Gasunie Deutschland
Florence Forum, 24-25 November 2008 - CESR/ERGEG advice in context of Third Energy Package
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Background to joint mandate to CESR and ERGEG
Joint mandate to CESR and ERGEG issued by the European
Commission on 21st December 2007
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Technical advice pursuant to Articles 22f and 24f respectively in the two
proposals for Directives amending Directive 2003/54/EC and
2003/55/EC (Third Energy Package)
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The Question: Are the requirements within financial regulations
(MAD, MiFID) sufficient to address market integrity in electricity
and gas markets properly?
Main issues
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Fact finding
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Market abuse
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Record keeping
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Trade transparency
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Exchange of information
advice delivered
consultation paper published
(consultation until 24th November)
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Market Abuse
Recommendations of CESR/ERGEG
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CESR and ERGEG propose a basic, tailor-made market abuse
framework in the energy sector legislation for all electricity and
gas products not covered by MAD (Market Abuse Directive).
 The current financial regulations are not sufficient to properly address
market integrity in the energy markets.
 Energy trading is only partly covered by MAD.
Conclusion: Neither safeguards nor sanctions against market
abuse exist.
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CESR and ERGEG propose disclosure obligations comparable to
Article 6 MAD in the energy sector regulations.
Very important:
Other related markets (e.g. oil, coal and CO2 emissions) have to be
considered as well, as prices of these commodities directly and
indirectly impact on electricity and gas prices.
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Transparency (1)
General principle
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Traders need European-wide harmonized data, which can be
processed easily and enables quick and sound decision making:
 Fundamental data (e.g. generation, transmission,
transportation, storage and capacity levels, etc.),
 addressed in advice on market abuse
 pre- and post-trade transparency, i.e. information about
trading (before and close to real time), and
 aggregated trading data is helpful in addition to get better
market overview.
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Transparency (2)
Trading transparency (1)
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Pre- and post-trade transparency - in the context of the Markets
in Financial Instruments Directive (MiFID) - relates to information
about trading that is relevant for traders when trading decision is
to be made.
 Pre-trade transparency addresses publication of current bid
and offer prices and the depth of trading interests at these
prices.
 Post-trade transparency relates to publication of the price,
volume and time of the transactions executed.
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Transparency (3)
Trading transparency (2)
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CESR/ERGEG lack evidence of market distortion (due to
unequal access to information on trading), but that is no proof it
does not happen.
 Trade transparency is an important tool to detect market
distortion.
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Generally, high level of transparency for trading at exchange
markets available
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Substantial portion of energy transactions is traded on not
regulated markets (OTC, MTF), i.e. trade transparency is less
easily accessible.
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Transparency (4)
Trading transparency (3)
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Extent of pre- and post-trade transparency needed is still
under discussion by CESR/ERGEG.
 CESR and ERGEG consider that confidence in the integrity of
the markets is of great importance in this context.
 It has to be examined to what extent additional pre- and posttrade transparency is necessary and at the same time
sufficient to support market integrity.
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General conclusion:
 No regulatory “Sarbanes-Oxley Act”, but what needs to
be done must be done.
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Transparency (5)
Aggregate trading data
 Basis: para. 3 of Art. 22f/24f of the proposals for amending
Directive 2003/54/EC and 2003/55/EC (Third Energy Package)
 ERGEG is in favour of a European harmonized framework for
aggregate transparency of transactions and proposes that
 each national regulatory authority (NRA) assesses whether the level of
transparency is sufficient in its Member State, and
 if the transparency level is considered not sufficient, the NRA should
publish missing data.
 ERGEG favours publication of data on all products including
those covered by MiFID => Backing by Art. 22f/24f open issue
 Market participants’ comments on the different options regarding
content/frequency of the publication requested
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Record-keeping
Main issues
 Record-keeping requirements for supply undertakings in Art.
22f/24f respectively in the proposals for Directives amending
Directive 2003/54/EC and 2003/55/EC
 Clear distinction: Record-keeping vs. transaction reporting
 Provisional proposals of CESR/ERGEG
 Requirements for all persons which conduct physical trade (spot
contracts and physically settled derivatives transactions), i.e.
o non-investment firms: all supply contracts and derivatives
o investment firms: only supply contracts not covered by MiFID
 Requirements similar to MiFID; ERGEG: additional content where
necessary should not be excluded.
 Electronic format (costs to be carefully inquired)
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Exchange of Information
Main issues
 CESR/ERGEG propose to start information exchange on a
case-by-case basis for fulfilling their legal tasks like monitoring
the market.
 Practical/legal obstacles for energy regulators to periodically access
data of MiFID firms that are not supply undertakings.
 Additionally, CESR/ERGEG propose to have a legal basis for
this information exchange given by European legislation.
 Pragmatic option: Establishment of bi-/multilateral agreements
among energy and financial regulators for exchanging
information.
 Periodic and automatic exchange of data through the
Transaction Reporting Exchange Mechanism (TREM; used by
securities regulators) is not appropriate at this stage.
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Thank you for your attention!
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