REGULATORY BRIEF. REMIT Transaction Reporting. Jens Schuback Mark Michael Ehlich REGULATORY BRIEF SAPIENT CORPORATION 2014

Transcription

1 CE 2 CE 3 REGULATORY BRIEF CE REMIT Transaction Reporting Jens Schuback Mark Michael Ehlich January

2 CONTENTS 1. REMIT in the context of regulatory reform 3 2. Timeline 4 3. Transaction reporting under REMIT 4 4. Products in scope of transaction reporting 5 5. Standardized and non-standardized products 6 6. Single-sided reporting 6 7. Governance 7 8. Outlook 7 9. About the authors 8 2

3 1. REMIT IN THE CONTEXT OF REGULATORY REFORM In the aftermath of the financial crisis, new regulations have been introduced to the financial industry and established regulations continue to be revisited. The Regulation on Wholesale Energy Market Integrity and Transparency (REMIT) contains aspects of various regulations for the financial industry and applies them to wholesale energy products and related derivatives. Specific registration and reporting rules for utilities and energy trading companies are coming into effect. Since REMIT contains references to some of the financial industry regulations (e.g., Markets in Financial Instruments Directive (MiFID)), market participants must maintain a holistic view of these regulations and their dependencies. Like the rules for financial instruments, the intention of REMIT is to ensure transparency and integrity within energy wholesale markets. This brief focuses on the transaction reporting obligation according to Article 8 (1) REMIT, which is similar to the transaction reporting under the European Market Infrastructure Regulation (EMIR). However, market participants should be aware that gaps exist in terms of the reporting infrastructure, required data, formats, as well as product scope. REMIT Obligations Prohibition of insider trading Publication of insider information Prohibition of market abuse Reporting of transactions Reporting of fundamental data Registration of market participants Related REMIT Article (1) 8 (5) 9 Related Regulation of the Financial Industry MAD MAD MAD MiFID EMIR MiFID Dodd-Frank (US) Figure 1. REMIT and related regulations within the financial industry 3

4 2. TIMELINE While REMIT itself has been in force since December 28th 2011, the transaction reporting obligation depends on the adoption of the related Implementing Act. The Implementing Act was drafted by the Agency for the Cooperation of Energy Regulators (ACER) and will follow the European Union s legislative process. Transaction reporting will start no earlier than six months after the adoption of the Implementing Act. Based on the industry s experience addressing EMIR transaction reporting requirements, six months to prepare for transaction reporting under REMIT may pose a challenge. Therefore, ensuring that market participants are prepared for transaction reporting should become a critical focus for the industry. Because REMIT transaction reporting requires such comprehensive data, market participants will most likely have to consolidate counterparty and transaction data from different source systems. Consequently, they will need to make amendments to their transaction process flows. Large utility companies should also evaluate a centralized versus a decentralized REMIT transaction reporting approach. Centralized REMIT transaction reporting requires that one legal entity of a group reports on behalf of all other legal entities of the group via a central REMIT transaction reporting hub. Decentralized REMIT transaction reporting requires all affected legal entities of a group to implement their own REMIT transaction reporting capabilities. REMIT TIMELINE 6 MONTHS 3 MONTHS 28. December 2011: REMIT coming into force 16. August 2012: EMIR coming into force 12. February 2014: EMIR reporting start date Expected in middle of 2014: Approval of Implementing Act Registration of market participants REMIT transaction reporting start date Figure 2. The REMIT timeline 3. TRANSACTION REPORTING UNDER REMIT Under REMIT, all market participants trading wholesale energy products are affected by the transaction reporting obligation. It is important to note that not only new business is affected, but outstanding transactions on the reporting start date will have to be reported as well. This will require firms to backload old transactions. Transactions in wholesale energy products must be reported via Registered Reporting Mechanisms (RRMs), Trade Repositories and National Regulatory Authorities (NRAs) or directly to ACER in a specific timeframe (execution date +1 day or execution date +1 month) and format. Firms will be required to report both counterparty and transaction data. Aside from reporting transactions to Trade Repositories, market participants will have to process feedback messages received from the Trade Repositories. As a result, processes and responsibilities will have to be designed and approved with regard to feedback messages. Moving forward, market participants should consider establishing a Target Operating Model (TOM) for REMIT transaction reporting, which helps to illustrate the many facets involved. Figure 3 provides an overview of aspects to be considered in the TOM. 4

5 TARGET OPERATING MODEL INVOLVE BUSINESS AND IT UNITS Define ownership, roles and responsibilities Describe applicable reporting policy State the accountability and delegation policy Create staff awareness of operating process Train relevant operative staff Monitor the regulatory landscape and changes Define operating process flow Describe management and monitoring process Collect known risks and issues Specify system architecture and integration Implement internal and external interfaces Test and sign off reporting solution GOVERNANCE PEOPLE PROCESS SYSTEMS Source System Business Logic Mgmt. Reporting Regulatory Reports Figure 3. Target Operating Model (TOM) 4. PRODUCTS IN SCOPE OF TRANSACTION REPORTING REMIT introduces the term wholesale energy products a term never before used in any law. Based on this term, the following products are covered by the reporting obligation: Contracts relating to the supply of electricity and natural gas with delivery in the EU, Contracts relating to the transportation of electricity or natural gas with delivery in the EU, Derivatives (physical and financial) relating to the aforementioned products. REMIT aligns its definition of derivatives to that of MiFID. Since MiFID is currently being revisited, a change in product scope of REMIT is likely. The following products are likely to be exempted from the reporting obligation unless they are traded on an organized market place as defined by REMIT: Over-the-counter (OTC) intra-group contracts, Contracts for the physical delivery of electricity or natural gas in case it is produced from renewable energy sources and the generation capacity does not exceed certain thresholds, Contracts for the supply and distribution of electricity or natural gas for the use of final customers unless a certain consumption capacity is exceeded. Assessing which commodity products and related derivatives fall under REMIT can be complex. As such, market participants should establish clear REMIT determination rules and can use tools, such as a decision tree, to help with the process. 5

6 5. STANDARDIZED AND NON- STANDARDIZED PRODUCTS 6. SINGLE-SIDED REPORTING REMIT distinguishes between standardized products and non-standardized products with regard to transaction reporting. ACER will publish and maintain a list of standardized contracts at a later stage, at which time all products not classified as standardized products will be classified as non-standardized products. The transaction reporting requirements are more comprehensive for standardized products than for non-standardized products. Similar to EMIR, REMIT distinguishes between counterparty data and common data (transaction data) in the reportable fields. For common data, different reporting forms are used for standardized products (long form) and nonstandardized products (short form). These two forms differ in the amount and type of information that have to be reported. In addition, firms will have to implement and maintain determination rules per product to reflect standardized products and non-standardized products and related reporting requirements. ACER does not specify any fields to report lifecycle events for non-standardized contracts, although REMIT explicitly states that lifecycle events shall be reported. It remains to be seen whether lifecycle events will have to be reported for non-standardized products. REMIT states that reporting transactions by one counterparty is sufficient. However, it does not provide a reporting hierarchy to determine which party of the transaction must report. Since each counterparty is ultimately responsible for its own REMIT transaction reporting compliance, it is reasonable to assume that each counterparty will report its own transactions to ensure that they are accurately reported. The role of organized markets and Transmission System Operators (TSOs) in the transaction reporting process has not yet been clearly defined. It remains to be seen whether these institutions will have to report certain transactions (e.g., orders to trade). If they do, transaction reporting would become more fragmented but would also relieve market participants from certain transaction reporting obligations. In addition, REMIT allows delegated reporting, whereby one counterparty reports on behalf of another counterparty. Smaller market participants should evaluate delegating the reporting obligation versus implementing their own reporting infrastructure. Large market participants should explore client delegated reporting as a service offering. Regarding the timing of the reporting, REMIT distinguishes between two types of contracts, which have to be reported under different timelines. Standardized contracts : New transactions and lifecycle events must be reported no later than the business day following the trade execution or lifecycle event. Non-standardized contracts : New transactions must be reported no later than one month following the trade execution. Lifecycle events must be reported no later than the business day following the lifecycle event. 6

7 7. GOVERNANCE Because of the many roles, responsibilities and processes that need to be defined, REMIT transaction reporting should be embedded into a firm s overall governance framework. In terms of REMIT transaction reporting, the governance framework should consider many aspects, such as: Roles and responsibilities, Data flows and data sources, Process documentation, Regulatory assurance testing, Escalation procedures, Management information, Participating industry bodies (e.g., European Federation of Energy Traders (EFET)). In addition, the governance framework should be set up in such a way so that: REMIT changes are captured in a timely fashion, REMIT is viewed as part of overall regulatory change, Changes are communicated on a timely and consistent basis, Projects are set up to implement changes and possible synergies with EMIR, Dodd-Frank or other commodity-related reporting requirements are considered. As an industry best practice, a Regulatory Design Authority, which looks across regulations, could be established. 8. OUTLOOK REMIT transaction reporting is designed to increase the transparency of trading activities in energy wholesale products in Europe. It remains to be seen how this high volume of data will be used by regulators, e.g., in terms of market manipulation detection. Since transaction reporting for energy products is apart from EMIR and Dodd-Frank a very new requirement with a short six-month timeline, market participants should begin developing their REMIT transaction reporting strategy today. The various types of relevant data sources and differing timeframes for reporting products will add a layer of complexity. Firms should not underestimate the impact compliance can have on business operations. It is very likely that questions around REMIT and related interpretation of the law will remain uncertain until the transaction reporting start date. Therefore, market participants will have to argue and document their interpretation and related implementation thoroughly as proof to auditors and regulators. 7

8 9. ABOUT THE AUTHORS Jens Schuback Business Consultant, Frankfurt Jens has extensive experience in the financial services and investment banking domains. Jens is a subject matter expert in the field of new regulatory requirements (Dodd-Frank, EMIR, REMIT, and MiFID II) and has advised both sell-side and energy clients on understanding, approaching and implementing these new mandates Mark Michael Ehlich Associate, Frankfurt Mark is a proactive business consultant with extensive investment banking product knowledge and a deep understanding of transaction reporting regulations. He is an active member of Sapient Global Markets Regulatory Response practice with a focus on transaction reporting to trade repositories for compliance with EMIR. He is also one of the main contacts for market transparency reporting under REMIT to the European Energy Exchange. Sapient Global Markets, a division of Sapient (NASDAQ: SAPE), is a leading provider of services to today s evolving financial and commodity markets. We provide a full range of capabilities to help our clients grow and enhance their businesses, create robust and transparent infrastructure, manage operating costs, and foster innovation throughout their organizations. We offer services across Advisory, Analytics, Technology, and Process, as well as unique methodologies in program management, technology development, and process outsourcing. Sapient Global Markets operates in key financial and commodity centers worldwide, including Boston, Calgary, Chicago, Dusseldorf, Frankfurt, Houston, London, Los Angeles, Milan, New York, Singapore, Washington D.C. and Zurich, as well as in large technology development and operations outsourcing centers in Bangalore, Delhi, and Noida, India. For more information, visit Sapient Corporation. Trademark Information: Sapient and the Sapient logo are trademarks or registered trademarks of Sapient Corporation or its subsidiaries in the U.S. and other countries. All other trade names are trademarks or registered trademarks of their respective holders. 8

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