Persons professionally arranging and executing transactions - PPAET
- Category: PPAET
Pursuant to Article 3(1)(28) of the Market Abuse Regulation (MAR) ‘person professionally arranging or executing transactions’ (sometimes the acronym "PPAET" is used) is "a person professionally engaged in the reception and transmission of orders for, or in the execution of transactions in, financial instruments".
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17 April 2024 REMIT 2 published in the EU Official Journal
16 April 2024
29 February 2024
14 December 2023 Proposal for a Regulation of the European Parliament and of the Council amending Regulations (EU) 2019/943 and (EU) 2019/942 as well as Directives (EU) 2018/2001 and (EU) 2019/944 to improve the Union’s electricity market design, Recital 21: virtual regional hubs should not be understood as entities arranging or executing transactions
ESMA publishes Report on Suspicious Transactions and Order Reports, ESMA74-1103241886-880
Questions and Answers on the Market Abuse Regulation (MAR), ESMA70-145-111 updated Questions and Answers on the Prevention and detection of market abuse - ESMA underlines that the PPAET regime applies also to investment firms providing direct electronic access (DEA providers) with respect to their DEA clients’ trading activity.
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The provisions o PPAET are the first line of defence in the fight against market abuse - at firm level, where arrangements, systems and procedure have to be implemented to ensure that potentially abusive trading is detected and reported in the form of a suspicious transaction and order report (STOR). Their presence represents both an ex-ante deterrence and a way to promote detection post facto (the view expressed in the ESMA Final Report of 28 March 2022: Emission allowances and associated derivatives, ESMA70-445-38, p. 20).
The definition of “person professionally arranging or executing transactions” laid down in point (28) of Article 3(1) of MAR is "activity based, does not cross refer to definitions under MiFID and is independent from the latter" (ESMA's Questions and Answers on the Market Abuse Regulation (MAR) ESMA70-145-111)
According to Article 16 of the MAR, any person professionally arranging or executing transactions is required to establish and to maintain effective arrangements, systems and procedures to detect and report suspicious orders and transactions. Such a person must notify the competent authority without delay where it has a reasonable suspicion that an order or transaction in any financial instrument, whether placed or executed on or outside a trading venue, could constitute insider dealing, market manipulation or attempted insider dealing or market manipulation.
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Article 3(1)(28) ‘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, financial instruments
Article 16 Prevention and detection of market abuse
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Requirements for the said systems and procedures as well as notification templates to be used are stipulated in detail in the Commission Delegated Regulation (EU) 2016/957 of 9 March 2016.
It is extremely important that the scope of Article 16(2) of MAR is not only limited to firms or entities providing investment services under MiFID.
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Links:
Persons professionally arranging transactions - PPAT (REMIT Definitions) |
The obligation to detect and identify market abuse or attempted market abuse under Article 16(2) of MAR applies broadly, and “persons professionally arranging or executing transactions” include buy side firms, such as investment management firms (AIFs and UCITS managers), as well as firms professionally engaged in trading on own account (proprietary traders). ESMA, moreover, underlines that also non-financial firms are in the scope of the respective requirements. In the aforementioned ESMA's Questions and Answers on the Market Abuse Regulation updated on 1 September 2017 ESMA explicitly stressed:
"Non-financial firms that, in addition to the production of goods and/or services, trade on own account in financial instruments as part of their business activities (e.g. industrial companies for hedging purposes) can be considered firms professionally arranging or executing transactions in financial instruments under Article 16(2) of MAR.
The fact that they have staff or a structure dedicated to systematically deal on own account, such as a trading desk, or that they execute their own orders directly on a trading venue as defined under MiFID II, are indicators to consider a non-financial firm as a person professionally arranging or executing transactions."
Moreover, on 25 November 2022 ESMA updated the MAR Questions and Answers once more and underlined that the PPAET regime applies also to investment firms providing direct electronic access (DEA providers) with respect to their DEA clients’ trading activity.
It is noteworthy that, according to Article 3(2) of the said Commission Delegated Regulation (EU) 2016/957 of 9 March 2016, persons professionally executing or arranging transactions and market operators and investment firms operating trading venues must, upon request, provide the competent authority with the information to demonstrate the appropriateness and proportionality of their systems in relation to the scale, size and nature of their business activity, including the information on the level of automation put in place in such systems.
In turn, the Electricity Market Design Package agreed on 14 December 2023 (Proposal for a Regulation of the European Parliament and of the Council amending Regulations (EU) 2019/943 and (EU) 2019/942 as well as Directives (EU) 2018/2001 and (EU) 2019/944 to improve the Union’s electricity market design) in Recital 21 reserves that virtual regional hubs "should not be understood" as entities arranging or executing transactions.
Elements of the regulatory framework
Among the requirements of the said Commission Delegated Regulation (EU) 2016/957 of 9 March 2016, which are placed upon persons professionally executing or arranging transaction, the following are particularly noteworthy:
1. Appropriateness and proportionality of systems used: the requirement to provide the competent authority, upon request, with the information to demonstrate the appropriateness and proportionality of systems in relation to the scale, size and nature of business activity, including the information on the level of automation put in place in such systems;
2. Human analysis: the requirement to put in place and maintain arrangements and procedures that ensure an appropriate level of human analysis in the monitoring, detection and identification of transactions and orders that could constitute insider dealing, market manipulation or attempted insider dealing or market manipulation;
3. Documentation's retention period: requirement to maintain for a period of five years the information documenting the analysis carried out with regard to orders and transactions that could constitute insider dealing, market manipulation or attempted insider dealing or market manipulation which have been examined and the reasons for submitting or not submitting a suspicious transaction and order report’ (STOR). That information must be provided to the competent authority upon request.
It is noteworthy, MAR includes a list of indicators of market manipulation that firms “must be mindful of in ensuring their systems and procedures are effective.”
Delegation of functions of monitoring, detection and identification of suspicious orders and transactions
Within the groups persons professionally arranging or executing transactions have the right to delegate to a legal person forming part of the same group the performance of the functions of monitoring, detection and identification of orders and transactions that could constitute insider dealing, market manipulation or attempted insider dealing or market manipulation. When such functions are centralised in this manner, the delegation requires a written agreement.
The person delegating those functions remains, however, fully responsible for discharging all of its obligations under MAR and its secondary legislation and must ensure the arrangement is clearly documented and the tasks and responsibilities are assigned and agreed, including the duration of the delegation.
Delegation of data analysis and of the generation of alerts necessary to conduct monitoring, detection and identification of suspicious orders and transactions
A person professionally arranging or executing transactions may, by written agreement, delegate the performance of data analysis, including order and transaction data, and the generation of alerts necessary for such person to conduct monitoring, detection and identification of orders and transactions that could constitute insider dealing, market manipulation or attempted insider dealing or market manipulation to a third party (‘provider’). Such delegation is possible also outside of company's groupings.
The person delegating those functions remains fully responsible for discharging all of its obligations under MAR and its secondary legislation and must comply at all times with the following conditions:
(a) it must retain the expertise and resources necessary for evaluating the quality of the services provided and the organisational adequacy of the providers, for supervising the delegated services and for the management of the risks associated with the delegation of those functions on an ongoing basis;
(b) it must have direct access to all the relevant information regarding the data analysis and the generation of alerts.
The obligation to report STOR as well as the responsibility to comply remains with the delegating person (recital 4 of the Regulation 2016/957).
The written agreement in such a case must contain:
- the description of the rights and obligations of the person delegating the functions and those of the provider,
- the grounds that allow the person delegating the functions to terminate such agreement.
Enforcement
Regulatory regime regarding PPAET is rigorous and subject to sanctions. By way of example, on 19 August 2022 the UK Financial Conduct Authority (FCA) issued the Final Notice regarding Citigroup Global Markets Limited (CGML) stating that between 2 November 2015 and 18 January 2018 CGML breached the requirements of Article 16(2) of MAR by failing to conduct its business with due skill, care, and diligence.
According to the said FCA’s Notice, CGML’s breach comprises the following failures:
a) CGML’s implementation of the requirements of Article 16(2) was flawed.
i. CGML proceeded to implement Article 16(2) without initially considering the secondary legislation that supplemented MAR.
ii. CGML’s initial MAR gap analysis, which was not completed until October 2017, did not provide CGML with the means to prioritise the most serious market abuse risks affecting its business.
iii. CGML did not begin preparing an Article 16(2) risk assessment until December 2017.
b) The failure to accurately track the implementation of the requirements of Article 16(2).
i. The MAR Working Group, which was one of the forums involved in the implementation of the requirements of Article 16(2), failed to provide sufficient oversight of the implementation of the requirements of Article 16(2).
ii. CGML failed to define the scope of the MAR implementation objective in its 2016 EMEA Compliance Plan. As a result compliance with Article 16(2) was not agreed as a prerequisite for the completion of the objective.
iii. CGML’s UK Business Risk, Compliance, and Controls committee and the CGML Board were both wrongly informed in late 2016 that MAR implementation was complete.
iv. EMEA Compliance failed to properly evaluate and monitor work relating to Article 16(2) implementation that was conducted as part of a global markets remediation programme undertaken by Citigroup.
Another example of enforcement action in this area is the press release of 29 February 2024 of the Central Bank of Ireland, where Goodbody Stockbrokers Unlimited Company has been fined €1,225,000 for a breach of its obligations under Article 16(2) of MAR. The Central Bank investigation found that Goodbody failed to put in place an effective trade surveillance framework to monitor, detect and report suspicious orders and transactions in relation to market abuse in the period July 2016 to January 2022.
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Q6.1 Does the obligation to detect and report market abuse under Article 16(2) of MAR apply to investment firms under MiFID only or do UCITS management companies, AIFMD managers or firms professionally engaged in trading on own account also fall within the scope of that obligation? Updated: 1 September 2017 A6.1 The definition of “person professionally arranging or executing transactions” laid down in point (28) of Article 3(1) of MAR is activity based, does not cross refer to definitions under MiFID and is independent from the latter, leading thus to consider that the scope of Article 16(2) of MAR is not only limited to firms or entities providing investment services under MiFID. |
REMIT 2
It is noteworthy that on 17 April 2024 Regulation (EU) 2024/1106 of the European Parliament and of the Council of 11 April 2024 amending Regulations (EU) No 1227/2011 and (EU) 2019/942 as regards improving the Union’s protection against market manipulation on the wholesale energy market (REMIT 2) has been published in the EU Official Journal.
REMIT 2 included the definition of a person professionally arranging or executing transactions also into the wholesale energy market legal framework - in addition to the existing construct of the person professionally arranging transactions (PPAT).
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Regulation (EU) 2024/1106 of the European Parliament and of the Council of 11 April 2024 amending Regulations (EU) No 1227/2011 and (EU) 2019/942 as regards improving the Union’s protection against market manipulation on the wholesale energy market (REMIT 2) Date of entry into force on 7 May 2024 with varying application dates for certain provisions, article 15(2) will apply from 8 November 2024
Recital 12 [...] Order book providers should also be designated as persons professionally arranging transactions subject to the obligation to monitor and report suspected breaches of this Regulation. (18) Persons professionally arranging or executing transactions should have the obligation to report suspicious transactions in breach of Regulation (EU) No 1227/2011 with regard to insider trading and market manipulation and, in order to enhance the possibility of enforcement of such breaches, should also have the obligation to report suspicious orders and potential breaches of the obligation to publish inside information. Direct electronic access providers and order book providers are considered to be persons professionally arranging transactions.
Article 1(3)(e) Regulation (EU) No 1227/2011 is amended as follows: (e) the following point is inserted: ‘(8a) “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;’
(18) Article 15 is replaced by the following: ‘Article 15 Obligations of persons professionally arranging or executing transactions 1. Any person professionally arranging transactions in wholesale energy products 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, 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. 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. 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. 4. Without prejudice to Regulation (EU) No 596/2014, persons professionally arranging or executing transactions shall be subject to the rules of notification of the Member States in which the market participant involved in the potential breach is registered and where the wholesale energy product is delivered. Such notification shall be addressed to the national regulatory authorities of those Member States. 5. By 8 May 2025 and every year thereafter, the Agency shall, in cooperation with national regulatory authorities, issue and make public a report with aggregated information in compliance with applicable data protection law, excluding commercially sensitive information, on the implementation of this Article, in particular with regard to: (a) the arrangements, systems and procedures referred to in paragraph 3 and their effectiveness; (b) the national regulatory authorities’ analysis of suspicious transactions, response to poor quality reporting and non-reporting of suspicious transactions and related activities with regard to enforcement and penalties.’; |
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ACER Open letter of 16 April 2024 on the implications of the revision of Regulation (EU) No 1227/2011 on REMIT data reporting aspects and notification obligations
• What novelties does the amended REMIT introduce about the concept of PPA(E)T?
The concept of persons professionally arranging or executing transactions (PPAETs) is currently not defined in neither REMIT nor the REMIT Implementing Regulation. The amended REMIT introduces for the first time such a definition under Article 2(8a), as well as new obligations for PPAETs under Article 15. Recitals 12 and 18 of the amended REMIT also make reference to the concept of PPAETs, with the underlying objectives to improve the Agency’s market monitoring and data collection regimes and to make them more complete, as well as to enhance the possibility of enforcement of market abuse breaches.
OLD No definition.
NEW ‘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.’
Chapter 8 of the 6th Edition of the ACER Guidance on the application of REMIT currently provides explanations and examples of the delimitation of the concept of PPAT, as well as guidance on the application of the obligations on PPATs. This section of the Guidance will be updated in the course of 2024 to consider the new changes stemming from the amended REMIT.
• What new obligations does Article 15(1)-(2) of the amended REMIT introduce for PPAETs/STORs?
As of the entry into force of the amended REMIT, PPAETs will have an obligation under Article 15 paragraphs 1 and 2 to notify ACER and the relevant NRAs (NRA of the Member State in which the market participant involved in the potential breach is registered, and the NRA of the Member State where the wholesale energy product is to be delivered) about any potential breaches of Articles 3, 4 or 5 of REMIT. Article 15 paragraphs 1 and 2 of the amended REMIT specify that the PPAETs must reasonably suspect that there is a potential breach of Articles 3, 4 or 5 of REMIT, and that such notifications must be carried out 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. ACER will update the 6th Edition of the ACER Guidance on the Application of REMIT to provide additional clarity on this new obligation. Article 15(2) imposes obligations on any PPETs under Article 16 of Regulation (EU) No 596/2014 (MAR) who also executes transactions in wholesale energy products that are not financial instruments. To this end, and by analogy to ESMA’s interpretation of the definition of ‘persons professionally arranging or executing transactions’ laid down in point 28 of Article 3(1) of MAR ESMA, Questions and Answers On the Market Abuse Regulation (MAR), Version 17, Last updated on 31 December 2023, A6.1, page 23: https://www.esma.europa.eu/sites/default/files/library/esma70-145-111_qa_on_mar.pdf), in the absence of any reference in the definition that would limit the scope and exclude particular categories of persons regulated by other financial or energy European legislation, ACER considers that the obligations stipulated under Article 15(2) apply broadly. The 6th Edition of the ACER Guidance on the application of REMIT will be updated in the course of 2024 to reflect the new obligations related to PPETs in the amended REMIT. ACER acknowledges 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. The amended REMIT envisages that obligations for PPATs in Article 15 (1) shall apply upon the entry into force of the amended REMIT. Notably, on the 20th day following the publication in the Official Journal of the European Union. However, obligations for PPETs under Article 15 (2) shall apply from six months upon the entry into force of the amended REMIT Regulation. ACER’s Notification Platform is already available to facilitate notification to ACER and the relevant NRAs: https://www.acer-remit.eu/np/str. In the course of the year 2024, it will be subject to minor updates to reflect the amended REMIT terminology (e.g. concepts of PPAETs and STORs) and its increasing scope (e.g. storage contracts, hydrogen). This platform should be used for the simultaneous notification of ACER and the relevant NRAs under Article 15 of REMIT. |