Extending regulatory safeguards of the MAD Directive to the spot markets in electricity and emission allowances – will this change so much?
Monday, 17 January 2011 22:46

Recently announced „Proposal for a Regulation of the European Parliament and of the Council on energy market integrity and transparency {SEC(2010) 1510} {SEC(2010) 1511}” subjects wholesale energy products traded on the spot market to the safeguards currently present mainly on the financial market. The issue obviously regards inter alia the prohibitions on insider dealing and market manipulation.

 

 

By means of the above mentioned legal instrument the said wholesale energy products (among other things, spot contracts for the supply of electricity) achieve special status among other commodities. Namely, according to the proposal for the regulation at issue, trading in electricity (for the use of final customers excepted), nevertheless not being financial instruments, will be subject to the legal framework analogous to the one provided for in the MAD Directive. It is interesting that these safeguards are not extended so far at EU level, to spot trading, for example, in emission allowances.

 

Pursuant to recent Commission communications such an option is however considered along with other ones, e.g. replacing the currently existing spot trade by trade in "spot futures" admitted to trading in regulated markets. The option to define EU ETS compliance units as financial instruments will also be explored by the European Commission in 2011.

 

Spot trading in emission allowances is not currently regulated at the Union level but a handful of Member States have individually decided to extend rules applicable to trading in financial instruments to such allowances when traded on spot markets established within their jurisdiction (see the draft Communication from the Commission to the European Parliament and the Council Towards an enhanced market oversight framework for the EU Emissions Trading Scheme, ec.europa.eu/clima/news/docs/communication_en.pdf, p. 10). Another level are self-regulated trading venues.

 

Interesting instance of the said self-regulation are the trading regulations for the Exchange Commodities Market of the Polish Power Exchange Joint Stock Company (www.tge.pl) in force from 21 June 2010. This Exchange achieved lately some sort of success. According to the data published by the said Exchange, trading volumes in electricity on the Exchange in the 2010 achieved in aggregate 81 757 763 MWh (twenty times more than in 2009) which amounts currently to 53 % of the electricity generation in Poland. The important cause for such an increase in trading volumes was, introduced in 2010, change in law requiring, in general, electricity generators to sell part of their generation at the exchange.

Among the markets at the Exchange is also the market in emission allowances (CO2 spot) but currently it shows no trading volumes.

 

The Trading Regulations for the Exchange Commodities Market of the Polish Power Exchange Joint Stock Company (source: www.tge.pl) in force from 21 June 2010, applying also to the electricity and emission allowances spot markets, impose a following requirements on the market participants:

„ §28  The Exchange Member shall be obliged to implement procedures of protection of confidential information pieces as well as the secret connected with the exchange transactions.

§29 1. The Exchange Member shall be obliged to carry out exchange activities in honest manner, that is instrumental to its efficient and secure functioning as well as to appropriate protection of interests of all other Exchange Members.

2. Actions aimed at forced up increasing or decreasing of the exchange commodities prices in any way shall be forbidden; and especially it shall be forbidden to publish or to contribute to publishing hearsays or untrue information pieces, which might affect the exchange transactions or the exchange commodities prices. It shall be strictly forbidden to conduct activities being manipulation in the meaning of the financial instruments trading act.

3. The Exchange member shall be obliged to abstain from direct or indirect trading of the exchange commodities in case when it has got confidential information pieces, which might affect process of exchange prices formation. And especially – the Exchange Member must not use or reveal confidential information pieces concerning the exchange commodities in the meaning of the financial instruments trading act. ...

§92 (3) The Exchange Members shall be obliged to inform the Exchange immediately about all events, which could affect rates or prices of the exchange commodities. Such information pieces shall be published by the Exchange on its public web site”.

 

Why is it interesting from a regulatory point of view? It is because that mentioned at the beginning „Proposal for a Regulation of the European Parliament and of the Council on energy market integrity and transparency {SEC(2010) 1510} {SEC(2010) 1511}” does not change so much the current trading practice already in force – at least on some trading venues. The same applies to the said possibilities explored at present by the European Commission with respect to the spot market in emission allowances. As is apparent from the above, some trading venues already extended similar to the MAD Directive requirements to the spot markets in electricity and emission allowances (which are currently not subject to MAD).

At the national level, the mentioned draft Communication from the Commission to the European Parliament and the Council Towards an enhanced market oversight framework for the EU Emissions Trading Scheme in turn enumerates Germany as already applying rules on regulated markets to trades in  commodities and rights taking place on an exchange. Pursuant to the said document, in France, legislation was passed in autumn 2010 envisaging coverage of spot carbon market by rules currently applied to regulated markets.

 

But considering the pan-European dimension of emission allowances market (which already today is a reality) and pan-European electricity market (which seems to be an issue of the near future – at least taking into account the “Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions Energy 2020 A strategy for competitive, sustainable and secure energy of 10 November 2010, COM(2010) 639 final, {SEC(2010) 1346}”) the harmonisation at EU level of the rules for spot trading in these “commodities” will be much appreciated.

 

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