Every company as a prosecutor - impressions from reading ACER's 4th edition of REMIT Guidelines
Monday, 11 July 2016 06:30

 

ACER has established a new, costly law for companies.

 

 


 

 

Some time ago I started doing notes on so-called "PPATs" i.e. Persons Professionally Arranging Transactions.

 

It is noteworthy PPATs' definition is met not only by entities disposing a some sort of institutional set-up, such as electricity and gas exchanges (regulated markets, MTFs and OTFs including), but also simple intermediaries - brokers, traders etc.

 

I must admit, I didn't place much emphasis on the whole issue, which is touched upon in only one article of REMIT (Article 15).

 

The said provision requires that any person professionally arranging transactions in wholesale energy products who reasonably suspects that a transaction might breach prohibitions of market abuse (insider trading or market manipulation) notify the national regulatory authority without further delay.

 

Article 15, moreover, explicitly requires that PPATs have procedures to identify the breaches in question.

 

Seems not overly onerous, isn't it?

 

However, everything's changed with the release by the ACER of its latest (4th) edition of a REMIT Guidelines.

 

ACER apparently has entirely divergent vision, how the procedures to identify the REMIT breaches should look like, and, I must say, the ACER's vision scares me.

 

Those who expected rather simply-framed document should no longer disguise themselves.

 

There is no surprise, the entire unit or department is necessary in the company to cope with these complex tasks, which, in normal circumstances, are carried out by the state prosecutors' office.

 

Just like a prosecutor, the PPAT will have to perform market surveillance "routinely", but, unlike him, will be restricted to establish whether there are reasonable grounds to suspect a REMIT breach no later than four weeks from the occurrence of the anomalous event.

 

What does it mean "routinely"? The new responsibility of a PPAT will not only be to notify whenever it has reasonable grounds to suspect a potential breach, but also to "proactively monitor" the wholesale energy markets in which it is involved.

 

There must be somewhere the border for imposing regulatory requirements beyond the the firms' core businesses.

 

In my opinion the requirement imposed on brokers to "proactively monitor" the market for market abuse represents actually an example of a threshold, which shouldn't be exceeded.

 

There are other, state-run agencies dedicated to market monitoring.

 

Who will be doing business if companies prosecute market abuse? Maybe ACER will do business instead?

 

If businesses are required to replace the state's institutions in their statutory duties, maybe the state's institutions replace companies in doing business. I think ACER has exceeded the delicate balance in that regard.

 

The above notwithstanding, ACER requires that once an anomalous event is detected, a non highly-sophisticated entity such as a broker (and not ACER or prosecutor) must collect evidence and conduct the necessary analysis to further assess that event.

 

The Agency requires that the Suspicious Transaction Report (STR) produced by the above brokers must be of a "good quality".

 

After the STR's dispatch to the ACER, PPATs are not free from further burdens since they are required to transmit any relevant additional information which they become aware of after the notification is originally submitted.

 

I'm personally shocked by the number of procedural arrangements, which are required to be included in the PPAT's documentation with respect to STRs.

 

Admittedly, ACER mentions that the amount of resources dedicated to the market surveillance activity should be "dependent on the size of the PPAT", but at the same time "for each dimension the PPAT should be able to justify why its organisational setup is best suited for the tasks of the market surveillance team".

 

The key requirements cover the items as in the table below.

 

 

Requirement

 

Description 
Human resources policy 

 

In order to ensure an adequate level of quality, consistency and effectiveness of the market surveillance team work, there should be a human resource policy with specific requirements for the market surveillance staff that can contribute to establish and safeguard the independence and integrity of the team.

 

That policy can include the principles for the management of conflicts of interest (including the list of interests that need to be declared).

 

As part of the specific requirements for the market surveillance staff, the human resource policy should develop specific incentives which are based on the accomplishment of the market surveillance function and not correlated to financial/commercial achievements.

 

Market surveillance function must be endowed with the relevant skills and able to devote the required time and operate in a timely manner.

 

Implementation of appropriate segregation measures is required.

 

Procedural arrangements 

 

PPATs' procedural arrangements should be documented, including any changes or updates to them.

 

Documentation on the compliance of the PPAT with these procedural arrangements should also be elaborated.

 

Both kinds of documentation should be maintained for a period of at least five years.

 

Arrangements and procedures in place must entail the possibility to notify a potential breach which occurred in the past, where reasonable grounds of suspicion have arisen in the light of subsequent events or information (in such cases, the PPAT should be able to explain the delay between the day of occurrence of the anomalous event and the notification, according to the specific circumstances of the case, if requested to by the NRA).

 

Market monitoring strategy

 

In order to identify potential breaches of Articles 3 or 5 of REMIT (insider trading and market manipulation), the PPAT shall have a documented market monitoring strategy.

 

That strategy shall be designed based on a risk assessment.

 

The market monitoring strategy shall define thresholds for investigating alerts and include processes in place to identify potential breaches.

 

It should also prescribe some actions to be performed by the monitoring team to further assess the anomalous events.

 

The risk assessment shall include at least the identification of the different types of market abuse that may constitute Article 3 or 5 breaches and a graduation of the different forms of market abuse based on the expected risk of occurrence on the PPAT platform/operations.

 

The risk assessment and the market monitoring strategy must be revised regularly.

 

In particular, they must be revised when there is evidence that the current strategy is not comprehensive enough and some potential breach was not detected.

 

It must also be revised whenever relevant changes in the markets or in the market participants' behaviour take place.

 

The PPAT should be able to explain to the National Regulatory Authority (NRA), upon request, how it manages the alerts generated by the adopted system and why the adopted level of automation is appropriate for its business.

 

Human resources related procedures

 

 

The market surveillance team within each PPAT should be covered by the organisation's human resources policies and procedures, which should safeguard the independence and integrity of the market surveillance team members.

 

As part of the management of conflicts of interest, relevant employees should be required to declare potential interests that they may have in companies active in the wholesale energy markets, for example shareholdings or close family relationships.

 

Basic background checks should routinely be carried out at the commencement of employment, covering fraud and criminal record checks.

 

Due diligence should be applied when employing staff to work in the market surveillance team.

 

Appropriate training should be given to the market surveillance team on how to handle potential psychological harassment from brokers or traders within the PPAT and safeguards should be in place to manage this.

 

Members of the market surveillance team should be given appropriate training and this training should be delivered regularly according to the training map and should be updated in line with any guidance offered by regulatory authorities.

 

Training on REMIT should not be restricted to the members of the market surveillance team and should be offered across the organisation where appropriate.

 

Communication related procedures

 

Internal policies should cover the use of data and information by the market surveillance team and should allow its members to access any information or data which may help to explain the

 

The market surveillance team should have and follow a policy setting the process for approaching members/customers and all communication in relation to an anomalous event/potential breach should be noted or recorded on file.

 

As a general rule, once an STR has been submitted to an NRA, the market surveillance team should not make contact with the member/customer in relation to that incident unless agreed with the NRA.

 

Furthermore, under no circumstance should the market surveillance team make the member/customer aware that an STR has been submitted to the NRA.

 

In exceptional circumstances it may be necessary for the market surveillance team or senior management at the PPAT to contact the member/customer reported in a STR and they may enforce a sanction such as suspension of trading.

 

By its nature, this form of contact may tip the member/customer off that an investigation is being conducted, but it may be necessary in order to avoid further harm to the market.

 

If this is to happen, engagement with the relevant NRA from the start is important.

 

In circumstances where contacts between market surveillance teams of different PPATs are envisaged, for example in potential cases of cross-market manipulation, internal policies should detail procedures accordingly.

 

Guidelines relating to what can be discussed between market surveillance teams should be clearly defined in the internal policies and all contact and decisions should be recorded so that if an STR is raised, the relevant NRA is aware of the work that has already been carried out and if it is not this can be justified.

 

The communication policy in place should detail how staff members outside of the market surveillance function identify and/or escalate suspicions of market abuse.

 

Traceability related procedures

 

All work carried out by the market surveillance team should be recorded whether in a dedicated case management system, a shared folder or in traceable email records, for a period of at least five years.

 

It is advisable to have a clear written policy on monitoring procedures which details the processes that the market surveillance team should follow when looking into an anomalous event.

 

The full PPATs' decision-making process related to the qualification of an anomalous event as a potential breach (from the initial alert to the STR being raised) should be traceable and key decision points should be recorded.

 

All transaction(s)/order(s)/behaviour(s), including related updates to them, particularly relating to an anomalous event/potential breach should be stored by the PPAT for a defined amount of time.

 

The relevant NRA may place further retention requirements on the PPAT where appropriate.

 

NRAs should request PPATs to maintain for a period of at least five years the information documenting the analysis carried out with regard to an anomalous event/potential breach which have been examined and the reasons as to whether or not submitting a STR.

 

This information shall be provided to the NRA upon request.

 

All processes and decisions made by the market surveillance team should also be recorded.

 

The PPAT should conduct internal audits or hire an external auditor to review their processes at least on an annual basis and in certain circumstances an NRA may wish to conduct a visit or audit.

 

 

 


 

 

Not to enter into excessive details it is sufficient to observe, the scope of new obligations is enormous.

 

It is understandable, therefore, the first question to ask is - does this concern me?

 

In the PPAT's definition the onus seems to be placed on "arranging transactions", which, according to ACER's Guidelines, is an activity that aims to:

 

- enable or assist third parties (buyer or seller) in a way that directly brings about a particular wholesale energy transaction (i.e. has the direct effect that the transaction is concluded); or,

 

- provide a facility that facilitates the entering into transactions by third parties in wholesale energy products (buyer or seller).

 

The Guidelines further explain that simply providing the means by which parties to a transaction (or possible transaction) are able to communicate with each other is excluded from the concept of PPAT.

 

If a person makes arrangements that go beyond providing the means of communication, and adds value to what is provided, it will lose the benefit of this exclusion and shall be recognised as a PPAT.

 



It is also underlined that the main characteristic of a PPAT is its intermediary role (whether acting as a principal or as an agent), i.e. arranging transactions in wholesale energy products.

 

To conclude, who is arranging transactions in wholesale energy products and who isn't - this is the major question now.

 

 

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