Forward transaction
European Union Electricity Market Glossary


The „forward‟ is not a term that is expressly defined under MiFID and therefore MiFID does not prescribe what the characteristics of these contracts are and how they should be treated. However, there exist common definitions underlining its essential elements (see for instance CESR/CEBS consultation paper on the MiFID commodities review (CESR/08-370)).


Pursuant to the above "forward" transaction can be defined as "a contract that includes an obligation of at least one of the counterparties that has a due date which is later than for spot contracts in the sense of Article 38(2)(a) of the MiFID Implementing Regulation (Commission Regulation (EC) No 1287/2006 of 10 August 2006 implementing Directive 2004/39/EC of the European Parliament and of the Council as regards record-keeping obligations for investment firms, transaction reporting, market transparency, admission of financial instruments to trading, and defined terms for the purposes of that Directive)".



Benefts from forward energy markets depending on different categories of participants


according to ACER/CEER Annual Report on the Results of Monitoring the Internal Electricity and Natural Gas Markets in 2014, November 2015 (p. 174)


a) Established players will see forward markets as an additional tool for managing their risk. They usually hold various forms of physical options (including generation units, permanent or semi-permanent customer bases, etc.), which can act as hedging instruments to protect against future price changes;


b) New entrant generation businesses will be looking to lock long-run prices in to cover for their fixed-cost exposure to investment sunk costs; such players will look for hedging instruments which lock in prices over the investment timeframe (up to 15 years or even more);


c) New entrant supply businesses will be looking to lock in wholesale prices, for instance up to two years ahead, to match the expected revenues from their projected customers base; and


d) Commodity traders will see forward energy products as part of a larger risk management portfolio. Their core business is speculation – taking market positions and profit from fluctuations in the price of the underlying assets – and they contribute to the liquidity in forward markets.


Hence, the term "forward" in most common cases will refer to transactions with a maturity date longer than two days.


The above document also observes significant portion of forwards are transacted through MTFs, which qualifies them as derivatives in the sense of MiFID. 


In this context it is useful to observe there are no grounds for views that "forwards are by nature OTC contracts" and that they should therefore not be subject to Section C6 of Annex I to MiFID.


ESMA's Guidelines on the application of the definitions in Sections C6 and C7 of Annex I of Directive 2004/39/EC (MiFID) of 6 May 2015 (ESMA/2015/675) explained "...there is nothing to preclude a trading venue from calling a product a "forward" regardless of whether it is traded on a regulated market, MTF or OTC. A commodity forward might constitute an "other derivative financial instrument" in circumstances where it meets the criteria for "other derivative" as defined by MIFID and thus may fall within C5, C7 or C10 as appropriate. It is, however, correct to say that OTC contracts do not fall within the scope of C6."


ESMA is of the view that forwards are included within the definition of Section C6 of Annex I to the MiFID Directive (C7 explicitly applies to "futures" and "forwards" whereas C6 omits reference to forwards, hence there were divergent views with regard to whether forwards that can be physically settled and are traded on a regulated market or an MTF fall within MiFID's scope).


ACER's Recommendation No 01/2015 of 17 March 2015 on the regime applying to the derivative contracts referred to in Section C.6 of Annex I of MiFID II which have the characteristics of wholesale energy products that must be physically settled according to Article 4(1)(2), second subparagraph, and Article 89 of MiFID II underlines uncertainties involved with the proper qualification of forwards on the ground of financial regulation.


Point 19 of the above Recommendation reads:

"Furthermore, the Agency believes that sometimes the distinction between forward contracts that can be settled in cash or with physical delivery (which are derivatives) and forward contract that must be settled with physical delivery (which are not derivatives) is not yet spelled out properly. The lack of guidance creates confusion among market players and sometimes contracts that have to be settled with physical delivery are understood to be derivatives when they are not.
The Commission's delegated acts should aim at clarifying this issue".


ACER therefore recommended that the Commission's delegated acts "clarify that forward contracts that must be settled with physical delivery (which are not derivatives) do not fall under the scope Annex I C.6 of MiFID II."


See more detailed remarks on the interpretation of the scope of the term: "contracts that must be physically settled" for purposes of Annex I C.6 of MiFID II.


Forwards should be differentiated from futures.


Forwards in the Network Code on Forward Capacity Allocation


"Forward" has specific meaning in the Network Code on Forward Capacity Allocation where it denotes the timeframe in which transmission rights are allocated ahead of the Day Ahead timeframe. 


In turn, the Forward Capacity Allocation means the attribution of Long Term Cross Zonal Capacity through an Auction.


Forwards in the Market Abuse Regulation


For Market Abuse Regulation (MAR) purposes physically settled forward contracts are treated the same as spot.




Forwards in the REMIT transactions' and orders' reporting framework


The specificity of "forward style contracts" in the REMIT reporting scheme needs also to be accounted for, as the REMIT Trade Reporting User Manual clarifies (for example Data Field No 13 of the non-standard reporting form): "[f]or bilateral contracts forward style contract refers to the forward style which also includes spot transactions. Market participants should not understand forward style as a sort of derivative contract but as the style of the contract itself."


Thus, it follows under the specific REMIT reporting rules "forward style contract" includes also spot.


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Last Updated on Sunday, 02 October 2016 18:12


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