Beneficiary of the contract (REMIT definitions)
European Union Electricity Market Glossary


 

The determination on the "beneficiary" of the contract under the rules of the REMIT reporting scheme is strictly involved with the way, in which the Field No 10 of the REMIT reporting format (regarding the trading capacity of the market participant or counterparty) is populated.

 

ACER's clarification on Data Field No (8) of the REMIT reporting format

 

This field indicates the ID of the beneficiary of the transaction in the case that the trade is executed by a third party on behalf of a market participant. If the beneficiary of the contract is the market participant entering into the transaction, this field is to be left blank. If the beneficiary of the contract is not counterparty to this contract, e.g. if the market participant is acting on behalf of another market participant, the reporting counterparty has to identify the beneficiary by a unique code.

 

For example, if party B is trading on behalf of party C, then party C is the beneficiary and party B is acting on behalf of C. However, by entering into a transaction on wholesale energy products, party B is a market participant unless it is only an agent in which case it would not appear in the report. In this case, the ID of C should be reported in field 1 and this field shall be left blank.

 

If the beneficiary ID is available to the organised market places or to one of the two counterparties to the contract in the case of bilateral contracts traded off-organised markets, the beneficiary ID must be reported. This can also be reported as lifecycle event after the trade takes place.

 

If the information on the beneficiary of the transaction is not available to the organised market place, this field shall be left blank. For example, the organised market place may only know the market participant (or the executing broker in case of exchange) that executed the transaction. Also when the trade is submitted for clearing, this information may be lost because the clearing house only executes transactions against its clearing members, and the market participant may (in the case of self‐clearing members) or may not be the ultimate beneficiary.

 

Some of the reported trades executed at organised market places will look like: A sells to B with beneficiary C. The Agency will in these cases receive two reported trades: A sells to B, B sells to C.

 

However, the trade may be even more complicated and it may involve more parties. For example, if a bilateral trade takes place off-market between A and B, there may be other trades between B and C and D to represent how they split the value of the A and B trade.

 

Bilateral and non-cleared transactions executed off-market may be of the form A sells to B with beneficiary C. In these cases, the Agency will receive one reported trade: A sells to B with C identified in field 8 as Beneficiary.

 

With regard to orders to trade placed by executing brokers at the organised market place, the Beneficiary ID of the broker's client shall also be reported in this field if available to the organised market place. Alternatively, if the order report is reported through a third party on behalf of the executing broker, this should be made available to the reporting party by the executing broker along with trading ID (field 3) and reported to the Agency by the third party reporting on behalf of the broker.

 

There may be many situations where the beneficiary may or may not be known and there are many possible scenarios. Market participants and reporting parties should bear in mind that it is their responsibility to contact the Agency to discuss any of their scenarios that are not represented in this manual.

 

 

If the beneficiary of the contract is the other person than the market participant entering into the transaction, the Field No 8 (data on the beneficiary ID) needs also to be filled in.

 

For details see the Agency for the Cooperation of Energy Regulators (ACER) clarifications (laid down in the Trade Reporting User Manual (TRUM) in the boxes below.

 

Tke key explanation appears to be as follows:

"[f]or example, if party B is trading on behalf of party C, then party C is the beneficiary and party B is acting on behalf of C. However, by entering into a transaction on wholesale energy products, party B is a market participant unless it is only an agent in which case it would not appear in the report. In this case, the ID of C should be reported in field 1 and this field shall be left blank."

  

The above point should be read against the background of the ACER's acknowledgment that investment firm enters into a transaction as principal or agent (depending on their business model):

a. acting on their own account and on their own behalf (pure principal transaction – i.e. on the decision of the firm);

b. acting on their own account and on behalf of a client – i.e. on the order of other market participant; and/or

c. acting for the account and on behalf of a market participant (pure agency transaction).

 

There may, however, be an ambiguity as regards point b above under circumstances where the maker participant fills an order of other market participant. From the two interpretations of the above order relationship:

- the first - "acting on their own account and on behalf of a client", and

- the second - "acting on their own behalf and on account of a client",

ACER evidently supported the former.

 

The problem when precisely the party acts "on account of" and "on behalf of" another counterparty will have to be determined by the competent authorities as it has somewhat broader character and is involved with divergent legal terminology conventions.

 

In the financial sector the European Securities and Market Authority (ESMA) in its Consultation Paper, MiFID II/MiFIR of 19 December 2014 (ESMA/2014/1570 (p. 576) noticed, market participants sought more clarity on the precise understandings of these terms. 

 

As regards trading capacity ESMA for MiFID II reporting purposes refers to the notions of principal and agency capacity to be reported in transaction reports in the following way:

i. principal capacity: dealing on own account either on own behalf or on behalf of a client.

ii. agency capacity: dealing on the account and on behalf of a client.

 

It follows, as opposite to the above ACER clarification, ESMA defines the principal capacity referring inherently to "dealing on own account", while actions may be done equally either on behalf of a client or on own behalf of a counterparty.

 

As regards the beneficiary designation, ESMA, moreover, explained that: "the concept of 'beneficiary' applies to the person that acquires or disposes of the legal title to the financial instrument, i.e. the investment firm is not expected to seek to obtain information beyond the legal identity of its clients in such instances as trusts. Usually the decision maker will be the same as the person that acquires or disposes of the legal title to the financial instrument" (ESMA's Consultation Paper, MiFID II/MiFIR of 19 December 2014 (ESMA/2014/1570) p. 581).

 

Unfortunately, beyond that ESMA did not addressed in the above Consultation Paper market expectations for precise directions as to the uniform use of legal formulas of acting "on account of" and "on behalf of" another counterparty.

 

There are no reasonable grounds for divergent meaning and interpretation of the formula where the party acts "on account of" and "on behalf of" another counterparty for REMIT reporting purposes on the one side and for MiFID reporting framework on the other.

Hence, the uniform interpretation of the above terms between ACER and ESMA would be of great importance and would help in the correct application of both reporting schedules.

 

However, also in the Final Report Draft Regulatory and Implementing Technical Standards MiFID II/MiFIR, 28 September 2015 (ESMA/2015/1464) ESMA has not been explicit on the above issues and referred in that regard to future ESMA Guidelines (p. 370):

 

"Following the feedback to the CP the trading capacity field, which shall be populated independently from the identification of the Buyer and the Seller, only refers to the following Level 1 definitions in MiFID II: 'dealing on own account' and 'matched principal trading'. Where none of the two definitions applies, the transaction falls under a third residual category.

 

... As there is no mentioning of "acting on behalf" in the above-mentioned Level 1 definitions, the description of the trading capacity field addresses the industry's concerns of an unclear distinction between the different capacities.

 

...Further instructions on how to use the trading capacities will be given in future ESMA Guidelines."

 

In turn, the European Banking Authority (EBA) in the Report on Investment Firms, Response to the Commission's Call for Advice of December 2014, EBA/Op/2015/20 (p. 19) argues that "order execution on behalf of clients may be assumed in those cases where the investment firm acts on behalf of the client but places the order on the market in its own name (emphasis added). Being the only contractual partner of its client, the firm has an obligation against the client to deliver the financial instruments purchased on their behalf. Whereas this situation leaves the firm without any market risk, since the parties agree that the client would bear the economic risk of the transaction, the firm may remain in principle exposed to credit risk towards both the market counterparts and its client, leading to concerns about whether such a service would fall under the execution of orders (MiFID A2) or would be seen as a market 'risk free' form of principal trading."

 

 

ACER's clarification on Data Field No 10 of the REMIT reporting format

 

This field identifies the trading capacity of the market participant or counterparty in field 1. Unless the market participant is acting on behalf of a third party as an agent, this field shall be populated with "P" for Principal.

 

If the market participant is acting on behalf of a third party as an agent and the beneficiary identification is known and reported in field 8, this field may be populated with "A" for Agent.

 

The Agency understands that the terms Principal and Agency is a term commonly used in the financial markets and it depends upon whether an investment firm enters into a transaction as principal or agent (depending on their business model). The Agency expects that market participants may enter into transactions:

 

a. acting on their own account and on their own behalf (pure principal transaction – i.e. on the decision of the firm);

 

b. acting on their own account and on behalf of a client – i.e. on the order of other market participant; and/or

 

c. acting for the account and on behalf of a market participant (pure agency transaction).

 

Market participants should bear in mind that the meaning of entering into transaction in EMIR is different that the meaning of entering into transaction in REMIT, where the latter refers to entering into transaction in "wholesale energy markets" and not to be counterparty to a contract, as CCPs or clearing members do.

 

See below for a fistful of practical cases on the "beneficiary" understanding taken from ACER's Frequently Asked Questions (FAQs) on REMIT transaction reporting of 8 September 2015:

 

Question 2.1.7 Data Field (8)

 

Article 4 (1)(a) of the Regulation 1348/2014 - Reporting of intragroup transactions and beneficiary identification.

 

A broker concludes a back-to-back transaction in an organised market place. It acts as a Principle (in the original text is: "Principle", but it can be guessed it should be: "Principal"), however the Beneficiary of the transaction will ultimately be a market participant belonging to the same capital group as the broker.

 

Can ACER confirm that:

1) The transaction concluded by the broker in the organised market place should be reported without indicating the Beneficiary in the Field 8 (as it is a back-to-back transaction);

2) The transaction between the broker and the market participant should not be normally reported at all (as it is an intragroup transaction and takes place OTC);

 

Hence, ACER will not have information about the beneficiary of the transaction?

 

Answer

 

A back-to-back transaction is a bilateral transaction not executed on the exchange. The transaction concluded by the executing broker at the Organised Market Place should be reported by the exchange indicating the Beneficiary in the Field 8 if this information is available to the exchange.

 

Please see the TRUM, guidance on Field 8.

 

The transaction between the broker and the market participant may not be reported if this is an intragroup transaction and takes place OTC. However, nothing prevents the market participant from reporting the back-to-back transaction to ACER.

 

Based on the above, the Beneficiary will be the executing broker who is also a market participant if the back-to-back transaction is an intragroup transaction. It is worth noting that if no beneficiary is provided, then the market participant indicated in Filed (1) will be assumed to be the beneficiary.

 

Question 2.1.8. Field Data Field (8)

 

The TRUM is not explicit about whether beneficiary information should be included as a lifecycle event for order data both on unexecuted orders and orders which result in a trade. It is clear that Participants will have to report the beneficiary information on trades, but it is not clear if they should have to for orders. Please could ACER clarify?

 

Example: Where a transaction needs to be updated with the beneficiary information as a lifecycle event; does ACER expect market participants to also update the related orders that led to the transaction with the beneficiary information?

 

The beneficiary information should only be required to be reported on executed trades

 

Answer

 

When a trade report is updated with the beneficiary information as a lifecycle event there is no expectation that market participants also update the related orders that led to the transaction with the beneficiary information.

 


 

Question 2.1.8. Field Data Field (8)

 

With regard to the Trading Capacity and the connected information final beneficiary we have a question: Our understanding is that a Trading Capacity setting of Agent only adds value in the context of also providing a final beneficiary that is then the actual owner of the transaction. A setting of Agent without the indication of the final beneficiary will need to be considered as if it were for the member (acting as an agent) until the actual beneficiary is acknowledged.

 

The current assumption is that the final beneficiary information for exchange trades will be provided starting April 2016 based on a back-to-back Non-Standard ACER Transaction between the member and the final beneficiary.

(The direct information for the final beneficiary is not an information that is available on the exchange platforms).

 

Based on these facts, our best effort suggestion is that all exchange trades should be reported as P – Principal until in April 2016 the complete set including the final beneficiaries (with their related Non-standard transaction between member and final beneficiary) can and needs to be reported.

 

Answer

 

The definition of Trading Capacity is available in the TRUM. If the Organised Market Place knows that the trading capacity of the market participant is "Agent" then "A" should be reported irrespective or the availability of the Beneficiary ID. This always adds value to the transaction report.

 

See also:

 

Execution of orders on behalf of clients

 

Dealing on own account

 

 

 

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Last Updated on Friday, 29 April 2016 22:01
 

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