|MAD/MAR application to the carbon market|
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The new EU regulation on market abuse (this term collectively covering practices such as insider dealing and market manipulation) has been necessary to address gaps functioning in the preexisting European legal framework and relating to new markets, platforms and over-the-counter (OTC) trading in financial instruments.
Equally significant loopholes were present in fighting market abuse in commodity and commodity derivatives markets.
The new Market Abuse Regulation (MAR) entered info force on 2 July 2014. MAR creates some tools to prevent and detect the said practices, being insiders lists, suspicious transaction reports and managers' transactions disclosure duties.
The tailored definition of inside information in relation to emission allowances or auctioned products based thereon can be found in Article 7(1)(c) of MAR.
Pursuant to the said provision inside information in relation to emission allowances or auctioned products based thereon comprises "information of a precise nature, which has not been made public, relating, directly or indirectly, to one or more such instruments, and which, if it were made public, would be likely to have a significant effect on the prices of such instruments or on the prices of related derivative financial instruments".
Among instruments introduced by the new framework is the revamped obligation to make public inside information, with limited possibilities to delay.
The above measures are also, in principle, applicable to emission allowance market participants (emissions allowances are classified by MiFID II as financial instruments), however, the key element when considering whether the MAD/MAR issues are relevant for a given participant in the emission allowance market, is the minimum threshold.
The essence of the MAR in that regard is:
- Article 17(2) of MAR requires an emission allowance market participant (EAMP) to publicly, effectively and in a timely manner disclose inside information concerning emission allowances which it holds in respect of its business, including aviation activities and installations, which the participant concerned, or its parent undertaking or related undertaking, owns or controls or for the operational matters of which the participant, or its parent undertaking or related undertaking, is responsible, in whole or in part.
- With regard to installations, such disclosure should include information relevant to the capacity and utilisation of installations, including planned or unplanned unavailability of such installations.
- Recital 51 of MAR states that the information to be disclosed should concern the physical operations of the disclosing party and not own plans or strategies for trading emission allowances, auctioned products based thereon, or derivative financial instruments relating thereto.
- ESMA is empowered to detail the public, effective and timely disclosure of inside information by an emission allowance market participant (Article 17(2)), MAR explicitly empowers ESMA to draft technical standards in this matter (Article 17(10)(a)).
Obligation for public disclosure of inside information on the carbon market - significance tresholds
It needs to be underlined, the fundamental requirement of the MAR i.e. the obligation for public disclosure of inside information applies only to emission allowance market participants being above the threshold specified in the MAR subordinate legislation.
The essence of the said thresholds lies - when it comes to emissions - in their absolute character, meaning any market participant below the threshold will not have to disclose under MAR anything whatsoever.
Equally, the information about physical activities of emitters below the threshold will not qualify as inside information in the MAR meaning (note, however, this does not influence on REMIT obligations to publish inside information, which is a self-standing legal framework).
In the Commission Delegated Regulation (EU) 2016/522 of 17 December 2015 supplementing Regulation (EU) No 596/2014 of the European Parliament and of the Council as regards an exemption for certain third countries public bodies and central banks, the indicators of market manipulation, the disclosure thresholds, the competent authority for notifications of delays, the permission for trading during closed periods and types of notifiable managers' transactions the thresholds have been set at the level of 6 million tonnes of carbon dioxide equivalent a year and a rated thermal input of 2,430 MW to trigger the obligation to disclose inside information in the carbon market.
It means the impact of the new regulatory measure would be rather limited - the MAR will likely cover approximately 70 companies (56% being energy producer and the rest other industrial emitters) while the bulk of 857 companies would be exempted (however, the 70 companies at issue account for 70% of the total verified emissions).
The above values have been proposed by the Paris-based European Securities and Markets Authority (ESMA) in the Final Report ESMA's technical advice on possible delegated acts concerning the Market Abuse Regulation of 3 February 2015 (ESMA/2015/224), which has been preceded, with minor adjustments only, by the ESMA Consultation Paper Draft technical standards on the Market Abuse Regulation of 15 July 2014 ESMA/2014/809.
Hence, the regulatory approach appears to be grounded, it is also supported by external experts' analyses and advice (see Economic Analysis for Impact Assessment on Threshold for Disclosure of Non-public Information on Emission Allowances of 22 May 2014).
It needs to be reserved, the said ESMA's Consultation Paper of 15 July 2014 and the aforementioned Economic Analysis for Impact Assessment on Threshold for Disclosure of Non-public Information on Emission Allowances of 22 May 2014 (s. 24) referred to the threshold 1,050 MW when it comes to the rated thermal input, but the increase of this value to 2,430 MW in the Final Report of 3 February 2015 represents the corresponding technical adjustment aligning it with the second threshold of 6 million tonnes of carbon dioxide equivalent (which remained unchanged), since the former calculation of the equivalent rated thermal input occurred inaccurate.
This is explained in the ESMA's aforementioned Final Report (p. 85):
"More appropriate emission metrics for the calculation of the rated thermal input are the emission factors from the ETS Monitoring and Reporting Regulation. While this affects the results, it does not change the methodology used by the consultants. Using average of these emission factors (between 94.6 and 101 tCO2/TJ, or between 0.3 and 0.36 when converted into kgCO2/kWh) for coal-fired stations, the rated thermal input figure equivalent to the 6-million tCO2eq threshold is around 2,430 MW. The advice has been modified accordingly."
Application's level - the group, company or installation?
The thresholds' values and assessments in the ESMA MAR Consultation Paper of 15 July 2014 referred to "companies" (and not "installations" as is the case for REMIT), but the ambiguity had been raised whether the threshold should be calculated on the legal entity basis or to capture the emissions of the entire corporate group (see ISDA input for ESMA's Consultation Papers on implementing measures under the Market Abuse Regulation of 15 October 2014).
The said ambiguity had been invoked with respect to the overall "emission allowance market participant" (EAMP) concept, as set by the MAR. ESMA in its Consultation Paper of 15 July 2014 clearly and consequently used in this context the word "company", which principally denotes the separate legal entity, and not the group.
The problem, whether the thresholds apply to a single installation, or to a single legal entity and all of its installations, or to an economic group of legal entities under common control and all its installations, has fundamental impacts and is of an utmost practical importance. The ambiguities at issue were reflected also in the course of MAR level 2 consultation process (ESMA's Final Report of 3 February 2015, p. 82).
In the Final Report of 3 February 2015 ESMA, however, unequivocally specified the thresholds apply at a group level and relate to all the installations of an economic group of entities.
In the Final Report of 3 February 2015 ESMA has reasoned its modified position as follows:
"According to the wording of Article 17(2) of MAR, thresholds apply at a group level and relate to all the installations of an economic group of entities. Applying the thresholds at a single entity or even installation level would allow adjusting the activities of respective single entities to be below the reporting threshold and be prone to circumventing MAR requirements. Similarly, it would allow adjusting activities of the group to circumvent the MAR requirements for trading entities related to the entities with physical operations under the EU ETS."
It was also added that such as the EU ETS Directive is of EEA relevance, installations located both in the EU Member States and EEA/EFTA countries and activities carried out in the EU Member States and in EEA/EFTA countries should count towards the above calculations.
The principle that the thresholds apply at the group - and not at the company - level has been finally explicitly stated in Article 5(2) of the Commission Delegated Regulation 2016/522 of 17 December 2015.
"Physical operations" as an important element of the diclosure obligation coverage - status of pure trading entities
MAR disclosure obligation in the carbon market can only rest on EAMPs with physical operations. It is clear from the level 1 text that MAR Article 17(2) and Recital 51 explicitly refers to information related to the physical operations of the installations (or activities).
The above observation is not changed by the fact that there may be some trading entities that will be covered by the EAMP's definition and the consequential duties. ESMA acknowledged in its Final Report of 3 February 2015 that "the disclosure obligation can only rest on participants, including such trading entities, with a link to physical operations".
Practical examples of such links are described in greater detail below in the part of this article analysing complexities involved with the EAMP's definition.
In any case it appears that such trading entities, which are owned or controlled or otherwise related to companies with physical operations, as specified in the EU ETS Directive, which are above the thresholds, would also satisfy the definition of an EAMP as a sub-set of the participants in the emission allowance markets.
The above approach will have the practical effect of the existence in the carbon market of the two legally-diversified categories of trading entities - the one with links to entities carrying out the "physical operations", and the second - without such links.
The overall design of new rules on disclosure obligations in the emissions market, laid down in the MAR, leads to the conclusion that from the above two categories of trading entities only the former will be covered with the administrative burden involved.
Thresholds' character - cumulative or alternative?
Another questionable issue was whether the thresholds of 6 million tonnes of carbon dioxide equivalent a year and a rated thermal input of 2,430 MWt were to apply cumulatively or alternatively.
The conjunction "and" used in Article 17(2) MAR between the two thresholds' components seemed to advocate for a cumulative application, which would mean that the MAR disclosure requirements would only apply if both thresholds were exceeded (this was also the ISDA's stance set out in the above document of 15 October 2014).
However, in the Final Report of 3 February 2015 ESMA unequivocally stated annual CO2 equivalent threshold and the rated thermal input threshold "are to apply cumulatively for the requirement not to apply".
So, in conclusion, exceeding one of the two thresholds is sufficient for the disclosure obligations under Article 17(2) to apply.
As the aforementioned Final Report further elaborates, "Level 1 text in second subparagraph of Article 17(2) states the obligation set in the first subparagraph "... shall not apply to a participant in the emission allowance market where the installations or aviation activities that it owns, controls or is responsible for, in the preceding year have had emissions not exceeding a minimum threshold of carbon dioxide equivalent and, where they carry out combustion activities, have had a rated thermal input not exceeding a minimum threshold" (emphasis added). This subparagraph clearly uses the term "and" for the disclosure requirement NOT to apply. This means that both thresholds must be satisfied (not exceeded) in order for the participant to be exempted from the requirement. In other words, exceeding one of the two thresholds is sufficient for the requirement to apply."
This rule has also been later expressly stipulated in the Recital 14 of the Commission Delegated Regulation 2016/522 of 17 December 2015 (see box).
Content of the inside information disclosure on the carbon market
The distinctive feature of the new framework applying to participants above the said thresholds is they will not have to disclose all information about their emissions, but only the information which is inside information.
The said information needs to be disclosed on a systematic basis, nevertheless, a case assessment must be conducted.
Such an approach, although burdensome, is clearly expressed in the recital 51 of the MAR, which requires the disclosure requirement to be cost-efficient and devoid of reporting of information that would not be useful to the market.
Hence, ESMA underlines participants above the threshold must have in place the proper systems and procedures and learn how to conduct such assessment.
Nobody hides the fact these 70 companies will face compliance costs associated with gathering and publishing information.
Given, however, that the scope for the new requirement overlaps partially with respect to some companies (particularly electricity producers) with REMIT obligation to publish inside information, the said compliance costs need not, necessarily, to skyrocket.
Regarding this point, ESMA's Final Report Draft technical standards on the Market Abuse Regulation of 28 September 2015 (ESMA/2015/1455) clarifies that the characteristics of inside information included in MAR are not exactly the same as the ones included in REMIT.
According to Article 7(1)(c) of MAR, information can only be considered inside information, in particular (among other conditions), "if it were made public, would be likely to have a significant effect on the prices" of 'emission allowances or auctioned products based thereon' while REMIT defines that the relevant effect has to be assessed on "the prices of wholesale energy products".
The said ESMA's Report of 28 September 2015 concludes that it is "clear from the definitions included in MAR and REMIT that not all REMIT inside information fulfils the criteria to be classified as MAR inside information, and also that not all MAR inside information related to the emission allowances or auctioned products based thereon is inside information according to REMIT."
Hence, the two analysed legal frameworks for the disclosure of inside information target entirely divergent asset classes:
- MAR - emission allowances, and
- REMIT - wholesale energy products, being mainly electricity, natural gas and transportation thereof (the respective derivatives including).
ESMA also points to another difference between the two Regulations, which results from the fact that there are market participants in the wholesale energy markets (covered by REMIT) that are not market participants in the emission allowance markets and vice versa (e.g. industrial combustion activities, such as steel making, are covered by MAR but not by REMIT).
Both ESMA's documents: Consultation Paper of 15 July 2014, as well as the Final Report of 28 September 2015, accentuate that, as opposite to REMIT, the use of market participants' own website only cannot be considered proper public disclosure under MAR.
When this approach is used by an EAMP for inside information in scope both under REMIT and MAR, it would have to be complemented with the use of a channel of appropriate disclosure of inside information which meets the characteristics required under MAR.
If an EAMP disseminates the information in the way requested by the MAR technical standards, fulfilling the obligation of communication of the information to the media (as well as the other requirements), it would satisfy the two regimes simultaneously.
Where possible and for emission allowance market participant own benefit, ESMA encourages to use a channel of disclosure satisfying both frameworks REMIT and MAR) at the same time.
The above reasoning is supported by the express wording of the MAR, recital 51 thereof stating: "Where emission allowance market participants already comply with equivalent inside information disclosure requirements, notably pursuant to Regulation (EU) No 1227/2011 [REMIT], the obligation to disclose inside information concerning emission allowances should not lead to the duplication of mandatory disclosures with substantially the same content."
The said ESMA Consultation Paper Draft technical standards on the Market Abuse Regulation of 15 July 2014 (ESMA/2014/809) in that regard reads:
"Only those platforms meeting the requirements foreseen under MAR, and further specified in the technical standards on the technical means for appropriate public disclosure, would be considered as appropriate dissemination channels under MAR. In these cases a single disclosure of inside information would satisfy both regimes, REMIT and MAR, at the same time. A crucial characteristic that a channel of disclosure under MAR must have, is the ability to actively distribute the (inside) information with the goal to reach all the interested parties. As already said, the mere availability of information on a website, implying that investors must actively seek it out, is not sufficient for ensuring effective disclosure of the inside information. Those platforms used under REMIT that are able to disseminate information in such a manner, would clearly be considered appropriate also under the MAR regime."
Recitals to the draft MAR Regulatory Technical Standard attached to the aforementioned Final Report of 28 September 2015 stress that the mere availability of inside information on a website only, even where users are provided with the possibility of being informed about the updated content of the website through subscription to a web feed, is not sufficient for meeting the MAR dissemination requirements (however, note that this passus has not been included in the final text of Recital 1 to the Commission Implementing Regulation 2016/1055).
Moreover, pursuant to the said Recitals of the ESMA's draft RTS, where emission allowance market participants already comply with inside information disclosure requirements equivalent to REMIT, and are requested to publicly disclose the same information under MAR and Regulation (EU) No 596/2014, the obligations under MAR are fulfilled by means of publication of the information in a platform for the disclosure of inside information used in the context of REMIT, as long as the inside information is communicated to the media according to the MAR (the reservation that the communication to the media must be made according to the MAR is missing in the final text of the technical standards as stipulated in the Commission Implementing Regulation 2016/1055).
Hence, it may be concluded that an active dissemination of inside information is an indispensable element of the publication system under MAR and it mustn't be omitted by emissions' market participants.
Further elements accentuated by ESMA were that the website where inside information is posted by the issuer in fulfilment of Article 17(1) and (9) of the MAR should have the technical features to allow the following:
a. the access to the inside information posted on the website is non-discriminatory and free of charge;
b. inside information should be easy to find: it should be located in an easily identifiable section of the website;
c. disclosed inside information should clearly indicate date and time of the disclosure.
It was also stressed by ESMA that when there is a change in a published inside information, and the change itself constitutes a new inside information, this new information is covered by the inside information's provisions within MAR, and the full process of public disclosure would have to take place (again).
To conclude, under Article 17(1) of MAR, an issuer of financial instruments should post on its website all inside information it is required to disclose and should maintain this information on the website at least for five years (ESMA draws the attention to the fact that EAMPs are not subject to the latter requirement (Final Report of 28 September 2015, p. 49)).
The above provision of MAR needs, however, to be complemented by the the important ESMA's clarification, that the posting of an inside information on a website only, with no communication of the information to the media, is not a sufficient means for ensuring appropriate public disclosure. This point, however, sparked controversies - see MAR publication channels: ESMA vs. EC.
Finally, Article 2(1)(b)(i) of the Commission Implementing Regulation 2016/1055 of 29 June 2016 requires that "inside information is communicated, directly or through a third party, to the media which are reasonably relied upon by the public to ensure its effective dissemination".
That communication is, moreover, required to clearly identify, among others "that the information communicated is inside information".
Article 2(2) of the said Regulation furthermore stipulates that "Emission allowance market participants required to disclose inside information in accordance with Article 4 of Regulation (EU) No 1227/2011 may use the technical means established for the purpose of disclosing inside information under that Regulation for the disclosure of inside information under Article 17(2) of Regulation (EU) No 596/2014 provided the inside information required to be disclosed has substantially the same content and the technical means used for the disclosure ensure that the inside information is communicated to the relevant media."
ESMA's Opinion, Draft Implementing Technical Standards on the technical means for appropriate public disclosure of inside information and for delaying the public disclosure of inside information of 17 June 2016 (ESMA/2016/982) underlines the draft ITS submitted by ESMA contains the two elements, which can be considered different compared to the basic REMIT inside information publication regime:
(1) the requirement to use disclosure channels that feature active dissemination; and
(2) the requirement to identify the information as inside information under MAR.
In conclusion, the former of the aforementioned ESMA's preferences can be assessed as fulfilled by the Commission Implementing Regulation 2016/1055, but the latter is lacking.
Another interesting topic involved is that ACER's Public Consultation Paper of 27 May 2015 (PC_2015_R_03) REMIT Common Schema for the Disclosure of Inside Information proposed REMIT publications' scheme include position named "impact on carbon permit prices", which refers to gas and electricity capacity and 'other' category, to allow readers of the UMM to evaluate the impact of events subject to REMIT inside information disclosure scheme.
As ACER argued, adding this field "is the first step for websites and platforms, to be able to disclose inside information according to the Market Abuse Regulation standards avoiding double publication of the same inside information".
In the subsequent document ACER, however, has not pursued this thread and the final REMIT Common Schema for the Disclosure of Inside Information does not contain this position.
The subject of new obligations - "emission allowance market participant"
New obligations for the disclosure of inside information apply to "emission allowance market participant" being defined in Article 3(20) of MAR as any person who enters into transactions, including the placing of orders to trade, in emission allowances, auctioned products based thereon, or derivatives thereof, provided it does not benefit from an exemption based on the above thresholds.
ESMA observed "emission allowance market participants" in the MAR meaning are a specific sub-set of all participants in the emission allowance market.
Distinctive features of this narrower category are the fact of being above the threshold and the consequent requirement for public disclosure of inside information.
Who can potentially consider itself in the scope?
On the basis of Article 3(e), (f) and (o)) of the EU ETS Directive (which contains legal definitions of "operators", "installations" and "aircraft operators") "emission allowance market participants in the MAR meaning are obviously companies producing CO2, the so-called emitters of emission, but one shouldn't neglect the fact that the Regulation (EU) No 1031/2010 on the timing, administration and other aspects of auctioning of greenhouse gas emission allowances includes investment firms and credit institutions among the persons eligible to participate in the bids of emission allowances organised by the auction platform (primary market auction).
On this basis ESMA expressly indicates, financial intermediaries can also be the "emission allowance market participants".
This specific MAR category also includes traders and any other persons entering into secondary transactions in emission allowances and derivatives thereof (secondary market trading).
The European financial regulator has also made a specific remark on dedicated trading entities of emitters of emission (such as energy producing companies and large industrials), which, in the ESMA opinion, could qualify as professional traders (in the conventional meaning of the term).
Consequently, when such dedicated trading entities are owned or controlled or otherwise related to companies with physical operations covered by the EU ETS, which do not qualify for the exemption (i.e. are above the threshold), they would also satisfy the definition of an "emission allowance market participant" and, consequently be covered with MAR inside information disclosure requirements.
The influence of the thresholds on MAR requirements relating to insiders' lists and managers transactions disclosure duties
Referring once more to the axis of this article, i.e. the significance thresholds, it is necessary, however, to point to another crucial implication of the legislative technique used.
It needs to be noted, the said thresholds have been incorporated into the very definition of the "emission allowance market participant" (Article 3(20) of the MAR).
This entails the conclusion, persons below the threshold are not covered and do not qualify as "emission allowance market participants" in the MAR meaning.
Given the entire array of other MAR requirements, being insiders lists and managers' transactions disclosure duties, apply - when it comes to emissions market - to "emission allowance market participants" in the meaning strictly defined in MAR (respectively: Article 18(8) and Article 19(1)(b) of the MAR), it follows, the participants in the said market being below the threshold are free not only from inside information disclosure duties, but also from MAR requirements relating to the said insiders' lists and managers transactions disclosure duties.
It needs, however, to be reserved, this remark relates only to the carbon market and is without prejudice to issuers' obligations.
Moreover, ESMA clearly underlines persons exempted from the requirement of public disclosure of inside information, remain subject to other market abuse prohibitions, in particular the prohibition of insider dealing in relation to any other inside information they have access to.
Officially Appointed Mechanism (OAM)
Article 17(1) of the MAR requires issuers of a financial instrument to publicly disclose as soon as possible inside information in a manner which enables fast access and complete, correct and timely assessment of the information by the public. These criteria are replicated from the Directive 2003/124/EC implementing MAD.
In addition to the disclosed inside information being posted on the issuer's website, where applicable, information should be also made available in the officially appointed mechanism (OAM) under the Transparency Directive 2004/109/EC.
It is to be noted, inside information relating only to an emission allowance product is not required by the MAR to be maintained in the OAM (Final Report of 28 September 2015, p. 42, 44).
|Last Updated on Tuesday, 31 January 2017 11:08|