UK Ofgem's open letter on REMIT market abuse prohibition: a prelude to enforcement

The Office of Gas and Electricity Markets (Ofgem) issued an open letter to draw to the attention of wholesale market participants its views on:

• behaviour that it has observed in the UK market which may constitute market manipulation;
• issues in relation to the publishing of inside information; and
• the upcoming deadlines for registration and transaction reporting.

The letter should be viewed by wholesale market participants as a warning - effectively the drawing of a line in the sand - which, if unheeded, may well be followed by enforcement action.   The regulator has plainly already engaged with some participants about these issues, which were identified through monitoring and investigation, and is now recommending that firms take stock of their approach to compliance with the Regulation on wholesale energy market integrity and transparency (EU) No 1227/2011 (REMIT) in the light of this and other published guidance.

Potentially manipulative behaviour

Ofgem highlights various behaviours that may constitute market manipulation in breach of Article 5 of REMIT and specifically:

• layering - entering a series of bids or offers, which are not intended to be executed, at increasing (or, for offers, decreasing) prices - this creating a false signal as to the level of demand (supply) to the market and/or securing, or attempting to secure the price at an artificial level
  • Ofgem has not (to date recognised any specific "accepted market practices", conformity with which might enable a participant establish a legitimate reason for entering into the transaction;
• placing small bids ahead of placing large offers (and vice versa) at prices which do not reflect market fundamentals, often at market opening
• marking the close (deliberately buying or selling wholesale energy products at the close of the market seeking to secure the closing price of the wholesale energy product at an artificial price)
• pre-arranged trading (subject of a prior arrangement as to price and/or volume).

Ofgem reminds participants that market manipulation may occur without impact on supply, demand or price, and that there is no requirement to establish an intention to manipulate the market if the trading results in an outcome that could constitute a breach of REMIT.

Disclosure of inside information

Ofgem also highlights the duty of market participants to publish inside information in an effective and timely manner.  Last July, Ofgem had raised concerns about the handling, use and disclosure of inside information (specifically timeliness and effectiveness of notifications) following a review.

Although Ofgem notes some improvement, based on its ongoing monitoring, it has again stressed that:

• inside information should be published as soon as possible but at the latest within one hour (unless applicable rules specify otherwise )
• notifications should be easy to understand - market participants are encouraged to consider publishing an inside information "factsheet" explaining procedures and assumptions
• disclosure of inside information to other market participants (including affected stakeholders) prior to public disclosure may breach REMIT
• there are no thresholds for disclosure of inside information - market conditions at the time are likely to determine whether a particular piece of information falls within the REMIT definition of inside information
• information under the Transparency Regulation (no. 543/2013) may also be inside information - primary data owners are reminded of their obligations (in force since January 2015) to make timely and effective publication of this data also

Deadlines for registering as a market participant and transaction reporting

Finally, Ofgem reminds market participants that they are required to register before entering into reportable transactions.  Transaction reporting to the Agency for the Cooperation of Energy Regulators (ACER) starts on:

• 7 October 2015 for transactions made on organised market places
• 7 April 2016 for transactions made outside of organised market places.

A ‘market participant’ is any person, including transmission system operators, who enters into transactions, including the placing of orders to trade, in one or more wholesale energy markets within the European Union.  Broadly speaking this will include:

• Energy trading companies carrying out at least one of the following functions: transportation, supply, or purchase of electricity and/or natural gas, including LNG
• Producers of electricity or natural gas including producers supplying their production to their in-house trading unit or energy trading company
• Shippers of natural gas
• Balance responsible entities
• Wholesale customers
• Final customers acting as a single economic entity with a consumption capacity of 600 Gwh or over for gas or electricity (across all markets with interrelated prices)
• Transmission system operators (TSOs)
• Storage system operators (SSOs)
• LNG system operators (LSOs)
• MiFID investment firms.

Note that the jurisdictional scope derives from placing orders/entering into transactions on a wholesale energy market within the European Union, irrespective of the location of the market participant.

Putting enforcement powers in place

The Electricity and Gas (Market Integrity and Transparency) (Enforcement etc.) Regulations 2013 put in place Ofgem's main investigatory, enforcement and penalty regime for breaches of REMIT as of 29 June 2013.

In November 2013, Ofgem announced that with the Financial Conduct Authority, it had conducted a review of allegations of manipulation of the gas market in September 2012., and had concluded that no evidence of the alleged market manipulation could be found.

Ofgem fed into the consultation on making market manipulation and insider trading criminal offences which resulted in the passing of The Electricity and Gas (Market Integrity and Transparency) (Criminal Sanctions) Regulations 2015.  A person convicted of an offence under those Regulations, which came into force in April 2015, would be liable (on conviction on indictment) to imprisonment for a term not exceeding two years or a fine, or both.

In June 2015 Ofgem published revisions to both the REMIT Procedural Guidelines and the REMIT Penalties Statement, introducing a vision and strategic objectives for REMIT casework, and changing:

- in the REMIT Procedural Guidelines:

• the processes for conducting settlement discussions
• the decision-makers, following the introduction of the Enforcement Decision Panel, and
• the way oral representations are made

- in the REMIT Penalties Statement:

• when restitution orders may be appropriate
• the steps in deciding the amount of a penalty, for companies and for individuals (including how factors such as the potential to cause serious financial hardship will be taken into account)
• the discounts to a penalty that are available for agreeing settlement and how these decrease over time.

Finally, the Electricity and Gas (Market Integrity and Transparency) (Enforcement etc.) (Amendment) Regulations 2015, which came into force on 1 July 2015, updated the 2013 Enforcement Regulations to cater for the requirements for data reporting and the registration of market participants under Articles 8 and 9 of REMIT.

What next?

Although Ofgem has since been actively monitoring wholesale electricity and gas markets in the UK, and has engaged with some participants about particular behaviours, it has not as yet publicised any enforcement action brought under REMIT.  However, its powers, procedures and sanctioning policies have now been brought fully up to date, and this latest open letter to the market clearly identifies some practices about which Ofgem has concerns and which may constitute breaches of REMIT, and recommends that market participants should now carefully consider the processes their traders follow when entering transactions.

Now that Ofgem is fully primed and ready for action, market participants should not be surprised to see enforcement activity follow, should this latest warning go unheeded.