By Collette O'Gorman, manager in Baringa Partner's markets and trading practice
Emir has dominated recent headlines, and its implementation is fresh in everyone's mind. But Remit is a different proposition. While the two regulations are often mentioned in the same breath, the industry would do well to consider their fundamental differences.
The first is the driver behind each regulation. Emir was drawn up in reaction to the credit crunch, with a focus on understanding and managing the financial risk exposures arising from transacting specifically in derivative financial instruments.
Remit’s primary focus is on market abuse and market manipulation – it mandates increased transparency in order to minimise abuse opportunities and data collection to enable market monitoring. Whilst Emir requires the reporting of trade data, there is not any specific Emir obligations on behalf of Esma or national regulators regarding the usage of the data. This contrasts with Remit, where there is a specific obligation on Acer (Agency for the Cooperation of Energy Regulators) to monitor the market.
The driver behind the regulation gives rise to the second significant difference to Emir: the breadth and depth of data which Acer is seeking to collect.
This includes data on market orders, standard and non-standard trades and contracts, the availability, contracted capacity and use of infrastructure and facilities, as well as data on supply contracts to large consumers. Moreover, the exemptions on this data collection are looking very limited.
The third difference is the scope of the regulation. Emir applies to EU-registered companies regardless of the geographic nature of their trades (e.g. a North American electricity swap is in scope), whereas under Remit any wholesale trade, contract (physical or financial) or infrastructure utilisation related to an EU delivery point falls within scope, regardless of the location of the counterparties. Non-EU companies outside of Emir’s reach can easily be caught by Remit.
The impact of Remit will vary depending on each individual organisation’s role within the market. Nevertheless, some broad concerns will touch most, if not all, participants.
Firstly, the definition of ‘market orders’ is still to be finalised. Participants are generally taking these to mean orders placed through exchanges or brokers which are made available to other market participants.
The general view is that exchanges and brokers are best placed for reporting orders, though there remains concern over the responsibility of organised marketplaces to do this and the residual liability of participants.
The breadth of Remit reporting includes companies who aren't perceived as “participating” in wholesale trading markets, such as large consumers and small generators without direct market access. These companies need to be educated on the implications of Remit reporting for their business, but putting this into practice may be difficult.
Under Emir, banks would often educate counterparties and clients about reporting obligations, despite having no obligation to do so. The question remains as to whether a similar practice will be adopted by the larger participants in the electricity and gas markets.
Once the IAs come into effect, REMIT sets a deadline of six months for reporting to commence. Experience from other reporting obligations is that the devil is in the detail when it comes to full implementation. A window of six months is very narrow for participants, trade repositories and RRMs to build, test and go live - and that’s without mentioning the impact of Christmas if the Act comes into force later this year.
The industry must hope that the IAs and the associated ACER reporting documentation will be available in final form with a much longer lead time.
Whilst much of the detail on Remit reporting is still to be finalised, there is probably enough of a framework for market participants to be undertaking an initial scoping analysis of where and how their business may be impacted by the regulation.
Market participants will also need to decide how to structure their implementation programmes, which may vary according to their internal organisation, commercial arrangements, systems and processes.
One thing’s for certain: the implementation of Remit is gathering pace.