Remit: more than just crossing the T’s of Emir
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.
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