Johannes Kindler Florence Forum – 4/5 June 2009 Transparency & Trading Analysis of energy and financial regulators

2Florence Forum – 4/5 June 2009 Analysis Action

3Florence Forum – 4/5 June 2009 Increasing Importance of Electricity Trading in Europe Electricity trading is of increasing importance within the European energy market electricity trading has evolved over time trading provides hedging opportunities which are important for market participants in order to ensure price predictability trading plays an important role for the integration of renewable energy sources is essential for achieving the EU internal market  Fair and orderly trading is crucial for achieving the EU internal electricity market.

4Florence Forum – 4/5 June 2009 Electricity trading in Europe - Background - To facilitate fair and orderly trading and to enhance confidence in market integrity, adequate supervision and regulatory oversight is essential: No Sarbanes-Oxley for energy trading, but what needs to be done, must be done! Cooperation between regulators is important to allow for efficient market oversight Energy regulators have in-depth knowledge of the functioning of energy markets To foster the development of the European internal market rules for trading need to be harmonised transparency requirements need to be further developed

5Florence Forum – 4/5 June 2009 Traded Volumes in Europe 2008 (2007) – Electricity Nord Pool Spot: 298 (292) TWh Derivatives: 1407 (1060) TWh EEX Exchange Spot: 154 (123) TWh Derivatives: 1165 (1150) TWh Powernext Spot: 51 (44) TWh Derivatives: 91 (79) TWh Endex Exchange: 41 (30) TWh OTC Clearing: 78 (52) TWh Source: EEX, Nord Pool, Powernext, APXGroup, Montel Power News (4/2008) Increasing volumes in electricity trading. Trading volume (esp. derivatives trading) exceeds total electricity consumption. Example Germany: 1165 TWh derivatives traded via exchange (incl. OTC clearing) 541 TWh electricity consumption (2007)

6Florence Forum – 4/5 June 2009 Analysis Action

7Florence Forum – 4/5 June 2009 The joint mandate to CESR / ERGEG European Commission issued a joint mandate to CESR and ERGEG on 21 December 2007 Scope: technical recommendation under the 3rd Package proposals (Article 39 Electricity-Directive) Main questions: -Is financial market regulation sufficient to secure integrity of energy markets? -What extent of transparency does financial and physical energy trading need?

8Florence Forum – 4/5 June 2009 The milestones of the joint mandate Report on the current situation in the individual Member States (“Fact Finding”) Market Abuse Trading Transparency Record Keeping Exchange of Information CESR/ERGEG received very positive feedback from the COM! Recommendation to COM: Sept 08 Recommendation to COM: Dec 08

9Florence Forum – 4/5 June 2009 Market Abuse: Tailor-made arrangements Current financial markets supervision arrangements are not sufficient to secure adequate integrity in the energy markets.  Only a small part of energy trading falls under MAD  There is insufficient protection against market abuse in the energy market. For all electricity and gas products that do not fall under MAD (Market Abuse Directive), ERGEG and CESR propose tailor- made arrangements in the legislation for the energy sector to combat market abuse. Other interdependent markets (e.g. oil, coal or CO2 emission rights) must be taken into account  Reason: Prices on these markets have a direct and indirect effect on the price of electricity and/or gas.

10Florence Forum – 4/5 June 2009 Transparency - Status quo - In general, trading on the exchange has a high degree of transparency BUT: most transactions take place in bilateral trading (over the counter – “OTC“): -there is less/or even no transparency in OTC- transactions -some OTC-trades are transparent only for traders on broker platforms -purely bilateral transactions are transparent only for the contractual parties

11Florence Forum – 4/5 June 2009 Transparency - Recommendation - Traders need European-wide harmonised information that can be processed easily Different stages of transparency: -Pre-trading transparency (e.g. fundamental data) -Post-trading transparency -anonymous publication of transactions close to real-time (within 15 minutes) and -aggregate market data at the end of each day

12Florence Forum – 4/5 June 2009 Record Keeping - Recommendation - Transparent description of all transaction details (e.g. buyer/seller, volume, price) Flexible approach, but minimum content needed Flexibility regarding the format, but electronic forwarding must be possible Extent of record keeping: -Non-investment firms: all supply contracts and derivatives -Investment firms: only supply contracts that do not fall under the Markets in Financial Instruments Directive (“MiFID”)  they are subject to an obligation to keep records under the MiFID

13Florence Forum – 4/5 June 2009 Exchange of Information - Status quo - Main feedback of public consultation: Investment firms must keep records under the MiFID - additional obligations should be avoided Energy regulators do not have access to data of “MiFID firms” on a regular basis  Information exchange between financial and energy regulators is necessary if market supervision should be efficient

14Florence Forum – 4/5 June 2009 Exchange of Information - Recommendations - ERGEG and CESR propose: To begin an information exchange on an individual-case basis; and to establish this information exchange on a legal basis. However, an automatic exchange of data under the Transaction Reporting Exchange Mechanism is not appropriate in the current phase.  “Transaction reporting” was not part of the mandate

15Florence Forum – 4/5 June 2009 Next Steps (1) Transparency Elaboration of detailed transparency requirements Should build up on previous work already done by ERGEG on transparency and focus on compatibility, practicability and suitability for electricity and gas trading Workshop in Summer 2009 foreseen by ERGEG to discuss the detailed requirements with the relevant stakeholders CEER/ERGEG open for cooperation with CESR and a permanent dialogue with market participants

16Florence Forum – 4/5 June 2009 Next Steps (2) Transaction Reporting vs. Record Keeping Mandate of the Commission was limited to record keeping and missing evidence at this stage ERGEG/CESR Advice: sensible to reconsider Transaction Reporting in connection with a potential EU regime for market abuse Analysis should take account of the experiences made in the US market CEER/ERGEG open to analyse this further and give sound advice on it

17Florence Forum – 4/5 June 2009 Next Steps (3) Harmonisation and Mutual Recognition of Trading Licenses in the EU Energy Markets ERGEG will analyse the current situation in the different Member States, and ERGEG will assess the possibilities and obstacles to the creation of a single energy trading passport. ERGEG will elaborate best practices of supervision of energy exchanges and gas hubs.

18Florence Forum – 4/5 June 2009 Thank you for your attention! Mark your diary for the World Forum on Energy Regulation IV October 18-21, 2009 Athens, Greece