1. XVIII Madrid Forum Madrid, 27-28 September 2010 Wholesale energy trading licenses in the EU Johannes Kindler, Vice-President Federal Network Agency Germany Vice-President ERGEG

2. 2 XVIII Madrid Forum Background Important message of CESR/ERGEG's – Advise of 2008: Trust in integrity and proper functioning of energy trading is "conditio sine qua non" for the creation of a single European energy market with high level of liquidity and high degree of competition. => Only achievable by an adequate regulatory oversight regime! Therefore the European Commission mandated European energy regulators to develop advise weather the implementation of a trading license would have an important function within the regulatory system.

3. 3 XVIII Madrid Forum What is the problem? Lack of harmonisation in the European Energy market Different national administrative requirements for traders when operating on national wholesale energy markets. "no requirements" (Germany)  "serious requirements" (e.g. Czech Republic requires to open a branch office) Existence of different requirements is an entry barrier and thus an obstacle on the way towards a true pan-European energy market (e.g. costs in Hungary for getting a license = approx. € 16.000) Need for a "Schengen Agreement" on energy trading … for free trading from Palermo to Hammerfest

4. 4 XVIII Madrid Forum What is the problem ? Regulatory gaps in wholesale energy market oversight regime Increase of energy trading creates massive "new" risks for market integrity (market abuse, insider trading, VAT fraud). Current regulatory framework, (e.g. MiFID or specific rules of national "market places") only addresses partly some of the existing risks. Single trading license is supposed to close regulatory gaps

5. 5 XVIII Madrid Forum Therefore … … European energy regulators commissioned external consultants to analyse the current situation in the Member States and to give recommendations on harmonisation and design of administrative requirements for trading.  Based on the outcome of this study detailed recommendations will be developed by European energy regulators.

6. 6 XVIII Madrid Forum Scope of the study To provide comprehensive advise on the legal, physical and financial characteristics of the administrative requirements as well as best practice examples. To inform European energy regulators on the appropriate level of harmonisation of trading requirements and the potential benefits and costs. To analyse if in the context of existing financial regulation (i.e. MiFID and MAD) there is a need for implementing an energy sector licensing system

7. 7 XVIII Madrid Forum Main findings of the study Differences between national regimes result in (unjustified) barriers to market entry, e.g. High cost of obtaining a license for "small traders" in some countries (e.g. Hungary) Differences in the length of the application procedure Regulatory gap regarding physical (OTC) trading of electricity and gas "non-MiFID firms" being active in the commodity and commodity derivative markets (esp. trading branches of energy companies)

8. 8 XVIII Madrid Forum MiFID coverage (green) /non- coverage (red) MiFID general rule Own account exemption Parents ’ or Subsidiaries ’ exemption Commodity business exemption Hedging and locals exemption Spot/ Physical Physically settled non- standardized derivative Physically settled standardized derivative Cash settled derivative

9. 9 XVIII Madrid Forum Main findings of the study Provisional conclusions: A single EU trading license both for electricity and gas is recommended. "Extension" of MiFID inappropriate: requirements of trading license go partly beyond MiFiD, e.g. transaction reporting But: transactions already covered by MiFID should not require the EU trading license. Every licensee should be licensed in its home country – the trading license will then be valid in all EEA countries. The license should cover gas and electricity wholesale trading (not supply).

10. 10 XVIII Madrid Forum Main findings of study on licensing requirements Licensing requirements (with respect to applicant), esp. "Fit and proper person test" ("quality control") Set up of effective risk management Ongoing requirements (to supervise licensee), esp. Record keeping of all relevant transactions Record keeping of all personnel involved in the business of Licensee relating to transactions Administrative requirements, esp. Applicant's "home state" Energy Regulator is responsible for issuing the license License fees: cost-based

11. 11 XVIII Madrid Forum Next steps The preliminary findings of the study were discussed with “practitioners” (EFET) together with CESR representatives and the consultants (in September) Based on the outcome of the discussion the finalised study will be open for a public consultation (in autumn) A public hearing is also foreseen ERGEG policy advise in 1 st quarter 2011

12. 12 XVIII Madrid Forum Thank you for your attention! www.energy-regulators.eu