The enabling legislation for the EU’s Wholesale Energy Market Integrity and Transparency (REMIT) regime, which is designed to prevent wholesale market manipulation and insider trading, took effect on 7th January. Yet, many energy market participants are at risk of non-compliance as they find themselves playing catch up, struggling to understand REMIT’s reporting guidelines and how to implement them. Needless to say, that’s a risky position to be in.
How did it come to this? In the aftermath of the global financial crisis, the G20 agreed a series of reforms to improve transparency in OTC derivative markets. Dodd-Frank marked the first major salvo to boost accountability in energy trading, followed by REMIT and its sister regime EMIR in the European Union. The rollout of both sets of rules has been marked by shifting deadlines and a worrying lack of detail. Add to that the coming launch of MiFID II in 2017, which will pile yet another layer of regulatory risk onto the compliance burden for energy trading.
Perhaps understandably, many companies are still waiting for regulators to shed some light on how all these different regimes will overlap before deciding how to act but this puts them at risk of delays in compliance and potentially steep fines.
What options do trading firms have?
Despite the urgency for REMIT compliance, there are viable alternatives for what companies can do in the short-term to get beyond tick-box compliance. It is essential that a robust method is in place for reporting, clearing and mitigating risk.
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Additionally, in cases when regulatory regimes intersect, specific processes need to be implemented. It would be impossible to cope with electronic reporting and data storage requirements manually. Managing by spreadsheet is therefore not an option.
Outsourcing may work, but it comes with the added cost of an ongoing third-party contract to manage. Furthermore, a third party provider will most likely not be responsible for paying fines should there be any mistakes or delays in compliance. Even if you could negotiate a contract that held them financially liable, what would an infraction mean to your brand reputation? The collateral cost of cleaning up a public relations nightmare could be devastating.
That leaves accepting higher prices by abandoning a hedging strategy altogether – not a good thing for the bottom line – or automating the process. From my perspective the best business decision rests with automation.
Investing in a robust CTRM system would make the most business sense. At minimum, it would execute trades efficiently and guarantee trade compliance. Improved decision-making and market intelligence would be added bonuses.
Energy traders need to address REMIT compliance today. Given the evolving standards and timelines that define today’s regulatory environment, letting automated systems do the heavy lifting offers the best and fastest solution.
— David Bernal is Senior Solutions Manager for Allegro Development Corporation (www.allegrodev.com)