PhD Defense L.M. Hiemstra

Trading in Energy Derivatives: who’s watching?

This PhD dissertation by Liebrich M. Hiemstra shows the financial side of the energy sector: the trade in energy derivatives and how such trading is supervised by EU and national regulatory authorities.

It appears that trading in energy derivatives (Energy Derivative Trading) is characterized by a cross-border nature and that EU agencies (ACER and ESMA) cooperate closely with national regulatory authorities to monitor and supervise market behavior whereby data relating to trading activities of market participants is exchanged based on the Regulation on Wholesale Market Integrity and Transparency (REMIT). Simply put, market participants are obliged to disclose data on their trades in energy derivatives to supervisory authorities, even when it includes business-sensitive information.

This research explains why energy companies get involved in Energy Derivative Trading, how it works, what legislation applies, how its supervision is organized and how the relevant supervisory authorities cooperate and share information. While market participants may count on regulatory authorities’ legality – that the authorities’ actions are based on an adequate legal basis – and effectiveness – that those actions contribute to the goal of the underlying legal basis –, they also have a right to have legal remedies available to them to seek judicial protection and to have a judicial protection framework in place that is effective. This research puts these concepts in light of regulatory authorities’ options to share information relating to Energy Derivative Trading.

Conclusions

Several conclusions come forward in this research: Firstly, it is vital that market participants are able to trust supervisory authorities in treating their disclosed information as confidential, and that they have sufficient remedies available to enforce their rights in case supervisory authorities breach their confidentiality obligation. Secondly, REMIT fills in a regulatory gap by making the prohibition of market abuse more concrete for the energy sector, which is essential to ensure a stable and orderly functioning of wholesale energy markets. The obligation to disclose data relating to Energy Derivative Trading to supervisory authorities could contribute to a properly functioning energy market, however, it seems the legislator has not sufficiently taken into account a comprehensive approach on the functioning of Energy Derivative Trading when drafting REMIT. Thirdly, the multitude of supervisory authorities does not contribute to effective supervision as ACER and national regulatory authorities lack the power to enforce and sanction, and other authorities lack the knowledge to do so, given the cross-border and cross-sectoral character of Energy Derivative Trading. Fourthly, market participants may not even be aware that their information is shared amongst supervisory authorities. The effectiveness of available remedies is therefore questionable.

Recommendations

First off, supervisory agencies should inform market participants on the sharing of their data with other authorities and such obligation could be included in article 10 REMIT, article 2 of Regulation 2019/942 and article 14 REMIT. Secondly, this research identifies several recommendations to ACER, including an adequate budget, further research on possible enforcement tasks and recommendations to advise the European Commission on binding rules for the ways in which supervisory agencies cooperate and share information. Lastly, when it comes to available remedies, this research recommends to open up the National Energy Ombudsman Network to market participants instead of end consumers only.