ESME Commodity_derivatives_EU_june 2008 GOOOOD Inc p41

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Mandate to ESME for Advice

Review under Articles 65(3)(a), (b) and (d) of the MiFID and 48(2) of the CAD and proposed guidelines to be adopted un der the

Third Energy Package

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Content Page I. Introduction 3 II. Questions in the Mandate for Advice 4 III. Summary of ESME’s Advice 6 IV. Advice 11

A. Question 1 “Fact Finding” 11 B. Question 2 “Fact Finding” 45 C. Question 3 “Assessment” 58 D. Question 4 “Assessment” 63 E. Question 5 “Record Keeping” 65 F. Question 6 “Transparency” 80 G. Question 7 “Market Abuse” 96

V. Annex: 124

• Annex 1: ESME Mandate • Annex 2: Members of ESME • Annex 3: Observers of ESME • Annex 4: Table 1 / List of fields for reporting pur poses • Annex 5: Transparency regulations for the electrici ty and gas sectors • Annex 6: Glossary

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I. Introduction This Mandate1 requests advice from ESME2 on certain issues regarding revision of the provisions of Directive 2004/39/EC (MiFID) and Directive 2006/49/EC (CAD) concerning the regulatory treatment of firms that provide investment services in relation to commodity and exotic derivatives (hereinafter: “Mandate”). This Mandate has been made in order to ensure that the Commission has adequate technical background to be able to complete its report under Article 65(3)(a), (b) and (d) of Directive 2004/39/EC and Article 48(2) of Directive 2006/49/EC (the “Report”). This Mandate also requests advice from ESME on issues concerning record keeping and transparency of transactions in electricity and gas supply contracts and derivatives in order to ensure that the Commission has adequate technical background to be able to adopt the guidelines under Articles 22f/24f and Recitals 20 and 22 in the two proposals for Directives amending Directive 2003/54/EC and Directive 2003/55/EC (The Third Energy Package).3 Advice is also sought on a possible clarification of the scope of the Market Abuse Directive in relation to trading in commodities and commodity derivatives. ESME’s advice in respect of these issues was drafted by the Sub-Group Commodities of ESME, whose members and observers are listed in the Annex 2 and 3 to this advice.

1 For further details please see the attached mandate to ESME at the end of this document. 2 For ESME members please see Annex 2 below. 3 http://ec.europa.eu/energy/electricity/package_2007/index_en.htm

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II. Questions in the Mandate for Advice The questions on which technical advice is sought by the European Commission are: Fact finding (please see section A and B below) 1. Who are the main participants, in terms of turnover, in trading commodities and their derivatives in the EU and what are their characteristics? Consider energy and non-energy commodities, including base and precious metals and softs. Identifying by name or by type the most significant traders in each market or market segment would be helpful. 2. Does ESME have any observations to make on how the exemptions in the CAD and MiFID for certain firms providing investment services relating to commodity derivatives and exotic derivatives are working in practice? What difficulties arise from differing interpretations? And what are some of the challenges or issues for market participants or market quality arising from the existing regulatory framework? These might arise from market distortions, regulatory arbitrage or other significant sub-optimalities in market functioning. Assessment (please see section C and D below) 3. What options does ESME consider most salient in addressing any challenges or issues identified above? Examples of options ESME might consider include: a) Issuing clarifying guidance as to the meaning of the various exemptions, and if so,

with what content; b) Re-examining the current scope and nature of exemptions from the relevant CAD

and MiFID requirements for firms in the commodities sector with a view to rationalising them;

c) Outlining some elements of a specialist regime for commodity firms with regard to

MiFID and CAD regulation; d) Removing some or all of the exemptions entirely? e) Any other options (e.g. making the exemptions optional for firms or mandatory for

Member States)? 4. ESME should identify the issues that would need to be addressed in assessing likely impacts on market participants and market quality of the most salient options. Record keeping (please see section E below) 5. What would the practical implication be, for firms active both in the physical supply of electricity and gas contracts and in commodity derivatives, of having to maintain two different formats of records of transactions for the relevant regulators? Would a single report based on the format in Table 1 of Annex I of Regulation EC 1287/2006 be appropriate and sufficient?

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Transparency (please see section F below) 6. The Commission has identified a number of market failures in its Sector Inquiry on energy and the subsequent study of the electricity wholesale markets4. In light of these findings, please consider: a) whether, greater pre- and post-trade transparency for electricity and gas supply

contracts (physical and spot trading) and derivatives would contribute to a more efficient wholesale price formation process and efficient and secure electricity and gas markets;

b) whether such transparency arrangements could be expected to mitigate the

concerns identified in the Sector Inquiry above; c) whether uniform EU-wide pre- and post-trade transparency could have other

benefits; d) whether additional transparency in trading could have negative effects on these

markets, for example could liquidity in these markets be expected to decrease? Is there a risk that trading could shift to third countries to escape regulation? If so, how could such risks be mitigated (delayed reporting, aggregated reporting, etc.).

Market abuse (please see section G below) 7. Does Directive 2003/6/EC on insider dealing and market manipulation (market abuse) properly address market integrity issues in the electricity, gas and other commodity markets? If not, what suggestions would ESME have to mitigate any shortcomings?

4 http://ec.europa.eu/comm/competition/sectors/energy/inquiry/index.html

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III. Summary of ESME’s Advice Question 1 (please see section A below) In the section A the advice is given for certain commodity and commodity derivative sectors separately in the form of a market information questionnaire. Question 2 “Fact Finding” (please see section B bel ow) The current position is clearly unsatisfactory for a number of reasons: • The differing boundaries of regulation across the EU seem to be less problematic

than in the past but remain a potential concern for firms seeking to operate across all Member States.

• The differing approaches to the application or interpretation of the exemptions is also a practical issue for many firms where they seek to operate across the EU.

• The differential treatment of firms conducting the same wholesale activity depending on whether they are members of a banking or investment services group causes practical difficulties and anomalies, not least in restricting the activities of some private equity investors in the sector.

The result is excessive complexity for firms, in a context where the wholesale nature of the business and the limited risks make it difficult to justify regulation of many firms on investor protection or systemic risk grounds. Question 3 “Assessment” (please see section C below ) 1. ESME considers that the second limb of article 2.1(i) and article 2.1(k) should be

replaced by a single exemption applicable to firms (other than operators of an MTF or a regulated market) whose main business consists of dealing on own account in relation to commodities and/or commodity derivatives or other non-financial derivatives contracts. However, this exemption should only apply to the firm's activities when dealing on own account in commodity and other non-financial derivatives with a defined class of wholesale market participants. The exemption should be combinable with other exemptions.

2. To achieve a common European approach to regulation in this area, Member States

should be required to implement the exemption into their legislation. However, firms should not be required to rely on the exemption where they wish to be authorised and there should be an appropriate capital regime for such firms and other commodity firms subject to authorisation.

Question 4 “Assessment” (please see section D below ) The most likely issues that would need to be addressed in an impact assessment are: any risk to the stability of financial markets; any effect on investors; any effect on the liquidity of commodity markets; whether any regulatory burden is proportionate; and the possible impact on the competitiveness of the EU as a place for doing business.

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Question 5 “Record Keeping” (please see section E b elow) 1. The record-keeping obligation is not aiming at an MiFID-style (or indeed level) of

reporting and this record-keeping obligation has to be clearly distinguished from periodic, ongoing reporting (e.g. transaction reporting).

2. ESME believes a principles-based, rather than rigid prescribed-format approach is

appropriate for the record-keeping obligation. This could specify the minimum information that should be recorded by market participants in order to ensure an appropriate level of consistency – including giving guidance on what information should be recorded for non-standard products (see below). Within this constraint and from a purely practical point of view, however, there seem to be benefits in trying to ensure that the format of records which are kept are the same for each of the relevant physical and financial regulators. This would depend though on the purpose for which the information would be used by the regulator and whether the regulators exchange data. Implementing and maintaining two separate record-keeping formats would involve additional investment in IT and associated processes for such firms which are active in both sectors, giving rise to additional costs that could create a barrier to entry to smaller market participants (thereby potentially reducing liquidity); and potential risks of inconsistencies and errors between formats.

3. There are a number of issues that need to be resolved if a single format of record

keeping is to be introduced. As explained in more detail below, ESME is not in favour of following a uniform prescribed format, such as that in Table 1 of Annex I of Regulation EC 1287/2006, at least where it would be used in a rigid way to allow automated regular reporting.

4. There is a very large number of traded commodity products across many different

markets. A prescribed format such as that of Table 1 of Annex I of Regulation EC 1287/2006 would be very difficult to develop and in any case would not capture trades that are non-standard in format – for example those with complex optionality. It would also need to take account of the variety of market participants, transactions and businesses. It would also need to take into account current industry standards, such as confirmations.

5. Rather than a single standardised format a more principles-based approach could

be far more appropriate for the record-keeping obligation. This could specify the minimum information that should be recorded by market participants in order to ensure an appropriate level of consistency – including giving guidance on what information should be recorded for non-standard products. This would ensure that information that is potentially needed by regulators is accessible upon request within reasonable timescales. This would then allow firms to compile the information in a format suitable to that request by the regulator - given an appropriate notice period. The prescribed format of Table 1 of Annex 1 was developed as the basis of standardised routine reporting for transactions and it is assumed that this is not the intention here. In addition:

• It is advisable to wait for the outcome of the CESR-ERGEG work on the record-

keeping obligation and the subsequent guidelines of the EU Commission

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pursuant to subparagraph 4 of Art. 22f and 24 f. of the Directives5 in order to have a more solid basis for considering what requirements, if any, are needed.

• A number of questions arise on (cross-sectoral) governance arrangements both in terms of developing and maintaining formats.

• The significant costs and complexity associated with introducing a standard recording format should be recognized. In particular the development of standardised unique codes for each traded product has significant implications, for some products many data fields will also not be relevant.

• It is imperative that a full impact assessment (looking at the relevant costs and benefits) is undertaken before decisions are proposed.

6. In addition, a solution to the problems of the record keeping addressed in this

section could be that the mentioned principles-based approach excludes certain categories of firms and transactions or limits the scope of application of the record-keeping obligation to certain categories of firms and transactions. A decisive factor in this limitation should be whether the categories of firms and/or transactions have a significally relevance for the price formation in the gas and power markets and the market monitoring. For example, ESME considers that small and medium-sized companies with no or very low level of wholesale trading transactions would not be relevant.

Question 6 “Transparency” (please see section F bel ow) 1. The Sector Inquiry did not identify any market failure resulting from a lack of

information transparency in trading on the wholesale energy markets and the wholesale derivatives market.

2. Based on the findings of the Sector Inquiry and on the experience of ESME

members, increased transparency on the physical side of the power and gas markets (use of the transmission and production infrastructure, demand/supply balance), and other relevant information as identified by ERGEG is likely to result in an increase in liquidity in the electricity and gas derivatives markets.

3. The implementation of information requirements concerning electricity and gas

wholesale physical and derivatives transactions should be driven by market developments and carried out in accordance with better regulation principles with a view to minimising the additional obligations that would result for the market participants.

4. Post-trade transparency as described in this section could be established (alongside

the record-keeping obligation of the Third Energy Package) for the purpose of facilitation of access to information.

5. However, regulators should make the maximum use of available information

sources (brokers, exchanges operators) for market monitoring purposes – as they are generally better-placed to provide this information than market participants.

5 Wording of this subpara. reads as follows: “To ensure the uniform application of this Article, the Commission may adopt guidelines which define the methods and arrangements for record keeping as well as the form and content of the data that shall be kept.”

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6. Therefore, information about commodity derivatives transactions conducted or

cleared at exchanges (e.g. EEX) and Multi-Trading Facilities “MTFs” (brokers) could be made accessible to the public. This would not mean obligations by participants of these platforms, but rather the obligation of the operator of such a platform to show to the public – on a aggregated and anonymous basis – the transactions. In this context it seems not to be appropriate to harmonize the details of this publication throughout the EU, as the MTFs and the level, kind and content of the transaction and information are different according to the market circumstances.

Question 7 (please see section G below) 1. Definition of commodity derivatives and exotics/hybrids derivatives: It would be

helpful in terms of application of MAD if the definitions of commodity derivatives and exotics/hybrid derivatives could be defined through reference to the corresponding definitions in MiFID. This harmonisation should not, however, broaden the scope of the MAD to new kinds of financial instruments beyond its existing scope.

2. Definition of insider information and scope of application of the prohibition of insider

trading and duty of publication by the issuer: There are significant practical problems in defining insider information and applying the insider dealing regime to the commodity and commodity derivatives businesses. This stems from both the specifics of and the diversity between different businesses together with the fact that participants operate to varying degrees in both physical and derivative markets. The ESME Group endorses the regulatory suggestions made in its earlier (6th July 2007) ESME-MAD report and furthermore notes that changes may be necessary to level 1 & 2 provisions to address the issues. ESME is of the opinion that there is a need to further adapt the insider dealing regime to the needs of the commodity and commodity derivatives business to guarantee the orderly functioning of these markets (for specific recommendations see section G below).

3. No extension of MAD regime to Multi-Trading Facilities (MTFs): MiFID already

requires investment firms and market operators to monitor transactions that may involve abuse. Furthermore, MTFs are required to report such conduct to the competent authority and provide further assistance as appropriate. This, together with other regulatory measures, ensures that there is already sufficient investor protection, transparency and market integrity within MTFs.

4. No extension of MAD regime to OTC markets and spot markets: There is no

evidence or threat of market failure that would result in significant consequences for the integrity and efficient operation of these markets to justify a wider application of MAD. Furthermore, the health and increasing participation in these markets together with the absence of any suggestion of a need in current energy and financial regulator consultations supports this assertion.

5. Transaction and position reporting: transaction reporting directly by market

participants, on its own, would not provide regulators with the necessary information to detect market abuse. Record-keeping obligations allow regulators to access such information from companies if it is needed as part of any investigation or query regarding market behaviour. Position reporting is more appropriate for detecting

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market abuse and regulators should have access to such information, but placing reporting requirements directly on participants is not the best route for providing such information. ESME suggests that regulated exchanges and MTFs are best placed to act as front line regulators by monitoring positions of market participants – including, where necessary, reporting directly to and coordinating with regulators. This should be explored further, recognising that flexibility on reporting levels would be needed and requirements proportional to market specifics. Solutions should be avoided which might have the unintended consequence of reducing liquidity.

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IV. Advice A. Question 1 “Fact Finding” The subject matter of this section is the advice from ESME regarding question 1 in the Mandate, which is as follows: “Who are the main participants, in terms of turnover, in trading commodities and their derivatives in the EU and what are their characteristics? Consider energy and non-energy commodities, including base and precious metals and softs. Identifying by name or by type the most significant traders in each market or market segment would be helpful.” Advice from ESME: In the following sections the answers are given for the following commodity and commodity derivative sector separately in the form of a market information questionnaire: 1. Continental Power Markets Exchange based trading Market (Exchange)

The major markets for exchange-based continental power trading are: Nordic (Nord Pool), Germany (EEX), France (Powernext), The Netherlands (APX/Endex)

Main Contracts � Nord Pool: spot, monthly, quarterly, yearly forwards � EEX, Powernext, APX/Endex: spot, monthly, quarterly, yearly

futures � Baseload and peakload contracts

Liquidity Annual futures trading volumes 2007 (2006) in TWh � Nord Pool: 1057 (766) � EEX: 189 (382) � Powernext: 79 (83) � Endex: 28 (32) Annual spot trading volumes 2007 (2006) in TWh � Nord Pool: 287 (248) � EEX: 118 (88) � Powernext: 44 (30) � APX: 21 (19) Spot trading volumes have continuously increased over the past few years. Most futures markets in 2007 lost market share to OTC clearing and OTC traded markets.

Types of firms present

� Market participants are diversified and are of pan-European origin. � Most participants can be grouped into the following categories:

brokers, utilities, municipalities/regional energy suppliers (RES), oil/gas majors, banks, industry, proprietary traders, transmission system operators (TSO)

� Market participants in the forward market at Nord Pool: 126 from

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20 different countries in Europe and the US � Members of Nord Pool are also listed under

http://www.nordpool.com/ (then go to member list) � Market participants in the futures market at EEX1): 103, of which

21% utilities, 13% RES, 25% proprietary traders, 23% banks, 7% oil/gas majors

� The complete list of EEX market participants is available on the EEX webpage: http://www.eex.com/en/about%20EEX/Participants

� In the Powernext futures market there are 42 market participants. Powernext members are listed under http://www.powernext.com

� In the Endex futures market there are 36 market participants Endex members are listed under http://www.endex.nl/index.php?a=75/

1) As the exchange-traded market is strictly anonymous, it is not possible to list trading volumes of individual market participants. EEX Members were classified into categories (whereby trading affiliates of utilities were classified under “utilities”). This classification is subjective and was done to the best of our knowledge. Percentage values represent the number of members in this category.

Regulation � Nord Pool is a Norwegian public limited company authorised by the Norwegian Ministry of Finance as an exchange under the Exchange Act 2007 and supervised by FSAN. Market participants authorised to trade are called exchange members. Exchange membership is only granted to parties accepted by Nord Pool Clearing as "Clearing Members." Nord Pool Clearing also has "clearing clients," for whom trade is conducted by an exchange member approved to act as a "client representative."

� EEX is an exchange under the German Exchange Act and a regulated market within the meaning of MiFID. Members are required to be regulated clearing members or customers of a regulated clearing member (non-clearing members).

� Powernext SA is an investment company which manages a multilateral trading facility agreed by the Comité des Etablissements de Crédit et des Entreprises d’Investissement on the advice of the Autorité des Marchés Financiers (AMF). The Commission de Régulation de l’Energie (CRE) and the DIDEME (French Ministry of Finance) also take part in Powernext’s supervision.

� ENDEX is a securities exchange recognised by the Dutch Minister of Finance and supervised by the Netherlands Authority for the Financial Markets (AFM) and the Dutch Central Bank (DNB).

Primary purposes of trading

� In the hourly spot auction the underlying settlement for the future markets is derived. The spot auction is the last possibility for traders to close their positions before physical delivery.

� The futures market allows members and customers to manage their power-price risk-exposures.

� They are also used for price discovery and to gauge market sentiment as prices generated from the futures market are fully transparent, being updated second by second as trading occurs.

Pricing � The reference price for Nord Pool forwards is the official Nordic

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underlying day-ahead price as published by Nord Pool Spot � The underlying security for the EEX Phelix Future is either the

Phelix Baseload or the Phelix Peakload. The Phelix Baseload is the average of all prices of the hourly auction on the Spot Market of EEX for the German/Austrian market area. The Phelix Peakload Index takes the hourly prices of the peak load times (08:00 am until 08:00 pm) from Monday until Friday into account.

OTC clearing Market (Exchange)

Besides exchange-traded products, all exchanges als o offer OTC clearing contracts. OTC clearing forms the link bet ween the future and the OTC market. OTC clearing is widely accepted by the market participants to mitigate counterparty risk.

Main Contracts � Nord Pool: monthly, quarterly, yearly forwards � EEX, Powernext, APX/Endex: monthly, quarterly, yearly futures � Baseload and peakload contracts

Liquidity Annual OTC clearing trading volumes 2007 (2006) in TWh � Nord Pool: 1250 (1394) � EEX: 922 (643) � Powernext: 4 (-) � Endex: 70 (96)


� Market participants are diversified and are of pan-European origin. � Brokers, utilities, municipalities/regional energy suppliers (RES),

oil/gas majors, banks, industry, proprietary traders, transmission system operators (TSO)

� The same market participants for the futures markets have also admission for the OTC clearing market at EEX.

Major underlying Physical Markets OTC physical power trading

The major OTC physical markets are Germany, France and the Netherlands Physical OTC trading takes place on electronic OTC platforms (eOTC) provided by several brokers, by phone or bilaterally between market participants.

Main Contracts � Besides the contracts listed on the exchanges, the OTC market provides additional contracts, such as:

� Additional short-term tenors: The next days-ahead, balance-of-week, weekly contracts. Balance-of-month

� Additional contract types: offpeak, hours 1-6, hours 16-20, hours 20-24

Liquidity Annual trading volumes in the eOTC markets 2007 (20 06) in TWh � Germany: 1981 (1682) � France: 306 (247) � The Netherlands: 176 (202) OTC trading volumes can only be measured from deals executed on the eOTC platforms. Bilateral and voice deals cannot be quantified. Their volume comes on top of the eOTC volumes.

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� Market participants are diversified and are from pan-European origin.

� Brokers, utilities, municipalities/regional energy suppliers (RES), oil/gas majors, banks, industry, proprietary traders, transmission system operators (TSO)

� Counterparties from RWE Trading in the OTC market in 20072): 53% European utilities, 24% banks, 9% German utilities, 3% RES, 6% proprietary traders, 2% industry, 1% oil/gas majors

2) As the OTC market is strictly confidential, it is not possible to list total trading volumes of individual market participants. To fulfill confidentiality requirements, RWE Trading classifies their counterparties into categories and lists the trading volume share by category. N.B.: This procedure is not representative for the whole OTC market as only counterparties from RWE Trading can be taken into consideration.

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Development of trading volumes for the major Europe an power trading markets Below are some graphical representations of the year-on-year development in power-trading volumes at Nord Pool, EEX, Powernext and Endex/APX.

Nordpool Power Trading Volume

0

500

1,000

1,500

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2,500

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4,000

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TW

h

NP OTC Clearing

NP Futures

NP Spot

German Power Trading Volume

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EEX OTC Clearing

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EEX Spot

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French Power Trading Volume

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2001 2002 2003 2004 2005 2006 2007

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Powernext OTC Clearing

Powernext Futures

Powernext Spot

Dutch Power Trading Volume

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NL eOTC

Endex OTC Clearing

Endex Futures

APX Spot

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Market Participants at EEX (Source: EEX)

Further market characteristics of Continental power trading

� Among all traded commodities, electricity is one of the most volatile. � Apart from the generally higher volatility of the energy markets versus other

commodities, there is another additional complexity. � This is because the energy markets are so closely intertwined that they are not only

correlated, but often even "co-integrated". � This means that the various energy markets do not develop independently of each

other. � More often than not, there is a price-determining energy commodity for electricity, such

as gas in winter or hard coal in summer. � The price trends of these energy sources also have an impact on the electricity price

which in turn is influenced also by the CO2 costs. � The correlation among the different power trading markets has increased significantly

since 2005.

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� The following table presents the log-return correlation of front year prices (Cal05 in

2004, Cal06 in 2005, Cal07 in 2006, Cal08 in 2007) for European power baseload contracts (NP: Nord Pool) vs. German contracts:

Price difference between OTC vs. exchange-traded ma rkets

� In general, there are no price differences between OTC and exchange prices. Market integrity is guaranteed as differentials between OTC and exchange quotes are immediately arbitraged and are therefore negligible.

� The mean absolute deviation is 0.05 €/MWh or 0.11% from Jan 2004.

� Price differences between OTC and EEX futures markets might only appear because

of market events occurring after the exchange closes at 4pm. As the last OTC deals are concluded up to 2.5 hours after EEX closure, the OTC market reacts on late market events. As the graph above shows the price deviation then diminishes on the next trading day.

� The largest deviation was -1.80 €/MWh (-3.24%) on 26th April 2006. On this day the unexpected release of verified carbon emissions led to major price movements after 4pm. As usual, the EEX future market traded in a narrow range around the OTC market. As more carbon news was released in the evening, the OTC price fell massively after EEX closure. On the next trading day exchange and OTC prices moved synchronously again.

Jahr D / F D / NL D / NP D / UK2004 0.807 0.694 0.175 0.2062005 0.945 0.778 0.724 0.4112006 0.959 0.874 0.608 0.5372007 0.912 0.914 0.688 0.669

Difference OTC/EEX closing price for baseload front year in %

-4.00%

-3.00%

-2.00%

-1.00%

0.00%

1.00%

2.00%

3.00%

Jan/

04

Mai

/ 04

Sep

/ 04

Jan/

05

Mai

/ 05

Sep

/ 05

Jan/

06

Mai

/ 06

Sep

/ 06

Jan/

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/ 07

Sep

/ 07

Trading day

Diff

eren

ce in

%

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2. Gas Trading Exchange-based trading Market

The major markets for exchange-based gas trading in Europe are: � Germany: The European Energy Exchange (EEX) � UK: Amsterdam Power Exchange UK (APX UK) � Netherlands: European Energy Derivatives Exchange

(Endex) and Amsterdam Power Exchange Netherlands (APX NL)

Main Contracts

� EEX: day ahead, weekend ahead, current month, 1 and 2 months ahead, 2 quarters ahead, 1 year ahead

� APX UK:

- OCM within-day market (NBP Title, NBP Physical, NBP Locational)

- Day-ahead market (individual days, balance of week, weekend strip, working days next week)

� APX NL:

- within-day market: hourly block via balance of the day (front 48 blocks)

- day-ahead market: individual days, weekend strip, balance of week, working days next week

� Endex: 3 months ahead, 4 quarters ahead, 2 seasons

ahead, 3 calendars ahead Annual futures trading volumes 2007 (2008)6

� EEX (EEX started 01 July 2007): 3,697,920 (2,827,020)

MWh7 � Endex: 17,793,940 (10,549,710) MWh8 Annual spot trading volumes 2007 (2008)

� EEX: 404,670 (5040) MWh

Annual APX trading volumes 2007 (2006)

� APX UK: 131 (148)TWh9 � APX NL: 59 (22) TWh

6 Until 6/05/2008. 7 Source: EEX; market data is published under http://www.eex.com/de/Downloads/Marktdaten and can also be obtained from EEX. 8 Source:Endex; market data can be accessed after receiving market login details. 9 Source: APX group; market data can be obtained from APX group.

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Market Participants

� Market participants are diversified and are of pan-European origin

� They can include brokers, utilities, municipalities, regional energy suppliers, oil/gas majors, banks, industry, proprietary traders and transmission system operators

� EEX has 30 members active in gas trading.10 � Endex has 36 members for trading TTF Gas.11 � The total number of members on APX Gas UK is 74.12

Regulation

� EEX is an exchange under the German Exchange Act and a regulated market within the meaning of MiFID.

� Members are required to be regulated clearing members or customers of a regulated clearing member (non-clearing members).

� ENDEX is a securities exchange recognised by the Dutch Minister of Finance and supervised by the Netherlands Authority for the Financial Markets (AFM) and the Dutch Central Bank (DNB). Furthermore, the Dutch Minister of Economic Affairs has appointed ENDEX as a gas exchange under the Dutch Gas Act.

� ENDEX distinguishes between five types of memberships: � 1. Proprietary Trader: has access to the ENDEX Futures

Exchange and the OTC clearing service and who acts on own account.

� 2. Agency trader: trades on behalf of and for the account of a third party who is not a member.

� 3. OTC broker: has access to the OTC clearing service and is authorized to register deals for clearing on behalf of another ENDEX member.

� 4. Executing broker: ENDEX member who has access to the ENDEX Futures Exchange and the OTC clearing service and is authorized to act on behalf of another ENDEX member.

� 5. Clearing member: provides clearing services to other ENDEX members who trade on the ENDEX Futures Exchange or register their deals via the OTC clearing service.

� Proprietary and agency traders must have entered into an agreement with a clearing member.

� APX NL: In the Netherlands, the Dutch Gas Act (2000) contains articles guaranteeing the existence of a gas exchange. Based on the Gas Act, APX Gas NL B.V. was appointed as Gas Exchange Operator on 20 January 2005 by the Dutch Minister of Economic Affairs.

� The Dutch Office of Energy regulation, the DTe, is

10 Please see tables 1 and 2 , internet:

http://www.eex.com/de/%C3%9Cber%20EEX/Teilnehmerliste?bcsi_scan_5E7893EC2CE2CEAF=dLShzvUmyCNxuqle6gC9yZUAAACpk6k2

11 Please see table 3, internet: http://www.endex.nl/index.php?a=75&t=trading 12 An (in-)complete list of 54 members can be found under http://www.apxgroup.com/index.php?id=100.

Members have the option not to have their name listed on the APX group website.

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responsible for implementing the Energy Act (1998) and Gas Act, as well as supervising compliance with these acts.

� Due to the appointment, APX Gas NL B.V. is supervised by the DTe.

� In the UK, the regulatory framework is quite similar to that of the Netherlands. Since 1999, APX Gas UK Ltd. now APX Commodities Ltd. is appointed by the Transmission System Operator National Grid Transco and regulated by Ofgem.

� In the UK, APX Commodities Ltd. is regulated by the Financial Services Authority (FSA).


� The futures market allows members and customers to manage their gas price risk exposures.

Pricing Market price OTC-Clearing

Offered by most exchanges, but not used by large suppliers (for example not used by E.ON Ruhrgas AG)

OTC-based trading Market

The major markets for OTC-based gas trading are: Na tional Balancing Point (NBP), Title Transfer Facility (TTF ), Zeebrugge Hub (ZEE), Points d’ échange de gaz (PEG) , E.ON Gastransport AG & Co KG Hub (EGT), BEB Transpo rt und Speicher Service GmbH Hub (BEB)

1. NBP

Main contracts Quarters, seasons, months and spot contracts Liquidity � 627 TWh monthly average in winter 07/08 Market participants

� Participants are essentially the same as for exchange-based trading. They could include utilities, oil/gas majors, banks, industry, proprietary traders, transmission system operators.13

2. TTF

Main contracts Years, quarters, seasons, months and spot contracts Liquidity � 87 TWh monthly average in winter 07/08 Market participants

Participants are essentially the same as for exchange-based trading. They could include utilities, oil/gas majors, banks, industry, proprietary traders, transmission system operators.14

13 For an exemplary list of participants see table 4. This is not representative for the whole OTC market as

only the main participants were taken into consideration. 14 For an exemplary list see table 5. This is not representative for the whole OTC market as only the main

participants were taken into consideration.

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3. ZEE

Main contracts

Quarters, seasons, months and spot contracts (almost no yearly contracts)

Liquidity � 27 TWh monthly average in winter 07/08 Market participants

� Participants are essentially the same as for exchange-based trading. They could include utilities, regional energy suppliers, oil/gas majors, banks, industry, proprietary traders, transmission system operators.15

4. PEG

Main contracts

Quarters, seasons, months and spot contracts (almost no yearly contracts)

Liquidity � 3 TWh monthly average in winter 07/08 Market participants

E.ON Ruhrgas AG does not trade on PEG and therefore cannot provide any data.

5. EGT

Main contracts Years, quarters, seasons, months and spot contracts Liquidity

� 6 TWh monthly average in winter 07/08, 11 TWh traded in Feb

Market participants

� Participants are essentially the same as for exchange-based trading. They could include municipalities, regional energy suppliers, utilities, oil/gas majors, industry, proprietary traders.16

6. BEB

Main contracts Years, quarters, seasons, months and spot contracts Liquidity

� 2 TWh monthly average in winter 07/08, 4 TWh traded in March

Market participants

� Participants are essentially the same as for exchange-based trading. They could include utilities, municipalities, regional energy suppliers, oil/gas majors, banks, industry and proprietary traders.17

15 For a non-exhaustive list see table 6. This is not representative for the whole OTC market as only the main participants were taken into consideration. A list of all participants at ZEE HUB can be found under http://www.huberator.be/page_type_03.aspx?id=42&idForm=4,5. 16 For a non-exhaustive list see table 7. This is not representative for the whole OTC market as only the main participants were taken into consideration. For a list of all participants at EGT Hub see http://www.eon-gastransport.com/cps/rde/xchg/SID-3F57EEF5-8D3C44A2/eon-gastransport/hs.xsl/2809.htm. 17 For a non-exhaustive list see table 8. This is not representative for the whole OTC market as only the main participants were taken into consideration. For a list of participants who consented to publication of their name see http://www.beb.de/cms/index.cfm?88EDBE5BD60EB4E27739A4C3D3CA2F7A.

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Table 1: Members of the EEX Derivatives Gas Market

Name Country

1. 24/7 Trading GmbH D

2. actogas GmbH D

3. Deutsche Bank AG D

4. DONG Naturgas A/S DK

5. E.ON Ruhrgs AG D

6. EDF Trading Limited GB

7. Electrabel S.A. B

8. EnBW Trading GmbH D

9. Energiefinanz GmbH D

10. Gaselys S.A. F

11. GETEC Energie AG D

12. CAP Energy AS N

13. KoM-SOLUTION GmbH D

14. Morgan Stanley & Co. International Ltd. GB

15. NUON Energy Trade & Wholesale N.V. NL

16. Österreichische Elektrizitätswirtschafts-AG A

17. RWE Supply & Trading GmbH D

18. Sempra Energy Europe Limited GB

19. Stadtwerke Hannover AG D

20. Stadtwerke Leipzig GmbH D

21. Stadtkraft Markets GmbH D

22. Syneco Trading GmbH D

23. Total Gas & Power Limited GB

24. Trianel European Energy Trading GmbH D

25. UBS AG CH

26. UBS AG London Branch GB

27. Vattenfall Trading Services GmbH D

28. VNG - Verbundnetz Gas Aktiengesellschaft D

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Table 2: Members of the EEX Spot Market

Company Name Country

1. 24/7 Trading GmbH D

2. Bergen Energi Commodity Markets Access GmbH D

3. BKW-FMB Energie AG CH

4. Deutsche Bank AG D

5. DONG Naturgas A/S DK

6. E.ON Ruhrgas AG D

7. EDF Trading Limited GB

8. EHA Energie-Handels-Gesellschaft mbH & Co. KG D

9. Electrabel S.A. B

10. EnBW Trading GmbH D

11. Energieunion AG D

12. Energy & More Energiebroker GmbH & Co. KG D

13. EWE AG D

14. Gaselys S.A. F

15. GETEC Energie AG D

16. KoM-SOLUTION GmbH D

17. Morgan Stanley & Co. International Ltd. GB

18. NUON Energy Trade & Wholesale N.V. NL

19. RWE Supply & Trading GmbH D

20. Sempra Energy Europe Limited GB

21. Shell Energy Trading Limited GB

22. Stadtwerke Hannover AG D

23. Stadtwerke Leipzig GmbH D

24. Stadtkraft Markets GmbH D

25. swb Vertrieb Bremen GmbH D

26. Syneco Trading GmbH D

27. Total Gas & Power Limited GB

28. Trianel European Energy Trading GmbH D

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29. UBS AG London Branch GB

30. Vattenfall Trading Services GmbH D

31. Vitol S.A. CH

32. VNG - Verbundnetz Gas Aktiengesellschaft D Source: www.eex.com Table 3: Members of Endex

1. Actogas GmbH

2. All Energy Trading B.V.

3. Atel Trading

4. BNP Paribas

5. Constellation Energy Commodities Group Inc.

6. Delta Energy B.V.

7. Deutsche Bank AG

8. Dong Naturgas A/S

9. E.ON Benelux N.V.

10. E.ON D-Gas B.V.

11. E.ON Energy Trading AG

12. E.ON Ruhrgas AG

13. EDF Trading Limited

14. Electrabel SA

15. Eneco Energy Trade B.V.

16. Enel Trade S.p.A.

17. Essent Energy Trading B.V.

18. Essent Trading International S.A.

19. Fortis Bank S.A.

20. Gaselys

21. GasTerra B.V.

22. Gazprom Marketing & Trading Limited

23. J. Aron & Company

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24. JP Morgan Securities Limited

25. Mercuria Energy Trading SA

26. MMT Energy Fund

27. Morgan Stanley & Co. International plc

28. N.V: NUON Energy Trade & Wholesale

29. RWE Trading GmbH

30. Scottish Power Energy Management Ltd.

31. Sempra Energy Europe Limited

32. Shell Energy Trading Limited

33. SJB Energy Trading B.V.

34. Vattenfall Trading Services GmbH

35. VDM Energy Trading B.V:

36 Vitol SA

Source: www.endex.nl Table 4: Exemplary list of NBP market participants

1. Accord Energy Ltd.

2. Barclays Bank Plc.

3. BG International Ltd.

4. BNP Paribas S.A.

5. BP Gas Marketing Ltd.

6. ConocoPhillips (UK) Ltd.

7. Deutsche Bank AG

8. Distrigaz S.A.

9. EDF Trading Ltd.

10. Electrabel S.A.

11. Elektrizitäts-Gesellschaft Laufenburg AG (EGL)

12. Eni (UK) Ltd.

13. E.ON Ruhrgas AG


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16. ExxonMobil Gas Marketing Europe Ltd.


18. Gaselys S.A.

19. Gazprom Marketing and Trading Ltd.

20. Glencore Energy UK Ltd.

21. Hess Energy Power & Gas Company (UK) Ltd.

22. J. Aron & Company

23. Merrill Lynch Commodities (Europe) Ltd.

24. Mitsui & Company Energy Risk Management Ltd.

25. Morgan Stanley Capital Group Inc.

26. National Grid Gas Plc.

27. Norsk Hydro Energie AS

28. Nuon Energy Trade & Wholesale N.V.

29. RWE Supply & Trading GmbH

30. Shell Energy Trading Ltd.

31. StatoilHydro ASA

32. Total Gas & Power Ltd.

33. Wingas GmbH

Table 5: Exemplary list of TTF market participants


2. ConocoPhillips (U.K.) Limited

3. Delta Energy B.V.

4. DONG Naturgas A/S

5. E.ON D-GAS B.V.

6. E.ON Energy Trading

7. E.ON Ruhrgas AG

8. Eneco Energy Trading B.V.


10. Essent Trading International SA

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12. Gaselys


14. N.V. Nuon Energy Trade & Wholesale


16. RWE Trading GmbH


18. SJB Energy Trading B.V.

19. Stadtwerke Hannover AG

20. Total Gas Power Ltd.

21. Vitol SA

Table 6: Exemplary list of ZEE Hub market participants

1. Accord Energy Ltd.

2. Barclays Bank Plc.

3. BG International Ltd.

4. BNP Paribas S.A.


6. ConocoPhillips (UK) Ltd.

7. DELTA Energy B.V.

8. Deutsche Bank AG

9. Distrigaz S.A.

10. EDF Trading Ltd.

11. Electrabel S.A.

12. Elektrizitäts-Gesellschaft Laufenburg AG (EGL)

13. EnBW Trading GmbH

14. Eni (UK) Ltd.

15. E.ON Ruhrgas AG

16. Essent Trading B.V.


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20. Gaselys S.A.


22. Glencore Energy UK Ltd.

23. Hess Energy Power & Gas Company (UK) Ltd.

24. J. Aron § Company

25. Merrill Lynch Commodities (Europe) Ltd.

26. Mitsui & Company Energy Risk Management Ltd.

27. Morgan Stanley Capital Group Inc.






33. Wingas GmbH

Table 7: Exemplary list of EGT Hub market participants

1. BP Gas Marketing Limited

2. Electrabel

3. Centrica Energie GmbH

4. Dong Naturgas A/S

5. EDF Trading Ltd.

6. Electrabel S.A.

7. Elektrizitätsgesellschaft Laufenburg AG (EGL)

8. EnBW Trading GmbH

9. Enoi S.p.A.

10. E.ON Ruhrgas AG



30

13. Gaselys S.A.



16. Sempra Energy Europe Ltd.


18. Statkraft Markets GmbH

19. Syneco Trading GmbH


21. Vattenfall Trading Services GmbH

22. Vitol S.A

23. VNG Verbundnetz Gas AG

Table 8: Exemplary list of BEB Hub market participants


2. EDF Trading Ltd.

3. Electrabel S.A.

4. E.ON Ruhrgas AG




8. Vitol S.A.

9. VNG Verbundnetz Gas AG

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3. Base Metals Products Trading Exchange based trading Market The London Metal Exchange Main Contracts � Futures and options contracts on primary aluminium and copper

on a daily basis for first three months, each Wednesday for 4-6 months, and every third Wednesday to 63 months forward.

� Futures and options contracts on aluminium alloy, North American Special Aluminium Alloy (NASAAC), nickel and zinc listed on a daily basis for first three months, each Wednesday for 4-6 months, and every third Wednesday to 27 months forward.

� Futures and options contracts on lead and tin listed on a daily basis for first three months, each Wednesday for 4-6 months, and every third Wednesday to 15 months forward.

Liquidity Volumes (2007): � Primary aluminium: 43,709,367 lots (1 lot = 25 tonnes) � Copper: 23,464,298 lots (1 lot = 25 tonnes)) � Aluminium alloy: 492,868 lots (1 lot = 20 tonnes) � NASAAC: 1,246,578 lots (1 lot = 20 tonnes) � Nickel: 3,995,432 lots (1 lot = 6 tonnes) � Zinc: 13,677,587 lots (1 lot = 25 tonnes) � Lead: 5,000,037 lots (1 lot = 25 tonnes) � Tin: 1,312,177 lots (1 lot = 5 tonnes) NYMEX in New York and the Shanghai Futures Exchange list derivatives on copper, primary aluminium and zinc.

Market Participants

� Executing brokers, clearing brokers, producers, refiners and consumers of the base metals traded, and traders and funds.

� Contracts trade in large lot sizes so are not suited to small investors - there is no retail involvement.

� LCH Clearnet centrally clears all trading. � Customers to the market trade through members by electronically

routing their orders to the LME SELECT electronic trading system, by trading against the telephone quotes of members or by giving orders to members that are executed on SELECT, by open outcry or against other members. Members may only act as principals.

Regulation � Recognised by the Financial Services Authority as a Recognised Investment Exchange and subject to the FSA’s Recognition Requirements.

� Members are required to be regulated firms and their customers, if not regulated firms, must be vetted by the member and seen as “fit and proper” to trade.

� Trading on the LME falls under the FSA’s Code of Market Conduct (UK implementation of the Market Abuse Directive)

� The exchange monitors trading and acts as “front-line” regulator Primary purposes of trading

� The futures and options market allows members and customers to manage their price and sourcing risk exposure to the base metals admitted to trading on the LME.

� They are also used for price discovery and to gauge market sentiment as prices generated from the futures and options market are fully transparent being updated second by second as

32

trading occurs. Pricing Real time prices are available via the LME SELECT electronic trading

platform, from indicative prices quoted by Members and from open outcry ring and kerb trading; these prices are distributed via major data vendors and the web-based LMElive. Settlement Prices are set daily based on the last bid and offer prices in the 2nd ring, with closing prices being established after the close of afternoon ring trading. The price formation process is transparent and is overseen by LME staff.

Settlement and Delivery of LME Base Metals Contracts

All the LME base metals contracts are deliverable, with delivery of net positions by broker taking the form of warrants and the seller selecting the warrants to deliver. An LME warrant represents an identifiable lot of a particular brand of the relevant metal stored by a particular warehouse company in a particular location; approved locations are located throughout the world. The metal must be in a form specified by the LME and of the appropriate weight. Each LME listed warehouse company undertakes to deliver to the holder of an LME warrant the precise lot of metal that it represents.

The underlying market in base metals Liquidity The underlying market is opaque, although organisations such as the

International Wrought Copper Council or the International Aluminium Institute produce data on supply and consumption.

Types of participants

Merchants, producers, refiners, consumers, and brokers.

Regulation � The underlying physical markets in the main fall outside financial services regulation. Trading in the “underlying” markets can influence LME Futures prices and hence falls within the scope of the FSA’s Code of Market Conduct.

Pricing � Prices for the underlying base metals market are reported by various services such as Metal Bulletin. Prices and price indices published by Metal Bulletin represent an approximate evaluation of current levels based upon dealings (if any) that may have been disclosed prior to publication to Metal Bulletin and are collated through regular contact with producers, traders and consumers; actual transaction prices reflect quantities, grades and qualities, credit terms, and many other parameters but their accuracy, adequacy or completeness is not guaranteed and nor is it verified independently.

� Terms of physical contracts in the underlying metals listed on the LME are frequently priced by reference to the LME Daily Official Settlement Prices, adjusted by a premium or discount to take account of differences in quality of metal from that required by LME Contract Rules.

OTC markets in base metals’ derivatives OTC There is an active OTC market in base metals’ derivatives. Subject to

LME rules, it is permissible to bring certain OTC contracts onto the LME and convert them to exchange contracts or to take exchange contracts off-exchange. Contracts brought on-exchange with one LME member can be transferred to another LME member where there is a customer in common and for the second member to take that contract off-exchange. This assists market participants to net OTC or exchange contracts held with different members.

33

Additional Information for LME: Breakdown of user types on the LME Members of the London Metal Exchange (LME) are obligated to provide LME Compliance daily with full data on all positions held by the firm and each of its clients for every settlement date traded on the Exchange; the LME has admitted to trading derivatives on aluminium alloy, high grade copper, lead, nickel, North American Special Aluminium Alloy, primary aluminium, tin, zinc, polypropylene, and linear low-density polyethylene with settlement dates being on a daily basis for the first three months, each Wednesday for 4-6 months, and every third Wednesday to between 15 and 63 months forward, depending on the contract traded. Steel billet has recently been admitted to trading but with restricted settlement dates available for trading until the full launch of the contract on 28 April 2008. The data provided by member firms includes the name of the client, or firm where the position is proprietary, holding the position by settlement date. This permits LME Compliance to aggregate the positions by market user across the market where a user is a client of more than one member and it will, where there are reasonable grounds, amalgamate positions of different market users if it considers that these users might be related. The aggregated positions are a critical element in ensuring that the LME can ensure the integrity and properness of its markets and monitor for abuses such as corners or squeezes. The LME does not have a need to break down the data received from members into user types such as producers, processors, smelters, merchants, consumers (such as automotive firms) and funds; retail activity is non-existent, perhaps due to the high value of LME contracts. To provide a breakdown of user types would be a major endeavour, requiring many man-hours. It is unlikely that it would provide useful information but would simply reinforce the fact that users of the LME are knowledgeable, experienced, wholesale and industrial users and professional funds that use LME markets to hedge, trade and source the commodities underlying the contracts traded on its markets. Authorisation Requirements for LME membership Ring Dealing Members (Category 1 members), Associate Broker Clearing Members (Category 2 members) and Associate Broker Non-Clearing Members (Category 4 members) of the LME must be authorised or exempt persons in accordance with Part III of the UK Financial Services & Markets Act (FSMA) or an investment firm authorised under Article 5 of MiFID or a credit institution authorised under the BCD. Associate Trade Clearing Members (Category 3 members) need not be authorised or exempt; they are entitled to clear their own LME business but they may not issue LME client contracts and nor may they trade in the Ring. Associate Trade Members (Category 5 Members) need not be authorised or exempt; they have no trading rights except as clients, they may not issue LME client contracts and nor may they clear their own LME business. LME members active as physical traders There are no category 1, 2 or 4 members that are active traders of the underlying physical commodities; some members are parts of groups that engage in the physical

34

business. Banks that are LME members in their own name Of the 25 banks, including investment banks, that are members of the LME, 16 have direct memberships, including through branches, with the other nine operating their membership through subsidiary companies. All other category 1, 2 and 4 members of the LME are investment firms rather than banks or parts of bank groups, although one of these is a joint venture with a major international banking group. The importance of commodity derivatives in pricing the underlying It is not easy to derive authenticated prices for deals taking place bilaterally in certain physical commodities due to the opaqueness of dealings; the commencement of on-exchange trading in derivatives on such commodities can bring truer price transparency to the value of the underlying commodities, with the settlement price of the exchange-traded derivative becoming accepted as the reference price for the pricing of the underlying physical commodities. Article 37 of Commission Regulation (EC) No. 1287/2006 recognised this feature of the commodity derivatives markets, stating that it is not necessary for commodity derivatives admitted to trading on a regulated market to have a price or other value measure for the underlying to be reliable and publicly available where the contract establishing the instrument is likely to provide a means of disclosing to the market, or enabling the market to assess the price or other value measure of the underlying. The daily Official Settlement Prices for these metals are used widely throughout the world to price dealings in the eight metals, with premiums or discounts being applied to take account of differences in metal quality from that required for deliveries arising on LME contracts.

35

4. Plastics Products Trading Exchange based trading Market The London Metal Exchange

Main Contracts � Futures contracts on polypropylene (PP) deliverable in a) North

America, b) Europe, c) Asia, and d) globally. Contracts listed on a daily basis for first three months, each Wednesday for 4-6 months, and every third Wednesday from 7 to 15 months forward.

� Futures contracts on linear low-density polyethylene (LL) deliverable in a) North America, b) Europe, c) Asia, and d) globally. Contracts listed on a daily basis for first three months, each Wednesday for 4-6 months, and every third Wednesday from 7 to 15 months forward.

Liquidity Volumes (2007): � PP: 8,509 lots (1 lot = 24.75 tonnes); � LL: 5,796 lots (1 lot = 24.75 tonnes).

Market Participants

� Executing brokers, clearing brokers, producers, refiners and consumers of PP and LL, traders and funds.


� LCH Clearnet centrally clears all trading. � Customers to the market trade through members by electronically

routing their orders to the LME SELECT electronic trading system, by trading against the telephone quotes of members or by giving orders to members that are executed on SELECT, by open outcry or against other members. Members may only act as principals.

Regulation � Recognised by the Financial Services Authority as a Recognised Investment Exchange and subject to the FSA’s Recognition Requirements.


� Trading on the LME falls under the FSA’s Code of Market Conduct (UK implementation of the Market Abuse Directive)


� To allow members and customers to manage their price and sourcing risk exposure to PP and LL.

� The contracts aid price discovery as prices generated from the futures market are fully transparent.

Pricing Real time prices are available via the LME SELECT electronic trading platform, from indicative prices quoted by members and from open outcry ring and kerb trading; these prices are distributed via major data vendors and the web-based LMElive. Settlement Prices are set daily based on the last bid and offer prices in the 2nd Ring, with closing prices being established after the close of afternoon ring trading. The price formation process is transparent and is overseen by LME staff.

Settlement and Delivery of LME Plastics Contracts

All the LME PP and LL contracts are deliverable, with delivery of net positions by broker taking the form of warrants and the seller selecting the warrants to deliver. An LME warrant represents an identifiable lot of a particular brand of the relevant PP or LL stored by a particular

36

warehouse company in a particular location; approved locations are located throughout the world. The PP or LL must be in a form specified by the LME and of the appropriate weight. Each LME listed warehouse company undertakes to deliver out to the holder of an LME warrant the precise lot of PP or LL that it represents. Delivery obligations on a European contract can only be met by delivery of a warrant issued by a warehouse in an approved European location; similar restrictions apply to delivery of Asian (North American) warrants in fulfilment of delivery obligations for an Asian (North American) contract. Any PP or LL warrant can be used to settle delivery obligations on global contracts.

The underlying market in PP and LL Liquidity The underlying market is opaque. Types of participants

Merchants, producers, refiners, consumers, and brokers.

Regulation The underlying physical markets in the main fall outside financial services regulation. Trading in the “underlying” markets can influence LME futures prices and hence falls within the scope of the FSA’s Code of Market Conduct.

OTC markets in PP and LL derivatives OTC There is an active OTC market in PP and LL derivatives. Subject to

LME rules it is permissible to bring certain OTC contracts onto the LME and convert them to exchange contracts or to take exchange contracts off-exchange. Contracts brought on-exchange with one LME member can be transferred to another LME member where there is a customer in common and for the second member to take that contract off-exchange. This assists market participants to net OTC or exchange contracts held with different members.

37

5. Oil Products trading Exchange based trading Market ICE Futures

Main Contracts � Gas oil futures and options contracts listed up to 36 months

forward on a monthly basis and further forward on a quarterly basis

� Heating oil futures listed up to 18 months forward � Gasoline futures listed up to 12 months forward � Calendar and product spreads can be traded between these

contracts. Liquidity Average daily volumes (2008 year to date up to 27 May 2008):

� Gas oil futures 108,000 lots (10.8 million tonnes) � Heating oil futures 467 lots (0.467 million barrels) � Gas oil options 567 lots (56,700 tonnes) � NY Harbour Gasoline futures 164 lots (164,000 barrels) Similar heating oil and gasoline futures contracts are listed by NYMEX in New York.


� Executing brokers, clearing brokers, oil majors, refiners and producers, utilities, traders, large users, funds.


� LCH Clearnet centrally clears all trading. � Members and customers can trade either directly on screen or

route orders through brokers. Regulation � Recognised by the Financial Services Authority as a Recognised

Investment Exchange and subject to the FSA’s Recognition Requirements.


� ICE futures trading falls under the FSA’s Code of Market Conduct (UK implementation of the Market Abuse Directive)


� The futures and options market allows members and customers to manage their oil price risk exposures.

� They are also used for price discovery and to gauge market sentiment as prices generated from the futures and options market are fully transparent being updated second by second as trading occurs.

Pricing � Real time prices are available via the ICE Platform and major data vendors. Daily settlement prices are based on the weighted average price of trades during a three minute settlement period from 16:27:00, London time. The price formation process is thus transparent and is overseen by compliance monitoring staff at the exchange.

38

Major underlying Physical Markets OTC physical oil trading

Rotterdam barges gas oil 0.2 Market The ICE Gas Oil Futures contract expires to physical delivery via barges, coasters or tanks at approved locations in the Amsterdam, Rotterdam and Antwerp (ARA) area. The most significant underlying is the “Rotterdam barges gas oil 0.2” market. The ICE heating oil and gasoline futures contracts are based on New York physical underlying markets which are outside the scope of the Commission’s review.

Liquidity � Spot trading is typically between 5 and 12 barges a day (this can vary from zero occasionally up to around 20 on a busy day). These barges are between 1,000 and 4,000 tonnes (2,000 tonnes is the typical size).

� There is also an additional and quite liquid “mini term” market for blocks of volume to be delivered rateably over a half month. Typically, these are for between 5,000 and 20,000 tonnes at a time and trade in blocks between and 5 and 10 times a month.

� There is also an additional trade of around 150-300,000 tonnes each month from long-term deals (typically for a year at a time)


� Executing brokers, oil majors, refiners and producers, traders, blenders, large users or wholesalers.

Regulation � These are OTC physical markets which in the main fall outside financial services regulation, however, trading in the “underlying” markets can influence ICE Futures prices and thus falls within the scope of the FSA’s Code of Market Conduct. Barge market usually trades “EFP related”, i.e. relative to an ICE Futures contract and so may fall within scope of FSA here also.


� ARA Refiners selling surplus to own requirements � End users/wholesalers/resellers buying to cover end user demand

in Benelux and Germany (up the Rhine) � Blenders selling finished grade to profit from blending components

imported and/or bought locally. � Blenders buying to blend cargoes (typically to a different

specification) for export. � Traders buying and selling to hedge or take positions, particularly

as linked to delivery on ICE futures Pricing � In the main prices are “assessed” daily and reported via Platts and

other price reporters. Platts prices are probably the most universally used OTC price references and are established via open and transparent trading in a set 30 minute trading “window” towards the end of each trading day.

� The underlying market typically trades at a premium or discount to the same or following month’s ICE Futures contract. This premium is a function of supply/demand and the contango/backwardation structure of the market at the time. Platts assess this premium at the end of their trading “window” and add to their own estimation of the ICE Futures price at the same time.

Standardisation & settlement

� Different terms and conditions apply depending on who is the buyer and who is the seller. A standard set of “TTB rules”

39

(predefining lay time and demurrage rates to apply depending on the size of the barge) is common to most contracts.

� Settlement terms are typically “bill of lading” date plus 5 days � Delivery is “Free on Board” ARA (ports of Amsterdam, Rotterdam,

Antwerp), but can include additional smaller ports (e.g. Dordrecht, Flushing and Amersfoort) in the ARA area

Other OTC Markets OTC OTC swaps markets

The Platts premium (to ICE futures) trades quite liquidly as a differential swap, typically by month, as defined by the difference between Platts barges and the 1st month of the ICE Gas Oil futures contract. As mentioned above, Platts produce a daily assessment of various oil product prices based on trading in a 30 minute window between 16:00 and 16:30 London time. Trading in this window is via a telephone market operated by a London broker who, based on trading during 2007, estimates a split of volume by firm type as follows:

Oil Product Derivatives Trading Companies: 52% Oil Companies: 30% Banks: 18% The aim of this document was to provide an overview of the principal oil products markets in Europe and how these interact with the relevant contracts listed on the ICE Futures market. Throughout Europe and globally there are myriad of oil products markets each with its own regional variations reflecting local conditions and customs and consumer requirements – many of these are quoted daily by Platts and other price reporting agencies. There are too many to list or comment on here.

40

6. Crude oil trading Exchange based trading Market ICE Futures Main Contracts � Brent and West Texas Intermediate (WTI) crude futures and

options contracts listed up to 72 months forward � ICE also offers a Middle East crude futures � Calendar and product spreads can be traded between these

contracts. Liquidity18 Average daily volumes (2008 y.t.d. up to 27 May 2008)

� Brent Crude Futures 271,000 lots (270 million barrels) � WTI Crude Futures 217,000 lots (217 million barrels) � Brent Crude options 96 lots (96,000 barrels) � WTI Crude options 64 lots (64,000 barrels)


� Executing brokers, clearing brokers, oil majors, refiners and producers, utilities, traders, large users, funds.

� Contracts trade in 1,000 barrel lots so are not suited to small investors - there is no retail involvement.

� LCH Clearnet centrally clears all trading. � Members and customers can trade either directly on screen or

route orders through brokers. Regulation � Recognised by the Financial Services Authority as a Recognised

Investment Exchange and subject to the FSA’s Recognition Requirements (will be a Regulated Market under MiFID).

� Members are required to be regulated firms and their customers must be vetted by the member and seen as “fit and proper” to trade.

� ICE futures trading falls under the FSA’s Code of Market Conduct (UK implementation of the Market Abuse Directive)


� The futures and options market allows members and customers to manage their crude oil price risk exposures.

� They are also used for price discovery and to gauge market sentiment as prices generated from the futures and options market are fully transparent being updated second by second as trading occurs.

Pricing � Real time prices are available via the ICE Platform and major data vendors. Daily settlement prices are based on the weighted average price of trades during a three-minute settlement period from 19:27:00, London time. The price formation process is thus transparent and is overseen by compliance monitoring staff at the exchange.

Major underlying Physical Market Instruments OTC forward trading

� The principal traded European crude oil market is the North Sea BFOE (Brent, Fortes, Oseberg, Ekofisk) forward market.

� Roughly 5-10 cargoes worth of “full” BFOE cargoes trades each day (1 cargo is 600,000 barrels). These trade forward on contract terms usually based on Shell (SUKO90) terms.

� Volumes have declined in line with declining underlying North Sea

18 Source; ICE Futures Month and YTD Volume Summary 16/7/07

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production and changes in upstream taxation which limit operational flexibility.

� A significant portion of the volume traded is based on time-spreads (e.g. Oct/Nov), and the balance is flat price.

� The most active players active in this market over past 3 years have been 3 of the oil majors plus 3 active oil traders. Up to 4 other oil majors and 4 more oil traders also participate but less frequently. Very occasionally one or more of the investment banks participate but appear to confine their activity to swaps trading.

� There is also a very liquid market for “partials” (less than full cargoes) whereby full cargoes can be aggregated from a number of smaller parcels at an average price. Partials are mostly flat price and it is typical to see 2-5 million barrels traded per day.

� This market attracts the same players above, and a number of others taking the total number of regularly active participants to roughly 20, though in all we see as many as 100 firms trade, most of them infrequently.

Physical Markets

� Something like 11,30,18,10 cargoes respectively per month are produced for each of the 4 fields (Brent, Forties, Ekofisk, Oseberg), so something like 70 cargoes are loaded each month. Many of these cargoes are sold as 'named grades' with a large proportion of Brent and Forties being delivered through the BFOE forward market.


� See above.

Regulation � These are OTC physical markets which in the main fall outside financial services regulation, however trading in these “underlying” markets can influence ICE Futures prices so can fall within the scope of the FSA’s Code of Market Conduct.


� The main reason for the oil firms to be present is to support their physical supply and demand needs. A producer with a natural long position may use the market to sell its production while refiners will be present to source crude. Integrated firms will usually have an imbalance in production and refining capacities so will trade to balance their needs.

� Firms also enter into “term” contracts (long term arrangements) to buy/sell crude from the many independent producers and other oil companies.

� Traded volumes exceed the available production of the North Sea fields. This might be explained in part by speculation on behalf of the trading firms and in part by physical players using the market to hedge exposures and source the optimal grades of crude for their refineries. It is impossible to gauge this exactly, though the resulting extra liquidity makes for a healthy liquid market with sufficient depth to support reliable price discovery despite the underlying decline in production.

Pricing � In the main prices are “assessed” daily and reported via Platts and other price reporters. Platts prices are probably the most universally used OTC price references and are set via open and transparent trading in a set 30-minute trading “window”. Platts produce a daily assessment of the BFOE price based on trading

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in a 30 minute window between 16:00 and 16:30 London time. Trading in this window is via a telephone market operated by a Lonodn broker who, based on trading during 2007, estimates a split by firm type as follows:

Crude Oil Derivatives Trading Companies: 40% Oil Companies: 28% Banks: 32%

Standardisation & settlement

� The great bulk of BFOE trading is standard conditions based on the Shell SUKO90 terms – these aim to standardise physical issues such as cargo quality and loading terms. Settlement is usually 30 days after loading the cargo or, if no cargo is declared, 30 days from the middle of the loading month.

Other OTC trading OTC

There are many other crude oil markets worldwide – too many to comment on here. The most significant trading hubs are based on the North Sea (the most relevant to EU regulation and hence the one described above) and on the US internal pipeline and storage network focussed on delivery into Cushing, Oklahoma. Other exchange-based contracts are traded in Dubai and Tokyo though these are newer and less liquid. Pretty much all of the hundreds of grades of crude oil produced across the globe give rise to trading as producers seek a route to market and refiners search for optimum grades to supply their refineries.

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7. Derivative Securities on Commodities Market Securitisation of commodities as an underlying of derivative securities.

Main markets are Germany (and Switzerland), but offerings in all countries with a market in retail derivative securities (for example Austria or Italy).

Main Products � Single commodities based on a standardised, regularly traded futures or options contract as well as commodity indices.

� One of the leading issuers in Germany offers products on more than 100 different commodity underlyings (as of June 2008). The same issuer offers products on 15 underlyings only in Italy.

� All types of products, including leverage and investment certificates (warrants, capital protection, bonus, discount certificates, etc.)

� There are almost no products on gas and electricity underlyings. Liquidity � Turnover on German stock exchanges in 2007

� 3.93 bn euro in investment certificates (3.80 per cent overall) � 1.08 bn euro in warrants (3.22 per cent of all warrants) � 3.25 bn euro in knock out products (5.94 per cent of all knock

outs) � Figures on outstanding volume are include FX and commodity

products and only refer to about 70 per cent of the market. End of 2007

� 711 investment certificates with an outstanding volume of 1.6 bn euro (1.7 per cent of all investment certificates)

� 8,751 leverage products with 0.3 bn euro (11.2 per cent overall). � In early 2008 at least the turnover in derivative securities referring

to commodities has significantly increased. In March 2009 the share of commodity knock outs topped almost 20 per cent of the total turnover (725 m euro out of 3.6 bn euro). However, despite the public awareness and media presence, derivative securities on commodities still only play a minor role in the portfolios of German private investors.

� Source for data: Deutscher Derivate Verband Types of firms present

� Issuers are financial instititutions, including special purpose vehicles. At present, there are no issuers only specialised on commodities as an underlying.

� Investors are mostly private investors who either purchase the products by themselves through their banks and discount brokers via stock exchange or OTC or who are advised by the client advisors of their banks.

� Almost all products are typically listed at a specialised derivative securities segment at a stock exchange (in Germany Scoach in Frankfurt and EUWAX in Stuttgart)

Regulation � Public offer and listing subject to the requirements of the Prospectus Directive.

� Issuers and intermediary banks are subject to European financial market regulations.

Primary purposes of

� Investment in case of investment certificates, speculation in case of leverage products.

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trading Pricing � The issuers (or a related company) permanently provide two-way

prices (bid and offer) for the offers during the trading hours of the exchanges. Pricing is based on the prices of the underlyings.

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B. Question 2 “Fact Finding” The subject matter of this section is the advice from ESME regarding question 2 in the Mandate, which is as follows: Does ESME have any observations to make on how the exemptions in the CAD and MiFID for certain firms providing investment services relating to commodity derivatives and exotic derivatives are working in practice? What difficulties arise from different interpretations? And what are some of the challenges or issues for market participants or market quality arising from the existing regulatory framework? These might arise from market distortions, regulatory arbitrage or other significant sub-optimalities in market functioning. Summary of Advice from ESME The current position is clearly unsatisfactory for a number of reasons: • The differing boundaries of regulation across the EU seem to be less problematic

than in the past but remain a potential concern for firms seeking to operate across all Member States.



The result is excessive complexity for firms, in a context where the wholesale nature of the business and the limited risks make it difficult to justify regulation of many firms on investor protection or systemic risk grounds.

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Advice from ESME: 1. Significance of MiFID for commodity and commodit y derivatives business MiFID made significant changes to the way in which many Member States regulate firms conducting business in commodity and other non-financial derivatives. Although the ISD had required Member States to impose authorisation requirements on firms carrying on certain kinds of investment business, those requirements did not apply to the business of trading in commodity or other non-financial derivatives. However, Member States were free to impose broader authorisation requirements than the ISD required and a number of Member States in fact did require firms to obtain authorisation to engage in businesses related to commodity and (in some cases) other non-financial derivatives. Correspondingly, EU firms carrying on those businesses did not benefit from the EU "passport" for that business, even if they qualified as a credit institution or investment firm under the BCD or ISD as a result of their other activities or were subject to a national authorisation regime that covered that business. Therefore, if they carried on cross-border business, or sought to establish branches in other Member States, they might encounter requirements to obtain additional local licences in other Member States which imposed broader licensing requirements than required by the ISD. Some Member States (such as Italy and the UK) provided a means under which firms authorised in another Member State to conduct this business could obtain "top up" authorisation to conduct business locally even where the passport was not available, but this facility did not exist in all Member States with broader licensing requirements. In any event, a top up licence was not available to commodity firms from other Member States that were not subject to authorisation in their home state (either because their home Member State had not adopted broader licensing requirements or provided exemptions from authorisation to certain categories of firm). Moreover, even though they did not benefit from the passport for that business, EU credit institutions and investment firms were still subject to capital requirements for their risks on commodity and other related businesses, as the CAD provided a capital framework which covered that business. Similarly, the ISD “passport” for regulated markets did not extend to markets trading commodity and other non-financial derivatives. Therefore, EU exchanges which traded commodity and other non-financial derivatives had issues as to whether they could admit remote members in other Member States without contravening local authorisation requirements applicable to exchanges. Finally, the ISD did not address the treatment of third country firms carrying on cross-border business with clients and counterparties in the EU, either in their own right or as a special purpose vehicle (SPV) which acts as a booking vehicle for transactions arranged by an EU firm. There are a number of different approaches across the EU to the territorial application of domestic authorisation requirements. For example, in some countries (such as the Belgium, Ireland and the UK) there are exemptions from authorisation requirements for firms conducting cross-border business with local institutional counterparties (including corporates), while in other countries, the law does not explicitly address its territorial scope or there is guidance indicating that the

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application of local authorisation requirements depends on the nature and degree of solicitation of local investors. MiFID sought to address some of the issues arising from this patchwork of authorisation requirements by extending the coverage of the authorisation and passport regimes to include investment services and activities in relation to certain commodity and other non-financial derivatives. In summary, the MiFID definition of “financial instrument” covers derivatives relating to commodities and a defined class of other underlying factors (such as climatic variables, freight rates, economic statistics, emissions allowances, telecommunications bandwidth, commodity storage capacity, etc.) where: • the derivative is cash-settled; • the derivative is admitted to trading on a regulated market or MTF; or • the derivative is (i) not a spot contract, (ii) traded on a third country trading facility,

expressed to be traded on a regulated market, MTF or third country trading facility or expressly stated to be equivalent to a contract which is so traded, (iii) subject to clearing or margining arrangements and (iv) on standardised terms.19

However, MiFID also extended the coverage of the authorisation regime in other ways. In particular, the definition of an “investment firm” in MiFID now covers (amongst others) any person whose regular occupation or business is the performance of the investment activity of “dealing for own account” in financial instruments on a professional basis, regardless of whether that person is providing a service to third parties when conducting that business.20 In contrast, the definition of an “investment firm” in the ISD only covered persons whose regular occupation or business was the provision of investment services for third parties on a professional basis.21 Although the ISD definition of investment services also covered dealing for own account, the definition of investment firm was limited to those providing services to third parties. The new definition of investment firm is significantly broader and is capable of applying to a broad range of professional investors and other market participants who invest or engage in transactions in financial instruments for their own account, without seeking to provide services to third parties, including many end-users of financial markets and of the services of financial intermediaries. The fact that MiFID pushed the boundaries of regulation outward in these ways focused attention on the provisions of MiFID which exempt certain categories of firm from the application of the directive.22 First, it was recognised that the extension of the definition of financial instruments to include many commodity and non-financial derivatives would potentially sweep a significant (but unknown) number of firms into the scope of EU authorisation requirements that were not necessarily well adapted for their business. Under the ISD, these firms were either not subject to authorisation requirements at all or were subject to 19 See Section C(5), (6), (7) and (10) of Annex I MiFID and articles 38 and 39 of the MiFID implementing regulation. As a result of the conditions in article 38 of the MiFID implementing regulation, MiFID does not generally apply to physically-settled spot or forward transactions or other physically-settled (OTC) derivatives on commodities or other physically-deliverable underlyings. 20 Article 4.1(1) MiFID. The other significant change in the scope of the authorisation regime was the extension of the definition of investment services and activities to cover “investment advice” and the operation of MTFs (see Section A(5) and (8) of Annex I MiFID). 21 Article 1(2) ISD. 22 Article 2.1 MiFID.

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specially-tailored national authorisation regimes. In particular, it was recognised that the pushing out of the boundaries of authorisation would potentially affect a range of energy companies which either directly or through specialised subsidiaries were active traders in physical markets and increasingly in derivatives markets as well. Secondly, it was understood that the extension of the definition of investment firm to include anyone who invested in or traded any financial instrument for their own account on a professional basis meant that it was necessary to include a number of broad exemptions in the directive. Otherwise, Member States would be required to impose authorisation requirements on many end-users and investors, not just on intermediaries. At the same time, there were conflicting pressures. A firm that is exempt from MiFID cannot take advantage of its benefits, in particular it cannot benefit from the MiFID “passport” to facilitate its cross-border business. Firms that fall within the exemptions cannot “opt into” MiFID (except by restructuring their business). Therefore, there was pressure to prevent certain of the exemptions applying to subsidiaries within a banking or securities firm group, so as to enable those group’s specialised derivatives trading arms to benefit from the passport for their activities, even though their business might be identical to that of other exempted firms and even though the risks to the regulated bank or investment firm associated with their business might be equally captured through consolidated supervision.23 The result was a complex set of interrelated and overlapping exemptions, the most important of which in this context are set out in the box below. Although only two of these are formally subject to the review process envisaged by the directive,24 it is necessary to consider the exemptions together, as in many cases an entity may have to rely on more than one exemption in relation to its business. Key exemptions in article 2 MiFID 1. This Directive shall not apply to: … (b) persons which provide investment services exclusively for their parent undertakings, for their subsidiaries or for other subsidiaries of their parent undertakings; … (d) persons who do not provide any investment services or activities other than dealing on own account unless they are market makers or deal on own account outside a regulated market or an MTF on an organised, frequent and systematic basis by providing a system accessible to third parties in order to engage in dealings with them; … (i) persons dealing on own account in financial instruments, or providing investment services in commodity derivatives or derivative contracts included in Annex I, Section C 10 to the clients of their main business, provided this is an ancillary activity to their main business, when considered on a group basis, and that main business is not the provision of investment services within the meaning of this Directive or banking

23 In fact, it is not always clear how the rules on consolidated supervision in BCD and CAD apply to subsidiaries trading commodity and other non-financial derivatives, in part because such a subsidiary would not normally be a “financial institution” within article 4.5 BCD as trading in commodity and non-financial derivatives is not an activity listed in points 2 to 12 of Annex I BCD. To some extent, this is addressed by other provisions in CAD but these may not apply to subsidiaries that benefit from an exemption in MiFID. 24 Article 65(3) requires the Commission to review and report on articles 2.1(i) and (k).

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services under Directive 2000/12/EC; … (k) persons whose main business consists of dealing on own account in commodities and/or commodity derivatives. This exception shall not apply where the persons that deal on own account in commodities and/or commodity derivatives are part of a group the main business of which is the provision of other investment services within the meaning of this Directive or banking services under Directive 2000/12/EC; (l) firms which provide investment services and/or perform investment activities consisting exclusively in dealing on own account on markets in financial futures or options or other derivatives and on cash markets for the sole purpose of hedging positions on derivatives markets or which deal for the accounts of other members of those markets or make prices for them and which are guaranteed by clearing members of the same markets, where responsibility for ensuring the performance of contracts entered into by such firms is assumed by clearing members of the same markets; … Even so, it was also clear at the time that these exemptions would not be enough to fully mitigate the possible effects of the extension of MiFID to cover commodity and non-financial derivatives. There would be some firms that could not or would not wish to benefit from the MiFID exemptions but for whom the CAD regime would be inappropriate and unduly burdensome. Accordingly, changes were made to the CRD to add provisions to CAD allowing Member States to exempt certain investment firms engaged in commodity and non-financial derivatives business from the large exposure requirements and capital rules in CAD, subject to certain conditions (see box below). These provisions expire (at the latest) on 31 December 2010, although the Commission has recently published proposals to extend this expiry date to 2012. Exemptions in the CAD Article 45 1. Competent authorities may permit investment firms to exceed the limits concerning large exposures set out in Article 111 of Directive 2006/48/EC. Investment firms need not include any excesses in their calculation of capital requirements exceeding such limits, as set out in Article 75(b) of that Directive. This discretion is available until 31 December 2010 or the date of entry into force of any modifications consequent to the treatment of large exposures pursuant to Article 119 of Directive 2006/48/EC, whichever is the earlier. For this discretion to be exercised, the following conditions shall be met: (a) the investment firm provides investment services or investment activities related to the financial instruments listed in points 5, 6, 7, 9 and 10 of Section C of Annex I to Directive 2004/39/EC; (b) the investment firm does not provide such investment services or undertake such investment activities for, or on behalf of, retail clients; (c) breaches of the limits referred to in the introductory part of this paragraph arise in connection with exposures resulting from contracts that are financial instruments as listed in point (a) and relate to commodities or underlyings within the meaning of point 10 of Section C of Annex I to Directive 2004/39/EC (MiFID) and are calculated in

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accordance with Annexes III and IV of Directive 2006/48/EC, or in connection with exposures resulting from contracts concerning the delivery of commodities or emission allowances; and (d) the investment firm has a documented strategy for managing and, in particular, for controlling and limiting risks arising from the concentration of exposures. The investment firm shall inform the competent authorities of this strategy and all material changes to it without delay. The investment firm shall make appropriate arrangements to ensure a continuous monitoring of the creditworthiness of borrowers, according to their impact on concentration risk. These arrangements shall enable the investment firm to react adequately and sufficiently promptly to any deterioration in that creditworthiness. 2. Where an investment firm exceeds the internal limits set according to the strategy referred to in point (d) of paragraph 1, it shall notify the competent authority without delay of the size and nature of the excess and of the counterparty. Article 48 1. The provisions on capital requirements as laid down in this Directive and Directive 2006/48/EC shall not apply to investment firms whose main business consists exclusively of the provision of investment services or activities in relation to the financial instruments set out in points 5, 6, 7, 9 and 10 of Section C of Annex I to Directive 2004/39/EC and to whom Directive 93/22/EEC did not apply on 31 December 2006. This exemption is available until 31 December 2010 or the date of entry into force of any modifications pursuant to paragraphs 2 and 3, whichever is the earlier. 2. MiFID implementation How then have the MiFID provisions on commodity and other non-financial derivatives been implemented in the Member States? MiFID allows Member States to adopt broader definitions of what activities trigger authorisation requirements. However, while they can adopt broader definitions of what constitutes a regulated activity or a regulated financial instrument, it seems that relatively few Member States have chosen to do this. In particular, of the Member States that responded to CESR’s October 2007 survey on this point, only Italy and the UK intended to apply definitions of financial instrument, for authorisation purposes, broader than those required by the directive.25 The same survey indicated that many Member States had decided to copy out the relevant exemptions in MiFID into their national law (even though they are not required to do so), although with some limited variations. Again, the UK is the principal outlier in that it continues to impose authorisation requirements on some firms that would benefit from exemptions from MiFID, although the UK applies a less stringent regime to MiFID exempt firms that are subject to its super-equivalent authorisation requirements (but Austria and Belgium also indicated an intention to require a national licence). Italy has not yet implemented the exemptions.

25 See CESR Response to the Commission's request for initial assistance on commodity and exotic derivatives and related business (October 2007). The same report indicates that France has adopted a broader definition of financial instrument but only for the purposes of ensuring that its netting legislation continues to apply to OTC physically settled transactions that are subject to margining requirements.

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3. Divergences of interpretation This would suggest that the introduction of MiFID has resulted in some progress towards a more harmonised application of authorisation requirements across the EU. However, even where Member States have copied out the directive’s provisions into their national law, there is still scope for differing interpretations of how these provisions apply. For example: • Article 2.1(b)

This exemption is available to persons which “provide investment services exclusively for” their group companies. If a group company acts on behalf of another group company to arrange transactions in derivatives between that group company and a third party, it may be providing the MiFID service of reception and transmission of orders as it will be “bringing together two investors, thereby bringing about a transaction between those investors”.26 However, there may be doubts (at least in some cases) as to whether the arranger is also providing a service to the third party, as well as its affiliate, thus meaning that it cannot rely on the exemption.

• Article 2.1(d)

This exemption is available to persons “who do not provide any investment services or activities other than dealing on own account”. On its face, therefore, this exemption is not available to an entity which provides investment services to other members of its group (otherwise falling within article 2.1(b)) but also deals for own account. The Commission has suggested in its Q&A that it is possible to combine the exemption in article 2.1(d) with other exemptions on the basis that the references to ‘investment services’ in article 2.1(d) do not include a reference to any activity which is covered by another exemption. However, if this were the case, it is unclear why article 2.1(f) would be necessary as it deals with the combination of the exemptions in article 2.1(b) and (e). There are other reasons why it can be difficult to determine whether article 2.1(d) applies in any particular case. In particular: o It is unclear whether the exemption covers a person that deals on own account

by executing client orders or otherwise in such a way that it might be regarded as providing services to third parties as clients (compare the differences of view regarding the scope of article 2.1(i) below).

o There is significant lack of clarity as to the scope of the definition of “market maker”, which is defined as covering a person who holds himself out on a continuous basis as being willing to deal on own account by buying and selling financial instruments against his proprietary capital at prices defined by him.27 The Commission’s Q&A suggests this is “quite broad” and it is not limited to firms publishing continuous two way prices or registered with an exchange as a market maker). The definition suggests that it might cover firms that actively hold themselves out as willing to provide liquidity to the market.

26 Recital 20 MiFID. 27 Article 2.1(8) MiFID.

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o It is unclear whether the guidelines in the MiFID implementing regulation as to the application of the definition of a systematic internaliser27 are relevant to determining when a person deals on own account on an “organised, frequent and systematic basis”. In particular, it is unclear whether it is necessary that the activity has a material commercial role for the firm and is carried on in accordance with non-discretionary rules and procedures (or whether a person has to show that its dealings are carried out on a unorganised, infrequent or unsystematic basis in order to take advantage of the exemption, which would be a much more demanding test).

o It is not clear when a person is regarded as “providing a system accessible to third parties in order to engage in dealings with them”.

o It is uncertain how the exemption applies to onshore or offshore SPVs used as booking vehicles, where the client interacts with personnel at an intermediary bank or investment firm but the transactions are booked to the SPV.

However, since this exemption is available to persons trading any form of financial instrument (including securities and financial derivatives), it is probable that the exemption should be regarded as “a very restricted one” (as the Commission states in its Q&A).

• Article 2.1(i) This exemption may be best understood as having two separate limbs covering: o Persons dealing on own account in financial instruments provided this is an

ancillary activity to their main business when considered on a group basis; 28and o Persons providing investment services in commodity and other non-financial

derivatives to the clients of their main business provided this is an ancillary activity to their main business when considered on a group basis.

However, in each case, the exemption is not available to a person if its group’s main business is the provision of investment services within the meaning of MiFID or banking services under the BCD. The first limb of the exemption is likely to be relatively narrow. The dealing on own account must be “ancillary” to the group’s main business. This should cover a group treasury’s hedging activities and incidental investment activities (such as investment of surplus cash). This may be important for group treasuries if they are not able to “combine” article 2.1(d) and other exemptions, such as article 2.1(b), as a group treasury company is likely to provide investment advice and other services to other group companies as well. However, if bank or investment firm holding companies are disqualified from relying on the exemption (because of the nature of their group’s main business), it is unclear how they would be able to perform their treasury functions (if article 2.1(d) is not “combinable” with other articles). On the other hand, the question of whether trading activities are "ancillary" to the main business is a more significant issue for energy companies and there have been

27 Article 21 MiFID implementing regulation. 28 The CESR October 2007 survey suggested that Italy and Portugal took the view that the proviso on ancillary business does not apply to the first limb of the exemption.

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differences of view as to the extent to which discrete activities that are connected with the main business can rely on the exemption. The exemption is also difficult to apply in other ways: o There is a debate as to whether the exemption for own account trading can be

used if the activities involve a client or client servicing. The CESR October 2007 survey indicated that the German legislator thought not, while the view of the UK's FSA is to the contrary. This is additionally important because there are differences of view as to whether a counterparty is a client even when the firm is not executing the counterparty's orders or otherwise providing investment services to the counterparty (particularly because of the suggestions in recital 40 to MiFID that eligible counterparties should be regarded as acting as clients).

o Some Member States have interpreted the first limb as not applying to all financial instruments. The CESR October 2007 survey suggested that France and Germany took this position.

o There has been debate as to how it applies where a commodities group owns a standalone commodity derivatives brokerage company. The better view is that such an entity does not fall within the exemption so long as its activities do not involve the provision of investment services to the clients of the group’s main business. It seems likely that the references to the main business are throughout to be read as references to the group’s main business.

o It may be unclear how the exemption applies where the group has more than one (non-banking and non-investment services) business or where that main business has separate elements.

o It is unclear when an undertaking is part of a “group” for these purposes. Is this limited to companies linked by a parent/subsidiary undertaking relationship29 or does it include entities in which group companies hold a participation and entities linked by common management?30 If the latter, an entity could lose the benefit of the exemption simply as a result of a bank or securities firm taking a direct or indirect minority stake in the entity, for example as a private equity investment.

• Article 2.1(k)

There are differing views as to the scope of this exemption. On its face, it is available to any entity whose main business is dealing in commodities and/or commodity derivatives, even if that entity also provides other investment services or activities (e.g. with respect to other non-financial derivatives or hedging or investment activity in securities and other conventional treasury products). This would potentially be a very broad application, although Member States would be able to put in place a super-equivalent authorisation and prudential regime for such firms. However, the Commission in its Q&A indicates that the exemption is only available for the activities specified in the article and that firms may need to rely on other exemptions for other activities. This is significant in relation to firms that also deal in related contracts (such as weather, freight, etc.) which are not specifically referred to in the exemption or which seek to hedge their interest rate or foreign exchange risk by entering into interest rate or foreign exchange derivatives. On the Commission’s interpretation, these entities must rely on article 2.1(i) (or possibly article 2.1(d), if

29 Compare article 2.1(b) MiFID. 30 Compare article 2.5 MiFID implementing directive

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that exemption is capable of being combined with other exemptions) for these other activities. Again, it is unclear when an undertaking is part of a “group” for these purposes or whether dealing for own account by executing client orders is covered by the exemption. Indeed, we understand that some authorities take an even narrower view of the scope of this exemption, suggesting that it is only available for hedging activities. In addition, MiFID did not address in any way the divergent approaches to the territorial application of national authorisation requirements to third country firms. Equally, there are concerns about the interpretation of the CAD exemptions. In particular, the CAD exemption for firms whose "main business consists exclusively of the provision of investment services or activities in relation to [commodity and other non-financial derivatives]" is difficult to apply in practice. There is an apparent internal contradiction in the concept of a firm whose main business consists exclusively of a particular activity. It is unclear the extent to which such a firm can engage in hedging activities in underlying commodities or other risk management activities. Also, the fact that the exemption is limited to firms to whom the ISD did not apply on 31 December 2006 raised questions about whether it would be available to newly incorporated firms. Perhaps more unsettling though has been the fact that the exemption should fall away in 2010, which has made it difficult for firms to plan, although the Commission has proposed extending this date to 2012.

4. Market response to MiFID Firms have responded to MiFID in different ways, depending on the structure and nature of their business. The following is intended to provide illustrative examples of how some firms have reacted to the new rules, without purporting to be an exhaustive account of all possibilities. For ease of presentation, it focuses on commodity derivatives business. • Mainstream EU commercial banks

EU-based commercial banks that engage in commodity derivatives trading business often conduct that business and hold any associated physical positions in their main EU banking entity. This avoids fragmentation of capital into separate entities and makes the best use of their credit standing. Such an entity benefits from the enhanced flexibility of the extended passport because (until MiFID was implemented) it may well have had to seek top-up licences in a number of countries. After MiFID, it should only need to seek a top-up licence in the limited number of countries applying super-equivalent licensing requirements covering a broader range of financial instruments than are covered by MiFID. In some cases, EU-based banking groups own specialised commodity derivatives trading or brokerage firms, perhaps as a result of acquisitions or through joint ventures. In most cases, these should be investment firms subject to MiFID benefiting from the enhanced passport. The exemptions in article 2.1(i) and (k) should not apply to them because of the nature of their group’s main business (although the application of these exemptions in relation to minority interests in joint venture companies will depend on the definition of "group" that applies for these

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purposes). The exemption in article 2.1(d) should not apply as in many cases the firm will provide a wider range of services, such as brokerage in exchange-traded products or investment advice, not just dealing for own account.

• Non-EU headquartered commercial and investment bank s

Non-EU headquartered commercial and investment banking groups typically would include one or more EU-incorporated banks or investment firms which can engage in commodity derivatives trading business and can take advantage of the enhanced passport in a similar way to their EU headquartered counterparts. However, because in other countries outside the EU (such as the US), the commodity derivatives business is not a regulated activity which must be carried on through a regulated firm, the group may own one or more non-EU (unregulated) entities in which their worldwide wholesale commodity derivatives trading (and related physical) business is centralised. These entities will not benefit from the passport, but the group may nevertheless wish to centralise booking of transactions into these entities for risk management purposes. The implementation of MiFID has made this more difficult, as it means that all EU Member States will now regulate commodity derivatives business, but will deny the availability of the exemptions in article 2.1(i) and (k) to subsidiaries of commercial or investment banking groups. Their ability to continue trading with EU counterparties will depend on the way in which the different EU states apply the territorial scope of their authorisation rules. In some cases, national implementation of article 2.1(d) may provide a safe harbour for offshore booking entities, if the entities' business is restricted to own account trading. However, uncertainties as to the application of the exemption to business with clients, the definitions of market maker and the application of the exemption to regular off-exchange dealers may make it difficult to rely on this. If national authorisation rules are an issue, they may have to restructure all or some of their business by booking business into their EU incorporated and authorised entity and, where this is required for capital or risk management reasons, transferring the risk to the non-EU affiliate by back-to-back transactions (but this can be costly because of restrictions on intra-group large exposures and introduces significant operational complexity).

• Non-EU headquartered commodity traders

A number of non-EU groups whose main business is trading oil, metals and other commodities with counterparties round the world have trading operations in the EU, although often transactions will be booked to a non-EU entity where risk management is centralised outside the EU. Where their business is focused on OTC physically-settled transactions, this normally will fall outside MiFID. To the extent that they engage in commodity derivatives business with counterparties or intermediaries, MiFID might apply but the trading entity should be able to benefit from the exemption in article 2.1(k) MiFID for entities whose main business is dealing on own account in commodities and/or commodity derivatives, except to the extent that particular countries apply more restrictive interpretations or do not implement the exemptions. However, they may encounter difficulties in relying on this exemption for other

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related business (e.g. weather derivatives and emissions contracts business) because some Member States take a restrictive view as to the application of the exemption.

• Airlines, auto companies, etc.

There are a number of businesses that are significant users of commodities (fuel, metals, etc.) and thus are active participants in commodity and increasingly in commodity derivative trading markets. These users may wish to take speculative positions as well as engage in hedging activities. They will often not be able to rely on article 2.1(k) as their main business is not dealing in commodities and/or commodity derivatives. Moreover, they may find it difficult to rely wholly on the first limb of article 2.1(i) to cover their trading activities as there may be uncertainties as to where their activities are "ancillary" to their main business. In addition, the uncertainties as to whether it is possible to combine the exemption in article 2.1(d) with other exemptions can raise issues where the entity engaged in the trading also performs other functions, such as arranging trading on behalf of other group companies.

• Oil, gas and electricity companies

Oil, gas and electricity companies are active traders in both physical and derivatives markets. They have taken differing strategies to dealing with MiFID, including the following: o One option is to seek to concentrate all business in one EU legal entity which

benefits from the exemption in article 2.1(k) MiFID for entities whose main business is dealing on own account in commodities and/or commodity derivatives. However, there is a risk that some Member States do not implement the exemptions or apply more restrictive interpretations. In particular, the fact that many Member States would regard the exemption as only available for trading for own account in commodities and/or commodity derivatives creates issues to the extent that the firm wishes to trade other derivatives subject to MiFID (such as weather derivatives or emissions contracts) in a way that may not be regarded as ancillary to the group’s main business (and thus within article 2.1(i)).

o Another option is to seek to concentrate all business in one EU legal entity which falls outside the MiFID exemptions and benefits from the passport for its business. This can be difficult to achieve. In addition, the regulatory capital requirements of such a business could be very significant, especially if it includes physical business (as the entity’s main business would then not “consist exclusively of the provision of investment services or activities in relation to [commodity and other non-financial derivatives]” so as to be eligible for the CAD exemption).

o Therefore, a further option is a form of mixed structure. The group uses an MiFID-regulated firm to arrange business for other (unregulated) group companies, which benefit from MiFID exemptions. However, the MiFID-regulated firm is also used to book commodity and other non-financial derivatives transactions where necessary, e.g. in countries which take a restrictive view of the MiFID exemptions (but in a way that ensures that the regulated firm can benefit from the CAD exemption from capital and large exposure requirements). If necessary to enable centralised risk management, the regulated entity may

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transfer the risks by back-to-back contracts to companies that fall within MiFID exemptions. The effect, therefore, of authorisation requirements is significant operational complexity.

Those companies that have chosen to operate all or part of their business through EU-authorised firms also encounter other difficulties with the current framework. In particular, the current conduct of business framework does not fully recognise the wholesale nature of commodity markets. There are concerns that the boundary between retail and professional clients is inappropriate, in that it requires firms to treat as retail clients a number of clients that should naturally be treated as professional clients or eligible counterparties. Specifically, the current regime in Annex II MiFID does not allow authorised investment firms to treat smaller companies which are part of a larger group of companies or are subsidiaries of listed companies as professional investors or eligible counterparties. Nor is there any facility for recognising that some professional users of the underlying commodity have adequate expertise to be treated as professionals even if they do not meet the size tests or the qualifications for being "opted up" because they employ a financial professional.

5. Commentary on the current position This current position is clearly unsatisfactory for a number of reasons:

• The differing boundary of regulation across the EU seems to be less problematic than in the past but remains a potential concern for firms seeking to operate across all Member States.



The result is excessive complexity for firms, in a context where the wholesale nature of the business and the limited risks make it difficult to justify regulation of many firms on investor protection or systemic risk grounds.

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C. Question 3 “Assessment” The subject matter of this section is the advice from ESME regarding question 3 in the Mandate, which is as follows: What options does ESME consider more salient in addressing any challenges or issues identified above? Examples of options ESME might consider include: a) Issuing clarifying guidance as to the meaning of the various exemptions, and if so,



c) Outlining some elements of a specialist regime for commodity firms with regard to MiFID and CAD regulation;

d) Removing some or all of the exemptions entirely? e) Any other options (e.g. making the exemptions optional for firms or mandatory for

Member States)? Summary of Advice from ESME 1. ESME considers that the second limb of article 2.1(i) and article 2.1(k) should be

replaced by a single exemption applicable to firms (other than operators of an MTF or a regulated market) whose main business consists of dealing on own account in relation to commodities and/or commodity derivatives or other non-financial derivatives contracts. However, this exemption should only apply to the firm's activities when dealing on own account in commodity and other non-financial derivatives with a defined class of wholesale market participants. The exemption should be combinable with other exemptions.

2. To achieve a common European approach to regulation in this area, Member States

should be required to implement the exemption into their legislation. However, firms should not be required to rely on the exemption where they wish to be authorised and there should be an appropriate capital regime for such firms and other commodity firms subject to authorisation.

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Advice from ESME: 1. Issuing clarifying guidance as to the meaning of the various exemptions, and if

so, in what context; Issuing clarifying guidance as to the meaning of the exemptions could address some of the interpretational uncertainties outlined in our response to question 2. However, some of these inconsistencies are generated by the overlapping nature of the exemptions, or the inability to combine such exemptions. Therefore, the effectiveness of any clarifying guidance will be limited to a large extent by the present draft of the exemptions in MiFID. To ensure a harmonised regime of authorisation requirements across the EU, Member States which have simply copied out the directive's provisions are likely to implement a revised regime - aiming at harmonisation - only if the provisions themselves are revised. ESME would prefer option (b) below. 2. Re-examining the current scope and nature of exe mptions from the relevant

CAD and MiFID requirements for firms in the commodi ties sector with a view to rationalising them;

ESME considers that the fundamental premises for imposing authorisation requirements - to protect clients or to mitigate systemic risks - do not present themselves in commodity markets to the same degree (if at all) as in financial markets, in particular because of the wholesale nature of the markets and the lack of the interconnections with payment systems and other mechanisms that magnify the effect of individual shocks in financial markets. As regards prudential issues, there seems to be little evidence of a case for imposing prudential regulation in order to protect against systemic risks and wholesale market participants should be capable of assessing the creditworthiness of their own counterparties. As regards conduct of business issues, MiFID already recognises that there is no need for the same range of conduct of business protections when firms deal on own account with other wholesale market participants (under the eligible counterparty regime in article 24 MiFID). As MiFID already recognises, conduct of business protection has little relevance for these kinds of arm's-length relationships. Therefore, ESME believes that there is scope for rationalisation and simplification of the current MiFID exemptions, in order to create an EU-wide regime governing specialist commodity firms which only deal on own account with other wholesale market participants. ESME believes that it would be inappropriate to extend regulation to cover this group of market participants in the absence of a compelling demonstration of the risks that they present. Thus, ESME considers that the second limb of article 2.1(i)32 and article 2.1(k) should be replaced by a single exemption applicable to firms (other than operators of an MTF or a regulated market) whose main business consists of dealing on own account in relation to commodities and/or commodity derivatives or other non-financial derivatives contracts covered by MiFID (points 5, 6, 7, 9 and 10, Section C, Annex I).

32 The first limb of article 2(1)(i) will continue to be relevant to a number of other companies, not just commodity firms, in relation to their treasury and other investment activities cannot be covered by article 2(1)(d).

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However, in order to ensure that this exemption is only used in relation to own account trading in wholesale markets, it should only apply to a firm's activities when the firm is dealing on own account in commodity and other non-financial derivatives with a defined class of wholesale market participant. In order to align the exemption with the exemptions from the conduct of business regime in MiFID, we consider that this defined class should at least cover entities that are capable of being treated as eligible counterparties under article 24(2) MiFID and "per se" professional clients within section I Annex II MiFID capable of being treated as eligible counterparties under article 50 of the MiFID implementing directive. However, we consider that for certain purposes, the definition of a "per se" professional client in Section1 Annex II MiFID should be amended to cover a broader category of investor, including entities that do not meet the size requirements specified in that section on their own but that are members of a larger group or that are subsidiaries of listed companies. In addition, the definition of a "per se" professional client should cover (in relation to commodity and other non-financial derivatives) undertakings whose main business is trading in commodities or the subject matter of the derivatives and/or that are producers or professional users of the commodities or underlying subject matter. We consider that these changes should apply generally for the purposes of MiFID, so that they would also apply to MiFID-authorised firms when determining the application of conduct of business rules under MiFID. Although the exemption should be limited to cases where the firm deals for own account, we consider that there could be difficulties if there is an attempt to prevent firms relying on the exemption in circumstances where their relationship with their counterparty could be characterised as a relationship with a client. Firms need a high degree of certainty to be satisfied that exemptions are available, in particular because a contravention of authorisation requirements can affect the enforceability of their contracts. Therefore, we consider that there should not be an attempt to distinguish, for these purposes, between different kinds of dealing for own account such as dealing for own account by executing client orders. Otherwise this risks undermining the effectiveness of the exemption, in particular because of the difficulty of determining in any particular case whether an own-account transaction also involved the execution of an order. This would be consistent with (but narrower in scope than) the approach taken under article 24 MiFID where the principal conduct of business protections do not apply both where a firm deals on own account and when it executes client orders or receives and transmits orders (in the latter case, regardless of whether it is dealing for own account). However, we do not advocate extending the exemption to other cases where a firm might be considered to be providing other investment services (such as investment advice or portfolio management services), although we are aware that the removal of the exemption in article 2(1)(i) for these activities may affect a number of firms that currently rely on it to provide ancillary services. Because the firm will also need to be able to deal in other financial instruments (for normal treasury purposes to invest surplus cash, or to hedge foreign exchange or interest rate exposures), it should be made clear that a firm can combine the new exemption with the first limb of article 2.1(i) or with article 2.1(d). The firm should also be able to combine the exemption with other exemptions, such as article 2.1(b). If the exemption is to be effective, Member States should be required to implement the exemption. They should not be able to apply super-equivalent provisions (including any

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super-equivalent definitions of financial instruments). There should be a common European approach to these issues. In addition, the same exemption should be available to all companies regardless of the nature of the activities of the other members of their group. This would ensure that the acquisition by a bank of a private equity stake in a commercial or industrial company (e.g. a power generator) would not deprive the target company of an exemption, simply because the target company is now part of the bank's "group".31 Any risks to the regulated entity in the group from the activities of a commodity derivatives trading subsidiary or affiliate should be captured through consolidated supervision, not by imposing unnecessary authorisation requirements on the legal entity.32 However, firms should not be required to rely on the exemption if they wish to be authorised under MiFID. Firms may choose to be authorised if they are concerned that their activities may not exactly fit the scope of the exemption (for example where there is doubt as to the exact scope of their main business). It is also possible that regulated status is significant to particular counterparties of the firm. Alternatively, they may need to elect for regulation to the extent that favourable third country regimes (such as the CFTC's Part 30 regime in the US) are only available to firms that are regulated in their home state. For those firms that opt into authorisation or that conduct other commodity related activities (such as advice or portfolio management), there will need to be an appropriate capital regime which is proportionate to the risks presented by such firms. There has been no change in the underlying reasons for the inclusion of the CAD exemptions, which were designed to reflect the fact that the current capital regime is largely inappropriate for commodities firms. We would support a regime that places greater weight on disclosure and risk management rather than hard capital targets. 3. Outlining some elements of a specialist regime f or commodity firms with

regard to MiFID and CAD regulation ESME strongly believes that there should be a common approach across the EU to the licensing of specialist commodity firms. MiFID should exempt own account dealing between professionals and this exemption should be applied in a binding way in all Member States with no possibility for super-equivalent licensing requirements (please see our response to question 3(b)). 4. Removing some or all of the exemptions entirely? ESME does not believe that it would be appropriate to remove some or all of the exemptions entirely considering the low risks to systemic stability and investor protection involved in this type of activity. Commodity and non-financial derivatives markets involve a wide range of market participants, whose business and risk profile is different from those involved in securities markets. A risk-based approach to regulation should recognise those differences and treat different market participants differently when they present different risks to the stability of the financial system or to investor protection.

31 This problem is exacerbated if the definition of "group" for these purposes includes "participations" (compare article 2(5) MiFID implementing regulation). 32 This may entail changes to the definition of "financial institution" in the Banking Consolidation Directive which currently does not cover commodity derivatives trading subsidiaries.

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By removing the present exemptions altogether, a number of firms that are not currently subject to regulation would potentially be faced with a disproportionate regulatory burden. This is likely to have a significant impact on some firms. To avoid burdensome regulation and related costs, firms may choose to relocate outside the EU, in particular if the main part of their business is with non-EU counterparties. Those firms which continue to be based in the EU may choose to reflect any further cost of compliance with the new regulatory framework in their price terms, thereby exacerbating the current rises in commodity prices. 5. Any other options (e.g. making the exemptions op tional for firms or mandatory

for Member States)? Please see our response in question 3(b).

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D. Question 4 “Assessment” The subject matter of this section is the advice from ESME regarding question 4 of the Mandate, which is as follows: ESME should identify the issues that would need to be addressed in assessing likely impacts on market participants and market quality of the most salient options. Summary of Advice from ESME: The most likely issues that would need to be addressed in an impact assessment are: any risk to the stability of financial markets; any effect on investors; any effect on the liquidity of commodity markets; whether any regulatory burden is proportionate; and the possible impact on the competitiveness of the EU as a place for doing business.

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Advice from ESME: The most likely issues that would need to be addressed in an impact assessment are: • Any risk to the stability of financial markets:

The evidence from the responses to the rounds of consultation indicate that specialised commodity firms present limited, if any, risks to financial stability. This was also the view presented by CEBS and CESR in their recent joint consultation paper (CP 3L3 08 02)

• Any effect on investors:

The new exemption would be limited to firms that deal with professional investors and therefore should have no significant impact on retail investors. Professional investors should be in a position to assess for themselves who they wish to have as counterparties. They should carry out appropriate checks on the credit standing of their counterparties and assess them for integrity. The licensing requirements would still apply if the exempt firm sought to provide a wider range of services than merely dealing on own account (e.g. advice or portfolio management).

• Any effect on the liquidity of commodity markets:

There have been concerns that the extension of the scope of licensing requirements to cover firms currently benefiting from an exemption could have unintended consequences by forcing some firms to withdraw from the market or restrict their trading which might adversely affect liquidity. The fact that some jurisdictions such as the UK have regulated commodities business for some time may not be a good guide as in addition to a less burdensome prudential and conduct of business framework it has provided a number of exemptions from authorisation requirements that could be affected by an extended EU regime.

• Whether any regulatory burden is proportional to the range and significance of

activities carried out by the affected firms:

The proposed outcome should ensure that any regulation is proportionate to the risks presented by firms conducting different activities.

• The possible impact on the competitiveness of the EU

There have been concerns that changes to the scope of regulation may have an impact on the competitiveness of the EU as a place for doing business. Extending the scope of regulation may cause companies to relocate business outside the EU particularly where their business is mainly with non-EU counterparties.

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E. Question 5 “Record Keeping” The subject matter of this section is the advice from ESME regarding question 5 of the Mandate which is as follows: What would the practical implication be, for firms active both in the physical supply of electricity and gas contracts and in commodity derivatives, of having to maintain two different formats of records of transactions for the relevant regulators? Would a single report based on the format in Table 1 of Annex I of Regulation EC 1287/2006 be appropriate and sufficient? Summary of Advice from ESME 1. The record-keeping obligation is not aiming at an MiFID-style (or indeed level) of

reporting and this record keeping obligation has to be clearly distinguished from periodic, ongoing reporting (e.g. transaction reporting).

2. ESME believes a principles-based, rather than rigid prescribed format, approach is

appropriate for the record-keeping obligation. This could specify the minimum information that should be recorded by market participants in order to ensure an appropriate level of consistency – including giving guidance on what information should be recorded for non-standard products (see below). Within this constraint and from a purely practical point of view, however, there seem to be benefits in trying to ensure that the format of records which are kept are the same for each of the relevant physical and financial regulators. This would depend though on the purpose for which the information would be used by the regulator and whether the regulators exchange data. Implementing and maintaining two separate record-keeping formats would involve additional investment in IT and associated processes for such firms which are active in both sectors, giving rise to additional costs that could create a barrier to entry to smaller market participants (thereby potentially reducing liquidity); and potential risks of inconsistencies and errors between formats.


keeping is to be introduced. As explained in more detail below ESME is not in favour of following a uniform prescribed format, such as that in Table 1 of Annex I of Regulation EC 1287/2006, at least where it would be used in a rigid way to allow automated regular reporting.

4. There is a very large number number of traded commodity products across many

different markets. A prescribed format such as that of Table 1 of Annex I of Regulation EC 1287/2006 would be very difficult to develop and in any case would not capture trades that are non-standard in format – for example those with complex optionality. It would also need to take account of the variety of market participants, transactions and businesses. It would also need to take into account current industry standards, such as confirmations.

5. Rather than a single standardised format, a more principles-based approach could

be more appropriate for the record-keeping obligation – as outlined in this section. This could specify the minimum information that should be recorded by market participants in order to ensure an appropriate level of consistency – including giving

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guidance on what information should be recorded for non-standard products (see below). This would ensure that information that is potentially needed by regulators is accessible on request within reasonable timescales. This would then allow firms to compile the information in a format suitable to that request by the regulator – given an appropriate notice period. The prescribed format of Table 1 of Annex I was developed as the basis of standardised routine reporting for transactions and it is assumed that this is not the intention here. In addition:

• It is advisable to wait for the outcome of the CESR-ERGEG work on the record-

keeping obligation and the subsequent guidelines of the EU Commission pursuant to subparagraph 4 of Art. 22f and 24 f. of the Directives33 in order to have a more solid basis for considering what requirements, if any, are needed.

• A number of questions arise on (cross-sectoral) governance arrangements both in terms of developing and maintaining formats.

• The significant costs and complexity associated with introducing a standard recording format should be recognized. In particular the development of standardised unique codes for each traded product has significant implications, for some products many data fields will also not be relevant.

• It is imperative that a full impact assessment (looking at the relevant costs and benefits) is undertaken before any such decisions are proposed.

6. In addition, a solution to the problems of the record keeping addressed in this

section could be that the mentioned principles-based approach excludes certain categories of firms and transactions or, respectively, limits the scope of application of the record-keeping obligation to certain categories of firms and transactions. A decisive factor in this limitation should be whether the categories of firms and/or transactions have a significally relevance for the price formation in the gas and power markets and the market monitoring. For example, ESME considers that small and medium-sized companies with no or very low level of wholesale trading transactions would not be relevant.

33 Wording of this subpara. reads as follows: “To ensure the uniform application of this Article, the Commission may adopt guidelines which define the methods and arrangements for record keeping as well as the form and content of the data that shall be kept.”

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Advice from ESME: 1. Regulatory framework under Third Energy Package and MIFiD The response to this question needs to take into account the current and future legislation which is relevant for this question, i.e. for the obligation of record keeping. In this context the possible future legislation proposed by the ‘Third Energy Package’ as well as the actual MIFiD and the format in Table 1 of Annex I of Regulation EC 1287/2006 are of relevance. Therefore, the following sections briefly explain the current and possible future legal situation: a. Possible future regulatory framework and Third E nergy Package

The Commission has included in its legislatory proposal of 19 September 2007 (COM (2007) 528 final) the following new record keeping article in the Electricity Directive: 1. Member States shall require supply undertakings to keep at the disposal of the

national regulatory authority, the national competition authority and the Commission, for at least five years, the relevant data relating to all transactions in electricity supply contracts and electricity derivatives with wholesale customers and transmission system operators.

2. The data shall include details on the characteristics of the relevant transactions

such as duration, delivery and settlement rules, the quantity, the dates and times of execution and the transaction prices and means of identifying the wholesale customer concerned, as well as specified details of all unsettled electricity supply contracts and electricity derivatives.

3. The regulatory authority may decide to make this information available to market

participants elements, provided that commercially sensitive information on individual market players or individual transactions is not released. This paragraph shall not apply to information about financial instruments which fall within the scope of Directive 2004/39/EC.

4. To ensure the uniform application of this Article, the Commission may adopt

guidelines which define the methods and arrangements for record keeping as well as the form and content of the data that shall be kept. These measures, designed to amend non-essential elements of this Directive by supplementing it, shall be adopted in accordance with the regulatory procedure with the scrutiny referred to in Article 27b(3).

5. With respect to transactions in electricity derivatives of supply undertakings with

wholesale customers and transmission system operators, this Article shall only apply once the Commission has adopted the guidelines referred to in paragraph 4.

6. The provisions of this Article shall not create additional obligations vis-à-vis the

authorities mentioned in paragraph 1 for entities falling within the scope of Directive 2004/39/EC.

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7. In case the authorities mentioned in paragraph 1 need access to data kept by entities falling within the scope of Directive 2004/39/EC, the authorities responsible under that Directive shall provide the authorities mentioned in paragraph 1 with the required data.

The European Commission has also proposed a new article for record keeping in the Gas Directive as follows. The wording of this article is exactly the same as for electricity except the first sub-para of Art. 24 f of the Gas Directive (amendments in bold): 1. Member States shall require supply undertakings to keep at the disposal of the

national regulatory authority, the national competition authority and the Commission, for at least five years, the relevant data relating to all transactions in gas supply contracts and gas derivatives with wholesale customers and transmission system operators as well as storage and LNG operators .

b. Record Keeping for MIFiD firms is prescribed for in Art. 25 sub-para. 2 of MIFiD

(Directive 2004/39/EC on Markets in Financial Instr uments) as follows: “Art. 25 Obligation to uphold integrity of markets, report t ransactions and maintain records (…) 2. Member States shall require investment firms to keep at the disposal of the competent authority, for at least five years, the relevant data relating to all transactions in financial instruments which they have carried out, whether on own account or on behalf of a client. In the case of transactions carried out on behalf of clients, the records shall contain all the information and details of the identity of the client, and the information required under Council Directive 91/308/EEC of 10 June 1991 on prevention of the use of the financial system for the purpose of money laundering. (…) In addition, the format of Table 1 of Annex 1 of the Regulation EC 1287/2006 is of relevance for the response of ESME, as question 5 of the ESME Mandate refers to it (for this table see Annex 4 below).

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2. ESME’s response to the first part of question 5 The first part of question 5 of the ESME Mandate reads as follows: “What would the practical implication be, for firms active both in the physical supply of electricity and gas contracts and in commodity derivatives, of having to maintain two different format of records of transactions for the relevant regulators?” Summary of Advice from ESME 1. As explained below, the ESME Group believes a principles-based, rather than rigid

prescribed format, approach is appropriate for the record keeping obligation. This could specify the minimum information that should be recorded by market participants in order to ensure an appropriate level of consistency – including giving guidance on what information should be recorded for non-standard products (see below). Within this constraint and from a purely practical point of view, however, there seem to be benefits in trying to ensure that the format of records that are kept are the same for each of the relevant physical and financial regulators. This would depend though on the purpose for which the information would be used by the regulator and whether the regulators exchange data. Implementing and maintaining two separate record keeping formats would involve additional investment in IT and associated processes for such firms which are active in both sectors, giving rise to additional costs that could create a barrier to entry to smaller market participants (thereby potentially reducing liquidity); and potential risks of inconsistencies and errors between formats.


keeping is to be introduced. As explained in more detail below, ESME is not in favour of following a uniform prescribed format, such as that in Table 1 of Annex I of Regulation EC 1287/2006, at least where it would be used in a rigid way to allow automated regular reporting.

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3. ESME’s response to the second part of question 5 of the ESME Mandate The second part of question 5 of the ESME Mandate reads as follows: “Would a single report based on the format in Table 1 of Annex I of Regulation EC 1287/2006 be appropriate and sufficient?” Advice from ESME 1. There is a very large number of traded commodity products across many different

markets. A prescribed format such as of Table 1 of Annex I of Regulation EC 1287/2006 would be very difficult to develop and in any case would not capture trades that are non-standard in format – for example those with complex optionality. It would also need to take account of the the variety of market participants, transactions and businesses. It would also need to take into account current industry standards, such as confirmations.

2. The record-keeping obligation is not aiming at an MiFID-style (or indeed level) of

reporting and this record keeping obligation has to be distinctingished cleary from periodic, ongoing reporting (e.g. transaction reporting).

3. Rather than a single standardised format a more principles-based approach could

be more appropriate for the record keeping obligation as outlined in this section. This could specify the minimum information that should be recorded by market participants in order to ensure an appropriate level of consistency – including giving guidance on what information should be recorded for non-standard products (see below). This would ensure that information that is potentially needed by regulators is accessible on request within reasonable timescales. This would then allow firms to compile the information in a format suitable to that request by the regulator – given an appropriate notice period. The prescribed format of Table 1 of Annex I was developed as the basis of standardised routine reporting for transactions and it is assumed that this is not the intention here. In addition:

o It is advisable to wait for the outcome of the CESR-ERGEG work on the record-

keeping obligation and the subsequent guidelines of the EU Commission pursuant to subparagraph 4 of Art. 22f and 24 f. of the Directives34 in order to have a more solid basis for considering what requirements, if any, are needed.

o A number of questions arise on (cross-sectoral) governance arrangements both in terms of developing and maintaining the formats.

4. The significant costs and complexity associated with introducing a standard

recording format should be recognized. In particular the development of standardised unique codes for each traded product has significant implications. It is imperative that a full impact assessment (looking at the relevant costs and benefits) is undertaken before any such decisions are proposed.

5. In addition, a solution to the problems of the record keeping addressed in this 34 Wording of this subpara. reads as follows: “To ensure the uniform application of this Article, the Commission may adopt guidelines which define the methods and arrangements for record keeping as well as the form and content of the data that shall be kept.”

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section could be that the mentioned principles-based approach excludes certain categories of firms and transactions or, respectively, limits the scope of application of the record-keeping obligation to certain categories of firms and transactions. A decisive factor in this limitation should be whether the categories of firms and/or transactions have a significally relevance for the price formation in the gas and power markets and the market monitoring. For examples ESME considers that small and medium-sized companies with no or very low level of wholesale trading transactions would not be relevant.

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Advice of ESME:

a. Unclear scope and content of record-keeping obli gation

It is clear that even if a single standard format for record keeping were to be introduced, this would not be possible until the basic issues of the current record-keeping obligation of Art. 22 f. of the proposed Electricity Directive and 24 f. of the proposed Gas Directive are resolved and put into more concrete form.35 The underlying legal obligation and compliance with it must be defined in more detail. This record-keeping obligation currently results in different interpretation so that the legal basis is too vague and uncertain. Therefore, firstly the scope and content of the record-keeping obligation should be defined through the guidelines pursuant to the subparagraph 4 of Art. 22 f and 24 f. of the Directives.

Issues that need to be looked at include:

• What is the purpose of the record-keeping obligation?

ESME is of the opinion that the underlying purpose of the record-keeping obligation has to be looked at in the context of the legislative history of this provision. The wording of this provision is a political compromise, which replaces two former legislative proposals for transparency and reporting obligation. In this context the periodic, ongoing reporting requirements have been deleted in the legislative proposals of the Third Energy Package. Therefore, ESME Group is of the opinion that the record-keeping obligation is not aiming at an MiFID-style (or indeed level) of reporting. Therefore, this record keeping obligation has to be distinguished from periodic, ongoing reporting (e.g. transaction reporting). This record-keeping obligation shall rather enable the regulatory authorities to receive transaction data only on demand. Therefore the MiFID-style format Table 1 of Annex I of Regulation EC 1287/2006 is not appropriate.

• What is the scope of application?

It is not entirely clear which firms are caught by the record keeping obligation and which firms are not. Based on the wording, so-called “supply undertakings“ are obliged to keep the records of their transactions. In the Electricity Directive the term supply is defined as “the sale, including resale, of electricity to customers” and in the Gas Directive the term supply undertaking is defined as “any natural or legal person who carries out the function of supply”, whereas “supply” means “the sale, including resale, of natural gas, including LNG, to customers”. This shows the potentially very wide scope of application of the requirement and consequently very different firms and businesses that could be caught by the record-keeping obligation – it is questionable whether the intention is to have such a wide scope.

• What information shall be recorded?

It is not entirely clear what kind of transactions and what information on these transactions shall be recorded. The current wording indicates that: “The firms shall keep records of relevant data relating to all transactions in electricity/gas supply

35 For wording of these articles see Section 1 a above.

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contracts and electricity/gas derivatives with wholesale customers and transmission system operators as well as storage and LNG operators. This data shall include details on the characteristics of the relevant transactions such as duration, delivery and settlement rules, the quantity, the dates and times of execution and the transaction prices and means of identifying the wholesale customer concerned, as well as specified details of all unsettled electricity supply contracts and electricity derivatives”. It stems from this wording that the scope of information that would need to be recorded would be very wide and different in nature and as such ESME is of the opinion that one single standard format could not cover all different transactions appropriately.

• How shall the data be recorded, how and when shall it be reported to the authorities

and what means are “at the disposal” of the authorities?

The record-keeping obligation does not provide sufficient clarity on these issues, which again allows for differences in interpretation and implementation – and guidelines may help in this respect. Again, ESME is also of the opinion that the first step is to make sure the mentioned guidelines needed are in place. As the record-keeping obligation is, in the opinion of ESME, not equivalent to (or intended as) an MiFID-style reporting obligation (i.e. regular reporting of transactions data in a defined format to authorities), it is therefore more practical to oblige firms to give regulatory authorities access to their transaction data on request rather than regular reporting and, therefore, not practical to fill out on a regular basis relevant forms. It is sufficient if the information is accessible within a reasonable timescale so that firms could gather the information to provide to the regulatory authorities on request within an appropriate notice period.

b. Usual market practices shall be respected

ESME is of the opinion that usual market practices shall be respected. This means that the design of any format for reporting needs to take into account the current industry standards, such as confirmations. c. Purpose of the format in Table 1 of Annex I of R egulation EC 1287/2006 is different The record-keeping obligation of MiFID (Art. 25 (2) ) and the reporting obligation of MiFID (Art. 25 (3) et seq. ) should be distinguished from each other. Table 1 of Annex I of Regulation EC 1287/2006 is exclusively meant to put only the reporting obligations Art. 25 (3) et seq. of the MiFID in more concrete form, whereas it does not apply to the record-keeping obligation of Art. 25 (2) of the MiFID. ESME is of the opinion that it is problematic to transfer the concept of transaction reporting and the underlying reporting obligations to a pure record-keeping obligation. In the opinion of ESME the aim of the record-keeping obligation should not be to install an MiFID-style reporting system. Therefore, ESME suggests that the different purpose of Table 1 of Annex I of Regulation EC 1287/2006 needs to be taken into account and concludes that this table may not be appropriate for the compliance with the record-keeping obligation.

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d. Different Markets Participants It has to be recognized that basically two different types of firms are active in the commodity and commodity derivatives markets, which means the one-size-fits-all approach may not be appropriate: • MiFID firms (e.g. banks, investment firms) • Non-MiFID firms (international energy firms and their trading branches, specialised

energy traders, power producers (possibly part of a larger energy group), regional and local (municipalities) energy distribution and/or supply companies, larger industrial firms, operators of transportation and distribution gas and power networks, storage and LNG operators, international oil and gas firms etc.)

Whereas MiFiD firms are already subject to the MiFID reporting and record-keeping obligations in respect of MiFID instruments, non-MiFID firms are not subject to any of these obligations. That means that MiFID firms should already have the necessary IT sytems, check, controls and staff in place to ensure compliance with this obligation whereas non-MiFID firms have not taken measures to comply with such obligations as they are not applicable. This issue needs to be taken into account if a single report based on the format in Table 1 of Annex I of Regulation EC 1287/2006 is to be introduced, because such a wide approach would force firms to procure and install IT sytems, check, controls and staff to be able to comply with such a format. For non-MiFID firms such a format would be completely new and therefore cause major compliance costs and could constitute a serious barrier to market entry (particularly for smaller players) or even force firms to leave the market. Also, the group of non-MiFID firms is represented by very different market players with completely different sizes, business models and purposes – from small local firms to medium-sized national firms to larger international groups (see above) – so it is questionable if such a single standardised approach for all firms would be appropriate and proportionate – without flexibility in its application through a principles-based approach.

e. Different underlying business, commodities and i nstruments

Thirdly, a further concern regarding such a “one-size-fits-all” approach is based on the fact that a single format would apply to different underlying gas/power commodity and commodity derivatives business. Basically, two categories of business would be caught by a single format:

• MiFID business, i.e. transactions with commodity derivatives. These are the financial

instruments as defined in Annex I Section C Nos. 5 to 7 of the MiFID. • Non-MiFID business, i.e. transactions with gas and power commodities. This

business comprises very different types of transactions with different entities and purposes, e.g. international gas import contracts between exporting and importing firms, gas and power supply contracts with regional and local supply/distributions companies, physically settled gas and power forward contracts between energy trading firms, possibly gas/power supply contract with procurement entities of large industrial customers etc.)

ESME is of the opinion that for certain transactions a separate record-keeping obligation in addition to the usual documentation of transactions is not appropriate. For certain categories of contracts it seems sufficient to keep the contractual documentation itself as

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for example the international gas import contracts between exporting and importing firms as well as gas and power supply contracts with regional and local supply/distributions companies. There seems little added value in importing certain data of such contracts into additional standard forms. f. Emerging Markets It needs to be taken into acount that the energy markets in question are relatively immature: in this still-fragile stage of liberalisation of energy markets, many market players have come to fear that financial market-style regulation of commodity derivative transactions may erect a further barrier to entry to often illiquid and fragmented continental European power and gas wholesale markets. Imposing a burdensome compulsory record-keeping obligation on each and every market participant and transaction of the EU wholesale power and gas business could cause considerable concern among the energy trading community across Europe. This could lead to a severe reduction of liquidity in currently liquid regional markets and prevent it occuring in new regional markets. Under normal regulatory and market circumstances the primary aim of record keeping and transaction reporting is not to create a liquid market, but to monitor such a market. The design of the record-keeping obligation has to take these findings into account. g. Further issues Finally, also a couple of problematic technical issues of Table 1 of Annex I of Regulation EC 1287/2006 and cross-sectoral governance issues mean that a standard format may not be appropriate: Even if for the large majority of the trading transactions that are currently undertaken, information that is routinely recorded would fit into many of the categories/field identifiers in the table, there is nevertheless clearly a need to revise the categories/field identifiers for commodities and commodity derivatives. The potential size of the project and costs associated with introducing a standard recording format should not be underestimated. For example, while it could be possible to develop standardised unique codes for each traded product – the number would be very large – for example in power there would be a need to develop codes as follows:

1. physical or financial product 2. location – i.e. in which country the trade was executed and/or across which borders.

This could be reported for which grid network the trade relates to and/or what exchange it is traded on.

3. maturity of the product – i.e, weekend, day-ahead, monthly etc 4. product type – baseload/peak/off-peak/intraday/hourly For gas similar considerations apply with the added complication that the traded day is not broken down by time of day like power – and therefore products could not be classified this way (i.e. as baseload/peak etc). This does not take account of future developments and only relates to products that are commonly traded today – this could mean that as the market develops and new products are developed and traded it would be costly to maintain the code fields to a standard

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format – and there would need to be a clear process for how this happens (as explained above). We think although possible, the development of a standard format of record keeping would be a very significant exercise that would involve major IT-systems development and substantial initial resource commitment and ongoing maintenance. It would therefore be appropriate for a full impact assessment (looking at the relevant costs and benefits) to be undertaken before decisions are taken. In addition, a standard format would not work for traders that are non-brokered OTC, and are bespoke and with complex optionality. These would not fit into some of the field identifiers below – for example the put/call option/strike price may be made up of a number of different conditions which would not fit into a standard format. While the relevant information could be reported it would not be in a standard format as each transaction effectively generates a bespoke report format. It may be possible to record ‘high level’ information associated with such trades in a standard format – but any other detailed information could not be presented in a standard format. Also, the process for developing the standard format would need to be considered – a number of questions arise primarily on the governance arrangements: • Who shall be responsible for developing the standard format – industry or the

regulatory authority? • If it was the regulatory authority, which sectoral regulator would have the primary

responsibility – (energy or financial regulator) and how would any disputes between the two be resolved?

• What role would CESR/ERGEG take to help ensure the development and implementation of a standard format?

• What consultation would be undertaken in developing the standard format and in bringing forward any changes – and who would be responsible for such a process? How would any disagreements between regulatory authority(ies) and industry be resolved?

h. Additional detailed comments

Some additional detailed comments are included in the table below:

Field Identifier Description

1. Reporting firm identification

A unique code to identify the firm which executed the transaction Comment: Would this be an issue if the code were to be an industry-wide code for each counterparty that is set centrally or if it were to be in a format not used generally?

2. Trading day The trading day on which the transaction was executed

3. Trading time The time at which the transaction was executed, reported in the local time of the competent authority to which the transaction will be reported, and the basis in which the transaction is reported

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expressed as Coordinated Universal Time (UTC)+/- hours.

4. Buy/sell indicator Identifies whether the transaction was a buy or sell from the perspective of the reporting investment firm or, in the case of a report to a client, of the client.

5. Trading capacity Identifies whether the firm executed the transaction: (a) on its own account (either on its own behalf or

on behalf of a client), (b) for the account, and on behalf, of a client.

6. Product identification This shall consist of: (a) A unique code, to be decided by the

competent authority (if any) to which the report is made identifying the product which is the subject of the transaction,

Comment: If the trading record is maintained for both energy and financial regulators they must decide and agree on the ‘unique code’ in full consultation with the industry. (b) if the product in question does not have a

unique identification code, the report must include the name of the product or, in the case of a derivative contract, the characteristics of the contract.

Comment: Should there be a reference to the Alternative Instrument Identifier (AII) agreed between industry and CESR for exchange-traded derivatives? Is the AII suitable for energy market participants? See the following comments.

7. Product code type The code type used to report the product . 8. Underlying instrument

identification The instrument identification applicable to the security that is the underlying asset in a derivative contract as well as the transferable security falling within Article 4(1)(18)(c) of Directive 2004/39/EC. Comment: Underlying physicals such as electricity, gas oil, or gas are not instru ments. Which industry code would apply?

9. Underlying instrument identification code type

The code type used to report the underlying instrument. Comment: What code type applies to the underlying physical?

10. Product type The harmonised classification of the financial instrument that is the subject of the transaction. The description must at least indicate whether the

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instrument belongs to one of the top-level categories as provided by a uniform internationally-accepted standard for financial instrument classification.

11. Maturity date The maturity date of a bond or other form of securitised debt, or the exercise date/maturity date of a derivative contract.

12. Derivative type The harmonised description of the derivative type should be done according to one of the top-level categories as provided by a uniform internationally-accepted standard for financial instrument classification.

13. Put/call Specification whether an option or any other financial instrument is a put or a call.

14. Strike price The strike price of an option or other financial instrument.

15. Price multiplier The number of units of the financial instrument in question which are contained in a trading lot; for example, the number of derivatives or securities represented by one contract.

16. Unit price The price per physical or derivative contract excluding commission.

17. Price notation The currency in which the price is expressed. 18. Quantity The number of derivative contracts included in

the transaction. Comment: How would this be expressed for the underlying physical?

19. Quantity notation An indication as to whether the quantity is the number of derivative contracts. Or ‘X’ for the underlying physical?

20. Counterparty Identification of the counterparty to the transaction. That identification shall consist of: (a) where the counterparty is an investment firm,

a unique code for that firm, to be determined by the competent authority (if any) to which the report is made,

(b) where the counterparty is a regulated market or MTF or an entity acting as its central counterparty, the unique harmonised identification code for that market, MTF or entity acting as central counterparty, as specified in the list published by the competent authority of the home Member State of that entity in accordance with Article 13(2),

(c) where the counterparty is not an investment firm, a regulated market, an MTF or an entity acting as central counterparty, it should be identified as ‘customer/client’ of the investment firm which executed the transaction.

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Comment: There may be a need to develop standard identifier lists for energy – which would be difficult to maintain given market entry/exit and changes in companies names.

21. Venue identification Identification of the venue where the transaction was executed. That identification shall consist in: (a) where the venue is a trading venue: its unique

harmonised identification code, (b) otherwise: the code ‘OTC’.

22. Transaction reference number

A unique identification number for the transaction provided by the investment firm or a third party reporting on its behalf.

23. Cancellation flag An indication as to whether the transaction was cancelled.

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F. Question 6 “Transparency” The subject matter of this section is the advice from ESME redarding question 6 in the Mandate, which is as follows: Transparency 6. The Commission has identified a number of market failures in its Sector Inquiry on energy and the subsequent study of the electricity wholesale markets. In light of these findings, please consider: a) whether greater pre- and post-trade transparency for electricity and gas supply contracts (physical and spot trading) and derivatives would contribute to a more efficient wholesale price formation process and efficient and secure electricity and gas markets; b) whether such transparency arrangements could be expected to mitigate the concerns identified in the Sector Inquiry above; c) whether uniform EU-wide pre- and post-trade transparency could have other benefits; d) whether additional transparency in trading could have negative effects on these markets, for example could liquidity in these markets be expected to decrease? Is there a risk that trading could shift to third countries to escape regulation? If so, how could such risks be mitigated (delayed reporting, aggregated reporting, etc.). Summary of Advice from ESME: 1. The Sector Inquiry did not identify any market failure resulting from a lack of

information transparency concerning trading on the wholesale energy markets and the wholesale derivatives markets.


members, increased transparency on the physical side of the power and gas markets (use of the transmission and production infrastructure, demand/supply balance), and other relevant information as identified by ERGEG is likely to result in an increase in liquidity in the electricity and gas derivatives markets.

3. The implementation of information requirements concerning electricity and gas

wholesale physical and derivatives transactions should be driven by market developments and carried out in accordance with better regulation principles with a view to minimising the additional obligations that would result for the market participants.

4. Post-trade transparency as described in this section could be established (alongside

the record-keeping obligation of the Third Energy Package) for the purpose of facilitation of access to information.


sources (brokers, exchanges, operators) for market monitoring purposes - as they are generally better-placed to provide this information than market participants.

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6. Therefore, information about commodity derivatives transactions conducted or

cleared at exchanges (e.g. EEX) and Multi-Trading Facilities “MTFs” (Brokers) could be made accessible to the public. This would not mean obligations by participants of these platforms, but rather the obligation of the operator of such a platform to show to the public – on an aggregated and anonymous basis – the transactions. In this context it seems not to be appropriate to harmonize throughout the EU the details of this publication as the MTFs and the level, kind and content of the transaction and information are different according to the market circumstances.

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Advice of ESME: This section seeks to provide advice regarding question 6 of the Mandate to ESME. 1. Analysis of Sector Inquiry The Mandate refers to the Energy Sector Inquiry, an extremely detailed review of the electricity and gas markets, whose final report was published on 10 January 2007, in which the EU Commission described a number of competition problems. The problems outlined in the EU Commission’s Sector Inquiry – those relating to vertical foreclosure, market concentration, lack of market integration or price formation – are not related to lack of transparency on supply contracts and derivatives for electricity and gas. As detailed in the first section of this document, before giving precise answers to the questions in the Mandate, the Inquiry, which provides a wealth of evidence and arguments to support its conclusions, does not make the case for further transparency measures on the wholesale and derivative markets. a. Introduction: review of issues raised in the EU Commission’s Energy Sector

Inquiry The purpose of the Sector Inquiry was to seek distortions of competition that could be addressed by competition law, as well as to identify problems with the regulatory environment that could be addressed by further legislation (in particular, the conclusions of the Sector Inquiry have been taken into account in the formulation of the Third Legislative Package on electricity and gas, presented in September 2007). The problems identified by the Sector Inquiry were grouped into five large categories: 1. Concentration and market power 2. Vertical foreclosure 3. Lack of market integration 4. Lack of transparency 5. Price formation The Sector Inquiry demands increased information transparency in a number of key areas (technical availability of interconnectors, technical availability of the transmission networks, generation (availability), balancing and reserve power, load, generation (production) as a means to increase the efficiency of the electricity and gas markets. b. Concentration and market power The EU Commission concluded that at the wholesale level, gas and electricity markets remain national in scope, and generally maintain the high level of concentration of the pre-liberalisation period. This gives scope for exercising market power. The EU Commission did not establish a link between concentration and market power and lack of transparency on wholesale markets, supply contracts and derivatives.

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Following the findings of the Sector Inquiry, the EU Commission has indeed included provisions regarding market concentration in the Third Legislative Package: • For instance, according to the proposal by the EU Commission, Member States

would be obliged to give its national energy regulators the authority to impose Virtual Power Plant auctions as a mechanism to increase competition.

• The Third Package also proposes a number of record-keeping obligations to be imposed on market participants. These obligations would facilitate market monitoring by energy regulators and competition authorities.

The demand of the Sector Inquiry for increased information transparency is not based on a link between the availability of such information and market concentration. On the other hand, record-keeping obligations, such as those already included in the Third Legislative Package on electricity and gas36 would facilitate the market-monitoring role of energy regulators and competition authorities sufficiently. c. Vertical foreclosure According to the EU Commission, the current level of unbundling of network and supply interests has negative repercussions on mark et functioning and on incentives to invest in networks . New entrants often lack effective access to networks (despite the existing unbundling provisions) and to information on the status of the network. On the basis of these findings of the Sector Inquiry, the EU Commission has expressed the view that ownership unbundling (a TSO that is independent of production and supply activities) or an appropriate Independent System Operator is necessary to provide non-discriminatory access to the grid and to optimise investment into further expansions. The Sector Inquiry also concluded that a second form of vertical foreclosure was found to exist by way of the integration of generation/imports and supply intere sts within the same group . This form of vertical integration reduces the incentives for incumbents to trade on wholesale markets and leads to sub-optimal levels of liquidity in these markets. Low liquidity can have many negative effects, such as high volatility of prices - which increases costs for hedging and can be an important barrier to entry - and lack of trust that the exchange prices reflect the overall supply and demand balance in the wholesale market (reduced reliability of the price signal). Auctions of electricity (the so called Virtual Power Plants) and gas release programmes have been used in several countries as a mechanism to enhance liquidity in the wholesale markets. Long-term gas contracts and power purchase agreements (PPAs) have similar effects to vertical integration, and the EU Commission has paid special attention to them. However, the EU Commission did not make the case that transparency requirements would contribute to solving the vertical foreclosure problem. In conclusion, according to the EU Commission, the problem of vertical foreclosure is not related to transparency on wholesale markets, supply contracts and derivatives.

36 This refers exclusively to the Art. 23 f of the Electricity Directive and 24 f of the Gas Directive; see section E of this paper.

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d. Lack of market integration The third problem area identified by the Sector Inquiry is the absence of market integration. According to the EU Commission, cross-border sales do not currently impose any significant competitive constraint. Incumbents rarely enter other national markets as competitors. Insufficient or unavailable cross-border capacity and different market designs hamper market integration. The Sector Inquiry concludes that the absence of energy market integration results from: - insufficient interconnecting infrastructure between national energy systems, - insufficient incentives to improve cross border infrastructure, - inefficient allocation of existing interconnection capacity, and - incompatible market design across borders (e.g. differences between balancing

regimes, nomination procedures, and differences in opening hours of power exchanges).

Throughout the discussion of these issues the EU Commission did not refer to the transparency of wholesale markets, derivatives and supply contracts as an issue or to a remedy for the lack of market integration. e. Lack of transparency

The next issue raised by the EU Commission’s Sector Inquiry was the lack of transparency “as a problem in itself”. According to the Sector Inquiry, for the development of efficient wholesale markets, it is essential that all market participants have access to the information considered necessary to trade, in particular as regards expected demand, supply and network issues. The Sector Inquiry has provided evidence that the level of transparency in the wholesale markets in the EU is not satisfactory and it is also widely divergent. However, it must be noted that the Sector Inquiry, when analysing the need for improved transparency, identifies only the need for transparency of “data relating to network availability, especially for electricity interconnections and gas transit pipelines”, as well as “data on the operation of generation capacity and gas storage”. The Sector inquiry indicated that the issues on which information is most important are (in decreasing order): 1. Technical availability of interconnectors 2. Technical availability of the transmission networks 3. Generation (availability) 4. Balancing and reserve power 5. Load 6. Generation (production)

There is no mention of information transparency on wholesale markets, supply contracts and derivatives. In line with this assessment by the Sector Inquiry, responding to previous requests by the EU Commission and after extensive consultation with market participants, on August

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2006 ERGEG (the Council of European Energy Regulators) published its Guidelines of Good Practice on Information Management and Transparency in Electricity Markets (Ref: E05-EMK-06-10), that propose a detailed definition of information to be made available, aggregation level, timing of the publication, etc. f. Price formation The last section of the Sector Inquiry discussed the factors which determine the price level in electricity markets. According to the EU Commission, there are three issues relating to the overall price level of electricity that deserve particular attention. • Which external factors, such as increases in fuel costs or the introduction of CO2

emission trading schemes, might explain – wholly or in part – the price increases over the recent years.

• The effects of regulated supply tariffs for competitive electricity wholesale and retail markets.

• Special support schemes – currently under consideration in certain Member States - to support large energy-intensive users.

Among other issues, the Sector Inquiry concludes that, in certain Member States, the recent increases in electricity prices could be explained by the rise of gas prices used in marginal plants. It is debated to what extent the value of CO2 allowances is priced into electricity prices. The Inquiry also reflects that industrial users claim that electricity producers should not be entitled to factor in the value of CO2 allowances, as they were largely distributed for free. Generators claim that the value of CO2 allowances is an opportunity cost, which can legitimately be taken into account. The EU Commission states that regulated tariffs for electricity supply have adverse effects for the development of competitive markets if set very low compared to wholesale prices and if they cover a large part of the eligible customer market. Support schemes for large energy-intensive users – currently considered in a number of Member States – need to be compatible with antitrust and state aid rules. The EU Commission in its Sector Inquiry did not refer to transparency in the wholesale and derivatives market as a factor influencing wholesale or derivatives energy prices. That can be explained by the fact that information on prices is available. Price references exist and are disclosed by certain publications and market exchanges which aggregate the information of transactions to publish price references and indices. As a conclusion, the review of the Sector Inquiry conclusions does not reveal any relation between the market failures identified by the European EU Commission and transparency of transactions on electricity and gas wholesale and derivatives market. Also, in a more recent document, answering to the EU Commission mandate on non-equities transparency, the Committee of European Securities Regulators CESR even mentioned that apart from the markets for cash bonds, they were not aware of

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transparency-related concerns in the derivatives market, including the commodity derivatives markets.37 On the other hand, the EU Commission working document - report on non-equities markets transparency - expressly stated that the transparency issues considered in the Sector Inquiries were outside the scope of this report and would be dealt with separately38 It should be noted that the initial draft of the Third Legislative Package for Energy contained proposals to the question of transparency in gas and electricity markets including derivatives markets that come within the scope of MiFID that were not based on any evidence provided by the EU Commission or on any of the previous analyses of this issue. These proposals were finally removed in the proposal that the EU Commission finally presented, and this area was reserved for examination during 2008. 2. Defining transparency For further analysis, ESME seeks to define certain concepts in order to make a correct assessment of objectives sought and consequences arising from transparency requirements. a. Transparency on infrastructure vs. transaction t ransparency At this point, it seems clear that the debate on wholesale energy markets refers to two different types of transparency: aa. Transparency on the status and use of infrastru cture and physical assets Electricity and gas are network-bound energy commodities. A high degree of transparency about the use of physical infrastructure is needed in order to understand price formation, to facilitate access to the grid and to encourage greater competition. The Sector Inquiry concluded that as much information as possible on the use of infrastructure should be published, so that market participants holding market-sensitive information would not be in a position to profit from this information at the expense of other market participants. In this context is has to be noted that already today there exists many transparency obligations for these activities (see annex “transparency regulations for the electricity and gas sectors” to this section), which already guarantee a certain level of transparency.

37 See CESR´s response to the Commission on non-equities transparency, CESR/07-284b, July 2007, No. 28 on page 9. It is stated that, “Unlike in the markets for cash bonds, where some concerns have been raised regarding investor protection relating to transparency levels (see next section), we are not aware of transparency-related concerns in the derivatives markets.” 38 / DG Internal market and Services Working Document, Report on equities markets transparency pursuant to Article 65 (1) OF Directive 2004/39/EC on Markets in financial instruments (‘MiFID’) p.4, 11 (dated 03.04.2008).

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bb. Transparency relating to wholesale markets, sup ply contracts and derivatives Concerns the disclosure of information about the state of the market and wholesale transactions. The Sector Inquiry does not provide any evidence regarding the need for further transparency of this type and fails to make any claim in this regard. Regulators and competition authorities need to have access to this type of information for market monitoring purposes (thus the provisions on record keeping that have been included in the Third Legislative Package on electricity and gas). It is the opinion of ESME members that improvements in transparency on the infrastructures may foster competition by increasing liquidity on the markets. On the contrary, transparency relating to electricity and gas wholesale markets, supply contracts and derivatives is not an issue and the burden created by additional transparency obligations directly imposed on market participants would be higher than the benefits expected from such measures. b. Pre-trade transparency vs. post trade transparen cy aa. Pre-trade transparency Pre-trade transparency is the obligation on regulated markets or MTFs to make public bid and offer prices on shares admitted to trading at such venues. Pre-trade transparency has been introduced in respect of shares admitted to trading on a regulated market by the Markets in Financial Instruments Directive (MiFID) to address the concerns that may have arisen following the abolition of the concentration rule and the development of multiple-trading venues. The principal concerns to address were that of illiquidity and the danger that retail investors would not be able to obtain a price which would reflect the totality of supply and demand in the investment concerned because of the large number of multilateral trading facilities. Based on the experience of its members and on the various discussions which led to the adoption of pre-trade transparency requirements, ESME believes that pre-trade transparency requirements beyond national requirements for commodity derivatives traded on regulated markets (i) are impractical to physical commodities and OTC commodity derivatives trading and (ii) would not contribute to a better price formation process of either of these. Besides, the category of investors for the protection of whom pre-trade transparency requirement were introduced, ie retail customers, are absent from the gas and electricity markets, which are markets among professional participants. In addition: i. Such requirements would be impractical and not necessary for electricity and gas

trading and commodity derivatives trading in general. The objective of pre-trade transparency objectives is to give information on standardized transactions to provide retail investors with valid information of bid and offer prices on competing trading venues.

Two prerequisites are necessary to achieve the objective of pre-trade transparency. The first is to deal with a uniform standardised product and this is why MiFID pre-

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trade transparency is limited in the current situation to shares admitted to trading, and the second one is that it must be traded on some kind of organized market, i.e. regulated markets and MTFs, and possibly systematic internalisers. The scope of these MiFID requirements is currently limited to shares admitted to trading on MTFs and Regulated Markets, and as a matter of fact, such a requirement only makes sense for liquid standardised instruments.

Electricity and gas markets as well as commodity derivatives markets are very different from shares and bonds markets. The majority of transactions are dealt OTC, outside of an organised market. Although they present a high degree of standardisation (e.g. most wholesale electricity and gas is traded in standard products with contractual terms based in the standard EFET Master Agreement), this standardisation is not comparable to that of the shares and bond markets. Market participants usually tailor the products and contractual terms to their business and energy needs. This is true for the derivatives market where most transactions are OTC transactions. It is even more the case for wholesale transactions with physical delivery, where essential contractual conditions, imposed by physical and technical constraints or the due to the business and energy needs of market participants, differ from one contract to another. This flexibility is an essential feature of the OTC markets in comparison to transactions concluded through regulated markets (as these are always standardised) and this feature is indispensable for the energy and commodity markets. Trying to define a uniform classification of all types of transaction characteristics would simply lead to artificial and misleading information about the market participants.

ii. For the reason outlined before, the impossibility to define a standard transaction

would necessarily lead to some very significant discrepancies in prices the justification of which could not be found in the information disclosed. This would result in such indications being misleading as to the exact state of the market and the result achieved would be the opposite of the objective sought.

As an example, comparing the price per MWh of a firm long-term contract with take or pay obligations with the price of a cross-border contract for physical delivery subject to the availability of interconnection capacity would simply be irrelevant.

In conclusion, ESME believes that the rationale that led the European legislator to impose pre-trade transparency on equity markets cannot be transposed to the physical and OTC commodities markets and, apart from the unnecessary burden it would create, would be likely to give improper information on the market. bb. Post-trade transparency A certain amount of information is already available on the basis of post-trade data. This is the basis on which information is published by regulated exchanges and MTFs and certain brokers. Part of this information is so far only accessible – as far as MTFs are concerned – to the members of such platforms. Following the guidelines of ERGEG (in particular, table 5) mentioned above, these platforms could provide public access to the information about

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the transactions which are concluded / cleared through them. This would not require imposing additional publication obligations on participants of these platforms, but rather the regulatory obligation of the operator of such a platform to make accessible to the public the available information on the transactions, including "best bid / best offer", "market depth", "trades done", etc. (this is already established by some broker platforms). Also, exchanges and MTFs will have an inherent interest to attract liquidity to their platform through publication of market data: the ENDEX electricity futures exchange has just announced a new service for this purpose, which could serve as an example to increase transaction transparency for trading activities on regulated markets and MTFs.39 Currently there are also superequivalent national obligations on regulated markets, with the UK, for instance, requiring full pre- and post-trade (bid, offer and trade) transparency for commodity derivatives admitted to trading on ICE Futures, LIFFE, and the LME.40 However, the principle of proportionality of regulatory measures urges that such a transparency regime should address the regulatory aims of transparency in an appropriate manner and therefore such a transparency regime would be limited to post-trade transparency (in particular also for the reasons explained above in aa) ). In this context is seems also not to be appropriate to harmonise throughout the EU the details of this publication, as the exchanges and MTFs and the level, kind and content of the transaction and information are different according to the market circumstances. In addition, further assesment is necessary whether such a regulatory regime shall apply to every exchange and MTF or whether it shall be limited to certain exchanges and MTFs on the basis of pre-fixed criteria, such as market share or liquidity etc. Also, the exact impact of such a regulatory measure needs to be considered through an impact assessment. This information obviously does not include the parties involved in each deal. In order to avoid the risk that certain participants have raised concerning possible collusion resulting from disclosure of prices, it is important that such post-trade transparency be organized on an anonymous basis. c. Transparency vs. monitoring It is important to distinguish the design and purposes of transparency and reporting obligations (see ESME Advice regarding questions 5 above) from each other to guarantee a “better regulation” approach: aa. Transparency in respect of wholesale electricity and gas markets means disclosure of information about transaction data, i.e. the state of the market and wholesale transactions. This improves the trust participants have in the market and its price-building mechanisms and – in doing so – secures a sufficient degree of liquidity of markets. Transparency obligations is also likely to reduce, if any, asymmetric information between market participants and enhance on this basis market liquidity. Therefore, ESME is in favour of a transparency design to be named as “better regulation” – giving the market participants a framework that will attract competition and liquidity. Currently, the increasing number of professional market participants and trading products and volumes indicates that the current regulatory framework attracts new market participants, competition and liquidity. Therefore, a transparency regime consisting of extending the

39 ENDEX will publish the aggregated volumes per contract (anonymously) and average traded prices and other reported trades; see: www.endex.nl. 40 However, ESME do not recommend extending this superequivalent regime throughout the EU for the reasons explained in this section.

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scope of post-trade transparency as described above should reach these intended regulatory objectives and should not have an adverse economic impact on energy markets/participants and should respect the principle of “better regulation”. It is paramount that it will not have diametrical adverse effects on these markets/participants and will not cause adverse regulatory issues. Hence, ESME is of the opinion that obligatory disclosure requirements (publication of transactions data) directly imposed on market participants are not appropriate and proportionate to reach these regulatory aims. Well-functioning wholesale power and gas markets need rather a high degree of transparency about use of physical infrastructures. Transparency about use of such infrastructure reduces risk, provides confidence and allows efficiency, liquidity and security of supply to improve (also see above). In this context, is has to be noted that already today there exist many transparency obligations for these activities (see annex “transparency regulations for the electricity and gas sectors” to this section), which already guarantee a certain level of transparency. bb. The objectives of financial and energy regulators, when dealing with transaction-reporting obligations of market participants (as under MiFID), is not to provide transparency in the market, but to have information on transactions in order to monitor the market and assess market participants’ behavior for the sake of investors’ or customers’ protection and of market integrity (market manipulation and insider dealing). Therefore, transaction reporting is rather related to the issue of market monitoring by regulators. Regarding the needs of market monitoring, is it already sufficient if regulators make use of their powers under the future record keeping obligation of the Third Energy Package and existing information sources. ESME considers that the regulators should make the maximum use of the existing sources of information on the market (exchanges, information providers, brokers) as a way of actively supervising the market while minimising the requests to market participants. Regarding record keeping (see ESME advice regarding questions 5 above), please see the comments above which conclude that a while single harmonised approach to record keeping, may be desirable, it is not appropriate for commodities. In a nutshell, transparency obligations shall not be used primarily to serve the regulatory aims of reporting obligations. ESME considers that a transparency regime must be tailored in compliance with the principle of “better regulation”. The intended aims of transparency could be achieved without adverse economic impact on energy markets/participants by simply extending the scope of post-trade transparency as described in this section and encouraging the initiatives of certain exchanges and brokers to publish transactions data. Before imposing any new requirements, it is paramount to make sure that it will not have diametrical adverse effects on these markets/participants and will not cause adverse regulatory issues. Furthermore, ESME considers that market monitoring can be achieved with the proper use of information currently available and possible extension of post-trade data availability on certain markets.

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3. Guiding principles for the ESME recommendations 1. The Sector Inquiry has not identified any market failure resulting from a lack of

information transparency concerning trading in the wholesale energy markets, supply contracts and wholesale derivatives markets.


members, increased transparency on the physical side of the power and gas markets (use of the transmission and production infrastructure, demand/supply balance) should result in an increase in liquidity in the electricity and gas derivatives markets.

3. Transparency on the use of the infrastructure should be addressed by EU-specific

legislation so that a single, harmonised, regime would be applicable in all EU Member States for the commodities concerned.

4. The implementation of information requirements concerning wholesale physical and

derivatives transactions should be driven by market developments and carried out in accordance with better regulation principles.


sources (brokers, power exchanges, information providers) for market-monitoring purposes and of the future record-keeping obligation. This is consistent with the practice in the US, where the regulation of commodity markets requires brokerage firms and other relevant entities to report both transactions and positions of large traders either to the exchange or to the market operator. Moreover, record-keeping requirements ensure that data regarding OTC positions and transactions are accessible to the CFTC to the extent that OTC activities are related to instruments traded on authorized trading venues.

6. Following the guidelines of ERGEG mentioned above, exchanges (e.g. EEX) and

Multi Trading Facilities “MTFs” (brokers) should provide public access to the information about the commodity derivatives transactions which are concluded / cleared through them. This would not mean obligations by participants of these platforms, but rather the obligation of the operator of such platform to show to the public – on a aggregated and anonymous basis – the transactions. In this context it seems not to be appropriate to harmonise throughout the EU the details of this publication as the MTFs and the level, kind and content of the transaction and information are different according to the market circumstances.

7. The implementation of transparency measures should be geared to serve market

integrity, through adequate and proportional measures. Transaction reporting is burdensome and it entails high administrative costs with no percievable regulatory comment. CESR recognised that uniform obligations for the reporting of trades in financial instruments that paid no attention to the nature of the instruments, their users and the use to which the reports could be put, would impose extremely onerous cost on the commodity derivatives industry.41 This should mitigate the risks that certain commodities trading might shift outside the EU (delocalisation).

41 This assessment is supported by the findings of the CESR Public Statement “New arrangements for the reporting of derivatives trades in accordance with MiFID”, CESR/07-627b, 26.10.2007; see: www.cesr.eu.

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8. Transparency rules geared to professionals. Evidence suggests that direct retail involvement in wholesale commodities and wholesale derivatives business is very limited and concentrated in certain exchange-traded products. Retail involvement in commodities derivatives, as described in this report under section A above, is very limited, especially in the field of gas and electricity products.42 Typical retail investors focus on retail derivative securities (see section A) and participations in investment funds. Among commodities, gas and electricity products only refer to a very small part of the investments. Participants in the wholesale energy markets deal with customers that are primarily wholesale and corporate final customers. Therefore transparency rules should essentially be geared to professionals/ qualified investors/ eligible counterparties.

42 See also FSA, Growth in commodity investment: risks and challenges for commodity market participants, March 2007.

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4. Answers to the questions of the Mandate a) whether greater pre- and post-trade transparency for electricity and gas supply contracts (physical and spot trading) and derivatives would contribute to a more efficient wholesale price formation process and efficient and secure electricity and gas markets; ESME considers that, in line with the analysis carried out in the Sector Inquiry, “greater pre- and post-trade transparency for electricity and gas supply contracts (physical and spot trading) and derivatives” would not contribute to a more efficient price formation process, if transparency is understood in terms of disclosure of information about the state of the market and wholesale transactions, supply contracts and derivatives. On the contrary, it may provide improper information, due to the relatively low degree of standardisation of transactions in this market. Instead, more information about technical availability of interconnections and technical availability of TSO networks is needed to increase the efficiency and security in electricity and gas markets. Market participants need to be able to predict the likely evolution of supply and demand fundamentals and their ability to move energy around the transmission systems. Access to information about electricity transmission and generation, gas transportation and gas storage would help new entrants to turn third-party access from legal theory into a real business tool. Transparency on the use of the network infrastructures would reduce risk, provide confidence and bring efficiency, liquidity and improved security of supply. This information should be made public, based on the ERGEG guidelines mentioned above. In this context is has to be noted that already today there do exist many transparency obligations for these activities (see annex “transparency regulations for the electricity and gas sectors” to this section), which already guarantee a certain level of transparency. Additionally, and according to the same guidelines, exchanges (e.g. EEX) and MTFs (brokers) could provide public access to post-trade information about the commodity derivatives transactions which are concluded / cleared through them. This would not mean obligations by participants of these platforms, but rather the obligation of the operator of such a platform to show to the public the available information on the transactions. This would serve the aim of transparency to improve the trust participants have in the market and its price-building mechanisms. The inclusion of MTFs (broker platforms) in such a transparency regime would also encompass OTC transactions (in standardised instruments) to a sufficient degree. It is our opinion that increased pre-trade transparency is not required due to the wholesale character of the market and is not technically feasible for the reasons detailed earlier in this paper. b) whether such transparency arrangements could be expected to mitigate the concerns identified in the Sector Inquiry above; No, as we have discussed in detail, problems about vertical foreclosure, market concentration, lack of market integration or price level are not related to the lack of transparency, at least the transparency related to the disclosure of information about the state of the market and wholesale transactions. The Sector Inquiry does not make any similar claim. More information on the use of infrastructure is necessary because it helps

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to a better performance of the market. Besides, it is absolutely necessary that any published information be the same across Europe. In relation to any possible lack of trust in the functioning of wholesale markets, ESME believes that improved and more systematic “market monitoring” could be carried out by regulators to identify any possible wrongdoing. We think that regulators can learn as much as they need to know in normal circumstances about price formation from published exchange data, from brokers and from the trade press (who construct their own OTC market price indices) and other information sources. Only in circumstances where there exists prima facie evidence of an abuse of dominant position, of collusion or of other market abuse, should it be necessary to demand specific transaction price data from producers and/or traders. In addition, the future record keeping obligation of the Third Energy Package is sufficient for the purposes of market monitoring by regulators. In relation to any possible lack of trust in the functioning of wholesale markets, ESME believes that improved access to information about the OTC market i.e. the broker platforms (MTFs) will provide consumers and interested market participants with information about best buy/sell prices for trading products, market depth and trades completed. Consumers not trading on the platform (MTF) themselves would be able to compare in realtime prices offered with standard products traded in the OTC market. Risk capital providers will easily follow the developments in any wholesale market and become more willing to enter new markets. c) whether uniform EU-wide pre- and post-trade transparency could have other benefits; Well-functioning wholesale power and gas markets would be an essential part of an efficient EU internal market in energy. Electricity and gas are network-bound energy commodities, and thus effectively necessitate a high degree of transparency about use of physical infrastructure. Transparency about use of such infrastructure reduces risk, provides confidence and allows efficiency, liquidity and security of supply to improve. The release by TSOs, producers and large consumers of demand, transmission and generation data is thus crucial to market participants’ ability to analyse likely market developments and to participate in forward markets. d) whether additional transparency in trading could have negative effects on these markets, for example could liquidity in these markets be expected to decrease? Is there a risk that trading could shift to third countries to escape regulation? If so, how could such risks be mitigated (delayed reporting, aggregated reporting, etc.). Depending on the way transparency requirements would be implemented trading could be affected and could move to third countries. Cumbersome or inadequate bureaucratic requirements could entail additional costs and barriers to entry. They would become a deterrent to doing business in European markets. Similarly disclosure of information which would be considered excessive could put commercial interests at risks and therefore contribute to delocalisation of trading activities. Concerning excessive bureaucratic requirements, it is fundamental to ensure that homogeneous requirements be implemented across Europe, and avoid overlap between requirements arising from energy regulation and from financial regulation. Concerning information disclosure, we favour aggregated reporting and delayed reporting on information. From a commercial point of view, commercially-sensitive information could only be required in aggregated form and under delayed reporting.

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For commodities markets other than electricity and gas, further transparency requirements are not required and should not be implemented at this stage, as they may have negative impacts. It is important that the financial regulation of commodity derivative transactions does not erect a further barrier to entry to often illiquid and fragmented continental European power and gas wholesale markets. Imposing compulsory disclosure to national regulators (or indeed publication) of details of market participants’ OTC wholesale power and gas transactions would cause considerable concern among the energy trading community across Europe. Conclusion: transparency to serve market integrity The EU legislation should be careful not to create new barriers to entry or incentives to trading firms to relocate their activity outside the EU by imposing bureaucratic disclosure obligations on wholesale tier participants in newly liberalised European energy markets. The focus should be on putting in place further transparency about the use and availability of network and production/storage infrastructure, so that competitive wholesale power and gas markets would be given a chance to develop efficiently, to the benefit of the European economy and the European consumers. Post-trade transparency could be envisaged by using existing references and making them public. Pre-trade transparency is not adequate for the specificities of the commodities market.

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G. Question 7 „Market Abuse“ The subject matter of this section is the ESME advice regarding question 7 of the Mandate, which is as follows: “Does Directive 2003/6/EC on insider dealing and market manipulation (market abuse) properly address market integrity issues in the electricity, gas and other commodity markets? If not, what suggestions would ESME have to mitigate any shortcomings?” (“Question 7”) Summary of Advice from ESME: 1. Definition of commodity derivatives and exotics/hybrids derivatives: it would be

helpful in terms of application of MAD if the definitions of commodity derivatives and exotics/hybrid derivatives could be defined through reference to the corresponding definitions in MiFID. This harmonisation should not, however, broaden the scope of the MAD to new kinds of financial instruments beyond its existing scope.

2. Definition of insider information and scope of application of the prohibition of insider

trading and duty of publication by the issuer: there are significant practical problems in defining insider information and applying the insider dealing regime to the commodity and commodity derivatives businesses. This stems from both the specifics of and the diversity between different businesses together with the fact that participants operate to varying degrees in both physical and derivative markets. The ESME Group endorses the regulatory suggestions made in its earlier (6th July 2007) ESME-MAD report and furthermore notes that changes may be necessary to level 1 & 2 provisions to address the issues. ESME is of the opinion that there is a need to further adapt the insider dealing regime to the needs of the commodity and commodity derivatives business to guarantee the orderly functioning of these markets (for specific recommendations see section G below).

3. No extension of MAD regime to Multi-Trading Facilities (MTFs): MiFIDalready

requires investment firms and market operators to monitor transactions that may involve abuse. Furthermore MTF’s are required to report such conduct to the competent authority and provide further assistance as appropriate. This, together with other regulatory measures, ensures that there is already sufficient investor protection, transparency and market integrity within MTF’s.

4. No extension of MAD regime to OTC markets and spot markets: There is no

evidence or threat of market failure that would result in significant consequences for the integrity and efficient operation of these markets to justify a wider application of MAD. Furthermore the health and increasing participation in these markets together with the absence of any suggestion of a need in current energy and financial regulator consultations supports this assertion.

5. Transaction and oosition reporting: transaction reporting directly by market

participants, on its own, would not provide regulators with the necessary information to detect market abuse. Record-keeping obligations allow regulators to access such information from companies if it is needed as part of any investigation or query regarding market behaviour. Position reporting is more appropriate for detecting

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market abuse and regulators should have access to such information, but placing reporting requirements on participants is also not the best route for providing such information. ESME suggests that regulated exchanges and MTF’s are best placed to act as front line regulators by monitoring positions of market participants – including, where necessary, reporting directly to and coordinating with regulators. This should be explored further recognising that flexibility on reporting levels would be needed and requirements proportional to market specifics. Solutions should be avoided which might have the unintended consequence of reducing liquidity.

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ESME-Advice: 1. Relevant EU Market Abuse Regime

The subject matter of this section is the advice from ESME regarding question 7 of the Mandate. This question needs to be answered in the context of the existing and relevant EU market abuse legislation: i) the Level 1 Directive 2003/6/EC of the European Parliament and of the Council

(in the following also referred to as “MAD”); ii) the Level 2 Directive 2003/124/EC, implementing MAD as regards “the

definition and public disclosure of inside information and the definition of market manipulation”;

iii) the Level 2 Directive 2004/72/EC, implementing MAD as regards the “accepted

market practices, the definition of inside information in relation to derivatives on commodities, the drawing up of lists of insiders, the notification of managers’ transactions and the notification of suspicious transactions”;

iv) the Level 3 first set of CESR guidance and information on the common

operation of the directive, addressing the accepted market practices, practices to be considered as market manipulation and the common format for reporting suspicious transactions (CESR/04-505b).

The ESME Sub-Group Commodities (“ESME Group”) has identified the following main issues under MAD, which it deems relevant in the context of question 7 above.

2. Definition of Commodity Derivatives and Exotics/ Hybrids Derivatives

ESME-Group Proposal: To define the terms of commodity derivatives and of exotic/hybrid derivatives in Art. 1 (3) of MAD through a reference to the corresponding MiFID definitions (Annex I Section C Nos. 5 to 7 and 10 of MiFID) and the definitions of Art. 38 and 39 of the Commission Regulation (EC) No 1287/2006 implementing Directive 2004/39/EC of 30 June 2006 (“MiFID Regulation”). a. Analysis of current regime The basic term for the insider dealing and market manipulation provisions of the MAD is the definition of financial instruments pursuant to Art. 1 subpara. 3 MAD. This definition, in combination with the provisions of article 9 MAD which state the scope of application of the directive, is decisive for the scope of the insider dealing provision of Art. 2, 3 and 4 MAD and of the market manipulation provision of Art. 5 MAD. ESME is of the opinion that a clarification of the definition of a financial instrument in MAD by reference to the corresponding definition in MiFID could help market participants to have a clearer view as regards the scope of applications of MAD. The MAD makes reference in its definition of financial instruments to commodity derivatives and other instruments admitted to trading on a regulated market in a

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member state but does not further define or explain these legal terms (see the seventh and last indent of article 1(3) MAD). The same is true for the Level II implementing measures of the MAD and also some of the national market abuse regimes which implement the MAD and its Level II measures. In contrast, Directive 2004/39/EC of 21 April 2004 on Markets in Financial Instruments (“MiFID”) defines in Annex I Section C no. 5-7 the scope of the term commodity derivatives and in its Annex I Section C no. 10 a further class of other non-financial derivatives, such as derivatives linked to weather, emissions allowances, freight rates and economic statistics (here referred to as “exotic/hybrids derivatives”). These derivatives are further defined in articles 38 and 39 of Commission Regulation (EC) No. 1287/2006 implementing MiFID (the “MiFID Regulation”) and form a sub-category of the broader definition of “financial instruments” contained in article 4.1(17) MiFID. While the MAD makes no direct reference to these definitions they are relevant to the interpretation of the MAD. By vitue of article 9, sub-paragraph 1, MAD, the MAD applies to instruments that are admitted to trading, or the subject of an application for admission to trading, on a “regulated market” as defined in MiFID43. The definition of a regulated market in article 2.1(14) MiFID makes clear that a regulated market is a market for trading “financial instruments” as defined in MiFID. Therefore, the reference to financial instruments in article 9, sub-paragraph 1, MAD is coextensive with the definition of financial instruments as defined in MiFID: • Under MiFID, a "regulated market" can only admit to trading "financial

instruments" as defined in MiFID. Thus, instruments which are not financial instruments as defined in MiFID cannot fall within the scope of article 9, sub-paragraph 1, MAD.

• Equally, a financial instrument as defined in MiFID will fall within the scope of

article 9, sub-paragraph 1, MAD if it is admitted to trading on a regulated market (or is the subject of a request for such admission), even if the instrument does not fall within the specific enumeration of the various categories of instrument in the first eight indents of the definition of "financial instrument" in article 1(3) MAD. This is because under the last indent of that article, MAD applies to any other instrument admitted to trading on a regulated market (or the subject of a request for such admission), thus encompassing every type of "financial instrument" defined in MiFID which is actually admitted (or is the subject of a request for admission) to a regulated market.

However, article 9, sub-paragraph 2, MAD also applies the insider dealing provisions of MAD (articles 2, 3 and 4) to "financial instruments" as defined in MAD which are not admitted to trading on a regulated market but whose value depends on a financial instrument to which article 9, sub-paragraph 1, MAD applies. The class of over-the-counter (OTC) derivative financial instruments to which MAD potentially applies in this way is somewhat narrower than the class of derivative financial instruments covered by MiFID:

43 Article 1(4) MAD originally defined a regulated market by reference to the Investment Services Directive (93/22/EEC). However, article 69 MiFID repeals the Investment Service Directive and provides that references to terms defined in that Directive shall be construed as references to terms defined in MiFID.

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• There are OTC derivative financial instruments that fall within the definition of

"financial instrument" in MiFID that would not be "financial instruments" as defined in MAD for this purpose (as the catch-all provisions of the last indent of article 1(3) MAD are not relevant to OTC instruments).

• In particular, it is unclear that the provisions of article 9, sub-paragraph 2, MAD

could apply to exotic/hybrid derivatives falling within Section C no. 10, Annex I, MiFID (or credit derivatives or contracts for differences falling within Section C no. 8 or 9, Annex I, MiFID) even if the value of those derivatives depends on a financial instrument admitted to trading on a regulated market. This is because it is unclear that those derivatives would fall within any of the specific categories of instrument enumerated in the first eight indents of article 1(3) MAD.

The present structure of the MAD is difficult to understand and, therefore, it would be desirable if MAD adopted a more transparent definition of what constitutes a "financial instrument" for the purposes of applying the insider dealing and market manipulation provisions set out in MAD. However, this definition should be aligned with other relevant EU provisions and, in this EU context, the definitions of MiFID would be an appropriate basis. This would lead to a clearer alignment of the scope of MAD and MiFID as well as assisting with a more harmonised application of MAD in all EU Member States.44

44 Therefore, the German Legislator has aligned the German Securities Trading Act (Gesetz über den

Wertpapierhandel – Wertpapierhandelsgesetz – WpHG – cited as “German Securities Act”) to the MiFID definitions: The current German Securities Trading Act does define in great detail the term of commodity derivatives and the term of the exotic/hybrids derivates (see Art. 2 subpara. 2 Nos. 2 and 5 German Securities Act).

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b. Proposed way forward Recommendation of ESME: 1. To align the definition of “financial instrument” in article 1(3) MAD so that it simply

applies the corresponding definition of “financial instrument” in article 4.1(17) MiFID. This would encompass commodity derivatives and exotic/hybrids derivatives as defined under MiFID. (We further discuss the specific reference to “commodity derivatives” in article 1(1), para 2, MAD below.)

2. For the reasons set out above, this harmonisation would not significantly broaden

the scope of application of the MAD to new kinds of financial instruments beyond its current scope45. In any event:

• ESME is of the opinion that the MiFID definitions are restrictive enough to

avoid insider dealing and market manipulation prohibition being applied too widely.

• Applying the aforementioned MiFID definition ensures that the MAD is not extended to the underlying (physical) market, i.e. no extension of the scope of MAD beyond the commodity derivative/exotic derivative markets into the underlying spot markets or to OTC forward physical trading46.

• Hence, the current restriction of application pursuant to Art. 9 of MAD needs to be preserved.

• Hence, the additional legal prerequisites of Art. 9 of MAD for the application of the insider dealing and market manipulation prohibitions shall be kept in mind, in particular financial instruments that fall under the scope of MAD are those traded at a regulated market.

45 In practice, as noted above, the only significant extension of MAD that would result from this alignment would be to include within the scope of article 9, para 2, MAD, the financial instruments in Sections C8, 9 and 10, Annex I, MIFID. Other financial instruments within the scope of Section C1 to C7, Annex I, MiFID are probably already covered by one or other of the first eight indents of article 1(3) MAD. 46 Article 1(2)(a) and (b) MAD defines market manipulation to mean "transactions or orders to trade" that have manipulative effects on financial instruments admitted to trading on a regulated market to which MAD applies by virtue of the article 9, para 1, MAD. It is uncertain whether these provisions are capable of applying to OTC transactions and orders to trade in physical commodities that underlie commodity derivatives that are admitted to trading if those transactions or orders have the requisite effect on the regulated market.

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3. Definition of inside information and scope of ap plication of the prohibition of insider trading and duty of publication by the issu er Recommendations of ESME: 1. There may be a need to amend the Level 1 and 2 provisions to solve the problems

identified in the sections below. 2. ESME supports and endorses the general regulatory suggestion in respect of the

MAD raised in clause 3 of the earlier ESME MAD Report insofar as they are relevant and valid analogously in the commodity and commodity business sector.

3. ESME also suggests that there is a need to clarify that all of the elements of the insider information definitions should be taken into account when assessing if information is insider information or not. That means that information should only be deemed to be insider information if all of the conditions are fulfilled.

4. ESME is of the opinion, therefore, that there is a need to further adapt the insider dealing regime to the needs of the commodity and commodity derivatives business to guarantee the orderly functioning of these markets (for details see section below).

In this context, ESME is of the opinion that neither the general definition of inside information nor the commodity-specific definition of insider information is appropriate to solve the practical implications of the MAD regime on commodity and commodity derivatives business. This statement is supported by the findings of the followings sections: a. General regulatory comments: General definition of insider definition: The scope of application of the insider dealing prohibition of Art. 2, 3 and 4 of the MAD is decisively defined by the term “inside information”, because the use and disclosure of such information is a legal prerequisite for the application of this prohibition (i.e. insider dealing can only be based on insider information).47 The same is true for the publication duties under Art. 6 of the MAD. The term inside information is defined by Art. 1 No. 1, first sub-paragraph of MAD in conjunction with Art. 1 of the Directive 2003/124/EC of 22 December 2003 implementing MAD (“Directive 2003/124/EC”) and although it has been applied adequately in Member States.48 The generality of the definition means it is difficult to

47 See Article 2 and 3 of MAD. Article 2 MAD: “1. Member States shall prohibit any person referred to in the

second subparagraph who possesses inside information from using that information by acquiring or disposing of, or by trying to acquire or dispose of, for his own account or for the account of a third party, either directly or indirectly, financial instruments to which that information relates.” Art. 3 MAD: “Member States shall prohibit any person subject to the prohibition laid down in Article 2 from: (a) disclosing inside information to any other person unless such disclosure is made in the normal course of the exercise of his employment, profession or duties; (b) recommending or inducing another person, on the basis of inside information, to acquire or dispose of financial instruments to which that information relates.”

48 For example, in the German Securities Act this definition is implemented by the legal definition of insider information pursuant to Section 13 subparagraph 1 sentence 1 to sentence 3 as follows: Art. 13 of the German Securities Act: “(1) Inside information is any specific information about circumstances which is not public knowledge relating to one or more issuers of insider securities, or to the insider securities themselves, which, if it became publicly known, would likely have a significant effect on the stock exchange or market price of the insider security. Such a likelihood is deemed to exist if a reasonable

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apply in the context of the commodity/energy trading market, i.e. the fact that it is not specific enough49 raises issues in respect of commodity/energy trading. Insider information in the terms of this definition are those events which do not have a specific significance for the commodity/energy trading market, the prices of commodities and commodities derivatives etc., but do apply in general to all businesses.50 It was designed to cover circumstances where there was an issuer of the financial instrument that could effectively ensure equality of information for market participants by disclosing inside information. It is ill-suited to a dispersed market where numerous market participants may have non-public information that could affect supply and demand and is relevant to price formation. Commodity-specific definition of insider information: Based on this evaluation, the more specific definition of inside information in respect of commodity derivatives (see Art. 1 subpara. 2 of the MAD) is the relevant definition.51 This definition is expanded on by Art. 4 of Directive 2004/72/EC which explains when users of commodity derivative markets are deemed to expect to receive information in accordance with accepted market practices on those markets52 – however it does not help greatly with the practical interpretation of MAD for commodities. These provisions have been implemented by national securities laws adequately, but have not been put in a form that is sufficiently specific which means that MAD is applied appropriately with respect to commodities.53

investor would take the information into account for investment decisions. The term “circumstances” within the meaning of sentence 1 also applies to cases which may reasonably be expected to come into existence in the future. Specifically, inside information refers to information about circumstances which are not public knowledge within the meaning of sentence 1, which

1. is related to orders by third parties for the purchase or sale of financial instruments or 2. is related to derivatives within the meaning of Section 2 (2) no. 4 and which market participants would expect to receive in accordance with the accepted practice of the markets in question.

(2) A valuation based solely on information about publicly-known circumstances is not inside information, even if it could have a significant effect on the price of insider securities.”

49 “ ‘Inside information’ shall mean information of a precise nature which has not been made public, relating, directly or indirectly, to one or more issuers of financial instruments or to one or more financial instruments and which, if it were made public, would be likely to have a significant effect on the prices of those financial instruments or on the price of related derivative financial instruments.”

50 Such insider information is, for example, equity measures, integration, conversion, squeeze-out processes and other substantial structural transformation measures, conclusion of a control and/or profit and loss transfer agreement; take over, tender or purchase offers; dividend payments; change rating; acquisition or disposal of principal investments.

51 See Art. 1 subpara. 2 of the MAD: “In relation to derivatives on commodities, ‘inside information’ shall mean information of a precise nature which has not been made public, relating, directly or indirectly, to one or more such derivatives and which users of markets on which such derivatives are traded would expect to receive in accordance with accepted market practices on those markets.”

52 For the purposes of applying the second paragraph of point 1 of Article 1 of Directive 2003/6/EC, users of markets on which derivatives on commodities are traded, are deemed to expect to receive information relating, directly or indirectly, to one or more such derivatives which is: (a) routinely made available to the users of those markets, or (b) required to be disclosed in accordance with legal or regulatory provisions, market rules, contracts or customs on the relevant underlying commodity market or commodity derivatives market.

53 See Section 13 subparagraph 1 sentence 4 No. 2 of the German Securities Act: “(1) … Specifically, inside information refers to information about circumstances which are not public knowledge within the meaning of sentence 1, which

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There are also a number of difficulties with this definition: • The specific definition applies in relation to "derivatives on commodities".

However, MAD does not define this term and it is unclear whether it is co-extensive with the class of "derivatives relating to commodities" covered by Section C nos. 5-7, Annex I of MiFID, or whether it is narrower in its scope.

• Furthermore, the specific definition is limited to derivatives on commodities and does not apply to exotic/hybrid derivatives or other derivatives where there is also no underlying issuer that can ensure equality of information. For example, it would appear that derivatives on emissions allowances that are admitted to trading on a regulated market would be subject to the general definition rather than the specific definition of inside information, even though the issues presented by such instruments are more akin to those of commodity derivatives than derivatives based on securities.

• Again these definitions of Art. 1 subpara. 2 of the MAD and Art. 4 of Directive 2004/72/EC, but also national laws, are still too indefinite to create the necessary level of legal certainty for market participants.

• In particular, notwithstanding the implementing directive, it is not clear under which circumstances market participants would expect to receive information in accordance with accepted market practices, such that the information should be treated as inside information.

• Neither it is wholly clear whether the relevant information has to fulfil the general legal prerequisites of Art. 1(1) subpara. 1 MAD for being deemed to be inside information. The specific definition does not expressly state that information can only be inside information in relation to derivatives on commodities if, were it to be made public, it would be likely to have a significant effect on the prices of those derivatives (or related derivative financial instruments).54 However, recital 16 to MAD contains a general statement that inside information is price-sensitive information which supports the view that the specific definition of inside information relevant to derivatives on commodities should be regarded as a sub-set of the general definition.

• It is also not wholly clear that the specific definition displaces the general definition in relation to derivatives on commodities (so that information is inside information in relation to commodity derivatives if but only if it meets both the requirements of the first and the second sub-paragraphs of Art 1(1)). This would seem to be the preferable view.

• However, we are not aware of national regulatory authorities offering more concrete definitions or guidance.55

1. …..

2. is related to derivatives within the meaning of Section 2 (2) no. 4 and which market participants would expect to receive in accordance with the accepted practice of the markets in question.”

54 Contrast the third sub-paragraph of article 1(1) MAD which also provides for a specific definition of inside information in relation persons charged with execution of client orders and which does expressly limit that definition to price sensitive information. 55 For example, the German Federal Financial Supervisory Authority (BaFin) has not offered a more

concrete definition in its insider dealing guidance paper (Emittentenleitfaden). Even worse, this insider dealing guidance paper does declare power plant outages, information about network capacity and the outage of power plants as insider information without the necessary consideration of the above mentioned legal prerequisites. See www.bafin.de. The Financial Service Authority FSA gives the following as an example of insider dealing in commodities, “Before the official publication of LME stock levels, a metals trader learns (from an insider) that there has been a significant decrease in the level of LME aluminium

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b. Practical implications and problems of actual re gime ESME stands by the general findings of its earlier report “Market abuse EU legal framework and its implementation by Member States: a first evaluation” of 6 July 2007 (“ESME MAD report”) in respect of the definition of insider information, the scope of application of the prohibition of insider trading and the duty of publication by the issuer.56 The following paragraphs illustrate some of the more relevant practical problems which arise under this regime: General issues of the definition of insider information as well as of the scope of application: Uncertain scope of insider information: Under these legal provisions it seems that inside information in the context of commodity derivatives is precise information that, if it were public, would likely have a significant effect on prices, including those of related derivative financial instruments, where the information is information that is routinely made public to users of regulated markets or required to be disclosed by law, regulations, rules, contracts or custom on the relevant underlying commodity market or commodities derivatives market. The vagueness of the definition when trying to apply it to commodity derivatives has led to uncertainty as to what types of information might constitute inside information. Precise information might be deemed to include information as diverse as: a) economic statistics, b) routine company announcements of commodity producers, processors and

consumers, c) changes to market rules or margin levels by regulated markets or MTFs or

clearing houses d) supply and demand data for the underlying physical commodities where that is

published, e) company announcements of commodity producers, processors and consumers

specifically affecting supply or demand, f) stock data from authorised warehouses of regulated markets g) data on the stocks of the underlying commodity not stored in authorised

warehouses of regulated markets but of a quality that is deliverable, or h) major contracts to supply relevant physical commodities. It seems unlikely a) and b) above could be precise information not publicly available whereas c), d), e), f) and g) appear more relevant for the purposes of the commodity markets. h) - individual contracts - appear not to constitute inside information unless perhaps they are frustrated by an unforeseen force majeure event which significantly impacts supply or demand.

stocks. This information is routinely made available to users of that prescribed market. The trader buys a substantial number of futures in that metal on the LME, based upon his knowledge of the significant decrease in aluminium stock levels.“

56 See clause 3 of this report.

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These points are not intended to form a recommendation of what should or should not constitute inside information, they are offered only to illustrate that there can be no "one-size-fits-all" definition. The definition of inside information needs to be flexible, recognising that the answer will be different depending on the commodity market involved and the role of individual market participants. Once we have decided what constitutes inside information we need to address a further question about what trading is permitted by a person in possession of such information, for example: • Could management of existing hedges and positions or the need to hedge by

commodity firms suffering major supply or demand interruptions be considered as insider dealing in the relevant commodity derivatives (see below for further details)?

• Is knowledge of order flow, in the context of broker-dealers dealing for proprietary

account or on an agency basis or both, precise information when they receive substantial orders while broking for other clients or having proprietary position?

• Should front running be abuse of insider information, and hence market abuse, or

should it be treated, perhaps more appropriately, as a conduct of business issue, that is as an abuse of the customer, bearing in mind that the former is a criminal activity while the latter is a serious regulatory failing?

Missing adoption to the specifics of commodity markets: The difficulties and uncertainties surrounding the nature of precise information that could have significant effect on prices when it comes to commodity derivatives has led ESME to conclude that while it is appropriate to apply the provisions of MAD on insider dealing, improper disclosure or misuse of information to dealings in equity and debt securities, it is problematical to apply the same provisions also to dealings in commodity derivatives. Equity and debt securities have issuers who have disclosure obligations and continuing obligations intended to prevent selective or inadvertent disclosure of precise material price-sensitive information that could have a significant effect on the price of the relevant security; for commodity derivatives admitted to trading on a regulated market there is difficulty in assessing what is comparable price-sensitive data that market participants might expect to receive. This is for two main reasons: • Commodities underlying derivatives are typically products such as oil, gas,

electricity, non-ferrous metals, plastics or agricultural produce that are completely interchangeable with another product of the same type. Due to the fungibility of commodities, the potential for material price impact is significantly reduced.

• Where regulated markets admit commodity derivatives to trading they set

qualitative and quantitative standards for the underlying commodity deliverable into the contract or against which the contract settles. In drafting contract terms, regulated markets ensure that no single producer or brand is of such significance that changes to their circumstances will result in a material change in the price of the derivative.

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As a result, commodity derivatives are typically markets where dispersed market participants reflect their information on supply and demand factors through the price mechanism. There is no equivalent of a single issuer with the responsibility of ensuring equality of information for market participants. Implication of disclosure requirements for gas and power markets: In addition, the provisions of Art. 4 of Directive 2004/72/EC that information is deemed to be inside information if it is “(a) routinely made available to the users of those markets, or (b) required to be disclosed in accordance with legal or regulatory provisions, market rules, contracts or customs on the relevant underlying commodity market or commodity derivatives market” have a significant practical impact, as laws or regulations applicable to underlying commodity markets (in particular the gas and power markets) impose a growing range of transparency (disclosure/publication) obligations on market participants (or as those market participants undertake voluntary practices of publishing data relevant to those markets). In practice, as current transparency requirements cover information such as network data, plant data, balancing data etc, such data would automatically be deemed to be insider information without any further consideration (of the additional legal prerequisites of the more general definition of insider definition). Also voluntary publication of data could lead to the same legal result, if it creates an expectation of market participants of publication, i.e. it would also automatically be deemed to be insider information. In practice this results in an application of the insider dealing prohibitions that it is too wide and exposes market participants to serious regulatory risk (i.e. breach of prohibitions on insider dealing and operational risks – e.g. short position in a commodity has to be covered (hedged) at higher prices if the market participants become aware of it) without any real additional benefit for market integrity. The example below explains the dilemma and serious risks which firms could face in the event of an overly wide application of MAD. In more detail: Where there is voluntary or obligatory publication for power plant data the application of MAD raises regulatory issues for market participants - particularly for a power plant operator and trading branches of an integrated energy company that raises the question of whether information about power plant data should be deemed insider information. If it is insider information, then the plant operator would need to make the information available to all market participants at the same time. However, this would mean that the power plant operator/trading branch could be cornered by the market which would be aware of the shortage, and therefore subject to very high power prices as a ‘distressed buyer’. However, if publication to the market was delayed by certain period of time, it would enable the plant operator/trading branch to take necessary steps to purchase the shortfall in power on the market without being in the position of a distressed buyer. Cornering has a negative impact on the proper and efficient functioning of the power markets and increases prices for end consumers. Hence, it seems appropriate then that in such unforeseen circumstances the plant operator should be allowed to delay publication and at least trade out of the short position.

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These issues are transferable more or less to most commodity markets where one market participant falls short of a commodity due to, for example, force majeure (e.g. explosion/sinking of an oil/gas platform or oil/gas tanker or oil/gas pipeline) or other unforeseen events, even if no specific obligation on publication of information exists. The general concept of the disclosure requirement does not fit to the commodity markets: Pursuant to article 6 of the MAD an issuer of financial instruments shall inform the public as soon as possible of inside information which directly concerns that issuer.57 This obligation does not deliver any additional benefit with regard to the energy (commodity) wholesale market. This is because Article 6 of MAD only covers financial instruments that are admitted to trading to a regulated / organized market within the EC. However, according to EU laws and regulations for the admission and issuance of products to regulated markets, the issuer of commodity derivatives in such markets is actually the operator of the market and not individual market participants, e.g. EEX future products on the EEX (European Energy Exchange).58 This would mean that the relevant commodity (derivatives) exchange (e.g. EEX) would have to publish insider information which directly concerns the issuer, i.e. itself. It is obvious, therefore, that such an obligation is not meaningful and does not provide any benefit. In addition, the general insider information in the sense of Art. No. 1 subparagraph 1 of the MAD, which does not specifically relate to commodity derivatives, is in any case published by the relevant market players, insofar it relates to the shares issued by these firms.

57 This provision has been implemented by Section 15 of the German Securities Act. 58 See www.eex.de

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c. Proposed way forward ESME supports and endorses the general regulatory suggestion in respect of the MAD raised in clause 3 of the earlier ESME MAD report (as they are relevant in the commodity sector).59 These general issues are valid analogously in the commodity and commodity business sector. Furthermore, ESME supports and endorses the specific regulatory suggestion in clause 7 of the earlier ESME MAD report. Recommendation of ESME: 1. It is questionable if Level 3 guidelines or amended Level 2 guidelines on their own

are sufficient to solve the above mentioned problems. ESME is of the opinion that there could be a need to amend the Level 1 and 2 provisions.

2. ESME also suggests that as a first step there is a need to clarify that all of the

elements of the above-mentioned definitions should be taken into account when assessing if information is insider information or not. That means that information should only be deemed to be insider information if all of the following conditions are fulfilled: • It is precise price-sensitive information that is not generally available

(information of a precise nature which has not been made public) and which the possessor knows or could reasonably be expected to know is inside information; and

• The information relates directly or indirectly to one or more commodity derivatives (financial instruments) traded on regulated markets; and

• It concerns circumstances that may reasonably be expected to come into existence; and

• Disclosure of the information is likely to have a significant effect on the prices of those commodity derivatives; having a significant effect on the prices of a commodity derivative shall mean information which a reasonable professional client or eligible counterparty would consider to be price-sensitive and would be likely to use as a part of a basis of an investment decision; and

• It is information that users of a regulated market on which relevant commodity derivatives are traded would expect to receive in accordance with accepted customs and market practices for that market or to be disclosed in accordance with laws, regulations, rules and contracts for that commodity derivatives market.

3. However, it remains questionable if a pure combination of the elements of the

general and commodity specific definition of insider information (Art. 1 No. 1 subparagraph 1 and 2 of the MAD, of Art. 4 of Directive 2004/72/EC) creates an appropriate insider dealing regime for commodities that solves the problems identified above.

4. ESME is of the opinion therefore that there is a need to further adapt the insider

dealing regime to the needs of the commodity and commodity derivatives business

59 See clause 3 of this report.

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to guarantee the orderly functioning of these markets. It proposes that the following issues be taken into account in the context of the wider MAD-review:

• That an obligatory transparency regime (e.g. publication of power plant data) is

or will be (in the context of the Third Energy Liberalisation package of the EU Commission) imposed on power and gas markets and that therefore a duplication of transparency obligation under financial market law (e.g. duty of publication of power plant data as insider information under MAD) should be avoided.

• It is perverse that information made available under an obligatory (e.g. in the context of the Third Energy Package) or voluntary transparency regime in power and gas markets would by definition be automatically be treated as inside information under MAD, i.e. that all transparency obligations in energy market law (and voluntary arrangements) would be automatically be treated as inside information under financial market law (e.g. for power plant data as insider information under MAD).

• As stated in the earlier ESME MAD report (see clause 3.1.2 of this report), that granting a delay for publication of certain information can contribute to a better functioning of the market. Insofar as the reasoning for this proposal is concerned it is referring to clause 3.1.2 of this report.

• A distinction should be made between information that is generated from within a company versus unauthorized gathered information/general market information - whereas trading on the first information should be an acceptable behaviour, i.e. there could be initial ‘proprietary rights’ for the holder of the information to use it as they see fit before it is released to the market, e.g. trading activities for the purpose of hedging for short positions arising from force majeure events.

• Further Level 3 guidance on what and what does not constitute insider information in the commodity and commodity derivatives markets.

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4. Extension of MAD regime to Multi-Trading Facilit ies (MTFs) Recommendation of ESME: ESME concludes that there is no regulatory need to extend the market abuse regime to cover transactions in commodity and exotic/hybrid derivatives executed on MTFs.

In responding to question 7, ESME has considered whether an extension of the MAD regime to MTFs could further foster market integrity. The scope of MAD and its implementing measure is limited: MAD applies primarily only to conduct on and in relation to financial instruments admitted to trading or for which a request for admission to trading on Regulated Markets (Art. 4 (1) No. 14 MiFID) has been made, but not to conduct on and in relation to financial instruments admitted to trading on Multilateral Trading Platforms (“MTFs”) (Art. 4 (1) No. 15 MiFID) and in the OTC-markets: The MAD provides for a market abuse regime in Art. 5 in conjunction with Art. 1 subpara. 2 and for an insider dealing regime in Art. 2, 3 in conjunction with Art. 1 subpara. 1, whereby these regimes are put in more concrete form by Directive 2003/124/EC and Directive 2004/72/EC. These regimes also apply to transactions in commodity derivatives and exotic/hybrid derivatives. However, Art. 9 of MAD limits the scope of application of these regimes as follows: The scope of the insider dealing and market manipulation provisions of MAD and the Directives 2003/124/EC and 2004/72/EC are limited to commodity derivatives and exotic/hybrid derivatives (see Art. 1 subpara. 3 of the MAD), which are • either admitted to trading on a regulated market, or • not admitted to a trading on an regulated market, but whose value depends on a

financial instrument traded on a regulated market. Consequently, Art. 2, 3 and 5 of MAD are in principle limited to transactions in commodity derivatives and exotic/hybrid derivatives (the underlying commodities are currently out of scope) on Regulated Markets (Regulated Markets are defined in Art. 4 No. 14 of MiFID). Therefore, these prohibitions do apply to commodity derivative exchanges under MiFID (both in the UK and continental Europe, e.g. LME, EEX). However, given the second point above, the requirements of Art 2, 3 and 5 of MAD could extend beyond Regulated Markets. Some extension of the scope of application of Art. 2, 3 and 4 of MAD (hence the insider dealing regime) beyond Regulated Markets is expressively stated in Art. 9 subpara. 2 of the MAD. Consequently, the insider dealing and market manipulation regime may also apply to any financial instrument (commodity/exotic derivatives) not admitted to trading on a regulated market in a Member State, but whose value depends on a financial instrument traded on a Regulated Market.60 Hence, some

60 See Art. 9 subpara. 2 of the MAD: “Articles 2, 3 and 4 shall also apply to any financial instrument not

admitted to trading on a regulated market in a Member State, but whose value depends on a financial instrument as referred to in paragraph 1”

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trading in commodity derivatives on MTFs and on the OTC-Markets may also be caught as far as it relates to financial instruments (commodity/exotic derivatives) admitted on Regulated Markets. The extension of the regulatory regime in this way reduces concerns of regulatory failure as far as Regulated Markets and financial instruments admitted to trading on these platforms are concerned. In practice, a very substantial proportion of the commodity and commodity derivative market is traded on MTFs and OTC markets. This means that generally transactions in commodities, commodity derivatives and exotic/hybrid derivatives on MTFs and OTC markets are in practice (due to the focus of the MAD on financial instruments traded on regulated markets and the above-mentioned limited application of MAD to MTFs and OTC markets) not caught by MAD. Therefore, transactions trading platforms which are MTFs (and not regulated markets), such as Powernext in France or other major broker platforms, are in principle not subject to the insider dealing and market manipulation provisions of MAD. This raises the question of whether there is a need to extend MAD to trading activities on MTFs and OTC markets – which essentially is an issue of whether market integrity would be improved (i.e. it remedies a market failure); whether it would be a proportionate regulatory response; and if were practicable. Art 26 (1) and (2) of MiFID requires investment firms and market operators operating an MTF to monitor transactions undertaken on the MTF in order to identify conduct that may involve market abuse and to report the conduct to their competent authority. This includes supplying relevant information for the investigation and prosecution of market abuse and giving full assistance to the competent authority in investigating and prosecuting market abuse occurring on or through the MTF. This essentially means that monitoring and reporting by MTFs of market abusive conduct, in line with MAD, already exists as there is a legal obligation on the MTF operator in this respect. Furthermore, market integrity on MTFs are ensured by further regulatory measures as follows: The operation of MTFs is an investment service, which needs to be licensed under MiFID (Art. 5 of the MiFID) and needs to fulfil certain legal prerequisites.61 Consequently, these licensed investment firms/operators are subject to the organisational and conduct-of-business rules of MiFID. In addition, the trading process on MTFs itself is subject to MiFID regulation (Art. 14 of the MiFID). All of these obligations/rules, if properly enforced by competent authorities, together

61 MTF is defined in MiFID. Recital 6 of MiFID notes that both regulated markets and MTFs may be systems

composed of a set of rules and a trading platform or systems that function on the basis of a set of rules; the Recital calls for the definitions of regulated markets and MTFs to be aligned closely. Article 4.1(15) of MiFID defines an MTF as a multilateral system, operated by an investment firm or a market operator, which brings together multiple third-party buying and selling interests in financial instruments in the system and in accordance with non-discretionary rules in a way that results in a contract in accordance with the provisions of Title II of MiFID but does not include bilateral systems operated by investment firms where the investment firm is counterparty to all transactions. For the purposes of MAD, an MTF is a person that performs investment services or activities as a regular occupation or business on a professional basis and is subject to authorisation in accordance with the provisions of Chapter 1 of MiFID, with authorisation being granted by the home Member State’s competent authority designated in accordance with Article 48 of MiFID.

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already provide for an appropriate level of market transparency and market integrity with regard to MTFs (e.g. Powernext), as they do for regulated markets (e.g. EEX). Taken together, these obligations/rules already ensure sufficient and appropriate investor protection, market transparency and market integrity at MTFs. In addition, Regulated Markets admitting commodity derivatives to trading require physical delivery set grades or quality, size and delivery points of the underlying commodity. Only a percentage of world supplies of commodities such as non-ferrous metals, plastics, or soft commodities that comply with delivery standards will be stored in warehouses authorised by regulated market authorities – and this percentage will be a tiny percentage of total production of the commodities in all grades and quality. The implication is that the amount of physical traded as such on MTFs is insignificant compared to world supplies. It is therefore not recommended that the market abuse regime should apply to physical business transacted through MTFs. A general extension of MAD to MTFs in respect of commodity and commodity derivatives trading would have practical implications. For example, MTFs can be set up by any party, at any time and can be very limited in size – and as such a general extension of MAD to all MTFs would constitute a disproportionate regulatory response (e.g. imposing significant compliance costs) creating barriers to efficient and effective operation of markets. Therefore, ESME concludes that there is no regulatory need to extend the market abuse regime to cover transactions in commodity and exotic/hybrid derivatives executed on MTFs.

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5. No extension of MAD regime to OTC markets and sp ot markets Recommendation of ESME: ESME does not advocate an extension of MAD to OTC markets and spot markets62 in commodities, commodity derivatives and exotic/hybrid derivatives on the basis of the following reasons.

As indicated above, ESME is of the opinion an extension of MAD would need to be justified on the basis that it is a remedy to a significant market failure and would be a proportionate regulatory response. A market failure in this context means the existence, or threat of, of substantial insider dealing and market manipulation facilitated by a ‘regulatory gap’ that would have significant consequences for the integrity and efficient operation of the market. ESME does not believe that there is any such evidence of existing market failure in the EU commodity and commodity derivatives business that would justify a wider application of MAD to OTC markets and spot markets. In addition, it believes that the threat of such activity is not significant, evidenced by the rising number of market participants and trading volumes on OTC and spot markets. This suggests that market participants have a high level of confidence in these markets and that generally they are well-functioning. In addition, as trading on OTC and spot markets is generally between two parties, and is not a continuos activity, the threat of the integrity of the whole market being threatened from any markt abuse is not as high as in other markets. Furthermore, the current consultation papers of the energy and financial regulators in their ongoing reviews63 of energy and financial markets do not suggest that an extension of MAD to OTC and spot markets is necessary. In addition, in the opinion of ESME such an extension is not supported by professional market participants of the commodity and commodity derivatives business. There seems to be no firm request of these market participants to introduce a binding MAD regime to such OTC and spot businesses. Also, it needs to be taken into acount that , for example, the energy markets (but also other commodity markets) in question are relatively immature: in this still-fragile market stage, many market players have come to fear that financial market-style regulation of commodity transactions may erect a further barrier to entry to often illiquid and fragmented markets. This could lead to a severe reduction of liquidity in currently liquid markets and prevent it arising in new markets.

62 For the definition of Spot Contract please see Art. 38 (2) of the Commission Regulation (EC) No

1287/2006 of 10 August 2006. 63 These are: (1) Request for joint CESR/CEBS advice on commodity derivatives (see:

http://ec.europa.eu/internal_market/securities/docs/isd/mandate_CESR-CEBS_21122007_en.pdf); (2) Request for joint CESR/ERGEG advice in the context of the Third Energy Package (see:http://ec.europa.eu/internal_market/securities/docs/isd/mandate_CESR-ERGEG_21122007_en.pdf); (3) Request for ESME advice in the context of exemptions in MiFID, CAD and proposed regulatory measures in the Third Energy Package (see: http://ec.europa.eu/internal_market/securities/docs/isd/mandate_ESME_21122007_en.pdf).

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It has also to be noted that such an extension would also constitute a special regime for these markets as it would not apply to all other classes of financial instruments and other markets. This would put commodity and commodity derivatives market and their participants at an unacceptable and unjustifiable disadvantage vis-à-vis other (non-financial and financial) markets. This would give rise to concerns of regulatory arbitrage as far as in third countries such a MAD regime is not present and, consequently, market participants could leave the EU and perform their business in these countries. Such a regime could create a competitive disadvantage for the EU market. Also, some technical aspects do indicate that such an extension would not be meaningful, e.g.: OTC transactions in commodities, commodity derivatives and exotic/hybrid derivatives are generally bilateral, non-standardised transactions with regard to size, quality, currency, period, and type that are quoted in response to specific quote requests; it is unlikely that the party responding to the quote request will be an insider although it is possible that the party requesting the quote could be, although due to the bilateral relationship this is perhaps unlikely. OTC transactions in non-standardised instruments of a different specification to standardised, exchange-traded commodity derivatives may not relate directly to investments traded on regulated markets.

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6. Transaction and Position Reporting Recommendation of ESME: 1. ESME do not suggest direct transaction reporting obligations (comparable with the

one of Art. 25 (3) et seq. of the MiFID) and direct position reporting obligations of market participants64 active in trading with commodities, commodity derivatives and exotic/hybrid derivatives for the following reasons.65

2. ESME therefore proposes a role for regulated exchanges and MTFs as “frontline

regulators” as follows. Therefore, ESME suggests to further explore the possibility of a position surveillance and possible reporting to competent authorities for operators of markets (regulated markets and MTFs) admitting commodity, commodity derivatives and exotic/hybrid derivatives to trading in the wider context of the MAD review.

a. Introduction

For energy markets there will be sufficient information already available to authorities through the transactions record keeping obligations of the Third Energy Package. Any information on transactions would therefore be available to regulators on request which would mean that additional reporting obligations imposed through MiFID are not necessary and would only duplicate regulation. It is important that regulators are able to monitor market behaviour including through ready access to relevant information that will allow them to undertake this task efficiently and effectively. ESME is of the opinion that an MiFID-style transaction reporting directly by market participants would not deliver what regulators need. Transaction reporting in itself does not provide information that allows regulators to identify insider dealing or market abuse in commodities, commodity derivatives and exotic/hybrid derivatives.66 ESME considers that a direct position reporting obligation by market participants is not appropriate or proportionate.67 It would be more efficient and effective if regulated markets and MTFs act as “front line” monitors of activity - supervising and reporting on market integrity issues to the competent supervisory authority.68 The operators of regulated markets and MTFs are best placed to identify suspicious activity rather than the sector regulator, as they are constantly monitoring the markets for which they have regulatory responsibilities. Competent authorities would have full access to relevant transaction and position information in the event that the regulated markets and MTFs notified them of possible markets abuse, as MiFID obliges them to do, and the competent authorities needed to investigate market behaviour in more detail.

64 This means non-MiFID firms, which are not licensed investment firms pursuant to Art. 5 et seq. of the

MiFID. Therefore, this section deals exclusively with firms which are not MiFID investment firms. 65 It shall be noted that investment firms which execute transactions in any financial instruments admitted to

trading on a regulated market have to report details of such transactions to the competent authority pursuant to Art. 25 (3) et seq. of the MiFID.

66 See for more details below. 67 See for more details below. 68 See for more details below.

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b. Transaction reporting obligations of market part icipants are not necessary and not appropriate Recommendation of ESME: ESME does not suggest direct transaction reporting obligations (comparable with the one of Art. 25 (3) et seq. of the MiFID) of market participants69 active in trading with commodities, commodity derivatives and exotic/hybrid derivatives for the following reasons.70

aa. Record-keeping obligation is sufficient for sup ervision of market integrity by authorities in the energy markets ESME is of the opinion that for energy markets (gas and power) the proposed record-keeping obligation is sufficient for supervision of market integrity by authorities. The Commission has included in its legislatory proposal of 19 September 2007 (COM (2007) 528 final) a new record-keeping article in the Electricity and Gas Directives. This means that Member States shall require supply undertakings to keep at the disposal of the national regulatory authority, the national competition authority and the Commission, for at least five years, the relevant data relating to all transactions in electricity/gas supply contracts and electricity/gas derivatives with wholesale customers and transmission system operators as well as storage and LNG operators.71 Hence, authorities are already entitled to receive transaction data, so that a duplication of such information obligations is not necessary. bb. Transaction reporting obligations of market par ticipants are not appropriate Currently, MiFID imposes transaction reporting obligations directly on those market participants that are MiFID firms. ESME has assessed that the main potential market abuses in commodities, commodity derivatives and exotic/hybrid derivatives are squeezes and corners.72 However, it is difficult to see how the provision of transaction reports would help competent authorities identify such activity. It should also be noted that all transactions executed subject to the rules of regulated markets must be matched before registration with the clearing house for the market, meaning that the regulated markets hold a database of all business executed on their markets that contains full transaction information. In the underlying commodity markets no such transaction reporting obligations for MiFID firms and non-MiFID firms currently exist under EU or national law (although the above-mentioned record keeping obligations do exist). Non-MiFID firms dealing

69 This means non-MiFID firms which are not licensed investment firms pursuant to Art. 5 et seq. of the

MiFID. Therefore this section deals exclusively with firms which are not MiFID-investment firms. 70 It shall be noted that investment firms which execute transactions in any financial instruments admitted to

trading on a regulated market have to report details of such transactions to the competent authority pursuant to Art. 25 (3) et seq. of the MiFID.

71 See for more detail response to Question 5. 72 Other abuses could also arise and could include creating false or misleading impressions as to value,

supply or demand, disseminating false or misleading information, price positioning and wash trading, while front running appears to be customer abuse rather than market abuse and, hence, it should be treated as a conduct of business offence.

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in commodity/exotic derivatives are not subject to transaction reporting obligations either. ESME suggests that it would not be appropriate to introduce such transaction reporting obligations for these markets and their participants for the reasons outlined below. In paragraphs 6.38-6.40 of the ‘UK discussion paper on the Commission’s review of the financial regulatory framework for commodity and exotic derivatives” (Discussion Paper) it states that “A further issue that may be raised in the [European Commission] review [of the financial regulatory framework for commodity derivatives and ’exotic’ derivatives] is the role of transaction reporting for commodity derivatives. The lesson of the UK regime is that such reporting offers little value and that position reporting is the more commonly used tool. The nature of abuse most commonly found on commodity derivative markets is typically through attempts to corner or squeeze the market. Position reports are acknowledged as the standard tool for monitoring of these markets, whereas transaction reports alone do not provide the information required to enable the detection of this type of abuse. HM Treasury and FSA believe that the costs to firms and exchanges of collating and submitting this data and the management of this data by competent authorities significantly outweighs any benefits that transaction reports may provide. HM Treasury and FSA would therefore propose that MiFID be amended to remove commodity derivatives from the scope of the transaction-reporting regime.“ The Discussion Paper continues by stating in paragraph 6.42, “UK provisional analysis has led to the following preliminary policy recommendations. … Commodity derivatives should be carved out of the MiFID transaction reporting regime and the benefits of position reporting considered. There are issues to be considered in relation to market abuse but these could better be picked up in the forthcoming Market Abuse Directive review.“ Also, the Discussion Paper state in paragraph 5.20, “HM Treasury and FSA do not believe that the benefits of applying the transaction-reporting framework to commodity derivatives outweigh the costs. In particular, transaction reports have little material benefit as the main form of abuse in these markets arises through market manipulation rather than insider dealing. Hence, the reliance on position reports.” ESME agrees with the HM Treasury and FSA opinion. In addition, table 1 of Annex 1 of Regulation EC 1287/2006 requires investment firms to make transaction reports to their regulator for all types of financial instruments admitted to trading on a regulated market. The transaction data reported must include, inter alia, trade date and time, price, volume, counterparts, trading capacity, maturity date, type of derivative, instrument identifier and underlying instrument identifier, strike price, and venue. Transaction reports are a significant tool for monitoring trading in equity and debt instruments where the chief types of market abuse include insider dealing, improper disclosure of inside information and misuse of information that is relevant but not generally available; the most relevant piece of information – and the easiest search tool – to detect market abuse in the case of debt and equity linked derivatives is the underlying. However, the same is not true for commodity derivatives where the major forms of market abuse are squeezes and corners. Here, regulators responsible for

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ensuring market integrity rely on scrutinising positions held by market users to identify unusual or abusive trading patterns rather than on analysing transaction reports. For OTC commodity derivatives, obliging firms to make transaction reports to the competent authority appears to provide little in the way of regulatory benefit. As with transactions on regulated markets, reports of transactions executed off-exchange provide little useful information unless tackled from the viewpoint of portfolio, or position, exposure and would therefore not provide data that would help identify the main common forms of market abuse. The situation is also more complicated than for on-exchange positions due to the lack of standardisation in contract terms such as derivative type, currency, maturity, size, and the quality/grade of the underlying; on-exchange contracts are standardised in all these, and other, respects. As mentioned above, identifying insider dealing in non-ferrous metals, plastics, or soft commodities is fraught with difficulty and transaction reporting does not help to identify the most common types of market abuse prevalent on the relevant markets. The most apparent unintended consequence of applying insider dealing rules to commodity derivatives is requiring the building of systems and procedures to monitor for abuses and the moral hazard to regulators of receiving information on which they are unable to rely for identifying abuse, at least in the first instance. CESR also supports this position. In its Public Statement CESR/07-627b published on 26 October 2007 on ‘New Arrangements for the Reporting of Derivatives Trades in Accordance with MIFID’, CESR noted that during discussions with the industry about extending transaction reporting to instruments such as commodity derivatives, it emerged that there would be major technical issues and cost implications in adopting the same approach to the reporting framework for non-securities derivatives as for securities and securities-based derivatives. The statement notes that in particular the CESR preference for using the ISIN code in transaction reports to facilitate the exchange of transaction reports among regulators would cause immense difficulties to derivatives markets and the financial industry as a whole where the ISIN code was not already in use. Also, it needs to be taken into acount that, for example, the energy markets (but also other commodity markets) in question are relatively immature: in this still-fragile market stage many market players have come to fear that financial market-style regulation (here: transaction reporting obligations) of commodity and commodity derivatives transactions may erect a further barrier to entry to often illiquid and fragmented markets. This could lead to a severe reduction of liquidity in today liquid markets and prevent it arising in new markets. For all of these reasons, ESME recommends that transaction reporting obligations are not imposed on market participants.

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c. Direct position-reporting obligations on market participants are not appropriate Recommendation of ESME:

In general, ESME Group is of the opinion that direct position-reporting obligations on market participants are not appropriate. However, there is a need for regulators to have appropriate and ready access to such information in order to investigate suspicious market behaviour.

It appears that position reporting is the prime method for detecting those market abuses found typically in commodity derivatives markets. Analysis of transactions tends to be a part of any subsequent investigations. It seems that it would be necessary for regulators to have position information to know whether the purpose of a transaction was to open or close a position. The simplest way to construct position reports seems to require (investment) firms to report all of their own and their clients’ positions in commodities and commodity/exotic derivatives. Examples of regulators using position reports rather than transaction reports are the US Commodity Futures Trading Commission (CFTC) and the London Metal Exchange (LME) – although the specific approach taken differs. Daily position-reporting provisions applying to contract markets are set down in Part 16 of the General Regulations under the U.S. Commodity Exchange Act. Each contract market is obliged to submit to the CFTC a report showing for each clearing member, by proprietary and customer account and by commodity, by futures and by options series, detailed position data. Part 17 contains the position reporting obligations for futures commission merchants, members of contract markets and foreign brokers were the account holds a reportable position. Firms are required to file daily reports with the CFTC showing futures and option positions of traders holding positions above specific reporting levels set by the regulations; if a trader has a position at or above the reporting level in any single futures month or option expiration, firms report the trader’s entire position in all futures and options expiration months in the particular commodity. Firms are required to aggregate positions in a given commodity in all accounts that are under common ownership or control; ownership includes an interest equal to 10% or more. The CFTC considers that the aggregate of all traders’ positions reported represent 70 to 90 percent of the total open interest in any given market. The report, which is published weekly, shows the percents of open interest held by the largest four and eight reportable traders. However, ESME Group rejects such a regulatory approach. The LME collates positions by identified users across its markets for every traded settlement date. The LME will, where there are reasonable grounds, amalgamate positions of different market users if it considers that these might be related. Together with data on deliverable stocks held in its authorised warehouses, this aids the LME in identifying the development or potential development of squeezes and corners in the instruments traded and subsequently informs the regulatory authority of this activity. ESME is of the opinion that transaction reporting for transactions in commodities and commodity/exotic derivatives should not be replaced by an obligatory position

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reporting requirement that is placed directly on market participants to the competent authorities. ESME is of the opinion that it is more appropriate for regulated markets and MTFs to be the frontline supervisors of activity on the markets that they regulate, and that their monitoring of positions should be central to ensuring the integrity of the markets for which they are responsible. For commodity derivatives, replacing the MiFID obligation on firms to make transaction reports to their competent authority, even if these can be made in the case of non-security derivatives via the regulated market of MTF on which the trades took place, are too burdensome for market participants and not efficient (see below).

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7. Role of regulated exchanges and MTFs as “frontli ne regulator” Recommendation of ESME: ESME therefore proposes a role of regulated exchanges and MTFs as “frontline regulator” as follows. The UK Discussion Paper highlighted above states in paragraph 5.17, “Before MiFID, frontline monitoring of the commodity markets in the UK was conducted by the relevant exchanges. The exchanges collate position reports that provide a breakdown by named users of all positions across their markets held by members and their clients. Position reports allow the exchanges to aggregate exposures and calculate the overall interests of each user, irrespective of the number of firms through which they deal.” The mentioned Discussion Paper continues in paragraph in 5.17, “Analysing position reports enables the exchanges to assess overall interests by users and the resulting market impact. Any specific suspicions the exchanges may have of market abuse are referred to FSA for investigation. Position reports are therefore the key tool in the identification of potential market abuse.” ESME suggests a role for regulated exchanges and MTFs as “frontline regulators” to enable them to fulfil their responsibilities pursuant to Art. 37 et seq.73 and Art. 2674 of the MiFID. Requiring transaction and positions reports to be made by market participants directly to competent authorities ‘overwrites’ the regulatory responsibility of a regulated market and MTF to ensure that trading over the market facilities is conducted in an orderly manner and so as to afford proper protection to investors; to ensure that there is a proper market in investments admitted to trading on its markets; and to reduce the extent to which the facilities of the market can be used for a purpose connected with market abuse or financial crime.

73 Art. 43 (1): Member States shall require that regulated markets establish and maintain effective arrangements and procedures for the regular monitoring of the compliance by their members or participants with their rules. Regulated markets shall monitor the transactions undertaken by their members or participants under their systems in order to identify breaches of those rules, disorderly trading conditions or conduct that may involve market abuse. Art. 43 (2): Member States shall require the operators of the regulated markets to report significant breaches of their rules or disorderly trading conditions or conduct that may involve market abuse to the competent authority of the regulated market. Member States shall also require the operator of the regulated market to supply the relevant information without delay to the authority competent for the investigation and prosecution of market abuse on the regulated market and to provide full assistance to the latter in investigating and prosecuting market abuse occurring on or through the systems of the regulated market. 74 Art 26 (1): Member States shall require that investment firms and market operators operating an MTF establish and maintain effective arrangements and procedures, relevant to the MTF, for the regular monitoring of the compliance by its users with its rules. Investment firms and market operators operating an MTF shall monitor the transactions undertaken by their users under their systems in order to identify breaches of those rules, disorderly trading conditions or conduct that may involve market abuse. Art. 26 (2): Member States shall require investment firms and market operators operating an MTF to report significant breaches of its rules or disorderly trading conditions or conduct that may involve market abuse to the competent authority. Member States shall also require investment firms and market operators operating an MTF to supply the relevant information without delay to the authority competent for the investigation and prosecution of market abuse and to provide full assistance to the latter in investigating and prosecuting market abuse occurring on or through its systems.

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Regulated markets - such as the EEX, the LME and MTFs (broker platforms) - that have admitted commodities or/and commodity/exotic derivatives to trading and which have day-to-day oversight of trading and observe closely supply and demand in the underlying physical market (could) use position reports to ensure that they comply with their regulatory obligations. On uncovering possible market abuse, regulated markets consult with their competent authority and agree on the conduct of any investigation, which will include reviewing relevant transactions leading to the build up of suspect positions; however, the reporting of transactions is an ineffective means of identifying potential market abuse in the first instance. Regulated markets and MTFs receive matched trade data of business executed on their markets and can look at open position data to monitor behaviour of market participants and to assist in identifying possible market abuse. For example, as mentioned above, the LME receives position data and stock data to allow it to identify dominant position holders and the build up of possible squeezes and/or corners. It matches transaction data, although not by beneficial holders, to assist it in investigations; members are obliged to provide whatever data the LME requires, including OTC dealings by the members and their clients and any associate of the members and their clients. In the securities markets the same security can be traded on more than one exchange or non-exchange forum. For this reason it makes sense for competent authorities to be the centralised collectors of transaction reports. In the case of a physically-settled commodity derivative exchange, only positions in that exchange’s instruments or holdings of its warehouse stocks can create a squeeze or corner of those warehouse stocks. For this reason it makes sense for the exchange itself to be the centralised collector of position reports. Therefore, ESME suggests to further explore in the wider context of the MAD review the benefits of position surveillance by regulated markets and MTFs as frontline regulators of commodity and exotic/hybrid derivatives traded on their markets in light of their obligations under Articles 26 and 43 of MiFID to monitor for possible abusive trading and to report possible instances to their competent authorities.

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Annex 1: ESME Mandate Subject: Request for ESME advice in the context of exemptions in MiFID, CAD

and proposed regulatory measures in the Third Energ y Package Dear Dr. Horstmann, Thank you for agreeing to lead the work of the European Securities Markets Expert Group Sub-group on commodities. In connection with the Commission’s work on the exemptions for some commodity firms from MiFID and CAD, as well as the relevant draft regulatory measures in the Third Energy Package, I enclose a mandate for advice from ESME on a range of topics. These relate to the functioning of the exemptions, and assessing possible changes pursuant to the Third Energy Package. You will note that we anticipate receiving advice from ESME by the end of June 2008.

Yours sincerely [signed] David WRIGHT

Contact: Hannes Huhtaniemi, Unit G-3, +32 2 29 54556

([email protected])

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Mandate to ESME for advice Review under Articles 65(3)(a), (b) and (d) of MiFI D and 48(2) of CAD and proposed guidelines to be adopted under the Third Energy Pac kage This mandate requests advice from ESME on certain issues concerning revision of the provisions of Directive 2004/39/EC (MiFID) and Directive 2006/49/EC (CAD) concerning the regulatory treatment of firms that provide investment services in relation to commodity and exotic derivatives. This mandate is given in order to ensure that the Commission has adequate technical background to be able to complete its report under Article 65(3)(a), (b) and (d) of Directive 2004/39/EC and Article 48(2) of Directive 2006/49/EC (the Report). This mandate also requests advice from ESME on issues concerning record keeping and transparency of transactions in electricity and gas supply contracts and derivatives in order to ensure that the Commission has adequate technical background to be able to adopt the guidelines under Articles 22f/24f and Recitals 20 and 22 in the two proposals for Directives amending Directive 2003/54/EC and Directive 2003/55/EC (The Third Energy Package).75 This mandate does not prejudice in any way the ongoing negotiations on any article in the Council and the European Parliament in the context of the co-decision procedure. Advice is also sought on a possible clarification of the scope of the Market Abuse Directive in relation to trading in commodities and commodity derivatives. The present mandate takes into full consideration the agreement on implementing the Lamfalussy recommendations reached with the European Parliament on 5 February 2002. In this agreement, the Commission committed itself to a number of important points, including full transparency. For this reason, this request for technical advice will be published on DG Internal Market’s web site and the European Parliament duly informed. Background and legal framework The European Commission is to report to the European Parliament and the Council on the following: Article 65(3) of MiFID relevantly requires the Commission to report on: (a) the continued appropriateness of the exemption provided for in Article 2(1)(k) for

undertakings whose main business is dealing on own account in commodity derivatives;

(b) the content and form of proportionate requirements for the authorisation and

supervision of such undertakings as investment firms within the meaning of this Directive; …

(d) the continued appropriateness of the exemption provided for in Article 2(1)(i). Article 48 of CAD relevantly states:

75 http://ec.europa.eu/energy/electricity/package_2007/index_en.htm

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2. As part of the review required by Article 65(3) of Directive 2004/39/EC, the

Commission shall, on the basis of public consultations and in the light of discussions with the competent authorities, report to the Parliament and the Council on: (a) an appropriate regime for the prudential supervision of investment firms whose

main business consists exclusively of the provision of investment services or activities in relation to the commodity derivatives or derivatives contracts set out in points 5, 6, 7, 9 and 10 of Section C of Annex I to Directive 2004/39/EC; and

(b) the desirability of amending Directive 2004/39/EC to create a further category of

investment firm whose main business consists exclusively of the provision of investment services or activities in relation to the financial instruments set out in points 5, 6, 7, 9 and 10 of Section C of Annex I to Directive 2004/39/EC relating to energy supplies (including electricity, coal, gas and oil).

3. On the basis of the report referred to in paragraph 2, the Commission may submit

proposals for amendments to this Directive and to Directive 2006/48/EC and 2006/49/EC. The purpose of this mandate is to seek technical advice in order to provide foundations for the Commission’s work on the Report. The Commission intends to publish its report in late 2008. Separately, the European Commission is to adopt guidelines pursuant to the following: Article 22f of the Proposal for a Directive of the European Parliament and of the Council amending Directive 2003/54/EC concerning common rules for the internal market in electricity relevantly states: Article 22f Record keeping 1. Member States shall require supply undertakings to keep at the disposal of the

national regulatory authority, the national competition authority and the Commission, for at least five years, the relevant data relating to all transactions in electricity supply contracts and electricity derivatives with wholesale customers and transmission system operators.

2. The data shall include details on the characteristics of the relevant transactions

such as duration, delivery and settlement rules, the quantity, the dates and times of execution and the transaction prices and means of identifying the wholesale customer concerned, as well as specified details of all unsettled electricity supply contracts and electricity derivatives.

3. The regulatory authority may decide to make available to market participants

elements of this information, provided that commercially-sensitive information on individual market players or individual transactions is not released. This paragraph shall not apply to information about financial instruments which fall within the scope of Directive 2004/39/EC.

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4. To ensure the uniform application of this Article, the Commission may adopt

guidelines which define the methods and arrangements for record keeping as well as the form and content of the data that shall be kept. These measures, designed to amend non-essential elements of this Directive by supplementing it, shall be adopted in accordance with the regulatory procedure with scrutiny referred to in Article 27b(3).

5. With respect to transactions in electricity derivatives of supply undertakings with

wholesale customers and transmission system operators, this Article shall only apply once the Commission has adopted the guidelines referred to in paragraph 4.

6. The provisions of this Article shall not create additional obligations vis-à-vis the

authorities mentioned in paragraph 1 for entities falling within the scope of Directive 2004/39/EC.

7. In case the authorities mentioned in paragraph 1 need access to data kept by

entities falling within the scope of Directive 2004/39/EC, the authorities responsible under that Directive shall provide the authorities mentioned in paragraph 1 with the required data.

Recital 20 states: 20. Prior to adoption by the Commission of guidelines defining further the record-

keeping requirements, the Agency for the Cooperation of Energy Regulators and the Committee of European Securities Regulators (CESR) should cooperate to investigate and advise the Commission on the content of the guidelines. The Agency and the Committee should also cooperate to further investigate and advise on the question whether transactions in electricity supply contracts and electricity derivatives should be subject to pre- and/or post-trade transparency requirements and if so what the content of those requirements should be.

The same provisions apply mutatis mutandis in Article 24f and Recital 22 in the proposal to amend Directive 2003/55/EC for gas. Finally, the mandate asks ESME for their views on possible clarifications to the scope of the Market Abuse Directive in the context of the review of that directive by the Commission to be completed in early 2009.

Consultation and sources of advice

The Commission is to act ‘on the basis of public consultation and in the light of discussions with competent authorities’. The Commission’s White Paper on Financial Services Policy 2005-2010 set out our commitment to open and transparent consultation:76 Open consultations (including with stakeholder groups) will continue to play a central role and will be required before any legislation is deemed necessary. The Commission will

76 Op. cit. at paragraph 2.1.

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continue to publish responses received to its consultations, practical summaries and feedback statements. In fulfilment of this commitment, we published a Call for Evidence on 8 December 2006, which was open until 30 April 2007. A statement summarising the feedback, published on 14 August 2007, is available on our website. 77 Separate mandates for initial advice/assistance were issued on 13 March 2007 to the Committee of European Securities Regulators (CESR) and on 16 August 2006 to the Committee of European Banking Supervisors (CEBS), both in two parts. Both sets of initial advice/assistance have now been received and studied by the Commission. A subsequent joint mandate to CESR and CEBS is issued in parallel to this mandate to ESME. ESME should familiarise itself with that mandate. ESME is asked to consider the views expressed in the public consultation and the conclusions reached in the feedback statement, as well as the advice/assistance provided by CESR and CEBS. As regards the Third Energy Package, the Commission will issue a provisional mandate for advice to CESR and ERGEG, the European Regulators' Group on Electricity and Gas, in order to adopt guidelines, by mid-2008, on possible record-keeping and transparency obligations in electricity and gas supply contracts and derivatives. ESME is asked to familiarise itself with this mandate as well, once it is published. The principles to which ESME should have regard

As regards its working approach, ESME is invited to take account of following principles: • The principles set out in the Decision 3 establishing ESME; in particular the

stipulation that ESME members serve in their personal capacities; • ESME should provide comprehensive advice on the matters described below; • ESME should address to the Commission any questions which arise in the course of

its work. Questions in relation to which technical advice is sought

Please consult Annex I for a list of questions in relation to which advice is sought. Due date

The advice from ESME is sought by the end of June 2008 .

77 http://ec.europa.eu/internal_market/securities/docs/isd/derivatives_en.pdf

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Annex I Fact-finding 1. Who are the main participants, in terms of turnover, in trading commodities and their derivatives in the EU and what are their characteristics? Consider energy and non-energy commodities, including base and precious metals and softs. Identifying by name or by type the most significant traders in each market or market segment would be helpful. 2. Does ESME have any observations to make on how the exemptions in the CAD and MiFID for certain firms providing investment services relating to commodity derivatives and exotic derivatives are working in practice? What difficulties arise from differing interpretations? And what are some of the challenges or issues for market participants or market quality arising from the existing regulatory framework? These might arise from market distortions, regulatory arbitrage or other significant sub-optimalities in market functioning. Assessment 3. What options does ESME consider most salient in addressing any challenges or issues identified above? Examples of options ESME might consider include: a) Issuing clarifying guidance as to the meaning of the various exemptions, and if so,



c) Outlining some elements of a specialist regime for commodity firms with regard to MiFID and CAD regulation;

d) Removing some or all of the exemptions entirely? e) Any other options (e.g. making the exemptions optional for firms or mandatory for

Member States)? 4. ESME should identify the issues that would need to be addressed in assessing likely impacts on market participants and market quality of the most salient options. Record keeping 5. What would the practical implication be, for firms active both in the physical supply of electricity and gas contracts and in commodity derivatives, of having to maintain two different formats of records of transactions for the relevant regulators? Would a single report based on the format in Table 1 of Annex I of Regulation EC 1287/2006 be appropriate and sufficient?

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Transparency 6. The Commission has identified a number of market failures in its Sector Inquiry on energy and the subsequent study of the electricity wholesale markets78. In light of these findings, please consider: a) whether, greater pre- and post-trade transparency for electricity and gas supply

contracts (physical and spot trading) and derivatives would contribute to a more efficient wholesale price formation process and efficient and secure electricity and gas markets;

b) whether such transparency arrangements could be expected to mitigate the concerns

identified in the Sector Inquiry above; c) whether uniform EU-wide pre- and post-trade transparency could have other benefits; d) whether additional transparency in trading could have negative effects on these

markets, for example could liquidity in these markets be expected to decrease? Is there a risk that trading could shift to third countries to escape regulation? If so, how could such risks be mitigated (delayed reporting, aggregated reporting, etc.).

Market abuse 7. Does Directive 2003/6/EC on insider dealing and market manipulation (market abuse) properly address market integrity issues in the electricity, gas and other commodity markets? If not, what suggestions would ESME have to mitigate any shortcomings?

78 http://ec.europa.eu/comm/competition/sectors/energy/inquiry/index.html

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Annex 2: Members of ESME Sebastián Albella Amigo - Linklaters

Chris Bates - Clifford Chance*

Mats Beckman - Lindahl

Margaret Chamberlain - Travers Smith

Carmine DiNoia - Assonime

Philippa Dodd - Royal Dutch Shell*

Gianluca Garbi – Dresdner Kleinwort

Wolfgang Gerhardt - Bank Sal. Oppenheim jr. & Cie.*

John Holland - UBS Investment Bank***

Karl-Peter Horstmann - RWE Trading**

Henny Kapteijn – Delta Lloyd

David Meagher

Roger Müller - Deutsche Börse

Bertrand Patillet - Crédit Agricole Cheuvreux

Els Ponnet - Fortis Bank

Andrew Procter - Deutsche Bank

Xavier Rolet - Lehman Brothers International Europe

María Gracia Rubio de Casas - Baker & McKenzie

Florence Sirel - BNP Paribas***

Tomasz Stachurski - ING Bank Slaski

*Participants in ESME sub group on the Mandate

**Raporteur of the ESME sub group on the Mandate

***Abstained from the conclusions of this Report

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Annex 3: Observers of ESME The following observers have actively participated in the work of the ESME sub-group on the Mandate, whereby their participation has been agreed with the EU Commission and with the ESME sub group on the Mandate: Juan José Alba Ríos, Endesa Cemil Altin, EDF Trading Matthias Bock, Goldman Sachs Simon Coombs, Marc Cornelius, Bernadette Willis, BP plc Neil McGeown, The London Metal Exchange (LME) Erwin Krapf, Gerd Stuhlmacher, E.ON Energy Trading AG Bertrand Meyer, BNP Paribas Francois-Xavier Olivieri, Pierre Ostrovsky, Gaselys Simon Smith, Shell International Trading and Shipping Company Limited Carola Reichold, Thomas Pieper, RWE Trading&Supply GmbH

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Annex 4:

Table 1 List of fields for reporting purposes

Field Identifier Description 1. Reporting firm identification A unique code to identify the firm which executed

the transaction 2. Trading day The trading day on which the transaction was

executed 3. Trading time The time at which the transaction was executed,

reported in the local time of the competent authority to which the transaction will be reported, and the basis in which the transaction is reported expressed as Coordinated Universal Time (UTC)+/- hours.

4. Buy/sell indicator Identifies whether the transaction was a buy or sell from the perspective of the reporting investment firm or, in the case of a report to a client, of the client.

5. Trading capacity Identifies whether the firm executed the transaction: (a) on its own account (either on its own

behalf or on behalf of a client), (b) for the account, and on behalf, of a client.

6. Instrument identification This shall consist of: (a) a unique code, to be decided by the

competent authority (if any) to which the report is made identifying the financial instrument which is the subject of the transaction,

(b) if the financial instrument in question does not have a unique identification code, the report must include the name of the instrument or, in the case of a derivative contract, the characteristics of the contract.

7. Instrument code type The code type used to report the instrument. 8. Underlying instrument

identification The instrument identification applicable to the security that is the underlying asset in a derivative contract as well as the transferable security falling within Article 4(1)(18)(c) of Directive 2004/39/EC.

9. Underlying instrument identification code type

The code type used to report the underlying instrument.

10. Instrument type The harmonised classification of the financial instrument that is the subject of the transaction. The description must at least indicate whether the instrument belongs to one of the top-level categories as provided by a uniform internationally-accepted standard for financial instrument classification.

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11. Maturity date The maturity date of a bond or other form of securitised debt, or the exercise date/maturity date of a derivative contract.

12. Derivative type The harmonised description of the derivative type should be done according to one of the top-level categories as provided by a uniform internationally-accepted standard for financial instrument classification.

13. Put/call Specification whether an option or any other financial instrument is a put or a call.

14. Strike price The strike price of an option or other financial instrument.

15. Price multiplier The number of units of the financial instrument in question which are contained in a trading lot; for example, the number of derivatives or securities represented by one contract.

16. Unit price The price per security or derivative contract excluding commission and (where relevant) accrued interest. In the case of a debt instrument, the price may be expressed either in terms of currency or as a percentage.

17. Price notation The currency in which the price is expressed. If, in the case of a bond or other form of securitised debt, the price is expressed as a percentage, that percentage shall be included.

18. Quantity The number of units of the financial instruments, the nominal value of bonds, or the number of derivative contracts included in the transaction.

19. Quantity notation An indication as to whether the quantity is the number of units of financial instruments, the nominal value of bonds or the number of derivative contracts.

20. Counterparty Identification of the counterparty to the transaction. That identification shall consist of: (a) where the counterparty is an investment

firm, a unique code for that firm, to be determined by the competent authority (if any) to which the report is made,

(b) where the counterparty is a regulated market or MTF or an entity acting as its central counterparty, the unique harmonised identification code for that market, MTF or entity acting as central counterparty, as specified in the list published by the competent authority of the home Member State of that entity in accordance with Article 13(2),

(c) where the counterparty is not an investment firm, a regulated market, an MTF or an entity acting as central counterparty, it should be identified as

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‘customer/client’ of the investment firm which executed the transaction.

21. Venue identification Identification of the venue where the transaction was executed. That identification shall consist in: (a) where the venue is a trading venue: its

unique harmonised identification code, (b) otherwise: the code ‘OTC’.

22. Transaction reference number

A unique identification number for the transaction provided by the investment firm or a third party reporting on its behalf.

23. Cancellation flag An indication as to whether the transaction was cancelled.

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Annex 5 “Transparency regulations for the electrici ty and gas sectors” I. Introduction The following overview lists the main transparency regulations for the electricity (cf. II.) and gas (cf. III.) sectors. Each section starts with a list of European regulations, followed by the national standards applicable in the Federal Republic of Germany. The section concerning the electricity sector ends with a list of voluntary rules. II. Transparency regulations in the electricity sec tor 1. European regulations a) Current European regulations (aa) Regulation (EC) No 1228/2003 of 26 June 2003 o n conditions for access to

the network for cross-border exchanges in electrici ty • Art. 5 of the Regulation: "Provision of information on interconnection capacities" • Addressees: transmission system operators

(bb) Guidelines on the management and allocation of available transfer capacity

of interconnections between national systems • Commission Decision of 9 November 2006 amending the Annex to Regulation

(EC) No 1228/2003 on conditions for access to the network for cross-border exchanges in electricity (2006/770/EC)

• Article 5 of the Guidelines: "Transparency" • Addressees: transmission system operators

b) Third liberalisation package (aa) Proposal for a regulation of the EP and the Co uncil amending Regulation

(EC) No 1228/2003 on conditions for access to the n etwork for cross-border exchanges in electricity (version: 23 June 2008)

• Article 2c of the Regulation: “Tasks of the European Network of Transmission System Operators for Electricity” o Article 2c (1): “The European Network of Transmission System Operators for

Electricity shall elaborate network codes in the areas mentioned in paragraph 3 upon an invitation addressed to it by the Commission in accordance with Article 2ba(6);”

o Article 2c (3): “The network codes shall cover the following areas, taking into account, if appropriate, regional specificities: h) transparency rules;”

• Article 5 of the Regulation: “Provision of Information []” o Article 5 (4): “Transmission system operators shall publish relevant data on

aggregated forecast and actual demand, on availability and actual use of generation and load assets [.] on availability and use of the networks and interconnections, and on balancing power and reserve capacity. For

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availability and actual use of small generation and load units, aggregated estimate data may be used.”

o Article 5 (5): “The market participants concerned shall provide the transmission system operators with the relevant data.”

o Article 5 (6): “Generation companies which own or operate generation assets, of which one generation asset has an installed capacity of at least 250 MW, shall keep at the disposal of the national regulatory authority, the national competition authority and the Commission, for five years all hourly data per plant that is necessary to verify all operational dispatching decisions and the bidding behaviour at power exchanges, interconnection auctions, reserve markets and OTC markets.” (sent. 2: content of the data)

• Article 8 of the Regulation: “Guidelines”

Article 8 (3): “Where appropriate, guidelines providing the minimum degree of harmonisation required to achieve the aim of this Regulation shall also specify: a) details on provision of information, in accordance with the principles set out in Article 5;“

(bb) Proposal for a directive of the EP and the Cou ncil amending Directive

2003/54/EC concerning common rules for the internal market in electricity and repealing Directive 96/92/EC (version: 23 June 2008)

• Article 22f (1) – (7) of the Directive: “Record keeping” o Article 22f (1): “Member States shall require supply undertakings to keep at

the disposal of the national authorities including the national regulatory authority, the national competition authority and the Commission, for the fulfilment of their tasks, for at least five years, the relevant data relating to all transactions in electricity supply contracts and electricity derivatives with wholesale customers and transmission system operators.“

o Article 22 f (2): Description of the required data o Article 22f (3): “The regulatory authority may decide to make available to

market participants elements of this information provided that commercially-sensitive information on individual market players or individual transactions is not released. This paragraph shall not apply to information about financial instruments which fall within the scope of Directive 2004/39/EC.“

o Article 22 f (4): The Commission may adopt guidelines concerning the methods and arrangements for record keeping

o Article 22 f (5): “With respect to transactions in electricity derivatives of supply undertakings with wholesale customers and transmission system operators, this Article shall only apply once the Commission has adopted the guidelines referred to in paragraph 4“.

o Article 22f (6) and (7): provisions concerning entities falling within the scope of Directive 2004/39/EC.

• Annex A of the Directive: “Measures on consumer protection“

“Without prejudice to Community rules on consumer protection, in particular Directives 97/7/EC of the European Parliament and of the Council and Council Directive 93/13/EC, the measures referred to in Article 3 are to ensure that customers: (h) have at their disposal their consumption data, and shall be able to, by explicit

agreement and free of charge, give any undertaking with a supply license access to its metering data. The party responsible for data management is

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obliged to give these data to the undertaking. Member States shall define a format for the data and a procedure for suppliers and consumers to have access to the data. No additional costs can be charged to the consumer for this service.

(i) shall be properly informed [] of actual electricity consumption and costs frequently enough to enable them to regulate their own electricity consumption. The information shall be given by using a sufficient time frame, which takes account of the capability of customers’ metering equipment and the electricity product in question. Due account shall be taken of the cost-efficiency of such measures. No additional costs can be charged to the consumer for this service.“

c) Transparency reports under the Electricity Regio nal Initiative

• Point 3 of the Congestion Management Guidelines provides for a breakdown of the European Union into seven regions

• On this basis, three Regional Initiatives have each published a "Report of Transparency“: o The Regional Initiative Northern Europe (Denmark, Sweden, Finland,

Germany and Poland) chaired by the Federal Network Agency on 13 September 2007

o The Regional Initiative Central Western Europe (Belgium, France, Germany, Luxembourg, Netherlands) on 23 November 2007

o The Regional Initiative Central Eastern Europe (Austria, Czech Republic, Germany, Hungary, Poland, Slovakia and Slovenia) on 8 February 2008

• The requirements have no binding effect; however, the Federal Network Agency assumes that the requirements will be implemented without formal agreement.

2. National regulations in the Federal Republic of Germany a) Formal acts (aa) Act on the Supply of Electricity and Gas (Ener gy Industry Act /

Energiewirtschaftsgesetz - EnWG) of 7 July 2005, last amended by Article 2 of the Act dated 18 December 2007

• Information and publication duties of electricity supply grid operators o Addressees: transmission system operators and/or distribution system

operators o Legal provisions: Section 8 (5), section 12 (3a) and (4), section 13 (2), (6) and

(7), section 14 (1), section 18 (1), section 19 (1), section 20 (1) sent. 1, section 23 sent. 2, section 35 (1), section 36 (2) sent. 2, section 52 of the Energy Industry Act

o The "guidelines for internet publication duties of electricity network operators" of the Federal Network Agency dated 22 January 2008 give further details

• Information and publication duties of electricity generators

o Addressees: generating plant operators o Legal provisions: section 12 (4), section 49 (6) of the Energy Industry Act

• Information and publication duties of electricity supply companies

o Addressees: electricity supply companies

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o Legal provisions: section 12 (4), section 35 (1), section 36 (1), section 42 of the Energy Industry Act

(bb) Act on the Peaceful Utilisation of Atomic Ener gy and Protection against its

Hazards (Atomic Energy Act / Atomgesetz) of 23 December 1959, last amended by Article 4 of the Act dated 26 February 2008

• Addressees: nuclear power plant operators • Legal provision: section 7 (1c) of the Atomic Energy Act

b) Statutory regulations (aa) Ordinance on Access to Electricity Supply Grid s (Electricity Grid Access

Ordinance / Stromnetzzugangsverordnung – StromNZV) of 25 July 2005, amended by Article 3 (1) of the Ordinance dated 1 November 2006

• The "guidelines for internet publication duties of electricity network operators" of the Federal Network Agency dated 22 January 2008 give further details o Addressees: transmission system operators and/or distribution system

operators o Legal provisions: section 5 (3), section 9 (1) and (2), section 12 (3) sent. 3,

section 13 (3) sent. 3 – 5, section 15 (4), sent. 1 and 2, section 15 (5), section 17 (1) nos. 1-8, section 17 (2) nos. 1-7 of the Electricity Grid Access Ordinance

(bb) Ordinance on Charges for Access to Electricity Supply Grids (Electricity

Grid Access Charges Ordinance / Stromnetzentgeltver ordnung – StromNEV) of 25 July 2005, last amended by Article 3a of the Act dated 8 April 2008

• Information and publication duties of electricity supply grid operators o Addressees: transmission system operators and/or distribution system

operators o Legal provisions: section 10 (2), section 21, section 24 (4), section 27 (1),

section 27 (2) nos. 1-7 of the Grid Access Charges Ordinance o The "guidelines for internet publication duties of electricity network operators"

of the Federal Network Agency dated 22 January 2008 give further details (cc) Ordinance on General Conditions for Network Co nnection and its Use for

Low-Voltage Electricity Supply (Low-Voltage Connect ion Ordinance / (Niederspan-nungsanschlussverordnung – NAV) of 1 November 2006

• The "guidelines for internet publication duties of electricity network operators" of the Federal Network Agency dated 22 January 2008 give further details o Addressees: distribution system operators o Legal provisions: section 4 (2) sent. 2, section 4 (3) sent. 2, section 25 (2)

sent. 2, section 29 (1) of the Low-Voltage Connection Ordinance (dd) Ordinance on General Conditions for the Basic Electricity Supply of

Domestic Customers and Replacement Electricity Supp ly from the Low-Voltage Grid (Basic Electricity Supply Ordinance / Stromgrundversorgungsverordnung – StromGVV) of 26 October 2006

• Addressees: electricity supply companies (basic suppliers) • Legal provisions: section 2 (4), section 5 (2)

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(ee) Ordinance on Network Connection of Electricity Generating Plant (Power Plant Network Connection Ordinance / Kraftwerks-Netzanschlussverordnung –KraftNAV) of 26 June 2007

• The "guidelines for internet publication duties of electricity network operators" of the Federal Network Agency dated 22 January 2008 give further details o Addressees: transmission system operators, Distribution system operators o Legal provision: section 3 (1) of the Power Plant Network Connection

Ordinance 3. Voluntary agreements

• Since April 2006, several electricity generators have voluntarily provided their generating data on the homepage of the European Energy Exchange (www.eex.com) in the category "Power plant data". Moreover, since May 2007, "standard reports" have informed about possible problems in providing power plant data. An interactive map shows the installed capacity of individual power plants. Since November 2007, the following participant-based electricity-trading information has been provided on the website of the EEX: active spot and futures market participants; number of buyers/sellers and net buyers/sellers on the spot market; average share of sales of the five top-selling participants; buying and selling on the spot and futures market (per participant); share of market makers in the overall sales on the futures market.

4. No publication duties

• Large-scale consumers are neither addressed by European nor national energy law provisions. At the present time, large-scale consumers are therefore not subject to any information or publication duties under energy law.

III. Transparency regulations in the gas sector 1. European regulations a) Current European regulations

• Regulation (EC) No 1775/2005 of 28 September 2005 o n conditions for access to the natural gas transmission networks

• Article 6 of the Regulation: "transparency requirements" • Addressees: transmission system operators

b) Third Liberalisation Package (aa) Proposal for a regulation of the EP and the Co uncil amending Regulation

(EC) No 1775/2005 on conditions for access to the n atural gas transmission networks (version: 23 June 2008)

• Article 2c of the Regulation: “Tasks of the European Network of Transmission System Operators for Gas” o Article 2c (1): “The European Network of Transmission System Operators for

Gas shall elaborate network codes in the areas mentioned in paragraph 3 upon an invitation addressed to it by the Commission in accordance with Article 2ba(6);

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o Article 2c (3): “The network codes shall cover the following areas, taking into account, if appropriate, regional specificities: h) transparency rules;”

• Article 4a of the Regulation: “Third Party Access services concerning storage

and LNG facilities” Article 4a (1): “LNG and storage system operators shall: (c) make relevant information public, in particular data on the use and availability of services, in a time frame compatible with the storage and LNG facility users' reasonable commercial needs.”

• Article 6 of the Regulation: “transparency requirements concerning transmission

operators” Article 6 (7): “Transmission system operators shall make public ex-ante and ex-post supply and demand information, based on nominations, forecasts and realised flows in and out of the system. The level of detail of the information that is made public shall reflect the information available to the transmission system operator. Transmission system operators shall make public measures taken as well as costs incurred and revenues generated to balance the system. The market participants concerned shall provide the transmission system operators with the data referred to in this Article.”

• Article 6a (1) – (4) of the Regulation: “transparency requirements concerning

storage facilities and LNG facilities” o Article 6a (1): “LNG and storage system operators shall make public detailed

information regarding the services they offer and the relevant conditions applied, together with the technical information necessary for LNG and storage facility users to gain effective access to the LNG and storage facilities.”

o Article 6a (2): “For the services provided, each LNG and storage system operator shall make public information on contracted and available storage and LNG facility capacities on a numerical basis on a regular and rolling basis in a user-friendly standardised manner.”

o Article 6a (3): “LNG and storage system operators shall always disclose the information required by this Regulation in a meaningful, quantifiably clear and easily accessible way and on a non-discriminatory basis.”

o Article 6a (4): “All LNG and storage system operators shall make public¹ the amount of gas in each storage or LNG facility, inflows and outflows, and the available storage and LNG facility capacities, including for those facilities exempted from third party access. The information shall also be communicated to the transmission system operator who shall make it public on an aggregated level per system or subsystem defined by the relevant points. The information shall be updated at least every day. ¹A recital was able to clarify that ‘Confidentiality requirements for commercially sensitive information are particularly important where data of a strategic nature are concerned or where there is only one single user for a storage facility’. ”

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(bb) Proposal for a directive of the EP and the Cou ncil amending Directive 2003/55/EC concerning common rules for the internal market in natural gas and repealing Directive 98/30/EC (version: 23 June 2008)

• Article 24f (1) – (7) of the Directive: “Record keeping” o Article 24 f (1): „Member States shall require supply undertakings to keep at

the disposal of the national authorities including the national regulatory authority, the national competition authority and the Commission, for the fulfilment of their tasks, for at least five years, the relevant data relating to all transactions in gas supply contracts and gas derivatives with wholesale customers and transmission system operators as well as storage and LNG operators.“

o Article 24f (2): Description of the required data o Article 24f (3): “The regulatory authority may decide to make available to

market participants elements of this information provided that commercially sensitive information on individual market players or individual transactions is not released.¹ This paragraph shall not apply to information about financial instruments which fall within the scope of Directive 2004/39/EC. ¹ A recital was able to clarify that ‘Confidentiality requirements for commercially sensitive information are particularly important where data of a strategic nature are concerned or where there is only one single user for a storage facility.’ “

o Article 24f (4): The Commission may adopt guidelines concerning the methods and arrangements for record keeping

o Article 24f (5): “With respect to transactions in gas derivatives of supply undertakings with wholesale customers and transmission system operators as well as storage and LNG operators, this Article shall only apply once the Commission has adopted the guidelines referred to in paragraph 4.”

o Article 24f (6) and (7): provisions concerning entities falling within the scope of Directive 2004/39/EC.

• Annex A of the Directive: “Measures on consumer protection”

“Without prejudice to Community rules on consumer protection, in particular Directives 97/7/EC of the European Parliament and of the Council and Council Directive 93/13/EC, the measures referred to in Article 3 are to ensure that customers: (h) have at their disposal their consumption data, and shall be able to, by

explicit agreement and free of charge, give any undertaking with a supply license access to its metering data. The party responsible for data management is obliged to give these data to the undertaking. Member States shall define a format for the data and a procedure for suppliers and consumers to have access to the data. No additional costs can be charged to the consumer for this service.

(i) shall be properly informed [] of actual gas consumption and costs frequently enough to enable them to regulate their own gas consumption. The information shall be given by using a sufficient time frame, which takes account of the capability of customers’ metering equipment. Due account shall be taken of the cost-efficiency of such measures. No additional costs can be charged to the consumer for this service.”

2. National regulations in the Federal Republic of Germany

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a) Formal acts

• Act on the Supply of Electricity and Gas (Energy In dustry Act / Energiewirtschaftsgesetz - EnWG) of 7 July 2005, last amended by Article 2 of the Act dated 18 December 2007

• Information and publication duties of gas supply grid operators o Addressees: transmission system operators and/or distribution system

operators and/or operators of storage or LNG plants o Legal provisions: section 8 (5), section 15 (2), section 16 (2), (4) and (5),

section 16a, section 18 (1), section 19 (2), section 20 (1) sent. 1, section 23 sent. 2, section 28 (3), section 35 (1), section 36 (1), section 52

• Information and publication duties of gas supply companies

o Addressees: gas supply companies o Legal provisions: section 35 (1), section 36 (1) of the Energy Industry Act

b) Statutory regulations (aa) Ordinance on Access to Gas Supply Grids (Gas G rid Access Ordinance /

(Gasnetzzugangsverordnung – GasNZV) of 25 July 2007, last amended by Article 1 of the Act dated 8 April 2008

• Addressees: gas supply grid operators • Legal provisions: section 10 (1) sent. 2, section 10 (6) sent. 5, section 14 (1),

section 15 (1), section 20 (1) nos. 1 – 9, (2) and (3), section 21 (1), (2) nos. 1 – 12, section 22 (1), (2) and (3), section 33

(bb) Ordinance on Charges for Access to Gas Supply Grids (Gas Grid Access

Charges Ordinance / Gasnetzentgeltverordnung – GasN EV) of 25 July 2005, last amended by Article 2 of the Act dated 8 April 2008

• Addressees: transmission system operators, distribution system operators • Legal provisions: section 17, section 23 (4), section 27 (1), section 27 (2) nos. 1 -

5 (cc) Ordinance on General Conditions for Network Co nnection and its Use for

Low-Pressure Gas Supply (Low-Pressure Connection Or dinance / Niederdruckanschlussverordnung – NDAV) of 1 November 2006

• Addressees: distribution system operators • Legal provisions: section 4 (2) sent. 2, section 4 (3) sent. 2, section 25 (2) sent.

2, section 29 (1) (dd) Ordinance on General Conditions for the Basic Gas Supply of Domestic

Customers and Replacement Gas Supply from the Low-P ressure Grid (Basic Gas Supply Ordinance / Gasgrundversorgungsve rordnung – GasGVV) of 26 October 2006

• Addressees: gas supply companies (basic suppliers) • Legal provisions: section 2 (4), section 5 (2)

***

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Annex 6: Glossary BCD Recast Banking Consolidation Directive (2006/48/EC) CAD Recast Capital Adequacy Directive (2006/49/EC) CRD Capital Requirements Directive recasting the BCD and CAD ISD Investment Services Directive (93/22/EEC) MiFID Markets in Financial Instruments Directive (2004/39/EC) MiFID implementing directive

Commission directive implementing MiFID (2006/73/EC)

MiFID implementing regulation

Commission regulation implementing MiFID (No. 1287/2006)

MTF Multilateral trading facility OTC Over-the-counter SPV Special purpose vehicle

ESME Commodity_derivatives_EU_june 2008 GOOOOD Inc p41

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