Regulatory requirements and required changes for organisation and processes

Transcription

1 Regulatory requirements and required changes for organisation and processes REMIT Regulatory Compliance Workshop Amsterdam, Volker Lischke, Leiter Handel BKW Energie AG

2 Regulatory requirements and required changes for organisation and processes Content Political framework: Status on bilateral agreement EU/Switzerland Effects of REMIT for companies based in Switzerland Interactions of different EU-regulations regarding energy trading Case study: usage of ancillary exemption under MiFID 2 What if? Impact of banking regulation example CRR / CRD IV

3 Regulatory requirements and required changes for organisation and processes Content Political framework: Status on bilateral agreement EU/Switzerland Effects of REMIT for companies based in Switzerland Interactions of different EU-regulations regarding energy trading Case study: usage of ancillary exemption under MiFID 2 What if? Impact of banking regulation example CRR / CRD IV

4 Political framework: Historical development of energy/power treaty CH-EU Negotiation mandate CH/ EU 1st negotiation round 2nd negotiation round 3rd negotiation round Extended mandate from Bundesrat (BR) BR makes suggestions for instituational topics Ongoing technical discussions, e.g. regarding long-term supply contracts EU provides reaction to BR suggestions Referendum on mass immigration initiative Suggestion for "transition treaty" Failure of "minitreaty" Negotiations are running for more than ten years: Subject of negotiations has been expanded several times (2nd/3rd single market package, Renewable Energy (RES-) Directive; REMIT; EU-ETS; Competition Law; State Aid Rules;...). Energy-/Power dossier was politically linked with so-called "institutional topcis" (international courts; responsible supervisory institutions; acquis communautaire) and with the crucial question of the Free Movement of Persons. Seite 4

5 Reflections in the Swiss press NZZ am Sonntag, Seite 5 Tagesanzeiger Online,

6 Objectives of Swiss stakeholders affecting the energy/power treaty with EU Affirming security of supply Growing import needs following phase-out of nuclear energy ð Bundesrat Complete market opening Intensified competition; realised market opening ð Bundesrat ð swisselectric ð Avenir Suisse Clear targets for expansion of renewable energy Subsidies for investiment in "new" renewable energy sources ð Environmental organisations ð Industry ð Cantons Access to internal market of the EU Participation in Market Coupling; Usage of pump storage resources ð swisselectric ð VSE Equality with EU national authorities Participation in supranationale bodies (ENTSO-E; ACER ) ð Swissgrid ð ElCom Continuation of long-term supply contracts FR-CH Affimation / compensation for import rights and contribution to security of supply ð swisselectric ð Canton-owned suppliers Objectives of Swiss stakeholders concerning further progress on energy/power treaty are heterogeneous. Seite 6

7 Elements of the energy/power treaty with EU Network Codes Rule adoption of the 3 rd EU-single market-package, EU market access free from discrimination Subsidies Adoption of EU-subsidies-law Network Codes Subsidies Unbundling Adoption of EU-regulations concerning the unbundling of monopoly- and market ranges (grid and production/trading/distribution) Market Coupling Implicit management of cross-border capacities at Swiss borders Unbundling Market Coupling ENTSO-E ACER ENTSO-E / ACER HKN Access and intervention rights for Swissgrid and ElCom to ENTSO-E respectively ACER Approval of CH-proofs of origin (particularly large hydro) in the EU HKN REMIT EU-ETS Environmental legislation REMIT EU-ETS Environmental law Adoption of REMIT in Swiss legislation (reporting also for contracts with Swizerland as place of delivery) Access of Switzerland to the EU emission trading system Equivalence of the environmental legislation LTC REStargets Market opening Long-Term Contracts Dissolution of the physical purchase rights concerning nuclear power plant participations in France RES-targets Development of targets for renewable energy (" ") Liberalisation Complete market opening for end consumers in Switzerland Competition law Hydroconcession ITC Consumer protection Competition law Hydro concessions Adoption of the competition law Duty to tender regarding the awarding of concessions for hydro-electric power plants ITC Cost compensation concerning the power transit through Swizerland Consumer protection Adoption of the regulations in the 3 rd EU-single market-package The exact content of the negotiation package is not announced in public. Two important items from the Swiss energy trader point of view are Market Coupling and REMIT. Seite 7

8 Market Coupling: Current status Day-ahead-Coupling in Europe Dimensioning of x-border capacity Flowbased EU target model Flow-based Market Coupling (FBMC) NTCbased CH-borders to EU today B NTC-based Market Coupling (MC) A Multi-Regional Coupling (MRC), NTC-based Regionales Coupling (noch yet in MRC), NTC-based CWE: Introcution FBMC in May 2015 Explicit Implicit / Market Coupling Allocation of x-border capacity Most countries in West- and Northern-Europe participate in the NTC-based Multi-Regional Coupling (Day-ahead). In the shown CWE-countries flow-based Market Coupling is introduced in Mid May Seite 8

9 Cross-border application of REMIT in Switzerland Producer Trader Producer Trader REMIT-relevant contract (delivery in the EU) Market participant in the sense of REMIT Supplier Supplier Final consumer Final consumer* Producers and suppliers outside the EU are normally not affected by REMIT unless they deliver to the EU or hedge price risks in the EU. * Final consumers in the EU with a consumption capacity greater than 600 GWh per year are also market participants Seite 9

10 Implementation of reporting obligations to ACER and ElCom for energy wholesale products Reporting channels for transaction data EU/CH Parallel data delivery to CH-Regulator Extract from national Swiss legislation (StromVV, Art. 26a): participants in EU energy wholesale markets based in Switzerland which have a reporting obligation due to REMIT have to provide identical information to swiss authorities (i.e. ElCom) Principle: Reporting obligations (also towards ElCom) only apply to contracts with delivery location inside EU countries. Current reporting alternative to ElCom under discussion: - [1] 1 requires agreement on energy/power treaty - [2] 2 will cause high costs for interfaces - [3] 3 will result in non-certified data Transactions for standard products at Organized Market Places Orders for standard products at Organized Market Places Transactions in standard and non-standard products outside Organized Market Places from 7th Oktober 2015 from 7th April 2016 Seite 10

11 Summary of current regulatory situation for Swiss energy companies Even without a completion of the energy/power treaty with the EU, Switzerland remains an integral part of EU energy wholesale markets. Only technical agreement has been achieved for the majority of dossiers in the treaty, however the solution of the pending "institutional issues" is completely open at present. Until negotiations on the energy/power treaty are resumed, Swiss market participants will have to accept: - Limited possibilities for intervention in decisions regarding the further development of the EU-internal markets for Energy, specifically Power; - Additional operational work load in areas where Switzerland has not taken over EU-legislation to the full extent in national law (e.g. REMIT-Reporting); - Higher insecurity regarding the operation of their business activities in EU-countries both with respect to the general relevance of EU law and to obtaining full market access to European power markets (spot-, forward-, capacity- and regulating energy markets). Seite 11

12 Regulatory requirements and required changes for organisation and processes Content Political framework: Status on bilateral agreement EU/Switzerland Effects of REMIT for companies based in Switzerland Interactions of different EU-regulations regarding energy trading Case study: usage of ancillary exemption under MiFID 2 What if? Impact of banking regulation example CRR / CRD IV

13 Interaction of main regulatory pieces potentially affecting commodity trading Regulation (EU) No 2014/65/EU MiFID II Classificiation as a financial institution would make the holding of capital reserves obligatory Reporting on position limits and current trading positions Start 2017: MiFID II enters into force Derivative definition, Exceptions for commodity traders EU- Regulierung Regulation (EU) No 648/2012 EMIR Clearing obligation dependant on transacted derivative volume Rules for risk mitigation and for reporting of derivative transactions Physical fulfillment, Transaction reporting Minimal standards for capital requirements Minimum regulatory capital Until 2017: exceptional rules for commodity traders applicable Provision against market manipulation and insider trading Reporting of gas and power transactions Publication of so-called fundamental data for assets CRR/CRD IV REMIT Directive (EU) No 575/2013 Regulation (EU) No 1227/2011 Seite 13

14 Definition of financial instruments (MiFID2, Annex 1, Section C) ( ) (5) Options, futures, swaps, forwards and any other derivative contracts relating to commodities that must be settled in cash or may be settled in cash at the option of one of the parties other than by reason of default or other termination event; (6) Options, futures, swaps, and any other derivative contract relating to commodities that can be physically settled provided that they are traded on a regulated market, a MTF, or an OTF, except for wholesale energy products traded on an OTF that must be physically settled; (7) Options, futures, swaps, forwards and any other derivative contracts relating to commodities, that can be physically settled not otherwise mentioned in point 6 of this Section and not being for commercial purposes, which have the characteristics of other derivative financial instruments; ( ) Seite 14

15 Derivative definition and ancillary activity exemption NO Is the contract derivative (forward and not spot)? Contracts in scope 2 Dealing on own account executing client orders? YES NOT Exempted 1 YES Is the contract physically settled (mandatory physical delivery)? NO 3 NO Hedging? Main regulatory implications YES YES Is the contract traded on a regulated market or MTF? NO Is the underlying gas or electricity? (REMIT carve out) YES YES NO Capital employed of activities in scope v overall capital employed <5% NO YES Gross notional value traded in a specific asset class (power, gas, coal, CO2) v. European market in this asset class NO NO Compliance with MiFID/CRD IV/ Basel III à Capital requirements, licence, MaRisk appl. EMIR relevant company (FC) à Clearing obligations for all OTC derivatives Contracts not in scope <0.5% YES Ancillary Test Exempted Seite 15

16 1 Contracts that must be physically settled This term is crucial for the definition of the wholesale energy contracts traded on an OTF which benefit from the exemption in Annex I Section C6 MiFID2 and as a consequence would not classify as financial instruments. A contract must be physically settled if all these conditions are fulfilled*: parties must be actually capable of delivery or receipt; unconditional, unrestricted and enforceable obligations of the parties to the contract to deliver and take delivery of the underlying commodity is established (exception: force majeure, bona fide inability, default clauses see next slide); not possible for either party to replace physical delivery with cash settlement; obligations under the contract cannot be offset against obligations from other contracts between the parties concerned (except for operational netting). *ESMA Final Results 2014/1569, p. 406, 403. Seite 16

17 2 Own account exemption In principle, the administration/management of a person s own assets shall not be subject to a license obligation and resulting regulatory obligations. Therefore, a person dealing on own account in financial instruments shall not be subject to a licensing obligation, but only if certain criteria are fulfilled: 1) The traded financial instruments do not include commodity derivatives or emission allowances or derivatives thereof otherwise the application of the ancillary activity exemption has to be examined; 2) The person is not a market maker - except for the case the market making activity refers to commodity derivatives or emission allowances or derivatives thereof; in this case the application of the ancillary activity exemption has to be examined; 3) The person is not a member of or participant in a regulated market or an MTF or has direct electronic access to a trading venue - except for the case the access to a trading venue refers to commodity derivatives or emission allowances or derivatives thereof; in this case the application of the ancillary activity exemption has to be examined; 4) The person does not apply a high-frequency algorithmic trading technique; 5) The person does not deal on own account when executing client orders. Seite 17

18 3 Possible scenarios for segregation of hedging and non-hedging activities Description Scenario 1 ("commercial" view) Hedging Definition All activities are asset based trading and therefore classified as hedging under EMIR and MiFiD II. Scenario 2 ("conservative" view) Not all activities are asset base trading and therefore hedging. Hedging and non-hedging transactions must be identified and separated. Description Further approach The overall risk reducing effect will be measured, evaluated and documented by Risk Management on regular basis (weekly by using a one-day-var, 95 % confidence). A regular process is implemented on risk controlling side. The evaluation and measurement of the risk reducing effect should be measured on a portfolio level in order to reflect the internal risk steering and reporting adequately. Adjust current process and calculate VaR on management reporting level. Existing or planned prop activities if any - with no link to an asset should be captured in separate books and should be flagged as non-hedging instruments. Define exemption for service-type deals or other planned activities. Hedging requires a direct link to an asset or group of assets and must be documented in sufficient manner (clear documentation of the hedging instrument and hedged item). Need to analyze the book structure and the respective strategies and available documentation in order to identify hedging and non-hedging transactions. Seite 18

19 Relation between the Own Funds Requirements and the Economic Capital required by MaRisk Origin: The Own Funds Requirements and the requirement for Economic Capital derive from the Basel II framework which introduced the three pillar model in the supervisory process. This model has been updated for certain aspects but is still valid under CRR and CRD IV (Basel III). Pillar I - Own funds requirements (Risk weighting, ratings etc.) CRR Quantitative criteria for regulatory supervision Pillar II - Supervisory Review Process (assessing capital adequacy) CRD IV - KWG - MaRisk Qualitative criteria for regulatory supervision Pillar III Reporting (disclosure requirements) CRR Quantitative and qualitative information Seite 19

20 Example: Own funds requirements for Market Risk The capital requirements for market risk are described in Title IV of CRR, which includes the own funds requirements especially for: Position risk Foreign-exchange risk Commodities risk Weather derivatives, freight derivatives, CO2 certificates and VPPs need to be assigned to commodities risk For the calculation of the own funds requirements for commodities risk CRR provides different methods: Maturity ladder approach (Article 359) Simplified approach (Article 360) Extended maturity ladder approach (Article 361) Seite 20

21 Calculation of own funds requirements for market risk Commodity positions are grouped to estimate the commodity exposure f i =15% N P i s i +3% G P i s i Data requirements: price history per commodity (sub) category, category type per trade, information which types can be delivered against each other, position per trade (amount in standard unit; short/long; delta for options and warrants), price per standard unit for each commodity category. Seite 21

22 Summary: Potential scope of impact assessment of MiFID2 to the business model of a typical energy supplier Provided that certain physically fulfilled brokered OTC-contracts may be considered as financial instruments according to MiFID2 and referring to the current draft status of Regulatory Technical Standards a further assessment of MiFID2 implications may be necessary. This is due to the fact that an energy trading company may not be able to use the ancillary exemption because: OTC contracts transacted via Broker cannot be classified as Hedging OR. Activities may have to be classified as executing client orders which gives no further access to MiFID2 exemptions OR. Share of non-hedging OTC contracts transacted via Broker is above the threshold for the ancillary exemption which may require interventions in size of proprietary trading activities. Available documents providing further evidence: ESMA Final Report 2014/1569: Technical Advice on financial instruments definition specifying Section C 6, 7 and 10 of Annex I of MiFID II ESMA Consultation Paper 2014/1570: ESMAs view on the ancillary activity exemption including minority of activities, size of trading activities and privileged transactions ESMA Consultation Paper 2014/1189 relating to the application of C6 and C7 of Annex I of MiFID I: indication for the definition of a contract that can be physically settled (e.g. Annex I Section C (6) Seite 22

23 Thank you for your attention. Volker Lischke Leiter Handel BKW Energie AG Viktoriaplatz Bern 25 Tel: +41 (0) volker.lischke@bkw.ch Seite 23