Legal basis of energy trading Aygul Avtakhova Manager at EFET Legal Committee, European Federation of Energy Traders

Transcription

1 Winter Academy 2018 Trading, Sales and Financing in the European Energy Market and Industry Legal basis of energy trading Aygul Avtakhova Manager at EFET Legal Committee, European Federation of Energy Traders 1

2 Overview The European Federation of Energy Traders (EFET) EFET vision and mission Conditions for a liquid wholesale energy market Benefits of contractual standardisation How does the EFET General Agreement work? Essential provisions and risk management Key takeaway messages and conclusions 2

3 The vision of Europe s energy traders EFET Vision We foresee sustainable energy markets throughout Europe, in which traders efficiently intermediate in the value chain on the basis of clear wholesale price signals, thereby optimising supply and demand and enhancing security of supply, to the overall long-term benefit of the economy and of society. 3

4 A wide variety of EFET Member Companies... 4

5 ... all committed to the development of energy trading 5

6 The role of EFET Activities & Organisation For more information visit:

7 Actively improving the wholesale energy market The EFET mission involves improving conditions for energy trading in Europe and fostering the development of an open, liquid and transparent European wholesale energy market Information transparency Through better: Data exchange Products and procedures Laws Regulation Taxation European Contracts Organised market Advocacy for liberalised markets Promotion of energy trading in Europe Standardisation of contracts 7

8 Value of the wholesale market Why is the wholesale market important? Trading can optimize the market by creating: Efficiencies across regions and countries Efficiencies between fuels used in generation (gas, coal, hydro, nuclear, wind, etc.) Efficiencies by virtue of play of inter-related products (e.g. weather derivatives; emission allowances; transmission rights) Efficiencies through financial markets and derivatives Efficiencies stimulated by price signals of new products 8

9 Formation of markets Criteria for Positive Market Development Market Confidence 1 Entry of New Players Diverse Players 2 Standard Products Standard Contracts 4 3 Liquidity and Choice of Products Any action creating market confidence within companies such as reliable price discovery, neutral price reporting, entry of new and diverse market particpants will help liquidity. A market cannot develop based on incumbent and vertically integrated stryctures as they hamber choice and flexibility. 9

10 What are the conditions for building a market? Characteristics mature wholesale market 1 0 Standardisation Liquidity Standard-Products and Standard Contracts: Base: Mo-Su: 0:00 24:00h Peak: Mo-Fr : 8:00 20:00h Physical: Master Contract EFET Financial: Master Contract ISDA Example: EEX-Futures Market multiple x consumption in DE 5 Market Maker: continuously simultaneous bids & offers Transparency Trading data: Prices & Volumes PXs & Broker Fundamental data: Generation data (incl. RES) e.g. EEX Transparency Platform; Nordpool; Grid data: transmission data ENTSO-Vista

11 What needs to be standardised? Products Duration (week, month, quarter, year) Firm/non-firm delivery Gas quality within same country Product descriptions, everyone needs to know what exactly is bought/sold Contractual Terms Operational Processes Example: Confirmation matching IT Standards REMIT Transaction Reporting -example: err (

12 Standardisation = Engine for Liquidity 12

13 Standardisation allows Risk Management Energy Traders need One Agreement across many countries to effectively manage their legal risks EFET Agreement offers international proven (!) standard solution across many jurisdictions Insular solutions lead to delay in product standardisation and create obstacles for market developments Standard products allow liquidity in trading and pricing is based on standard conditions 13

14 1 4 Formation of markets Contractual Standardisation = Condition For Market Development EFET Standard Agreement enjoys market acceptance in Europe

15 The Challenge: right agreement for each type of transaction 15

16 The EFET Master Agreement EFET Individual PRISMA Gas Capacity Contract Credit Support Annex EFET GENERAL AGREEMENT Emissions Allowance Annex Power Election Sheet Gas TTF (Netherlands) ZBT (Belgium) NBP (UK) PSV (Italy) PEG (France) Austrian VTP Gaspool (Germany) Confirmation PSV (Italy) UK Beach Polish VP Appendix 16

17 Advantages of the EFET Master Agreement Standardisation Ensures smooth operational processes and avoids back to back risks; allows for speedy negotiations and high volume trading Credit Protection Insolvency Protection Credit clauses allow parties to monitor each other s creditworthiness over time Close-out netting and single agreement character to avoid cherry picking by liquidator Legal certainty Endorsed by EFET Legal Committee and supported by legal opinions in various jurisdictions 17

18 EFET General Agreement (Natural Gas) Essential provisions of the Agreement Legal RISKS Operational Credit

19 Navigating the EFET Universe of Documentation EFET Credit Support Annex (CSA) EMIR RMTA EFET Master Netting Agreement (MNA) (formerly: CPMA) CSA REMIT RA EFET General Agreement Electricity EFET General Agreement Natural Gas CSA CO 2 Gaspool TTF ZBT NBP Austrian VTP PEG PSV AOC VP PRISMA Gas Capacity UK Beach CO 2

20 EFET General Agreement (Natural Gas) Contractual Structure General General Agreement Agreement ( main body ) body ) Election Election Annexes Annexes & & Sheet Sheet Appendices Individual Contract Individual Contract Individual Contract Individual Contract Individual Contract single agreement concept ( 1)

21 3 Concluding and Confirming Individual Contracts The contract can be concluded in any form of communication Contract becomes legally binding from the time the commercial terms are agreed Confirmation merely documents an agree transaction; standard confirmation templates Many companies send confirmation for each transaction (regardless of whether they are Seller or Buyer); electronic matching for flow deals common 3.4: Only very few companies maintain authorised trader lists (administratively too burdensome)

22 6 Delivery, Measurement, Transportation and Risk Seller represents that it has right to transfer to Buyer full entitlement to the gas, free and clear of encumbrances Measurement of gas in accordance with nomination and allocation arrangements at the Delivery Point Seller bears risk and bear all costs up to the Delivery Point, Buyer at and from the Delivery Point

23 7 Risk and Force Majeure An event beyond reasonable control of Party claiming Force Majeure that it could not reasonably have avoided or overcome makes it impossible for the claiming party to perform its delivery or acceptance obligations

24 10 Termination for Material Reason INSOLVENCY EVENT: Law of the incorporation of counterparty applies not law chosen to govern Agreement Close-out netting enforceable? EFET provides up to date netting opinions TERMINATION AMOUNT: Calculation in accordance with 11 Costs (Losses + Gains) No replacement transaction required

25 Close-Out Netting Close-out netting is process by which, following an early termination of the Agreement: open transactions between two parties are terminated; each terminated transaction is valued; and all the termination values, together with any unpaid amounts, are reduced to a single net amount owed by one party to the other. Reduces Credit Risk can reduce exposure in close-out as exposed only up to the net amount of mutual obligations can reduce collateral-posting requirements by netting collateral requirements across agreements Expands Credit Lines Reduces Regulatory Capital Requirements regulators are willing to require a lower amount of capital to cover transactions if netting arrangements are in place

26 data2map.de Physically Settled OTC 2017 (Insolvency) Iceland Finland Norway Sweden Estonia Denmark Lithuania Russian Federation Latvia Ireland Great Britian and Northern Ireland Belarus The Netherlands Poland Belgium Germany Guernsey Jersey Luxembourg Czech Republic. Slovakia Ukraine Netting enforceable Netting possible subject to additional conditions, ex: One party must be a Financial Institution or Margining required Andorra France Switzerland Monaco Liechtenstein Austria San Marino Slovenia Croatia Hungary Bosnia- Herzegovina Serbia Montenegro Romania Bulgaria Moldavia Italy Macedonia Albania Spain Greece Turkey Portugal Gibraltar Malta Cyprus

27 22 Applicable Law and Jurisdiction Option A: English Law and Arbitration at London Court of International Arbitration Option B: German Law and Arbitration at German Institution of Arbitration Some parties agree on ordinary courts e.g. English courts Some legal systems in emerging markets require further development

28 Interaction between Financial and Energy Regulation Directives MiFID MAD CRD Regulations Financial track DG Market EMIR OTC Derivatives MiFIR MAR CRR Benchmark Regulation Guidelines FSA s Coordination Harmonisation Energy Industry DG COMP Antitrust Agencies National Supervision, Enforcement, Sanctionin g Energy track DG Energy Directives/ Regulations Binding Guidelines 3 rd Energy Package Fundamental Data / Record keeping Guidelines REMIT Sector specific market integrity and transparency regime Registration Energ y NRAs 28

29 EFET Offering for Reporting Standards 29

30 Conclusions No Standard Contractual Terms = No OTC Market in any Commodity Single agreement concept, downloadable for free & usable by all EFET issues a number of bi-lingual versions in national languages available at: Main Body of the template should not be changed, but ample room for changes via Election Sheet Emerging markets often require netting reform or changes to the insolvency law recent success stories: Germany, Italy, Denmark; pending challenges: Croatia, Ukraine etc.

31 Vision: Trading without borders Thank you for your attention! Winter Academy 2018 in Brussels 31

32 Contact: European Federation of Energy Traders EU Liaison Office Rue Le Corrège Brussels Tel: Winter Academy 2018 in Brussels 32