In Europe, one of the big trends in energy trading markets has been for market participants to increasingly face rules akin to those that apply in the financial markets. This is for two reasons: Financial regulators are extending the reach of their rules to impact more directly energy markets and their participants; and energy regulators are developing rules that take their inspiration from those governing the financial markets. This Client Alert highlights these trends in three key areas and considers what they mean for energy trading businesses, be they part of banks, utilities or trading companies.
Insider trading and disclosure
It has been long-accepted in securities markets that equal access to information protects market integrity and confidence. Non-public price-sensitive information should be disclosed to the market, and people who trade using that information before it is disclosed should be punished. This is the underlying reason for having insider trading laws.
Energy and commodity markets have taken a different approach. These markets do not have wide-ranging disclosure regimes. Energy companies facing physical disruptions (such as unscheduled maintenance) have largely been free to use that information in their trading before the market becomes aware of it.
Under the Market Abuse Directive (MAD), Europe introduced an insider trading and market manipulation regime for commodity derivatives traded on regulated markets. But the insider trading rules are toothless because of the narrow definition of "inside information". In other markets the definition picks up non-public information that has a significant effect on price. The commodity derivatives definition requires the information be that which market users would expect to receive in accordance with "accepted market practices" on those markets. As commodity derivatives markets do not tend to require companies to disclose information about their energy and commodities activities, there is not much inside information on which a regulator can base an insider trading case under MAD.
That position is now changing. In October, the European Commission is expected formally to propose amending MAD to align the definition of inside information for commodity derivatives with that for other financial instruments. This will expand the scope of "inside information" for commodity derivatives.
Energy regulators are also getting in on the act. The European authorities are developing a specific...