Regulation (EU) No. 1227/2011 on wholesale energy market integrity and transparency (REMIT) prohibits market abuse in relation to wholsesale energy products, requires effective and timely public disclosure of inside information by market participants and obliges firms that professionally arrange transactions to report suspicious transactions. Further to our previous lawnow on the first enforcement cases by competent National Regulatory Authorities (NRA), the Agency of the Cooperation of Energy Regulators (ACER) has reported on a substantial third and latest sanction by an NRA, this time in France.
The disciplinary tribunal (CoRDiS) of the French Regulatory Commission (CRE) fined VITOL S.A (VITOL) for engaging in market manipulation on the French Southern virtual Gas Trading Point. This fine results from an investigation opened in April 2014, which found the energy and commodities company’s behaviour breached Article 5 of REMIT, which prohibits any engagement in, or attempt to engage in, market manipulation on wholesale energy markets.
Detail of the case
The investigation found that VITOL had engaged in market manipulation in relation to the French Southern virtual Gas Trading Point between 1 June 2013 and 31 March 2014. In particular, VITOL:
- issued multiple sell orders, at the beginning of the trading day when liquidity was low;
- as the day moved along, it issued sell orders at gradually decreasing prices and with decreasing frequency after 4 a.m. during the more liquid period of the day;
- once the gas prices had decreased, VITOL would engage in gas purchases; and
- following these purchases, VITOL would cancel its sell orders to finish the day as a net buyer.
CoRDIS found that VITOL engaged in such behaviour in 65 cases spread over 54 trading days. It was held that this activity was likely to give the wider energy market misleading signals as to the gas supply or demand on the French Southern virtual Gas Trading Point, which amounted to market manipulation. As a result, it imposed a €5 million fine on VITOL.
In response, in its 9 October 2018 press release, VITOL rejected the findings, and announced that it would be appealing the decision. It maintains that its trading strategies were appropriate to physical energy markets and were in accordance with the applicable market regulations. Furthermore, VITOL has stated that CoRDiS did not follow due process and that had it done so, the result of the investigation would have been different.
This is the first fine levied by an NRA under REMIT in relation to the gas market. It also comes as a timely reminder to market participants that historic activity will be actively pursued by NRAs.
Although there are other prohibitions/obligations set out in REMIT (e.g. relating to the use of inside information), it is worth highlighting that a breach of Article 5 (i.e. breaching the prohibition on market manipulation) does not necessarily require that there is an intention to do so; a market participant may be found as having manipulated the market in breach of REMIT if it enters into any transaction or issues an order to trade that gives, or is likely to give, false or misleading signals as to the supply of, demand for, or price of wholesale energy products. Further, given that the definition of market manipulation in REMIT is very broad, ACER has stated that it should be read together with the further detail provided in its guidance on REMIT.
Lastly, as markets continue to liberalise in Europe, there is likely to be greater regulatory scrutiny of issues concerning market manipulation and use of inside information. Experiences elsewhere in the world suggest that liberalising and liberalised energy markets are prone to manipulation and abuse. REMIT sets rules prohibiting certain trading practices and requiring specified steps to be taken concerning inside information. However, the scope of REMIT continues to lack clarity. For example, with markets that continue to contain a mixture of traded and long-term gas sales agreements there is little official guidance on practices such as a market participant trading around its own day-ahead nominations, not necessarily known to the market, under big legacy pipeline contracts the might impact the volume of gas in the market the next day.