On 26 November 2020, the Ministry of Energy of Ukraine (the “Ministry”) has announced that as part of its plans for 2021 it would implement European rules on wholesale energy market integrity and transparency as found in EU Regulation No. 1227/2011, commonly known as REMIT.
REMIT establishes a legal framework for identifying and penalising insider trading and market manipulation in wholesale electricity and gas markets across Europe – an area that is currently unregulated in Ukraine. For more details on implementation of REMIT, follow this link to the main article.
REMIT should be transposed into Ukrainian legislation through a draft law prepared by the National Commission Regulating in the Spheres of Energy and Utilities (the “Regulator”). Having already undergone a public discussion, the draft law is now expected to be registered with parliament.
In the following article, we provide a summary of the initial version of the draft law, which is the only version currently available for public review (available by the link), although it is likely that the Regulator has already made modifications to the bill following a review of comments received from the public and that members of parliament will introduce more changes after the draft law has been considered by the relevant parliamentary committees.
While the draft law may in many aspects accurately transpose REMIT provisions, it does not provide further guidance on their practical application and must take into account recommendations issued by the Council of European Energy Regulators (CEER). It is also expected that the Regulator will adopt secondary legislation to fill this gap.
The draft law applies regulation to wholesale gas and electricity markets, which are defined as any market where operations with wholesale energy products are being performed.
The wholesale energy products must be understood as any contract on:
- purchase and sale of gas or electricity;
- transportation of gas or electricity; or
- supply or distribution of gas or electricity to end-consumers which facilities are capable of consuming 600 GWh or more per year.
However, the available text of the draft law is not clear on whether such contracts extend to all energy products traded within the territory of Ukraine or if there will be exemptions for energy products that are not customs cleared for free circulation in Ukraine (e.g. products in transit or placed in customs warehouse). Furthermore, in accordance with Article 2(5) of REMIT, wholesale energy products must exempt geographically unconnected facilities under the control of a single entity. There is also no clarity whether the capacity of end-consumer facilities should be measured separately or cumulatively for gas and electricity.
To perform transactions with wholesale energy products, the draft law requires the parties to be listed in a special register maintained by the Regulator.
The Draft Law also regulates activities of gas and electricity market brokers – entities who professionally arrange transactions on organised trading facilities (e.g. stock exchanges, electronic trading platforms, etc.) or perform transactions on behalf of other market participants.
The market brokers, which include existing electricity market operators (i.e. operators of the day-ahead market, intraday market, balancing market, and market of ancillary services), must report to the Regulator any information on suspicious transactions that may involve insider trading or attempts to manipulate the market. In order to be capable of performing this requirement, market brokers must have the appropriate monitoring system.
In this connection, the main role of the Regulator is to:
- establish requirements on prohibition and prevention of abusive market practices on energy markets in accordance with EU regulations;
- define activities that are considered to be market manipulation or an attempt to manipulate a market;
- establish requirements on protection, disclosure, and the publishing of insider information;
- monitor the activities of market participants and identify suspicious activities and abusive market practices;
- cooperate with the CEER and the national regulators of EU countries to ensure the integrity and transparency of wholesale energy markets.
Inside information is defined in accordance with REMIT as information of a precise nature, which has not been made public, directly or indirectly relates to one or more wholesale energy products and – if it were made public – could significantly affect prices of one or more wholesale energy products.
According to the draft law, insider information includes:
- Information that is required to be made public in accordance with market rules, the applicable regulatory framework, and contracts in that this information, if not published, is likely to impact market prices;
- Information on capacities and the use of facilities for the production, storage, transmission, and consumption of gas or electricity (excluding electrical facilities with a capacity of less than 100 MW) and LNG terminals, which includes their planned and unplanned availability;
- Other information that could be used by market participants as for deciding to enter into a transaction relating to, or to issue an order to trade in, a wholesale energy product.
According to the draft law, the following persons possess inside information:
- Members of supervisory or executive bodies of a market participant;
- Persons with holdings in the capital of a market participant;
- Persons with access to inside information through the exercise of their employment or professional duties;
- Persons who have acquired inside information as a result of their unlawful activities;
- Persons who know or ought to know that the information is inside information.
Persons possessing inside information must not:
- Perform or attempt to perform – for their own benefit or benefit of third parties either directly or indirectly – transactions with wholesale energy products to which the information relates or by using this inside information;
- Disclose, transfer or provide access to information considered inside information;
- Recommend performing transactions with wholesale energy products on the basis of inside information.
The Regulator will additionally establish requirements on disclosure of inside information and exemptions relating to inside information or persons possessing it, if any.
The draft law prohibits market manipulation and defines it as:
- Entering a transaction or issuing any order to perform a transaction with wholesale energy products or other activities which:
- give, or are likely to give, false or misleading signals as to the supply, demand for, or price of wholesale energy products;
- secure wholesale energy products at an artificial price level, unless it is proven that such a transaction conforms to the regulatory framework and established market practices; or
- employ or attempt to employ a device or any deception, which gives or may give false or misleading signals for the supply, demand for, or price of wholesale energy products.
- Disclosure or dissemination of information through the media, which gives or could give false or misleading signals for the supply, demand for, or price of wholesale energy products.
In addition, the Regulator will adopt a list of activities, which will be regarded as market manipulation and a list of established market practices not considered market manipulation.
The draft law introduces liability for breach of restrictions on the use of inside information; non-disclosure or disclosure of inside information against regulatory requirements; and market manipulation. The draft law allows the Regulator to impose the following administrative fines:
- Up to UAH 25,500,000 (approximately EUR 750,000) on undertakings for non-disclosure or disclosure of inside information against regulatory requirements;
- Up to UAH 51,000,000 (approximately EUR 1,500,000) on undertakings for breach of restrictions on the use of inside information and performance of any activities that are regarded as a market manipulation;
- From UAH 340 to UAH 15,300 (approximately EUR 10 - 45) on officials of undertakings.
The draft law does not provide for any guidelines for the Regulator on the application of administrative fines to ensure their fairness and proportionality to the gravity of an infringement. Furthermore, such fines range from zero to their maximum amount, which appears to provide an extremely wide discretion for the Regulator.
The above fines may not exceed 10% of the undertaking’s income earned from activities on energy markets in the previous year. However, the Regulator may additionally confiscate all income earned as a result of these infringements.
Investigations by the Regulator
The draft law allows the Regulator to carry out market monitoring and investigate infringements or a suspected breach in connection with insider trading or market manipulation. An investigation consists of the following steps:
- Preliminary investigation (or analysis) of the case and the preparation of a justification for launching an investigation;
- Taking a decision on commencement of an investigation, and establishing the investigation commission;
- Establishing all facts and circumstances and preparing an investigation report;
- Receiving evidence, explanations, and rebuttal arguments from a market participant under investigation;
- Taking a decision based on the results of the investigation.
During investigation, the Regulator may, among other things:
- Request documents, information, and explanations from market participants in relation to an investigation;
- Inspect premises and seize documents or information media that may be evidence or a source of evidence for the investigation and involve law enforcement authorities if an undertaking refuses to provide them voluntarily;
- Apply for injunctive measures, if there is a threat to the rights of other market participants.
Based on the investigation results, the Regulator may:
- Approve a mandatory decision on mitigation of identified infringements;
- Apply administrative fines on energy market participants or their officials;
- Apply to law enforcement authorities on the initiation of criminal proceedings;
- Notify the Antimonopoly Committee of Ukraine on the infringement of legislation on the protection of economic competition;
- Apply to the National Securities and Stock Market Commission to impose liability on brokers.
The Regulator may also involve and cooperate with the National Securities and Stock Market Commission, Antimonopoly Committee of Ukraine, and financial control authorities during the investigation process. The draft law, however, does not define the competence or liability of these regulatory bodies during the investigation process.
For more information on the new regulation, contact your regular CMS advisor or local CMS experts: Vitaliy Radchenko and Maria Orlyk.