Johannes Kindler Madrid Forum – 28/29 May 2009 Transparency & Trading: Analysis of energy and financial regulators

Analysis Action

3Madrid Forum – 28/29 May 2009 Importance of Gas Trading in Europe Gas trading is of increasing importance within European energy market 1st and 2nd package have had an impact: trading of gas has evolved over time Trading is able to significantly contribute to security of supply: -Trading results in efficient allocation of gas -Trading provides hedging opportunities which are important for market participants in order to ensure price predictability -Trading plays an important role for integrating renewable energy sources  Fair and orderly trading is crucial for achieving the EU internal market

4Madrid Forum – 28/29 May 2009 Gas trading in Europe - Background - In order to facilitate fair and orderly trading and to enhance confidence in market integrity adequate supervision and regulatory oversight is essential: No Sarbanes-Oxley for gas trading, but what needs to be done, must be done Cooperation between regulators is important to allow for an efficient market oversight Energy regulators have in-depth knowledge of the functioning of energy markets In order to foster the development of the European internal gas market rules for gas trading need to be harmonised transparency requirements need to be further developed

5Madrid Forum – 28/29 May 2009 Gas Trading in Europe: Regulator’s Activities Trading actively fostered by ERGEG and national regulators: ERGEG took the initiative to remove barriers resulting from contractual congestion. Intentions of proposals: -Facilitation of cross-border market interaction -Reduction of dominance of dominant players Reduction of balancing zones: -Progress in Germany achieved and expected -Activities in France (ongoing public consultation) -H-Gas / L-Gas merger in NL announced for July Revision of balancing regimes done or envisaged in several countries

6Madrid Forum – 28/29 May 2009 Traded Volumes in Europe 2008 (2007) – Gas (TWh) TTF (930) NCG: 276 (73,2) Gasunie D: 106 (67) GRTgaz D: 1,7 (2,4) NBP (8.545) Baumgarten 500 (197) PEG (118) Zeebrügge 468 (447) PSV (72) CDG (436) Sources: ENERGIE & MANAGEMENT, ; EEX; Petroleum Economist, Fundamentals of the World Gas Industry, 2008; brokers screen data EU-Gas trading is evolving! National Balancing Point (NBP): still the most liquid European Gas Hub Baumgarten: developed to the third most important Gas Hub NetConnect Germany (NCG): increased trading volume

7Madrid Forum – 28/29 May 2009 Analysis Action

8Madrid Forum – 28/29 May 2009 The joint mandate to CESR / ERGEG European Commission issued a joint mandate to CESR and ERGEG on 21 December 2007 Scope: technical recommendation under the Third Energy Package proposals (Article 43 Gas-Directive) Main questions: -Is the financial market regulation sufficient to secure the integrity of gas markets? -What extent of transparency does financial and physical gas trading need?

9Madrid Forum – 28/29 May 2009 The milestones of the joint mandate Report on the current situation in the individual Member States (“Fact Finding”) Market Abuse Record Keeping Trading Transparency Exchange of Information CESR/ERGEG received a very positive feedback by the COM! Recommendation to COM: Sept 08 Recommendation to COM: Dec 08

10Madrid Forum – 28/29 May 2009 Market Abuse: Tailor made arrangements Current supervision of arrangements in financial markets is not sufficient to ensure adequate integrity in the gas markets only a small part of energy trading falls under the Market Abuse Directive (“MAD”) Trading at borders splits the liquidity and weakens trading hubs (bundling of capacity required, see ERGEG-proposals on capacity) other interdependent markets (e.g. oil, coal or CO2 emission rights) must be taken into account because prices on these markets have a direct and indirect effect on the price of gas

11Madrid Forum – 28/29 May 2009 Transparency - Status quo - In general, trading on the exchange has a high degree of transparency BUT: most gas transactions take place in bilateral tradings (over the counter, „OTC“): -there is less/or even non transparency in OTC- transactions -some OTC-trades are transparent only for traders on broker platforms -purely bilateral transactions are transparent only for the contractual parties

12Madrid Forum – 28/29 May 2009 Transparency - Recommendation - Traders need European-wide harmonised information that can be processed easily Different stages of transparency: -Pre-trading transparency (e.g. fundamental data) to be covered by new annexed Guidelines and Framework Guidelines -Post-trading transparency (anonymous publication of transactions close to real-time and aggregate market data at the end of each day)

13Madrid Forum – 28/29 May 2009 Record Keeping - Recommendation - Transparent description of all transaction details (e.g. buyer/seller, volume, price) Flexible approach, but minimum content needed flexibility regarding the format, but electronic forwarding must be possible Extent of record keeping: -Non-investment firms: all supply contracts and derivatives -Investment firms: only supply contracts that do not fall under the Markets in Financial Instruments Directive (“MiFID”)  they are subject to an obligation to keep records under the MiFID

14Madrid Forum – 28/29 May 2009 Exchange of Information - Status quo - Main Feedbacks of public consultation: Investment firms must keep records under the MiFID - additional obligations should be avoided Energy regulators do not have access to the data of the “MiFID firms” on a regular basis  Information exchange between financial and energy regulators is necessary if market supervision should be efficient

15Madrid Forum – 28/29 May 2009 Exchange of Information - Recommendations - ERGEG and CESR propose: to begin an information exchange on an individual-case basis to establish this information exchange on a legal basis an automatic exchange of data under the Transaction Reporting Exchange Mechanism is not appropriate in the current phase. “Transaction reporting” was not part of the mandate

16Madrid Forum – 28/29 May 2009 Next Steps (1) Transparency Elaboration of detailed transparency requirements Should build up on previous work already done by ERGEG on Transparency and focus on compatibility, practicability and suitability for gas trading Workshop in Summer 2009 foreseen by ERGEG to discuss the detailed requirements with the relevant stakeholders CEER/ERGEG open for cooperation with CESR and a permanent dialogue with market participants

17Madrid Forum – 28/29 May 2009 Next Steps (2) Transaction Reporting vs. Record Keeping Mandate of the Commission was limited to record keeping and missing evidence at this stage ERGEG/CESR Advice: sensible to reconsider Transaction Reporting in connection with a potential EU regime for market abuse Analysis should take account of the experiences made in the US market CEER/ERGEG open to analyse this further and give a sound advice on it

18Madrid Forum – 28/29 May 2009 Next Steps (3) Harmonisation and Mutual Recognition of Trading Licenses in the EU Gas Markets ERGEG will analyse the current situation in the different Member States and ERGEG will assess the possibilities and obstacles to the creation of a single trading passport ERGEG will elaborate best practices of supervision of gas hubs

19Madrid Forum – 28/29 May 2009 Thank you for your attention! Mark your diary for the World Forum on Energy Regulation IV October 18-21, 2009 Athens, Greece