Mandate to ESME for Advice on Commodity Derivatives Regulation

Mandate to ESME for Advice
Review under Articles 65(3)(a), (b) and (d) of the MiFID and 48(2)
of the CAD and proposed guidelines to be adopted under the
Third Energy Package
1
Content
Page
I. Introduction 3
II. Questions in the Mandate for Advice 4
III. Summary of ESME’s Advice 6
IV. Advice 11
A. Question 1 “Fact Finding” 11
B. Question 2 “Fact Finding” 45
C. Question 3 “Assessment” 58
D. Question 4 “Assessment” 63
E. Question 5 “Record Keeping” 65
F. Question 6 “Transparency” 80
G. Question 7 “Market Abuse” 96
V. Annex: 124
• Annex 1: ESME Mandate
• Annex 2: Members of ESME
• Annex 3: Observers of ESME
• Annex 4: Table 1 / List of fields for reporting purposes
• Annex 5: Transparency regulations for the electricity and gas sectors
• Annex 6: Glossary
2
I. Introduction
This Mandate1 requests advice from ESME2 on certain issues regarding revision of the
provisions of Directive 2004/39/EC (MiFID) and Directive 2006/49/EC (CAD) concerning
the regulatory treatment of firms that provide investment services in relation to
commodity and exotic derivatives (hereinafter: “Mandate”). This Mandate has been
made in order to ensure that the Commission has adequate technical background to be
able to complete its report under Article 65(3)(a), (b) and (d) of Directive 2004/39/EC and
Article 48(2) of Directive 2006/49/EC (the “Report”).
This Mandate also requests advice from ESME on issues concerning record keeping
and transparency of transactions in electricity and gas supply contracts and derivatives
in order to ensure that the Commission has adequate technical background to be able to
adopt the guidelines under Articles 22f/24f and Recitals 20 and 22 in the two proposals
for Directives amending Directive 2003/54/EC and Directive 2003/55/EC (The Third
Energy Package).3
Advice is also sought on a possible clarification of the scope of the Market Abuse
Directive in relation to trading in commodities and commodity derivatives.
ESME’s advice in respect of these issues was drafted by the Sub-Group Commodities of
ESME, whose members and observers are listed in the Annex 2 and 3 to this advice.
1
For further details please see the attached mandate to ESME at the end of this document.
2
For ESME members please see Annex 2 below.
3
http://ec.europa.eu/energy/electricity/package_2007/index_en.htm
3
II. Questions in the Mandate for Advice
The questions on which technical advice is sought by the European Commission are:
Fact finding (please see section A and B below)
1. Who are the main participants, in terms of turnover, in trading commodities and their
derivatives in the EU and what are their characteristics? Consider energy and non-
energy commodities, including base and precious metals and softs. Identifying by name
or by type the most significant traders in each market or market segment would be
helpful.
2. Does ESME have any observations to make on how the exemptions in the CAD and
MiFID for certain firms providing investment services relating to commodity derivatives
and exotic derivatives are working in practice? What difficulties arise from differing
interpretations? And what are some of the challenges or issues for market participants
or market quality arising from the existing regulatory framework? These might arise
from market distortions, regulatory arbitrage or other significant sub-optimalities in
market functioning.
Assessment (please see section C and D below)
3. What options does ESME consider most salient in addressing any challenges or
issues identified above? Examples of options ESME might consider include:
a) Issuing clarifying guidance as to the meaning of the various exemptions, and if so,
with what content;
b) Re-examining the current scope and nature of exemptions from the relevant CAD
and MiFID requirements for firms in the commodities sector with a view to
rationalising them;
c) Outlining some elements of a specialist regime for commodity firms with regard to
MiFID and CAD regulation;
d) Removing some or all of the exemptions entirely?
e) Any other options (e.g. making the exemptions optional for firms or mandatory for
Member States)?
4. ESME should identify the issues that would need to be addressed in assessing likely
impacts on market participants and market quality of the most salient options.
Record keeping (please see section E below)
5. What would the practical implication be, for firms active both in the physical supply of
electricity and gas contracts and in commodity derivatives, of having to maintain two
different formats of records of transactions for the relevant regulators? Would a single
report based on the format in Table 1 of Annex I of Regulation EC 1287/2006 be
appropriate and sufficient?
4
Transparency (please see section F below)
6. The Commission has identified a number of market failures in its Sector Inquiry on
energy and the subsequent study of the electricity wholesale markets4. In light of these
findings, please consider:
a) whether, greater pre- and post-trade transparency for electricity and gas supply
contracts (physical and spot trading) and derivatives would contribute to a more
efficient wholesale price formation process and efficient and secure electricity and
gas markets;
b) whether such transparency arrangements could be expected to mitigate the

concerns identified in the Sector Inquiry above;
c) whether uniform EU-wide pre- and post-trade transparency could have other
benefits;
d) whether additional transparency in trading could have negative effects on these

markets, for example could liquidity in these markets be expected to decrease? Is
there a risk that trading could shift to third countries to escape regulation? If so, how
could such risks be mitigated (delayed reporting, aggregated reporting, etc.).
Market abuse (please see section G below)
7. Does Directive 2003/6/EC on insider dealing and market manipulation (market

abuse) properly address market integrity issues in the electricity, gas and other
commodity markets? If not, what suggestions would ESME have to mitigate any
shortcomings?
4
http://ec.europa.eu/comm/competition/sectors/energy/inquiry/index.html
5
III. Summary of ESME’s Advice
Question 1 (please see section A below)
In the section A the advice is given for certain commodity and commodity derivative
sectors separately in the form of a market information questionnaire.
Question 2 “Fact Finding” (please see section B below)
The current position is clearly unsatisfactory for a number of reasons:
• The differing boundaries of regulation across the EU seem to be less problematic

than in the past but remain a potential concern for firms seeking to operate across
all Member States.
• The differing approaches to the application or interpretation of the exemptions is
also a practical issue for many firms where they seek to operate across the EU.
• The differential treatment of firms conducting the same wholesale activity depending
on whether they are members of a banking or investment services group causes
practical difficulties and anomalies, not least in restricting the activities of some
private equity investors in the sector.
The result is excessive complexity for firms, in a context where the wholesale nature of
the business and the limited risks make it difficult to justify regulation of many firms on
investor protection or systemic risk grounds.
Question 3 “Assessment” (please see section C below)
1. ESME considers that the second limb of article 2.1(i) and article 2.1(k) should be
replaced by a single exemption applicable to firms (other than operators of an MTF
or a regulated market) whose main business consists of dealing on own account in
relation to commodities and/or commodity derivatives or other non-financial
derivatives contracts. However, this exemption should only apply to the firm's
activities when dealing on own account in commodity and other non-financial
derivatives with a defined class of wholesale market participants. The exemption
should be combinable with other exemptions.
2. To achieve a common European approach to regulation in this area, Member States

should be required to implement the exemption into their legislation. However, firms
should not be required to rely on the exemption where they wish to be authorised
and there should be an appropriate capital regime for such firms and other
commodity firms subject to authorisation.
Question 4 “Assessment” (please see section D below)
The most likely issues that would need to be addressed in an impact assessment are:
any risk to the stability of financial markets; any effect on investors; any effect on the
liquidity of commodity markets; whether any regulatory burden is proportionate; and the
possible impact on the competitiveness of the EU as a place for doing business.
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Question 5 “Record Keeping” (please see section E below)
1. The record-keeping obligation is not aiming at an MiFID-style (or indeed level) of

reporting and this record-keeping obligation has to be clearly distinguished from
periodic, ongoing reporting (e.g. transaction reporting).
2. ESME believes a principles-based, rather than rigid prescribed-format approach is

appropriate for the record-keeping obligation. This could specify the minimum
information that should be recorded by market participants in order to ensure an
appropriate level of consistency – including giving guidance on what information
should be recorded for non-standard products (see below). Within this constraint
and from a purely practical point of view, however, there seem to be benefits in
trying to ensure that the format of records which are kept are the same for each of
the relevant physical and financial regulators. This would depend though on the
purpose for which the information would be used by the regulator and whether the
regulators exchange data. Implementing and maintaining two separate record-
keeping formats would involve additional investment in IT and associated processes
for such firms which are active in both sectors, giving rise to additional costs that
could create a barrier to entry to smaller market participants (thereby potentially
reducing liquidity); and potential risks of inconsistencies and errors between
formats.
3. There are a number of issues that need to be resolved if a single format of record
keeping is to be introduced. As explained in more detail below, ESME is not in
favour of following a uniform prescribed format, such as that in Table 1 of Annex I of
Regulation EC 1287/2006, at least where it would be used in a rigid way to allow
automated regular reporting.
4. There is a very large number of traded commodity products across many different
markets. A prescribed format such as that of Table 1 of Annex I of Regulation
EC 1287/2006 would be very difficult to develop and in any case would not capture
trades that are non-standard in format – for example those with complex optionality.
It would also need to take account of the variety of market participants, transactions
and businesses. It would also need to take into account current industry standards,
such as confirmations.
5. Rather than a single standardised format a more principles-based approach could

be far more appropriate for the record-keeping obligation. This could specify the
minimum information that should be recorded by market participants in order to
ensure an appropriate level of consistency – including giving guidance on what
information should be recorded for non-standard products. This would ensure that
information that is potentially needed by regulators is accessible upon request within
reasonable timescales. This would then allow firms to compile the information in a
format suitable to that request by the regulator - given an appropriate notice period.
The prescribed format of Table 1 of Annex 1 was developed as the basis of
standardised routine reporting for transactions and it is assumed that this is not the
intention here. In addition:
• It is advisable to wait for the outcome of the CESR-ERGEG work on the record-
keeping obligation and the subsequent guidelines of the EU Commission
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pursuant to subparagraph 4 of Art. 22f and 24 f. of the Directives5 in order to
have a more solid basis for considering what requirements, if any, are needed.
• A number of questions arise on (cross-sectoral) governance arrangements both
in terms of developing and maintaining formats.
• The significant costs and complexity associated with introducing a standard
recording format should be recognized. In particular the development of
standardised unique codes for each traded product has significant implications,
for some products many data fields will also not be relevant.
• It is imperative that a full impact assessment (looking at the relevant costs and
benefits) is undertaken before decisions are proposed.
6. In addition, a solution to the problems of the record keeping addressed in this

section could be that the mentioned principles-based approach excludes certain
categories of firms and transactions or limits the scope of application of the record-
keeping obligation to certain categories of firms and transactions. A decisive factor
in this limitation should be whether the categories of firms and/or transactions have
a significally relevance for the price formation in the gas and power markets and the
market monitoring. For example, ESME considers that small and medium-sized
companies with no or very low level of wholesale trading transactions would not be
relevant.
Question 6 “Transparency” (please see section F below)
1. The Sector Inquiry did not identify any market failure resulting from a lack of
information transparency in trading on the wholesale energy markets and the
wholesale derivatives market.
2. Based on the findings of the Sector Inquiry and on the experience of ESME
members, increased transparency on the physical side of the power and gas
markets (use of the transmission and production infrastructure, demand/supply
balance), and other relevant information as identified by ERGEG is likely to result in
an increase in liquidity in the electricity and gas derivatives markets.
3. The implementation of information requirements concerning electricity and gas

wholesale physical and derivatives transactions should be driven by market
developments and carried out in accordance with better regulation principles with a
view to minimising the additional obligations that would result for the market
participants.
4. Post-trade transparency as described in this section could be established (alongside

the record-keeping obligation of the Third Energy Package) for the purpose of
facilitation of access to information.
5. However, regulators should make the maximum use of available information

sources (brokers, exchanges operators) for market monitoring purposes – as they
are generally better-placed to provide this information than market participants.
5
Wording of this subpara. reads as follows: “To ensure the uniform application of this Article, the
Commission may adopt guidelines which define the methods and arrangements for record keeping as well
as the form and content of the data that shall be kept.”
8
6. Therefore, information about commodity derivatives transactions conducted or
cleared at exchanges (e.g. EEX) and Multi-Trading Facilities “MTFs” (brokers) could
be made accessible to the public. This would not mean obligations by participants of
these platforms, but rather the obligation of the operator of such a platform to show
to the public – on a aggregated and anonymous basis – the transactions. In this
context it seems not to be appropriate to harmonize the details of this publication
throughout the EU, as the MTFs and the level, kind and content of the transaction
and information are different according to the market circumstances.
Question 7 (please see section G below)
1. Definition of commodity derivatives and exotics/hybrids derivatives: It would be

helpful in terms of application of MAD if the definitions of commodity derivatives and
exotics/hybrid derivatives could be defined through reference to the corresponding
definitions in MiFID. This harmonisation should not, however, broaden the scope of
the MAD to new kinds of financial instruments beyond its existing scope.
2. Definition of insider information and scope of application of the prohibition of insider

trading and duty of publication by the issuer: There are significant practical problems
in defining insider information and applying the insider dealing regime to the
commodity and commodity derivatives businesses. This stems from both the
specifics of and the diversity between different businesses together with the fact that
participants operate to varying degrees in both physical and derivative markets.
The ESME Group endorses the regulatory suggestions made in its earlier (6th July
2007) ESME-MAD report and furthermore notes that changes may be necessary to
level 1 & 2 provisions to address the issues. ESME is of the opinion that there is a
need to further adapt the insider dealing regime to the needs of the commodity and
commodity derivatives business to guarantee the orderly functioning of these
markets (for specific recommendations see section G below).
3. No extension of MAD regime to Multi-Trading Facilities (MTFs): MiFID already

requires investment firms and market operators to monitor transactions that may
involve abuse. Furthermore, MTFs are required to report such conduct to the
competent authority and provide further assistance as appropriate. This, together
with other regulatory measures, ensures that there is already sufficient investor
protection, transparency and market integrity within MTFs.
4. No extension of MAD regime to OTC markets and spot markets: There is no

evidence or threat of market failure that would result in significant consequences for
the integrity and efficient operation of these markets to justify a wider application of
MAD. Furthermore, the health and increasing participation in these markets
together with the absence of any suggestion of a need in current energy and
financial regulator consultations supports this assertion.
5. Transaction and position reporting: transaction reporting directly by market

participants, on its own, would not provide regulators with the necessary information
to detect market abuse. Record-keeping obligations allow regulators to access such
information from companies if it is needed as part of any investigation or query
regarding market behaviour. Position reporting is more appropriate for detecting
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market abuse and regulators should have access to such information, but placing
reporting requirements directly on participants is not the best route for providing
such information. ESME suggests that regulated exchanges and MTFs are best
placed to act as front line regulators by monitoring positions of market participants –
including, where necessary, reporting directly to and coordinating with regulators.
This should be explored further, recognising that flexibility on reporting levels would
be needed and requirements proportional to market specifics. Solutions should be
avoided which might have the unintended consequence of reducing liquidity.
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IV. Advice
A. Question 1 “Fact Finding”
The subject matter of this section is the advice from ESME regarding question 1 in the
Mandate, which is as follows:
“Who are the main participants, in terms of turnover, in trading commodities and their
helpful.”
Advice from ESME:
In the following sections the answers are given for the following commodity and
commodity derivative sector separately in the form of a market information
questionnaire:
1. Continental Power Markets
Exchange based trading

Market The major markets for exchange-based continental power trading are:
(Exchange) Nordic (Nord Pool), Germany (EEX), France (Powernext), The
Netherlands (APX/Endex)
Main Contracts Nord Pool: spot, monthly, quarterly, yearly forwards

EEX, Powernext, APX/Endex: spot, monthly, quarterly, yearly
futures
Baseload and peakload contracts
Liquidity Annual futures trading volumes 2007 (2006) in TWh
Nord Pool: 1057 (766)
EEX: 189 (382)
Powernext: 79 (83)
Endex: 28 (32)
Annual spot trading volumes 2007 (2006) in TWh

Nord Pool: 287 (248)
EEX: 118 (88)
Powernext: 44 (30)
APX: 21 (19)
Spot trading volumes have continuously increased over the past few
years. Most futures markets in 2007 lost market share to OTC clearing
and OTC traded markets.
Types of firms Market participants are diversified and are of pan-European origin.
present Most participants can be grouped into the following categories:
brokers, utilities, municipalities/regional energy suppliers (RES),
oil/gas majors, banks, industry, proprietary traders, transmission
system operators (TSO)
Market participants in the forward market at Nord Pool: 126 from
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20 different countries in Europe and the US
Members of Nord Pool are also listed under
http://www.nordpool.com/ (then go to member list)
Market participants in the futures market at EEX1): 103, of which
21% utilities, 13% RES, 25% proprietary traders, 23% banks, 7%
oil/gas majors
The complete list of EEX market participants is available on the
EEX webpage: http://www.eex.com/en/about%20EEX/Participants
In the Powernext futures market there are 42 market participants.
Powernext members are listed under http://www.powernext.com
In the Endex futures market there are 36 market participants
Endex members are listed under
http://www.endex.nl/index.php?a=75/
1) As the exchange-traded market is strictly anonymous, it is not

possible to list trading volumes of individual market participants. EEX
Members were classified into categories (whereby trading affiliates of
utilities were classified under “utilities”). This classification is subjective
and was done to the best of our knowledge. Percentage values
represent the number of members in this category.
Regulation Nord Pool is a Norwegian public limited company authorised by
the Norwegian Ministry of Finance as an exchange under the
Exchange Act 2007 and supervised by FSAN. Market participants
authorised to trade are called exchange members. Exchange
membership is only granted to parties accepted by Nord Pool
Clearing as "Clearing Members." Nord Pool Clearing also has
"clearing clients," for whom trade is conducted by an exchange
member approved to act as a "client representative."
EEX is an exchange under the German Exchange Act and a
regulated market within the meaning of MiFID. Members are
required to be regulated clearing members or customers of a
regulated clearing member (non-clearing members).
Powernext SA is an investment company which manages a
multilateral trading facility agreed by the Comité des
Etablissements de Crédit et des Entreprises d’Investissement on
the advice of the Autorité des Marchés Financiers (AMF). The
Commission de Régulation de l’Energie (CRE) and the DIDEME
(French Ministry of Finance) also take part in Powernext’s
supervision.
ENDEX is a securities exchange recognised by the Dutch Minister
of Finance and supervised by the Netherlands Authority for the
Financial Markets (AFM) and the Dutch Central Bank (DNB).
Primary In the hourly spot auction the underlying settlement for the future
purposes of markets is derived. The spot auction is the last possibility for
trading traders to close their positions before physical delivery.
The futures market allows members and customers to manage
their power-price risk-exposures.
They are also used for price discovery and to gauge market
sentiment as prices generated from the futures market are fully
transparent, being updated second by second as trading occurs.
Pricing The reference price for Nord Pool forwards is the official Nordic
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underlying day-ahead price as published by Nord Pool Spot
The underlying security for the EEX Phelix Future is either the
Phelix Baseload or the Phelix Peakload. The Phelix Baseload is
the average of all prices of the hourly auction on the Spot Market
of EEX for the German/Austrian market area. The Phelix Peakload
Index takes the hourly prices of the peak load times (08:00 am
until 08:00 pm) from Monday until Friday into account.
OTC clearing
Market Besides exchange-traded products, all exchanges also offer OTC
(Exchange) clearing contracts. OTC clearing forms the link between the future
and the OTC market. OTC clearing is widely accepted by the
market participants to mitigate counterparty risk.
Main Contracts Nord Pool: monthly, quarterly, yearly forwards

EEX, Powernext, APX/Endex: monthly, quarterly, yearly futures
Baseload and peakload contracts
Liquidity Annual OTC clearing trading volumes 2007 (2006) in TWh
Nord Pool: 1250 (1394)
EEX: 922 (643)
Powernext: 4 (-)
Endex: 70 (96)
Types of firms Market participants are diversified and are of pan-European origin.
present Brokers, utilities, municipalities/regional energy suppliers (RES),
The same market participants for the futures markets have also
admission for the OTC clearing market at EEX.
Major underlying Physical Markets

OTC physical The major OTC physical markets are Germany, France and the
power trading Netherlands
Physical OTC trading takes place on electronic OTC platforms (eOTC)

provided by several brokers, by phone or bilaterally between market
participants.
Main Contracts Besides the contracts listed on the exchanges, the OTC market
provides additional contracts, such as:
Additional short-term tenors: The next days-ahead, balance-of-
week, weekly contracts. Balance-of-month
Additional contract types: offpeak, hours 1-6, hours 16-20, hours
20-24
Liquidity Annual trading volumes in the eOTC markets 2007 (2006) in TWh
Germany: 1981 (1682)
France: 306 (247)
The Netherlands: 176 (202)
OTC trading volumes can only be measured from deals executed on

the eOTC platforms. Bilateral and voice deals cannot be quantified.
Their volume comes on top of the eOTC volumes.
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Types of firms Market participants are diversified and are from pan-European
present origin.
Brokers, utilities, municipalities/regional energy suppliers (RES),
Counterparties from RWE Trading in the OTC market in 20072):
53% European utilities, 24% banks, 9% German utilities, 3% RES,
6% proprietary traders, 2% industry, 1% oil/gas majors
2) As the OTC market is strictly confidential, it is not possible to list

total trading volumes of individual market participants. To fulfill
confidentiality requirements, RWE Trading classifies their
counterparties into categories and lists the trading volume share by
category.
N.B.: This procedure is not representative for the whole OTC market
as only counterparties from RWE Trading can be taken into
consideration.
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Development of trading volumes for the major European power trading markets
Below are some graphical representations of the year-on-year development in power-

trading volumes at Nord Pool, EEX, Powernext and Endex/APX.
Nordpool Power Trading Volume

4,000
NP OTC Clearing
3,500
NP Futures
3,000 NP Spot
2,500
TWh
2,000
1,500
1,000
500
0
2001 2002 2003 2004 2005 2006 2007
German Power Trading Volume

3,500
3,000 D eOTC
EEX OTC Clearing
2,500
EEX Futures
2,000 EEX Spot

TWh
1,500
1,000
500
0
2001 2002 2003 2004 2005 2006 2007
15
French Power Trading Volume
500
450
F eOTC
400
Powernext OTC Clearing
350 Powernext Futures
300 Powernext Spot
TWh
250
200
150
100
50
0
2001 2002 2003 2004 2005 2006 2007
Dutch Power Trading Volume

400
350
NL eOTC
300 Endex OTC Clearing
Endex Futures
250
APX Spot
TWh
200
150
100
50
0
2001 2002 2003 2004 2005 2006 2007
16
Market Participants at EEX (Source: EEX)
Further market characteristics of Continental power trading
Among all traded commodities, electricity is one of the most volatile.

Apart from the generally higher volatility of the energy markets versus other
commodities, there is another additional complexity.
This is because the energy markets are so closely intertwined that they are not only
correlated, but often even "co-integrated".
This means that the various energy markets do not develop independently of each
other.
More often than not, there is a price-determining energy commodity for electricity, such
as gas in winter or hard coal in summer.
The price trends of these energy sources also have an impact on the electricity price
which in turn is influenced also by the CO2 costs.
The correlation among the different power trading markets has increased significantly
since 2005.
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The following table presents the log-return correlation of front year prices (Cal05 in
2004, Cal06 in 2005, Cal07 in 2006, Cal08 in 2007) for European power baseload
contracts (NP: Nord Pool) vs. German contracts:
Jahr D/F D / NL D / NP D / UK
2004 0.807 0.694 0.175 0.206
2005 0.945 0.778 0.724 0.411
2006 0.959 0.874 0.608 0.537
2007 0.912 0.914 0.688 0.669
Price difference between OTC vs. exchange-traded markets
In general, there are no price differences between OTC and exchange prices. Market
integrity is guaranteed as differentials between OTC and exchange quotes are
immediately arbitraged and are therefore negligible.
The mean absolute deviation is 0.05 €/MWh or 0.11% from Jan 2004.
Difference OTC/EEX closing price for baseload front year in %
3.00%
2.00%
1.00%
Difference in %
0.00%
-1.00%
-2.00%
-3.00%
-4.00%
Jan/ 04
Mai/ 04
Sep/ 04
Jan/ 05
Mai/ 05
Sep/ 05
Jan/ 06
Mai/ 06
Sep/ 06
Jan/ 07
Mai/ 07
Sep/ 07
Trading day
Price differences between OTC and EEX futures markets might only appear because
of market events occurring after the exchange closes at 4pm. As the last OTC deals
are concluded up to 2.5 hours after EEX closure, the OTC market reacts on late
market events. As the graph above shows the price deviation then diminishes on the
next trading day.
The largest deviation was -1.80 €/MWh (-3.24%) on 26th April 2006. On this day the
unexpected release of verified carbon emissions led to major price movements after
4pm. As usual, the EEX future market traded in a narrow range around the OTC
market. As more carbon news was released in the evening, the OTC price fell
massively after EEX closure. On the next trading day exchange and OTC prices
moved synchronously again.
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2. Gas Trading
Exchange-based trading
Market The major markets for exchange-based gas trading in
Europe are:
Germany: The European Energy Exchange (EEX)

UK: Amsterdam Power Exchange UK (APX UK)
Netherlands: European Energy Derivatives Exchange
(Endex) and Amsterdam Power Exchange Netherlands
(APX NL)
Main Contracts EEX: day ahead, weekend ahead, current month, 1 and 2
months ahead, 2 quarters ahead, 1 year ahead
APX UK:
- OCM within-day market (NBP Title, NBP Physical, NBP
Locational)
- Day-ahead market (individual days, balance of week,
weekend strip, working days next week)
APX NL:
- within-day market: hourly block via balance of the day
(front 48 blocks)
- day-ahead market: individual days, weekend strip,
balance of week, working days next week
Endex: 3 months ahead, 4 quarters ahead, 2 seasons

ahead, 3 calendars ahead
Annual futures trading volumes 2007 (2008)6
EEX (EEX started 01 July 2007): 3,697,920 (2,827,020)

MWh7
Endex: 17,793,940 (10,549,710) MWh8
Annual spot trading volumes 2007 (2008)
EEX: 404,670 (5040) MWh
Annual APX trading volumes 2007 (2006)
APX UK: 131 (148)TWh9

APX NL: 59 (22) TWh
6
Until 6/05/2008.
7
Source: EEX; market data is published under http://www.eex.com/de/Downloads/Marktdaten and can also
be obtained from EEX.
8
Source:Endex; market data can be accessed after receiving market login details.
9
Source: APX group; market data can be obtained from APX group.
19
Market Participants Market participants are diversified and are of pan-
European origin
They can include brokers, utilities, municipalities, regional
energy suppliers, oil/gas majors, banks, industry,
proprietary traders and transmission system operators
EEX has 30 members active in gas trading.10
Endex has 36 members for trading TTF Gas.11
The total number of members on APX Gas UK is 74.12
Regulation EEX is an exchange under the German Exchange Act and
a regulated market within the meaning of MiFID.
Members are required to be regulated clearing members or
customers of a regulated clearing member (non-clearing
members).
ENDEX is a securities exchange recognised by the Dutch
Minister of Finance and supervised by the Netherlands
Authority for the Financial Markets (AFM) and the Dutch
Central Bank (DNB). Furthermore, the Dutch Minister of
Economic Affairs has appointed ENDEX as a gas
exchange under the Dutch Gas Act.
ENDEX distinguishes between five types of memberships:
1. Proprietary Trader: has access to the ENDEX Futures
Exchange and the OTC clearing service and who acts on
own account.
2. Agency trader: trades on behalf of and for the account of
a third party who is not a member.
3. OTC broker: has access to the OTC clearing service
and is authorized to register deals for clearing on behalf of
another ENDEX member.
4. Executing broker: ENDEX member who has access to
the ENDEX Futures Exchange and the OTC clearing
service and is authorized to act on behalf of another
ENDEX member.
5. Clearing member: provides clearing services to other
ENDEX members who trade on the ENDEX Futures
Exchange or register their deals via the OTC clearing
service.
Proprietary and agency traders must have entered into an
agreement with a clearing member.
APX NL: In the Netherlands, the Dutch Gas Act (2000)
contains articles guaranteeing the existence of a gas
exchange. Based on the Gas Act, APX Gas NL B.V. was
appointed as Gas Exchange Operator on 20 January 2005
by the Dutch Minister of Economic Affairs.
The Dutch Office of Energy regulation, the DTe, is
10
Please see tables 1 and 2 , internet:
http://www.eex.com/de/%C3%9Cber%20EEX/Teilnehmerliste?bcsi_scan_5E7893EC2CE2CEAF=dLShzv
UmyCNxuqle6gC9yZUAAACpk6k2
11
Please see table 3, internet: http://www.endex.nl/index.php?a=75&t=trading
12
An (in-)complete list of 54 members can be found under http://www.apxgroup.com/index.php?id=100.
Members have the option not to have their name listed on the APX group website.
20
responsible for implementing the Energy Act (1998) and
Gas Act, as well as supervising compliance with these
acts.
Due to the appointment, APX Gas NL B.V. is supervised by
the DTe.
In the UK, the regulatory framework is quite similar to that
of the Netherlands. Since 1999, APX Gas UK Ltd. now
APX Commodities Ltd. is appointed by the Transmission
System Operator National Grid Transco and regulated by
Ofgem.
In the UK, APX Commodities Ltd. is regulated by the
Financial Services Authority (FSA).
Primary purposes of The futures market allows members and customers to
trading manage their gas price risk exposures.
Pricing Market price
OTC-Clearing Offered by most exchanges, but not used by large suppliers (for
example not used by E.ON Ruhrgas AG)
OTC-based trading
Market The major markets for OTC-based gas trading are: National
Balancing Point (NBP), Title Transfer Facility (TTF),
Zeebrugge Hub (ZEE), Points d’ échange de gaz (PEG),
E.ON Gastransport AG & Co KG Hub (EGT), BEB Transport
und Speicher Service GmbH Hub (BEB)
1. NBP
Main contracts Quarters, seasons, months and spot contracts

Liquidity 627 TWh monthly average in winter 07/08
Market participants Participants are essentially the same as for exchange-
based trading. They could include utilities, oil/gas majors,
banks, industry, proprietary traders, transmission system
operators.13
2. TTF
Main contracts Years, quarters, seasons, months and spot contracts

based trading. They could include utilities, oil/gas majors,
banks, industry, proprietary traders, transmission system
operators.14
13
For an exemplary list of participants see table 4. This is not representative for the whole OTC market as
only the main participants were taken into consideration.
14
For an exemplary list see table 5. This is not representative for the whole OTC market as only the main
participants were taken into consideration.
21
3. ZEE
Main contracts Quarters, seasons, months and spot contracts (almost no yearly
contracts)
based trading. They could include utilities, regional energy
suppliers, oil/gas majors, banks, industry, proprietary
traders, transmission system operators.15
4. PEG
Main contracts Quarters, seasons, months and spot contracts (almost no yearly
contracts)
Market participants E.ON Ruhrgas AG does not trade on PEG and therefore cannot
provide any data.
5. EGT

Liquidity 6 TWh monthly average in winter 07/08, 11 TWh traded in
Feb
based trading. They could include municipalities, regional
energy suppliers, utilities, oil/gas majors, industry,
proprietary traders.16
6. BEB

Liquidity 2 TWh monthly average in winter 07/08, 4 TWh traded in
March
based trading. They could include utilities, municipalities,
regional energy suppliers, oil/gas majors, banks, industry
and proprietary traders.17
15
For a non-exhaustive list see table 6. This is not representative for the whole OTC market as only the
main participants were taken into consideration. A list of all participants at ZEE HUB can be found under
http://www.huberator.be/page_type_03.aspx?id=42&idForm=4,5.
16
main participants were taken into consideration. For a list of all participants at EGT Hub see http://www.eon-
gastransport.com/cps/rde/xchg/SID-3F57EEF5-8D3C44A2/eon-gastransport/hs.xsl/2809.htm.
17
main participants were taken into consideration. For a list of participants who consented to publication of
their name see http://www.beb.de/cms/index.cfm?88EDBE5BD60EB4E27739A4C3D3CA2F7A.
22
Table 1: Members of the EEX Derivatives Gas Market
Name Country
1. 24/7 Trading GmbH D
2. actogas GmbH D
3. Deutsche Bank AG D
4. DONG Naturgas A/S DK
5. E.ON Ruhrgs AG D
6. EDF Trading Limited GB
7. Electrabel S.A. B
8. EnBW Trading GmbH D
9. Energiefinanz GmbH D
10. Gaselys S.A. F
11. GETEC Energie AG D
12. CAP Energy AS N
13. KoM-SOLUTION GmbH D
14. Morgan Stanley & Co. International Ltd. GB
15. NUON Energy Trade & Wholesale N.V. NL
16. Österreichische Elektrizitätswirtschafts-AG A
17. RWE Supply & Trading GmbH D
18. Sempra Energy Europe Limited GB
19. Stadtwerke Hannover AG D
20. Stadtwerke Leipzig GmbH D
21. Stadtkraft Markets GmbH D
22. Syneco Trading GmbH D
23. Total Gas & Power Limited GB
24. Trianel European Energy Trading GmbH D
25. UBS AG CH
26. UBS AG London Branch GB
27. Vattenfall Trading Services GmbH D
28. VNG - Verbundnetz Gas Aktiengesellschaft D
23
Table 2: Members of the EEX Spot Market
Company Name Country

1. 24/7 Trading GmbH D
2. Bergen Energi Commodity Markets Access GmbH D
3. BKW-FMB Energie AG CH
4. Deutsche Bank AG D
5. DONG Naturgas A/S DK
6. E.ON Ruhrgas AG D
7. EDF Trading Limited GB
8. EHA Energie-Handels-Gesellschaft mbH & Co. KG D
9. Electrabel S.A. B
10. EnBW Trading GmbH D
11. Energieunion AG D
12. Energy & More Energiebroker GmbH & Co. KG D
13. EWE AG D
14. Gaselys S.A. F
15. GETEC Energie AG D
16. KoM-SOLUTION GmbH D
17. Morgan Stanley & Co. International Ltd. GB
18. NUON Energy Trade & Wholesale N.V. NL
19. RWE Supply & Trading GmbH D
20. Sempra Energy Europe Limited GB
21. Shell Energy Trading Limited GB
22. Stadtwerke Hannover AG D
23. Stadtwerke Leipzig GmbH D
24. Stadtkraft Markets GmbH D
25. swb Vertrieb Bremen GmbH D
26. Syneco Trading GmbH D
27. Total Gas & Power Limited GB
28. Trianel European Energy Trading GmbH D
24
29. UBS AG London Branch GB
30. Vattenfall Trading Services GmbH D
31. Vitol S.A. CH
32. VNG - Verbundnetz Gas Aktiengesellschaft D
Source: www.eex.com
Table 3: Members of Endex
1. Actogas GmbH
2. All Energy Trading B.V.
3. Atel Trading
4. BNP Paribas
5. Constellation Energy Commodities Group Inc.
6. Delta Energy B.V.
7. Deutsche Bank AG
8. Dong Naturgas A/S
9. E.ON Benelux N.V.
10. E.ON D-Gas B.V.
11. E.ON Energy Trading AG
12. E.ON Ruhrgas AG
13. EDF Trading Limited
14. Electrabel SA
15. Eneco Energy Trade B.V.
16. Enel Trade S.p.A.
17. Essent Energy Trading B.V.
18. Essent Trading International S.A.
19. Fortis Bank S.A.
20. Gaselys
21. GasTerra B.V.
22. Gazprom Marketing & Trading Limited
23. J. Aron & Company
25
24. JP Morgan Securities Limited
25. Mercuria Energy Trading SA
26. MMT Energy Fund
27. Morgan Stanley & Co. International plc
28. N.V: NUON Energy Trade & Wholesale
29. RWE Trading GmbH
30. Scottish Power Energy Management Ltd.
31. Sempra Energy Europe Limited
32. Shell Energy Trading Limited
33. SJB Energy Trading B.V.
34. Vattenfall Trading Services GmbH
35. VDM Energy Trading B.V:
36 Vitol SA
Source: www.endex.nl
Table 4: Exemplary list of NBP market participants
1. Accord Energy Ltd.

2. Barclays Bank Plc.
3. BG International Ltd.
4. BNP Paribas S.A.
5. BP Gas Marketing Ltd.
6. ConocoPhillips (UK) Ltd.
7. Deutsche Bank AG
8. Distrigaz S.A.
9. EDF Trading Ltd.
10. Electrabel S.A.
11. Elektrizitäts-Gesellschaft Laufenburg AG (EGL)
12. Eni (UK) Ltd.
13. E.ON Ruhrgas AG
26
16. ExxonMobil Gas Marketing Europe Ltd.
18. Gaselys S.A.
19. Gazprom Marketing and Trading Ltd.
20. Glencore Energy UK Ltd.
21. Hess Energy Power & Gas Company (UK) Ltd.
22. J. Aron & Company
23. Merrill Lynch Commodities (Europe) Ltd.
24. Mitsui & Company Energy Risk Management Ltd.
25. Morgan Stanley Capital Group Inc.
26. National Grid Gas Plc.
27. Norsk Hydro Energie AS
28. Nuon Energy Trade & Wholesale N.V.
29. RWE Supply & Trading GmbH
30. Shell Energy Trading Ltd.
31. StatoilHydro ASA
32. Total Gas & Power Ltd.
33. Wingas GmbH
Table 5: Exemplary list of TTF market participants

2. ConocoPhillips (U.K.) Limited
3. Delta Energy B.V.
4. DONG Naturgas A/S
5. E.ON D-GAS B.V.
6. E.ON Energy Trading
7. E.ON Ruhrgas AG
8. Eneco Energy Trading B.V.
10. Essent Trading International SA
27
12. Gaselys
14. N.V. Nuon Energy Trade & Wholesale
16. RWE Trading GmbH
18. SJB Energy Trading B.V.
19. Stadtwerke Hannover AG
20. Total Gas Power Ltd.
21. Vitol SA
Table 6: Exemplary list of ZEE Hub market participants
1. Accord Energy Ltd.

2. Barclays Bank Plc.
3. BG International Ltd.
4. BNP Paribas S.A.
6. ConocoPhillips (UK) Ltd.
7. DELTA Energy B.V.
8. Deutsche Bank AG
9. Distrigaz S.A.
10. EDF Trading Ltd.
11. Electrabel S.A.
12. Elektrizitäts-Gesellschaft Laufenburg AG (EGL)
13. EnBW Trading GmbH
14. Eni (UK) Ltd.
15. E.ON Ruhrgas AG
16. Essent Trading B.V.
28
20. Gaselys S.A.
22. Glencore Energy UK Ltd.
23. Hess Energy Power & Gas Company (UK) Ltd.
24. J. Aron § Company
25. Merrill Lynch Commodities (Europe) Ltd.
26. Mitsui & Company Energy Risk Management Ltd.
27. Morgan Stanley Capital Group Inc.
33. Wingas GmbH
Table 7: Exemplary list of EGT Hub market participants
1. BP Gas Marketing Limited

2. Electrabel
3. Centrica Energie GmbH
4. Dong Naturgas A/S
5. EDF Trading Ltd.
6. Electrabel S.A.
7. Elektrizitätsgesellschaft Laufenburg AG (EGL)
8. EnBW Trading GmbH
9. Enoi S.p.A.
10. E.ON Ruhrgas AG
29
13. Gaselys S.A.
16. Sempra Energy Europe Ltd.
18. Statkraft Markets GmbH
19. Syneco Trading GmbH
21. Vattenfall Trading Services GmbH
22. Vitol S.A
23. VNG Verbundnetz Gas AG
Table 8: Exemplary list of BEB Hub market participants

2. EDF Trading Ltd.
3. Electrabel S.A.
4. E.ON Ruhrgas AG
8. Vitol S.A.
9. VNG Verbundnetz Gas AG
30
3. Base Metals Products Trading

Market The London Metal Exchange
Main Contracts Futures and options contracts on primary aluminium and copper
on a daily basis for first three months, each Wednesday for 4-6
months, and every third Wednesday to 63 months forward.
Futures and options contracts on aluminium alloy, North American
Special Aluminium Alloy (NASAAC), nickel and zinc listed on a
daily basis for first three months, each Wednesday for 4-6 months,
and every third Wednesday to 27 months forward.
Futures and options contracts on lead and tin listed on a daily
basis for first three months, each Wednesday for 4-6 months, and
every third Wednesday to 15 months forward.
Liquidity Volumes (2007):
Primary aluminium: 43,709,367 lots (1 lot = 25 tonnes)
Copper: 23,464,298 lots (1 lot = 25 tonnes))
Aluminium alloy: 492,868 lots (1 lot = 20 tonnes)
NASAAC: 1,246,578 lots (1 lot = 20 tonnes)
Nickel: 3,995,432 lots (1 lot = 6 tonnes)
Zinc: 13,677,587 lots (1 lot = 25 tonnes)
Lead: 5,000,037 lots (1 lot = 25 tonnes)
Tin: 1,312,177 lots (1 lot = 5 tonnes)
NYMEX in New York and the Shanghai Futures Exchange list

derivatives on copper, primary aluminium and zinc.
Market Executing brokers, clearing brokers, producers, refiners and
Participants consumers of the base metals traded, and traders and funds.
Contracts trade in large lot sizes so are not suited to small
investors - there is no retail involvement.
LCH Clearnet centrally clears all trading.
Customers to the market trade through members by electronically
routing their orders to the LME SELECT electronic trading system,
by trading against the telephone quotes of members or by giving
orders to members that are executed on SELECT, by open outcry
or against other members. Members may only act as principals.
Regulation Recognised by the Financial Services Authority as a Recognised
Investment Exchange and subject to the FSA’s Recognition
Requirements.
Members are required to be regulated firms and their customers, if
not regulated firms, must be vetted by the member and seen as
“fit and proper” to trade.
Trading on the LME falls under the FSA’s Code of Market Conduct
(UK implementation of the Market Abuse Directive)
The exchange monitors trading and acts as “front-line” regulator
Primary The futures and options market allows members and customers to
purposes of manage their price and sourcing risk exposure to the base metals
trading admitted to trading on the LME.
They are also used for price discovery and to gauge market
sentiment as prices generated from the futures and options
market are fully transparent being updated second by second as
31
trading occurs.
Pricing Real time prices are available via the LME SELECT electronic trading
platform, from indicative prices quoted by Members and from open
outcry ring and kerb trading; these prices are distributed via major data
vendors and the web-based LMElive. Settlement Prices are set daily
based on the last bid and offer prices in the 2nd ring, with closing prices
being established after the close of afternoon ring trading. The price
formation process is transparent and is overseen by LME staff.
Settlement and All the LME base metals contracts are deliverable, with delivery of net
Delivery of positions by broker taking the form of warrants and the seller selecting
LME Base the warrants to deliver. An LME warrant represents an identifiable lot
Metals of a particular brand of the relevant metal stored by a particular
Contracts warehouse company in a particular location; approved locations are
located throughout the world. The metal must be in a form specified by
the LME and of the appropriate weight. Each LME listed warehouse
company undertakes to deliver to the holder of an LME warrant the
precise lot of metal that it represents.
The underlying market in base metals
Liquidity The underlying market is opaque, although organisations such as the
International Wrought Copper Council or the International Aluminium
Institute produce data on supply and consumption.
Types of Merchants, producers, refiners, consumers, and brokers.
participants
Regulation The underlying physical markets in the main fall outside financial
services regulation. Trading in the “underlying” markets can
influence LME Futures prices and hence falls within the scope of
the FSA’s Code of Market Conduct.
Pricing Prices for the underlying base metals market are reported by
various services such as Metal Bulletin. Prices and price indices
published by Metal Bulletin represent an approximate evaluation
of current levels based upon dealings (if any) that may have been
disclosed prior to publication to Metal Bulletin and are collated
through regular contact with producers, traders and consumers;
actual transaction prices reflect quantities, grades and qualities,
credit terms, and many other parameters but their accuracy,
adequacy or completeness is not guaranteed and nor is it verified
independently.
Terms of physical contracts in the underlying metals listed on the
LME are frequently priced by reference to the LME Daily Official
Settlement Prices, adjusted by a premium or discount to take
account of differences in quality of metal from that required by
LME Contract Rules.
OTC markets in base metals’ derivatives
OTC There is an active OTC market in base metals’ derivatives. Subject to
LME rules, it is permissible to bring certain OTC contracts onto the
LME and convert them to exchange contracts or to take exchange
contracts off-exchange. Contracts brought on-exchange with one LME
member can be transferred to another LME member where there is a
customer in common and for the second member to take that contract
off-exchange. This assists market participants to net OTC or exchange
contracts held with different members.
32
Additional Information for LME:
Breakdown of user types on the LME
Members of the London Metal Exchange (LME) are obligated to provide LME
Compliance daily with full data on all positions held by the firm and each of its clients for
every settlement date traded on the Exchange; the LME has admitted to trading
derivatives on aluminium alloy, high grade copper, lead, nickel, North American Special
Aluminium Alloy, primary aluminium, tin, zinc, polypropylene, and linear low-density
polyethylene with settlement dates being on a daily basis for the first three months, each
Wednesday for 4-6 months, and every third Wednesday to between 15 and 63 months
forward, depending on the contract traded. Steel billet has recently been admitted to
trading but with restricted settlement dates available for trading until the full launch of the
contract on 28 April 2008.
The data provided by member firms includes the name of the client, or firm where the
position is proprietary, holding the position by settlement date. This permits LME
Compliance to aggregate the positions by market user across the market where a user is
a client of more than one member and it will, where there are reasonable grounds,
amalgamate positions of different market users if it considers that these users might be
related. The aggregated positions are a critical element in ensuring that the LME can
ensure the integrity and properness of its markets and monitor for abuses such as
corners or squeezes.
The LME does not have a need to break down the data received from members into
user types such as producers, processors, smelters, merchants, consumers (such as
automotive firms) and funds; retail activity is non-existent, perhaps due to the high value
of LME contracts.
To provide a breakdown of user types would be a major endeavour, requiring many

man-hours. It is unlikely that it would provide useful information but would simply
reinforce the fact that users of the LME are knowledgeable, experienced, wholesale and
industrial users and professional funds that use LME markets to hedge, trade and
source the commodities underlying the contracts traded on its markets.
Authorisation Requirements for LME membership
Ring Dealing Members (Category 1 members), Associate Broker Clearing Members

(Category 2 members) and Associate Broker Non-Clearing Members (Category 4
members) of the LME must be authorised or exempt persons in accordance with Part III
of the UK Financial Services & Markets Act (FSMA) or an investment firm authorised
under Article 5 of MiFID or a credit institution authorised under the BCD. Associate
Trade Clearing Members (Category 3 members) need not be authorised or exempt; they
are entitled to clear their own LME business but they may not issue LME client contracts
and nor may they trade in the Ring. Associate Trade Members (Category 5 Members)
need not be authorised or exempt; they have no trading rights except as clients, they
may not issue LME client contracts and nor may they clear their own LME business.
LME members active as physical traders
There are no category 1, 2 or 4 members that are active traders of the underlying
physical commodities; some members are parts of groups that engage in the physical
33
business.
Banks that are LME members in their own name
Of the 25 banks, including investment banks, that are members of the LME, 16 have
direct memberships, including through branches, with the other nine operating their
membership through subsidiary companies. All other category 1, 2 and 4 members of
the LME are investment firms rather than banks or parts of bank groups, although one of
these is a joint venture with a major international banking group.
The importance of commodity derivatives in pricing the underlying
It is not easy to derive authenticated prices for deals taking place bilaterally in certain
physical commodities due to the opaqueness of dealings; the commencement of on-
exchange trading in derivatives on such commodities can bring truer price transparency
to the value of the underlying commodities, with the settlement price of the exchange-
traded derivative becoming accepted as the reference price for the pricing of the
underlying physical commodities. Article 37 of Commission Regulation (EC) No.
1287/2006 recognised this feature of the commodity derivatives markets, stating that it is
not necessary for commodity derivatives admitted to trading on a regulated market to
have a price or other value measure for the underlying to be reliable and publicly
available where the contract establishing the instrument is likely to provide a means of
disclosing to the market, or enabling the market to assess the price or other value
measure of the underlying.
The daily Official Settlement Prices for these metals are used widely throughout the
world to price dealings in the eight metals, with premiums or discounts being applied to
take account of differences in metal quality from that required for deliveries arising on
LME contracts.
34
4. Plastics Products Trading

Market The London Metal Exchange
Main Contracts Futures contracts on polypropylene (PP) deliverable in a) North

America, b) Europe, c) Asia, and d) globally. Contracts listed on a
daily basis for first three months, each Wednesday for 4-6 months,
and every third Wednesday from 7 to 15 months forward.
Futures contracts on linear low-density polyethylene (LL)
deliverable in a) North America, b) Europe, c) Asia, and d)
globally. Contracts listed on a daily basis for first three months,
each Wednesday for 4-6 months, and every third Wednesday
from 7 to 15 months forward.
Liquidity Volumes (2007):
PP: 8,509 lots (1 lot = 24.75 tonnes);
LL: 5,796 lots (1 lot = 24.75 tonnes).
Market Executing brokers, clearing brokers, producers, refiners and
Participants consumers of PP and LL, traders and funds.
Customers to the market trade through members by electronically
routing their orders to the LME SELECT electronic trading system,
by trading against the telephone quotes of members or by giving
orders to members that are executed on SELECT, by open outcry
or against other members. Members may only act as principals.
Requirements.
Trading on the LME falls under the FSA’s Code of Market Conduct
Primary To allow members and customers to manage their price and
purposes of sourcing risk exposure to PP and LL.
trading The contracts aid price discovery as prices generated from the
futures market are fully transparent.
Pricing Real time prices are available via the LME SELECT electronic trading
platform, from indicative prices quoted by members and from open
outcry ring and kerb trading; these prices are distributed via major data
vendors and the web-based LMElive. Settlement Prices are set daily
based on the last bid and offer prices in the 2nd Ring, with closing
prices being established after the close of afternoon ring trading. The
price formation process is transparent and is overseen by LME staff.
Settlement and All the LME PP and LL contracts are deliverable, with delivery of net
Delivery of positions by broker taking the form of warrants and the seller selecting
LME Plastics the warrants to deliver. An LME warrant represents an identifiable lot
Contracts of a particular brand of the relevant PP or LL stored by a particular
35
warehouse company in a particular location; approved locations are
located throughout the world. The PP or LL must be in a form
specified by the LME and of the appropriate weight. Each LME listed
warehouse company undertakes to deliver out to the holder of an LME
warrant the precise lot of PP or LL that it represents.
Delivery obligations on a European contract can only be met by
delivery of a warrant issued by a warehouse in an approved European
location; similar restrictions apply to delivery of Asian (North American)
warrants in fulfilment of delivery obligations for an Asian (North
American) contract. Any PP or LL warrant can be used to settle
delivery obligations on global contracts.
The underlying market in PP and LL
Liquidity The underlying market is opaque.
Types of Merchants, producers, refiners, consumers, and brokers.
participants
Regulation The underlying physical markets in the main fall outside financial
services regulation. Trading in the “underlying” markets can influence
LME futures prices and hence falls within the scope of the FSA’s Code
of Market Conduct.
OTC markets in PP and LL derivatives
OTC There is an active OTC market in PP and LL derivatives. Subject to
LME rules it is permissible to bring certain OTC contracts onto the
LME and convert them to exchange contracts or to take exchange
contracts off-exchange. Contracts brought on-exchange with one LME
member can be transferred to another LME member where there is a
customer in common and for the second member to take that contract
off-exchange. This assists market participants to net OTC or exchange
contracts held with different members.
36
5. Oil Products trading

Market ICE Futures
Main Contracts Gas oil futures and options contracts listed up to 36 months
forward on a monthly basis and further forward on a quarterly
basis
Heating oil futures listed up to 18 months forward
Gasoline futures listed up to 12 months forward
Calendar and product spreads can be traded between these
contracts.
Liquidity Average daily volumes (2008 year to date up to 27 May 2008):
Gas oil futures 108,000 lots (10.8 million tonnes)
Heating oil futures 467 lots (0.467 million barrels)
Gas oil options 567 lots (56,700 tonnes)
NY Harbour Gasoline futures 164 lots (164,000 barrels)
Similar heating oil and gasoline futures contracts are listed by NYMEX
in New York.
Types of firms Executing brokers, clearing brokers, oil majors, refiners and
present producers, utilities, traders, large users, funds.
Members and customers can trade either directly on screen or
route orders through brokers.
Requirements.
ICE futures trading falls under the FSA’s Code of Market Conduct
purposes of manage their oil price risk exposures.
trading They are also used for price discovery and to gauge market
trading occurs.
Pricing Real time prices are available via the ICE Platform and major data
vendors. Daily settlement prices are based on the weighted
average price of trades during a three minute settlement period
from 16:27:00, London time. The price formation process is thus
transparent and is overseen by compliance monitoring staff at the
exchange.
37
Major underlying Physical Markets
OTC physical Rotterdam barges gas oil 0.2 Market
oil trading
The ICE Gas Oil Futures contract expires to physical delivery via
barges, coasters or tanks at approved locations in the Amsterdam,
Rotterdam and Antwerp (ARA) area. The most significant underlying is
the “Rotterdam barges gas oil 0.2” market.
The ICE heating oil and gasoline futures contracts are based on New
York physical underlying markets which are outside the scope of the
Commission’s review.
Liquidity Spot trading is typically between 5 and 12 barges a day (this can
vary from zero occasionally up to around 20 on a busy day).
These barges are between 1,000 and 4,000 tonnes (2,000 tonnes
is the typical size).
There is also an additional and quite liquid “mini term” market for
blocks of volume to be delivered rateably over a half month.
Typically, these are for between 5,000 and 20,000 tonnes at a
time and trade in blocks between and 5 and 10 times a month.
There is also an additional trade of around 150-300,000 tonnes
each month from long-term deals (typically for a year at a time)
Types of firms Executing brokers, oil majors, refiners and producers, traders,
present blenders, large users or wholesalers.
Regulation These are OTC physical markets which in the main fall outside
financial services regulation, however, trading in the “underlying”
markets can influence ICE Futures prices and thus falls within the
scope of the FSA’s Code of Market Conduct. Barge market
usually trades “EFP related”, i.e. relative to an ICE Futures
contract and so may fall within scope of FSA here also.
Primary ARA Refiners selling surplus to own requirements
purposes of End users/wholesalers/resellers buying to cover end user demand
trading in Benelux and Germany (up the Rhine)
Blenders selling finished grade to profit from blending components
imported and/or bought locally.
Blenders buying to blend cargoes (typically to a different
specification) for export.
Traders buying and selling to hedge or take positions, particularly
as linked to delivery on ICE futures
Pricing In the main prices are “assessed” daily and reported via Platts and
other price reporters. Platts prices are probably the most
universally used OTC price references and are established via
open and transparent trading in a set 30 minute trading “window”
towards the end of each trading day.
The underlying market typically trades at a premium or discount to
the same or following month’s ICE Futures contract. This premium
is a function of supply/demand and the contango/backwardation
structure of the market at the time. Platts assess this premium at
the end of their trading “window” and add to their own estimation
of the ICE Futures price at the same time.
Standardisation Different terms and conditions apply depending on who is the
& settlement buyer and who is the seller. A standard set of “TTB rules”
38
(predefining lay time and demurrage rates to apply depending on
the size of the barge) is common to most contracts.
Settlement terms are typically “bill of lading” date plus 5 days
Delivery is “Free on Board” ARA (ports of Amsterdam, Rotterdam,
Antwerp), but can include additional smaller ports (e.g. Dordrecht,
Flushing and Amersfoort) in the ARA area
Other OTC Markets
OTC OTC swaps markets
The Platts premium (to ICE futures) trades quite liquidly as a

differential swap, typically by month, as defined by the difference
between Platts barges and the 1st month of the ICE Gas Oil futures
contract.
As mentioned above, Platts produce a daily assessment of various oil

product prices based on trading in a 30 minute window between 16:00
and 16:30 London time. Trading in this window is via a telephone
market operated by a London broker who, based on trading during
2007, estimates a split of volume by firm type as follows:
Oil Product Derivatives

Trading Companies: 52%
Oil Companies: 30%
Banks: 18%
The aim of this document was to provide an overview of the principal

oil products markets in Europe and how these interact with the
relevant contracts listed on the ICE Futures market. Throughout
Europe and globally there are myriad of oil products markets each with
its own regional variations reflecting local conditions and customs and
consumer requirements – many of these are quoted daily by Platts and
other price reporting agencies. There are too many to list or comment
on here.
39
6. Crude oil trading

Market ICE Futures
Main Contracts Brent and West Texas Intermediate (WTI) crude futures and
options contracts listed up to 72 months forward
ICE also offers a Middle East crude futures
Calendar and product spreads can be traded between these
contracts.
Liquidity18 Average daily volumes (2008 y.t.d. up to 27 May 2008)
Brent Crude Futures 271,000 lots (270 million barrels)
WTI Crude Futures 217,000 lots (217 million barrels)
Brent Crude options 96 lots (96,000 barrels)
WTI Crude options 64 lots (64,000 barrels)
Types of firms Executing brokers, clearing brokers, oil majors, refiners and
present producers, utilities, traders, large users, funds.
Contracts trade in 1,000 barrel lots so are not suited to small
Members and customers can trade either directly on screen or
route orders through brokers.
Requirements (will be a Regulated Market under MiFID).
Members are required to be regulated firms and their customers
must be vetted by the member and seen as “fit and proper” to
trade.
ICE futures trading falls under the FSA’s Code of Market Conduct
purposes of manage their crude oil price risk exposures.
trading They are also used for price discovery and to gauge market
trading occurs.
Pricing Real time prices are available via the ICE Platform and major data
vendors. Daily settlement prices are based on the weighted
average price of trades during a three-minute settlement period
from 19:27:00, London time. The price formation process is thus
transparent and is overseen by compliance monitoring staff at the
exchange.
Major underlying Physical Market Instruments
OTC forward The principal traded European crude oil market is the North Sea
trading BFOE (Brent, Fortes, Oseberg, Ekofisk) forward market.
Roughly 5-10 cargoes worth of “full” BFOE cargoes trades each
day (1 cargo is 600,000 barrels). These trade forward on contract
terms usually based on Shell (SUKO90) terms.
Volumes have declined in line with declining underlying North Sea
18
Source; ICE Futures Month and YTD Volume Summary 16/7/07
40
production and changes in upstream taxation which limit
operational flexibility.
A significant portion of the volume traded is based on time-
spreads (e.g. Oct/Nov), and the balance is flat price.
The most active players active in this market over past 3 years
have been 3 of the oil majors plus 3 active oil traders. Up to 4
other oil majors and 4 more oil traders also participate but less
frequently. Very occasionally one or more of the investment banks
participate but appear to confine their activity to swaps trading.
There is also a very liquid market for “partials” (less than full
cargoes) whereby full cargoes can be aggregated from a number
of smaller parcels at an average price. Partials are mostly flat
price and it is typical to see 2-5 million barrels traded per day.
This market attracts the same players above, and a number of
others taking the total number of regularly active participants to
roughly 20, though in all we see as many as 100 firms trade, most
of them infrequently.
Physical Something like 11,30,18,10 cargoes respectively per month are
Markets produced for each of the 4 fields (Brent, Forties, Ekofisk,
Oseberg), so something like 70 cargoes are loaded each month.
Many of these cargoes are sold as 'named grades' with a large
proportion of Brent and Forties being delivered through the BFOE
forward market.
Types of firms See above.
present
Regulation These are OTC physical markets which in the main fall outside
financial services regulation, however trading in these “underlying”
markets can influence ICE Futures prices so can fall within the
scope of the FSA’s Code of Market Conduct.
Primary The main reason for the oil firms to be present is to support their
purposes of physical supply and demand needs. A producer with a natural
trading long position may use the market to sell its production while
refiners will be present to source crude. Integrated firms will
usually have an imbalance in production and refining capacities so
will trade to balance their needs.
Firms also enter into “term” contracts (long term arrangements) to
buy/sell crude from the many independent producers and other oil
companies.
Traded volumes exceed the available production of the North Sea
fields. This might be explained in part by speculation on behalf of
the trading firms and in part by physical players using the market
to hedge exposures and source the optimal grades of crude for
their refineries. It is impossible to gauge this exactly, though the
resulting extra liquidity makes for a healthy liquid market with
sufficient depth to support reliable price discovery despite the
underlying decline in production.
Pricing In the main prices are “assessed” daily and reported via Platts and
other price reporters. Platts prices are probably the most
universally used OTC price references and are set via open and
transparent trading in a set 30-minute trading “window”. Platts
produce a daily assessment of the BFOE price based on trading
41
in a 30 minute window between 16:00 and 16:30 London time.
Trading in this window is via a telephone market operated by a
Lonodn broker who, based on trading during 2007, estimates a
split by firm type as follows:
Crude Oil Derivatives

Trading Companies: 40%
Oil Companies: 28%
Banks: 32%
Standardisation The great bulk of BFOE trading is standard conditions based on
& settlement the Shell SUKO90 terms – these aim to standardise physical
issues such as cargo quality and loading terms. Settlement is
usually 30 days after loading the cargo or, if no cargo is declared,
30 days from the middle of the loading month.
Other OTC trading
OTC
There are many other crude oil markets worldwide – too many to
comment on here. The most significant trading hubs are based on the
North Sea (the most relevant to EU regulation and hence the one
described above) and on the US internal pipeline and storage network
focussed on delivery into Cushing, Oklahoma. Other exchange-based
contracts are traded in Dubai and Tokyo though these are newer and
less liquid. Pretty much all of the hundreds of grades of crude oil
produced across the globe give rise to trading as producers seek a
route to market and refiners search for optimum grades to supply their
refineries.
42
7. Derivative Securities on Commodities
Market Securitisation of commodities as an underlying of derivative securities.

Main markets are Germany (and Switzerland), but offerings in all
countries with a market in retail derivative securities (for example
Austria or Italy).
Main Products Single commodities based on a standardised, regularly traded
futures or options contract as well as commodity indices.
One of the leading issuers in Germany offers products on more
than 100 different commodity underlyings (as of June 2008). The
same issuer offers products on 15 underlyings only in Italy.
All types of products, including leverage and investment
certificates (warrants, capital protection, bonus, discount
certificates, etc.)
There are almost no products on gas and electricity underlyings.
Liquidity Turnover on German stock exchanges in 2007
3.93 bn euro in investment certificates (3.80 per cent overall)
1.08 bn euro in warrants (3.22 per cent of all warrants)
3.25 bn euro in knock out products (5.94 per cent of all knock
outs)
Figures on outstanding volume are include FX and commodity
products and only refer to about 70 per cent of the market. End of
2007
711 investment certificates with an outstanding volume of 1.6 bn
euro (1.7 per cent of all investment certificates)
8,751 leverage products with 0.3 bn euro (11.2 per cent overall).
In early 2008 at least the turnover in derivative securities referring
to commodities has significantly increased. In March 2009 the
share of commodity knock outs topped almost 20 per cent of the
total turnover (725 m euro out of 3.6 bn euro). However, despite
the public awareness and media presence, derivative securities
on commodities still only play a minor role in the portfolios of
German private investors.
Source for data: Deutscher Derivate Verband
Types of firms Issuers are financial instititutions, including special purpose
present vehicles. At present, there are no issuers only specialised on
commodities as an underlying.
Investors are mostly private investors who either purchase the
products by themselves through their banks and discount brokers
via stock exchange or OTC or who are advised by the client
advisors of their banks.
Almost all products are typically listed at a specialised derivative
securities segment at a stock exchange (in Germany Scoach in
Frankfurt and EUWAX in Stuttgart)
Regulation Public offer and listing subject to the requirements of the
Prospectus Directive.
Issuers and intermediary banks are subject to European financial
market regulations.
Primary Investment in case of investment certificates, speculation in case
purposes of of leverage products.
43
trading
Pricing The issuers (or a related company) permanently provide two-way
prices (bid and offer) for the offers during the trading hours of the
exchanges. Pricing is based on the prices of the underlyings.
44
B. Question 2 “Fact Finding”
Does ESME have any observations to make on how the exemptions in the CAD and
and exotic derivatives are working in practice? What difficulties arise from different
interpretations? And what are some of the challenges or issues for market participants
or market quality arising from the existing regulatory framework? These might arise
from market distortions, regulatory arbitrage or other significant sub-optimalities in
market functioning.
Summary of Advice from ESME
The current position is clearly unsatisfactory for a number of reasons:
• The differing boundaries of regulation across the EU seem to be less problematic

than in the past but remain a potential concern for firms seeking to operate across
all Member States.
• The differential treatment of firms conducting the same wholesale activity depending
on whether they are members of a banking or investment services group causes
practical difficulties and anomalies, not least in restricting the activities of some
private equity investors in the sector.
45
Advice from ESME:
1. Significance of MiFID for commodity and commodity derivatives business
MiFID made significant changes to the way in which many Member States regulate firms
conducting business in commodity and other non-financial derivatives.
Although the ISD had required Member States to impose authorisation requirements on
firms carrying on certain kinds of investment business, those requirements did not apply
to the business of trading in commodity or other non-financial derivatives. However,
Member States were free to impose broader authorisation requirements than the ISD
required and a number of Member States in fact did require firms to obtain authorisation
to engage in businesses related to commodity and (in some cases) other non-financial
derivatives.
Correspondingly, EU firms carrying on those businesses did not benefit from the EU
"passport" for that business, even if they qualified as a credit institution or investment
firm under the BCD or ISD as a result of their other activities or were subject to a
national authorisation regime that covered that business. Therefore, if they carried on
cross-border business, or sought to establish branches in other Member States, they
might encounter requirements to obtain additional local licences in other Member States
which imposed broader licensing requirements than required by the ISD.
Some Member States (such as Italy and the UK) provided a means under which firms
authorised in another Member State to conduct this business could obtain "top up"
authorisation to conduct business locally even where the passport was not available, but
this facility did not exist in all Member States with broader licensing requirements. In any
event, a top up licence was not available to commodity firms from other Member States
that were not subject to authorisation in their home state (either because their home
Member State had not adopted broader licensing requirements or provided exemptions
from authorisation to certain categories of firm). Moreover, even though they did not
benefit from the passport for that business, EU credit institutions and investment firms
were still subject to capital requirements for their risks on commodity and other related
businesses, as the CAD provided a capital framework which covered that business.
Similarly, the ISD “passport” for regulated markets did not extend to markets trading
commodity and other non-financial derivatives. Therefore, EU exchanges which traded
commodity and other non-financial derivatives had issues as to whether they could admit
remote members in other Member States without contravening local authorisation
requirements applicable to exchanges.
Finally, the ISD did not address the treatment of third country firms carrying on cross-
border business with clients and counterparties in the EU, either in their own right or as a
special purpose vehicle (SPV) which acts as a booking vehicle for transactions arranged
by an EU firm. There are a number of different approaches across the EU to the
territorial application of domestic authorisation requirements. For example, in some
countries (such as the Belgium, Ireland and the UK) there are exemptions from
authorisation requirements for firms conducting cross-border business with local
institutional counterparties (including corporates), while in other countries, the law does
not explicitly address its territorial scope or there is guidance indicating that the
46
application of local authorisation requirements depends on the nature and degree of
solicitation of local investors.
MiFID sought to address some of the issues arising from this patchwork of authorisation
requirements by extending the coverage of the authorisation and passport regimes to
include investment services and activities in relation to certain commodity and other non-
financial derivatives. In summary, the MiFID definition of “financial instrument” covers
derivatives relating to commodities and a defined class of other underlying factors (such
as climatic variables, freight rates, economic statistics, emissions allowances,
telecommunications bandwidth, commodity storage capacity, etc.) where:
• the derivative is cash-settled;

• the derivative is admitted to trading on a regulated market or MTF; or
• the derivative is (i) not a spot contract, (ii) traded on a third country trading facility,
expressed to be traded on a regulated market, MTF or third country trading facility or
expressly stated to be equivalent to a contract which is so traded, (iii) subject to
clearing or margining arrangements and (iv) on standardised terms.19
However, MiFID also extended the coverage of the authorisation regime in other ways.
In particular, the definition of an “investment firm” in MiFID now covers (amongst others)
any person whose regular occupation or business is the performance of the investment
activity of “dealing for own account” in financial instruments on a professional basis,
regardless of whether that person is providing a service to third parties when conducting
that business.20 In contrast, the definition of an “investment firm” in the ISD only covered
persons whose regular occupation or business was the provision of investment services
for third parties on a professional basis.21 Although the ISD definition of investment
services also covered dealing for own account, the definition of investment firm was
limited to those providing services to third parties. The new definition of investment firm
is significantly broader and is capable of applying to a broad range of professional
investors and other market participants who invest or engage in transactions in financial
instruments for their own account, without seeking to provide services to third parties,
including many end-users of financial markets and of the services of financial
intermediaries.
The fact that MiFID pushed the boundaries of regulation outward in these ways focused
attention on the provisions of MiFID which exempt certain categories of firm from the
application of the directive.22
First, it was recognised that the extension of the definition of financial instruments to
include many commodity and non-financial derivatives would potentially sweep a
significant (but unknown) number of firms into the scope of EU authorisation
requirements that were not necessarily well adapted for their business. Under the ISD,
these firms were either not subject to authorisation requirements at all or were subject to
19
See Section C(5), (6), (7) and (10) of Annex I MiFID and articles 38 and 39 of the MiFID implementing
regulation. As a result of the conditions in article 38 of the MiFID implementing regulation, MiFID does not
generally apply to physically-settled spot or forward transactions or other physically-settled (OTC)
derivatives on commodities or other physically-deliverable underlyings.
20
Article 4.1(1) MiFID. The other significant change in the scope of the authorisation regime was the
extension of the definition of investment services and activities to cover “investment advice” and the
operation of MTFs (see Section A(5) and (8) of Annex I MiFID).
21
Article 1(2) ISD.
22
Article 2.1 MiFID.
47
specially-tailored national authorisation regimes. In particular, it was recognised that the
pushing out of the boundaries of authorisation would potentially affect a range of energy
companies which either directly or through specialised subsidiaries were active traders in
physical markets and increasingly in derivatives markets as well.
Secondly, it was understood that the extension of the definition of investment firm to
include anyone who invested in or traded any financial instrument for their own account
on a professional basis meant that it was necessary to include a number of broad
exemptions in the directive. Otherwise, Member States would be required to impose
authorisation requirements on many end-users and investors, not just on intermediaries.
At the same time, there were conflicting pressures. A firm that is exempt from MiFID
cannot take advantage of its benefits, in particular it cannot benefit from the MiFID
“passport” to facilitate its cross-border business. Firms that fall within the exemptions
cannot “opt into” MiFID (except by restructuring their business). Therefore, there was
pressure to prevent certain of the exemptions applying to subsidiaries within a banking
or securities firm group, so as to enable those group’s specialised derivatives trading
arms to benefit from the passport for their activities, even though their business might be
identical to that of other exempted firms and even though the risks to the regulated bank
or investment firm associated with their business might be equally captured through
consolidated supervision.23
The result was a complex set of interrelated and overlapping exemptions, the most
important of which in this context are set out in the box below. Although only two of
these are formally subject to the review process envisaged by the directive,24 it is
necessary to consider the exemptions together, as in many cases an entity may have to
rely on more than one exemption in relation to its business.
Key exemptions in article 2 MiFID

1. This Directive shall not apply to:
…
(b) persons which provide investment services exclusively for their parent
undertakings, for their subsidiaries or for other subsidiaries of their parent
undertakings;
…
(d) persons who do not provide any investment services or activities other than dealing
on own account unless they are market makers or deal on own account outside a
regulated market or an MTF on an organised, frequent and systematic basis by
providing a system accessible to third parties in order to engage in dealings with them;
…
(i) persons dealing on own account in financial instruments, or providing investment
services in commodity derivatives or derivative contracts included in Annex I, Section C
10 to the clients of their main business, provided this is an ancillary activity to their
main business, when considered on a group basis, and that main business is not the
provision of investment services within the meaning of this Directive or banking
23
In fact, it is not always clear how the rules on consolidated supervision in BCD and CAD apply to
subsidiaries trading commodity and other non-financial derivatives, in part because such a subsidiary would
not normally be a “financial institution” within article 4.5 BCD as trading in commodity and non-financial
derivatives is not an activity listed in points 2 to 12 of Annex I BCD. To some extent, this is addressed by
other provisions in CAD but these may not apply to subsidiaries that benefit from an exemption in MiFID.
24
Article 65(3) requires the Commission to review and report on articles 2.1(i) and (k).
48
services under Directive 2000/12/EC;
…
(k) persons whose main business consists of dealing on own account in commodities
and/or commodity derivatives. This exception shall not apply where the persons that
deal on own account in commodities and/or commodity derivatives are part of a group
the main business of which is the provision of other investment services within the
meaning of this Directive or banking services under Directive 2000/12/EC;
(l) firms which provide investment services and/or perform investment activities
consisting exclusively in dealing on own account on markets in financial futures or
options or other derivatives and on cash markets for the sole purpose of hedging
positions on derivatives markets or which deal for the accounts of other members of
those markets or make prices for them and which are guaranteed by clearing members
of the same markets, where responsibility for ensuring the performance of contracts
entered into by such firms is assumed by clearing members of the same markets;
…
Even so, it was also clear at the time that these exemptions would not be enough to fully
mitigate the possible effects of the extension of MiFID to cover commodity and non-
financial derivatives. There would be some firms that could not or would not wish to
benefit from the MiFID exemptions but for whom the CAD regime would be inappropriate
and unduly burdensome. Accordingly, changes were made to the CRD to add provisions
to CAD allowing Member States to exempt certain investment firms engaged in
commodity and non-financial derivatives business from the large exposure requirements
and capital rules in CAD, subject to certain conditions (see box below). These provisions
expire (at the latest) on 31 December 2010, although the Commission has recently
published proposals to extend this expiry date to 2012.
Exemptions in the CAD

Article 45
1. Competent authorities may permit investment firms to exceed the limits concerning
large exposures set out in Article 111 of Directive 2006/48/EC. Investment firms need
not include any excesses in their calculation of capital requirements exceeding such
limits, as set out in Article 75(b) of that Directive. This discretion is available until 31
December 2010 or the date of entry into force of any modifications consequent to the
treatment of large exposures pursuant to Article 119 of Directive 2006/48/EC,
whichever is the earlier. For this discretion to be exercised, the following conditions
shall be met:
(a) the investment firm provides investment services or investment activities related to
the financial instruments listed in points 5, 6, 7, 9 and 10 of Section C of Annex I to
Directive 2004/39/EC;
(b) the investment firm does not provide such investment services or undertake such
investment activities for, or on behalf of, retail clients;
(c) breaches of the limits referred to in the introductory part of this paragraph arise in
connection with exposures resulting from contracts that are financial instruments as
listed in point (a) and relate to commodities or underlyings within the meaning of point
10 of Section C of Annex I to Directive 2004/39/EC (MiFID) and are calculated in
49
accordance with Annexes III and IV of Directive 2006/48/EC, or in connection with
exposures resulting from contracts concerning the delivery of commodities or emission
allowances; and
(d) the investment firm has a documented strategy for managing and, in particular, for
controlling and limiting risks arising from the concentration of exposures. The
investment firm shall inform the competent authorities of this strategy and all material
changes to it without delay. The investment firm shall make appropriate arrangements
to ensure a continuous monitoring of the creditworthiness of borrowers, according to
their impact on concentration risk. These arrangements shall enable the investment
firm to react adequately and sufficiently promptly to any deterioration in that
creditworthiness.
2. Where an investment firm exceeds the internal limits set according to the strategy
referred to in point (d) of paragraph 1, it shall notify the competent authority without
delay of the size and nature of the excess and of the counterparty.
Article 48
1. The provisions on capital requirements as laid down in this Directive and Directive
2006/48/EC shall not apply to investment firms whose main business consists
exclusively of the provision of investment services or activities in relation to the
financial instruments set out in points 5, 6, 7, 9 and 10 of Section C of Annex I to
Directive 2004/39/EC and to whom Directive 93/22/EEC did not apply on 31 December
2006. This exemption is available until 31 December 2010 or the date of entry into
force of any modifications pursuant to paragraphs 2 and 3, whichever is the earlier.
2. MiFID implementation
How then have the MiFID provisions on commodity and other non-financial derivatives
been implemented in the Member States?
MiFID allows Member States to adopt broader definitions of what activities trigger
authorisation requirements. However, while they can adopt broader definitions of what
constitutes a regulated activity or a regulated financial instrument, it seems that relatively
few Member States have chosen to do this. In particular, of the Member States that
responded to CESR’s October 2007 survey on this point, only Italy and the UK intended
to apply definitions of financial instrument, for authorisation purposes, broader than
those required by the directive.25
The same survey indicated that many Member States had decided to copy out the
relevant exemptions in MiFID into their national law (even though they are not required
to do so), although with some limited variations. Again, the UK is the principal outlier in
that it continues to impose authorisation requirements on some firms that would benefit
from exemptions from MiFID, although the UK applies a less stringent regime to MiFID
exempt firms that are subject to its super-equivalent authorisation requirements (but
Austria and Belgium also indicated an intention to require a national licence). Italy has
not yet implemented the exemptions.
25
See CESR Response to the Commission's request for initial assistance on commodity and exotic
derivatives and related business (October 2007). The same report indicates that France has adopted a
broader definition of financial instrument but only for the purposes of ensuring that its netting legislation
continues to apply to OTC physically settled transactions that are subject to margining requirements.
50
3. Divergences of interpretation
This would suggest that the introduction of MiFID has resulted in some progress towards
a more harmonised application of authorisation requirements across the EU. However,
even where Member States have copied out the directive’s provisions into their national
law, there is still scope for differing interpretations of how these provisions apply. For
example:
• Article 2.1(b)
This exemption is available to persons which “provide investment services

exclusively for” their group companies. If a group company acts on behalf of another
group company to arrange transactions in derivatives between that group company
and a third party, it may be providing the MiFID service of reception and transmission
of orders as it will be “bringing together two investors, thereby bringing about a
transaction between those investors”.26 However, there may be doubts (at least in
some cases) as to whether the arranger is also providing a service to the third party,
as well as its affiliate, thus meaning that it cannot rely on the exemption.
• Article 2.1(d)
This exemption is available to persons “who do not provide any investment services
or activities other than dealing on own account”. On its face, therefore, this
exemption is not available to an entity which provides investment services to other
members of its group (otherwise falling within article 2.1(b)) but also deals for own
account. The Commission has suggested in its Q&A that it is possible to combine
the exemption in article 2.1(d) with other exemptions on the basis that the references
to ‘investment services’ in article 2.1(d) do not include a reference to any activity
which is covered by another exemption. However, if this were the case, it is unclear
why article 2.1(f) would be necessary as it deals with the combination of the
exemptions in article 2.1(b) and (e).
There are other reasons why it can be difficult to determine whether article 2.1(d)
applies in any particular case. In particular:
o It is unclear whether the exemption covers a person that deals on own account
by executing client orders or otherwise in such a way that it might be regarded as
providing services to third parties as clients (compare the differences of view
regarding the scope of article 2.1(i) below).
o There is significant lack of clarity as to the scope of the definition of “market
maker”, which is defined as covering a person who holds himself out on a
continuous basis as being willing to deal on own account by buying and selling
financial instruments against his proprietary capital at prices defined by him.27
The Commission’s Q&A suggests this is “quite broad” and it is not limited to firms
publishing continuous two way prices or registered with an exchange as a market
maker). The definition suggests that it might cover firms that actively hold
themselves out as willing to provide liquidity to the market.
26
Recital 20 MiFID.
27
Article 2.1(8) MiFID.
51
o It is unclear whether the guidelines in the MiFID implementing regulation as to
the application of the definition of a systematic internaliser27 are relevant to
determining when a person deals on own account on an “organised, frequent and
systematic basis”. In particular, it is unclear whether it is necessary that the
activity has a material commercial role for the firm and is carried on in
accordance with non-discretionary rules and procedures (or whether a person
has to show that its dealings are carried out on a unorganised, infrequent or
unsystematic basis in order to take advantage of the exemption, which would be
a much more demanding test).
o It is not clear when a person is regarded as “providing a system accessible to
third parties in order to engage in dealings with them”.
o It is uncertain how the exemption applies to onshore or offshore SPVs used as
booking vehicles, where the client interacts with personnel at an intermediary
bank or investment firm but the transactions are booked to the SPV.
However, since this exemption is available to persons trading any form of financial
instrument (including securities and financial derivatives), it is probable that the
exemption should be regarded as “a very restricted one” (as the Commission states in
its Q&A).
• Article 2.1(i)
This exemption may be best understood as having two separate limbs covering:
o Persons dealing on own account in financial instruments provided this is an

ancillary activity to their main business when considered on a group basis; 28and
o Persons providing investment services in commodity and other non-financial
derivatives to the clients of their main business provided this is an ancillary
activity to their main business when considered on a group basis.
However, in each case, the exemption is not available to a person if its group’s main
business is the provision of investment services within the meaning of MiFID or
banking services under the BCD.
The first limb of the exemption is likely to be relatively narrow. The dealing on own
account must be “ancillary” to the group’s main business. This should cover a group
treasury’s hedging activities and incidental investment activities (such as investment
of surplus cash). This may be important for group treasuries if they are not able to
“combine” article 2.1(d) and other exemptions, such as article 2.1(b), as a group
treasury company is likely to provide investment advice and other services to other
group companies as well. However, if bank or investment firm holding companies are
disqualified from relying on the exemption (because of the nature of their group’s
main business), it is unclear how they would be able to perform their treasury
functions (if article 2.1(d) is not “combinable” with other articles).
On the other hand, the question of whether trading activities are "ancillary" to the
main business is a more significant issue for energy companies and there have been
27
Article 21 MiFID implementing regulation.
28
The CESR October 2007 survey suggested that Italy and Portugal took the view that the proviso on
ancillary business does not apply to the first limb of the exemption.
52
differences of view as to the extent to which discrete activities that are connected
with the main business can rely on the exemption.
The exemption is also difficult to apply in other ways:
o There is a debate as to whether the exemption for own account trading can be
used if the activities involve a client or client servicing. The CESR October 2007
survey indicated that the German legislator thought not, while the view of the
UK's FSA is to the contrary. This is additionally important because there are
differences of view as to whether a counterparty is a client even when the firm is
not executing the counterparty's orders or otherwise providing investment
services to the counterparty (particularly because of the suggestions in recital 40
to MiFID that eligible counterparties should be regarded as acting as clients).
o Some Member States have interpreted the first limb as not applying to all
financial instruments. The CESR October 2007 survey suggested that France
and Germany took this position.
o There has been debate as to how it applies where a commodities group owns a
standalone commodity derivatives brokerage company. The better view is that
such an entity does not fall within the exemption so long as its activities do not
involve the provision of investment services to the clients of the group’s main
business. It seems likely that the references to the main business are throughout
to be read as references to the group’s main business.
o It may be unclear how the exemption applies where the group has more than one
(non-banking and non-investment services) business or where that main
business has separate elements.
o It is unclear when an undertaking is part of a “group” for these purposes. Is this
limited to companies linked by a parent/subsidiary undertaking relationship29 or
does it include entities in which group companies hold a participation and entities
linked by common management?30 If the latter, an entity could lose the benefit of
the exemption simply as a result of a bank or securities firm taking a direct or
indirect minority stake in the entity, for example as a private equity investment.
• Article 2.1(k)
There are differing views as to the scope of this exemption. On its face, it is available
to any entity whose main business is dealing in commodities and/or commodity
derivatives, even if that entity also provides other investment services or activities
(e.g. with respect to other non-financial derivatives or hedging or investment activity
in securities and other conventional treasury products). This would potentially be a
very broad application, although Member States would be able to put in place a
super-equivalent authorisation and prudential regime for such firms.
However, the Commission in its Q&A indicates that the exemption is only available
for the activities specified in the article and that firms may need to rely on other
exemptions for other activities. This is significant in relation to firms that also deal in
related contracts (such as weather, freight, etc.) which are not specifically referred to
in the exemption or which seek to hedge their interest rate or foreign exchange risk
by entering into interest rate or foreign exchange derivatives. On the Commission’s
interpretation, these entities must rely on article 2.1(i) (or possibly article 2.1(d), if
29
Compare article 2.1(b) MiFID.
30
Compare article 2.5 MiFID implementing directive
53
that exemption is capable of being combined with other exemptions) for these other
activities.
Again, it is unclear when an undertaking is part of a “group” for these purposes or

whether dealing for own account by executing client orders is covered by the
exemption. Indeed, we understand that some authorities take an even narrower view
of the scope of this exemption, suggesting that it is only available for hedging
activities.
In addition, MiFID did not address in any way the divergent approaches to the
territorial application of national authorisation requirements to third country firms.
Equally, there are concerns about the interpretation of the CAD exemptions. In
particular, the CAD exemption for firms whose "main business consists exclusively of
the provision of investment services or activities in relation to [commodity and other
non-financial derivatives]" is difficult to apply in practice. There is an apparent
internal contradiction in the concept of a firm whose main business consists
exclusively of a particular activity. It is unclear the extent to which such a firm can
engage in hedging activities in underlying commodities or other risk management
activities. Also, the fact that the exemption is limited to firms to whom the ISD did not
apply on 31 December 2006 raised questions about whether it would be available to
newly incorporated firms. Perhaps more unsettling though has been the fact that the
exemption should fall away in 2010, which has made it difficult for firms to plan,
although the Commission has proposed extending this date to 2012.
4. Market response to MiFID
Firms have responded to MiFID in different ways, depending on the structure and nature
of their business. The following is intended to provide illustrative examples of how some
firms have reacted to the new rules, without purporting to be an exhaustive account of all
possibilities. For ease of presentation, it focuses on commodity derivatives business.
• Mainstream EU commercial banks
EU-based commercial banks that engage in commodity derivatives trading business

often conduct that business and hold any associated physical positions in their main
EU banking entity. This avoids fragmentation of capital into separate entities and
makes the best use of their credit standing. Such an entity benefits from the
enhanced flexibility of the extended passport because (until MiFID was implemented)
it may well have had to seek top-up licences in a number of countries. After MiFID, it
should only need to seek a top-up licence in the limited number of countries applying
super-equivalent licensing requirements covering a broader range of financial
instruments than are covered by MiFID.
In some cases, EU-based banking groups own specialised commodity derivatives

trading or brokerage firms, perhaps as a result of acquisitions or through joint
ventures. In most cases, these should be investment firms subject to MiFID
benefiting from the enhanced passport. The exemptions in article 2.1(i) and (k)
should not apply to them because of the nature of their group’s main business
(although the application of these exemptions in relation to minority interests in joint
venture companies will depend on the definition of "group" that applies for these
54
purposes). The exemption in article 2.1(d) should not apply as in many cases the
firm will provide a wider range of services, such as brokerage in exchange-traded
products or investment advice, not just dealing for own account.
• Non-EU headquartered commercial and investment banks
Non-EU headquartered commercial and investment banking groups typically would

include one or more EU-incorporated banks or investment firms which can engage in
commodity derivatives trading business and can take advantage of the enhanced
passport in a similar way to their EU headquartered counterparts.
However, because in other countries outside the EU (such as the US), the
commodity derivatives business is not a regulated activity which must be carried on
through a regulated firm, the group may own one or more non-EU (unregulated)
entities in which their worldwide wholesale commodity derivatives trading (and
related physical) business is centralised. These entities will not benefit from the
passport, but the group may nevertheless wish to centralise booking of transactions
into these entities for risk management purposes.
The implementation of MiFID has made this more difficult, as it means that all EU
Member States will now regulate commodity derivatives business, but will deny the
availability of the exemptions in article 2.1(i) and (k) to subsidiaries of commercial or
investment banking groups. Their ability to continue trading with EU counterparties
will depend on the way in which the different EU states apply the territorial scope of
their authorisation rules. In some cases, national implementation of article 2.1(d) may
provide a safe harbour for offshore booking entities, if the entities' business is
restricted to own account trading. However, uncertainties as to the application of the
exemption to business with clients, the definitions of market maker and the
application of the exemption to regular off-exchange dealers may make it difficult to
rely on this.
If national authorisation rules are an issue, they may have to restructure all or some
of their business by booking business into their EU incorporated and authorised
entity and, where this is required for capital or risk management reasons, transferring
the risk to the non-EU affiliate by back-to-back transactions (but this can be costly
because of restrictions on intra-group large exposures and introduces significant
operational complexity).
• Non-EU headquartered commodity traders
A number of non-EU groups whose main business is trading oil, metals and other
commodities with counterparties round the world have trading operations in the EU,
although often transactions will be booked to a non-EU entity where risk
management is centralised outside the EU. Where their business is focused on OTC
physically-settled transactions, this normally will fall outside MiFID. To the extent that
they engage in commodity derivatives business with counterparties or intermediaries,
MiFID might apply but the trading entity should be able to benefit from the exemption
in article 2.1(k) MiFID for entities whose main business is dealing on own account in
commodities and/or commodity derivatives, except to the extent that particular
countries apply more restrictive interpretations or do not implement the exemptions.
However, they may encounter difficulties in relying on this exemption for other
55
related business (e.g. weather derivatives and emissions contracts business)
because some Member States take a restrictive view as to the application of the
exemption.
• Airlines, auto companies, etc.
There are a number of businesses that are significant users of commodities (fuel,
metals, etc.) and thus are active participants in commodity and increasingly in
commodity derivative trading markets. These users may wish to take speculative
positions as well as engage in hedging activities. They will often not be able to rely
on article 2.1(k) as their main business is not dealing in commodities and/or
commodity derivatives. Moreover, they may find it difficult to rely wholly on the first
limb of article 2.1(i) to cover their trading activities as there may be uncertainties as
to where their activities are "ancillary" to their main business. In addition, the
uncertainties as to whether it is possible to combine the exemption in article 2.1(d)
with other exemptions can raise issues where the entity engaged in the trading also
performs other functions, such as arranging trading on behalf of other group
companies.
• Oil, gas and electricity companies
Oil, gas and electricity companies are active traders in both physical and derivatives
markets. They have taken differing strategies to dealing with MiFID, including the
following:
o One option is to seek to concentrate all business in one EU legal entity which
benefits from the exemption in article 2.1(k) MiFID for entities whose main
business is dealing on own account in commodities and/or commodity
derivatives. However, there is a risk that some Member States do not implement
the exemptions or apply more restrictive interpretations. In particular, the fact that
many Member States would regard the exemption as only available for trading for
own account in commodities and/or commodity derivatives creates issues to the
extent that the firm wishes to trade other derivatives subject to MiFID (such as
weather derivatives or emissions contracts) in a way that may not be regarded as
ancillary to the group’s main business (and thus within article 2.1(i)).
o Another option is to seek to concentrate all business in one EU legal entity which
falls outside the MiFID exemptions and benefits from the passport for its
business. This can be difficult to achieve. In addition, the regulatory capital
requirements of such a business could be very significant, especially if it includes
physical business (as the entity’s main business would then not “consist
exclusively of the provision of investment services or activities in relation to
[commodity and other non-financial derivatives]” so as to be eligible for the CAD
exemption).
o Therefore, a further option is a form of mixed structure. The group uses an
MiFID-regulated firm to arrange business for other (unregulated) group
companies, which benefit from MiFID exemptions. However, the MiFID-regulated
firm is also used to book commodity and other non-financial derivatives
transactions where necessary, e.g. in countries which take a restrictive view of
the MiFID exemptions (but in a way that ensures that the regulated firm can
benefit from the CAD exemption from capital and large exposure requirements).
If necessary to enable centralised risk management, the regulated entity may
56
transfer the risks by back-to-back contracts to companies that fall within MiFID
exemptions. The effect, therefore, of authorisation requirements is significant
operational complexity.
Those companies that have chosen to operate all or part of their business through
EU-authorised firms also encounter other difficulties with the current framework. In
particular, the current conduct of business framework does not fully recognise the
wholesale nature of commodity markets. There are concerns that the boundary
between retail and professional clients is inappropriate, in that it requires firms to
treat as retail clients a number of clients that should naturally be treated as
professional clients or eligible counterparties.
Specifically, the current regime in Annex II MiFID does not allow authorised
investment firms to treat smaller companies which are part of a larger group of
companies or are subsidiaries of listed companies as professional investors or
eligible counterparties. Nor is there any facility for recognising that some professional
users of the underlying commodity have adequate expertise to be treated as
professionals even if they do not meet the size tests or the qualifications for being
"opted up" because they employ a financial professional.
5. Commentary on the current position
This current position is clearly unsatisfactory for a number of reasons:
• The differing boundary of regulation across the EU seems to be less problematic

than in the past but remains a potential concern for firms seeking to operate across
all Member States.
• The differential treatment of firms conducting the same wholesale activity
depending on whether they are members of a banking or investment services
group causes practical difficulties and anomalies, not least in restricting the
activities of some private equity investors in the sector.
57
C. Question 3 “Assessment”
What options does ESME consider more salient in addressing any challenges or issues
identified above? Examples of options ESME might consider include:
with what content;
rationalising them;
Member States)?
1. ESME considers that the second limb of article 2.1(i) and article 2.1(k) should be
replaced by a single exemption applicable to firms (other than operators of an MTF
or a regulated market) whose main business consists of dealing on own account in
relation to commodities and/or commodity derivatives or other non-financial
derivatives contracts. However, this exemption should only apply to the firm's
activities when dealing on own account in commodity and other non-financial
derivatives with a defined class of wholesale market participants. The exemption
should be combinable with other exemptions.
2. To achieve a common European approach to regulation in this area, Member States

should be required to implement the exemption into their legislation. However, firms
should not be required to rely on the exemption where they wish to be authorised
and there should be an appropriate capital regime for such firms and other
commodity firms subject to authorisation.
58
Advice from ESME:
1. Issuing clarifying guidance as to the meaning of the various exemptions, and if

so, in what context;
Issuing clarifying guidance as to the meaning of the exemptions could address some of
the interpretational uncertainties outlined in our response to question 2. However, some
of these inconsistencies are generated by the overlapping nature of the exemptions, or
the inability to combine such exemptions. Therefore, the effectiveness of any clarifying
guidance will be limited to a large extent by the present draft of the exemptions in MiFID.
To ensure a harmonised regime of authorisation requirements across the EU, Member
States which have simply copied out the directive's provisions are likely to implement a
revised regime - aiming at harmonisation - only if the provisions themselves are revised.
ESME would prefer option (b) below.
2. Re-examining the current scope and nature of exemptions from the relevant
CAD and MiFID requirements for firms in the commodities sector with a view to
rationalising them;
ESME considers that the fundamental premises for imposing authorisation requirements
- to protect clients or to mitigate systemic risks - do not present themselves in commodity
markets to the same degree (if at all) as in financial markets, in particular because of the
wholesale nature of the markets and the lack of the interconnections with payment
systems and other mechanisms that magnify the effect of individual shocks in financial
markets. As regards prudential issues, there seems to be little evidence of a case for
imposing prudential regulation in order to protect against systemic risks and wholesale
market participants should be capable of assessing the creditworthiness of their own
counterparties. As regards conduct of business issues, MiFID already recognises that
there is no need for the same range of conduct of business protections when firms deal
on own account with other wholesale market participants (under the eligible counterparty
regime in article 24 MiFID). As MiFID already recognises, conduct of business protection
has little relevance for these kinds of arm's-length relationships.
Therefore, ESME believes that there is scope for rationalisation and simplification of the
current MiFID exemptions, in order to create an EU-wide regime governing specialist
commodity firms which only deal on own account with other wholesale market
participants. ESME believes that it would be inappropriate to extend regulation to cover
this group of market participants in the absence of a compelling demonstration of the
risks that they present.
Thus, ESME considers that the second limb of article 2.1(i)32 and article 2.1(k) should
be replaced by a single exemption applicable to firms (other than operators of an MTF or
a regulated market) whose main business consists of dealing on own account in relation
to commodities and/or commodity derivatives or other non-financial derivatives contracts
covered by MiFID (points 5, 6, 7, 9 and 10, Section C, Annex I).
32
The first limb of article 2(1)(i) will continue to be relevant to a number of other companies, not
just commodity firms, in relation to their treasury and other investment activities cannot be
covered by article 2(1)(d).
59
However, in order to ensure that this exemption is only used in relation to own account
trading in wholesale markets, it should only apply to a firm's activities when the firm is
dealing on own account in commodity and other non-financial derivatives with a defined
class of wholesale market participant. In order to align the exemption with the
exemptions from the conduct of business regime in MiFID, we consider that this defined
class should at least cover entities that are capable of being treated as eligible
counterparties under article 24(2) MiFID and "per se" professional clients within section I
Annex II MiFID capable of being treated as eligible counterparties under article 50 of the
MiFID implementing directive.
However, we consider that for certain purposes, the definition of a "per se" professional
client in Section1 Annex II MiFID should be amended to cover a broader category of
investor, including entities that do not meet the size requirements specified in that
section on their own but that are members of a larger group or that are subsidiaries of
listed companies. In addition, the definition of a "per se" professional client should cover
(in relation to commodity and other non-financial derivatives) undertakings whose main
business is trading in commodities or the subject matter of the derivatives and/or that are
producers or professional users of the commodities or underlying subject matter. We
consider that these changes should apply generally for the purposes of MiFID, so that
they would also apply to MiFID-authorised firms when determining the application of
conduct of business rules under MiFID.
Although the exemption should be limited to cases where the firm deals for own account,
we consider that there could be difficulties if there is an attempt to prevent firms relying
on the exemption in circumstances where their relationship with their counterparty could
be characterised as a relationship with a client. Firms need a high degree of certainty to
be satisfied that exemptions are available, in particular because a contravention of
authorisation requirements can affect the enforceability of their contracts. Therefore, we
consider that there should not be an attempt to distinguish, for these purposes, between
different kinds of dealing for own account such as dealing for own account by executing
client orders. Otherwise this risks undermining the effectiveness of the exemption, in
particular because of the difficulty of determining in any particular case whether an own-
account transaction also involved the execution of an order. This would be consistent
with (but narrower in scope than) the approach taken under article 24 MiFID where the
principal conduct of business protections do not apply both where a firm deals on own
account and when it executes client orders or receives and transmits orders (in the latter
case, regardless of whether it is dealing for own account). However, we do not advocate
extending the exemption to other cases where a firm might be considered to be
providing other investment services (such as investment advice or portfolio management
services), although we are aware that the removal of the exemption in article 2(1)(i) for
these activities may affect a number of firms that currently rely on it to provide ancillary
services.
Because the firm will also need to be able to deal in other financial instruments (for
normal treasury purposes to invest surplus cash, or to hedge foreign exchange or
interest rate exposures), it should be made clear that a firm can combine the new
exemption with the first limb of article 2.1(i) or with article 2.1(d). The firm should also be
able to combine the exemption with other exemptions, such as article 2.1(b).
If the exemption is to be effective, Member States should be required to implement the

exemption. They should not be able to apply super-equivalent provisions (including any
60
super-equivalent definitions of financial instruments). There should be a common
European approach to these issues.
In addition, the same exemption should be available to all companies regardless of the
nature of the activities of the other members of their group. This would ensure that the
acquisition by a bank of a private equity stake in a commercial or industrial company
(e.g. a power generator) would not deprive the target company of an exemption, simply
because the target company is now part of the bank's "group".31 Any risks to the
regulated entity in the group from the activities of a commodity derivatives trading
subsidiary or affiliate should be captured through consolidated supervision, not by
imposing unnecessary authorisation requirements on the legal entity.32
However, firms should not be required to rely on the exemption if they wish to be
authorised under MiFID. Firms may choose to be authorised if they are concerned that
their activities may not exactly fit the scope of the exemption (for example where there is
doubt as to the exact scope of their main business). It is also possible that regulated
status is significant to particular counterparties of the firm. Alternatively, they may need
to elect for regulation to the extent that favourable third country regimes (such as the
CFTC's Part 30 regime in the US) are only available to firms that are regulated in their
home state.
For those firms that opt into authorisation or that conduct other commodity related
activities (such as advice or portfolio management), there will need to be an appropriate
capital regime which is proportionate to the risks presented by such firms. There has
been no change in the underlying reasons for the inclusion of the CAD exemptions,
which were designed to reflect the fact that the current capital regime is largely
inappropriate for commodities firms. We would support a regime that places greater
weight on disclosure and risk management rather than hard capital targets.
3. Outlining some elements of a specialist regime for commodity firms with

regard to MiFID and CAD regulation
ESME strongly believes that there should be a common approach across the EU to the
licensing of specialist commodity firms. MiFID should exempt own account dealing
between professionals and this exemption should be applied in a binding way in all
Member States with no possibility for super-equivalent licensing requirements (please
see our response to question 3(b)).
4. Removing some or all of the exemptions entirely?
ESME does not believe that it would be appropriate to remove some or all of the
exemptions entirely considering the low risks to systemic stability and investor protection
involved in this type of activity. Commodity and non-financial derivatives markets involve
a wide range of market participants, whose business and risk profile is different from
those involved in securities markets. A risk-based approach to regulation should
recognise those differences and treat different market participants differently when they
present different risks to the stability of the financial system or to investor protection.
31
This problem is exacerbated if the definition of "group" for these purposes includes "participations"
(compare article 2(5) MiFID implementing regulation).
32
This may entail changes to the definition of "financial institution" in the Banking Consolidation Directive
which currently does not cover commodity derivatives trading subsidiaries.
61
By removing the present exemptions altogether, a number of firms that are not currently
subject to regulation would potentially be faced with a disproportionate regulatory
burden. This is likely to have a significant impact on some firms. To avoid burdensome
regulation and related costs, firms may choose to relocate outside the EU, in particular if
the main part of their business is with non-EU counterparties. Those firms which
continue to be based in the EU may choose to reflect any further cost of compliance with
the new regulatory framework in their price terms, thereby exacerbating the current rises
in commodity prices.
5. Any other options (e.g. making the exemptions optional for firms or mandatory
for Member States)?
Please see our response in question 3(b).
62
D. Question 4 “Assessment”
The subject matter of this section is the advice from ESME regarding question 4 of the
ESME should identify the issues that would need to be addressed in assessing likely
Summary of Advice from ESME:
any risk to the stability of financial markets; any effect on investors; any effect on the
liquidity of commodity markets; whether any regulatory burden is proportionate; and the
possible impact on the competitiveness of the EU as a place for doing business.
63
Advice from ESME:
• Any risk to the stability of financial markets:
The evidence from the responses to the rounds of consultation indicate that
specialised commodity firms present limited, if any, risks to financial stability. This
was also the view presented by CEBS and CESR in their recent joint consultation
paper (CP 3L3 08 02)
• Any effect on investors:
The new exemption would be limited to firms that deal with professional investors
and therefore should have no significant impact on retail investors.
Professional investors should be in a position to assess for themselves who they

wish to have as counterparties. They should carry out appropriate checks on the
credit standing of their counterparties and assess them for integrity. The licensing
requirements would still apply if the exempt firm sought to provide a wider range of
services than merely dealing on own account (e.g. advice or portfolio management).
• Any effect on the liquidity of commodity markets:
There have been concerns that the extension of the scope of licensing requirements
to cover firms currently benefiting from an exemption could have unintended
consequences by forcing some firms to withdraw from the market or restrict their
trading which might adversely affect liquidity. The fact that some jurisdictions such as
the UK have regulated commodities business for some time may not be a good
guide as in addition to a less burdensome prudential and conduct of business
framework it has provided a number of exemptions from authorisation requirements
that could be affected by an extended EU regime.
• Whether any regulatory burden is proportional to the range and significance of

activities carried out by the affected firms:
The proposed outcome should ensure that any regulation is proportionate to the risks
presented by firms conducting different activities.
• The possible impact on the competitiveness of the EU
There have been concerns that changes to the scope of regulation may have an
impact on the competitiveness of the EU as a place for doing business. Extending
the scope of regulation may cause companies to relocate business outside the EU
particularly where their business is mainly with non-EU counterparties.
64
E. Question 5 “Record Keeping”
The subject matter of this section is the advice from ESME regarding question 5 of the
Mandate which is as follows:
What would the practical implication be, for firms active both in the physical supply of

reporting and this record keeping obligation has to be clearly distinguished from
2. ESME believes a principles-based, rather than rigid prescribed format, approach is

appropriate for the record-keeping obligation. This could specify the minimum
information that should be recorded by market participants in order to ensure an
appropriate level of consistency – including giving guidance on what information
should be recorded for non-standard products (see below). Within this constraint
and from a purely practical point of view, however, there seem to be benefits in
trying to ensure that the format of records which are kept are the same for each of
the relevant physical and financial regulators. This would depend though on the
purpose for which the information would be used by the regulator and whether the
regulators exchange data. Implementing and maintaining two separate record-
keeping formats would involve additional investment in IT and associated processes
for such firms which are active in both sectors, giving rise to additional costs that
could create a barrier to entry to smaller market participants (thereby potentially
reducing liquidity); and potential risks of inconsistencies and errors between
formats.
keeping is to be introduced. As explained in more detail below ESME is not in favour
of following a uniform prescribed format, such as that in Table 1 of Annex I of
4. There is a very large number number of traded commodity products across many
different markets. A prescribed format such as that of Table 1 of Annex I of
Regulation EC 1287/2006 would be very difficult to develop and in any case would
not capture trades that are non-standard in format – for example those with complex
optionality. It would also need to take account of the variety of market participants,
transactions and businesses. It would also need to take into account current
industry standards, such as confirmations.
5. Rather than a single standardised format, a more principles-based approach could

be more appropriate for the record-keeping obligation – as outlined in this section.
This could specify the minimum information that should be recorded by market
participants in order to ensure an appropriate level of consistency – including giving
65
guidance on what information should be recorded for non-standard products (see
below). This would ensure that information that is potentially needed by regulators is
accessible on request within reasonable timescales. This would then allow firms to
compile the information in a format suitable to that request by the regulator – given
an appropriate notice period. The prescribed format of Table 1 of Annex I was
developed as the basis of standardised routine reporting for transactions and it is
assumed that this is not the intention here. In addition:
• It is advisable to wait for the outcome of the CESR-ERGEG work on the record-
• A number of questions arise on (cross-sectoral) governance arrangements both
in terms of developing and maintaining formats.
• The significant costs and complexity associated with introducing a standard
standardised unique codes for each traded product has significant implications,
for some products many data fields will also not be relevant.
• It is imperative that a full impact assessment (looking at the relevant costs and
benefits) is undertaken before any such decisions are proposed.

categories of firms and transactions or, respectively, limits the scope of application
of the record-keeping obligation to certain categories of firms and transactions. A
decisive factor in this limitation should be whether the categories of firms and/or
transactions have a significally relevance for the price formation in the gas and
power markets and the market monitoring. For example, ESME considers that small
and medium-sized companies with no or very low level of wholesale trading
transactions would not be relevant.
33
66
Advice from ESME:
1. Regulatory framework under Third Energy Package and MIFiD
The response to this question needs to take into account the current and future
legislation which is relevant for this question, i.e. for the obligation of record keeping. In
this context the possible future legislation proposed by the ‘Third Energy Package’ as
well as the actual MIFiD and the format in Table 1 of Annex I of Regulation EC
1287/2006 are of relevance. Therefore, the following sections briefly explain the current
and possible future legal situation:
a. Possible future regulatory framework and Third Energy Package
The Commission has included in its legislatory proposal of 19 September 2007

(COM (2007) 528 final) the following new record keeping article in the Electricity
Directive:
1. Member States shall require supply undertakings to keep at the disposal of the
national regulatory authority, the national competition authority and the
Commission, for at least five years, the relevant data relating to all transactions in
electricity supply contracts and electricity derivatives with wholesale customers
and transmission system operators.
2. The data shall include details on the characteristics of the relevant transactions
such as duration, delivery and settlement rules, the quantity, the dates and times
of execution and the transaction prices and means of identifying the wholesale
customer concerned, as well as specified details of all unsettled electricity supply
contracts and electricity derivatives.
3. The regulatory authority may decide to make this information available to market
participants elements, provided that commercially sensitive information on
individual market players or individual transactions is not released. This
paragraph shall not apply to information about financial instruments which fall
within the scope of Directive 2004/39/EC.
4. To ensure the uniform application of this Article, the Commission may adopt
guidelines which define the methods and arrangements for record keeping as well
as the form and content of the data that shall be kept. These measures, designed
to amend non-essential elements of this Directive by supplementing it, shall be
adopted in accordance with the regulatory procedure with the scrutiny referred to
in Article 27b(3).
5. With respect to transactions in electricity derivatives of supply undertakings with

wholesale customers and transmission system operators, this Article shall only
apply once the Commission has adopted the guidelines referred to in paragraph
4.
6. The provisions of this Article shall not create additional obligations vis-à-vis the
authorities mentioned in paragraph 1 for entities falling within the scope of
Directive 2004/39/EC.
67
7. In case the authorities mentioned in paragraph 1 need access to data kept by
entities falling within the scope of Directive 2004/39/EC, the authorities
responsible under that Directive shall provide the authorities mentioned in
paragraph 1 with the required data.
The European Commission has also proposed a new article for record keeping in the
Gas Directive as follows. The wording of this article is exactly the same as for
electricity except the first sub-para of Art. 24 f of the Gas Directive (amendments in
bold):
gas supply contracts and gas derivatives with wholesale customers and
transmission system operators as well as storage and LNG operators.
b. Record Keeping for MIFiD firms is prescribed for in Art. 25 sub-para. 2 of MIFiD
(Directive 2004/39/EC on Markets in Financial Instruments) as follows:
“Art. 25
Obligation to uphold integrity of markets, report transactions and maintain
records
(…)
2. Member States shall require investment firms to keep at the disposal of the
competent authority, for at least five years, the relevant data relating to all
transactions in financial instruments which they have carried out, whether on own
account or on behalf of a client. In the case of transactions carried out on behalf of
clients, the records shall contain all the information and details of the identity of the
client, and the information required under Council Directive 91/308/EEC of 10 June
1991 on prevention of the use of the financial system for the purpose of money
laundering.
(…)
In addition, the format of Table 1 of Annex 1 of the Regulation EC 1287/2006 is of

relevance for the response of ESME, as question 5 of the ESME Mandate refers to it
(for this table see Annex 4 below).
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2. ESME’s response to the first part of question 5
The first part of question 5 of the ESME Mandate reads as follows:
“What would the practical implication be, for firms active both in the physical supply of
different format of records of transactions for the relevant regulators?”
1. As explained below, the ESME Group believes a principles-based, rather than rigid
prescribed format, approach is appropriate for the record keeping obligation. This
could specify the minimum information that should be recorded by market
below). Within this constraint and from a purely practical point of view, however,
there seem to be benefits in trying to ensure that the format of records that are kept
are the same for each of the relevant physical and financial regulators. This would
depend though on the purpose for which the information would be used by the
regulator and whether the regulators exchange data. Implementing and maintaining
two separate record keeping formats would involve additional investment in IT and
associated processes for such firms which are active in both sectors, giving rise to
additional costs that could create a barrier to entry to smaller market participants
(thereby potentially reducing liquidity); and potential risks of inconsistencies and
errors between formats.
keeping is to be introduced. As explained in more detail below, ESME is not in
favour of following a uniform prescribed format, such as that in Table 1 of Annex I of
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3. ESME’s response to the second part of question 5 of the ESME Mandate
The second part of question 5 of the ESME Mandate reads as follows:
“Would a single report based on the format in Table 1 of Annex I of Regulation

EC 1287/2006 be appropriate and sufficient?”
Advice from ESME
1. There is a very large number of traded commodity products across many different
markets. A prescribed format such as of Table 1 of Annex I of Regulation
EC 1287/2006 would be very difficult to develop and in any case would not capture
trades that are non-standard in format – for example those with complex optionality.
It would also need to take account of the the variety of market participants,
transactions and businesses. It would also need to take into account current
industry standards, such as confirmations.

reporting and this record keeping obligation has to be distinctingished cleary from
3. Rather than a single standardised format a more principles-based approach could

be more appropriate for the record keeping obligation as outlined in this section.
This could specify the minimum information that should be recorded by market
below). This would ensure that information that is potentially needed by regulators
is accessible on request within reasonable timescales. This would then allow firms
to compile the information in a format suitable to that request by the regulator –
given an appropriate notice period. The prescribed format of Table 1 of Annex I was
developed as the basis of standardised routine reporting for transactions and it is
assumed that this is not the intention here. In addition:
o It is advisable to wait for the outcome of the CESR-ERGEG work on the record-
o A number of questions arise on (cross-sectoral) governance arrangements both
in terms of developing and maintaining the formats.
4. The significant costs and complexity associated with introducing a standard

standardised unique codes for each traded product has significant implications. It is
imperative that a full impact assessment (looking at the relevant costs and benefits)
is undertaken before any such decisions are proposed.

34
70
categories of firms and transactions or, respectively, limits the scope of application
of the record-keeping obligation to certain categories of firms and transactions. A
decisive factor in this limitation should be whether the categories of firms and/or
transactions have a significally relevance for the price formation in the gas and
power markets and the market monitoring. For examples ESME considers that small
and medium-sized companies with no or very low level of wholesale trading
transactions would not be relevant.
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Advice of ESME:
a. Unclear scope and content of record-keeping obligation
It is clear that even if a single standard format for record keeping were to be introduced,
this would not be possible until the basic issues of the current record-keeping obligation
of Art. 22 f. of the proposed Electricity Directive and 24 f. of the proposed Gas Directive
are resolved and put into more concrete form.35 The underlying legal obligation and
compliance with it must be defined in more detail. This record-keeping obligation
currently results in different interpretation so that the legal basis is too vague and
uncertain. Therefore, firstly the scope and content of the record-keeping obligation
should be defined through the guidelines pursuant to the subparagraph 4 of Art. 22 f and
24 f. of the Directives.
Issues that need to be looked at include:
• What is the purpose of the record-keeping obligation?
ESME is of the opinion that the underlying purpose of the record-keeping obligation
has to be looked at in the context of the legislative history of this provision. The
wording of this provision is a political compromise, which replaces two former
legislative proposals for transparency and reporting obligation. In this context the
periodic, ongoing reporting requirements have been deleted in the legislative
proposals of the Third Energy Package. Therefore, ESME Group is of the opinion
that the record-keeping obligation is not aiming at an MiFID-style (or indeed level) of
reporting. Therefore, this record keeping obligation has to be distinguished from
periodic, ongoing reporting (e.g. transaction reporting). This record-keeping
obligation shall rather enable the regulatory authorities to receive transaction data
only on demand. Therefore the MiFID-style format Table 1 of Annex I of Regulation
EC 1287/2006 is not appropriate.
• What is the scope of application?
It is not entirely clear which firms are caught by the record keeping obligation and
which firms are not. Based on the wording, so-called “supply undertakings“ are
obliged to keep the records of their transactions. In the Electricity Directive the term
supply is defined as “the sale, including resale, of electricity to customers” and in the
Gas Directive the term supply undertaking is defined as “any natural or legal person
who carries out the function of supply”, whereas “supply” means “the sale, including
resale, of natural gas, including LNG, to customers”. This shows the potentially very
wide scope of application of the requirement and consequently very different firms
and businesses that could be caught by the record-keeping obligation – it is
questionable whether the intention is to have such a wide scope.
• What information shall be recorded?
It is not entirely clear what kind of transactions and what information on these
transactions shall be recorded. The current wording indicates that: “The firms shall
keep records of relevant data relating to all transactions in electricity/gas supply
35
For wording of these articles see Section 1 a above.
72
contracts and electricity/gas derivatives with wholesale customers and transmission
system operators as well as storage and LNG operators. This data shall include
details on the characteristics of the relevant transactions such as duration, delivery
and settlement rules, the quantity, the dates and times of execution and the
transaction prices and means of identifying the wholesale customer concerned, as
well as specified details of all unsettled electricity supply contracts and electricity
derivatives”. It stems from this wording that the scope of information that would need
to be recorded would be very wide and different in nature and as such ESME is of
the opinion that one single standard format could not cover all different transactions
appropriately.
• How shall the data be recorded, how and when shall it be reported to the authorities
and what means are “at the disposal” of the authorities?
The record-keeping obligation does not provide sufficient clarity on these issues,
which again allows for differences in interpretation and implementation – and
guidelines may help in this respect. Again, ESME is also of the opinion that the first
step is to make sure the mentioned guidelines needed are in place.
As the record-keeping obligation is, in the opinion of ESME, not equivalent to (or
intended as) an MiFID-style reporting obligation (i.e. regular reporting of transactions
data in a defined format to authorities), it is therefore more practical to oblige firms to
give regulatory authorities access to their transaction data on request rather than
regular reporting and, therefore, not practical to fill out on a regular basis relevant
forms. It is sufficient if the information is accessible within a reasonable timescale so
that firms could gather the information to provide to the regulatory authorities on
request within an appropriate notice period.
b. Usual market practices shall be respected
ESME is of the opinion that usual market practices shall be respected. This means that
the design of any format for reporting needs to take into account the current industry
standards, such as confirmations.
c. Purpose of the format in Table 1 of Annex I of Regulation EC 1287/2006 is

different
The record-keeping obligation of MiFID (Art. 25 (2) ) and the reporting obligation of
MiFID (Art. 25 (3) et seq. ) should be distinguished from each other. Table 1 of Annex I
of Regulation EC 1287/2006 is exclusively meant to put only the reporting obligations
Art. 25 (3) et seq. of the MiFID in more concrete form, whereas it does not apply to the
record-keeping obligation of Art. 25 (2) of the MiFID. ESME is of the opinion that it is
problematic to transfer the concept of transaction reporting and the underlying reporting
obligations to a pure record-keeping obligation. In the opinion of ESME the aim of the
record-keeping obligation should not be to install an MiFID-style reporting system.
Therefore, ESME suggests that the different purpose of Table 1 of Annex I of Regulation
EC 1287/2006 needs to be taken into account and concludes that this table may not be
appropriate for the compliance with the record-keeping obligation.
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d. Different Markets Participants
It has to be recognized that basically two different types of firms are active in the
commodity and commodity derivatives markets, which means the one-size-fits-all
approach may not be appropriate:
• MiFID firms (e.g. banks, investment firms)

• Non-MiFID firms (international energy firms and their trading branches, specialised
energy traders, power producers (possibly part of a larger energy group), regional
and local (municipalities) energy distribution and/or supply companies, larger
industrial firms, operators of transportation and distribution gas and power networks,
storage and LNG operators, international oil and gas firms etc.)
Whereas MiFiD firms are already subject to the MiFID reporting and record-keeping
obligations in respect of MiFID instruments, non-MiFID firms are not subject to any of
these obligations. That means that MiFID firms should already have the necessary IT
sytems, check, controls and staff in place to ensure compliance with this obligation
whereas non-MiFID firms have not taken measures to comply with such obligations as
they are not applicable. This issue needs to be taken into account if a single report
based on the format in Table 1 of Annex I of Regulation EC 1287/2006 is to be
introduced, because such a wide approach would force firms to procure and install IT
sytems, check, controls and staff to be able to comply with such a format. For non-MiFID
firms such a format would be completely new and therefore cause major compliance
costs and could constitute a serious barrier to market entry (particularly for smaller
players) or even force firms to leave the market. Also, the group of non-MiFID firms is
represented by very different market players with completely different sizes, business
models and purposes – from small local firms to medium-sized national firms to larger
international groups (see above) – so it is questionable if such a single standardised
approach for all firms would be appropriate and proportionate – without flexibility in its
application through a principles-based approach.
e. Different underlying business, commodities and instruments
Thirdly, a further concern regarding such a “one-size-fits-all” approach is based on the

fact that a single format would apply to different underlying gas/power commodity and
commodity derivatives business. Basically, two categories of business would be caught
by a single format:
• MiFID business, i.e. transactions with commodity derivatives. These are the financial
instruments as defined in Annex I Section C Nos. 5 to 7 of the MiFID.
• Non-MiFID business, i.e. transactions with gas and power commodities. This
business comprises very different types of transactions with different entities and
purposes, e.g. international gas import contracts between exporting and importing
firms, gas and power supply contracts with regional and local supply/distributions
companies, physically settled gas and power forward contracts between energy
trading firms, possibly gas/power supply contract with procurement entities of large
industrial customers etc.)
ESME is of the opinion that for certain transactions a separate record-keeping obligation
in addition to the usual documentation of transactions is not appropriate. For certain
categories of contracts it seems sufficient to keep the contractual documentation itself as
74
for example the international gas import contracts between exporting and importing firms
as well as gas and power supply contracts with regional and local supply/distributions
companies. There seems little added value in importing certain data of such contracts
into additional standard forms.
f. Emerging Markets
It needs to be taken into acount that the energy markets in question are relatively
immature: in this still-fragile stage of liberalisation of energy markets, many market
players have come to fear that financial market-style regulation of commodity derivative
transactions may erect a further barrier to entry to often illiquid and fragmented
continental European power and gas wholesale markets. Imposing a burdensome
compulsory record-keeping obligation on each and every market participant and
transaction of the EU wholesale power and gas business could cause considerable
concern among the energy trading community across Europe. This could lead to a
severe reduction of liquidity in currently liquid regional markets and prevent it occuring in
new regional markets. Under normal regulatory and market circumstances the primary
aim of record keeping and transaction reporting is not to create a liquid market, but to
monitor such a market. The design of the record-keeping obligation has to take these
findings into account.
g. Further issues
Finally, also a couple of problematic technical issues of Table 1 of Annex I of Regulation

EC 1287/2006 and cross-sectoral governance issues mean that a standard format may
not be appropriate:
Even if for the large majority of the trading transactions that are currently undertaken,
information that is routinely recorded would fit into many of the categories/field identifiers
in the table, there is nevertheless clearly a need to revise the categories/field identifiers
for commodities and commodity derivatives.
The potential size of the project and costs associated with introducing a standard
recording format should not be underestimated. For example, while it could be possible
to develop standardised unique codes for each traded product – the number would be
very large – for example in power there would be a need to develop codes as follows:
1. physical or financial product

2. location – i.e. in which country the trade was executed and/or across which borders.
This could be reported for which grid network the trade relates to and/or what
exchange it is traded on.
3. maturity of the product – i.e, weekend, day-ahead, monthly etc
4. product type – baseload/peak/off-peak/intraday/hourly
For gas similar considerations apply with the added complication that the traded day is
not broken down by time of day like power – and therefore products could not be
classified this way (i.e. as baseload/peak etc).
This does not take account of future developments and only relates to products that are
commonly traded today – this could mean that as the market develops and new products
are developed and traded it would be costly to maintain the code fields to a standard
75
format – and there would need to be a clear process for how this happens (as explained
above).
We think although possible, the development of a standard format of record keeping

would be a very significant exercise that would involve major IT-systems development
and substantial initial resource commitment and ongoing maintenance. It would therefore
be appropriate for a full impact assessment (looking at the relevant costs and benefits) to
be undertaken before decisions are taken.
In addition, a standard format would not work for traders that are non-brokered OTC, and
are bespoke and with complex optionality. These would not fit into some of the field
identifiers below – for example the put/call option/strike price may be made up of a
number of different conditions which would not fit into a standard format. While the
relevant information could be reported it would not be in a standard format as each
transaction effectively generates a bespoke report format. It may be possible to record
‘high level’ information associated with such trades in a standard format – but any other
detailed information could not be presented in a standard format.
Also, the process for developing the standard format would need to be considered – a
number of questions arise primarily on the governance arrangements:
• Who shall be responsible for developing the standard format – industry or the
regulatory authority?
• If it was the regulatory authority, which sectoral regulator would have the primary
responsibility – (energy or financial regulator) and how would any disputes between
the two be resolved?
• What role would CESR/ERGEG take to help ensure the development and
implementation of a standard format?
• What consultation would be undertaken in developing the standard format and in
bringing forward any changes – and who would be responsible for such a process?
How would any disagreements between regulatory authority(ies) and industry be
resolved?
h. Additional detailed comments
Some additional detailed comments are included in the table below:
Field Identifier Description

1. Reporting firm A unique code to identify the firm which executed
identification the transaction
Comment: Would this be an issue if the code

were to be an industry-wide code for each
counterparty that is set centrally or if it were to
be in a format not used generally?
2. Trading day The trading day on which the transaction was
executed
3. Trading time The time at which the transaction was executed,
reported in the local time of the competent
authority to which the transaction will be reported,
and the basis in which the transaction is reported
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expressed as Coordinated Universal Time
(UTC)+/- hours.
4. Buy/sell indicator Identifies whether the transaction was a buy or sell
from the perspective of the reporting investment
firm or, in the case of a report to a client, of the
client.
5. Trading capacity Identifies whether the firm executed the
transaction:
(a) on its own account (either on its own behalf or
on behalf of a client),
(b) for the account, and on behalf, of a client.
6. Product identification This shall consist of:
(a) A unique code, to be decided by the
competent authority (if any) to which the report
is made identifying the product which is the
subject of the transaction,
Comment: If the trading record is maintained

for both energy and financial regulators they
must decide and agree on the ‘unique code’ in
full consultation with the industry.
(b) if the product in question does not have a

unique identification code, the report must
include the name of the product or, in the case
of a derivative contract, the characteristics of
the contract.
Comment: Should there be a reference to the

Alternative Instrument Identifier (AII) agreed
between industry and CESR for exchange-
traded derivatives? Is the AII suitable for
energy market participants? See the following
comments.
7. Product code type The code type used to report the product .
8. Underlying instrument The instrument identification applicable to the
identification security that is the underlying asset in a derivative
contract as well as the transferable security falling
within Article 4(1)(18)(c) of Directive 2004/39/EC.
Comment: Underlying physicals such as

electricity, gas oil, or gas are not instruments.
Which industry code would apply?
9. Underlying instrument The code type used to report the underlying
identification code type instrument.
Comment: What code type applies to the

underlying physical?
10. Product type The harmonised classification of the financial
instrument that is the subject of the transaction.
The description must at least indicate whether the
77
instrument belongs to one of the top-level
categories as provided by a uniform
internationally-accepted standard for financial
instrument classification.
11. Maturity date The maturity date of a bond or other form of
securitised debt, or the exercise date/maturity date
of a derivative contract.
12. Derivative type The harmonised description of the derivative type
should be done according to one of the top-level
13. Put/call Specification whether an option or any other
financial instrument is a put or a call.
14. Strike price The strike price of an option or other financial
instrument.
15. Price multiplier The number of units of the financial instrument in
question which are contained in a trading lot; for
example, the number of derivatives or securities
represented by one contract.
16. Unit price The price per physical or derivative contract
excluding commission.
17. Price notation The currency in which the price is expressed.
18. Quantity The number of derivative contracts included in
the transaction.
Comment: How would this be expressed for

the underlying physical?
19. Quantity notation An indication as to whether the quantity is the
number of derivative contracts. Or ‘X’ for the
underlying physical?
20. Counterparty Identification of the counterparty to the transaction.
That identification shall consist of:
(a) where the counterparty is an investment firm,
a unique code for that firm, to be determined
by the competent authority (if any) to which the
report is made,
(b) where the counterparty is a regulated market
or MTF or an entity acting as its central
counterparty, the unique harmonised
identification code for that market, MTF or
entity acting as central counterparty, as
specified in the list published by the competent
authority of the home Member State of that
entity in accordance with Article 13(2),
(c) where the counterparty is not an investment
firm, a regulated market, an MTF or an entity
acting as central counterparty, it should be
identified as ‘customer/client’ of the investment
firm which executed the transaction.
78
Comment: There may be a need to develop
standard identifier lists for energy – which
would be difficult to maintain given market
entry/exit and changes in companies names.
21. Venue identification Identification of the venue where the transaction
was executed. That identification shall consist in:
(a) where the venue is a trading venue: its unique
harmonised identification code,
(b) otherwise: the code ‘OTC’.
22. Transaction reference A unique identification number for the transaction
number provided by the investment firm or a third party
reporting on its behalf.
23. Cancellation flag An indication as to whether the transaction was
cancelled.
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F. Question 6 “Transparency”
The subject matter of this section is the advice from ESME redarding question 6 in the
Transparency
energy and the subsequent study of the electricity wholesale markets. In light of these
a) whether greater pre- and post-trade transparency for electricity and gas supply
contracts (physical and spot trading) and derivatives would contribute to a more efficient
wholesale price formation process and efficient and secure electricity and gas markets;
b) whether such transparency arrangements could be expected to mitigate the concerns

identified in the Sector Inquiry above;
c) whether uniform EU-wide pre- and post-trade transparency could have other benefits;

markets, for example could liquidity in these markets be expected to decrease? Is there
a risk that trading could shift to third countries to escape regulation? If so, how could
such risks be mitigated (delayed reporting, aggregated reporting, etc.).
1. The Sector Inquiry did not identify any market failure resulting from a lack of
information transparency concerning trading on the wholesale energy markets and
the wholesale derivatives markets.
balance), and other relevant information as identified by ERGEG is likely to result in
an increase in liquidity in the electricity and gas derivatives markets.
3. The implementation of information requirements concerning electricity and gas

wholesale physical and derivatives transactions should be driven by market
developments and carried out in accordance with better regulation principles with a
view to minimising the additional obligations that would result for the market
participants.
4. Post-trade transparency as described in this section could be established (alongside

the record-keeping obligation of the Third Energy Package) for the purpose of
facilitation of access to information.

sources (brokers, exchanges, operators) for market monitoring purposes - as they
are generally better-placed to provide this information than market participants.
80
6. Therefore, information about commodity derivatives transactions conducted or
cleared at exchanges (e.g. EEX) and Multi-Trading Facilities “MTFs” (Brokers) could
be made accessible to the public. This would not mean obligations by participants of
these platforms, but rather the obligation of the operator of such a platform to show
to the public – on an aggregated and anonymous basis – the transactions. In this
context it seems not to be appropriate to harmonize throughout the EU the details of
this publication as the MTFs and the level, kind and content of the transaction and
information are different according to the market circumstances.
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Advice of ESME:
This section seeks to provide advice regarding question 6 of the Mandate to ESME.
1. Analysis of Sector Inquiry
The Mandate refers to the Energy Sector Inquiry, an extremely detailed review of the
electricity and gas markets, whose final report was published on 10 January 2007, in
which the EU Commission described a number of competition problems.
The problems outlined in the EU Commission’s Sector Inquiry – those relating to vertical
foreclosure, market concentration, lack of market integration or price formation – are not
related to lack of transparency on supply contracts and derivatives for electricity and gas.
As detailed in the first section of this document, before giving precise answers to the
questions in the Mandate, the Inquiry, which provides a wealth of evidence and
arguments to support its conclusions, does not make the case for further transparency
measures on the wholesale and derivative markets.
a. Introduction: review of issues raised in the EU Commission’s Energy Sector

Inquiry
The purpose of the Sector Inquiry was to seek distortions of competition that could be
addressed by competition law, as well as to identify problems with the regulatory
environment that could be addressed by further legislation (in particular, the conclusions
of the Sector Inquiry have been taken into account in the formulation of the Third
Legislative Package on electricity and gas, presented in September 2007). The
problems identified by the Sector Inquiry were grouped into five large categories:
1. Concentration and market power

2. Vertical foreclosure
3. Lack of market integration
4. Lack of transparency
5. Price formation
The Sector Inquiry demands increased information transparency in a number of key

areas (technical availability of interconnectors, technical availability of the transmission
networks, generation (availability), balancing and reserve power, load, generation
(production) as a means to increase the efficiency of the electricity and gas markets.
b. Concentration and market power
The EU Commission concluded that at the wholesale level, gas and electricity markets
remain national in scope, and generally maintain the high level of concentration of the
pre-liberalisation period. This gives scope for exercising market power.
The EU Commission did not establish a link between concentration and market power
and lack of transparency on wholesale markets, supply contracts and derivatives.
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Following the findings of the Sector Inquiry, the EU Commission has indeed included
provisions regarding market concentration in the Third Legislative Package:
• For instance, according to the proposal by the EU Commission, Member States

would be obliged to give its national energy regulators the authority to impose Virtual
Power Plant auctions as a mechanism to increase competition.
• The Third Package also proposes a number of record-keeping obligations to be
imposed on market participants. These obligations would facilitate market monitoring
by energy regulators and competition authorities.
The demand of the Sector Inquiry for increased information transparency is not based on
a link between the availability of such information and market concentration. On the
other hand, record-keeping obligations, such as those already included in the Third
Legislative Package on electricity and gas36 would facilitate the market-monitoring role of
energy regulators and competition authorities sufficiently.
c. Vertical foreclosure
According to the EU Commission, the current level of unbundling of network and

supply interests has negative repercussions on market functioning and on
incentives to invest in networks. New entrants often lack effective access to networks
(despite the existing unbundling provisions) and to information on the status of the
network.
On the basis of these findings of the Sector Inquiry, the EU Commission has expressed
the view that ownership unbundling (a TSO that is independent of production and supply
activities) or an appropriate Independent System Operator is necessary to provide non-
discriminatory access to the grid and to optimise investment into further expansions.
The Sector Inquiry also concluded that a second form of vertical foreclosure was found
to exist by way of the integration of generation/imports and supply interests within
the same group. This form of vertical integration reduces the incentives for incumbents
to trade on wholesale markets and leads to sub-optimal levels of liquidity in these
markets. Low liquidity can have many negative effects, such as high volatility of prices -
which increases costs for hedging and can be an important barrier to entry - and lack of
trust that the exchange prices reflect the overall supply and demand balance in the
wholesale market (reduced reliability of the price signal).
Auctions of electricity (the so called Virtual Power Plants) and gas release programmes
have been used in several countries as a mechanism to enhance liquidity in the
wholesale markets. Long-term gas contracts and power purchase agreements (PPAs)
have similar effects to vertical integration, and the EU Commission has paid special
attention to them. However, the EU Commission did not make the case that
transparency requirements would contribute to solving the vertical foreclosure problem.
In conclusion, according to the EU Commission, the problem of vertical foreclosure is not

related to transparency on wholesale markets, supply contracts and derivatives.
36
This refers exclusively to the Art. 23 f of the Electricity Directive and 24 f of the Gas Directive; see section
E of this paper.
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d. Lack of market integration
The third problem area identified by the Sector Inquiry is the absence of market
integration. According to the EU Commission, cross-border sales do not currently
impose any significant competitive constraint. Incumbents rarely enter other national
markets as competitors. Insufficient or unavailable cross-border capacity and different
market designs hamper market integration. The Sector Inquiry concludes that the
absence of energy market integration results from:
- insufficient interconnecting infrastructure between national energy systems,

- insufficient incentives to improve cross border infrastructure,
- inefficient allocation of existing interconnection capacity, and
- incompatible market design across borders (e.g. differences between balancing
regimes, nomination procedures, and differences in opening hours of power
exchanges).
Throughout the discussion of these issues the EU Commission did not refer to the
transparency of wholesale markets, derivatives and supply contracts as an issue or to a
remedy for the lack of market integration.
e. Lack of transparency
The next issue raised by the EU Commission’s Sector Inquiry was the lack of
transparency “as a problem in itself”.
According to the Sector Inquiry, for the development of efficient wholesale markets, it is
essential that all market participants have access to the information considered
necessary to trade, in particular as regards expected demand, supply and network
issues. The Sector Inquiry has provided evidence that the level of transparency in the
wholesale markets in the EU is not satisfactory and it is also widely divergent.
However, it must be noted that the Sector Inquiry, when analysing the need for improved
transparency, identifies only the need for transparency of “data relating to network
availability, especially for electricity interconnections and gas transit pipelines”, as well
as “data on the operation of generation capacity and gas storage”.
The Sector inquiry indicated that the issues on which information is most important are
(in decreasing order):
1. Technical availability of interconnectors

2. Technical availability of the transmission networks
3. Generation (availability)
4. Balancing and reserve power
5. Load
6. Generation (production)
There is no mention of information transparency on wholesale markets, supply contracts

and derivatives.
In line with this assessment by the Sector Inquiry, responding to previous requests by
the EU Commission and after extensive consultation with market participants, on August
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2006 ERGEG (the Council of European Energy Regulators) published its Guidelines of
Good Practice on Information Management and Transparency in Electricity Markets
(Ref: E05-EMK-06-10), that propose a detailed definition of information to be made
available, aggregation level, timing of the publication, etc.
f. Price formation
The last section of the Sector Inquiry discussed the factors which determine the price
level in electricity markets. According to the EU Commission, there are three issues
relating to the overall price level of electricity that deserve particular attention.
• Which external factors, such as increases in fuel costs or the introduction of CO2
emission trading schemes, might explain – wholly or in part – the price increases
over the recent years.
• The effects of regulated supply tariffs for competitive electricity wholesale and retail
markets.
• Special support schemes – currently under consideration in certain Member States -
to support large energy-intensive users.
Among other issues, the Sector Inquiry concludes that, in certain Member States, the
recent increases in electricity prices could be explained by the rise of gas prices used in
marginal plants. It is debated to what extent the value of CO2 allowances is priced into
electricity prices.
The Inquiry also reflects that industrial users claim that electricity producers should not
be entitled to factor in the value of CO2 allowances, as they were largely distributed for
free. Generators claim that the value of CO2 allowances is an opportunity cost, which
can legitimately be taken into account.
The EU Commission states that regulated tariffs for electricity supply have adverse
effects for the development of competitive markets if set very low compared to wholesale
prices and if they cover a large part of the eligible customer market. Support schemes for
large energy-intensive users – currently considered in a number of Member States –
need to be compatible with antitrust and state aid rules.
The EU Commission in its Sector Inquiry did not refer to transparency in the wholesale
and derivatives market as a factor influencing wholesale or derivatives energy prices.
That can be explained by the fact that information on prices is available. Price references
exist and are disclosed by certain publications and market exchanges which aggregate
the information of transactions to publish price references and indices.
As a conclusion, the review of the Sector Inquiry conclusions does not reveal any
relation between the market failures identified by the European EU Commission and
transparency of transactions on electricity and gas wholesale and derivatives market.
Also, in a more recent document, answering to the EU Commission mandate on non-

equities transparency, the Committee of European Securities Regulators CESR even
mentioned that apart from the markets for cash bonds, they were not aware of
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transparency-related concerns in the derivatives market, including the commodity
derivatives markets.37
On the other hand, the EU Commission working document - report on non-equities

markets transparency - expressly stated that the transparency issues considered in the
Sector Inquiries were outside the scope of this report and would be dealt with
separately38
It should be noted that the initial draft of the Third Legislative Package for Energy
contained proposals to the question of transparency in gas and electricity markets
including derivatives markets that come within the scope of MiFID that were not based
on any evidence provided by the EU Commission or on any of the previous analyses of
this issue. These proposals were finally removed in the proposal that the EU
Commission finally presented, and this area was reserved for examination during 2008.
2. Defining transparency
For further analysis, ESME seeks to define certain concepts in order to make a correct
assessment of objectives sought and consequences arising from transparency
requirements.
a. Transparency on infrastructure vs. transaction transparency
At this point, it seems clear that the debate on wholesale energy markets refers to two
different types of transparency:
aa. Transparency on the status and use of infrastructure and physical assets
Electricity and gas are network-bound energy commodities. A high degree of

transparency about the use of physical infrastructure is needed in order to understand
price formation, to facilitate access to the grid and to encourage greater competition. The
Sector Inquiry concluded that as much information as possible on the use of
infrastructure should be published, so that market participants holding market-sensitive
information would not be in a position to profit from this information at the expense of
other market participants. In this context is has to be noted that already today there
exists many transparency obligations for these activities (see annex “transparency
regulations for the electricity and gas sectors” to this section), which already guarantee a
certain level of transparency.
37
See CESR´s response to the Commission on non-equities transparency, CESR/07-284b, July 2007, No.
28 on page 9. It is stated that, “Unlike in the markets for cash bonds, where some concerns have been
raised regarding investor protection relating to transparency levels (see next section), we are not aware of
transparency-related concerns in the derivatives markets.”
38
/ DG Internal market and Services Working Document, Report on equities markets transparency pursuant
to Article 65 (1) OF Directive 2004/39/EC on Markets in financial instruments (‘MiFID’) p.4, 11 (dated
03.04.2008).
86
bb. Transparency relating to wholesale markets, supply contracts and derivatives
Concerns the disclosure of information about the state of the market and wholesale
transactions. The Sector Inquiry does not provide any evidence regarding the need for
further transparency of this type and fails to make any claim in this regard. Regulators
and competition authorities need to have access to this type of information for market
monitoring purposes (thus the provisions on record keeping that have been included in
the Third Legislative Package on electricity and gas).
It is the opinion of ESME members that improvements in transparency on the

infrastructures may foster competition by increasing liquidity on the markets. On the
contrary, transparency relating to electricity and gas wholesale markets, supply contracts
and derivatives is not an issue and the burden created by additional transparency
obligations directly imposed on market participants would be higher than the benefits
expected from such measures.
b. Pre-trade transparency vs. post trade transparency
aa. Pre-trade transparency
Pre-trade transparency is the obligation on regulated markets or MTFs to make public

bid and offer prices on shares admitted to trading at such venues.
Pre-trade transparency has been introduced in respect of shares admitted to trading on

a regulated market by the Markets in Financial Instruments Directive (MiFID) to address
the concerns that may have arisen following the abolition of the concentration rule and
the development of multiple-trading venues.
The principal concerns to address were that of illiquidity and the danger that retail
investors would not be able to obtain a price which would reflect the totality of supply
and demand in the investment concerned because of the large number of multilateral
trading facilities.
Based on the experience of its members and on the various discussions which led to the
adoption of pre-trade transparency requirements, ESME believes that pre-trade
transparency requirements beyond national requirements for commodity derivatives
traded on regulated markets (i) are impractical to physical commodities and OTC
commodity derivatives trading and (ii) would not contribute to a better price formation
process of either of these. Besides, the category of investors for the protection of whom
pre-trade transparency requirement were introduced, ie retail customers, are absent
from the gas and electricity markets, which are markets among professional participants.
In addition:
i. Such requirements would be impractical and not necessary for electricity and gas
trading and commodity derivatives trading in general. The objective of pre-trade
transparency objectives is to give information on standardized transactions to
provide retail investors with valid information of bid and offer prices on competing
trading venues.
Two prerequisites are necessary to achieve the objective of pre-trade transparency.

The first is to deal with a uniform standardised product and this is why MiFID pre-
87
trade transparency is limited in the current situation to shares admitted to trading,
and the second one is that it must be traded on some kind of organized market, i.e.
regulated markets and MTFs, and possibly systematic internalisers. The scope of
these MiFID requirements is currently limited to shares admitted to trading on MTFs
and Regulated Markets, and as a matter of fact, such a requirement only makes
sense for liquid standardised instruments.
Electricity and gas markets as well as commodity derivatives markets are very
different from shares and bonds markets. The majority of transactions are dealt OTC,
outside of an organised market. Although they present a high degree of
standardisation (e.g. most wholesale electricity and gas is traded in standard
products with contractual terms based in the standard EFET Master Agreement), this
standardisation is not comparable to that of the shares and bond markets. Market
participants usually tailor the products and contractual terms to their business and
energy needs.
This is true for the derivatives market where most transactions are OTC transactions.
It is even more the case for wholesale transactions with physical delivery, where
essential contractual conditions, imposed by physical and technical constraints or the
due to the business and energy needs of market participants, differ from one contract
to another. This flexibility is an essential feature of the OTC markets in comparison to
transactions concluded through regulated markets (as these are always
standardised) and this feature is indispensable for the energy and commodity
markets. Trying to define a uniform classification of all types of transaction
characteristics would simply lead to artificial and misleading information about the
market participants.
ii. For the reason outlined before, the impossibility to define a standard transaction
would necessarily lead to some very significant discrepancies in prices the
justification of which could not be found in the information disclosed. This would
result in such indications being misleading as to the exact state of the market and the
result achieved would be the opposite of the objective sought.
As an example, comparing the price per MWh of a firm long-term contract with take
or pay obligations with the price of a cross-border contract for physical delivery
subject to the availability of interconnection capacity would simply be irrelevant.
In conclusion, ESME believes that the rationale that led the European legislator to
impose pre-trade transparency on equity markets cannot be transposed to the physical
and OTC commodities markets and, apart from the unnecessary burden it would create,
would be likely to give improper information on the market.
bb. Post-trade transparency
A certain amount of information is already available on the basis of post-trade data. This
is the basis on which information is published by regulated exchanges and MTFs and
certain brokers.
Part of this information is so far only accessible – as far as MTFs are concerned – to the
members of such platforms. Following the guidelines of ERGEG (in particular, table 5)
mentioned above, these platforms could provide public access to the information about
88
the transactions which are concluded / cleared through them. This would not require
imposing additional publication obligations on participants of these platforms, but rather
the regulatory obligation of the operator of such a platform to make accessible to the
public the available information on the transactions, including "best bid / best offer",
"market depth", "trades done", etc. (this is already established by some broker
platforms). Also, exchanges and MTFs will have an inherent interest to attract liquidity to
their platform through publication of market data: the ENDEX electricity futures exchange
has just announced a new service for this purpose, which could serve as an example to
increase transaction transparency for trading activities on regulated markets and
MTFs.39 Currently there are also superequivalent national obligations on regulated
markets, with the UK, for instance, requiring full pre- and post-trade (bid, offer and trade)
transparency for commodity derivatives admitted to trading on ICE Futures, LIFFE, and
the LME.40 However, the principle of proportionality of regulatory measures urges that
such a transparency regime should address the regulatory aims of transparency in an
appropriate manner and therefore such a transparency regime would be limited to post-
trade transparency (in particular also for the reasons explained above in aa) ). In this
context is seems also not to be appropriate to harmonise throughout the EU the details
of this publication, as the exchanges and MTFs and the level, kind and content of the
transaction and information are different according to the market circumstances. In
addition, further assesment is necessary whether such a regulatory regime shall apply to
every exchange and MTF or whether it shall be limited to certain exchanges and MTFs
on the basis of pre-fixed criteria, such as market share or liquidity etc. Also, the exact
impact of such a regulatory measure needs to be considered through an impact
assessment.
This information obviously does not include the parties involved in each deal. In order to
avoid the risk that certain participants have raised concerning possible collusion resulting
from disclosure of prices, it is important that such post-trade transparency be organized
on an anonymous basis.
c. Transparency vs. monitoring
It is important to distinguish the design and purposes of transparency and reporting

obligations (see ESME Advice regarding questions 5 above) from each other to
guarantee a “better regulation” approach:
aa. Transparency in respect of wholesale electricity and gas markets means disclosure
of information about transaction data, i.e. the state of the market and wholesale
transactions. This improves the trust participants have in the market and its price-
building mechanisms and – in doing so – secures a sufficient degree of liquidity of
markets. Transparency obligations is also likely to reduce, if any, asymmetric information
between market participants and enhance on this basis market liquidity. Therefore,
ESME is in favour of a transparency design to be named as “better regulation” – giving
the market participants a framework that will attract competition and liquidity. Currently,
the increasing number of professional market participants and trading products and
volumes indicates that the current regulatory framework attracts new market participants,
competition and liquidity. Therefore, a transparency regime consisting of extending the
39
ENDEX will publish the aggregated volumes per contract (anonymously) and average traded prices and
other reported trades; see: www.endex.nl.
40
However, ESME do not recommend extending this superequivalent regime throughout the EU for the
reasons explained in this section.
89
scope of post-trade transparency as described above should reach these intended
regulatory objectives and should not have an adverse economic impact on energy
markets/participants and should respect the principle of “better regulation”. It is
paramount that it will not have diametrical adverse effects on these markets/participants
and will not cause adverse regulatory issues. Hence, ESME is of the opinion that
obligatory disclosure requirements (publication of transactions data) directly imposed on
market participants are not appropriate and proportionate to reach these regulatory aims.
Well-functioning wholesale power and gas markets need rather a high degree of
transparency about use of physical infrastructures. Transparency about use of such
infrastructure reduces risk, provides confidence and allows efficiency, liquidity and
security of supply to improve (also see above). In this context, is has to be noted that
already today there exist many transparency obligations for these activities (see annex
“transparency regulations for the electricity and gas sectors” to this section), which
already guarantee a certain level of transparency.
bb. The objectives of financial and energy regulators, when dealing with transaction-
reporting obligations of market participants (as under MiFID), is not to provide
transparency in the market, but to have information on transactions in order to monitor
the market and assess market participants’ behavior for the sake of investors’ or
customers’ protection and of market integrity (market manipulation and insider dealing).
Therefore, transaction reporting is rather related to the issue of market monitoring by
regulators.
Regarding the needs of market monitoring, is it already sufficient if regulators make use
of their powers under the future record keeping obligation of the Third Energy Package
and existing information sources. ESME considers that the regulators should make the
maximum use of the existing sources of information on the market (exchanges,
information providers, brokers) as a way of actively supervising the market while
minimising the requests to market participants. Regarding record keeping (see ESME
advice regarding questions 5 above), please see the comments above which conclude
that a while single harmonised approach to record keeping, may be desirable, it is not
appropriate for commodities.
In a nutshell, transparency obligations shall not be used primarily to serve the regulatory
aims of reporting obligations.
ESME considers that a transparency regime must be tailored in compliance with the
principle of “better regulation”. The intended aims of transparency could be achieved
without adverse economic impact on energy markets/participants by simply extending
the scope of post-trade transparency as described in this section and encouraging the
initiatives of certain exchanges and brokers to publish transactions data. Before
imposing any new requirements, it is paramount to make sure that it will not have
diametrical adverse effects on these markets/participants and will not cause adverse
regulatory issues.
Furthermore, ESME considers that market monitoring can be achieved with the proper
use of information currently available and possible extension of post-trade data
availability on certain markets.
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3. Guiding principles for the ESME recommendations
1. The Sector Inquiry has not identified any market failure resulting from a lack of
information transparency concerning trading in the wholesale energy markets,
supply contracts and wholesale derivatives markets.
balance) should result in an increase in liquidity in the electricity and gas derivatives
markets.
3. Transparency on the use of the infrastructure should be addressed by EU-specific

legislation so that a single, harmonised, regime would be applicable in all EU
Member States for the commodities concerned.
4. The implementation of information requirements concerning wholesale physical and

derivatives transactions should be driven by market developments and carried out in
accordance with better regulation principles.

sources (brokers, power exchanges, information providers) for market-monitoring
purposes and of the future record-keeping obligation. This is consistent with the
practice in the US, where the regulation of commodity markets requires brokerage
firms and other relevant entities to report both transactions and positions of large
traders either to the exchange or to the market operator. Moreover, record-keeping
requirements ensure that data regarding OTC positions and transactions are
accessible to the CFTC to the extent that OTC activities are related to instruments
traded on authorized trading venues.
6. Following the guidelines of ERGEG mentioned above, exchanges (e.g. EEX) and
Multi Trading Facilities “MTFs” (brokers) should provide public access to the
information about the commodity derivatives transactions which are concluded /
cleared through them. This would not mean obligations by participants of these
platforms, but rather the obligation of the operator of such platform to show to the
public – on a aggregated and anonymous basis – the transactions. In this context it
seems not to be appropriate to harmonise throughout the EU the details of this
publication as the MTFs and the level, kind and content of the transaction and
information are different according to the market circumstances.
7. The implementation of transparency measures should be geared to serve market

integrity, through adequate and proportional measures. Transaction reporting is
burdensome and it entails high administrative costs with no percievable regulatory
comment. CESR recognised that uniform obligations for the reporting of trades in
financial instruments that paid no attention to the nature of the instruments, their
users and the use to which the reports could be put, would impose extremely
onerous cost on the commodity derivatives industry.41 This should mitigate the risks
that certain commodities trading might shift outside the EU (delocalisation).
41
This assessment is supported by the findings of the CESR Public Statement “New arrangements for the
reporting of derivatives trades in accordance with MiFID”, CESR/07-627b, 26.10.2007; see: www.cesr.eu.
91
8. Transparency rules geared to professionals. Evidence suggests that direct retail
involvement in wholesale commodities and wholesale derivatives business is very
limited and concentrated in certain exchange-traded products. Retail involvement in
commodities derivatives, as described in this report under section A above, is very
limited, especially in the field of gas and electricity products.42 Typical retail
investors focus on retail derivative securities (see section A) and participations in
investment funds. Among commodities, gas and electricity products only refer to a
very small part of the investments. Participants in the wholesale energy markets
deal with customers that are primarily wholesale and corporate final customers.
Therefore transparency rules should essentially be geared to professionals/
qualified investors/ eligible counterparties.
42
See also FSA, Growth in commodity investment: risks and challenges for commodity market participants,
March 2007.
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4. Answers to the questions of the Mandate
a) whether greater pre- and post-trade transparency for electricity and gas supply
contracts (physical and spot trading) and derivatives would contribute to a more efficient
wholesale price formation process and efficient and secure electricity and gas markets;
ESME considers that, in line with the analysis carried out in the Sector Inquiry, “greater
pre- and post-trade transparency for electricity and gas supply contracts (physical and
spot trading) and derivatives” would not contribute to a more efficient price formation
process, if transparency is understood in terms of disclosure of information about the
state of the market and wholesale transactions, supply contracts and derivatives. On the
contrary, it may provide improper information, due to the relatively low degree of
standardisation of transactions in this market.
Instead, more information about technical availability of interconnections and technical

availability of TSO networks is needed to increase the efficiency and security in
electricity and gas markets. Market participants need to be able to predict the likely
evolution of supply and demand fundamentals and their ability to move energy around
the transmission systems. Access to information about electricity transmission and
generation, gas transportation and gas storage would help new entrants to turn third-
party access from legal theory into a real business tool. Transparency on the use of the
network infrastructures would reduce risk, provide confidence and bring
efficiency, liquidity and improved security of supply. This information should be made
public, based on the ERGEG guidelines mentioned above. In this context is has to be
noted that already today there do exist many transparency obligations for these activities
(see annex “transparency regulations for the electricity and gas sectors” to this section),
which already guarantee a certain level of transparency.
Additionally, and according to the same guidelines, exchanges (e.g. EEX) and MTFs
(brokers) could provide public access to post-trade information about the commodity
derivatives transactions which are concluded / cleared through them. This would not
mean obligations by participants of these platforms, but rather the obligation of the
operator of such a platform to show to the public the available information on the
transactions. This would serve the aim of transparency to improve the trust participants
have in the market and its price-building mechanisms. The inclusion of MTFs (broker
platforms) in such a transparency regime would also encompass OTC transactions (in
standardised instruments) to a sufficient degree.
It is our opinion that increased pre-trade transparency is not required due to the
wholesale character of the market and is not technically feasible for the reasons detailed
earlier in this paper.

No, as we have discussed in detail, problems about vertical foreclosure, market

concentration, lack of market integration or price level are not related to the lack of
transparency, at least the transparency related to the disclosure of information about the
state of the market and wholesale transactions. The Sector Inquiry does not make any
similar claim. More information on the use of infrastructure is necessary because it helps
93
to a better performance of the market. Besides, it is absolutely necessary that any
published information be the same across Europe.
In relation to any possible lack of trust in the functioning of wholesale markets, ESME
believes that improved and more systematic “market monitoring” could be carried out by
regulators to identify any possible wrongdoing. We think that regulators can learn as
much as they need to know in normal circumstances about price formation from
published exchange data, from brokers and from the trade press (who construct their
own OTC market price indices) and other information sources. Only in circumstances
where there exists prima facie evidence of an abuse of dominant position, of collusion or
of other market abuse, should it be necessary to demand specific transaction price data
from producers and/or traders. In addition, the future record keeping obligation of the
Third Energy Package is sufficient for the purposes of market monitoring by regulators.
In relation to any possible lack of trust in the functioning of wholesale markets, ESME
believes that improved access to information about the OTC market i.e. the broker
platforms (MTFs) will provide consumers and interested market participants with
information about best buy/sell prices for trading products, market depth and trades
completed. Consumers not trading on the platform (MTF) themselves would be able to
compare in realtime prices offered with standard products traded in the OTC market.
Risk capital providers will easily follow the developments in any wholesale market and
become more willing to enter new markets.
Well-functioning wholesale power and gas markets would be an essential part of an

efficient EU internal market in energy. Electricity and gas are network-bound energy
commodities, and thus effectively necessitate a high degree of transparency about use
of physical infrastructure. Transparency about use of such infrastructure reduces risk,
provides confidence and allows efficiency, liquidity and security of supply to improve.
The release by TSOs, producers and large consumers of demand, transmission and
generation data is thus crucial to market participants’ ability to analyse likely market
developments and to participate in forward markets.

markets, for example could liquidity in these markets be expected to decrease? Is there
a risk that trading could shift to third countries to escape regulation? If so, how could
such risks be mitigated (delayed reporting, aggregated reporting, etc.).
Depending on the way transparency requirements would be implemented trading could

be affected and could move to third countries. Cumbersome or inadequate bureaucratic
requirements could entail additional costs and barriers to entry. They would become a
deterrent to doing business in European markets. Similarly disclosure of information
which would be considered excessive could put commercial interests at risks and
therefore contribute to delocalisation of trading activities. Concerning excessive
bureaucratic requirements, it is fundamental to ensure that homogeneous requirements
be implemented across Europe, and avoid overlap between requirements arising from
energy regulation and from financial regulation. Concerning information disclosure, we
favour aggregated reporting and delayed reporting on information. From a commercial
point of view, commercially-sensitive information could only be required in aggregated
form and under delayed reporting.
94
For commodities markets other than electricity and gas, further transparency
requirements are not required and should not be implemented at this stage, as they may
have negative impacts.
It is important that the financial regulation of commodity derivative transactions does not
erect a further barrier to entry to often illiquid and fragmented continental European
power and gas wholesale markets. Imposing compulsory disclosure to national
regulators (or indeed publication) of details of market participants’ OTC wholesale power
and gas transactions would cause considerable concern among the energy trading
community across Europe.
Conclusion: transparency to serve market integrity
The EU legislation should be careful not to create new barriers to entry or incentives to
trading firms to relocate their activity outside the EU by imposing bureaucratic disclosure
obligations on wholesale tier participants in newly liberalised European energy markets.
The focus should be on putting in place further transparency about the use and
availability of network and production/storage infrastructure, so that competitive
wholesale power and gas markets would be given a chance to develop efficiently, to the
benefit of the European economy and the European consumers. Post-trade
transparency could be envisaged by using existing references and making them public.
Pre-trade transparency is not adequate for the specificities of the commodities market.
95
G. Question 7 „Market Abuse“
The subject matter of this section is the ESME advice regarding question 7 of the
“Does Directive 2003/6/EC on insider dealing and market manipulation (market abuse)
properly address market integrity issues in the electricity, gas and other commodity
markets? If not, what suggestions would ESME have to mitigate any shortcomings?”
(“Question 7”)
1. Definition of commodity derivatives and exotics/hybrids derivatives: it would be

helpful in terms of application of MAD if the definitions of commodity derivatives and
exotics/hybrid derivatives could be defined through reference to the corresponding
definitions in MiFID. This harmonisation should not, however, broaden the scope of
the MAD to new kinds of financial instruments beyond its existing scope.
2. Definition of insider information and scope of application of the prohibition of insider

trading and duty of publication by the issuer: there are significant practical problems
in defining insider information and applying the insider dealing regime to the
commodity and commodity derivatives businesses. This stems from both the
specifics of and the diversity between different businesses together with the fact that
participants operate to varying degrees in both physical and derivative markets.
The ESME Group endorses the regulatory suggestions made in its earlier (6th July
2007) ESME-MAD report and furthermore notes that changes may be necessary to
level 1 & 2 provisions to address the issues. ESME is of the opinion that there is a
need to further adapt the insider dealing regime to the needs of the commodity and
commodity derivatives business to guarantee the orderly functioning of these
markets (for specific recommendations see section G below).
3. No extension of MAD regime to Multi-Trading Facilities (MTFs): MiFIDalready

requires investment firms and market operators to monitor transactions that may
involve abuse. Furthermore MTF’s are required to report such conduct to the
competent authority and provide further assistance as appropriate. This, together
with other regulatory measures, ensures that there is already sufficient investor
protection, transparency and market integrity within MTF’s.
4. No extension of MAD regime to OTC markets and spot markets: There is no

evidence or threat of market failure that would result in significant consequences for
the integrity and efficient operation of these markets to justify a wider application of
MAD. Furthermore the health and increasing participation in these markets together
with the absence of any suggestion of a need in current energy and financial
regulator consultations supports this assertion.
5. Transaction and oosition reporting: transaction reporting directly by market

participants, on its own, would not provide regulators with the necessary information
to detect market abuse. Record-keeping obligations allow regulators to access such
information from companies if it is needed as part of any investigation or query
regarding market behaviour. Position reporting is more appropriate for detecting
96
market abuse and regulators should have access to such information, but placing
reporting requirements on participants is also not the best route for providing such
information. ESME suggests that regulated exchanges and MTF’s are best placed
to act as front line regulators by monitoring positions of market participants –
including, where necessary, reporting directly to and coordinating with regulators.
This should be explored further recognising that flexibility on reporting levels would
be needed and requirements proportional to market specifics. Solutions should be
avoided which might have the unintended consequence of reducing liquidity.
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ESME-Advice:
1. Relevant EU Market Abuse Regime
The subject matter of this section is the advice from ESME regarding question 7 of
the Mandate. This question needs to be answered in the context of the existing and
relevant EU market abuse legislation:
i) the Level 1 Directive 2003/6/EC of the European Parliament and of the Council
(in the following also referred to as “MAD”);
ii) the Level 2 Directive 2003/124/EC, implementing MAD as regards “the

definition and public disclosure of inside information and the definition of market
manipulation”;
iii) the Level 2 Directive 2004/72/EC, implementing MAD as regards the “accepted
market practices, the definition of inside information in relation to derivatives on
commodities, the drawing up of lists of insiders, the notification of managers’
transactions and the notification of suspicious transactions”;
iv) the Level 3 first set of CESR guidance and information on the common
operation of the directive, addressing the accepted market practices, practices
to be considered as market manipulation and the common format for reporting
suspicious transactions (CESR/04-505b).
The ESME Sub-Group Commodities (“ESME Group”) has identified the following
main issues under MAD, which it deems relevant in the context of question 7 above.
2. Definition of Commodity Derivatives and Exotics/Hybrids Derivatives

ESME-Group Proposal:
To define the terms of commodity derivatives and of exotic/hybrid derivatives in Art. 1

(3) of MAD through a reference to the corresponding MiFID definitions (Annex I
Section C Nos. 5 to 7 and 10 of MiFID) and the definitions of Art. 38 and 39 of the
Commission Regulation (EC) No 1287/2006 implementing Directive 2004/39/EC of
30 June 2006 (“MiFID Regulation”).
a. Analysis of current regime
The basic term for the insider dealing and market manipulation provisions of the
MAD is the definition of financial instruments pursuant to Art. 1 subpara. 3 MAD. This
definition, in combination with the provisions of article 9 MAD which state the scope
of application of the directive, is decisive for the scope of the insider dealing
provision of Art. 2, 3 and 4 MAD and of the market manipulation provision of Art. 5
MAD. ESME is of the opinion that a clarification of the definition of a financial
instrument in MAD by reference to the corresponding definition in MiFID could help
market participants to have a clearer view as regards the scope of applications of
MAD.
The MAD makes reference in its definition of financial instruments to commodity

derivatives and other instruments admitted to trading on a regulated market in a
98
member state but does not further define or explain these legal terms (see the
seventh and last indent of article 1(3) MAD). The same is true for the Level II
implementing measures of the MAD and also some of the national market abuse
regimes which implement the MAD and its Level II measures.
In contrast, Directive 2004/39/EC of 21 April 2004 on Markets in Financial

Instruments (“MiFID”) defines in Annex I Section C no. 5-7 the scope of the term
commodity derivatives and in its Annex I Section C no. 10 a further class of other
non-financial derivatives, such as derivatives linked to weather, emissions
allowances, freight rates and economic statistics (here referred to as “exotic/hybrids
derivatives”). These derivatives are further defined in articles 38 and 39 of
Commission Regulation (EC) No. 1287/2006 implementing MiFID (the “MiFID
Regulation”) and form a sub-category of the broader definition of “financial
instruments” contained in article 4.1(17) MiFID.
While the MAD makes no direct reference to these definitions they are relevant to the
interpretation of the MAD. By vitue of article 9, sub-paragraph 1, MAD, the MAD
applies to instruments that are admitted to trading, or the subject of an application for
admission to trading, on a “regulated market” as defined in MiFID43. The definition of
a regulated market in article 2.1(14) MiFID makes clear that a regulated market is a
market for trading “financial instruments” as defined in MiFID.
Therefore, the reference to financial instruments in article 9, sub-paragraph 1, MAD

is coextensive with the definition of financial instruments as defined in MiFID:
• Under MiFID, a "regulated market" can only admit to trading "financial

instruments" as defined in MiFID. Thus, instruments which are not financial
instruments as defined in MiFID cannot fall within the scope of article 9, sub-
paragraph 1, MAD.
• Equally, a financial instrument as defined in MiFID will fall within the scope of
article 9, sub-paragraph 1, MAD if it is admitted to trading on a regulated market
(or is the subject of a request for such admission), even if the instrument does
not fall within the specific enumeration of the various categories of instrument in
the first eight indents of the definition of "financial instrument" in article 1(3) MAD.
This is because under the last indent of that article, MAD applies to any other
instrument admitted to trading on a regulated market (or the subject of a request
for such admission), thus encompassing every type of "financial instrument"
defined in MiFID which is actually admitted (or is the subject of a request for
admission) to a regulated market.
However, article 9, sub-paragraph 2, MAD also applies the insider dealing provisions
of MAD (articles 2, 3 and 4) to "financial instruments" as defined in MAD which are
not admitted to trading on a regulated market but whose value depends on a
financial instrument to which article 9, sub-paragraph 1, MAD applies. The class of
over-the-counter (OTC) derivative financial instruments to which MAD potentially
applies in this way is somewhat narrower than the class of derivative financial
instruments covered by MiFID:
43
Article 1(4) MAD originally defined a regulated market by reference to the Investment Services Directive
(93/22/EEC). However, article 69 MiFID repeals the Investment Service Directive and provides that
references to terms defined in that Directive shall be construed as references to terms defined in MiFID.
99
• There are OTC derivative financial instruments that fall within the definition of
"financial instrument" in MiFID that would not be "financial instruments" as
defined in MAD for this purpose (as the catch-all provisions of the last indent of
article 1(3) MAD are not relevant to OTC instruments).
• In particular, it is unclear that the provisions of article 9, sub-paragraph 2, MAD

could apply to exotic/hybrid derivatives falling within Section C no. 10, Annex I,
MiFID (or credit derivatives or contracts for differences falling within Section C
no. 8 or 9, Annex I, MiFID) even if the value of those derivatives depends on a
financial instrument admitted to trading on a regulated market. This is because it
is unclear that those derivatives would fall within any of the specific categories of
instrument enumerated in the first eight indents of article 1(3) MAD.
The present structure of the MAD is difficult to understand and, therefore, it would be
desirable if MAD adopted a more transparent definition of what constitutes a
"financial instrument" for the purposes of applying the insider dealing and market
manipulation provisions set out in MAD. However, this definition should be aligned
with other relevant EU provisions and, in this EU context, the definitions of MiFID
would be an appropriate basis. This would lead to a clearer alignment of the scope
of MAD and MiFID as well as assisting with a more harmonised application of MAD
in all EU Member States.44
44
Therefore, the German Legislator has aligned the German Securities Trading Act (Gesetz über den
Wertpapierhandel – Wertpapierhandelsgesetz – WpHG – cited as “German Securities Act”) to the MiFID
definitions: The current German Securities Trading Act does define in great detail the term of commodity
derivatives and the term of the exotic/hybrids derivates (see Art. 2 subpara. 2 Nos. 2 and 5 German
Securities Act).
100
b. Proposed way forward
Recommendation of ESME:
1. To align the definition of “financial instrument” in article 1(3) MAD so that it simply
applies the corresponding definition of “financial instrument” in article 4.1(17)
MiFID. This would encompass commodity derivatives and exotic/hybrids
derivatives as defined under MiFID. (We further discuss the specific reference to
“commodity derivatives” in article 1(1), para 2, MAD below.)
2. For the reasons set out above, this harmonisation would not significantly broaden
the scope of application of the MAD to new kinds of financial instruments beyond
its current scope45. In any event:
• ESME is of the opinion that the MiFID definitions are restrictive enough to
avoid insider dealing and market manipulation prohibition being applied too
widely.
• Applying the aforementioned MiFID definition ensures that the MAD is not
extended to the underlying (physical) market, i.e. no extension of the scope of
MAD beyond the commodity derivative/exotic derivative markets into the
underlying spot markets or to OTC forward physical trading46.
• Hence, the current restriction of application pursuant to Art. 9 of MAD needs to
be preserved.
• Hence, the additional legal prerequisites of Art. 9 of MAD for the application of
the insider dealing and market manipulation prohibitions shall be kept in mind,
in particular financial instruments that fall under the scope of MAD are those
traded at a regulated market.
45
In practice, as noted above, the only significant extension of MAD that would result from this alignment
would be to include within the scope of article 9, para 2, MAD, the financial instruments in Sections C8, 9
and 10, Annex I, MIFID. Other financial instruments within the scope of Section C1 to C7, Annex I, MiFID are
probably already covered by one or other of the first eight indents of article 1(3) MAD.
46
Article 1(2)(a) and (b) MAD defines market manipulation to mean "transactions or orders to trade" that
have manipulative effects on financial instruments admitted to trading on a regulated market to which MAD
applies by virtue of the article 9, para 1, MAD. It is uncertain whether these provisions are capable of
applying to OTC transactions and orders to trade in physical commodities that underlie commodity
derivatives that are admitted to trading if those transactions or orders have the requisite effect on the
regulated market.
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3. Definition of inside information and scope of application of the prohibition of
insider trading and duty of publication by the issuer
Recommendations of ESME:
1. There may be a need to amend the Level 1 and 2 provisions to solve the problems
identified in the sections below.
2. ESME supports and endorses the general regulatory suggestion in respect of the
MAD raised in clause 3 of the earlier ESME MAD Report insofar as they are
relevant and valid analogously in the commodity and commodity business sector.
3. ESME also suggests that there is a need to clarify that all of the elements of the
insider information definitions should be taken into account when assessing if
information is insider information or not. That means that information should only be
deemed to be insider information if all of the conditions are fulfilled.
4. ESME is of the opinion, therefore, that there is a need to further adapt the insider
dealing regime to the needs of the commodity and commodity derivatives business
to guarantee the orderly functioning of these markets (for details see section
below).
In this context, ESME is of the opinion that neither the general definition of inside
information nor the commodity-specific definition of insider information is appropriate
to solve the practical implications of the MAD regime on commodity and commodity
derivatives business. This statement is supported by the findings of the followings
sections:
a. General regulatory comments:
General definition of insider definition:
The scope of application of the insider dealing prohibition of Art. 2, 3 and 4 of the
MAD is decisively defined by the term “inside information”, because the use and
disclosure of such information is a legal prerequisite for the application of this
prohibition (i.e. insider dealing can only be based on insider information).47 The same
is true for the publication duties under Art. 6 of the MAD.
The term inside information is defined by Art. 1 No. 1, first sub-paragraph of MAD in
conjunction with Art. 1 of the Directive 2003/124/EC of 22 December 2003
implementing MAD (“Directive 2003/124/EC”) and although it has been applied
adequately in Member States.48 The generality of the definition means it is difficult to
47
See Article 2 and 3 of MAD. Article 2 MAD: “1. Member States shall prohibit any person referred to in the
second subparagraph who possesses inside information from using that information by acquiring or
disposing of, or by trying to acquire or dispose of, for his own account or for the account of a third party,
either directly or indirectly, financial instruments to which that information relates.” Art. 3 MAD: “Member
States shall prohibit any person subject to the prohibition laid down in Article 2 from: (a) disclosing inside
information to any other person unless such disclosure is made in the normal course of the exercise of his
employment, profession or duties; (b) recommending or inducing another person, on the basis of inside
information, to acquire or dispose of financial instruments to which that information relates.”
48
For example, in the German Securities Act this definition is implemented by the legal definition of insider
information pursuant to Section 13 subparagraph 1 sentence 1 to sentence 3 as follows: Art. 13 of the
German Securities Act: “(1) Inside information is any specific information about circumstances which is not
public knowledge relating to one or more issuers of insider securities, or to the insider securities
themselves, which, if it became publicly known, would likely have a significant effect on the stock
exchange or market price of the insider security. Such a likelihood is deemed to exist if a reasonable
102
apply in the context of the commodity/energy trading market, i.e. the fact that it is not
specific enough49 raises issues in respect of commodity/energy trading. Insider
information in the terms of this definition are those events which do not have a
specific significance for the commodity/energy trading market, the prices of
commodities and commodities derivatives etc., but do apply in general to all
businesses.50 It was designed to cover circumstances where there was an issuer of
the financial instrument that could effectively ensure equality of information for
market participants by disclosing inside information. It is ill-suited to a dispersed
market where numerous market participants may have non-public information that
could affect supply and demand and is relevant to price formation.
Commodity-specific definition of insider information:
Based on this evaluation, the more specific definition of inside information in respect
of commodity derivatives (see Art. 1 subpara. 2 of the MAD) is the relevant
definition.51 This definition is expanded on by Art. 4 of Directive 2004/72/EC which
explains when users of commodity derivative markets are deemed to expect to
receive information in accordance with accepted market practices on those markets52
– however it does not help greatly with the practical interpretation of MAD for
commodities.
These provisions have been implemented by national securities laws adequately, but
have not been put in a form that is sufficiently specific which means that MAD is
applied appropriately with respect to commodities.53
investor would take the information into account for investment decisions. The term “circumstances” within
the meaning of sentence 1 also applies to cases which may reasonably be expected to come into
existence in the future. Specifically, inside information refers to information about circumstances which are
not public knowledge within the meaning of sentence 1, which
1. is related to orders by third parties for the purchase or sale of financial instruments or
2. is related to derivatives within the meaning of Section 2 (2) no. 4 and which market participants would
expect to receive in accordance with the accepted practice of the markets in question.
(2) A valuation based solely on information about publicly-known circumstances is not inside information,
even if it could have a significant effect on the price of insider securities.”
49
“ ‘Inside information’ shall mean information of a precise nature which has not been made public, relating,
directly or indirectly, to one or more issuers of financial instruments or to one or more financial instruments
and which, if it were made public, would be likely to have a significant effect on the prices of those
financial instruments or on the price of related derivative financial instruments.”
50
Such insider information is, for example, equity measures, integration, conversion, squeeze-out
processes and other substantial structural transformation measures, conclusion of a control and/or profit
and loss transfer agreement; take over, tender or purchase offers; dividend payments; change rating;
acquisition or disposal of principal investments.
51
See Art. 1 subpara. 2 of the MAD: “In relation to derivatives on commodities, ‘inside information’
shall mean information of a precise nature which has not been made public, relating, directly or indirectly,
to one or more such derivatives and which users of markets on which such derivatives are traded would
expect to receive in accordance with accepted market practices on those markets.”
52
For the purposes of applying the second paragraph of point 1 of Article 1 of Directive 2003/6/EC, users of
markets on which derivatives on commodities are traded, are deemed to expect to receive information
relating, directly or indirectly, to one or more such derivatives which is: (a) routinely made available to the
users of those markets, or (b) required to be disclosed in accordance with legal or regulatory provisions,
market rules, contracts or customs on the relevant underlying commodity market or commodity derivatives
market.
53
See Section 13 subparagraph 1 sentence 4 No. 2 of the German Securities Act: “(1) … Specifically, inside
information refers to information about circumstances which are not public knowledge within the meaning
of sentence 1, which
103
There are also a number of difficulties with this definition:
• The specific definition applies in relation to "derivatives on commodities".

However, MAD does not define this term and it is unclear whether it is co-
extensive with the class of "derivatives relating to commodities" covered by
Section C nos. 5-7, Annex I of MiFID, or whether it is narrower in its scope.
• Furthermore, the specific definition is limited to derivatives on commodities and
does not apply to exotic/hybrid derivatives or other derivatives where there is also
no underlying issuer that can ensure equality of information. For example, it
would appear that derivatives on emissions allowances that are admitted to
trading on a regulated market would be subject to the general definition rather
than the specific definition of inside information, even though the issues
presented by such instruments are more akin to those of commodity derivatives
than derivatives based on securities.
• Again these definitions of Art. 1 subpara. 2 of the MAD and Art. 4 of Directive
2004/72/EC, but also national laws, are still too indefinite to create the necessary
level of legal certainty for market participants.
• In particular, notwithstanding the implementing directive, it is not clear under
which circumstances market participants would expect to receive information in
accordance with accepted market practices, such that the information should be
treated as inside information.
• Neither it is wholly clear whether the relevant information has to fulfil the general
legal prerequisites of Art. 1(1) subpara. 1 MAD for being deemed to be inside
information. The specific definition does not expressly state that information can
only be inside information in relation to derivatives on commodities if, were it to
be made public, it would be likely to have a significant effect on the prices of
those derivatives (or related derivative financial instruments).54 However, recital
16 to MAD contains a general statement that inside information is price-sensitive
information which supports the view that the specific definition of inside
information relevant to derivatives on commodities should be regarded as a sub-
set of the general definition.
• It is also not wholly clear that the specific definition displaces the general
definition in relation to derivatives on commodities (so that information is inside
information in relation to commodity derivatives if but only if it meets both the
requirements of the first and the second sub-paragraphs of Art 1(1)). This would
seem to be the preferable view.
• However, we are not aware of national regulatory authorities offering more
concrete definitions or guidance.55
1. …..
2. is related to derivatives within the meaning of Section 2 (2) no. 4 and which market participants would
expect to receive in accordance with the accepted practice of the markets in question.”
54
Contrast the third sub-paragraph of article 1(1) MAD which also provides for a specific definition of inside
information in relation persons charged with execution of client orders and which does expressly limit that
definition to price sensitive information.
55
For example, the German Federal Financial Supervisory Authority (BaFin) has not offered a more
concrete definition in its insider dealing guidance paper (Emittentenleitfaden). Even worse, this insider
dealing guidance paper does declare power plant outages, information about network capacity and the
outage of power plants as insider information without the necessary consideration of the above mentioned
legal prerequisites. See www.bafin.de. The Financial Service Authority FSA gives the following as an
example of insider dealing in commodities, “Before the official publication of LME stock levels, a metals
trader learns (from an insider) that there has been a significant decrease in the level of LME aluminium
104
b. Practical implications and problems of actual regime
ESME stands by the general findings of its earlier report “Market abuse EU legal
framework and its implementation by Member States: a first evaluation” of 6 July
2007 (“ESME MAD report”) in respect of the definition of insider information, the
scope of application of the prohibition of insider trading and the duty of publication by
the issuer.56
The following paragraphs illustrate some of the more relevant practical problems
which arise under this regime:
General issues of the definition of insider information as well as of the scope of

application:
Uncertain scope of insider information:
Under these legal provisions it seems that inside information in the context of
commodity derivatives is precise information that, if it were public, would likely have
a significant effect on prices, including those of related derivative financial
instruments, where the information is information that is routinely made public to
users of regulated markets or required to be disclosed by law, regulations, rules,
contracts or custom on the relevant underlying commodity market or commodities
derivatives market.
The vagueness of the definition when trying to apply it to commodity derivatives has
led to uncertainty as to what types of information might constitute inside information.
Precise information might be deemed to include information as diverse as:
a) economic statistics,
b) routine company announcements of commodity producers, processors and
consumers,
c) changes to market rules or margin levels by regulated markets or MTFs or
clearing houses
d) supply and demand data for the underlying physical commodities where that is
published,
e) company announcements of commodity producers, processors and consumers
specifically affecting supply or demand,
f) stock data from authorised warehouses of regulated markets
g) data on the stocks of the underlying commodity not stored in authorised
warehouses of regulated markets but of a quality that is deliverable, or
h) major contracts to supply relevant physical commodities.
It seems unlikely a) and b) above could be precise information not publicly available
whereas c), d), e), f) and g) appear more relevant for the purposes of the commodity
markets. h) - individual contracts - appear not to constitute inside information unless
perhaps they are frustrated by an unforeseen force majeure event which significantly
impacts supply or demand.
stocks. This information is routinely made available to users of that prescribed market. The trader buys a
substantial number of futures in that metal on the LME, based upon his knowledge of the significant
decrease in aluminium stock levels.“
56
See clause 3 of this report.
105
These points are not intended to form a recommendation of what should or should
not constitute inside information, they are offered only to illustrate that there can
be no "one-size-fits-all" definition. The definition of inside information needs to be
flexible, recognising that the answer will be different depending on the commodity
market involved and the role of individual market participants.
Once we have decided what constitutes inside information we need to address a

further question about what trading is permitted by a person in possession of such
information, for example:
• Could management of existing hedges and positions or the need to hedge by

commodity firms suffering major supply or demand interruptions be considered
as insider dealing in the relevant commodity derivatives (see below for further
details)?
• Is knowledge of order flow, in the context of broker-dealers dealing for proprietary

account or on an agency basis or both, precise information when they receive
substantial orders while broking for other clients or having proprietary position?
• Should front running be abuse of insider information, and hence market abuse, or
should it be treated, perhaps more appropriately, as a conduct of business issue,
that is as an abuse of the customer, bearing in mind that the former is a criminal
activity while the latter is a serious regulatory failing?
Missing adoption to the specifics of commodity markets:
The difficulties and uncertainties surrounding the nature of precise information that
could have significant effect on prices when it comes to commodity derivatives has
led ESME to conclude that while it is appropriate to apply the provisions of MAD on
insider dealing, improper disclosure or misuse of information to dealings in equity
and debt securities, it is problematical to apply the same provisions also to dealings
in commodity derivatives. Equity and debt securities have issuers who have
disclosure obligations and continuing obligations intended to prevent selective or
inadvertent disclosure of precise material price-sensitive information that could have
a significant effect on the price of the relevant security; for commodity derivatives
admitted to trading on a regulated market there is difficulty in assessing what is
comparable price-sensitive data that market participants might expect to receive.
This is for two main reasons:
• Commodities underlying derivatives are typically products such as oil, gas,

electricity, non-ferrous metals, plastics or agricultural produce that are completely
interchangeable with another product of the same type. Due to the fungibility of
commodities, the potential for material price impact is significantly reduced.
• Where regulated markets admit commodity derivatives to trading they set

qualitative and quantitative standards for the underlying commodity deliverable
into the contract or against which the contract settles. In drafting contract terms,
regulated markets ensure that no single producer or brand is of such significance
that changes to their circumstances will result in a material change in the price of
the derivative.
106
As a result, commodity derivatives are typically markets where dispersed market
participants reflect their information on supply and demand factors through the price
mechanism. There is no equivalent of a single issuer with the responsibility of
ensuring equality of information for market participants.
Implication of disclosure requirements for gas and power markets:
In addition, the provisions of Art. 4 of Directive 2004/72/EC that information is

deemed to be inside information if it is “(a) routinely made available to the users of
those markets, or (b) required to be disclosed in accordance with legal or regulatory
provisions, market rules, contracts or customs on the relevant underlying commodity
market or commodity derivatives market” have a significant practical impact, as laws
or regulations applicable to underlying commodity markets (in particular the gas and
power markets) impose a growing range of transparency (disclosure/publication)
obligations on market participants (or as those market participants undertake
voluntary practices of publishing data relevant to those markets).
In practice, as current transparency requirements cover information such as network

data, plant data, balancing data etc, such data would automatically be deemed to be
insider information without any further consideration (of the additional legal
prerequisites of the more general definition of insider definition). Also voluntary
publication of data could lead to the same legal result, if it creates an expectation of
market participants of publication, i.e. it would also automatically be deemed to be
insider information.
In practice this results in an application of the insider dealing prohibitions that it is too
wide and exposes market participants to serious regulatory risk (i.e. breach of
prohibitions on insider dealing and operational risks – e.g. short position in a
commodity has to be covered (hedged) at higher prices if the market participants
become aware of it) without any real additional benefit for market integrity.
The example below explains the dilemma and serious risks which firms could face in
the event of an overly wide application of MAD. In more detail:
Where there is voluntary or obligatory publication for power plant data the application
of MAD raises regulatory issues for market participants - particularly for a power
plant operator and trading branches of an integrated energy company that raises the
question of whether information about power plant data should be deemed insider
information.
If it is insider information, then the plant operator would need to make the information
available to all market participants at the same time. However, this would mean that
the power plant operator/trading branch could be cornered by the market which
would be aware of the shortage, and therefore subject to very high power prices as a
‘distressed buyer’. However, if publication to the market was delayed by certain
period of time, it would enable the plant operator/trading branch to take necessary
steps to purchase the shortfall in power on the market without being in the position of
a distressed buyer. Cornering has a negative impact on the proper and efficient
functioning of the power markets and increases prices for end consumers. Hence, it
seems appropriate then that in such unforeseen circumstances the plant operator
should be allowed to delay publication and at least trade out of the short position.
107
These issues are transferable more or less to most commodity markets where one
market participant falls short of a commodity due to, for example, force majeure (e.g.
explosion/sinking of an oil/gas platform or oil/gas tanker or oil/gas pipeline) or other
unforeseen events, even if no specific obligation on publication of information exists.
The general concept of the disclosure requirement does not fit to the commodity
markets:
Pursuant to article 6 of the MAD an issuer of financial instruments shall inform the
public as soon as possible of inside information which directly concerns that issuer.57
This obligation does not deliver any additional benefit with regard to the energy
(commodity) wholesale market. This is because Article 6 of MAD only covers
financial instruments that are admitted to trading to a regulated / organized market
within the EC. However, according to EU laws and regulations for the admission and
issuance of products to regulated markets, the issuer of commodity derivatives in
such markets is actually the operator of the market and not individual market
participants, e.g. EEX future products on the EEX (European Energy Exchange).58
This would mean that the relevant commodity (derivatives) exchange (e.g. EEX)
would have to publish insider information which directly concerns the issuer, i.e.
itself. It is obvious, therefore, that such an obligation is not meaningful and does not
provide any benefit. In addition, the general insider information in the sense of Art.
No. 1 subparagraph 1 of the MAD, which does not specifically relate to commodity
derivatives, is in any case published by the relevant market players, insofar it relates
to the shares issued by these firms.
57
This provision has been implemented by Section 15 of the German Securities Act.
58
See www.eex.de
108
c. Proposed way forward
ESME supports and endorses the general regulatory suggestion in respect of the
MAD raised in clause 3 of the earlier ESME MAD report (as they are relevant in the
commodity sector).59 These general issues are valid analogously in the commodity
and commodity business sector.
Furthermore, ESME supports and endorses the specific regulatory suggestion in

clause 7 of the earlier ESME MAD report.
1. It is questionable if Level 3 guidelines or amended Level 2 guidelines on their own

are sufficient to solve the above mentioned problems. ESME is of the opinion that
there could be a need to amend the Level 1 and 2 provisions.
2. ESME also suggests that as a first step there is a need to clarify that all of the
elements of the above-mentioned definitions should be taken into account when
assessing if information is insider information or not. That means that information
should only be deemed to be insider information if all of the following conditions are
fulfilled:
• It is precise price-sensitive information that is not generally available

(information of a precise nature which has not been made public) and which the
possessor knows or could reasonably be expected to know is inside
information; and
• The information relates directly or indirectly to one or more commodity
derivatives (financial instruments) traded on regulated markets; and
• It concerns circumstances that may reasonably be expected to come into
existence; and
• Disclosure of the information is likely to have a significant effect on the prices of
those commodity derivatives; having a significant effect on the prices of a
commodity derivative shall mean information which a reasonable professional
client or eligible counterparty would consider to be price-sensitive and would be
likely to use as a part of a basis of an investment decision; and
• It is information that users of a regulated market on which relevant commodity
derivatives are traded would expect to receive in accordance with accepted
customs and market practices for that market or to be disclosed in accordance
with laws, regulations, rules and contracts for that commodity derivatives
market.
3. However, it remains questionable if a pure combination of the elements of the

general and commodity specific definition of insider information (Art. 1 No. 1
subparagraph 1 and 2 of the MAD, of Art. 4 of Directive 2004/72/EC) creates an
appropriate insider dealing regime for commodities that solves the problems
identified above.
4. ESME is of the opinion therefore that there is a need to further adapt the insider
dealing regime to the needs of the commodity and commodity derivatives business
59
See clause 3 of this report.
109
to guarantee the orderly functioning of these markets. It proposes that the
following issues be taken into account in the context of the wider MAD-review:
• That an obligatory transparency regime (e.g. publication of power plant data) is

or will be (in the context of the Third Energy Liberalisation package of the EU
Commission) imposed on power and gas markets and that therefore a
duplication of transparency obligation under financial market law (e.g. duty of
publication of power plant data as insider information under MAD) should be
avoided.
• It is perverse that information made available under an obligatory (e.g. in the
context of the Third Energy Package) or voluntary transparency regime in
power and gas markets would by definition be automatically be treated as
inside information under MAD, i.e. that all transparency obligations in energy
market law (and voluntary arrangements) would be automatically be treated as
inside information under financial market law (e.g. for power plant data as
insider information under MAD).
• As stated in the earlier ESME MAD report (see clause 3.1.2 of this report), that
granting a delay for publication of certain information can contribute to a better
functioning of the market. Insofar as the reasoning for this proposal is
concerned it is referring to clause 3.1.2 of this report.
• A distinction should be made between information that is generated from within
a company versus unauthorized gathered information/general market
information - whereas trading on the first information should be an acceptable
behaviour, i.e. there could be initial ‘proprietary rights’ for the holder of the
information to use it as they see fit before it is released to the market, e.g.
trading activities for the purpose of hedging for short positions arising from
force majeure events.
• Further Level 3 guidance on what and what does not constitute insider
information in the commodity and commodity derivatives markets.
110
4. Extension of MAD regime to Multi-Trading Facilities (MTFs)
ESME concludes that there is no regulatory need to extend the market abuse regime to
cover transactions in commodity and exotic/hybrid derivatives executed on MTFs.
In responding to question 7, ESME has considered whether an extension of the MAD

regime to MTFs could further foster market integrity.
The scope of MAD and its implementing measure is limited: MAD applies primarily
only to conduct on and in relation to financial instruments admitted to trading or for
which a request for admission to trading on Regulated Markets (Art. 4 (1) No. 14
MiFID) has been made, but not to conduct on and in relation to financial instruments
admitted to trading on Multilateral Trading Platforms (“MTFs”) (Art. 4 (1) No. 15
MiFID) and in the OTC-markets:
The MAD provides for a market abuse regime in Art. 5 in conjunction with Art. 1
subpara. 2 and for an insider dealing regime in Art. 2, 3 in conjunction with Art. 1
subpara. 1, whereby these regimes are put in more concrete form by Directive
2003/124/EC and Directive 2004/72/EC. These regimes also apply to transactions in
commodity derivatives and exotic/hybrid derivatives.
However, Art. 9 of MAD limits the scope of application of these regimes as follows:
The scope of the insider dealing and market manipulation provisions of MAD and the
Directives 2003/124/EC and 2004/72/EC are limited to commodity derivatives and
exotic/hybrid derivatives (see Art. 1 subpara. 3 of the MAD), which are
• either admitted to trading on a regulated market, or

• not admitted to a trading on an regulated market, but whose value depends on a
financial instrument traded on a regulated market.
Consequently, Art. 2, 3 and 5 of MAD are in principle limited to transactions in

commodity derivatives and exotic/hybrid derivatives (the underlying commodities are
currently out of scope) on Regulated Markets (Regulated Markets are defined in Art.
4 No. 14 of MiFID). Therefore, these prohibitions do apply to commodity derivative
exchanges under MiFID (both in the UK and continental Europe, e.g. LME, EEX).
However, given the second point above, the requirements of Art 2, 3 and 5 of MAD
could extend beyond Regulated Markets.
Some extension of the scope of application of Art. 2, 3 and 4 of MAD (hence the
insider dealing regime) beyond Regulated Markets is expressively stated in Art. 9
subpara. 2 of the MAD. Consequently, the insider dealing and market manipulation
regime may also apply to any financial instrument (commodity/exotic derivatives) not
admitted to trading on a regulated market in a Member State, but whose value
depends on a financial instrument traded on a Regulated Market.60 Hence, some
60
See Art. 9 subpara. 2 of the MAD: “Articles 2, 3 and 4 shall also apply to any financial instrument not
admitted to trading on a regulated market in a Member State, but whose value depends on a financial
instrument as referred to in paragraph 1”
111
trading in commodity derivatives on MTFs and on the OTC-Markets may also be
caught as far as it relates to financial instruments (commodity/exotic derivatives)
admitted on Regulated Markets. The extension of the regulatory regime in this way
reduces concerns of regulatory failure as far as Regulated Markets and financial
instruments admitted to trading on these platforms are concerned.
In practice, a very substantial proportion of the commodity and commodity derivative

market is traded on MTFs and OTC markets. This means that generally transactions
in commodities, commodity derivatives and exotic/hybrid derivatives on MTFs and
OTC markets are in practice (due to the focus of the MAD on financial instruments
traded on regulated markets and the above-mentioned limited application of MAD to
MTFs and OTC markets) not caught by MAD. Therefore, transactions trading
platforms which are MTFs (and not regulated markets), such as Powernext in France
or other major broker platforms, are in principle not subject to the insider dealing and
market manipulation provisions of MAD. This raises the question of whether there is
a need to extend MAD to trading activities on MTFs and OTC markets – which
essentially is an issue of whether market integrity would be improved (i.e. it remedies
a market failure); whether it would be a proportionate regulatory response; and if
were practicable.
Art 26 (1) and (2) of MiFID requires investment firms and market operators operating
an MTF to monitor transactions undertaken on the MTF in order to identify conduct
that may involve market abuse and to report the conduct to their competent authority.
This includes supplying relevant information for the investigation and prosecution of
market abuse and giving full assistance to the competent authority in investigating
and prosecuting market abuse occurring on or through the MTF. This essentially
means that monitoring and reporting by MTFs of market abusive conduct, in line with
MAD, already exists as there is a legal obligation on the MTF operator in this
respect.
Furthermore, market integrity on MTFs are ensured by further regulatory measures

as follows:
The operation of MTFs is an investment service, which needs to be licensed under

MiFID (Art. 5 of the MiFID) and needs to fulfil certain legal prerequisites.61
Consequently, these licensed investment firms/operators are subject to the
organisational and conduct-of-business rules of MiFID. In addition, the trading
process on MTFs itself is subject to MiFID regulation (Art. 14 of the MiFID). All of
these obligations/rules, if properly enforced by competent authorities, together
61
MTF is defined in MiFID. Recital 6 of MiFID notes that both regulated markets and MTFs may be systems
composed of a set of rules and a trading platform or systems that function on the basis of a set of rules;
the Recital calls for the definitions of regulated markets and MTFs to be aligned closely. Article 4.1(15) of
MiFID defines an MTF as a multilateral system, operated by an investment firm or a market operator,
which brings together multiple third-party buying and selling interests in financial instruments in the system
and in accordance with non-discretionary rules in a way that results in a contract in accordance with the
provisions of Title II of MiFID but does not include bilateral systems operated by investment firms where
the investment firm is counterparty to all transactions. For the purposes of MAD, an MTF is a person that
performs investment services or activities as a regular occupation or business on a professional basis and
is subject to authorisation in accordance with the provisions of Chapter 1 of MiFID, with authorisation
being granted by the home Member State’s competent authority designated in accordance with Article 48
of MiFID.
112
already provide for an appropriate level of market transparency and market integrity
with regard to MTFs (e.g. Powernext), as they do for regulated markets (e.g. EEX).
Taken together, these obligations/rules already ensure sufficient and appropriate

investor protection, market transparency and market integrity at MTFs.
In addition, Regulated Markets admitting commodity derivatives to trading require

physical delivery set grades or quality, size and delivery points of the underlying
commodity. Only a percentage of world supplies of commodities such as non-ferrous
metals, plastics, or soft commodities that comply with delivery standards will be
stored in warehouses authorised by regulated market authorities – and this
percentage will be a tiny percentage of total production of the commodities in all
grades and quality. The implication is that the amount of physical traded as such on
MTFs is insignificant compared to world supplies. It is therefore not recommended
that the market abuse regime should apply to physical business transacted through
MTFs.
A general extension of MAD to MTFs in respect of commodity and commodity

derivatives trading would have practical implications. For example, MTFs can be set
up by any party, at any time and can be very limited in size – and as such a general
extension of MAD to all MTFs would constitute a disproportionate regulatory
response (e.g. imposing significant compliance costs) creating barriers to efficient
and effective operation of markets.
Therefore, ESME concludes that there is no regulatory need to extend the market
abuse regime to cover transactions in commodity and exotic/hybrid derivatives
executed on MTFs.
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5. No extension of MAD regime to OTC markets and spot markets
ESME does not advocate an extension of MAD to OTC markets and spot markets62 in
commodities, commodity derivatives and exotic/hybrid derivatives on the basis of the
following reasons.
As indicated above, ESME is of the opinion an extension of MAD would need to be

justified on the basis that it is a remedy to a significant market failure and would be a
proportionate regulatory response. A market failure in this context means the
existence, or threat of, of substantial insider dealing and market manipulation
facilitated by a ‘regulatory gap’ that would have significant consequences for the
integrity and efficient operation of the market.
ESME does not believe that there is any such evidence of existing market failure in
the EU commodity and commodity derivatives business that would justify a wider
application of MAD to OTC markets and spot markets. In addition, it believes that the
threat of such activity is not significant, evidenced by the rising number of market
participants and trading volumes on OTC and spot markets. This suggests that
market participants have a high level of confidence in these markets and that
generally they are well-functioning. In addition, as trading on OTC and spot markets
is generally between two parties, and is not a continuos activity, the threat of the
integrity of the whole market being threatened from any markt abuse is not as high
as in other markets.
Furthermore, the current consultation papers of the energy and financial regulators in
their ongoing reviews63 of energy and financial markets do not suggest that an
extension of MAD to OTC and spot markets is necessary.
In addition, in the opinion of ESME such an extension is not supported by

professional market participants of the commodity and commodity derivatives
business. There seems to be no firm request of these market participants to
introduce a binding MAD regime to such OTC and spot businesses.
Also, it needs to be taken into acount that , for example, the energy markets (but also
other commodity markets) in question are relatively immature: in this still-fragile
market stage, many market players have come to fear that financial market-style
regulation of commodity transactions may erect a further barrier to entry to often
illiquid and fragmented markets. This could lead to a severe reduction of liquidity in
currently liquid markets and prevent it arising in new markets.
62
For the definition of Spot Contract please see Art. 38 (2) of the Commission Regulation (EC) No
1287/2006 of 10 August 2006.
63
These are: (1) Request for joint CESR/CEBS advice on commodity derivatives (see:
http://ec.europa.eu/internal_market/securities/docs/isd/mandate_CESR-CEBS_21122007_en.pdf); (2)
Request for joint CESR/ERGEG advice in the context of the Third Energy
Package (see:http://ec.europa.eu/internal_market/securities/docs/isd/mandate_CESR-
ERGEG_21122007_en.pdf); (3) Request for ESME advice in the context of exemptions in MiFID, CAD
and proposed regulatory measures in the Third Energy Package (see:
http://ec.europa.eu/internal_market/securities/docs/isd/mandate_ESME_21122007_en.pdf).
114
It has also to be noted that such an extension would also constitute a special regime
for these markets as it would not apply to all other classes of financial instruments
and other markets. This would put commodity and commodity derivatives market and
their participants at an unacceptable and unjustifiable disadvantage vis-à-vis other
(non-financial and financial) markets.
This would give rise to concerns of regulatory arbitrage as far as in third countries
such a MAD regime is not present and, consequently, market participants could
leave the EU and perform their business in these countries. Such a regime could
create a competitive disadvantage for the EU market.
Also, some technical aspects do indicate that such an extension would not be
meaningful, e.g.: OTC transactions in commodities, commodity derivatives and
exotic/hybrid derivatives are generally bilateral, non-standardised transactions with
regard to size, quality, currency, period, and type that are quoted in response to
specific quote requests; it is unlikely that the party responding to the quote request
will be an insider although it is possible that the party requesting the quote could be,
although due to the bilateral relationship this is perhaps unlikely. OTC transactions in
non-standardised instruments of a different specification to standardised, exchange-
traded commodity derivatives may not relate directly to investments traded on
regulated markets.
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6. Transaction and Position Reporting
1. ESME do not suggest direct transaction reporting obligations (comparable with the
one of Art. 25 (3) et seq. of the MiFID) and direct position reporting obligations of
market participants64 active in trading with commodities, commodity derivatives and
exotic/hybrid derivatives for the following reasons.65
2. ESME therefore proposes a role for regulated exchanges and MTFs as “frontline
regulators” as follows. Therefore, ESME suggests to further explore the possibility of
a position surveillance and possible reporting to competent authorities for operators
of markets (regulated markets and MTFs) admitting commodity, commodity
derivatives and exotic/hybrid derivatives to trading in the wider context of the MAD
review.
a. Introduction
For energy markets there will be sufficient information already available to authorities
through the transactions record keeping obligations of the Third Energy Package.
Any information on transactions would therefore be available to regulators on request
which would mean that additional reporting obligations imposed through MiFID are
not necessary and would only duplicate regulation.
It is important that regulators are able to monitor market behaviour including through
ready access to relevant information that will allow them to undertake this task
efficiently and effectively. ESME is of the opinion that an MiFID-style transaction
reporting directly by market participants would not deliver what regulators need.
Transaction reporting in itself does not provide information that allows regulators to
identify insider dealing or market abuse in commodities, commodity derivatives and
exotic/hybrid derivatives.66
ESME considers that a direct position reporting obligation by market participants is

not appropriate or proportionate.67 It would be more efficient and effective if
regulated markets and MTFs act as “front line” monitors of activity - supervising and
reporting on market integrity issues to the competent supervisory authority.68 The
operators of regulated markets and MTFs are best placed to identify suspicious
activity rather than the sector regulator, as they are constantly monitoring the
markets for which they have regulatory responsibilities. Competent authorities would
have full access to relevant transaction and position information in the event that the
regulated markets and MTFs notified them of possible markets abuse, as MiFID
obliges them to do, and the competent authorities needed to investigate market
behaviour in more detail.
64
This means non-MiFID firms, which are not licensed investment firms pursuant to Art. 5 et seq. of the
MiFID. Therefore, this section deals exclusively with firms which are not MiFID investment firms.
65
It shall be noted that investment firms which execute transactions in any financial instruments admitted to
trading on a regulated market have to report details of such transactions to the competent authority
pursuant to Art. 25 (3) et seq. of the MiFID.
66
See for more details below.
67
68
116
b. Transaction reporting obligations of market participants are not necessary
and not appropriate
ESME does not suggest direct transaction reporting obligations (comparable with the
one of Art. 25 (3) et seq. of the MiFID) of market participants69 active in trading with
commodities, commodity derivatives and exotic/hybrid derivatives for the following
reasons.70
aa. Record-keeping obligation is sufficient for supervision of market integrity

by authorities in the energy markets
ESME is of the opinion that for energy markets (gas and power) the proposed
record-keeping obligation is sufficient for supervision of market integrity by
authorities. The Commission has included in its legislatory proposal of 19 September
2007 (COM (2007) 528 final) a new record-keeping article in the Electricity and Gas
Directives. This means that Member States shall require supply undertakings to keep
at the disposal of the national regulatory authority, the national competition authority
and the Commission, for at least five years, the relevant data relating to all
transactions in electricity/gas supply contracts and electricity/gas derivatives with
wholesale customers and transmission system operators as well as storage and
LNG operators.71 Hence, authorities are already entitled to receive transaction data,
so that a duplication of such information obligations is not necessary.
bb. Transaction reporting obligations of market participants are not

appropriate
Currently, MiFID imposes transaction reporting obligations directly on those market

participants that are MiFID firms. ESME has assessed that the main potential market
abuses in commodities, commodity derivatives and exotic/hybrid derivatives are
squeezes and corners.72 However, it is difficult to see how the provision of
transaction reports would help competent authorities identify such activity.
It should also be noted that all transactions executed subject to the rules of regulated
markets must be matched before registration with the clearing house for the market,
meaning that the regulated markets hold a database of all business executed on
their markets that contains full transaction information.
In the underlying commodity markets no such transaction reporting obligations for

MiFID firms and non-MiFID firms currently exist under EU or national law (although
the above-mentioned record keeping obligations do exist). Non-MiFID firms dealing
69
This means non-MiFID firms which are not licensed investment firms pursuant to Art. 5 et seq. of the
MiFID. Therefore this section deals exclusively with firms which are not MiFID-investment firms.
70
It shall be noted that investment firms which execute transactions in any financial instruments admitted to
trading on a regulated market have to report details of such transactions to the competent authority
pursuant to Art. 25 (3) et seq. of the MiFID.
71
See for more detail response to Question 5.
72
Other abuses could also arise and could include creating false or misleading impressions as to value,
supply or demand, disseminating false or misleading information, price positioning and wash trading, while
front running appears to be customer abuse rather than market abuse and, hence, it should be treated as
a conduct of business offence.
117
in commodity/exotic derivatives are not subject to transaction reporting obligations
either. ESME suggests that it would not be appropriate to introduce such transaction
reporting obligations for these markets and their participants for the reasons outlined
below.
In paragraphs 6.38-6.40 of the ‘UK discussion paper on the Commission’s review of

the financial regulatory framework for commodity and exotic derivatives” (Discussion
Paper) it states that “A further issue that may be raised in the [European
Commission] review [of the financial regulatory framework for commodity derivatives
and ’exotic’ derivatives] is the role of transaction reporting for commodity derivatives.
The lesson of the UK regime is that such reporting offers little value and that position
reporting is the more commonly used tool. The nature of abuse most commonly
found on commodity derivative markets is typically through attempts to corner or
squeeze the market. Position reports are acknowledged as the standard tool for
monitoring of these markets, whereas transaction reports alone do not provide the
information required to enable the detection of this type of abuse. HM Treasury and
FSA believe that the costs to firms and exchanges of collating and submitting this
data and the management of this data by competent authorities significantly
outweighs any benefits that transaction reports may provide. HM Treasury and FSA
would therefore propose that MiFID be amended to remove commodity derivatives
from the scope of the transaction-reporting regime.“
The Discussion Paper continues by stating in paragraph 6.42, “UK provisional

analysis has led to the following preliminary policy recommendations. … Commodity
derivatives should be carved out of the MiFID transaction reporting regime and the
benefits of position reporting considered. There are issues to be considered in
relation to market abuse but these could better be picked up in the forthcoming
Market Abuse Directive review.“
Also, the Discussion Paper state in paragraph 5.20, “HM Treasury and FSA do not
believe that the benefits of applying the transaction-reporting framework to
commodity derivatives outweigh the costs. In particular, transaction reports have little
material benefit as the main form of abuse in these markets arises through market
manipulation rather than insider dealing. Hence, the reliance on position reports.”
ESME agrees with the HM Treasury and FSA opinion.
In addition, table 1 of Annex 1 of Regulation EC 1287/2006 requires investment firms

to make transaction reports to their regulator for all types of financial instruments
admitted to trading on a regulated market. The transaction data reported must
include, inter alia, trade date and time, price, volume, counterparts, trading capacity,
maturity date, type of derivative, instrument identifier and underlying instrument
identifier, strike price, and venue.
Transaction reports are a significant tool for monitoring trading in equity and debt
instruments where the chief types of market abuse include insider dealing, improper
disclosure of inside information and misuse of information that is relevant but not
generally available; the most relevant piece of information – and the easiest search
tool – to detect market abuse in the case of debt and equity linked derivatives is the
underlying. However, the same is not true for commodity derivatives where the major
forms of market abuse are squeezes and corners. Here, regulators responsible for
118
ensuring market integrity rely on scrutinising positions held by market users to
identify unusual or abusive trading patterns rather than on analysing transaction
reports.
For OTC commodity derivatives, obliging firms to make transaction reports to the
competent authority appears to provide little in the way of regulatory benefit. As with
transactions on regulated markets, reports of transactions executed off-exchange
provide little useful information unless tackled from the viewpoint of portfolio, or
position, exposure and would therefore not provide data that would help identify the
main common forms of market abuse. The situation is also more complicated than
for on-exchange positions due to the lack of standardisation in contract terms such
as derivative type, currency, maturity, size, and the quality/grade of the underlying;
on-exchange contracts are standardised in all these, and other, respects.
As mentioned above, identifying insider dealing in non-ferrous metals, plastics, or

soft commodities is fraught with difficulty and transaction reporting does not help to
identify the most common types of market abuse prevalent on the relevant markets.
The most apparent unintended consequence of applying insider dealing rules to
commodity derivatives is requiring the building of systems and procedures to monitor
for abuses and the moral hazard to regulators of receiving information on which they
are unable to rely for identifying abuse, at least in the first instance.
CESR also supports this position. In its Public Statement CESR/07-627b published
on 26 October 2007 on ‘New Arrangements for the Reporting of Derivatives Trades
in Accordance with MIFID’, CESR noted that during discussions with the industry
about extending transaction reporting to instruments such as commodity derivatives,
it emerged that there would be major technical issues and cost implications in
adopting the same approach to the reporting framework for non-securities derivatives
as for securities and securities-based derivatives. The statement notes that in
particular the CESR preference for using the ISIN code in transaction reports to
facilitate the exchange of transaction reports among regulators would cause
immense difficulties to derivatives markets and the financial industry as a whole
where the ISIN code was not already in use.
Also, it needs to be taken into acount that, for example, the energy markets (but also
other commodity markets) in question are relatively immature: in this still-fragile
market stage many market players have come to fear that financial market-style
regulation (here: transaction reporting obligations) of commodity and commodity
derivatives transactions may erect a further barrier to entry to often illiquid and
fragmented markets. This could lead to a severe reduction of liquidity in today liquid
markets and prevent it arising in new markets.
For all of these reasons, ESME recommends that transaction reporting obligations
are not imposed on market participants.
119
c. Direct position-reporting obligations on market participants are not
appropriate
In general, ESME Group is of the opinion that direct position-reporting obligations on

market participants are not appropriate. However, there is a need for regulators to
have appropriate and ready access to such information in order to investigate
suspicious market behaviour.
It appears that position reporting is the prime method for detecting those market
abuses found typically in commodity derivatives markets. Analysis of transactions
tends to be a part of any subsequent investigations. It seems that it would be
necessary for regulators to have position information to know whether the purpose of
a transaction was to open or close a position. The simplest way to construct position
reports seems to require (investment) firms to report all of their own and their clients’
positions in commodities and commodity/exotic derivatives.
Examples of regulators using position reports rather than transaction reports are the
US Commodity Futures Trading Commission (CFTC) and the London Metal
Exchange (LME) – although the specific approach taken differs.
Daily position-reporting provisions applying to contract markets are set down in Part
16 of the General Regulations under the U.S. Commodity Exchange Act. Each
contract market is obliged to submit to the CFTC a report showing for each clearing
member, by proprietary and customer account and by commodity, by futures and by
options series, detailed position data. Part 17 contains the position reporting
obligations for futures commission merchants, members of contract markets and
foreign brokers were the account holds a reportable position. Firms are required to
file daily reports with the CFTC showing futures and option positions of traders
holding positions above specific reporting levels set by the regulations; if a trader has
a position at or above the reporting level in any single futures month or option
expiration, firms report the trader’s entire position in all futures and options expiration
months in the particular commodity. Firms are required to aggregate positions in a
given commodity in all accounts that are under common ownership or control;
ownership includes an interest equal to 10% or more. The CFTC considers that the
aggregate of all traders’ positions reported represent 70 to 90 percent of the total
open interest in any given market. The report, which is published weekly, shows the
percents of open interest held by the largest four and eight reportable traders.
However, ESME Group rejects such a regulatory approach.
The LME collates positions by identified users across its markets for every traded
settlement date. The LME will, where there are reasonable grounds, amalgamate
positions of different market users if it considers that these might be related.
Together with data on deliverable stocks held in its authorised warehouses, this aids
the LME in identifying the development or potential development of squeezes and
corners in the instruments traded and subsequently informs the regulatory authority
of this activity.
ESME is of the opinion that transaction reporting for transactions in commodities and
commodity/exotic derivatives should not be replaced by an obligatory position
120
reporting requirement that is placed directly on market participants to the competent
authorities. ESME is of the opinion that it is more appropriate for regulated markets
and MTFs to be the frontline supervisors of activity on the markets that they regulate,
and that their monitoring of positions should be central to ensuring the integrity of the
markets for which they are responsible.
For commodity derivatives, replacing the MiFID obligation on firms to make

transaction reports to their competent authority, even if these can be made in the
case of non-security derivatives via the regulated market of MTF on which the trades
took place, are too burdensome for market participants and not efficient (see below).
121
7. Role of regulated exchanges and MTFs as “frontline regulator”
ESME therefore proposes a role of regulated exchanges and MTFs as “frontline

regulator” as follows.
The UK Discussion Paper highlighted above states in paragraph 5.17, “Before

MiFID, frontline monitoring of the commodity markets in the UK was conducted by
the relevant exchanges. The exchanges collate position reports that provide a
breakdown by named users of all positions across their markets held by members
and their clients. Position reports allow the exchanges to aggregate exposures and
calculate the overall interests of each user, irrespective of the number of firms
through which they deal.”
The mentioned Discussion Paper continues in paragraph in 5.17, “Analysing position

reports enables the exchanges to assess overall interests by users and the resulting
market impact. Any specific suspicions the exchanges may have of market abuse
are referred to FSA for investigation. Position reports are therefore the key tool in the
identification of potential market abuse.”
ESME suggests a role for regulated exchanges and MTFs as “frontline regulators” to
enable them to fulfil their responsibilities pursuant to Art. 37 et seq.73 and Art. 2674 of
the MiFID. Requiring transaction and positions reports to be made by market
participants directly to competent authorities ‘overwrites’ the regulatory responsibility
of a regulated market and MTF to ensure that trading over the market facilities is
conducted in an orderly manner and so as to afford proper protection to investors; to
ensure that there is a proper market in investments admitted to trading on its
markets; and to reduce the extent to which the facilities of the market can be used for
a purpose connected with market abuse or financial crime.
73
Art. 43 (1): Member States shall require that regulated markets establish and maintain effective
arrangements and procedures for the regular monitoring of the compliance by their members or participants
with their rules. Regulated markets shall monitor the transactions undertaken by their members or
participants under their systems in order to identify breaches of those rules, disorderly trading conditions or
conduct that may involve market abuse.
Art. 43 (2): Member States shall require the operators of the regulated markets to report significant breaches
of their rules or disorderly trading conditions or conduct that may involve market abuse to the competent
authority of the regulated market. Member States shall also require the operator of the regulated market to
supply the relevant information without delay to the authority competent for the investigation and prosecution
of market abuse on the regulated market and to provide full assistance to the latter in investigating and
prosecuting market abuse occurring on or through the systems of the regulated market.
74
Art 26 (1): Member States shall require that investment firms and market operators operating an
MTF establish and maintain effective arrangements and procedures, relevant to the MTF, for the regular
monitoring of the compliance by its users with its rules. Investment firms and market operators operating an
MTF shall monitor the transactions undertaken by their users under their systems in order to identify
breaches of those rules, disorderly trading conditions or conduct that may involve market abuse.
Art. 26 (2): Member States shall require investment firms and market operators operating an MTF to report
significant breaches of its rules or disorderly trading conditions or conduct that may involve market abuse to
the competent authority. Member States shall also require investment firms and market operators operating
an MTF to supply the relevant information without delay to the authority competent for the investigation and
prosecution of market abuse and to provide full assistance to the latter in investigating and prosecuting
market abuse occurring on or through its systems.
122
Regulated markets - such as the EEX, the LME and MTFs (broker platforms) - that
have admitted commodities or/and commodity/exotic derivatives to trading and which
have day-to-day oversight of trading and observe closely supply and demand in the
underlying physical market (could) use position reports to ensure that they comply
with their regulatory obligations. On uncovering possible market abuse, regulated
markets consult with their competent authority and agree on the conduct of any
investigation, which will include reviewing relevant transactions leading to the build
up of suspect positions; however, the reporting of transactions is an ineffective
means of identifying potential market abuse in the first instance.
Regulated markets and MTFs receive matched trade data of business executed on
their markets and can look at open position data to monitor behaviour of market
participants and to assist in identifying possible market abuse. For example, as
mentioned above, the LME receives position data and stock data to allow it to
identify dominant position holders and the build up of possible squeezes and/or
corners. It matches transaction data, although not by beneficial holders, to assist it in
investigations; members are obliged to provide whatever data the LME requires,
including OTC dealings by the members and their clients and any associate of the
members and their clients.
In the securities markets the same security can be traded on more than one
exchange or non-exchange forum. For this reason it makes sense for competent
authorities to be the centralised collectors of transaction reports. In the case of a
physically-settled commodity derivative exchange, only positions in that exchange’s
instruments or holdings of its warehouse stocks can create a squeeze or corner of
those warehouse stocks. For this reason it makes sense for the exchange itself to be
the centralised collector of position reports.
Therefore, ESME suggests to further explore in the wider context of the MAD review
the benefits of position surveillance by regulated markets and MTFs as frontline
regulators of commodity and exotic/hybrid derivatives traded on their markets in light
of their obligations under Articles 26 and 43 of MiFID to monitor for possible abusive
trading and to report possible instances to their competent authorities.
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Annex 1: ESME Mandate
Subject: Request for ESME advice in the context of exemptions in MiFID, CAD
and proposed regulatory measures in the Third Energy Package
Dear Dr. Horstmann,
Thank you for agreeing to lead the work of the European Securities Markets Expert
Group Sub-group on commodities.
In connection with the Commission’s work on the exemptions for some commodity firms
from MiFID and CAD, as well as the relevant draft regulatory measures in the Third
Energy Package, I enclose a mandate for advice from ESME on a range of topics. These
relate to the functioning of the exemptions, and assessing possible changes pursuant to
the Third Energy Package.
You will note that we anticipate receiving advice from ESME by the end of June 2008.
Yours sincerely
[signed] David WRIGHT
Contact: Hannes Huhtaniemi, Unit G-3, +32 2 29 54556

(hannes.huhtaniemi@ec.europa.eu)
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Mandate to ESME for advice
Review under Articles 65(3)(a), (b) and (d) of MiFID and 48(2) of CAD and proposed
guidelines to be adopted under the Third Energy Package
This mandate requests advice from ESME on certain issues concerning revision of the
provisions of Directive 2004/39/EC (MiFID) and Directive 2006/49/EC (CAD) concerning
the regulatory treatment of firms that provide investment services in relation to
commodity and exotic derivatives. This mandate is given in order to ensure that the
Commission has adequate technical background to be able to complete its report under
Article 65(3)(a), (b) and (d) of Directive 2004/39/EC and Article 48(2) of Directive
2006/49/EC (the Report).
This mandate also requests advice from ESME on issues concerning record keeping
and transparency of transactions in electricity and gas supply contracts and derivatives
in order to ensure that the Commission has adequate technical background to be able to
adopt the guidelines under Articles 22f/24f and Recitals 20 and 22 in the two proposals
for Directives amending Directive 2003/54/EC and Directive 2003/55/EC (The Third
Energy Package).75 This mandate does not prejudice in any way the ongoing
negotiations on any article in the Council and the European Parliament in the context of
the co-decision procedure.
Advice is also sought on a possible clarification of the scope of the Market Abuse
Directive in relation to trading in commodities and commodity derivatives.
The present mandate takes into full consideration the agreement on implementing the
Lamfalussy recommendations reached with the European Parliament on 5 February
2002. In this agreement, the Commission committed itself to a number of important
points, including full transparency. For this reason, this request for technical advice will
be published on DG Internal Market’s web site and the European Parliament duly
informed.
Background and legal framework

The European Commission is to report to the European Parliament and the Council on
the following:
Article 65(3) of MiFID relevantly requires the Commission to report on:
(a) the continued appropriateness of the exemption provided for in Article 2(1)(k) for
undertakings whose main business is dealing on own account in commodity
derivatives;
(b) the content and form of proportionate requirements for the authorisation and
supervision of such undertakings as investment firms within the meaning of this
Directive; …
(d) the continued appropriateness of the exemption provided for in Article 2(1)(i).
Article 48 of CAD relevantly states:
75
http://ec.europa.eu/energy/electricity/package_2007/index_en.htm
125
2. As part of the review required by Article 65(3) of Directive 2004/39/EC, the
Commission shall, on the basis of public consultations and in the light of discussions
with the competent authorities, report to the Parliament and the Council on:
(a) an appropriate regime for the prudential supervision of investment firms whose
main business consists exclusively of the provision of investment services or
activities in relation to the commodity derivatives or derivatives contracts set out
in points 5, 6, 7, 9 and 10 of Section C of Annex I to Directive 2004/39/EC; and
(b) the desirability of amending Directive 2004/39/EC to create a further category of

investment firm whose main business consists exclusively of the provision of
investment services or activities in relation to the financial instruments set out in
points 5, 6, 7, 9 and 10 of Section C of Annex I to Directive 2004/39/EC relating
to energy supplies (including electricity, coal, gas and oil).
3. On the basis of the report referred to in paragraph 2, the Commission may submit
proposals for amendments to this Directive and to Directive 2006/48/EC and
2006/49/EC.
The purpose of this mandate is to seek technical advice in order to provide

foundations for the Commission’s work on the Report. The Commission intends to
publish its report in late 2008.
Separately, the European Commission is to adopt guidelines pursuant to the
following:
Article 22f of the Proposal for a Directive of the European Parliament and of the
Council amending Directive 2003/54/EC concerning common rules for the internal
market in electricity relevantly states:
Article 22f
Record keeping
electricity supply contracts and electricity derivatives with wholesale customers
and transmission system operators.
2. The data shall include details on the characteristics of the relevant transactions
such as duration, delivery and settlement rules, the quantity, the dates and times
of execution and the transaction prices and means of identifying the wholesale
customer concerned, as well as specified details of all unsettled electricity supply
contracts and electricity derivatives.
3. The regulatory authority may decide to make available to market participants

elements of this information, provided that commercially-sensitive information on
individual market players or individual transactions is not released. This
paragraph shall not apply to information about financial instruments which fall
within the scope of Directive 2004/39/EC.
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4. To ensure the uniform application of this Article, the Commission may adopt
guidelines which define the methods and arrangements for record keeping as
well as the form and content of the data that shall be kept. These measures,
designed to amend non-essential elements of this Directive by supplementing it,
shall be adopted in accordance with the regulatory procedure with scrutiny
referred to in Article 27b(3).
5. With respect to transactions in electricity derivatives of supply undertakings with

wholesale customers and transmission system operators, this Article shall only
apply once the Commission has adopted the guidelines referred to in paragraph
4.
6. The provisions of this Article shall not create additional obligations vis-à-vis the
authorities mentioned in paragraph 1 for entities falling within the scope of
7. In case the authorities mentioned in paragraph 1 need access to data kept by

entities falling within the scope of Directive 2004/39/EC, the authorities
responsible under that Directive shall provide the authorities mentioned in
paragraph 1 with the required data.
Recital 20 states:
20. Prior to adoption by the Commission of guidelines defining further the record-
keeping requirements, the Agency for the Cooperation of Energy Regulators and
the Committee of European Securities Regulators (CESR) should cooperate to
investigate and advise the Commission on the content of the guidelines. The
Agency and the Committee should also cooperate to further investigate and
advise on the question whether transactions in electricity supply contracts and
electricity derivatives should be subject to pre- and/or post-trade transparency
requirements and if so what the content of those requirements should be.
The same provisions apply mutatis mutandis in Article 24f and Recital 22 in the
proposal to amend Directive 2003/55/EC for gas.
Finally, the mandate asks ESME for their views on possible clarifications to the
scope of the Market Abuse Directive in the context of the review of that directive by
the Commission to be completed in early 2009.
Consultation and sources of advice
The Commission is to act ‘on the basis of public consultation and in the light of
discussions with competent authorities’. The Commission’s White Paper on Financial
Services Policy 2005-2010 set out our commitment to open and transparent
consultation:76
Open consultations (including with stakeholder groups) will continue to play a central role
and will be required before any legislation is deemed necessary. The Commission will
76
Op. cit. at paragraph 2.1.
127
continue to publish responses received to its consultations, practical summaries and
feedback statements.
In fulfilment of this commitment, we published a Call for Evidence on 8 December 2006,

which was open until 30 April 2007. A statement summarising the feedback, published
on 14 August 2007, is available on our website. 77 Separate mandates for initial
advice/assistance were issued on 13 March 2007 to the Committee of European
Securities Regulators (CESR) and on 16 August 2006 to the Committee of European
Banking Supervisors (CEBS), both in two parts. Both sets of initial advice/assistance
have now been received and studied by the Commission. A subsequent joint mandate to
CESR and CEBS is issued in parallel to this mandate to ESME. ESME should familiarise
itself with that mandate.
ESME is asked to consider the views expressed in the public consultation and the
conclusions reached in the feedback statement, as well as the advice/assistance
provided by CESR and CEBS.
As regards the Third Energy Package, the Commission will issue a provisional mandate
for advice to CESR and ERGEG, the European Regulators' Group on Electricity and
Gas, in order to adopt guidelines, by mid-2008, on possible record-keeping and
transparency obligations in electricity and gas supply contracts and derivatives. ESME is
asked to familiarise itself with this mandate as well, once it is published.
The principles to which ESME should have regard
As regards its working approach, ESME is invited to take account of following principles:
• The principles set out in the Decision 3 establishing ESME; in particular the
stipulation that ESME members serve in their personal capacities;
• ESME should provide comprehensive advice on the matters described below;
• ESME should address to the Commission any questions which arise in the course of
its work.
Questions in relation to which technical advice is sought
Please consult Annex I for a list of questions in relation to which advice is sought.
Due date
The advice from ESME is sought by the end of June 2008.
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Annex I
Fact-finding
1. Who are the main participants, in terms of turnover, in trading commodities and their
helpful.
2. Does ESME have any observations to make on how the exemptions in the CAD and
and exotic derivatives are working in practice? What difficulties arise from differing
interpretations? And what are some of the challenges or issues for market participants or
market quality arising from the existing regulatory framework? These might arise from
market distortions, regulatory arbitrage or other significant sub-optimalities in market
functioning.
Assessment
3. What options does ESME consider most salient in addressing any challenges or
issues identified above? Examples of options ESME might consider include:
with what content;
rationalising them;
Member States)?
4. ESME should identify the issues that would need to be addressed in assessing likely
Record keeping
5. What would the practical implication be, for firms active both in the physical supply of
129
Transparency
energy and the subsequent study of the electricity wholesale markets78. In light of these
a) whether, greater pre- and post-trade transparency for electricity and gas supply
contracts (physical and spot trading) and derivatives would contribute to a more
efficient wholesale price formation process and efficient and secure electricity and
gas markets;


markets, for example could liquidity in these markets be expected to decrease? Is
there a risk that trading could shift to third countries to escape regulation? If so, how
could such risks be mitigated (delayed reporting, aggregated reporting, etc.).
Market abuse
7. Does Directive 2003/6/EC on insider dealing and market manipulation (market abuse)
properly address market integrity issues in the electricity, gas and other commodity
markets? If not, what suggestions would ESME have to mitigate any shortcomings?
78
http://ec.europa.eu/comm/competition/sectors/energy/inquiry/index.html
130
Annex 2: Members of ESME
Sebastián Albella Amigo - Linklaters

Chris Bates - Clifford Chance*
Mats Beckman - Lindahl
Margaret Chamberlain - Travers Smith
Carmine DiNoia - Assonime
Philippa Dodd - Royal Dutch Shell*
Gianluca Garbi – Dresdner Kleinwort
Wolfgang Gerhardt - Bank Sal. Oppenheim jr. & Cie.*
John Holland - UBS Investment Bank***
Karl-Peter Horstmann - RWE Trading**
Henny Kapteijn – Delta Lloyd
David Meagher
Roger Müller - Deutsche Börse
Bertrand Patillet - Crédit Agricole Cheuvreux
Els Ponnet - Fortis Bank
Andrew Procter - Deutsche Bank
Xavier Rolet - Lehman Brothers International Europe
María Gracia Rubio de Casas - Baker & McKenzie
Florence Sirel - BNP Paribas***
Tomasz Stachurski - ING Bank Slaski
*Participants in ESME sub group on the Mandate

**Raporteur of the ESME sub group on the Mandate
***Abstained from the conclusions of this Report
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Annex 3: Observers of ESME
The following observers have actively participated in the work of the ESME sub-group on
the Mandate, whereby their participation has been agreed with the EU Commission and
with the ESME sub group on the Mandate:
Juan José Alba Ríos, Endesa
Cemil Altin, EDF Trading
Matthias Bock, Goldman Sachs
Simon Coombs, Marc Cornelius, Bernadette Willis, BP plc
Neil McGeown, The London Metal Exchange (LME)
Erwin Krapf, Gerd Stuhlmacher, E.ON Energy Trading AG
Bertrand Meyer, BNP Paribas
Francois-Xavier Olivieri, Pierre Ostrovsky, Gaselys
Simon Smith, Shell International Trading and Shipping Company Limited
Carola Reichold, Thomas Pieper, RWE Trading&Supply GmbH
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Annex 4:
Table 1
List of fields for reporting purposes
Field Identifier Description

1. Reporting firm identification A unique code to identify the firm which executed
the transaction
2. Trading day The trading day on which the transaction was
executed
3. Trading time The time at which the transaction was executed,
reported in the local time of the competent
authority to which the transaction will be
reported, and the basis in which the transaction
is reported expressed as Coordinated Universal
Time (UTC)+/- hours.
4. Buy/sell indicator Identifies whether the transaction was a buy or
sell from the perspective of the reporting
investment firm or, in the case of a report to a
client, of the client.
5. Trading capacity Identifies whether the firm executed the
transaction:
(a) on its own account (either on its own
behalf or on behalf of a client),
(b) for the account, and on behalf, of a client.
6. Instrument identification This shall consist of:
(a) a unique code, to be decided by the
competent authority (if any) to which the
report is made identifying the financial
instrument which is the subject of the
transaction,
(b) if the financial instrument in question does
not have a unique identification code, the
report must include the name of the
instrument or, in the case of a derivative
contract, the characteristics of the contract.
7. Instrument code type The code type used to report the instrument.
8. Underlying instrument The instrument identification applicable to the
identification security that is the underlying asset in a
derivative contract as well as the transferable
security falling within Article 4(1)(18)(c) of
9. Underlying instrument The code type used to report the underlying
identification code type instrument.
10. Instrument type The harmonised classification of the financial
instrument that is the subject of the transaction.
The description must at least indicate whether
the instrument belongs to one of the top-level
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11. Maturity date The maturity date of a bond or other form of
securitised debt, or the exercise date/maturity
date of a derivative contract.
12. Derivative type The harmonised description of the derivative
type should be done according to one of the top-
level categories as provided by a uniform
13. Put/call Specification whether an option or any other
financial instrument is a put or a call.
14. Strike price The strike price of an option or other financial
instrument.
15. Price multiplier The number of units of the financial instrument in
question which are contained in a trading lot; for
example, the number of derivatives or securities
represented by one contract.
16. Unit price The price per security or derivative contract
excluding commission and (where relevant)
accrued interest. In the case of a debt
instrument, the price may be expressed either in
terms of currency or as a percentage.
17. Price notation The currency in which the price is expressed. If,
in the case of a bond or other form of securitised
debt, the price is expressed as a percentage,
that percentage shall be included.
18. Quantity The number of units of the financial instruments,
the nominal value of bonds, or the number of
derivative contracts included in the transaction.
19. Quantity notation An indication as to whether the quantity is the
number of units of financial instruments, the
nominal value of bonds or the number of
derivative contracts.
20. Counterparty Identification of the counterparty to the
transaction. That identification shall consist of:
(a) where the counterparty is an investment
firm, a unique code for that firm, to be
determined by the competent authority (if
any) to which the report is made,
(b) where the counterparty is a regulated
market or MTF or an entity acting as its
central counterparty, the unique
harmonised identification code for that
market, MTF or entity acting as central
counterparty, as specified in the list
published by the competent authority of
the home Member State of that entity in
accordance with Article 13(2),
(c) where the counterparty is not an
investment firm, a regulated market, an
MTF or an entity acting as central
counterparty, it should be identified as
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‘customer/client’ of the investment firm
which executed the transaction.
21. Venue identification Identification of the venue where the transaction
was executed. That identification shall consist in:
(a) where the venue is a trading venue: its
unique harmonised identification code,
(b) otherwise: the code ‘OTC’.
22. Transaction reference A unique identification number for the transaction
number provided by the investment firm or a third party
reporting on its behalf.
23. Cancellation flag An indication as to whether the transaction was
cancelled.
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Annex 5 “Transparency regulations for the electricity and gas sectors”
I. Introduction
The following overview lists the main transparency regulations for the electricity (cf. II.)
and gas (cf. III.) sectors.
Each section starts with a list of European regulations, followed by the national
standards applicable in the Federal Republic of Germany. The section concerning the
electricity sector ends with a list of voluntary rules.
II. Transparency regulations in the electricity sector
1. European regulations
a) Current European regulations
(aa) Regulation (EC) No 1228/2003 of 26 June 2003 on conditions for access to

the network for cross-border exchanges in electricity
• Art. 5 of the Regulation: "Provision of information on interconnection capacities"
• Addressees: transmission system operators
(bb) Guidelines on the management and allocation of available transfer capacity

of interconnections between national systems
• Commission Decision of 9 November 2006 amending the Annex to Regulation
(EC) No 1228/2003 on conditions for access to the network for cross-border
exchanges in electricity (2006/770/EC)
• Article 5 of the Guidelines: "Transparency"
b) Third liberalisation package
(aa) Proposal for a regulation of the EP and the Council amending Regulation
(EC) No 1228/2003 on conditions for access to the network for cross-border
exchanges in electricity (version: 23 June 2008)
• Article 2c of the Regulation: “Tasks of the European Network of Transmission
System Operators for Electricity”
o Article 2c (1): “The European Network of Transmission System Operators for
Electricity shall elaborate network codes in the areas mentioned in paragraph
3 upon an invitation addressed to it by the Commission in accordance with
Article 2ba(6);”
o Article 2c (3): “The network codes shall cover the following areas, taking into
account, if appropriate, regional specificities:
h) transparency rules;”
• Article 5 of the Regulation: “Provision of Information []”

o Article 5 (4): “Transmission system operators shall publish relevant data on
aggregated forecast and actual demand, on availability and actual use of
generation and load assets [.] on availability and use of the networks and
interconnections, and on balancing power and reserve capacity. For
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availability and actual use of small generation and load units, aggregated
estimate data may be used.”
o Article 5 (5): “The market participants concerned shall provide the
transmission system operators with the relevant data.”
o Article 5 (6): “Generation companies which own or operate generation assets,
of which one generation asset has an installed capacity of at least 250 MW,
shall keep at the disposal of the national regulatory authority, the national
competition authority and the Commission, for five years all hourly data per
plant that is necessary to verify all operational dispatching decisions and the
bidding behaviour at power exchanges, interconnection auctions, reserve
markets and OTC markets.” (sent. 2: content of the data)
• Article 8 of the Regulation: “Guidelines”

Article 8 (3): “Where appropriate, guidelines providing the minimum degree of
harmonisation required to achieve the aim of this Regulation shall also specify:
a) details on provision of information, in accordance with the principles set out in
Article 5;“
(bb) Proposal for a directive of the EP and the Council amending Directive
2003/54/EC concerning common rules for the internal market in electricity
and repealing Directive 96/92/EC (version: 23 June 2008)
• Article 22f (1) – (7) of the Directive: “Record keeping”
o Article 22f (1): “Member States shall require supply undertakings to keep at
the disposal of the national authorities including the national regulatory
authority, the national competition authority and the Commission, for the
fulfilment of their tasks, for at least five years, the relevant data relating to all
transactions in electricity supply contracts and electricity derivatives with
wholesale customers and transmission system operators.“
o Article 22 f (2): Description of the required data
o Article 22f (3): “The regulatory authority may decide to make available to
market participants elements of this information provided that commercially-
sensitive information on individual market players or individual transactions is
not released. This paragraph shall not apply to information about financial
instruments which fall within the scope of Directive 2004/39/EC.“
o Article 22 f (4): The Commission may adopt guidelines concerning the
methods and arrangements for record keeping
o Article 22 f (5): “With respect to transactions in electricity derivatives of supply
undertakings with wholesale customers and transmission system operators,
this Article shall only apply once the Commission has adopted the guidelines
referred to in paragraph 4“.
o Article 22f (6) and (7): provisions concerning entities falling within the scope
of Directive 2004/39/EC.
• Annex A of the Directive: “Measures on consumer protection“

“Without prejudice to Community rules on consumer protection, in particular
Directives 97/7/EC of the European Parliament and of the Council and Council
Directive 93/13/EC, the measures referred to in Article 3 are to ensure that
customers:
(h) have at their disposal their consumption data, and shall be able to, by explicit
agreement and free of charge, give any undertaking with a supply license
access to its metering data. The party responsible for data management is
137
obliged to give these data to the undertaking. Member States shall define a
format for the data and a procedure for suppliers and consumers to have
access to the data. No additional costs can be charged to the consumer for
this service.
(i) shall be properly informed [] of actual electricity consumption and costs
frequently enough to enable them to regulate their own electricity
consumption. The information shall be given by using a sufficient time frame,
which takes account of the capability of customers’ metering equipment and
the electricity product in question. Due account shall be taken of the cost-
efficiency of such measures. No additional costs can be charged to the
consumer for this service.“
c) Transparency reports under the Electricity Regional Initiative
• Point 3 of the Congestion Management Guidelines provides for a breakdown of

the European Union into seven regions
• On this basis, three Regional Initiatives have each published a "Report of
Transparency“:
o The Regional Initiative Northern Europe (Denmark, Sweden, Finland,
Germany and Poland) chaired by the Federal Network Agency on 13
September 2007
o The Regional Initiative Central Western Europe (Belgium, France, Germany,
Luxembourg, Netherlands) on 23 November 2007
o The Regional Initiative Central Eastern Europe (Austria, Czech Republic,
Germany, Hungary, Poland, Slovakia and Slovenia) on 8 February 2008
• The requirements have no binding effect; however, the Federal Network Agency
assumes that the requirements will be implemented without formal agreement.
2. National regulations in the Federal Republic of Germany
a) Formal acts
(aa) Act on the Supply of Electricity and Gas (Energy Industry Act /
Energiewirtschaftsgesetz - EnWG) of 7 July 2005, last amended by Article 2 of
the Act dated 18 December 2007
• Information and publication duties of electricity supply grid operators
o Addressees: transmission system operators and/or distribution system
operators
o Legal provisions: Section 8 (5), section 12 (3a) and (4), section 13 (2), (6) and
(7), section 14 (1), section 18 (1), section 19 (1), section 20 (1) sent. 1,
section 23 sent. 2, section 35 (1), section 36 (2) sent. 2, section 52 of the
Energy Industry Act
o The "guidelines for internet publication duties of electricity network operators"
of the Federal Network Agency dated 22 January 2008 give further details
• Information and publication duties of electricity generators

o Addressees: generating plant operators
o Legal provisions: section 12 (4), section 49 (6) of the Energy Industry Act
• Information and publication duties of electricity supply companies

o Addressees: electricity supply companies
138
o Legal provisions: section 12 (4), section 35 (1), section 36 (1), section 42 of
the Energy Industry Act
(bb) Act on the Peaceful Utilisation of Atomic Energy and Protection against its
Hazards (Atomic Energy Act / Atomgesetz) of 23 December 1959, last
amended by Article 4 of the Act dated 26 February 2008
• Addressees: nuclear power plant operators
• Legal provision: section 7 (1c) of the Atomic Energy Act
b) Statutory regulations
(aa) Ordinance on Access to Electricity Supply Grids (Electricity Grid Access

Ordinance / Stromnetzzugangsverordnung – StromNZV) of 25 July 2005,
amended by Article 3 (1) of the Ordinance dated 1 November 2006
• The "guidelines for internet publication duties of electricity network operators" of
the Federal Network Agency dated 22 January 2008 give further details
operators
o Legal provisions: section 5 (3), section 9 (1) and (2), section 12 (3) sent. 3,
section 13 (3) sent. 3 – 5, section 15 (4), sent. 1 and 2, section 15 (5), section
17 (1) nos. 1-8, section 17 (2) nos. 1-7 of the Electricity Grid Access
Ordinance
(bb) Ordinance on Charges for Access to Electricity Supply Grids (Electricity

Grid Access Charges Ordinance / Stromnetzentgeltverordnung –
StromNEV) of 25 July 2005, last amended by Article 3a of the Act dated 8 April
2008
• Information and publication duties of electricity supply grid operators
operators
o Legal provisions: section 10 (2), section 21, section 24 (4), section 27 (1),
section 27 (2) nos. 1-7 of the Grid Access Charges Ordinance
o The "guidelines for internet publication duties of electricity network operators"
of the Federal Network Agency dated 22 January 2008 give further details
(cc) Ordinance on General Conditions for Network Connection and its Use for
Low-Voltage Electricity Supply (Low-Voltage Connection Ordinance /
(Niederspan-nungsanschlussverordnung – NAV) of 1 November 2006
o Addressees: distribution system operators
o Legal provisions: section 4 (2) sent. 2, section 4 (3) sent. 2, section 25 (2)
sent. 2, section 29 (1) of the Low-Voltage Connection Ordinance
(dd) Ordinance on General Conditions for the Basic Electricity Supply of

Domestic Customers and Replacement Electricity Supply from the Low-
Voltage Grid (Basic Electricity Supply Ordinance /
Stromgrundversorgungsverordnung – StromGVV) of 26 October 2006
• Addressees: electricity supply companies (basic suppliers)
• Legal provisions: section 2 (4), section 5 (2)
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(ee) Ordinance on Network Connection of Electricity Generating Plant (Power
Plant Network Connection Ordinance / Kraftwerks-
Netzanschlussverordnung –KraftNAV) of 26 June 2007
o Addressees: transmission system operators, Distribution system operators
o Legal provision: section 3 (1) of the Power Plant Network Connection
Ordinance
3. Voluntary agreements
• Since April 2006, several electricity generators have voluntarily provided their
generating data on the homepage of the European Energy Exchange
(www.eex.com) in the category "Power plant data". Moreover, since May 2007,
"standard reports" have informed about possible problems in providing power
plant data. An interactive map shows the installed capacity of individual power
plants.
Since November 2007, the following participant-based electricity-trading
information has been provided on the website of the EEX: active spot and futures
market participants; number of buyers/sellers and net buyers/sellers on the spot
market; average share of sales of the five top-selling participants; buying and
selling on the spot and futures market (per participant); share of market makers in
the overall sales on the futures market.
4. No publication duties
• Large-scale consumers are neither addressed by European nor national energy
law provisions. At the present time, large-scale consumers are therefore not
subject to any information or publication duties under energy law.
III. Transparency regulations in the gas sector
1. European regulations
a) Current European regulations
• Regulation (EC) No 1775/2005 of 28 September 2005 on conditions for

access to the natural gas transmission networks
• Article 6 of the Regulation: "transparency requirements"
b) Third Liberalisation Package
(aa) Proposal for a regulation of the EP and the Council amending Regulation
(EC) No 1775/2005 on conditions for access to the natural gas transmission
networks (version: 23 June 2008)
• Article 2c of the Regulation: “Tasks of the European Network of Transmission
System Operators for Gas”
o Article 2c (1): “The European Network of Transmission System Operators for
Gas shall elaborate network codes in the areas mentioned in paragraph 3
upon an invitation addressed to it by the Commission in accordance with
Article 2ba(6);
140
o Article 2c (3): “The network codes shall cover the following areas, taking into
account, if appropriate, regional specificities:
h) transparency rules;”
• Article 4a of the Regulation: “Third Party Access services concerning storage

and LNG facilities”
Article 4a (1): “LNG and storage system operators shall:
(c) make relevant information public, in particular data on the use and availability
of services, in a time frame compatible with the storage and LNG facility users'
reasonable commercial needs.”
• Article 6 of the Regulation: “transparency requirements concerning transmission

operators”
Article 6 (7): “Transmission system operators shall make public ex-ante and ex-
post supply and demand information, based on nominations, forecasts and
realised flows in and out of the system. The level of detail of the information that
is made public shall reflect the information available to the transmission system
operator.
Transmission system operators shall make public measures taken as well as
costs incurred and revenues generated to balance the system.
The market participants concerned shall provide the transmission system
operators with the data referred to in this Article.”
• Article 6a (1) – (4) of the Regulation: “transparency requirements concerning

storage facilities and LNG facilities”
o Article 6a (1): “LNG and storage system operators shall make public detailed
information regarding the services they offer and the relevant conditions
applied, together with the technical information necessary for LNG and
storage facility users to gain effective access to the LNG and storage
facilities.”
o Article 6a (2): “For the services provided, each LNG and storage system
operator shall make public information on contracted and available storage
and LNG facility capacities on a numerical basis on a regular and rolling basis
in a user-friendly standardised manner.”
o Article 6a (3): “LNG and storage system operators shall always disclose the
information required by this Regulation in a meaningful, quantifiably clear and
easily accessible way and on a non-discriminatory basis.”
o Article 6a (4): “All LNG and storage system operators shall make public¹ the
amount of gas in each storage or LNG facility, inflows and outflows, and the
available storage and LNG facility capacities, including for those facilities
exempted from third party access. The information shall also be
communicated to the transmission system operator who shall make it public
on an aggregated level per system or subsystem defined by the relevant
points. The information shall be updated at least every day.
¹A recital was able to clarify that ‘Confidentiality requirements for
commercially sensitive information are particularly important where data of a
strategic nature are concerned or where there is only one single user for a
storage facility’. ”
141
(bb) Proposal for a directive of the EP and the Council amending Directive
2003/55/EC concerning common rules for the internal market in natural gas
and repealing Directive 98/30/EC (version: 23 June 2008)
• Article 24f (1) – (7) of the Directive: “Record keeping”
o Article 24 f (1): „Member States shall require supply undertakings to keep at
the disposal of the national authorities including the national regulatory
authority, the national competition authority and the Commission, for the
fulfilment of their tasks, for at least five years, the relevant data relating to all
transactions in gas supply contracts and gas derivatives with wholesale
customers and transmission system operators as well as storage and LNG
operators.“
o Article 24f (2): Description of the required data
o Article 24f (3): “The regulatory authority may decide to make available to
market participants elements of this information provided that commercially
sensitive information on individual market players or individual transactions is
not released.¹ This paragraph shall not apply to information about financial
instruments which fall within the scope of Directive 2004/39/EC.
¹ A recital was able to clarify that ‘Confidentiality requirements for
commercially sensitive information are particularly important where data of a
strategic nature are concerned or where there is only one single user for a
storage facility.’ “
o Article 24f (4): The Commission may adopt guidelines concerning the
methods and arrangements for record keeping
o Article 24f (5): “With respect to transactions in gas derivatives of supply
undertakings with wholesale customers and transmission system operators
as well as storage and LNG operators, this Article shall only apply once the
Commission has adopted the guidelines referred to in paragraph 4.”
o Article 24f (6) and (7): provisions concerning entities falling within the scope
of Directive 2004/39/EC.
• Annex A of the Directive: “Measures on consumer protection”

“Without prejudice to Community rules on consumer protection, in particular
Directives 97/7/EC of the European Parliament and of the Council and Council
Directive 93/13/EC, the measures referred to in Article 3 are to ensure that
customers:
(h) have at their disposal their consumption data, and shall be able to, by
explicit agreement and free of charge, give any undertaking with a supply
license access to its metering data. The party responsible for data
management is obliged to give these data to the undertaking. Member
States shall define a format for the data and a procedure for suppliers and
consumers to have access to the data. No additional costs can be
charged to the consumer for this service.
(i) shall be properly informed [] of actual gas consumption and costs
frequently enough to enable them to regulate their own gas consumption.
The information shall be given by using a sufficient time frame, which
takes account of the capability of customers’ metering equipment. Due
account shall be taken of the cost-efficiency of such measures. No
additional costs can be charged to the consumer for this service.”
2. National regulations in the Federal Republic of Germany
142
a) Formal acts
• Act on the Supply of Electricity and Gas (Energy Industry Act /

Energiewirtschaftsgesetz - EnWG) of 7 July 2005, last amended by Article 2 of
the Act dated 18 December 2007
• Information and publication duties of gas supply grid operators
operators and/or operators of storage or LNG plants
o Legal provisions: section 8 (5), section 15 (2), section 16 (2), (4) and (5),
section 16a, section 18 (1), section 19 (2), section 20 (1) sent. 1, section 23
sent. 2, section 28 (3), section 35 (1), section 36 (1), section 52
• Information and publication duties of gas supply companies

o Addressees: gas supply companies
o Legal provisions: section 35 (1), section 36 (1) of the Energy Industry Act
b) Statutory regulations
(aa) Ordinance on Access to Gas Supply Grids (Gas Grid Access Ordinance /
(Gasnetzzugangsverordnung – GasNZV) of 25 July 2007, last amended by
Article 1 of the Act dated 8 April 2008
• Addressees: gas supply grid operators
• Legal provisions: section 10 (1) sent. 2, section 10 (6) sent. 5, section 14 (1),
section 15 (1), section 20 (1) nos. 1 – 9, (2) and (3), section 21 (1), (2) nos. 1 –
12, section 22 (1), (2) and (3), section 33
(bb) Ordinance on Charges for Access to Gas Supply Grids (Gas Grid Access
Charges Ordinance / Gasnetzentgeltverordnung – GasNEV) of 25 July 2005,
last amended by Article 2 of the Act dated 8 April 2008
• Addressees: transmission system operators, distribution system operators
• Legal provisions: section 17, section 23 (4), section 27 (1), section 27 (2) nos. 1 -
5
(cc) Ordinance on General Conditions for Network Connection and its Use for
Low-Pressure Gas Supply (Low-Pressure Connection Ordinance /
Niederdruckanschlussverordnung – NDAV) of 1 November 2006
• Addressees: distribution system operators
• Legal provisions: section 4 (2) sent. 2, section 4 (3) sent. 2, section 25 (2) sent.
2, section 29 (1)
(dd) Ordinance on General Conditions for the Basic Gas Supply of Domestic
Customers and Replacement Gas Supply from the Low-Pressure Grid
(Basic Gas Supply Ordinance / Gasgrundversorgungsverordnung –
GasGVV) of 26 October 2006
• Addressees: gas supply companies (basic suppliers)
• Legal provisions: section 2 (4), section 5 (2)
***
143
Annex 6: Glossary
BCD Recast Banking Consolidation Directive (2006/48/EC)

CAD Recast Capital Adequacy Directive (2006/49/EC)
CRD Capital Requirements Directive recasting the BCD and CAD
ISD Investment Services Directive (93/22/EEC)
MiFID Markets in Financial Instruments Directive (2004/39/EC)
MiFID implementing Commission directive implementing MiFID (2006/73/EC)
directive
MiFID implementing Commission regulation implementing MiFID (No. 1287/2006)
regulation
MTF Multilateral trading facility
OTC Over-the-counter
SPV Special purpose vehicle
144

Mandate to ESME for Advice on Commodity Derivatives Regulation

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Mandate to ESME for Advice on Commodity Derivatives Regulation

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Mandate to ESME for Advice

II. Questions in the Mandate for Advice 4

III. Summary of ESME’s Advice 6

A. Question 1 “Fact Finding” 11

B. Question 2 “Fact Finding” 45

E. Question 5 “Record Keeping” 65

G. Question 7 “Market Abuse” 96

Fact finding (please see section A and B below)

Assessment (please see section C and D below)

d) Removing some or all of the exemptions entirely?

Record keeping (please see section E below)

b) whether such transparency arrangements could be expected to mitigate the

d) whether additional transparency in trading could have negative effects on these

Market abuse (please see section G below)

7. Does Directive 2003/6/EC on insider dealing and market manipulation (market

Question 1 (please see section A below)

Question 2 “Fact Finding” (please see section B below)

The current position is clearly unsatisfactory for a number of reasons:

• The differing boundaries of regulation across the EU seem to be less problematic

Question 3 “Assessment” (please see section C below)

2. To achieve a common European approach to regulation in this area, Member States

Question 4 “Assessment” (please see section D below)

1. The record-keeping obligation is not aiming at an MiFID-style (or indeed level) of

2. ESME believes a principles-based, rather than rigid prescribed-format approach is

5. Rather than a single standardised format a more principles-based approach could

6. In addition, a solution to the problems of the record keeping addressed in this

Question 6 “Transparency” (please see section F below)

3. The implementation of information requirements concerning electricity and gas

4. Post-trade transparency as described in this section could be established (alongside

5. However, regulators should make the maximum use of available information

Question 7 (please see section G below)

1. Definition of commodity derivatives and exotics/hybrids derivatives: It would be

2. Definition of insider information and scope of application of the prohibition of insider

3. No extension of MAD regime to Multi-Trading Facilities (MTFs): MiFID already

4. No extension of MAD regime to OTC markets and spot markets: There is no

5. Transaction and position reporting: transaction reporting directly by market

A. Question 1 “Fact Finding”

Advice from ESME:

1. Continental Power Markets

Exchange based trading

Main Contracts Nord Pool: spot, monthly, quarterly, yearly forwards

Annual spot trading volumes 2007 (2006) in TWh

1) As the exchange-traded market is strictly anonymous, it is not

Main Contracts Nord Pool: monthly, quarterly, yearly forwards

Major underlying Physical Markets

Physical OTC trading takes place on electronic OTC platforms (eOTC)

OTC trading volumes can only be measured from deals executed on

2) As the OTC market is strictly confidential, it is not possible to list

Below are some graphical representations of the year-on-year development in power-

Nordpool Power Trading Volume

German Power Trading Volume

2,000 EEX Spot

Dutch Power Trading Volume

Further market characteristics of Continental power trading

Among all traded commodities, electricity is one of the most volatile.

Price difference between OTC vs. exchange-traded markets

Difference OTC/EEX closing price for baseload front year in %

Germany: The European Energy Exchange (EEX)

Endex: 3 months ahead, 4 quarters ahead, 2 seasons

EEX (EEX started 01 July 2007): 3,697,920 (2,827,020)

Endex: 17,793,940 (10,549,710) MWh8

Annual spot trading volumes 2007 (2008)