REMIT II in the light of increasing investigations on market manipulation

In reaction to the energy market crisis and effects of volatile prices in the summer of 2021, numerous reforms have been proposed for the EU-wide regulation of energy markets. One such reform envisages amending and completing Regulation (EU) No 1227/2011 of the European Parliament and of the Council (REMIT) as a way to strengthen the set of tools available for monitoring and enforcing energy market integrity and transparency. REMIT sets the framework for monitoring wholesale energy markets and prohibits abuses such as insider trading and market manipulation.

By Angelica Pintilie, Senior Associate, Dentons

Thus, Regulation (EU) 2024/1106 of the European Parliament and of the Council of 11 April 2024 amending Regulations (EU) No 1227/2011 and (EU) 2019/942 as regards improving the Union’s protection against market manipulation on the wholesale energy market (REMIT II) published in the Official Journal of the European Union on 17 April 2024 (entering into force on 7 May 2024 with varying application dates for certain provisions), expands REMIT’s scope to include contracts with potential delivery into the EU. It also covers derivatives and introduces new products related to energy storage. Additionally, REMIT II aligns with financial markets legislation and addresses the need for sanctions harmonization among member states, exemplified by discrepancies in fines imposed by ANRE compared to EU-wide fines under REMIT. In this regard, due to the lack of harmonization of sanctions, ANRE applied approximately half of the fines (€111,035,080), of the total €224,561,237 imposed at the European level since the entry into force of REMIT in 2015.

REMIT II also introduces new provisions on reporting obligations, on extended powers for ACER to investigate certain cases and on trading algorithm conditions, which we describe below.

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Market manipulation  – The focus has been to align the definition of “market manipulation” with that in the MAR, i.e. to include: (i) false or misleading information regarding a benchmark, knowingly or negligently provided, and any conduct manipulating benchmark calculation; (ii) extending manipulation to both legal entity and individual actions in decision-making for the entity; (iii) broadening the definition to encompass a wide range of manipulative behaviors, including those beyond trading markets, by incorporating a general expression, “any other behavior.”

Privileged information – in addition to aspects that are considered good practice under the REMIT guidelines, issued by ACER, REMIT II (i) specifies that information potentially materially affecting prices of wholesale energy products also includes information that a reasonable investor could use as part of the basis for investment decisions and (ii) expands the prohibition on using privileged information when cancelling or modifying an order to trade wholesale energy products.

In cases where inside information pertains to a multi-stage process, each stage, as well as the process as a whole, could be considered inside information. An intermediate step in a prolonged process could itself constitute a set of particular circumstances or events, based on an overall assessment of existing factors. Information is deemed directly or indirectly related to wholesale energy products if it’s likely to impact their demand, supply, price, or expectations thereof.

Reporting obligations – introduction of several measures to enhance data reporting and market monitoring: (i) organized marketplaces (OMPs) must provide ACER with complete order book data; (ii) Market participants must submit transaction data and/or fundamental data through registered reporting mechanisms (referred to as “RRMs”). RRMs will be the persons authorized by ACER (and registered with ACER) to provide transaction details, including trading orders and fundamental data on behalf of market participants.

Details for the reporting records of transactions entered into, concluded or executed on OMPs, including the specific arrangements for ensuring effective data reporting, are to be set out by the Commission in an implementing act, which is expected to take form of an amendment to the REMIT Implementing Regulation (the Commission’s deadline for this is 8 May 2025).

ACER outlined key aspects regarding the new reporting obligations in its open letter on REMIT II implications: (i) “new” OMPs aren’t expected to report data until specified in the REMIT Implementing Regulation; (ii) current (“old”) OMPs should report data relating to the order book(s) based on existing standards; (iii) relevant details related to storage contracts and related derivative contracts (i.e. wholesale energy products), will be added to the REMIT Implementing Regulation, but until that time, the reporting of storage as fundamental data will continue; (iv) reporting of exposures is also dependent on the details to be included in the amended REMIT Implementing Regulation; (v) Single Day-Ahead and Intraday Coupling contracts are expected to follow current reporting standards.

REMIT II introduces a new category of persons who “arrange or execute transactions in a professional capacity” (PPAETs), defined as individuals engaged in receiving, transmitting, or executing orders for wholesale energy products. PPAETs must report suspicious transactions elated to insider trading, market manipulation, and failure to disclose insider information beginning with 8 November 2024.

Implementing rules for algorithmic trading – Introduction of a new set of rules to govern algorithmic trading in wholesale energy products, defined as trading—including high-frequency trading—in wholesale energy products where a computer algorithm determines order parameters (e.g. order initiation, timing, price, quantity, and order management post-submission. Algorithmic trading entails minimal or no human intervention and excludes systems used solely for order routing, processing without determining trading parameters, or order confirmation/post-trade processing.

Market participants engaging in algorithmic trading in wholesale energy products will have to have in place effective systems and risk controls suitable to the business they operate in to ensure that their trading systems i) are resilient and have sufficient capacity, ii) are subject to appropriate trading thresholds and limits and iii) prevent the transmission of erroneous orders that may disrupt the market. Finally, traders will have to notify their engagement in algorithmic trading to the national authority of the member state where they are registered.

Extension on ACER’s investigative powers – To address cross-border market abuse cases, ACER will receive enforcement powers under REMIT. Investigations into such breaches will involve an EU-level process led by ACER, working in cooperation with national authorities. ACER will conduct on-site inspections and issue information requests during investigations. It will also have the authority to impose periodic penalties to enforce on-site inspections or information submission. However, the power to sanction REMIT violations will still reside with member states.

New measures on harmonization of financial sanctions – outlining a framework for harmonizing sanctions and measures. Although the regulation of penalties remains the responsibility of the individual member states, national authorities are required to adopt a graduated approach to remedies for REMIT breaches, aiming to resolve issues without imposing fines initially. In such a graduated approach, national authorities should: (i) demand that the person to bring the breach to an end, (ii) disgorge any profits gained or losses avoided as a result of the breach, (iii) issue public warnings or notices, (iv) impose periodic penalty payments and finally, (v) impose administrative fines.

In cases where financial sanctions are necessary, REMIT II introduces specific thresholds depending on the entity involved:

• For legal persons, financial penalties are capped at 20% of the annual turnover from the preceding financial year, with the introduction of thresholds for the different types of violations, as follows:

1. 15 percent of total turnover for breaches of insider dealing and market manipulation prohibitions;
2. 2 percent of total turnover for breaches of the obligation to disclose inside information and relating to PPAETs;
3. 1 percent of total turnover for breaches of data reporting and registration obligations.

If the legal entity gained financially from the violation, the fine must be at least equal to that benefit.

• For natural persons, financial penalties are capped at 20 percent of their annual income from the preceding financial year, with the following minimum thresholds:

1. €5 million for breaches of insider dealing and market manipulation prohibitions;
2. €1 million for breaches of the obligation to disclose inside information and relating to PPAETs;
3. €500,000 for breaches of data reporting and registration obligations.

If the individual directly or indirectly benefited financially from the violation, the fine must be at least equal to that benefit.

As regards the individualization of penalties for market participants, member states must ensure that regulatory authorities take into account all relevant circumstances, including: (a) the gravity and duration of the infringement, (b) the degree of responsibility of the person responsible for the infringement (c) the financial strength of the person responsible for the infringement. For example, this could be measured by the total annual turnover of a legal person or the yearly income of a natural person; (d) the importance of the profits gained or losses avoided by the person responsible for the infringement (insofar as they can be determined); (e) the level of cooperation of the person responsible for the infringement with the competent authority, without prejudice to the need to ensure disgorgement of profits gained or losses avoided by that person; (f) previous infringements by the person responsible for the infringement; (g) measures taken by the person responsible for the infringement to prevent its repetition; and (h) the duplication of criminal and administrative proceedings and fines for the same infringement against the person responsible for the infringement.