Insider trading, market manipulation, and a 459 million UAH fine. Details on the wholesale energy market

What natural gas and electricity suppliers and wholesalers (traders) need to know about wholesale energy market operations. What constitutes inside information and what is considered market manipulation, which carries a fine of 459 million hryvnias.

As is widely known, on June 10, 2023, the Verkhovna Rada of Ukraine adopted the so-called REMIT Law, which amended several Ukrainian laws to prevent abuse in wholesale energy markets.

To improve competitiveness and transparency in the natural gas and electricity (energy) markets, this Law introduced the following key changes:

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- establishment of a wholesale energy market;

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- definition of the list of wholesale energy products;

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- rules for the use of inside information regarding wholesale energy products;

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- prevention of market manipulation in the wholesale energy market;

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- monitoring of trading activities involving wholesale energy products;

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- penalties for violations in the wholesale energy market.

Let's start with wholesale energy products

Legislation now defines the following transactions as "wholesale energy products":

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1. contracts for the sale and purchase of electricity or natural gas;

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2. derivative contracts relating to electricity or natural gas;

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    3. contracts for the transmission of electricity or transportation of natural gas, and access to capacity/distribution capacity;

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4. derivative contracts relating to the transmission of electricity or transportation of natural gas, and access to capacity/distribution capacity;

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5. contracts for the supply or distribution of electricity and/or natural gas to final customers with a total nominal consumption capacity of installations that provides a technical capability to consume 600 GWh per year or more.

The first point covers energy sale and purchase agreements concluded between energy market participants for the resale of energy or for its subsequent supply to a final customer.

The third point refers to contracts between energy market participants and the Transmission System Operator or the Gas Transmission System Operator.

The fifth point concerns contracts concluded by suppliers with final customers of natural gas and/or electricity whose total nominal consumption capacity of installations provides a technical capability to consume 600 GWh per year or more.

The contracts mentioned in the second and fourth points refer to transactions defined in the first and third points, but which take the specific form of a "derivative contract."

Please note that derivative contracts are financial instruments whose conclusion and execution are governed by the Law of Ukraine "On Capital Markets and Organized Commodity Markets"; therefore, it would be appropriate to discuss derivatives in detail in a separate article.

Consequently, the aforementioned contracts may only be concluded by participants in the wholesale energy market. Furthermore, should any such transaction be executed without prior registration as a wholesale energy market participant, such action will be subject to a fine, the amount of which I will detail below.

What is the wholesale energy market, and how do you become a participant?

The REMIT Law defines the wholesale energy market as any market where trading operations are conducted involving wholesale energy products, including those on organized trading venues, commodity exchanges, electronic auctions, and trading platforms.

To legally conduct trading operations with wholesale energy products, a business entity must register as a participant in the wholesale energy market.

I covered the registration procedure in a previous article, so I will briefly note here that the NEURC has already approved the registration process and has even provided energy market entities with a recommended schedule for submitting registration forms to the NEURC. Registration is mandatory for everyone who intends to conduct, or is already conducting, trading operations with wholesale energy products.

What constitutes "inside information" and where should it be disclosed?

While energy market entities were entering into contracts classified as wholesale energy products even before the adoption of the REMIT Law, terms such as "inside information" and "market manipulation" are new, and integrating them into the framework of Ukrainian legislation will take some time.

The REMIT Law states that inside information is non-public, precise information concerning, directly or indirectly, one or more wholesale energy products, the disclosure or publication of which could significantly affect the market price of one or more wholesale energy products.

For greater clarity, the law provides the following list of "inside information":

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1. Information that must be disclosed under laws, codes, and regulations governing energy markets, as well as under contracts, as such information may influence energy market prices prior to its disclosure.
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2. Information regarding the capacity and usage of facilities for the extraction/production, storage, transportation, or consumption of natural gas, or the capacity and usage of LNG facilities, including planned or unplanned unavailability of these facilities (for facilities with an installed capacity as defined by the Regulator).

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3. Information regarding the capacity and usage of facilities for the production, storage, consumption, transmission, or distribution of electricity, including planned or unplanned unavailability of these facilities (for facilities with an installed capacity as defined by the Regulator).

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4. Other information that could be used by energy market participants to make decisions regarding transactions or the submission of orders for transactions related to wholesale energy products in energy markets.

If a person possesses inside information that meets the criteria above, they must disclose it on an inside information platform.

In energy markets, such platforms must be established by the Gas Transmission System Operator, the Transmission System Operator, and the Market Operator.

However, until these platforms are operational, wholesale energy market participants must disclose inside information on their own websites.

The law also prohibits persons in possession of inside information from using it in the following cases:

1) executing or attempting to execute (directly or indirectly) transactions involving wholesale energy products on any energy market for their own benefit or the benefit of others, using inside information.
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2) disclosing or transmitting inside information, or providing access to it to other persons (except for the disclosure of inside information in the course of performing professional or employment duties and in other cases provided for by law);
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3) recommend, on the basis of inside information, that another person enter into transactions related to wholesale energy products on the energy markets to which that information relates.

As we can see, it is prohibited to directly or indirectly enter into transactions involving any wholesale energy products while using inside information.

Furthermore, it is prohibited to disclose inside information or to use it to recommend that a third party enter into a transaction related to the wholesale energy market.

The list of prohibitions applies to the following persons who possess inside information:

1) members of the management bodies of a wholesale energy market participant;

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2) persons who hold shares or equity interests in the authorized capital of a wholesale energy market participant;

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3) persons who have access to such information in the course of their professional, employment, or official duties;

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4) persons who have obtained access to inside information through unlawful acts;

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5) persons who know, or ought to know, that the information is inside information;

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6) persons involved in decision-making regarding commercial trading operations related to wholesale energy products on behalf of a legal entity that possesses inside information.

Wholesale energy market participants should not get complacent or think they can devise a "clever scheme" where they withhold inside information, use it to their advantage, and assume no one will suspect a thing.

The law anticipates this and mandates that the Gas Transmission System Operator maintain its own monitoring system for capacity allocation and balancing operations. If there are reasonable grounds to suspect that these operations violate restrictions on the handling of inside information or show signs of market manipulation or attempted manipulation, the Operator must immediately notify the NEURC.

The same applies to the Transmission System Operator regarding the monitoring of the ancillary services and balancing markets, as well as cross-border capacity allocation, and to the Market Operator regarding the monitoring of the day-ahead market, the intraday market, and organized electronic auctions for electricity trading.

The NEURC, in turn, monitors the market behavior and trading activities of entities dealing in wholesale energy products.

As for the attempt to register multiple energy market participants that will act as founders for a series of other market participants, this mechanism is also provided for by law.

Indeed, a wholesale energy market participant must timely disclose any inside information they possess regarding their business activities or assets, or those owned or controlled by their parent company or an affiliated entity, or regarding assets for which the participant or entity is fully or partially responsible for operational activities.

When does an attempt to manipulate turn into actual manipulation?

As I mentioned earlier, the Gas Transmission System Operator, the Transmission System Operator, and the Market Operator are required to have monitoring systems in place to detect operations on the wholesale energy market that show signs of manipulation or attempted manipulation.

In this regard, manipulation on energy markets includes the following actions:
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1) Disclosing or disseminating false or misleading information through media, including electronic media, or by any other means, which provides false or misleading signals regarding the demand for, supply of, or price formation of wholesale energy products.
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2) entering into transactions, issuing orders and/or instructions to other energy market participants to enter into transactions for wholesale energy products that:

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- create misleading signals regarding the supply of, demand for, or price of wholesale energy products; or

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- set the price of wholesale energy products at an artificial level, unless the person or persons acting in concert who entered into the purchase or sale agreement or submitted the purchase or sale order for the wholesale energy product can demonstrate that they acted for legitimate reasons, or that the transaction or order complies with accepted market practices on the wholesale energy market; or

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- involve the use or attempted use of fictitious devices or any other form of deception or contrivance that creates or is likely to create misleading signals regarding the supply of, demand for, or price of wholesale energy products.

If a person intends to perform any of the actions listed above, it is classified as an attempted manipulation, which is also prohibited by law.

Please note that the law provides a non-exhaustive list of practices that may constitute manipulation or attempted manipulation in the wholesale energy market.

Penalties

It is clear that following these legislative changes, new penalties have been introduced in the natural gas and electricity markets.

For a period of 12 months starting from November 1, 2023, the fine for manipulation or attempted manipulation is up to UAH 229.5 million. After this period, the maximum fine will increase to UAH 459 million.

For a period of 12 months starting from February 1, 2024, the fine for violating established restrictions on the use of inside information is up to UAH 229.5 million. After this period, the maximum fine will increase to UAH 459 million.

For a 12-month period starting February 1, 2024, the fine for failing to disclose inside information or for disclosing it in violation of established requirements is up to 22,950,000 UAH. After this period, the maximum fine will increase to 45,900,000 UAH.

Although these fines are quite substantial, there are certain mitigating factors.

The law stipulates that, regardless of these maximum limits, the fine imposed on a wholesale energy market participant cannot exceed 10 percent of their annual revenue from the sale of products (goods, works, services) in the natural gas or electricity market.

Significantly lower fines are provided for engaging in wholesale energy product transactions without registering as a wholesale energy market participant—ranging from 51,000 to 1,700,000 UAH.

At the same time, I would add that the REMIT Law, like a number of other recent laws, contains certain flaws that market participants can use to their advantage. Therefore, it is too early to be intimidated by such fines, and most importantly, remember your right to appeal any NEURC penalty decision.

So, these are the new developments for energy market participants. Undoubtedly, these changes are significant, as market participants now need to pay more attention to the legal compliance of their operations. In addition to new obligations, there are new penalty amounts, but as always, it is essential to monitor NEURC inspections and be prepared to challenge their results.

The legal consulting firm FEDOTOV & PARTNERS specializes in providing services to electricity and natural gas market participants. Our experience in supporting energy companies allows us to say that we not only know what is written in energy laws but also understand how the energy business works in practice. If you have any legal questions, we are always ready to help and offer you the most optimal solutions.

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