© Frontier Economics Ltd, London.
Contents
rpt-px reg final-v1.3-public version-stc-14-11-05Regulation of power exchanges
1 Introduction ...5
1.1 Background...5
1.2 Methodology...5
1.3 Organisation of our report ...5
2 Approach to regulation...7
2.1 Introduction...7
2.2 Definition of a power exchange ...7
2.3 The geographic dimension ...8
2.4 The rationale for regulation...8
2.5 Generic versus specific regulation...9
2.6 The relevance of APX’s specific position ... 10
3 Power exchange regulation in other countries ... 11
3.1 Belgium... 11
3.2 France ... 12
3.3 Germany... 12
3.4 UK... 14
3.5 Summary from international survey... 15
4 Prudential regulation... 17
4.1 Description of possible unpredictable power exchange events ... 17
4.2 Summary on prudential regulation ... 27
5 Market monitoring ...29
5.1 Generic practice ... 29
5.2 Current monitoring undertaken by APX ... 29
5.3 The need for market monitoring... 30
5.4 Who should be responsible for market monitoring?... 30
5.5 Views of participants ... 30
5.6 Summary ... 31
6 Economic regulation...33
Contents
rpt-px reg final-v1.3-public version-stc-14-11-056.2 Enforced trade of day ahead interconnector capacity on the APX .. 34
6.3 APX fees versus those of other PXs ... 34
6.4 Approaches to regulation... 35
6.5 Summary ... 36
Annexe 1: Additional observations on risks ...37
Annexe 2: List of organisations/people consulted... 41
Power exchanges ... 41
Other governmental organisations ... 41
Tables & figures
Regulation of power exchanges
Introduction
1 Introduction
1.1 BACKGROUND
DTe has been asked to advise the Ministry of Economy on the issue of whether or not power/energy exchanges need regulating and, if so, what is the appropriate scope of such regulation and which body or bodies should undertake that regulation.
DTe has in turn engaged Frontier Economics to assist it in formulating this advice, inter alia providing the following:
• a description of the risks, as well as the size of these risks, involved with the APX and Endex;
• a limited international comparison of the risks, as well as the size of these risks, involved with the power exchanges in France, Belgium, Germany and the United Kingdom;
• an analysis of the risk-mitigating measures taken by Dutch electricity and power exchanges; and
• the possible shortcomings in risk-mitigating measures by the power exchanges mentioned under point three., as well as the solutions to these shortcomings.
1.2 METHODOLOGY
The approach we have adopted to fulfilling this assignment has been to conduct a series of interviews with key personal at APX, Endex, a number of other exchanges in European countries, the UK Financial Services Authority and a number of participants in the Dutch market including TenneT. The information gathered from these interviews has been supplemented with further research by Frontier and supported by referring to published material and publicly available data.
This report summarises this process and presents a summary of our findings and recommendations to DTe.
To meet the DTe’s tight timetable the majority of this work was carried out within a period of three weeks.
1.3 ORGANISATION OF OUR REPORT
Our report is organised as follows:
• Section 2 discusses our approach to identifying appropriate regulation;
• Section 3 reviews the extent of regulation applicable to power/energy
Introduction
• Section 4 addresses the issue of prudential regulation, examining the
consequences of exchange failure;
• Section 5 addresses the issue of economic regulation as it relates to the
behaviour of participants on the existing Dutch power/exchange, APX; and
• Section 6 looks at the potential need for economic regulation of APX as
it relates to the charges levied by APX on market participants.
Approach to regulation
2 Approach to regulation
2.1 INTRODUCTION
The purpose of this section of our report is to discuss a number of high level issues that set the context for, and influence, our analysis. These issues include:
• the definition of a power exchange;
• the geographic dimension;
• the role of existing regulators;
• the rationale for regulation;
• the extent to which regulatory recommendations should apply generically to any power exchange or just specifically to APX; and
• the relevance of APX’s specific position.
2.2 DEFINITION OF A POWER EXCHANGE
Before analysing what regulation is appropriate, we need to define what is meant by a power exchange. We take a power exchange to mean an organisation meeting the following criteria:
It arranges the purchase and sale of power, where the power in question is for delivery in no more than two working days from the time at which the purchase and sale is arranged1.
It deals with multiple parties and trades are arranged such that sellers sell to a central counterparty and buyers buy from that same central counterparty. The two important points to note from these criteria are that:
We exclude any organisation just trading products with more than two working days to delivery as we understand that such products would be treated as investment products and an exchange dealing in these would be subject to whatever regulation the Authority for Financial Markets saw fit. If an exchange were to deal in both prompt and investment products our regulatory recommendations are intended to apply only to activities related to trade in the prompt.
1 In principle, the term power exchange could be taken to mean a platform where participants trade
Approach to regulation
We exclude any organisation just arranging bilateral trades without the use of a central counterparty. We would regard such an organisation as a brokerage rather than an exchange.
This report covers both electricity and gas exchanges, although we focus more on electricity exchanges. This focus is due to the relatively low level of activity on the Dutch TTF exchange, in comparison to the volumes traded through electricity exchanges. In addition, we have also investigated in some detail one specific concern raised by the AFM regarding the affect of trades on Endex that are delivered through APX, which is solely an electricity issue.
2.3 THE GEOGRAPHIC DIMENSION
The previous section dealt with the question of what is a power or energy exchange. There is a subsidiary question which is when should it be subject to regulation within the Netherlands. If the exchange is a company registered in the Netherlands, trading contracts that involve delivery in the Netherlands and all substantive operations are in the Netherlands, the answer would seem clear. However, more complex situations leave the answer far form clear.
In terms of specific examples, there is a subsidiary of APX that is a Dutch registered company trading a gas contract delivered in Belgium and has all its operations carried out in the UK.
As noted in our proposal we are not bringing specialist legal expertise to this assignment and therefore we do not propose to offer definitive advice on jurisdiction. Instead we will focus on power/energy exchanges within the Netherlands. It follows that ideally the same extent of regulation should apply to the more complex international positions but it will be up to the relevant Dutch authorities to ascertain the extent to which regulators from other countries will perform those roles.
2.4 THE RATIONALE FOR REGULATION
The primary purpose of regulation is to address market failure, where such failure may either be a deficiency of information, a significant externality or a position in which a party could exert market power.
In more concrete terms related to the functions of a power/energy exchange, there could be a prima facia case for regulation if one or more of the following applied:
• Participants in the exchange would not reasonably be able to obtain the information that would inform them as to the probability and impact of the risks they faced if either the exchange failed or a participant failed to meet its financial obligations and those risks /impacts could be large;
Approach to regulation
• One or more participants in the exchange is in a position to exercise market power and thereby inflict economic damage on other parties /consumers; or
• The exchange itself has either a de facto or de jure monopoly (or strictly more generally a dominant position in its relevant market) and may earn monopoly rents.
Whether regulation is in fact justified depends on whether the benefits of potential regulation justify the cost that the regulation would entail for all the parties concerned.
These potential rationales for regulation have therefore led us to organise our review around three categories of regulation:
• Prudential regulation protecting parties other than the power exchange in question from the operational or financial failure of that exchange .
• Regulation of a power exchange designed to cause that exchange to in turn monitor and regulate participants’ economic behaviour.
• Regulation of the exchange itself as an economic agent that may have market power with respect to the market for the services that it offers.
2.5 GENERIC VERSUS SPECIFIC REGULATION
Our terms of reference require us to consider regulation of power exchanges but many of the specific questions that we are asked to address concern APX. This is not altogether surprising as APX operates the only power exchange in the Netherlands. However, this does raise the key issue as to whether the recommendations that are sought constitute a generic framework for regulation of power exchanges in the Netherlands or are in effect aimed at establishing regulation of APX per se.
Our understanding is that there is no legal obstacle to anyone setting up a power exchange anywhere in the EU and, if only by default, the EU Electricity and Gas Directives implicitly treat exchanges as competitive.
Dutch law provides for the Minister to appoint a power exchange and a gas exchange. We understand that APX Gas NL BV has become an appointed gas exchange. However, we understand that such appointments do not appear to confer either any exclusive rights or any particular responsibilities and that there is no reason in principle why a second exchange could not be appointed in either gas or electricity.
It is tempting to conclude from this that the framework for regulation should apply equally to any new exchange in the Netherlands. However, the appropriate regulatory framework may itself depend on whether there are in fact other power exchanges available to provide the same service.
Approach to regulation
of trade and enabled it to establish what appears to be a de facto monopoly not just for the mandated trade but for all exchange based day ahead trade of Dutch delivered electricity.
Our current view is that it is unlikely that another Dutch power exchange will be developed while APX is functioning reasonably. This position means that participants on the exchange may not be able to exercise the degree of choice that could in other circumstances obviate the need for regulation.
The remainder of our report is based on this premise, but we note where our conclusions could be affected by the emergence of a competitive new entrant.
2.6 THE RELEVANCE OF APX’s SPECIFIC POSITION
The overall aim of our study is to assist DTe to advise the Ministry of Economy on what, if any, regulation there should be of power exchanges including APX The important point to note here is that it is not the current performance of APX that should mould the appropriate regulatory framework. It is the role and impact of APX that should determine the framework. As a consequence, much of this report does not focus on the detail of APX’s current arrangements, which might change, but on the possible consequences of a failure on the part of APX, which is a more fundamental measure of whether or not APX needs regulation. Prima facia evidence that APX addresses certain risks well now should not influence whether regulation is needed in the longer term as, in the absence of regulation, management might evolve in such a way as to not manage those risks in the future.
To illustrate this in more concrete terms, we fail to see that an assessment of the suitability of the current CEO is germane to the formulation of a regulatory framework. Mr den Ouden’s credentials may be perfect, but this should not influence whether it is appropriate for a regulatory framework to assess the suitability of the CEO. If Mr den Ouden resigns tomorrow the issue is whether there should be a regulatory concern about the competence and propriety of the new CEO. If so, there should be regulation even if there is no current concern related to the incumbent CEO.
The general point is that the assessment of actual current practice and competence should not determine the regulatory framework. Although, if there were major concerns, the assessment might influence the speed at which it is desirable for the Ministry to introduce regulation.
Power exchange regulation in other countries
3 Power exchange regulation in other
countries
In this section we present a brief review of the exchanges currently operating in a number of other European countries. We describe any important similarities and differences between exchanges in these countries and the Dutch exchange. We also identify any form of regulation that is imposed and why.
3.1 BELGIUM
3.1.1 Electricity
At present there is no electricity exchange operating in Belgium.
CREG has issued a document in which it identifies what it believes to be the most important issues in relation to the forthcoming establishment of BelPX. This paper does not include a detailed discussion of the potential role of the regulator, but it does identify issues of potential concern from a public policy perspective. Many of the issues raised by CREG are focussed on the structure of ownership in Belgium and the conduct of potential participants on the exchange, rather than the trading platform itself. In particular CREG expressed concern that:
• the concentrated market structure in Belgium could potentially lead to market manipulation;
• any manipulation might be compounded by vertical integration (the danger that vertically integrated firms self-supply at low cost and only offer higher prices to its competitors on the PX); and
• the relatively low level of VPP capacity and non-market based rules for interconnector access might aid further manipulation.
With regard to the design of the trading platform itself, the main concerns were:
• to guard against any lack of transparency or asymmetry in the information available to the various potential market participants; and
• to define clearly the boundary between the role of the TSO with respect to balancing and the role of the PX with respect trading.
We believe that both of these issues have been dealt with clearly and satisfactorily in the Netherlands.
3.1.2 Gas
APX has recently launched (February 2005) a gas exchange trading Zeebrugge contracts. APX Gas ZEE is jointly owned by APX and Huberator, a subsidiary of Fluxys.
Power exchange regulation in other countries
trading a contract for delivery in Belgium. Given this, it is not immediately obvious who, if anyone, should be responsible for regulating its activities. This issue is beyond the scope of this report.
3.2 FRANCE
A description of the background and key features of the regulatory regime in which the French power exchange, Powernext, operates are given below
• Even when Powernext was only operating the day ahead market, it was deemed to be a financial exchange. The crucial factors in this decision were the time between the day ahead market and the balancing market, together with the major movements that are possible in the value of power in that time.
• Powernext is classified as a Mutilateral Trading Facility (MTF). As such, market supervision is provided by the Autorité de Marché Financier (AMF). Prudential supervision is provided by the Commission Banquaire
• The AMF applies relevant articles of the Financial and Monetary Code and focuses on participant behaviour as well as monitoring any possible conflicts of interest that the exchange itself may have. For example, EDF is a major shareholder, but must not receive any market information that is not available to all participants.
• Powernext has a rule prohibiting price manipulation, but admits that it has difficulty enforcing this directly. However, if a regulatory investigation were to reveal such behaviour, it would be feasible for Powernext to expel the relevant member.
• Similarly, it has rules prohibiting bids based on price sensitive information but is again not really able to enforce this.
• The Commission Banquaire provides prudential regulation covering all the usual areas including capital adequacy, etc.
• As CRE is charged with supervision of electricity markets in general, Powernext has adopted a cooperative relationship with the CRE. The CRE has access to all relevant information on bidding behaviour etc and Powernext’s contracts with participants specify that Powernext has the right to furnish the CRE with information. We understand that Powernext does not inform participants of generic enquiries by CRE but would inform a participant if the enquiry were specific to that participant.
3.3 GERMANY
The European Energy Exchange (EEX) trades both derivatives and spot (day ahead) commodity. The derivatives are futures settled financially on the basis of the spot price. Key points to note in relation to regulation of EEX are as follows:
Power exchange regulation in other countries
regulation under the Securities Trading Act. BAFIN applies both prudential and participant market behaviour regulation to the derivatives part of EEX’s business. BAFIN also has an interest in EEX’s spot market, not directly in its own right but because the orderly and proper functioning of the derivatives market depends, in turn, on the orderly operation of the spot market which forms the basis for cash settlement of the derivatives. Any manipulation of the spot price would quickly lead to distortion of the derivatives market.
In contrast Endex trades are not cash settled on the basis of the APX price but go to delivery with APX performing solely the role of nomination agent. Therefore, AFM does not have the same direct concern with APX as BAFIN has with EEX’s spot market.
• EEX is also regulated by Exchange Supervision under Germany’s Exchange Act. We understand that this supervision, which is implemented at the ‘Land’ rather than Federal level, is not mandatory but is opted for by EEX as a way to assure participants of proper management of the exchange practiced by EEX.
• The Exchange Act regulates, inter alia, conditions for admission to an authorised exchange. Generic conditions for admission include checks not only on ability to applicant to meet financial security requirements of the exchange but also checks as to whether the applicant is knowledgeable and capable of conducting the relevant business.
• Exchange Supervision also checks on the suitability (competence and propriety) of exchange staff and implements prudential supervision typical of that which would be applied to a financial exchange. Furthermore, it must approve an exchange’s rules and all modifications thereto.
• In compliance with the requirements of Exchange Supervision, EEX has a Market Surveillance Office. Although this office is staffed by people paid by the exchange, it is afforded substantial independence because the head of the Market Surveillance Office is appointed by the Exchange Council, which is democratically elected by all the exchange participants. The head cannot be dismissed by management without referral to both the Exchange Council and the Exchange Supervision.
• The Market Surveillance Office in EEX monitors both trades and settlement of those trades to ensure compliance with EEX’s rule book. The rule book governs participants’ behaviour, for example by prohibiting unannounced cross trades and prearranged trades. (Note that prearranged trades do not present the same problem for APX as an electricity exchange as it only operates an auction, not continuous trading). EEX has automated systems to detect these. EEX is also obliged to impose a catchall prohibition on behaviour capable of affecting prices for other than legitimate economic reasons.
Power exchange regulation in other countries
3.4 UK
3.4.1 Electricity
The UKPX, a power exchange owned by APX, is the largest power exchange in the UK both in terms of the number of participants and volume of trade.
The UKPX has a number of important differences compared to APX in the Netherlands.
• UKPX is an exchange that operates continuous trading rather than a single shot daily auction.
• UKPX trades does not only trade spot power for almost immediate delivery, but also prompt power (up to a week) together with a forward market (months, quarters and seasons).
• Spot and prompt market trades are cleared and notified by UKPX as a central counterparty. Trades on the forwards market are centrally cleared by LCH.
Prudential regulation
The activities of UKPX are regulated by the FSA. From discussion with the FSA we understand that, while the boundary is not as clearly defined as in the Netherlands, the UKPX is regulated because it offers financial products and is not a commodity exchange offering only products for spot delivery. In other words, UKPX is regulated in the UK for the same reasons that Endex is regulated in the Netherlands. The FSA has indicated that if UKPX offered only spot contracts then it is highly likely that it would not be subject to prudential regulation. We understand that there are no special arrangements or provisions put in place by the FSA in its scrutiny of UKPX, i.e. from the FSA’s perspective UKPX could be trading any commodity.
UKPX’s role in Market monitoring
We understand that UKPX is not required to participate in any market monitoring activity. However, should Ofgem wish to conduct an investigation into the conduct of wholesale market participants, it is likely that it would request information from UKPX. Similarly, UKPX is active in ensuring that the rules of participation on the exchange are adhered to.
We are not aware of any suggestion on the part of Ofgem that UKPX should play a more active role in market monitoring.
Economic regulation of UKPX
Power exchange regulation in other countries
3.4.2 Gas
With the introduction of new gas trading arrangements in the UK in 1999, Ofgem and BG plc agreed to a number of licence modifications, one of which required BG to appoint an independent market operator to arrange an On-the-day Commodity Market (OCM). This led to the appointment of EnMO, a joint venture between National Grid (now NGT) and Altra. APX purchased 100% of EnMO in July 2003 and renamed the platform APX Gas.
APX Gas provides a continuous trading facility within which market participants, including the system operator Transco, can buy and sell within-day and day-ahead gas. The platform also offers physical futures up to seven days in advance of delivery through a range of contracts. Since the system operator also participates in the exchange, the scope of its activities is arguably wider than that of gas exchanges operating elsewhere, since it offers not only an exchange where market participants can fine tune their positions, but also plays a role in system balancing.
The exchange is not regulated by the FSA since it has been designated by the Director General of Gas Supply (i.e. Ofgem). Effectively, the exchange was appointed by Transco to fulfil a remit that had been agreed between Transco and Ofgem. As a result, EnMO has been granted an exemption from the prudential regulation that would usually apply to an exchange offering forwards.
At the time the exchange was introduced, Ofgem identified a need to ensure that participants would have confidence in the exchange. As a result, Ofgem required some modifications to the draft market rules, adding clauses that placed a contractual obligation on market participants to ensure good market conduct. At present gross trade on APX Gas represents approximately 10% of physical volumes delivered.
3.5 SUMMARY FROM INTERNATIONAL SURVEY
The power exchanges operating in both the UK and Germany are subjected to prudential regulation. However, we understand that this regulation is not imposed because there is a belief that spot power markets require prudential regulation, but instead because these power exchanges trade not only spot products but also financial products. In other words, the motivation for applying prudential regulation is similar to the motivation for the regulation of Endex by AFM in the Netherlands. For this reason, it is not immediately obvious that one should infer that international practice is to regulate spot exchanges, although we note that in France the day ahead electricity market is classed as dealing in an investment product.
Power exchange regulation in other countries
Prudential regulation
4 Prudential regulation
For the generic reasons outlined in Section 2, DTe might wish to implement some form of prudential regulation on APX. Much of the regulation on exchanges of all types is focused on this area. The main objective of prudential regulation is the protection of parties other than the exchange itself from an operational or financial failure and, in this specific instance, the minimisation of any threat to security of supply. Key objectives of prudential regulation include:
• promotion of prudent and proper behaviour within an entity;
• ensuring that an entity’s systems for identifying, measuring and managing risk are effective; and
• ensuring that there are adequate collateral provisions to act as a buffer against unexpected losses.
Before imposing prudential regulation on an organisation, one should assess whether there is a compelling need for such regulatory scrutiny. This will typically involve attempting to gain an understanding of the risks to which the exchange exposes parties trading on the exchange, should there be some form of event with negative consequences. When considering whether to implement prudential regulation, questions that might need to be addressed include:
• what unusual/unpredictable events might occur on the trading platform that could cause negative effects?
• how significant are those effects likely to be?, and
• how likely are those events to transpire?
As discussed in Section 2, such analysis should tread a careful path between generic investigation of underlying risks and detailed scrutiny of existing arrangements specific to the exchange.
In addition to identifying whether a need for regulation might exist, DTe will also consider the potential cost that any new regulation might cause when deciding whether to regulate or not. An assessment of the potential cost of regulation is beyond the scope of this report, but we understand that it will be considered by DTe.
In the remainder of this section, we set out the three types of unanticipated event that we believe are most relevant to APX. We explore the consequence of these events in order to gain at least a preliminary understanding of whether the consequences of such an event are likely to be substantive.
4.1 DESCRIPTION OF POSSIBLE UNPREDICTABLE POWER
EXCHANGE EVENTS
Prudential regulation
then explore thepossible consequences of each. In doing this we consider the exposure of:
• APX itself;
• a participant on the exchange; and
• overall system security (i.e. TenneT’s ability to balance the system in the event of the failure identified).
4.1.1 System failure
The APX trading platform depends on an IT system. This system:
• enables participants to submit their bids;
• allows these bids to be cleared and a price determined;
• notifies revised contract positions to TenneT and/or GTS; and
• processes the payments required, from buyers and to sellers.
No IT system is 100% robust. Software or hardware failures are always possible, although comprehensive backup systems can minimise the likelihood of a system not being available. Here we explore briefly the consequences of a system failure making the APX unavailable.
Effect of a system failure
The broad affect of the failure that we envisage would be to remove APX as an arena for trading for a number of days, i.e. participants would no longer be able to trade day ahead. At present we understand that 11% of total final demand is traded through APX, on the basis of data in a presentation prepared for APX by McKinsey. Of this 11%, McKinsey estimates that 70% is due to enforced trade related to interconnector capacity.
TenneT informs us that it does not depend on APX for system balancing. In the event APX were not available, TenneT’s ability to balance the system would not be compromised in any way.
Our interviews with participants have reinforced this conclusion, suggesting not only that system security would not be jeopardised, but that an APX failure would not impose a major economic burden at least on those that had physical generating assets.
Electrabel did not anticipate facing substantial problems in balancing/fine tuning its position in the Netherlands in the event that APX was unavailable. APX was certainly the most convenient arena in which to fine tune its position close to dispatch, but bilateral trades, plant flexibility and making use of interconnector capacity would suggest that the inconvenience to market participants would not be substantial.
Prudential regulation
owners have the ability to fine tune and balance their own positions at a known cost, whereas those without physical assets do not. However, working on the presumption that any failure would be short lived, either because APX would restore service quickly or because a competitor would establish a rival service (see below), we would not anticipate a failure causing a serious or long lasting problem for a player, even one with no generation capacity. Notwithstanding this, we understand that DTe intends to investigate the possible impact of a failure on a participant without generation assets further, by interviewing a market participant of this type.
While a single day disappearance would be unlikely to cause a substantial problem for such a player, a more protracted period would be more problematic. We regard a protracted period without service as unlikely as it would clearly be in APX’s own commercial interests to restore service as quickly as possible. In addition, we note that in the event of a protracted failure by APX, Endex has indicated that it could establish a spot market service, although there would inevitably be some delay while Endex established the required systems and processes.
Likelihood of a system failure
We are not aware of APX failing to operate completely on any day since it was launched. Experience of participants and reports from APX suggests that the likelihood of such a failure is small. We are aware of APX encountering minor problems that have, on occasion, required it to delay running its systems. We understand, from discussion with participants, that the frequency of these delays is typically of the order of at most 5 events per year. All of the market participants to whom we have spoken tell us that they have a high degree of confidence in APX’s systems.
Summary
In summary, it is difficult to foresee a system failure giving rise to serious detrimental effects, although it would be likely to cause some inconvenience and cost to market participants, especially those without generation capacity.
It also appears clear that a system failure by APX would pose no threat to system security. This conclusion holds for both volumes traded through the day ahead and also for volumes that go to physical delivery on Endex and are passed to APX via LCH Clearnet. On the basis of figures contained in a presentation given by Bert den Ouden of APX (June 2005), Endex trades account for approximately 13% of APX’s volumes.
Furthermore, we note that based on past experience and the current maturity of their systems, there seems to be no particular cause for concern regarding APX’s current systems.
4.1.2 Financial failure
Prudential regulation
Exposure to companies that have purchased power on the exchange. Such companies might take delivery of the commodity and then fail to pay.
Exposure to companies that have sold power on the exchange. Such companies might fail to deliver leaving APX with an open position.
We note that this second risk is insignificant for APX’s day ahead power activities since there is little time between a contract being agreed and nomination to TenneT, hence a very small chance of the selling counterparty falling into financial distress between contract acceptance by APX and nomination to TenneT. Once a contract has been notified to TenneT, there is no exposure to the selling participant for APX, as any failure to deliver will result in an imbalance charge to the selling party. Exposure to a risk of delivery failure becomes more likely to be material when APX becomes the counterparty to a trade transferred from Endex, since there is then a two business day period during which the selling participant might go into liquidation.
APX requires companies to make collateral available to it to provide cover against these risks. This gives rise to two questions.
Are the APX’s credit arrangements adequate?
What would be the consequences of a financial failure on the part of either the exchange, or a participant on the exchange?
We begin with description of the processes through which participants on APX might take a contract position with APX as a counterparty. We then provide an overview of the APX’s credit arrangements, based on a telephone interview with Albert Vreeman of APX.
Process by which a position might be opened on APX
APX day ahead market
APX operates a day ahead market used by market participants to fine-tune their positions. The market is a two sided, single shot auction, where both buyers and sellers submit schedules setting out the amount of power they are willing to buy/sell at any given price. APX’s software (which can also handle block bids) matches supply and demand, arriving at a market price and a market volume. Sellers with accepted bids then have a contract to sell power to APX, while buyers with accepted bids have a contract to buy power from APX.
In its activities as the central counterparty to day ahead trades, APX is exposed to risk when it acts as a seller of power – it is possible that the purchaser might be unable to pay its bills. However, it faces almost no exposure when it acts as a buyer of power, since a failure by a participant to deliver power will result in an imbalance charge to the defaulting producer and not an open position for APX. Endex trades delivered through APX
Prudential regulation
B i l a t e r a l d e a l n o t i f i e d t o E n d e x A P X e n t e r s d e a l i n E C S P a r t i c i p a n t s c h e c k E C S e n t r y T r a d e i s n o v a t e d t o L C H C l e a r n e t L C H C l e a r n e t o f f s e t s a p p r o v e d t r a d e s a g a i n s t e x i s t i n g o b l i g a t i o n s L C H C l e a r n e t h o l d s c o l l a t e r a l L C H C l e a r n e t s u r r e n d e r s c o n t r a c t t o A P X f o r n o m i n a t i o n a n d s e t t l e m e n t D - 2 , L C H C l e a r n e t c o n t a c t s c l e a r e r s t o t o i d e n t i f y p a r t i c i p a n t s f o r d e l i v e r y A P X c h e c k s n o m i n a t e d p a r t i c p a n t s f o r e l i g i b i l i t y a n d c o l l a t e r a lFigure 1: Overview of the process where Endex trades are transferred from LCH Clearnet to APX
Source: Frontier Economics, based on communication with APX
While we have included an illustration of this process following a specific request from the expert group, this activity of APX as a nomination agent is not directly related to its power exchange activities and therefore is formally beyond the scope of this study. The services that APX provides to Endex are not core to their operation as a power exchange – any agent could perform this service, although the rationale for this agent being APX is clear, given that they already have all the required agreements and relationships in place with market participants and with TenneT. But if APX were to stop offering this nomination service to Endex, we can see no reason to suppose that an alternative supplier of the service could not be found.
Prudential regulation
APX’s credit arrangementsFor trades on the day ahead market (electricity)
APX takes collateral to cover the risk that purchasers of power are unable to settle their account. The amount of collateral2 required is based on:
• an initial collateral of €10,000 that does not vary; and
• a varying amount, based on the sum of all purchases undertaken during the last 28 days.
Collateral requirements are monitored continuously with the aim of ensuring at least 100% cover for all outstanding positions3. APX has an internal process for ensuring that collateral based on the 28 days previous trading provides sufficient cover. For example, in the event a participant spends a period of time on the sell side of the market (where no collateral is required for day ahead trades), then switches to the buy side, it is possible that they would seek to take substantial buy positions on APX while only being required to post relatively small amounts of collateral. APX has in place an internal system to spot such a switch in trading patterns and to identify a need for increased collateral. Indeed, it is standard APX practice to complete a preliminary market clearing process and then to assess whether all participants have sufficient collateral in place to allow the resulting trades to stand.
APX will not allow a trade to take place day ahead unless sufficient collateral is posted. Participants are warned first when their position reaches 80% of the posted collateral, again at 90% and then at 100% cover participants are prohibited from conducting further trade on the market.
Endex trades delivered through APX (electricity)
APX’s standard practice, of not allowing a trade to proceed unless at least 100% cover is provided, also applies to trades arriving from Endex via LCH Clearnet. As with day ahead trades, the party on the purchase side of the agreement must have surplus collateral in place to cover the entire value of the proposed contract. In addition, since there is some danger that during the two business days between trades being transferred to APX and finally being notified to TenneT the selling party might become insolvent, APX also requires collateral from the seller. The seller is required to post sufficient collateral to allow APX to trade out of any position that would result from a financial failure on the part of the seller. We have not investigated the details of how this sum is calculated as the size of the exposure is likely to be very small. This is because the risk of default is small in
2 The arrangements described here primarily cover collateral arrangements. Credit can also be
provided through bank guarantees. A number of traders on the APX provide cover for their positions primarily through bank guarantees rather than posing collaterals. Bank guarantees would not become the property of APX in the event of a default by APX.
3 APX has weekly settlement, limiting the potential size of positions. While this is a relatively long
Prudential regulation
any 2 day period and because APX’s exposure is limited to the movement in prices in those 2 days, not to the entire value of the position.
For trades on APXGas
The Transfer Title Facility (TTF) hub operated by APX is not a single shot daily auction, like the day ahead power exchange. Instead it operates on the basis of continuous trading. This makes it more straightforward to calculate the size of each participant’s outstanding position and monitor whether collateral is sufficient. Buy positions must be covered by collateral totalling 100% of the position value. All sell positions must be covered by collateral totalling 1.25 their value.
APX requires that participants have collateral sufficient to cover at least 100% of their positions, as described above. Should a participant have insufficient collateral to cover its outstanding position, it is not permitted to extend its position until additional collateral has been posted. The exposure arising from each player’s position is updated in real time and monitored continuously. Participants automatically receive an initial warning when its total open position exceeds 80% of posted collateral, a second warning when this level reaches 90% and then loses the ability to trade further at 100%.
Ring fencing of collateral arrangements
We understand that credit arrangements for parties trading across more than one of APX’s platforms cannot be combined, i.e. collateral must be posted to cover all outstanding positions on all exchanges. These arrangements should help to manage the concern that an unforeseen event outside the Netherlands might cause a financial failure for APX as a whole. Of course, this depends on credit arrangements on each exchange being suitably robust.
Additional monitoring of participants
In addition to monitoring the level of posted collateral compared to the exposure arising from open positions on a continuous basis, APX also monitors the financial health of its participants. This is done by monitoring the opinions of ratings agencies and also the stock price for listed companies. Where a company moves towards a position where insolvency becomes a greater risk4, APX will consider requiring even higher levels of collateral. This approach was effective in dealing with the financial failure of Enron. Instead of facing a potential shortfall as a result of default by Enron, APX held a surplus of collateral. Monitoring of market participants is particularly relevant during periods where price spikes are occurring on the APX, which could potentially lead to large exposures and a large collateral requirement.
4 The APX does not have a formal approach to assessing whether a party is moving towards a
Prudential regulation
Views expressed regarding the robustness of APX’s credit arrangements
All parties we consulted expressed a high degree of confidence in APX’s collateral arrangements, which reflects the view that APX has of its own arrangements.
TenneT also expressed the view that, as sole parent of APX, it was very happy with the credit arrangements in place and had a high degree of faith in their robustness. However, Tennet does not formally offer any guarantee which goes beyond its share capital obligations.
In addition, TenneT asks its auditors5 to provide it with an assessment of APX’s systems, including in particular the credit arrangements in place at APX. It asks its auditors to report any potential weakness and highlight priority action. TenneT undertakes this scrutiny as part of its role as sole shareholder in APX.
Quantification of credit arrangements
We asked APX to provide some illustrative figures regarding typical open positions and the level of collateral held.
We were told that:
• average daily trade on the exchange was typically somewhere between 40 and 50 GWh;
• typical average prices on the exchange were in the region €30-50/MWh; and
• together these facts imply that the typical daily size of the position taken by APX (and equivalently the sum of exposures of all selling parties) is approximately €2.5mn (although the self dealing arising form mandated trading related to interconnectors could reduce this).
As a consequence of this, exposure in a typical week will therefore be in the region of €17.5mn. In contrast, we understand that APX will typically hold, at any one time, a total sum ranging between €70-€100mn in collateral.
We also asked APX to provide information on the scale of trades arriving from Endex for delivery through APX. APX indicated that positions are typically small in relation to trade on the day ahead market with positions of APX typically ranging from 5-50 MW per day.
Summary
In summary, there does not appear to be an obvious concern regarding the financial robustness of APX. In common with the participants that we consulted we believe that, on the basis of the description provided, there is no evidence to suggest that APX’s arrangements are materially flawed.
5 We have asked TenneT whether it would be possible for us to see a copy of such a report. At the
Prudential regulation
Potential impropriety at APXThe above discussion has focussed on the effect that a failure by a participant would have on the exchange and other participants. It is also appropriate to consider what effect impropriety at APX could have on participants.
We understand that collateral collected from participants is not ring fenced in client accounts, and hence could be accessed by APX without proof of the default that the collateral is designed to cover.
In relation to risks prior to resolution of the banking issue, we understand that TenneT uses independent auditors to assess risks in APX although we have not received any copy of their report at the time of writing. We also note that the sums involved are unlikely to be very large in relation to the size of participants.
4.1.3 Nomination failure
One important role performed by APX is to nominate revised contract positions arising from trade on the APX on behalf of parties trading on the exchange. Here we explore the possibility that APX might fail to nominate, or make erroneous nominations on behalf of market participants.
There are two key concerns regarding nomination failure:
• Could a nomination failure jeopardise system security?
• Could a nomination failure create a significant exposure to imbalance charges?
Potential threat to system security
We have discussed hypothetical nomination failures with TenneT and asked them to consider how a nomination error might inhibit their ability to balance the system.
TenneT receives nominations from both parties to a trade, before 12.00. Therefore any single trade on APX is reported by both APX and also by the participant. This provides an immediate point at which to cross check nominations by APX.
In addition, since APX is merely acting as a central counterparty to trades, it must follow that its nominations sum to zero. Again, this provides an immediate cross check.
In the event that there is any discrepancy between the nominations made by a participant and APX, TenneT will seek immediate clarification from both parties. Ultimately, TenneT has emergency procedures in place that will allow it to ignore any erroneous nominations from APX and accept nominations only from the participants themselves.
Prudential regulation
As a result, there would appear to be no concerns regarding the ability of TenneT to balance the system in the event of a nomination failure.
Electrabel confirmed the position held by TenneT. The only situation in which they could conceive of a nomination error causing problems with security of supply would be if there was a failure in TenneT’s systems. However, this eventuality is already adequately covered by TenneT’s system operator licence obligations and put into force in the relevant technical codes and rule books (see
www.tennet.org).
The nomination proces for APX Gas NL differs from the above. GTS introduced a system of Single Sided Nominations for transactions concluded on the exchange. Single Sided Nomination means that APX nominates on behalf of itself and the participant. Hence, participants do not send matching nominations. The nominations sent by APX are directly matched and settled. As a result, participants cannot change nominations made by APX. GTS sends the participant a confirmation of the nomination made by APX. If it appears that APX nominated wrongly (and we understand that this has not happened to date), APX shall indemnify the participant against any loss.
The differences between the nomination systems are due to the differences in the markets operated by and the systems used by APX Spotmarket and APX Gas NL. APX Spotmarket is a day-ahead auction while APX Gas NL operates a Within Day and Day Ahead Market using a system of continuous matching.
Impact on market participants
Most participants we talked to did not perceive a significant risk to themselves from notification error, since the checks described above (required by TenneT to ensure system security) provide so many cross checks. However, we did ask participants to consider the possible consequence of a false notification that was not noticed by these cross checks.
Nuon indicated that parties, of course, also check carefully information that they receive from APX against their own records. For this reason they believe that it is highly unlikely that any sort of error could remain undetected.
Prudential regulation
to conceive that a mistake of this magnitude could be made and remain undetected prior to dispatch in any event.
Summary
In conclusion, it would appear that TenneT’s system of cross checking nominations almost excludes completely the risk that a nomination error by APX might pose a threat to security of supply or create a substantial financial exposure. In addition, cross-checks made by participants reduce further the likelihood of a notification error remaining undetected. Should an error not be caught, participants indicated that they were confident that any financial exposure that results would be unwound during the imbalance settlement process.
4.2 SUMMARY ON PRUDENTIAL REGULATION
It is not obvious that there is a compelling need for prudential regulation:
• Credit arrangements are such that participant default is very unlikely to lead to financial failure of APX;
• Neither financial nor operating failure of APX is likely to cause any of the participants to lose much money;
• All participants appear to be substantial companies who understand the business they are in; and
• Tennet does not rely on APX in order to fulfil its system security obligations and a failure of APX will have no effect on system security.
Market monitoring
5 Market monitoring
The principal objective of regulation in the form of market monitoring would be to detect possible abuse of market power or any attempt to mislead other market participants by giving false information to the market.
In this regard it is important to note that APX is only offering a day ahead auction for gas and electricity in the Netherlands. It therefore follows that certain forms of market manipulation relevant to a continuous trading environment are not pertinent here.
5.1 GENERIC PRACTICE
Exchanges in the Netherlands are, at present, often the first line of defence against market manipulation and the abuse of market power. As noted in Section 2, this is mirrored in the UK where Recognised Investment Exchanges are treated as the first line regulators of behaviour in their respective markets. While APX Gas in the UK is exempted from prudential regulation, it was required to include a number of clauses to encourage proper conduct on the exchange. These clauses were introduced in order to help ensure a successful launch for the platform.
We understand that in The Netherlands changes to the legislation will shortly make the AFM the first line regulators of participant conduct, rather than the exchange.
5.2 CURRENT MONITORING UNDERTAKEN BY APX
At present, APX plays a small role in market monitoring.
We understand that if APX regards bids as unusual (e.g. negative prices, large volumes), it will contact the market participant to query those bids.
APX is also committed to ensuring that its rules are clear, transparent and enforced. Its rule book, which is approved by the Ministry6, effectively forms a contract between itself and trading participants.
APX’s monitoring of bids submitted by participants is aimed more at detecting errors by participants, rather than identifying any possible market manipulation. Nuon reported that they welcome this additional scrutiny. Nuon added that infrequently (perhaps 1-2 times a year) this check on bids by APX identifies an error prior to market clearing.
APX does not believe that it can reasonably perform the task of monitoring abuse of market power.
6 This approval does not extend to a full and detailed review of the rule books, but rather an arms
Market monitoring
5.3 THE NEED FOR MARKET MONITORING
It is beyond the scope of this assignment to estimate the extent to which there is market power in the Dutch electricity sector. Our experience suggests that, with the current structure and import constraints, it is quite likely that one or more players has at least some ability to manipulate prices in all wholesale electricity markets (OTC, APX and balancing).
With regard to APX, some element of self-policing exists in so far as any abuse by some participants at the expense of others would lead to the others not being prepared to trade on the exchange. However, we do not regard this as a sufficient control.
Overall, this suggests that there is a need for monitoring. However, monitoring wholesale markets and detecting abuse is a complex and difficult task. Market manipulation might be found in any of the places in which power is traded. Since APX is just one of many places in which power can be traded, it might not be straightforward to detect market manipulation on the basis of data from APX alone.
5.4 WHO SHOULD BE RESPONSIBLE FOR MARKET
MONITORING?
As indicated above the potential for abusive behaviour extends beyond the narrow confines of APX and cannot be addressed by APX rules alone, even if it were practicable for APX to have and to enforce such rules.
Any checks on market abuse require an ability to collect cost and other confidential information from participants, a task APX has no legal powers to perform.
We therefore believe that regulation of market behaviour needs to address the wider market and should be the combined responsibility of DTe and the NMa. Clearly, in doing this DTe should have the cooperation of APX and if it does not have adequate authority currently to request relevant data from APX, as and when it deems it to be necessary, DTe should be given reasonable powers to require such data.
5.5 VIEWS OF PARTICIPANTS
The general view of participants was that they would not welcome an enhanced role for APX in monitoring market behaviour. Electrabel indicated that they regard APX as their trading partner and as such it would be inappropriate for APX to scrutinise their activities. Similar views were expressed by both Nuon and Essent.
Market monitoring
it provides data to DTe. Participants would be less comfortable with an arrangement where DTe received regular or routine reports. Ultimately, DTe could pursue the authority to request data on a regular basis from APX should it so desire, but this would be at the expense of some good will from the sector..
5.6 SUMMARY
At present APX plays a minor role in supervising the market, focussed more on identifying bids made in error into the day ahead market. This role is valued by market participants and should continue.
It is difficult to envisage how APX could expand its role to be more active in monitoring the electricity market for potential abuse. Potentially abusive behaviour is difficult to identify and doing so inevitably involves an element of judgement. In areas where one must exercise judgement, it is typically better for such judgement to be exercised by a public body, rather than a commercial entity. More importantly such behaviour will potentially manifest itself in all places where power is traded, not just in the APX. Since APX will only have its own data available to it and lacks the authority to request data from other sources, it is difficult to see how its role can be expanded.
Economic regulation
6 Economic regulation
As noted in Section 2, there could in principle be a case for economic regulation of APX if it has a monopoly or dominant position in the market for the service that it provides.
In this regard, there are two causes for potential concern:
• First, exchanges generally have monopoly characteristics. Not only are marginal costs of accommodating extra trade are much lower than average costs but increased liquidity also means that participants receive a superior product.
• Secondly, APX has an explicit monopoly related to the day ahead release of capacity on Dutch international interconnectors.
We explore both of these in more detail below.
6.1 NATURAL (LOCAL) MONOPOLY
One can observe that in most countries, there is now a single power exchange in operation. There are two reasons why power exchanges (indeed exchanges in general) tend to have no active competitors.
Firstly, exchanges typically charge fees that have a substantial fixed element, rather than being solely variable with volume. Thus, as volume increases on an exchange, the effective charge per unit decreases. Larger exchanges can typically offer lower charges to customers and therefore have an advantage over smaller exchanges. Over time, one would expect volume to decrease on exchanges that are already small, as their charges become progressively less and less competitive in relation to larger competitors. The logical conclusion of this analysis is that, eventually, all market participants will migrate to a single trading venue.
Secondly, one of the factors that enhances the value of an exchange to a participant is a higher level of liquidity. More liquid exchanges are better places for participants to trade, as they are more likely to have prices that are reflective of the “true” market price and are better able to cope with larger trades that might move shallower markets substantially. As a result, over time one would expect larger exchanges to attract more customers. Eventually, one would expect all customers to migrate to the largest exchange.
While this analysis suggests that the equilibrium outcome is a single exchange, this does not necessarily imply that there is no competitive restraint on power exchange charges. If APX fees were very high indeed, it would be quite possible for a coordinated action by large market participants to establish a new exchange to bypass APX.
Economic regulation
One might therefore reasonably decide that, while there is no observable competitor to an existing exchange, it does face potential competition.
6.2 ENFORCED TRADE OF DAY AHEAD
INTERCONNECTOR CAPACITY ON THE APX
Dutch law requires that those who purchase import capacity in TenneT’s day ahead auction must bid this capacity in the form of energy bids into APX.
We understand that the argument for enforced bidding of energy over inter-connector capacity is that it increases liquidity in the exchange and helps to ensure that inter-connector capacity is not withheld for market power reasons. In extremis, one might imagine APX volumes reducing to the level of enforced interconnector trades. While we understand that at present, trade on APX is well in excess of levels consistent with enforced trade alone, we believe that there may still be cause for concern. Quantifying the extent to which volumes exceed required levels is not conceptually straightforward (since bids into the APX are not flagged to indicate whether they are associated with interconnector capacity). However, a report prepared by McKinsey indicates that 70% of APX’s volume arises as a result of enforced interconnector trade. Without access to detailed APX data we have no way of verifying this estimate.
While APX may be using funds from a monopoly business to fund investment in other exchanges, we do not believe that this represents a distortion of competition per se. However, APX’s move to unify its technology allowing traders to access all its exchanges through one platform could represent leverage from a position of monopoly to gain a competitive advantage in an otherwise competitive field. However, there is clearly a potential objective justification for this development.
Finally, we note that the plans for cooperation between APX, BelPex and Powernext, with the implementation of market splitting arrangements, may alter a part of the context, but still leaves essentially the same issue as market splitting also involves conferring monopoly rights on the relevant power exhange(s). Given the objections raised by market participants regarding enforced interconnector trades, DTe might wish to review this policy in order to identify whether it is meeting its stated objectives. Such a review might identify alternative arrangements that remove the monopoly rights bestowed on APX while ensuring that interconnector capacity is still allocated efficiently and cannot be withheld.
6.3 APX FEES VERSUS THOSE OF OTHER PXs
It is not appropriate within the scope of this study to attempt to establish whether there in fact any abuse of APX’s de facto/de jure monopoly. However, we thought it would be useful to compare APX’s fees with those of other power exchanges in order to have at least some pointer as to whether there was a real problem.
Economic regulation
0.0 0.5 1.0 1.5 2.0 2.5 3.0 1.0 10.0 100.0Average traded volume (MW)
A ver age f ee (€ /M Wh) APX Powernext EEX EXAA 0.33€/MWh 18.0MW 0.11€/MWh 37.0MW
Figure 2: Comparison of effective fees on different power exchanges.
Note: Effective fees combine all fees faced by participants, including annual fixed charges and volume related charges.
Source: Frontier Economics
APX’s fees are higher than average across the whole range of trading volume. For higher volumes of trade, APX is the most expensive of the exchanges examined. We stress that we do not regard this as evidence of abuse and there could well be legitimate reasons contributing to this position.
All the participants we spoke to noted APX’s high fees. However, participants also indicated that while APX’s fees were high, they did not regard an investigation into their fees as a policy priority.
We understand that APX is the only exchange in Europe that is profitable at present. This means that fees higher than those of other exchanges might still only represent reasonable charges rather than the extraction of monopoly rent.
6.4 APPROACHES TO REGULATION
To the extent that the de jure monopoly is the problem, the first best arrangement would be to remove the de jure monopoly, especially as we have seen no evidence to suggest that it achieves either of its intended policy goals.
Economic regulation
• Ex ante regulation, setting prices and constraining behaviour; or
• Ex post regulation, essentially through the application of existing competition law.
In our view the cost of APX’s fees are such a small part of the total value chain that it would be excessive to introduce the weight of ex ante regulation. The normal application of competition law, applied proactively in review or in response to any complaints by participants or rival exchanges would be both sufficient and proportionate to the scale of the potential problem.
6.5 SUMMARY
APX has both a de facto monopoly of Dutch exchange based day ahead electricity trade and a de jure monopoly of trade through the day ahead release of import inter-connector capacity.
Furthermore, APX’s fees appear prima facia to be high in comparison to comparable exchanges.
Annexe 1: Additional observations on risks
Annexe 1: Additional observations on risks
As we pointed out it Section 2, it is not the current performance of APX which should really determine the appropriate regulatory framework but a more generic assessment of impact and risk.Nevertheless, for the sake of completeness we have recorded the following observations:
• Governance We believe that the senior APX staff with whom we have
had contact are very knowledgeable in the field and while we have not attempted to carry out any formal checks we have not heard anyone impune their trustworthiness and we know of no reason why this should be doubted. TenneT has informed us that in making senior appointments it carries out the kind of due diligence that one might reasonably expect. We have been asked specifically whether Tennet’s ownership constitutes a conflict of interest. With one caveat we do not believe that it does. TenneT is required to remain neutral and impartial with respect to all participants and this is desirable from the perspective of the power exchange. Our caveat concerns the possibility that TenneT may use its transmission monopoly to lever a greater role than it could otherwise justify in a competitive activity, i.e. that APX would be allowed to engage in activities from which TenneT would otherwise be prohibited. This concern is discussed in detail Section 6.
• Organisation - APX seems to have a reasonably clear and sensible
structure with a clear allocation of responsibilities. We note that, unlike at some other exchanges there is not as clear a distinction between operations and compliance surveillance as their might be. However, the incumbent head of operations seems to be extremely well versed in risk and compliance issues and therefore there is no major cause for concern.
• Systems - APX’s systems have a very good track record for reliability.
Furthermore, at least the key element (the auction mechanics) is now quite mature and therefore not subject to the additional risks that frequent change or rapid evolution would entail.
• Continuity - In general continuity seems to be adequately addressed, for
example with the use of back up servers. There does seem to be an issue that traders with leased lines would not have the same access to the back-up server (i.e. in the event of a primary server failure, these leased lines continue to try to access the primary server rather than communicating with the backup server) but we see no reason why they should not have the web access that others, including the exchange operators, use. The fact that it operates an auction, not continuous trade, also means that system performance is less critical. A half hour delay will cause little or no disruption.
• Accessibility – Accessibility is not such an issue with an auction rather
Annexe 1: Additional observations on risks
aware of any problems arising out of the differential speeds at which various participants can use the system.
• Insider trading - In common with many other power exchanges there
are no specific rules regarding insider trading. The issue of market monitoring is discussed in more depth in the next section.
The list of risks we analyse is drawn from the generic checklist that the AFM uses in its regulatory activities. We reproduce this check list below.
1. Governance risks
a. Expertise and trustworthiness of policy makers b. Monitoring of trading platform
2. Organisational risks a. AO/IC
b. Chain of command c. Clarity of responsibility
d. Transparent organisational structures e. Risk management
f. Conflicts of interest g. Human resources 3. System risks
a. Operational data processes b. Control of modifications
c. Control of incidents and problems d. Outsourcing
e. Security safeguards f. Continuity safeguards
4. Clearing, settlement and fulfilment risks 5. Continuity risks
a. Financial safeguards and collateral b. Back up facilities
6. Risks concerning non-conformity with orderly trading a. Prevention of anti-competitive behaviour b. Non-discrimination
c. Black trades, margin, volatility breaks 7. Obstruction of public transparency
Annexe 1: Additional observations on risks
a. Parties b. Products 9. Risk monitoring
a. Compliance with internal rules b. Market supervision
Annexe 2: List of organisations/people consulted
Annexe 2: List of organisations/people
consulted
In the course of our work on this assignment we have held meetings and conference calls with a wide range of individuals. We are grateful for the time that they took to discuss these issues with us.
POWER EXCHANGES
APX
Bert den Ouden (CEO) Pieter Verberne (COO)
Albert Vreeman (Head of Operations and Market Surveillance) Yvonne Neef (Public Affairs officer)
Endex
Stephan L.M. Follender Grossfeld (CEO) Dirk J. van Vuuren (COO)
EEX
Stephan Niessen (Market Surveillance Office)
Powernext
Philippe Redaelli
OTHER GOVERNMENTAL ORGANISATIONS
AFM
Fridjof Bron (Markets and Exchanges)
Sander R. van Leijenhorst (Clearing, Settlement, Depository and Payment systems)
DNB
Frans A. Rijkschroeff (Payments policy division)
