The term wash trade refers to the act of a market participant entering into arrangements for the sale or purchase of a wholesale energy product, where there is no change in beneficial interests or market risk or where the beneficial interest or market risk is transferred between parties who are acting in concert or collusion.
The above definition is understood mutatis mutandis the same under the Market Abuse Regulation (Commission Delegated Regulation (EU) 2016/522 of 17 December 2015 supplementing Regulation (EU) No 596/2014 of the European Parliament and of the Council as regards an exemption for certain third countries public bodies and central banks, the indicators of market manipulation, the disclosure thresholds, the competent authority for notifications of delays, the permission for trading during closed periods and types of notifiable managers' transactions) as well as under the REMIT Regulation (Guidance Note 1/2017 on the application of Article 5 of REMIT on the prohibition of market manipulation, Wash Trades 1st Edition, of 19 June 2017, p. 4).
According to the ACER's Guidance Note 1/2017 on the application of Article 5 of REMIT on the prohibition of market manipulation, Wash Trades 1st Edition of 19 June 2017 an entity is considered to have a ‘beneficial interest’ in the arrangement for the sale or purchase of a wholesale energy product if it has the opportunity, directly or indirectly, to profit/loss or share any profit/loss derived from the arrangement for the sale or purchase of that wholesale energy product.
A transaction in wholesale energy products leads to no change in beneficial interests where it represents the same interests on both sides.
The following entities represent the same beneficial interest:
- the same legal or natural person; or
- a legal or natural person and its parent or related undertaking; or
- a legal or natural person and its controlled subsidiary; or
- a legal or natural person and a subsidiary that is controlled by the same parent; or
- different legal or natural persons that perform the transactions using accounts with common ownership.
For the above purposes the following definitions are used:
- ‘parent undertaking’ means a parent undertaking within the meaning of Articles 1 and 2 of the Seventh Council Directive 83/349/EEC of 13 June 1983 based on Article 54(3)(g) of the Treaty on consolidated accounts (OJ L 193, 18.7.1983, p. 1);
- ‘related undertaking’ means either a subsidiary or other undertaking in which a participation is held, or an undertaking linked with another undertaking by a relationship within the meaning of Article 12(1) of Directive 83/349/EEC.
The concept of control should be understood here as defined in competition law by Council Regulation (EC) No 139/2004 of 20 January 2004 on the control of concentrations between undertakings (the EC Merger Regulation).
According to the Securities and Exchange Commission General Rules and Regulations, Securities Exchange Act of 1934 (§ 240.16a1 Definition of Terms (a)(2)): ‘The term beneficial owner shall mean any person who, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, has or shares a direct or indirect pecuniary interest in the equity securities, subject to the following: (...)(i) The term pecuniary interest in any class of equity securities shall mean the opportunity, directly or indirectly, to profit or share in any profit derived from a transaction in the subject securities’.
Currently, taking into consideration the limited use of trustees in the arrangements for the sale or purchase of wholesale energy products, typically the same legal or natural person holds the ‘beneficial interest’ and the ‘beneficial ownership’.
Depending on the specificity of each case, wash trades considered to be manipulative will typically fall into one or both of the following categories of market manipulation:
- false/misleading signals,
- price positioning.
This is because:
a) wash trades give or are likely to give false or misleading signals to the market as to the supply, demand or price, and therefore fall under the category of market manipulation, or attempted market manipulation, through false/misleading signals according to Article 2(2)(a)i and Article 2(3)(a)i of REMIT;
b) wash trades may secure or attempt to secure the price of a wholesale product at an artificial level, and therefore fall under the category of market manipulation through price positioning according to Article 2(2)(a)ii and Article 2(3)(a)ii of REMIT.
Wash trades giving false/misleading signals
ACER underlines that an important element to keep in mind when assessing whether a wash trade meets the definition in Article 2(2)(a)(i) of REMIT is that it is sufficient that a false or misleading signal as to the supply of, or demand for, or the price of a wholesale energy product is likely to be given.
The likelihood that a certain behaviour would give false or misleading signals to the market has to be evaluated ex-post, taking into consideration the circumstances existing at the time when the suspicious transaction occurred.
Furthermore, it is to be noted that the definition of market manipulation in Article 2(2)(a)(i) of REMIT does not require the examination of the intent or the state of mind of the market participant(s) when executing the wash trade.
It is therefore - under this Article - not necessary to show that the market participant(s) knew that it was infringing REMIT.
The intent to manipulate the market will only have to be demonstrated to qualify a wash trade as attempted market manipulation, i.e. entering into transactions with the intention of giving false or misleading signals as defined in Article 2(3)(a)(i) of REMIT.
Wash trades as an element of price positioning
Article 2(2)(a)(ii) and Article 2(3)(a)(ii) of REMIT entail that either an artificial price level is actually secured (in that sense, the artificial price level must be secured by the market manipulation) or there is an attempt to secure the price at an artificial level (in that case, no actual effect on the price is required to conclude the potential REMIT breach).
Artificiality entails that the price should deviate from the price level absent any manipulation (i.e. the counterfactual price) irrespective of the size of the deviation.
ACER unequivocally concludes that for the qualification that the price is artificial, it is not necessary to examine whether it is abnormally high or low.
A price will be considered artificial if it does not correspond to the genuine intersection of demand and supply reflecting market fundamentals.
In the event prices are at an artificial level, the market participant’s conduct and its potential impacts on the market should be further assessed (existence of legitimate reasons, compliance with accepted market practices).
The price at which a wash trade is executed is therefore an important element when assessing such behaviour against the market manipulation prohibition in REMIT.
Persons Professionally Arranging Transaction (PPATs) are required by ACER to implement rules and procedures so as to mitigate the occurrence of wash trades that may be deemed as market manipulation under REMIT.
The use of their own IT systems to create these procedures seems critical.
The combination of either a pre-notification system or a transaction flagging system with the price tunnel and the correction measures outlined above is likely to reduce the likelihood of market manipulation using wash trades.
Commission Delegated Regulation (EU) 2016/522 of 17 December 2015 supplementing Regulation (EU) No 596/2014 of the European Parliament and of the Council as regards an exemption for certain third countries public bodies and central banks, the indicators of market manipulation, the disclosure thresholds, the competent authority for notifications of delays, the permission for trading during closed periods and types of notifiable managers' transactions