Persons professionally arranging transactions - PPAT (REMIT Definitions)
The non-binding interpretation of the European Agency for the Cooperation of Energy Regulators (ACER) and the EU National Regulatory Authorities (NRAs) regarding the concept of 'persons professionally arranging transactions' (PPATs) under Article 15 of the REMIT Regulation is laid down in the Guidance Note 1/2015 of 4 March 2015.
Role and obligatons of a PPAT
(ACER's REMIT Quaterly, Issue No. 1 / Q1 2015, p. 2/8)
"PPATs typically act as intermediaries that either enable or assist third parties (buyer or seller) in a way that directly brings about a particular wholesale energy transaction(s). They can also facilitate the entering into transactions in wholesale energy products by third parties. Under this role PPATs have a good understanding and overview of the market segment they operate in.
Taking into account their proximity to the market, PPATs qualify as potential informants should any suspicious transaction appear in the market segments they operate in. Thus the legislation (Article 15 of REMIT) puts an obligation on PPATs to notify the relevant NRA without delay if they reasonably suspect that a wholesale energy market transaction might breach the prohibitions on insider trading or market manipulation.
To fulfil their obligation to notify NRAs, Article 15 of REMIT imposes on PPATs the obligation to establish and maintain effective arrangements and procedures to identify breaches.
Such arrangements may involve setting up active software aided surveillance systems, passive process based mechanisms to detect and notify potential market abuses, as well as organisational mechanisms to avoid possible conflicts which may arise between commercial and compliance interests."
REMIT puts two obligations on persons professionally arranging transactions in wholesale energy products:
- to notify the NRA without further delay, when it reasonably suspects that a transaction might breach Articles 3 (prohibition of insider trading) or Article 5 (prohibition of market manipulation) of REMIT (Suspicious Transaction Report - STR); and
- to establish and maintain effective arrangements and procedures to identify breaches of Article 3 or 5 of REMIT (Article 15).
ACER underlines the need to distinguish different sources of the PPATs’ obligations: REMIT reporting obligations based on Article 8 on the one hand, and notifications as well as establishment and maintenance of effective arrangements and procedures based on Article 15 of REMIT on the other (because of different nature of these requirements, which are to be assessed according to the specific rules).
The assumption of a reasonable suspicion rests within the responsibility of the PPAT (ACER Guidance on the application of REMIT, p. 59).
Persons professionally arranging transactions are, in particular, organised market places and trade-matching systems, as well as other entities engaged in similar activities (see Article 8 (4)(d) of REMIT: '4. For the purposes of paragraph 1, information shall be provided by: (...) (d) an organised market, a trade-matching system or other person professionally arranging transactions').
It follows, the most common examples of PPATs will in practice be electricity and gas brokers and exchanges, including:
- MTFs and
When it comes to brokers acting as sleeves, the PPATs’ qualification depends on whether the broker taking part in the sleeve trades on behalf of other market participants (if he does so, he is a PPAT).
Although ACER does not mentioned this explicitly, the preceding remark may lead to the conclusion, the Distribution System Operators will not be considered persons professionally arranging transactions under REMIT, as long as they are not engaged in operating balancing markets (this is usually the TSOs' competence).
REMIT Article 15
Obligations of persons professionally arranging transactions
Any person professionally arranging transactions in wholesale energy products who reasonably suspects that a transaction might breach Article 3 or 5 shall notify the national regulatory authority without further delay.
Persons professionally arranging transactions in wholesale energy products shall establish and maintain effective arrangements and procedures to identify breaches of Article 3 or 5.
Under some circumstances the PPATs' definition include also gas hubs.
In that regard ACER said:
"Concerning gas hubs, the Agency considers that normally the TSO operates the gas hub, but it might be the case that gas hubs operate separately from the TSO.
At gas hubs transfer of title (ownership) takes places, which can be considered a transaction. Thus the person owning the gas hub can be considered as a person professionally arranging transactions according to Article 15 of REMIT.
It should be noted that the depth of data available to hubs varies on a hub-by-hub basis. Certain hubs will be unable to conduct surveillance (for example, a hub receiving highly aggregated data without price details), with market monitoring being conducted elsewhere (e.g. at an exchange)."
ACER's annual report on its activities under REMIT in 2014 (p. 47) refers to the following cases where the obligations of persons professionally arranging transactions were enforced.
In the course of a review of a case related to a potential market manipulation in the form of marking the close, the voice records between the trader and the broker that intermediated the orders and transactions unveiled that the broker was aware that the orders introduced were not reflecting the market fundamentals.
The Agency shared this evidence with the relevant NRA to verify the PPAT compliance with obligations under Article 15 of REMIT. Based on the evidence collected through an interview with the transaction intermediary, the NRA concluded that there was a potential breach of Article 15 of REMIT.
That time the NRA could not sanction, as no sanctioning powers were implemented in the relevant Member State (as defined in Article 18 of REMIT). Nevertheless the intermediary decided to internally develop training for the personnel to ensure full compliance with REMIT obligations.
When it comes to practical aspect, ACER received in 2018 over a hundred STRs from market participants, organised market places and other stakeholders (Consolidated Annual Activity Report - Year 2018, ACER, 14 June 2019, p. 13).
Considering, in turn, the ACER's own screening practice, ACER’s Consolidated Annual Activity Report for the Year 2018 of 14 June 2019 refers to the number of 80 million records of transactions, including orders to trade, per month, the Agency is collecting currently.
From this amount, the Agency’s automated screening identifies around 8-10,000 anomalous events (triggered alerts), i.e. instances which, while not necessarily in breach of the REMIT provisions, appear to require further attention.
According to said Report of 14 June 2019:
-given the limited resources of the Agency, both in terms of expert analysts and of funds for further developing the automated screening platform, the Agency is currently able to manually assess only a fraction of the identified anomalous events, in the order of 1000 per month;
- such an assessment results in around 70 notifications of anomalous events to national regulators each month.
PPAT characteristics pursuant to ACER's Guidance Note 1/2015
The term 'person professionally arranging transactions' includes three different elements that should be assessed independently in order to determine whether an entity is a PPAT or not. For an entity to be considered a PPAT it has to fulfil the following three cumulative criteria:
-person: means either natural or legal person;
- professionally: the literal analysis of the wording and the jurisprudence leads to the following interpretation: 'engaged in a specified activity as part of one's normal and regular paid occupation';
- arranging transactions is an activity that aims to: enable or assist third parties (buyer or seller) in a way that directly brings about a particular wholesale energy transaction(s) (i.e., has the direct effect that the transaction is concluded); or, provide a facility that facilitates the entering into transactions by third parties (buyer or seller) with a view to transactions in wholesale energy products. Simply providing the means by which parties to a transaction (or possible transaction) are able to communicate with each other is excluded from the concept of PPATs. For instance, persons such as Internet service providers, e-mail service providers, messaging providers or telecommunication providers are excluded from the concept of PPATs.
If a person makes arrangements that go beyond providing the means of communication, and adds value to what is provided, it will lose the benefit of this exclusion and shall be recognised as a PPAT.
Further ACER's considerations for the definition of PPAT concept:
- The main characteristic of a PPAT is its intermediary role, i.e. arranging transactions in wholesale energy products. Its legal form, ownership, the type of market it operates, the type of the wholesale energy contract, the number of parties it represents and whether it acts as a principal or as an agent are not relevant in order to determine whether an entity is a PPAT.
- REMIT places different obligations on PPATs and market participants. Therefore, it is necessary to establish whether that person is acting as a PPAT or as a market participant, in the particular case. Whereas a market participant enters into transactions involving a wholesale energy product, a PPAT arranges the transaction on the wholesale energy product. Nevertheless, the same entity may well qualify as a PPAT in one transaction and a market participant in another transaction. Also, there are situations where a person is both a market participant and a PPAT in the same transaction.
- The arranging activity can comprise the whole trade lifecycle or be restricted to one or more parts of it.
- Some transactions may involve the participation of several PPATs and others may not involve the participation of any PPAT.
According to the ACER the amount of resources dedicated to the PPATs’ market surveillance activity should be dependent on the size of the PPAT, nevertheless for each dimension the PPAT should be able to justify why its organisational setup is best suited for the tasks of the market surveillance team.
When it comes to the PPATs’ procedural requirements, the key ACER’s recommendations have been summarised in the table below.
|Human resources policy
In order to ensure an adequate level of quality, consistency and effectiveness of the market surveillance team work, there should be a human resource policy with specific requirements for the market surveillance staff that can contribute to establish and safeguard the independence and integrity of the team.
That policy can include the principles for the management of conflicts of interest (including the list of interests that need to be declared).
As part of the specific requirements for the market surveillance staff, the human resource policy should develop specific incentives which are based on the accomplishment of the market surveillance function and not correlated to financial/commercial achievements.
Market surveillance function must be endowed with the relevant skills and able to devote the required time and operate in a timely manner.
Implementation of appropriate segregation measures is required.
PPATs' procedural arrangements should be documented, including any changes or updates to them.
Documentation on the compliance of the PPAT with these procedural arrangements should also be elaborated.
Both kinds of documentation should be maintained for a period of at least five years.
Arrangements and procedures in place must entail the possibility to notify a potential breach which occurred in the past, where reasonable grounds of suspicion have arisen in the light of subsequent events or information (in such cases, the PPAT should be able to explain the delay between the day of occurrence of the anomalous event and the notification, according to the specific circumstances of the case, if requested to by the NRA).
|Market monitoring strategy||
In order to identify potential breaches of Articles 3 or 5 of REMIT (insider trading and market manipulation), the PPAT shall have a documented market monitoring strategy.
That strategy shall be designed based on a risk assessment.
The market monitoring strategy shall define thresholds for investigating alerts and include processes in place to identify potential breaches.
It should also prescribe some actions to be performed by the monitoring team to further assess the anomalous events.
The risk assessment shall include at least the identification of the different types of market abuse that may constitute Article 3 or 5 breaches and a graduation of the different forms of market abuse based on the expected risk of occurrence on the PPAT platform/operations.
The risk assessment and the market monitoring strategy must be revised regularly.
In particular, they must be revised when there is evidence that the current strategy is not comprehensive enough and some potential breach was not detected.
It must also be revised whenever relevant changes in the markets or in the market participants' behaviour take place.
The PPAT should be able to explain to the NRA, upon request, how it manages the alerts generated by the adopted system and why the adopted level of automation is appropriate for its business.
Human resources related procedures
The market surveillance team within each PPAT should be covered by the organisation's human resources policies and procedures, which should safeguard the independence and integrity of the market surveillance team members.
As part of the management of conflicts of interest, relevant employees should be required to declare potential interests that they may have in companies active in the wholesale energy markets, for example shareholdings or close family relationships.
Basic background checks should routinely be carried out at the commencement of employment, covering fraud and criminal record checks.
Due diligence should be applied when employing staff to work in the market surveillance team.
Appropriate training should be given to the market surveillance team on how to handle potential psychological harassment from brokers or traders within the PPAT and safeguards should be in place to manage this.
Members of the market surveillance team should be given appropriate training and this training should be delivered regularly according to the training map and should be updated in line with any guidance offered by regulatory authorities.
Training on REMIT should not be restricted to the members of the market surveillance team and should be offered across the organisation where appropriate.
|Communication related procedures||
Internal policies should cover the use of data and information by the market surveillance team and should allow its members to access any information or data which may help to explain the anomalous event under investigation.
The market surveillance team should have and follow a policy setting the process for approaching members/customers and all communication in relation to an anomalous event/potential breach should be noted or recorded on file.
As a general rule, once an STR has been submitted to an NRA, the market surveillance team should not make contact with the member/customer in relation to that incident unless agreed with the NRA.
Furthermore, under no circumstance should the market surveillance team make the member/customer aware that an STR has been submitted to the NRA.
In exceptional circumstances it may be necessary for the market surveillance team or senior management at the PPAT to contact the member/customer reported in a STR and they may enforce a sanction such as suspension of trading.
By its nature, this form of contact may tip the member/customer off that an investigation is being conducted, but it may be necessary in order to avoid further harm to the market.
If this is to happen, engagement with the relevant NRA from the start is important.
In circumstances where contacts between market surveillance teams of different PPATs are envisaged, for example in potential cases of cross-market manipulation, internal policies should detail procedures accordingly.
Guidelines relating to what can be discussed between market surveillance teams should be clearly defined in the internal policies and all contact and decisions should be recorded so that if an STR is raised, the relevant NRA is aware of the work that has already been carried out and if it is not this can be justified.
The communication policy in place should detail how staff members outside of the market surveillance function identify and/or escalate suspicions of market abuse.
|Traceability related procedures||
All work carried out by the market surveillance team should be recorded whether in a dedicated case management system, a shared folder or in traceable email records, for a period of at least five years.
It is advisable to have a clear written policy on monitoring procedures which details the processes that the market surveillance team should follow when looking into an anomalous event.
The full PPATs' decision-making process related to the qualification of an anomalous event as a potential breach (from the initial alert to the STR being raised) should be traceable and key decision points should be recorded.
All transaction(s)/order(s)/behaviour(s), including related updates to them, particularly relating to an anomalous event/potential breach should be stored by the PPAT for a defined amount of time.
The relevant NRA may place further retention requirements on the PPAT where appropriate.
NRAs should request PPATs to maintain for a period of at least five years the information documenting the analysis carried out with regard to an anomalous event/potential breach which have been examined and the reasons as to whether or not submitting a STR.
This information shall be provided to the NRA upon request.
All processes and decisions made by the market surveillance team should also be recorded.
The PPAT should conduct internal audits or hire an external auditor to review their processes at least on an annual basis and in certain circumstances an NRA may wish to conduct a visit or audit.