EU energy rules to curb OTC trade, boost exchanges-consultant

Mon Oct 29, 2012 10:06am EDT

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* Transparency rules require spending on management, admin, IT

* Traders, customers may choose to migrate to established platforms

* Germany may see more concentration of trading activities

By Vera Eckert

FRANKFURT, Oct 29 (Reuters) - EU rules to toughen laws against market abuses in gas and power trading are likely to drive operators to exchanges and away from the bigger over-the-counter markets (OTC), energy and financial consultancy Baringa said on Monday.

"The intention of the new rules is to shrink the OTC market and make it more transparent and accountable," said Susanne Funke, head of regulatory affairs at the consultancy, on the sidelines of a conference.

"This means that OTC volumes will increasingly migrate to exchanges," she said, citing the exchanges' existing transparency functions and clearing provisions.

Experts say it is hard to gauge the size of OTC trading in Europe's power and gas markets, which have developed over the past decade in the wake of sector liberalisation.

But its scale dwarfs trade on official bourses.

OTC attracts 80 to 90 percent of all trades taking place because it has allowed participants to trade informally and to avoid bourses' fees.

OTC German electricity, the biggest power market in Europe which sets price benchmarks, is estimated at 5,000 terawatt hours (TWh) a year or five times actual consumption, officials of Paris energy bourse Epex Spot said at a briefing last week.

German OTC gas trading probably grew to over 2,000 TWh last year, which put it in third position in Europe after Britain and the Netherlands, according to a recent study.

The EU late last year drew up the new rules - called the Regulation on Energy Market Integrity and Transparency (Remit).

Currently, markets are in a phase-in period to introduce what they need for Remit to function in 2014 and beyond.

Utility firms will need more personnel and technology to comply with the new transparency rules which delegates heard could easily cost sector leaders millions of euros per year.

Thus, Remit will likely benefit exchanges such as power bourse EEX, because their reporting instruments are acceptable to the regulators and because they have established central clearing units.

This may make trading cheaper even if exchange fees have to be factored in, delegates said.

Germany has also built up two central gas trading hubs, NCG and Gas Pool.

In addition to trade details, utility companies must disclose the timing of power station outages or gas field maintenances and pipeline bottlenecks, as this is considered sensitive detail for pricing.

German companies that lead in volunteering information about market-sensitive disruption include E.ON, RWE and EnBW.

Many smaller firms - Germany has a landscape of hundreds of local utilities with or without wholesale market activities - were slow to integrate their trading with compliance management, said Maik Neubauer, partner at Baringa.

"That way, they could be vulnerable if they were confronted with any suspicions of wrongdoing," he said. (Editing by William Hardy)

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