The impact of regulatory changes on trading activities

Platts European Gas Summit

September 29 – 30, 2014

Kempinski Hotel Bristol • Berlin, Germany

www.chappuishalder.com Twitter : @ch_retail

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A significant number of new regulations is about to transform the way of conducting business on gas markets

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This presentation aims at giving you an overview on challenges lying ahead, how they could impact your daily business and what are your options to address those constraints, turning them into competitive advantage.

Transaction oriented rules

EMIR (European Market Infrastructure Regulation)

MiFID II / MiFIR (Markets in Financial Instruments Directive and Regulations of derivatives)

REMIT (Regulation Energy Market Integrity Transparency)

Gas market oriented rules

3rd energy package framework guidelines (European commission) and network codes (Balancing, capacity allocation mechanism, congestion management procedure, tariff, interoperability, investment,….)

European or national security measures and rules (storage obligations for end consumers, etc.)

Harmonization & integration of a single

European Market

Main objectives

Reach efficient, transparent & properly

regulated markets (financial and commodity

instruments)

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After a long period of preparation and discussion, new balancing rules have been published earlier this year: they must be applied by October 1st 2015

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October 1 2015 Application of the balancing code by TSOs : any delays should be justified to ACER and a reporting done by relevant regulators.

2013 - 2015 Implementation of interim measure : according to each member state or TSO (a progressive reduction of balancing tolerances and evolution towards target marginal price)

April 2014 Publication by the EC (and entry into force )of the final gas balancing network code

October 2012 First draft of balancing Codes by ACER reviewed and worked on by ENTSOG and EC

October 2011 Framework guidelines set by ACER and approved by the EC

September 2007 Adoption of 3rd package of legislative energy proposals

Today

Global timeline

You probably have only one year left to ensure compliance with new balancing rules!

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New balancing rules introduce systematic imbalance penalties

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Shipper 1 Shipper 2

Gas Market

Exchange Platform

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Shipper 1, which is originally balanced, sells X MWh to Shipper 2 that presents a –X MWh imbalance.

TSO buys X MWh on the exchange to make up for global system deficit of –X MWh

At the end of the day TSO bills Shipper 1 for their imbalance (in our case TSO sells X MWh at marginal price)

The financial transactions made by TSO are stored in an imbalance account (in our example, a X MWh volume x price difference bw. exchange and marginal price)

TSO Other shippers 2

imbalanced balanced

balanced imbalanced

Simplified billing – example of a shipper in gas deficit at the end of the day

Every kW/h imbalance will be made up for by the TSOs, per balancing horizon (hourly / daily):

• excess volumes are sold to TSO

• deficit volumes are sold to the shipper

These buy or sell operations shall be executed by the TSOs at the most unfavourable price for the shipper between:

• the highest or lowest price of TSO interventions on market exchanges,

• the Daily Average Price (DAP) + an adjustment of maximum +/-10%

At the end of a defined period, say a month, the financial result recorded in the imbalance account is re-distributed by the TSO according to an allocation key:

• if account presents a positive balance, profit is redistributed to all shippers

• if account presents a negative amount, loss is billed to all shippers

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Imbalance account

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Is it possible to limit the impact of ‘imbalance’ penalties for a shipper?

Financial impact of imbalance penalties depends on factors that are not at shippers’ hand, such as the TSO account global balance or the selected allocation rules (subscribed capacity vs. delivered volumes).

Nevertheless, each player can take actions to limit their individual contribution to global imbalance account by playing on two levers:

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Given the combination of internal and collective influencing factors it is difficult to globally assess impacts of this change. One thing is sure, the more efficient your balancing, the lower the penalties.

Volume/ Frequency of

imbalance

• balancing might be complicated by external or environmental factors such as weather, price & spark spread levels etc. that are not at shippers’ hand….

• …but efficient forecasting processes and Intra-day (ID) / Day ahead (DA) strategies can significantly reduce volume & frequency of imbalance

Marginal price

• the closer to daily average prices your orders are, the lower the impact of financial penalties (marginal price of TSO interventions) might be

• lobbying with national regulators could also help to limit, at the lowest possible level (0%), the adjustment added to DAP to calculate marginal price

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Marketing

Key success factors for actually limiting the impact of financial penalties

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Under new rules, TSOs* shall have to provide more frequent, precise and quality consumption data : • day ahead forecasting on various consumer segments • daily or intraday consumption measurements

Regulators can take incentives to secure qualitative and timely

delivery of this data to Gas shippers.

Efficient use of new data from TSOs

Enhanced cooperation between teams

An efficient articulation between procurement, marketing, trading and balancing teams is crucial to ensure that: • long and medium term strategies

are optimized • short-term (ID / DA) needs are

limited to an optimum level

* Both either done by DSO (relayed by TSOs) or directly by TSOs

Procu rement

A balancing framework in line with sourcing mix

More important short term supply can mean greater exposure in volumes and marginal price if balancing actions are not managed efficiently

Long Medium Short

Medium Short

100% 0%

Optimization of flexibility sources

All flexibility sources, both on supply & demand sides, should be used to optimize marginal balancing: • on the supply side: markets (OTC and Exchanges), storages, LNG

terminals according to their actionability / reactivity and their economic value

• on the consumption side, postpone demand (probably less actionable): CCGT, energy curtailment (consumption is shifted in time)

Forecasts

Balancing Trading

Those 4 KSF have in common to require a large volume of data (flowing in and out) and advanced analytics engineering

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New balancing rules are only one of the numerous regulatory evolutions on Gas markets

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New network codes

EMIR, REMIT and MiFID II, to only name a few, aim at establishing efficient, transparent and regulated markets…

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EMIR REMIT MiFID II / MiFIR

Regulator in charge ESMA* ACER* ESMA

Date of implementation

Launch : 16 August 2012 For energy players : 1st January 2014

Launch : 20 January 2012 Trade reporting : allegedly end 2014

Applicable : January 2017

Intent

Improve transparency of the over-the-counter (OTC) derivatives market

Prevent from market abuse manipulation and the use of inside information on wholesale energy markets

Make EU financial markets more transparent and more efficient Improve investor protection Strengthen supervision

Trade reporting measures

All derivative transactions shall be reported, either executed on an exchange or traded OTC

Daily reporting

Physical gas & power trades and orders not included under EMIR/ MIFID II/ MIFIR

Data relating to the network/physical assets

Reporting at each stage of the life cycle (+ pre-trade)

All financial products (including commodity derivatives listed on exchanges or not (OTC))

Real-Time reporting

Other measures

Clearing : forced clearing of OTC transactions above a certain threshold 3bn € of non-hedging commodity derivatives notional value

Risk Management : streamline operational processes on OTC deals

Inside information : disclosing inside information via website and sending web feeds to ACER

Intragroup contracts : are reportable upon requests

Delayed reporting obligations: for non-standard contracts 1 year after implementation act entry into force

Enhanced scope : extension in terms of instruments and firms covered

Trade restrictions : position limits on the trading of commodity derivatives

Additional rules on trade execution, investor protection and governance

A B C

*ESMA : European Securities and Markets Authority **ACER : The Agency for Cooperation of Energy Regulators

… like the creation of trade reports and strengthening of various other risk mitigation measures

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So much data to handle, so many reports to produce in order to ensure regulatory compliance…

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What are the keys to efficient compliance?

Assess compliance with current rules

Anticipate forthcoming regulations

Big data

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How can Big Data help you face this new challenge?

As previously seen, regulatory compliance requires, among other things:

• to be able to handle huge volumes of data, flowing in and out throughout the organization

• to run advanced analytics engine to properly process and report added-value information

In this context, designing a Big Data strategy is a must-have to secure regulatory compliance, with 2 major attention points:

• a robust infrastructure with continuous upgrade in hard- and software to handle increasing volumes

• state of the art analytics engine to face increasing complexity

But Big Data goes much beyond sole regulatory compliance …

Quality

Depth

Exhausti-veness

Centrali-sation

« Real time » data

« Data storage »

Exogen-ous data

Big Data

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It can take industrialization of data processing to a whole other level…

Pro

cess

-ori

ente

d is

sue

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Advanced risk and P&L indicators, income attribution, VaR back-testing

On-demand data mining in Risk & P&L indicators

To support KYC, AML, rogue trading and more generally anti-fraud process, detection of abnormal variations (exposures – P&L – risk indicators)

Secure trade capture through identification of duplicates or ‘abnormal’ data

Data Tagging

Watch Tower

Financial Data Management

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…and more importantly, Big Data can also help you identify and select new business opportunities B

usi

ne

ss-o

rie

nte

d is

sue

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Pre-trade decision support Trading Analytics Choose between locational/ geographical

spreads, time spreads on storage etc.

Automatically executed quantitative processes or High-Frequency-Trading

Systematic Trading Take advantage of possible arbitrage

situations that may arise and being quick to react

Real-time optimization of day-ahead and intra-day position

Price risk hedging

Hedging Strategy Design optimal hedging strategies (physical

or financial) over different time horizons

Optimize client consumption and production forecasts (gas to power plants)

Forecasting Optimize your sourcing mix Optimize your portfolio of physical assets

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A good time to seize the opportunity to be more reactive to a changing environment

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Optimize your organization, through the technology, people & process lenses, and develop a better view on real time exposures, positions and opportunities

Efficiently manage transition by factoring response to regulatory requirements, given considerable costs and change management effort at stake

Regulatory changes clearly offer an

opportunity to better steer the boat

Extract the useful information from data flowing in and include them into your strategic and operational decision-making processes

Ensure long-term regulatory compliance through scalable and flexible reporting framework

Big Data, a powerful lever for today’s and future competitiveness