ankara, 25-27 september 2019 - epgprojesi.com · studies & gratuation universität freiburg...

25-27 September 2019 BOTAS Workshop, Ankara25-27 September 2019 BOTAS Workshop, Ankara

Energy Market Development Risk Management Training for

BOTAS

Ankara, 25-27 September 2019

25-27 September 2019 BOTAS Workshop, Ankara

Correggio ConsultingBoutique consulting company set up in 2006 by Jan Haizmann

after 15 years of legal and commercial practice

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Workshop leader: Jan Haizmann

Academia

Studies & Gratuation Universität Freiburg (Germany)1st State Exam in Law (1990)In Munich 2nd State Exam in Law (Ass.iur 1994), Post-Grad: Brussels University (Dr. iur. - 1998) und London University (LL.M. 1991)Admission to The German Bar, OLG München 1994

Career

1994-1999 Associate Lawyer Graf von Westphalen, Freiburg & Brussels Office 1999-2001 Director Regulatory Affairs, ENRON, London and Frankfurt2001-2002 Senior Legal Counsel, TXU Energy Trading SA, Geneva2003-2005 Front Desk Gas, Glencore Energy, London

Since 2006 Chairman EFET Legal Committee, Director EFET Brussels OfficeBoard Member EFET, Amsterdam, Member of the EEX Exchange Council, Leipzig

Founder and Managing Director of CORREGGIO CONSULTING, Brussels - successful boutique advisory firmwww.correggio-consulting.eu:• Multiple advice in arbitration proceeding context• Building own practice as independent international expert for energy trading • Planned co-operation with network of lawyers and industry experts in partnership with European Energy Lawyers Association: www.eela.eu

Introduction

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http://www.correggio-consulting.eu/

http://www.eela.eu/


Agenda - Day 1

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• Legal Basis Risk: Contractual Training

– Introduction into traded gas market and market risks

– Contractual training

– What needs to be in a trading contract?

– What is the advantage of standardization (Back-to-Back risk)

– EFET Trading Gas Agreement in detail

– Questions and Answers

– Test on Contractual Issues


Agenda - Day 2

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Morning Session

• Introduction to risk policies for political risks

– KYC principles

– Ways to manage trade restrictions such as sanctions

• Trade sanctions on Russia and Iran

Afternoon Session

• Regulatory risk

– Introduction into compliance system

– REMIT reporting obligations as envisaged by the EU


Agenda - Day 3

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• Market Risk Management, Credit Risk Management, Operational Risks

– Market risk management & ways to mitigate currency risks

– Credit risk management through credit arrangements

• Ways to mitigate insolvency risk

• Collateralization of trading (what type of collateral)

• Functionality of letters of credit

• Functionality of parental guarantees

• Functionality of a credit department and credit setting with counterparties

• Clearing

– Operational Risks

• Force Majeure scenarios

• Non-delivery due to grid failures

– Questions and Answers

25-27 September 2019 BOTAS Workshop, Ankara25-27 September 2019 BOTAS Workshop, Ankara

Day Two

Regulatory and political risks:

KYC process, trading restrictions/sanctions,

compliance system, REMIT reporting



Regulatory and political risks:

• PART I: KYC process

• PART II: Trading restrictions / sanctions

• PART III: Compliance system

• PART IV: REMIT reporting

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PART I: KYC process

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Reasons for KYC

• Self-Protection against risk from:

– money laundering,

– terrorist financing,

– bribery and fraud

– corruption,

– market abuse, or

– international sanctions (UN).

• Implementation of due diligence measures enable market participants to know their counterparties.

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Legal Sources in EU

• EU Council Regulation 2580/2001 on specific restrictivemeasures directed against certain persons and entitieswith a view to combating terrorism:

– provides for freezing of all funds, other financial assets andeconomic resources belonging to the ‘blacklisted’ persons,groups and entities and introduced the list of such persons,groups and entities to which it applies;

– will apply only indirectly to Turkish companies.

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KYC Procedures

• Senior Management Awareness and Oversight

• Policies and Procedures

• Roles and Responsibilities

• Risk-Based Approach

• Identification and Verification of Counterparties

• Identification and Verification of Beneficial Owners

• Politically Exposed Persons (PEPs)

• Sanctions Screening

• Training and Awareness

• Record Keeping

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Key principles (1)

Senior Management Awareness and Oversight:

• Senior management of market participants are ultimately responsible for effectivelymanaging and mitigating applicable risks in their businesses;

• They have a responsibility to ensure that the processes and controls are appropriatelydesigned and implemented, and are effectively operated to reduce the risk of financialcrime;

• They should be kept aware of all major developments and trends in the area ofcounterparty due diligence (CDD) and broader financial crime risk on a regular basis.

Best Practice: Annual MLRO report; periodic MI to senior management

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Key principles (2)

Policies and Procedures

• Market participants should have effective procedures in place to mitigate theapplicable financial crime risk through application of the relevant CDD measuresboth at the time of on-boarding and during the course of the businessrelationship;

• Market participants should seek to document their counterparty due diligencemeasures in the form of a written procedure that should be approved by theirsenior management.

Best Practice: Written AML Policy and/or CDD procedures

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Key principles (3)

Roles and Responsibilities

• Senior management should ensure that adequate and sufficient resources areavailable and devoted to effective application of the relevant CDD measures;

• Nominated employees are responsible for effective application of the relevant CDDmeasures on behalf of the market participant on a day to day basis.

Best Practice: Designated MLRO or KYC officer

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Key principles (4)

Risk-Based Approach

• CDD measures implemented by market participants should be commensurate withthe degree of the financial crime risk represented by their business and theircounterparties. Market participants should seek to determine and applyappropriate CDD measures on a risk-sensitive basis;

• Counterparties representing higher than normal financial crime risk shouldnormally be subject to additional scrutiny and more stringent CDD measures.

Best Practice: Documented counterparty risk assessment; different set ofKYC requirements for normal and higher risk counterparties

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Key principles (5)

Identification and Verification of Counterparties

• As a minimum, as part of CDD process market participants should always identifytheir counterparty and, where relevant, verify their identity;

• This implies obtaining a range of mandatory information about counterparty andverifying some or all of this information against actual documents or data obtainedfrom a reliable and independent source.

Best Practice: Set of minimum information/documentation to be obtainedfrom potential counterparties

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Key principles (6)

Identification and Verification of Beneficial Owners

• Market participants should seek to identify the beneficialowner(s) of their counterparty and, where relevant, verifytheir identities, i.e. individuals who ultimately own orcontrol a counterparty or on whose behalf a transaction orbusiness activity is being conducted.

Best Practice: Set of minimum information/documentationto be obtained from potential counterparties in relation totheir ownership and control structure

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Non-implementation of KYC may result in high exposure for you 🡪 Banks may stop dealing with you as client

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Key principles (7)

Politically Exposed Persons (PEPs)

• Market participants should take particular care when dealing withcounterparties that are associated with PEPs and should seek to identify PEPconnections among their counterparties, their directors and beneficialowners both at the time of on-boarding and during the course of the businessrelationship;

• When a PEP connection is identified, market participants should obtain seniormanagement approval for entering into or maintaining a businessrelationship with such a counterparty.

Best Practice: Established routine process of identification of PEPconnections among counterparties; standard process of internalapproval of counterparties associated with PEPs

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Key principles (8)

Sanctions Screening

• Market participants should manage the risk of conducting business with or on behalfof individuals and entities that are subject to applicable financial sanctions and shouldseek to check their counterparties, their directors and beneficial owners against theapplicable sanctions lists both at the time of on-boarding and during the course ofthe business relationship;

• When a positive match is identified, market participants must avoid entering into abusiness relationship with such a counterparty.

Best Practice: Established routine process of screening potential counterpartiesagainst applicable sanctions lists

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Key principles (9)

Training and Awareness

• Market participants must take appropriate measures so that all relevantemployees are made aware of the risk of financial crime, the applicablelegislation and their obligations under that legislation;

• Relevant employees should be trained at the start of their employment andwhen appropriate throughout their employment.

Best Practice: Standard training in anti-money laundering and anti-bribery& corruption delivered to all relevant employees

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Key principles (10)

Record Keeping

• Market participants must retainthe evidence they have obtainedas part of identification andverification of their counterparties,their directors and beneficialowners.

Best Practice: Standard retentionperiod established for all KYCrecords

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Coffee Break

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PART II: Trading restrictions / sanctions

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• Trade restrictions / sanctions (US /EU regimes)

• Sanctions regime in relation to Russian and Iran


Who must comply with EU and US Sanctions?

EU Sanctions

• EU legal persons, entities or bodies

− This does not include foreign subsidiaries of EU companies.

• EU nationals, anywhere in the world

• Any legal person, in respect of business done in the EU

• Any party within the territory of the EU

• Any party on board of EU aircraft and vessels

US Sanctions

US Persons must comply:

• Entities organized under US laws and their non-US branches

− This does not include foreign-incorporated subsidiaries of US companies.

• US citizens and „Green Card“ holders, anywhere in the world

• Any person while in the United States.

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Financial Sanctions –What is prohibited?

EU Financial Sanctions

• Prohibition to make funds or economic resources available to Designated Parties

• Prohibition to make funds or economic resources available „indirectly“:

− Transactions with (majority-owned or controlled) subsidiaries may be prohibited

− Transactions with non-listed Parties are prohibited if funds / items are passed on to Designated Parties

− Transactions with companies where the CEO / managers are listed are generally not prohibited

• Freeze of assets and economic resources of Designated Parties or under the control of Designated Parties

US Financial Sanctions

• Prohibition of any dealings with Designated Parties, directly or indirectly

• Prohibition of any dealings with entities that are at leas 50 % owned by one or more Designated Parties

• Property of Designated Parties must be blocked

• Prohibition of facilitation

− Any activity that would further, assist or make a prohibited transaction possible

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Prohibited Activities.Special measures: EU Russia Sanctions

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• Transferable securities and money-market instruments with a maturity exceeding 30 days issued after 12 September 2014

• Grant new Credit or Loans with a maturity exceeding 30 days

– Exemptions for imports, exports, certain non-financial services and emergency funding

• Applicability

⏤ Five banks (Sberbank, VTB Bank, Gazprombank, Vnesheconombank (VEB) and Rosselkhozbank)

⏤ Three defense companies (OPK Oboronprom, United Aircraft Corporation, Uralvagonzavod)

⏤ Three energy companies (Rosneft, Transneft, Gazprom Neft)

• These banks and companies are NOT subject to commodity trading restrictions!


Russia

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Timeline: EU & US Sanctions against Russia (I)

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• March 2014

– EU & US: Financial Sanctions against Ukrainian and Russian parties (individuals andcompanies); New parties are added to the Lists continually

• June 2014

– EU: Sanctions against Crimea

• August 2014

– EU: arms embargo

– EU & US: restrictions for exports to Russia, restrictions for 5 (EU)/ 6 (US) majorRussian banks limiting their access to international capital markets

• September 2014

– EU & US: scope of the export restrictions broadened, restrictions for the Russianbanks and restricted access to international capital markets for certain Russianenergy and defense companies extended


Timeline: EU & US Sanctions against Russia (II)

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• December 2014

– EU: scope of the Russia sanctions clarified/limited

– EU & US: far-reaching sanctions against Crimea

– US: Ukraine Freedom Support Act

• February 2015

– EU: expands the scope of designated party controls targeting those consideredresponible for the misappropriation of Ukrainian state funds

– EU: further 19 persons & 9 entities added to sanctions lists

• March 2015

– EU annonces sanctions are to remain at least until end 2015


Russia – Designations in 2018

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• 6 April 2018: OFAC designated 7 Russian oligarchs and 12 companies they own or control, 17 senior Russian government officials, and a state-owned Russian weapons trading company and its subsidiary, a Russian bank

⏤ Also applies to entities owned 50% or more by a designated person⏤ Designations included companies like EN+, Rusal and Gaz Group because of

their link to Oleg Deripaska

• 27 January 2019: OFAC removed Rusal, EN+ and EuroSibEnego from the SDN List after Deripaska agreed to reduce his direct and indirect shareholding stake and sever his control over the companies

⏤ DD Deripaska remains subject to secondary sanctions like all Russian SDNs


Russia – Recent developments

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Increased likelihood of additional sanctions since the Democratic Party took control ofthe U.S. House of Representatives.

• 8 August 2018: Additional sanctions pursuant to the Chemical and Biological Weapons Controland Warfare Elimination Act of 1991. This comes as a result of the Kremlin’s alleged attemptedmurder of UK citizen Sergei Skirpal.

• 27 August 2018: First batch of sanctions denying export licenses to Russia for items with nationalsecurity implications (i.e., gas turbine engines, electronics and calibration equipment).

• Russia had until 6 November to provide assurances that: 1) it is no longer using chemical weapons,2) it will not use them in the future, and 3) it will allow inspections by the United Nations.

• U.S. said additional sanctions would be imposed if Russia did not comply. If that does not occur, asecond batch of sanctions will be imposed.

• This is yet to occur.


US Ukraine Freedom Support Act of 2014

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• Signed into law by President Obama on 18 December 2014

• Mandates the President to impose at least three sanctions against:

– Rosoboronexport

– Russian defense article brokers who knowingly transfers defense articles into Ukraine without Ukrainian government consent

– Gazprom if Gazprom withholds significant gas supplies from Ukraine

• Authorizes the President to enact a myriad of economic various sanctions against Russia

• Gives the President flexibility in the implementation of the text


Russia Sanctions – EU

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• 21 December 2018, the Council prolonged theeconomic sanctions targeting specific sectors of theRussian economy until 31 July 2019

• Asset freeze in place against numerous individuals andentities

• As with the U.S., specific restrictions relating to Crimeaand Sevastopol

• Restrictions on technologies and services relating to oilexploration and military

• Capital markets sectoral sanctions


Financial Sanctions –Practical Questions (1)

Event Consequences

The contract partner is Designated.

No further payments to the contract partner / no further transactions with the contract partner. Under EU Sanctions, negotiations remain permitted. Under US Sanctions, negotiations are prohibited.

The parent company of the contract partner is Designated.

EU Sanctions: Whether transactions are prohibited depends on the practice of the respective EU Member State. US Sanctions: If the (Designated) parent company owns at least 50% of the contract partner, all further payments to and all transactions with the contract partner are prohibited.

A bank that has provided a guarantee is Designated.

EU Sanctions: Wether a guarantee can still be drawn depends on the practice of the respective EU Member State. No funds of the Designated guarantor can be drawn from accounts in EU Member States or held by EU banks. US Sanctions: A guarantee cannot be drawn anymore. In any event, funds would have to be blocked / frozen.

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Financial Sanctions –Practical Questions (2)

Event Consequences

The CEO of the contract partner is Designated.

EU Sanctions: Transactions with the contract partner remain permitted. US Sanctions: Transactions with the contract partner remain permitted. No negotiations with the CEO may be undertaken.

The CEO or owner of a business partner has close links to the Russian government.

Transactions with the business partner remain permitted, but the development of EU and US Sanctions should be monitored closely. Even if the CEO of the business partner is Designated, transactions remain permitted. If the owner of the business partner is Designated, transactions may be prohibited if the owner holds at least 50% of the interest in the business partner.

The business partner is significant / important for key sectors of Russia‘s economy (in particular defense and energy sectors).

The development of EU and US Sanctions should be monitored closely, as there is an increased risk that the business partner may be Designated in the future.

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EU Restrictions of Access to Capital Markets

Prohibitions

• Granting of new credit or loans with a maturity exceeding 30 days. Exemptions:

− Financing of imports, exports and non-financial services between the EU and any third State

− Drawdowns under contracts concluded before 12 September 2014

• Directly or indirectly

− purchasing or selling or dealing with otherwise, or

− providing brokering or assistance in the issuance of transferable securities and money-market instruments with a maturity exceeding 30 days issued after 12 September 2014

The EU Restrictions apply for

the following entities:

• 5 major banks (Sberbank, VTB Bank,Gazprombank, Vnesheconombank (VEB)and Rosselkhozbank)

• 3 energy transport companies (Rosneft,Transneft, Gazprom Neft)

• 3 defense companies (OPK Oboronprom,United Aircraft Corporation,Uralvagonzavod)

• Legal persons established outside of theEU which are more than 50 % owned byone of the above

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US Sectoral SanctionsIdentification List (SSI List)

Prohibitions

• Transactions in new debt or new equity

− „New debt“ means any kind of credit or loan, including trade credit (= payment terms)

• Providing financing for new debt or new equity

• Dealing in new debt or new equity otherwise

• Scope of restrictions differs for each company concerned, based on four different Directives

• Directive 1 – Financial sector: New equity or new debt with a matury exceeding 30 days

• Directive 2 – Energy sector: New debt with a maturity exceeding 90 days

• Directive 3 – Defense sector: New debt with a maturity exceeding 30 days

• Directive 4 – Energy sector: Export prohibitions for items to be used in unconventional oil projects

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US SSI List – Applicability

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Secondary sanctions

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• U.S. extra-territorial extension of sanctions againstcountries such as Iran, Russia, and North Korea

• Prohibit non-U.S. persons from participating in orfacilitating significant transactions outside U.S.jurisdiction with named individuals andorganizations in sanctioned countries

• Apply to ‘significant’ transactions with sanctionedpersons or organizations

• Ultimate consequence: listing as an SDN;exclusion from U.S. banking system


Iran

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Iran – U.S. sanctions (1)

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• Prohibitions on U.S. persons• Dealing in Iranian-origin goods or services

• Exports of most products/services to Iran

• Restrictions apply outside of the U.S.

• U.S. dollars can never be used for transactions related to Iran, unless an exception applies



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• President Trump’s announcement• 8 May 2018, President Trump announced decision to withdraw the United

States from the Joint Comprehensive Plan of Action (JCPOA)

• U.S. reimposed the nuclear-related sanctions that were lifted as a result ofthe JCPOA

• Reimposition of sanctions occurred in two main phases:

» 90-day wind-down period – Terminated 6 August 2018

» 180-day wind-down period – Terminated 4 November 2018



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6 August 2018, the United States reimposed secondary sanctions on the following:

• the purchase or acquisition of U.S. dollar banknotes by the Government of Iran;

• Iran’s trade in gold or precious metals;

• the sale, supply, or transfer to or from Iran of graphite, raw, or semi-finished metals suchas aluminum and steel, coal, and software for integrating industrial processes;

• the purchase and/or sale of rials;

• the purchase, subscription to, or facilitation of the issuance of Iranian sovereign debt; and

• Iran’s automotive sector.

Sanctions can be imposed on foreign financial institutions for engaging in significanttransactions related to any of the above activities.



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5 November 2018, the United States reimposed sanctions on the following:

• Shipping and shipbuilding sectors – including on the Islamic Republic of Iran Shipping Lines (IRISL)

• Sanctions on Iran’s energy sector

• Petroleum-related transactions with, among others:

» National Iranian Oil Company (NIOC)

» Naftiran Intertrade Company (NICO)

» National Iranian Tanker Company (NITC)

• Sanctions on transactions with the Central Bank of Iran and designated Iranian financial institutions

• Sanctions on the provision of specialized financial messaging services to the Central Bank of Iranand Iranian financial institutions

• Sanctions on underwriting services, insurance, and reinsurance

Sanctions can be imposed on foreign financial institutions for engaging in significant transactionsrelated to any of the above activities.



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• Relisting of sanctioned parties• Signing of the JCPOA in 2016 resulted in the removal of over 400 individuals and

entities from the OFAC SDN list, Foreign Sanctions Evaders List (“FSE List”), andNon-SDN Iran Sanctions Act List (“NS-ISA List”) – E.O. 13599

• These individuals and entities were re-listed, most of which are subject tosecondary sanctions

• Examples:

• Bank Saderat

• Bank Melli

• Bank Sepah

• Day Bank



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Non-U.S. entities owned or controlled by U.S. persons are prohibited fromengaging in Iran-related transactions with certain designated persons:

• Persons designated for providing material support for, or goods andservices in support of Iranian SDNs; and

• Persons designated for being either part of the Iranian energy, shipping, orshipbuilding sectors in Iran, or for providing support to certain designatedparties.


Iran Sanctions: EU

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• EU appears unlikely to review the JCPOA to determine whether thesuspension of sanctions related to Iran pursuant to the JCPOA isvital to the national security interests of the EU

• In 2016, the UK government (among other EU Member Stategovernments) had expressed the generally held EU view that Iranhad become the biggest new market to enter the global economyin over a decade, with significant growth potential

• On 12 April 2018, the EU extended by one year, sanctionsresponding to serious human rights violations in Iran


EU Blocking Regulation

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• Introduced through Commission delegated regulation (EU) 2018/1100, amendingCouncil Regulation (EC) No. 2271/96

– Prohibits persons operating within the EU from complying with US SecondarySanctions targeting Iran.

– Allowing affected persons to recover damages arising from the effects of theSanctions

– Foreign court rulings based on US Sanctions invalid

– BUT article 5 authorisation process

• 31 January: Germany France announced establishment of SPV: Instrument in Support ofTrade Exchanges (INSTEX)

– Focus on pharmaceutical, medical devices, agri-food goods

– Facilitate Europe-Iranian trade while reducing the need for transactions betweenEuropean Banks and Iran.


Recent developments

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• US position – US has introduced SREs to 8 countries, allowing the purchase of Iranian oil for 180 days:

– China, India, Italy, Greece, Japan, South Korea, Taiwan, Turkey

– Bilateral Trade only

• EU Position– Mamancochet Mining Ltd v Aegis Managing Agency Ltd [2018] EWHC 2643 (Comm)

– English court invited to consider whether reliance on a sanctions contractual exclusion clause would represent a breach of the Blocking Regulation

– Obiter comments from the judge give some hope that reliance on the clause might not represent a breach


Prohibited Activities –US SDN Lists

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• Any dealings, directly or indirectly

• Any dealings with entities owned orcontrolled by an SDN

• Dealings with entities in which SDNshold an interest of at least 50%

• Facilitation – widest interpretations

• Extraterritoriality: any USD-transaction


Prohibited Activities –US SSI List (12 September 2014)

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• Directive 1 – Financial sector: New equity or new debt of longer than 30 days maturity

• Directive 2 – Energy sector: New debt of longer than 90 days maturity

• Directive 3 – Defense sector: New debt of longer than 30 days maturity

• Directive 4 – Energy sector: Export prohibitions for items for unconventional oil projects to these entities

Applicability

• Directive 1: Gazprombank, Vnesheconombank, Bank of Moscow, Russian Agricultural Bank, VTB Bank, Sberbank

• Directive 2: AK Transneft, Gazprom Neft, Novatek, Rosneft

• Directive 3: Rostec

• Directive 4: Gazprom, Gazprom Neft, Lukoil, Rosneft, Surgutneftegas

These banks and companies are NOT subject to restrictions for commodity trading!


Subsidiaries –Applicability of Prohibitions

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EU

• Ownership by SDN of majority interest or exercise of control over subsidiary otherwise

• Transactions may be allowed where SDN only has a financial interest in subsidiary

• Different application of sanctions in EU Member States possible

• Different rules apply with respect to the „Special Measures“ under the EU Russia Sanctions

US

• Ownership by SDN of majority interest in subsidiaries

• Transactions are also prohibited where several SDNs together hold a majority interest in another company

• These rules also apply with respect to parties on the List


Impacts of US Financial Sanctions on Non-US Persons

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• Applicability of US criminal penalties to foreign parties

• Prohibition to „cause“ violation of US financial sanctions

• Interpreted extremely broad by US authorities

• E.g.: US$ transactions with US SDNs

• Possibility to impose financial sanctions on foreign parties

• „Foreign Sanctions Evaders“

• Applies with respect to Iran and Syria sanctions

• Situation with Ukraine/Russia unclear


EFET work on standard sanctions clause

• Legal TF considered two main drafting scenarios:

– Force Majeure-like mechanism with a walk-away, or

– Early Termination right & calculation of Termination Amount.

• Inter alia, following issues had to be considered in the drafting:

– Suspension right <-> Termination right

– If suspension right allowed, should there be a maximum suspension period?

– Right to terminate and determine the termination amount: both parties or the non-sanctioned party only?

– Obligation to try to obtain a license from the regulator to continue the trade relationship?

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Result: EFET Trade Restrictions Clause (1)

• New clause § 7(a) „Non-Performance Due to Trade Restriction”(“Trade Restrictions clause”) for EFET Gas & Power

• Based on standard wording of the § 7 EFET Force Majeure clause

• Version for EFET Gas published on 26 May 2015 on the EFET website

• Wording reflecting situation when under the laws of certainjurisdictions, e.g. in Germany (section 7 ofAußenwirtschaftsverordnung), counterparties are limited as to thetype of contractual references they make to foreignsanctions/trade restriction regimes, or they cannot pre-agree howto deal with such foreign regimes

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Result: EFET Trade Restrictions Clause (2)

• § 7(a).2 : "Trade Affected Party” is not obliged to perform affectedobligations and released from those obligations

• § 7(a).6: A right to terminate when “Long Term Trade Restrictions Limit”is reached

Trade Affected Party = a Party, which is fully or partly prevented due to aTrade Restriction from performing or procuring the performance of anyobligation otherwise required by the EFET Gas General Agreement, sincethis would be in violation of, inconsistent with, or expose this Party topunitive measure under any Trade Restriction.

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Turkey

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• UN Sanctions are applicable in Turkey

• EU Sanctions will be applicable when dealing with EUCounterparties

• US Sanctions are not applicable directly in Turkey butbanks will have reservations dealing with sanctionedcompanies (non-execution) in particular if the transactionis in USD


Lunch Break

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PART III: Compliance system

Introduction into

compliance system

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• No explicit statutory provisions exist re implementation of a compliance regime• But strongly recommended for several reasons:

Why to implement a compliance regime?

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How to implement a compliance regime? (1)

Compliance objective

• REMIT compliance vs. general compliance

Compliance culture

• Corporate culture for REMIT compliance in the company

• Embedded in the management (tone from the top)

• Points to consider:

– Compliance function with sufficient resources

– Adequate policies and procedures to ensure compliance and detect non-compliance

– Compliance function takes a risk-based approach for efficient use of resources

– Compliance programme with priorities determined by a risk assessment and

– Adequate communication of the legal framework and internal rules/guidelines, including training of employees and regularly and ad-hoc reporting to the management

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Compliance organisation• Clear defined roles and responsibilities• Sufficient staff with sufficient business knowledge and competence• Ensure sufficient independence• Authority and support from the management• Access to information• Direct reporting line to management• Involved in significant changes in the organisation (new product approvals)• Documentation of procedures



Compliance risks

• The compliance function may on a regular basis do an assessment of the marketparticipant’s compliance areas and its risk exposure:

– Identify the relevant compliance areas (activities)

– Identify the main source/areas for compliance risks

– Identify existing controls (particularly existing internal controls)

– Identify the key stakeholders for the identified compliance and risk areas to helpwith input regarding the relevant business activities and compliance risks

• The compliance function may do interviews with key stakeholders within the

company

– Acquire a description of the activities of the business unit

– Pre-structured questions, e.g. to identify the potential flow of inside information

– Open questions to receive additional concerns/suggestions

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Compliance programme

• The compliance programme should cover three main pillars

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Compliance plan (and report)

• Annual plans should be developed based on risk assessment (prioritisation of critical

areas)

• Regular assessment of different business units and processes

• Annual report should be drafted for management, which may include:

– What has been done?

– What are the concerns?

– Have there been breaches?

– How many incidents?

– Sufficient resources?

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Communication

• Internal Communication

• Communication from the compliance function to the business:

• Training

• Lessons learned

• Information regarding regulations, new routines and developments

• Communication from the business to the compliance function

• Communication from the compliance function to management

• External communication

• Contact with market surveillance teams and authorities

• Contact with press

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Excurse: Training concept

• Set up a tailored training programme based on the company’s needs and risk- groups

of employees

• Training should take into account the specific risk profile and experience and

knowledge of the employees

• Training should be performed regularly and in addition

– When there are new developments in the market practice or regulatory updates

– On ad-hoc basis after incidents happened

• No generic one-size-fits-all training

• Test may be performed (with scores to pass)

• Training attendance should be documented as well as content of the training

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Monitoring Improvements

• Three lines of defense:

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Inside information (1)

Identification and mapping of inside information• Identify all facilities (production/consumption/transmission) the market participant

owns or is responsible for and specify in which situations inside information might

occur

• Identify what kind of situations exist in general, not related to specific facilities,

where inside information occurs or might occur (such as having access to customer

orders)

• Identify stress points/parts of the organisation that are vulnerable for information

leaks – intentionally and non-intentionally

• Map information flow to identify any information that could contain or qualify (or

potentially qualify) as inside information

• Identify in what kind of situations the market participant might receive inside

information from other third parties

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Handling of inside information based on routines and procedures

• List of functions authorised to routinely receive inside information

• Specification of responsibilities for handling inside information

• There should be a dedicated team responsible for publishing inside information

• Specification on how to handle inside information

• Internal communication process with definition of the point in time the information arises

• Not spread to any unauthorised personnel prior to publication

• No advice shall be given based on inside information and not used for trading

• What to do if you receive inside information by accident e.g. from a third party

• Facilitate publishing of inside information

• Routines for inside information not related to own assets

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Handling of inside information Chinese Walls vs. Trade-Stop

• Chinese Wall between teams with inside information and traders

– It should be ensured that persons involved in trading are not authorised to gain accessto inside information prior to publication

– Traders should be physically separated from any persons authorised to gain access toinside information

• Chinese walls e.g.

– Between production assets and dispatch teams

– Between dispatch teams and trading teams

• Trade-stop where required

• Specific routines related to usage of exemptions from the prohibition of insidertrading



74

Publication of inside information

• Routines for publishing inside information

– Designation of specific teams responsible for publication

– Special training for such teams to avoid wrong/delayed publication

– Systems for publication and back-up procedures

• May include routines for delayed publication

– Notification of authorities

– Required documentation

• If relevant, routines for publication where more than one company is responsible for publication

– Agreement between companies involved for who has primary responsibility

– Regular checks whether such companies complies with publication requirements


Market Manipulation

Compliance departments need to address common causes for market

manipulation:

• Intentional manipulation to increase profits

• Unintended or negligent manipulation

– Unawareness of what is prohibited

– Technical or human errors

• Spreading information

– Insufficient or wrong information

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Measures to prevent market manipulation (1)

General measures

• Risk assessment and awareness training

– Based on business model and trading activities

– Should as a minimum include all types of MM in ACER Guidance

– In addition also other types of manipulative behaviour

• Trading mandates

– Develop and document

• Instructions and procedures

– Dynamic Q&As

76



Negligent or unintentional market manipulation

• Routines to prevent erroneous trading, i.e. in day-ahead auctions:

– Compare orders with previous day’s orders

– Check whether the orders placed equal the orders in your internal system

– Four-eyes principle: the orders may be checked by another person before submitting them

– As far as possible avoid manual steps (copy/paste) in planning /bidding process in order to avoid human mistakes

– Submit “safety bids” for at least d+2 in order to always have a bid in case of IT-or other disturbances

– Check that orders are logical, i.e. that fields contain values or that purchase volumes are not increasing with increased price

– Automatic alerts, for instance if the orders deviate significantly from normal

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Automated trading

• Routines to thoroughly test and document trading algorithms

• REMIT compliance aspects needs be considered when programming algorithms

• Defined process for approving algorithms

• Designated personnel responsible for each algorithm

• Supervision of the algorithm by human trader with kill-functionality

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• Avoid spreading false or misleading information• A policy on how to handle communication with the media• Only authorised persons can communicate with the media, for instance:

– Communication personnel– Management– Board of directors– Others– Processes to ensure that information is correct and precise– Do not spread rumours

• Relevant persons should have specific awareness training to ensure that they do not send false or misleading signals

• A policy for staff on information given in social media and other fora

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What can Compliance functions learn from recent cases / investigations?

80

The approach authorities have taken in investigations can help to understand

• What triggers an alert in the regulator’s view and should this be aligned with

the alerts set up in the firm’s trading surveillance tool?

• What are relevant criteria in the regulator’s assessment of such alerts and

should this be aligned with the human analysis conducted under the STOR

process?

• How can the Compliance function have a positive (or negative) impact on the

investigation, with regard to

– Self-reporting, whistleblowing ?

– Compliance program/training ?

• And how can the Compliance function be impacted ?


Coffee Break

81


PART IV: REMIT reporting

82

REMIT reporting obligations as envisaged by the EU


REMIT (1)

83

• Regulation No 1227/2011 on wholesale energy market integrityand transparency

• In force since 28 December 2011; Transaction reporting in full forcesince 7 April 2016

• No implementation into national law required but directly bindingon all EU Member States

• REMIT sets the framework

• Precise details are set out in subordinate legislation

• Relevant European agency „European Agency for the Cooperationof Energy Regulators“ - ACER


REMIT (2)

84

• Applies irrespective of the place of incorporation of theperson entering into relevant transactions

• Relevant is only that the entity, which enters intoWholesale Energy Products for delivery in the EUqualifies as Market Participant

• Prohibits abusive practices, such as market manipulationand insider trading, affecting European wholesale energymarkets; and

• Imposes obligations to register and disclose certaininformation to the public and the regulator


REMIT TerminologyEnergy Wholesale Product

Art 2 (4) REMIT

85

• Means

– contracts for the supply of electricity or natural gaswhere delivery is in the Union

• Q&A 14th Edition (Feb 2016) clarification that LNG isconsidered to be Natural Gas

• Derivatives relating to electricity or natural gas produced,traded or delivered in the Union


REMIT TerminologyEnergy Wholesale Product

Art 2 (4) REMIT (2)

86

• Excluded from the REMIT scope are:

– Derivatives traded on regulated markets (e.g.exchanges);

– contracts for the supply or transportation of naturalgas and electricity outside the EU;

– derivatives related to natural gas or electricityproduced, traded, delivered or transported outsidethe EU


Contracts Reportable upon request of ACER

(Art 4 Implementation Act)

87

• Following contract are only reportable on ad-hoc basis uponreasoned request by ACER unless traded on an organisedmarket place:

– Intragroup contracts;

– Contracts for the physical delivery of electricity produced by a singleproduction unit with a capacity equal to or less than 10 MW or byproduction units with a combined capacity equal to or less than 10 MW;

– Contract for the physical delivery or gas produced by a single productionfacility with a capacity equal to or less than 20 MW;

– Contract for balancing services in electricity and gas.


Fundamental Data

88

• ACER publishes separate FAQs on fundamental data reporting

• Reportable information:

– Central Platform Data;

– Gas Nominations;

– Availability of LNG facilities;

– Un- and reloading of LNG;

– Availability of Storage facilities;

– Amount of Gas stored.


Reporting of Transactions

89


Who has Reporting Obligation

90

General reporting obligation stays the following parties:

• Market Participants;

• Third parties acting on behalf of a Market Participant known asRegistered Reporting Mechanism;

• Organised market places (“OMP”), trade matching systems or otherparties professionally arranging transactions;

• Trade Repositories registered or recognised under EMIR;

• Competent authorities which receive data either under MiFID orEMIR.


Who has Reporting ObligationReporting Channels

91

• Organised market place, trade matching or trade reporting system (onbehalf of Market Participant) – WEPs including matched and unmatchedorders executed on the organised market place concerned;

• TSO or third party acting on behalf of TSO – WEPs in relation to primarymarket contracts relating to transportation of electricity and gas;

• Market Participants or third party acting on behalf them – WEPsconcluded outside an organised market:– Any other REMIT relevant supply contracts in electricity and gas;

– Financial instruments relating to electricity and gas traded or delivered inthe EU and transportation of electricity and gas in the EU ;

– Secondary market contracts relating to transportation of electricity andgas.


Fundamental Data

92

ENTSOG on behalf of MP

TSOs LSOs SSOs 3rd PartyRRM

MPs

Central Platform Data

x

Gas Nominations x x

Availability of LNG facilities

x x

Un- and reloading of LNG

x x x

Availability of Storage facilities

x x

Amount of Gas stored

X X x


Reporting deadlines and formats (1)

93


Reporting deadlines and formats (2)

94

• Contract in WEP admitted totrading at an OMP;

• Irrespectively of whether or notthe transaction takes place on thatmarket place (Art 2 Sec 2 IA);

• Contract is listed on the publicACER list of standard contracts (Art3 Sec 2 IA) (decisive fact); list ismaintained constantly (last update14.05.2018) (https://www.acer-remit.eu/portal/standardised-contract)

• WEP that is not a StandardContract (Art 2 Sec 3 IA);

• A contract that is not listed byACER as Standard Contract

Non-Standard ContractsStandard Contracts

https://www.acer-remit.eu/portal/standardised-contract


Reporting of Transactions

95


Reporting deadlines and formats(Art 7 Implementation Act) (1)

96

• Standard Contracts and orders to trade, including auctions (for Auction markets where orders are not made publicly visible, only concluded contracts and final orders):

• Asap but no later than on the working day following the conclusion of the contract or placement of the order

• Modifications or amendments of concluded contracts asap but no later than on the working day following the modification/termination

• Orders placed in brokers’ voice operated services not appearing on electronic screens – only upon request of ACER;


Reporting deadlines and formats(Art 7 Implementation Act) (2)

97

• Non-standard contracts

– No later than one month following the conclusion of the contract

– Modifications or amendments of concluded contracts no later than one month following the modification/termination

– Executions one month following the discovery of price and quantity, hence the latest possible point in time for that is the invoicing date

• Primary market transportation contracts no later than one month following the conclusion of the contract.


Consequences for breach of REMITRecords of Transactions

98

MP’s

2016 2017 2018

No of entities Registered 11,876 12,895 13,971

No of all records per entity

Active 8,708 8,977 9,344

Median 18 28 29

Average 41,516 62,682 94,125

Top 5 contribution 109 million 207 million 334 million

All entities 362 million 563 million 879 million


Responsible persons in case of a breach

• Individuals involved in the manipulation or attempted manipulation or

insider trading;

• REMIT Officer/Compliance Office in case it ignored specific concerns,

indications or information or for organisational omission;

• Directors of the company and the company in case of organisational

omission or tolerance of abusive behaviours.

99


Cooperation between ACER and NRAs

• ACER has the right to request based on its internal assessment or analyses:

– supply information to the suspected breach from one or more NRAs;

– Request that one or more NRA look into he matter further and take appropriate actions to remedy any breach found;

– In case of cross-border impact, establish and coordinate an investigatory group consisting of representatives of the concerned NRAs.

100


Consequences

101

• Market participants have to comply with the prohibitions andobligations imposed by REMIT and MAR

• The Member States are required to ensure that penalties areput in place for all potential infringements of REMIT and MAR

• Guideline for minimum rules Directive on criminal sanctionsfor insider dealing and market manipulation (“CSMAD” – onlyDK and UK opted out)

• Violations will attract administrative measures and criminalsanctions (vary between member states)


Potential REMIT Breach Cases (quarterly statistics)

102


Market Abuse Decisions

103

Decision date NRA/MS Market Participant

REMIT Breach

Fine Status Market

24.11.2015 CNMC/ES Iberdrola Generación

Art. 5 € 25,000,000 Under Appeal E - Spain

05.10.2018 CRE/FR Vitol S.A. Art 5 € 5,000,000 Under Appeal NG - PEG

30.10.2018 Prosecutor,DUR/DK

Energi Danmark A/S

Art 5 App. € 147,000 Final E – Nordic

28.11.2018 CNMC /ES Galp Gas Natural S.A

Art. 5 € 80,000 Under Appeal NG - Spain

28.11.2018 CNMC /ES Multienergia Art. 5 € 120,000 Under Appeal NG - Spain

21.12.2018 Prosecutor,DUR/DK

Neas Energy A/S

Art. 5 App. € 20,400 Final E- Nordic

20.02.2019 BNetzA/DE UGC and2 Traders

Art. 5 € 150,000, €2,000 and €1,500

Final NG - NCG


Sample: FranceVitol Case (1)

104

• Period: between June 2013 and March 2014,

• Over 65 cases spread over 54 trading days,

• Modus operandi:

– 1 Step: Issuance of multiple sell orders, generally at the beginning of thetrading day (especially before 3pm) when liquidity was low

– As day moves along issuance of sell orders at gradually decreasing pricesespecially after 4pm when markets are more liquid

– 2 Step: once market prices had decreased, Vitol engages in importantpurchases using iceberg orders

– 3 Step: after having concluded those purchases, cancellation of sellorders and finish day as net buyer


Sample: FranceVitol Case (2)

• Behaviour was likely to give misleading signals as to thesupply and demand at PEG Sud

• Behaviour gave impression of relatively abundant supply toother MPs

• Regulator stresses that in isolation the (i) pilling of sell orders,(ii) the use of iceberg orders on the buy side and (iii) thecancellation of the sell orders cannot be sufficient toconstitute market manipulation

BUT: the succession and the accumulation of these thereelements let to the analyses that this behaviour wasprohibited under REMIT

105


Sample: UK REMIT (1)

106

• Responsible authority: Ofgem

• REMIT Procedural Guidelines (https://www.ofgem.gov.uk/sites/default/files/docs/2015/06/remit_procedural_guidelines_23_june_2015_0.pdf);

• Reg. 8 of the Electricity and Gas (Market Integrity and Transparency) Regulations 2013 all Regulated Persons are obliged to take reasonable steps to:– Record all telephone conversation made for the direct or indirect purpose of entering

into transactions in wholesale energy products, and

– Keep a copy of all electronic communication (email, fax, instant messaging etc) made for the direct or indirect purpose of entering into transactions in wholesale energy products

– For at least 6 month from the date the record was created;

– Applies to persons incorporated in UK and under registered with the UK NRA and if “clear UK element”.

https://www.ofgem.gov.uk/sites/default/files/docs/2015/06/remit_procedural_guidelines_23_june_2015_0.pdf



107

• The Electricity and Gas (Market Integrity and Transparency) (Criminal Sanctions) Regulations 2015

• UK prosecutor considers itself responsible if a “clear UK element” exists:

– A person being in the UK at the time of the offence/breach,

– Gas or electricity being originated in UK (within the 12 nautical miles radius),

– A transactions takes place in the UK (for instance on a trading platform based in the UK),

– Information is disseminated in or into the UK,

– Wholesale energy product to which offence relates is for gas, electricity or transportation right in the UK.



108

• In the UK Ofgem has published an authority’s statement of policy withrespect to financial penalties under REMIT but similar to EMIR noamounts have been made public

(https://www.ofgem.gov.uk/sites/default/files/docs/2015/06/remit_penalties_statement_23_june_2015_1.pdf)

• “We [Ofgem] can publicly censure or place unlimited financial penaltieson those who break the rules. We can also demand payment forprofits, or losses suffered, from non-compliance with REMIT.”

https://www.ofgem.gov.uk/sites/default/files/docs/2015/06/remit_penalties_statement_23_june_2015_1.pdf


Sample: Germany REMIT

• Responsible authority: Bundesnetzagentur (“BNetzA”)

• §95 Energy Industry Act (EnWG) the negligent or intentional breachof regulation as set out in Art 3, 4, 5, 8, 9 and 15 REMIT(irrespectively of the success of such breach): administrative penaltyfrom 10,000 Euro up to 1 million Euro or up to three times of thewindfall profits made by the person or entity due to the breach ofregulation

• §95a EnWG if the breach in §95 was intentional and causes themanipulation of a wholesale energy product imprisonment of up to5 years or financial penalty; the attempt and careless actions arealso punishable

109


Sample: Germany MAR

110

• Responsible authority: Bundesanstalt für Finanzdienstleistungs-aufsicht (BaFin)

• New guidance on fines published in January 2018

• Fines as outlined in CSMAD for companies the higher of €15million or 15% of the consolidated annual turnover and forindividuals € 5 million

• Companies or groups with high market capitalisation or in case orserious violations will receive significantly higher fines in order toensure noticeable sanctions


Uniper Case

• Oct 2016, five (5) reported cases of manipulative trading, BNetzA discovered further cases during its investigation

• Trader placed deliberately bids and offers on such way that they were able able to deliberately exclude other market participants from trading NCG

– Activities on both sides of the order book

– Usage of “iceberg orders” on one side to block other MPs long enough for the trade to go through

– As a result other MPs were unable to submit lower bids and NCG was misled about the offer situation

• UGC: fined for violation of supervision duty

• Admittance that trading behaviour was part of the agreed trading strategy to beat automated trading algorithms

• No prior examination of legality of action

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Thank you for your attention!

Q & A

112

Dr. Jan Haizmann, Managing Director

CORREGGIO CONSULTING Ltd.

93, rue Le Corrège, 1000 Brussels

tel: 32 (0) 472 365 725

[email protected]

mailto:[email protected]

http://www.correggio-consulting.eu/

ankara, 25-27 september 2019 - epgprojesi.com · studies & gratuation universität freiburg...

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