Electricity Marketplaces

All electricity exchanges operate in a highly regulated environment. As a rule, derivative contracts that are settled financially fall within the regulatory regime for financial markets. Contracts for the physical supply of electricity do not fall within the regulatory regime for financial markets—provided that the contracts can only be settled physically. However, complicated questions of interpretation may arise where contracts for the physical supply of electricity can be settled both physically and financially.²⁴

From a regulatory perspective, there are three main categories of financial electricity exchanges in the EU: venues that fall within the scope of the MiFID/MiFID II regime, venues that fall within the scope of the EMIR regime, and other venues. The scope of the MiFID II regime is very important for parties that wish to do business on an exchange.

Trading venues. Trading venues that fall within the scope of the MiFID II regime are “regulated markets”, “multilateral trading facilities” (MTFs), or “organised trading facilities” (OTFs).²⁵ OTC markets do not fall within the scope of the MiFID II regime, unless the OTC marketplace is a “multilateral system”,²⁶ that is, an organised exchange.²⁷

Contracts. In addition to trading venues, the nature of contracts is important. The scope of the MiFID II regime depends on the contracts traded on the exchange. The regime customarily applies to contracts that are settled financially. The regime can thus apply to financial electricity exchanges. Sometimes the regime applies regardless of how contracts end up being settled.²⁸

Moreover, certain derivatives must be traded on trading venues that are governed by the MiFID II/MiFIR regime. There is an obligation to trade on a regulated market, MTF, or OTF where derivatives belong to a class of derivatives that has been declared subject to the trading obligation.²⁹ There are particular rules on trading on third country trading venues³⁰ or with third country financial institutions.³¹

There are similar obligations in the US under the Commodity Exchange Act (CEA) that restricts trading in futures.³² According to the CEA, the CFTC has jurisdiction over futures contracts, that is, “contracts of sale of a commodity for future delivery”. The CEA was amended by the Commodity Futures Modernization Act of 2000 (CFMA). The enactment of the CFMA brought about a ‘three-tiered’ layering of commodities and derivatives regulation. The greatest degree of regulation takes place on the designated contract markets, where retail futures trading occurs.³³ Futures must not be traded other than on boards of trade designated or registered as a contract market or derivatives transaction execution facility by the CFTC (subject to certain exemptions).³⁴ Swaps subject to mandatory clearing must also be traded through a board of trade designated as a contract market or on a registered or exempt swap execution facility.³⁵ However, many swap agreements are exempt transactions.³⁶

The MiFID II regime is complemented by EMIR that lays down mandatory clearing obligations for some OTC derivatives.³⁷ Consequently, there must be clearing members and other market participants that deal through clearing members.³⁸

In the US, futures trading is a regulated activity.³⁹ Clearing is required for any swap which the CFTC or SEC has decided should be required to be cleared.⁴⁰ The requirement was inserted into the Commodity Exchange Act by the Dodd-Frank Act.⁴¹ The Commodity Exchange Act sets out five factors to be considered by the Commission in reviewing a swap or class of swaps for mandatory clearing.⁴² There is a connection between mandatory clearing and the requirement that swaps subject to mandatory clearing must be traded on a designated contract market or swap execution facility.⁴³

The distinction between clearing members and other members or clients makes it easier for electricity producers to trade. The distinction is also important for credit institutions that can play two kinds of roles in electricity derivatives markets. First, credit institutions may fulfil margin requirements and provide guarantees on behalf of market participants and act as lenders to them. Second, they can act as general clearing members responsible for the settlement of market participants’ duties. In the latter case, credit institutions assume the counterparty risk.⁴⁴

This may bring benefits, because a credit institution tends to have information about its customers’ total financial position and ability to settle the transactions, and because a credit institution that acts as a general clearing member for several customers and may be able to net some of the positions in the margin payment process.

Credit institutions in the EU customarily act as general clearing members in the electricity derivatives market.⁴⁵ When they do, they must comply with capital requirements for their positions. They must also comply with rules on large exposures. These rules can raise concerns for credit institutions, because some energy firms are very large and have large exposures.⁴⁶

In the following, we can briefly study the regulation of the most important service providers in the light of the practices of major electricity derivatives exchanges. Similar and related issues are discussed in detail in the context of spot markets (Sect. 4.5).

Nasdaq Commodities is the Nordic marketplace operated by NASDAQ OMX Oslo ASA, a Norwegian company authorised as a commodity derivatives exchange in Norway under the Norwegian Act on Exchanges.⁵¹ It is a regulated market under MiFID⁵² and supervised by Finanstilsynet (the Financial Supervisory Authority of Norway).⁵³ In addition, Nasdaq Commodities is a marketplace for NASDAQ OMX UK Power Futures. The central counterparty and clearing house is NASDAQ OMX Clearing AB.⁵⁴

There is a connection between the Nordic marketplace and N2EX. N2EX used to be a joint venture. In 2010, the Futures & Options Association (FOA) chose the market operated by NASDAQ OMX Commodities Europe (now known as Nasdaq Commodities) and Nord Pool Spot as the preferred marketplace for the trading of UK electricity contracts. On 1 October 2014, Nord Pool Spot took over the physical markets of N2EX. Nasdaq Commodities continued to operate the financial markets of N2EX.

Before the takeover on 1 October 2014, the party acting as clearing house and central counterparty on N2EX was NASDAQ OMX Clearing AB (NOMX Clearing).

Formerly known as NASDAQ OMX Stockholm AB, the company was renamed in September 2013. Its exchange-related operations were moved to a separate company that assumed the name NASDAQ OMX Stockholm AB. The reason was compliance with EMIR.⁵⁵ NASDAQ OMX Clearing AB is authorised in Sweden and in Norway where it is acting through its Norwegian branch NASDAQ OMX Oslo NUF.⁵⁶ It was the first clearing house in Europe to submit an application for a re-authorisation of the clearing house under EMIR.⁵⁷

NASDAQ OMX Clearing AB operates within the scope of an exemption from the need for UK authorisation. It applied for Recognised Overseas Clearing House (ROCH) status in the UK in 2011 when it was still known as NASDAQ OMX Stockholm AB.⁵⁸ ROCH status would have given it more flexibility and regulatory certainty in the way it conducted its business related to UK. However, an EMIR authorisation is effective for the entire territory of the EU.⁵⁹

On 1 October 2014, the clearing and central counterparty functions relating to the physical markets of N2EX were transferred to Nord Pool Spot AS.

EEX is a regulated market under MiFID and a licenced exchange under the German Exchange Act (BörsG).⁶⁰ Its operating entity European Energy Exchange AG is regulated under the German Exchange Act. In 2011, Eurex Group acquired a majority stake in European Energy Exchange AG. The sole shareholder of Eurex is Deutsche Börse Group.

EEX consists of several sub-markets. A sub-market of EEX, the EEX Power Derivatives Market is the electricity derivatives market for Germany and France. The EEX Power Derivatives Market is jointly operated by European Energy Exchange AG through its subsidiary EEX Power Derivatives GmbH in Leipzig.⁶¹

The competent supervisory authority for the exchange is Sächsisches Staatsministerium für Wirtschaft und Arbeit (the Saxon Ministry for Economic Affairs and Labour) in Dresden.⁶² BaFin (Bundesanstalt für Finanzdienstleistungsaufsicht, the Federal Financial Supervisory Authority) is responsible for its share of supervision under the German Securities Trading Act (WpHG). In particular, BaFin is responsible for supervising the prohibition of insider trading and market manipulation.⁶³

The central counterparty and clearing house is European Commodity Clearing AG (ECC) in Leipzig.⁶⁴ It is authorised as a central counterparty under German law.⁶⁵ At the national level it is supervised by BaFin and the Bundesbank.

Eurex Clearing AG (ECAG) provides clearing services for transactions in certain markets and in certain products (co-operation products) as a central counterparty (Sub-CCP) based on a separate agreement (CCP-Sub-CCP Agreement).

UK electricity futures can also be traded on ICE Futures Europe in London. ICE Futures Europe is operated and owned by IntercontinentalExchange, Inc., a Delaware company (ICE).

The status of ICE Futures Europe is particularly interesting, because ICE Futures Europe has connections to many regulatory regimes. First, it is a regulated market under MiFID.⁶⁶ Second, it is a Recognised Investment Exchange (RIE) and a Recognised Auction Platform (RAP) supervised by the Financial Conduct Authority (FCA) in the UK.⁶⁷ Recognition as a Recognised Investment Exchange under the Financial Services and Markets Act 2000 gives an exemption from the need to be authorised to carry on a regulated activities in the UK. As an RIP, ICE is permitted to operate an auction platform for the purposes of auctioning primary emission allowances under Phase III of the EU Emissions Trading Scheme. Third, ICE is an Exempt Commercial Market (ECM) in the US.

Unlike ICE Futures Europe, ICE’s US competitor NYMEX is a Designated Contract Market (DCM) and Self-Regulatory Organization (SRO). It is therefore subject to full oversight by the Commodity Futures Trading Commission (CFTC) in the US. ICE is subject to less US regulation, in particular because it trades its energy futures overseas through ICE Futures Europe.⁶⁸

The roots of ICE Endex lie in APX-ENDEX. APX-ENDEX Holding B.V. was a holding company that owned operators of spot markets and derivatives markets in the Netherlands, Belgium, and the UK. It was behind APX-ENDEX Derivatives and APX Power UK.

APX-ENDEX Derivatives was the electricity derivatives market for the Netherlands and Belgium. It was a regulated market operated by APX-ENDEX Derivatives B.V., a Dutch company.⁶⁹ APX-ENDEX Derivatives B.V. was supervised by the Netherlands Authority for the Financial Markets and by the Dutch Central Bank. APX Power UK was a market operated by APX Commodities Limited, a company authorised by the UK Financial Services Authority (FSA) to act as a Multilateral Trading Facility (MTF).

ICE Endex Futures Exchange was established in March 2013 after the split of APX-ENDEX into a derivatives exchange and an exchange for physical products.

It is a regulated market operated by ICE Endex Derivatives B.V., a Dutch company. The company’s majority shareholder is ICE with N.V. Nederlandse Gasunie as a minority shareholder. ICE Clear Europe Limited, a company registered in England & Wales, acts as the central counterparty and clearing house. ICE Clear Europe is a recognised clearing house under section 288 of the Financial Services and Markets Act 2000 supervised by the Bank of England.

Most emission allowances are auctioned in Phase III of the EU ETS (Sect. 7.​2). The procedure is based on the Auctioning Regulation⁷⁰ that also lays down the selection procedure for auction platforms.⁷¹ There are several auction platforms. (a) There is a common auction platform.⁷² The Commission has appointed European Energy Exchange AG (EEX) as the first common platform. (b) However, a Member State may decide not to participate in the joint action.⁷³ Germany, Poland, and the UK have decided to opt out of the common platform and to appoint their own auction platforms. EEX has been selected by Germany as its opt-out auction platform. The UK has appointed ICE Futures Europe as its opt-out auction platform.

Margining means the organised process by which collateral is furnished by market participants to cover financial positions. In the EU, margining is a legal requirement under EMIR¹⁵² and the Auctioning Regulation.¹⁵³

Margining is used both for exchange and for OTC trades. Margins are customarily required even in bilateral OTC trade. In exchange trade, the required collateral is posted directly with the clearing house. If a margin is posted in bilateral OTC trade, it can either be posted with the counterparty directly (which is customary) or through a clearing house.¹⁵⁴

The amount of the required margins increases with higher price volatility. An increase in the volatility of spot market prices increases the amount of required margins in the derivatives market more.¹⁵⁵

In principle, there can be cash collateral and non-cash collateral. (a) There is a distinction between highly liquid collateral and bank guarantees. According to EMIR, a central counterparty may only accept “highly liquid collateral with minimal credit and market risk”. For non-financial counterparties, it may accept bank guarantees that are demand guarantees. Where “appropriate and sufficiently prudent”, it may accept the underlying of the derivative contract.¹⁵⁶ (b) A Commission Delegated Regulation specifies the applicable standards.¹⁵⁷ Cash, financial instruments, bank guarantees, and gold are regarded as “highly liquid collateral”.¹⁵⁸ Collateral must usually be marked-to-market “on a near to real time basis”.¹⁵⁹ There must be “prudent haircuts”.¹⁶⁰ Moreover, collateral must remain “sufficiently diversified to allow its liquidation within a defined holding period without a significant market impact”. There are thus concentration limits.¹⁶¹

Commission Delegated Regulation 153/2013 limits the use of financial instruments as highly liquid collateral. Only certain kinds of financial instruments, transferable securities and money market instruments are considered as highly liquid collateral according to Annex I.

Moreover, Annex I limits the use of bank guarantees as collateral. A commercial bank guarantee is not accepted unless it fulfils the following and other conditions: (1) it is a demand guarantee; (2) it is issued to guarantee a non-financial clearing member; (3) it is irrevocable and unconditional; and (4) the CCP can demonstrate to the competent authority that the issuer has low credit risk; (5) it is not issued by an entity that is part of the same group as the non-financial clearing member covered by the guarantee; and (6) it is “fully backed by collateral” that meets further conditions.

The wording of Annex I is problematic. Asking non-financial counterparties such as electricity producers, suppliers, and end consumers to pay for demand guarantees and back them fully by collateral has effects that are contrary to the stated purposes of EMIR.¹⁶²

The effect of the rule that bank guarantees must be “fully backed by collateral” is that it becomes more difficult for electricity producers to use derivatives that are subject to the mandatory clearing obligation. Obviously, the collateral will need to be provided by the bank’s customer which in most cases is an electricity producer, a supplier, or a large end consumer. This increases costs without reducing systemic risk. It cannot be assumed that both the issuer of the guarantee (a bank) and the customer (a participant active in electricity generation, supply, or consumption) would default at the same time, and the obligations of non-financial counterparties customarily are backed by non-financial and other assets. Because it is very important for electricity producers, suppliers, and end consumers to use derivatives for hedging purposes, the rule that guarantees must be “fully backed by collateral” in a qualified way gives an incentive to use derivatives that are not subject to the clearing obligation. Consequently, transaction costs could be increased, transparency and liquidity reduced, and risks increased. The Delegated Regulation provides for a transitional period of 3 years ending in March 2016¹⁶³ because of other unwanted effects.¹⁶⁴ However, the main problem remains. From the perspective of all market participants, it would have been better to make the transitional exemption permanent.

Counterparty risk is reduced if the settlement period is short. While there have been differences between markets in the past,¹⁶⁵ it is customary to use daily settlement of positions in financial electricity markets.

Nasdaq Commodities uses Daily Market Settlement and Expiry Market Settlement. In both cases, trades are settled on each bank day in cash. Only the net sum of the payable amounts will be paid to the clearing house.¹⁶⁶ Daily settlement is used also in the EEX Power Derivatives Market.

Gross settlement would require more capital than the netting of payments. Netting belongs to the customary ways to reduce capital needs and manage counterparty risk.¹⁶⁷

Netting should be facilitated by a contractual framework to make it enforceable and binding. It is customary to use the ISDA Master Agreement or a similar legal framework (Sect. 11.​6). Legal risks relating to clearing and settlement are reduced in the EU by the Settlement Finality Directive¹⁶⁸ and the Collateral Directive.¹⁶⁹

A spot market needs an electricity pool, an auction mechanism, and physical matching.

Bids are matched by the operator of the exchange or the clearing house. There are bids to supply and bids to purchase electrical energy. For every hourly (or sometimes half-hourly) period of the following day, bids to supply are ranked in ascending order of price. Offers to purchase are ranked in descending order of price. The point where supply and demand intersects is the system (marginal) price for the entire geographic region covered by the electricity pool.

Physical real-time matching of supply and demand is done by the system operator that has to monitor the frequency of the power system and call up a producer (a balance provider) to increase or decrease electricity generation to keep the frequency within narrow bounds.

The two most important Northern European spot markets are Nord Pool Spot (the Nordic and Baltic area and the UK) and EPEX Spot (Western Central Europe).

EPEX Spot is defined as “a fully electronic exchange offering spot trading in power by closed auction and continuous trading with expiries day ahead and intra-day for the market areas Austria, France, Germany, and Switzerland”.¹⁷¹ One or more market segments are associated with each market area.

Nord Pool Spot is the largest power market in Europe.¹⁷² It is the physical wholesale marketplace for Denmark, Norway, Sweden, Finland, Estonia (since 2010), Lithuania (since 2011), and Latvia (since June 2013).¹⁷³ Because of market integration, there are no separate national wholesale electricity markets in this region. In 2013, the share of electricity traded on Nord Pool Spot was 84 % of the region’s consumption (up from 76 % in 2011).¹⁷⁴

Because of grid bottlenecks, the Nordic and Baltic area is divided into a number of bidding areas. For each country, the local TSO decides which bidding areas the country is divided into. The Nordic market used to be split into six price areas: Finland, Sweden, West Denmark (Jutland), East Denmark (Zealand), South Norway (Oslo), and North Norway (Tromsø). In 2010, Norway was split into five price areas. Sweden was split into four price areas in 2011. Each of Estonia, Latvia, and Lithuania is a price area.¹⁷⁵

Nord Pool Spot has provided a model for the organisation of other sport markets in the EU¹⁷⁶ and it has activities even outside its core geographical area. Nord Pool Spot consists of Elspot, Elbas, and N2EX. N2EX is the physical market for the UK. The Elbas market covers even Germany.

Elspot is the common Nordic and Baltic market for trading physical electricity contracts with next-day supply. On Elspot, hourly power contracts are traded daily for physical delivery in the next day’s 24-h period.

Elbas is a physical balance adjustment market for the Nordic and Baltic region including Germany.

Both the Elspot and Elbas market used to include even the KONTEK area in Germany. The German bidding area KONTEK in Nord Pool Spot’s Elspot market was closed down in November 2009 because of the launch of the EMCC market coupling between Denmark and Germany. However, the Elbas market covers Germany as well.

In June 2010, APX-ENDEX, Belpex and Nord Pool Spot agreed to create a cross-border intraday electricity market based on Nord Pool Spot’s Elbas technology.

An improved version of the Elbas trading system was launched on 25 November 2014. The launch of Elbas 4 that replaced Elbas 3.2 (the previous intraday trading system) enabled trade across multiple markets. The transition was identical in all ten countries using Elbas: the Nordic countries, the Baltic countries, Germany, the Netherlands, and Belgium. Elbas 4 improved trading opportunities in all ten countries but even more in Germany.¹⁷⁷

In May 2014, the power exchanges APX, Belpex, EPEX SPOT, Nord Pool Spot, and OMIE (including sixteen TSOs) agreed on the core building blocks of the future European Cross Border Intraday Solution. The future Intraday Solution will enable continuous cross-border trading across the whole of Europe with intraday adjustments to trades concluded in the day-ahead market.¹⁷⁸

On Elbas, the trading hours are the coming 10–38 h. For the Nordic and Baltic areas, contracts are opened for trading the same day as the Elspot prices are set, normally at 14:00 CET. Trading is closed 1 h before delivery commences.

The German market is different. Before the launch of Elbas 4, trading was open from 08:00 until 13:45 CET and from 15:00 until 30 min before the commencement of delivery.¹⁷⁹ With Elbas 4 both 15-min and 30-min products were introduced initially only for trading in the German market area. To further improve trading opportunities within Germany, Germany is handled as four bidding areas. The four bidding areas are identical to the four TSO areas 50HZ, TTG, AMP and TBW.¹⁸⁰

N2EX commenced its operations in 2010 after NASDAQ OMX Commodities and Nord Pool Spot had been selected by The Futures & Options Association (FOA) to provide market and clearing services for the UK wholesale power market. Since October 2014, N2EX is Nord Pool Spot’s physical power market in the UK.

A condition for the approval of a trading participant is that the applicant can participate in the physical settlement of transactions. The exchange operator and the clearing house require evidence of the applicant’s capability for physical settlement. The TSO’s contractual framework therefore has to be in place for the applicant.

Participants in the N2EX physical market must be parties to the BSC and fulfil all applicable criteria for being ECV Transferees under the Clearing Rules, the ECV Transferee Agreement, and the BSC.¹⁹¹

Participants in the other physical markets of Nord Pool Spot must have in place all necessary agreements to enable them to trade in the physical markets and to perform their obligations¹⁹², and they must have entered into an agreement on balance responsibility with the relevant balance responsible party or the TSO.¹⁹³

Participants in trading on EPEX Spot must also have secured the orderly settlement of transactions.¹⁹⁴ According to the EPEX Spot Exchange Rules, the approval of an applicant as a trading participant requires the necessary declarations and evidence of the capability for physical settlement of transactions. The Exchange Rules focus more on financial settlement (in addition to technical facilities and personnel).¹⁹⁵

This does not exclude the use of middlemen such as trading agents that act on behalf of one or more admitted participants.¹⁹⁶

On EEX, Approved Trading Agents are entitled to effect the conclusion of transactions on behalf and for the account of trading participants. These Trading Agents do not have to be trading participants themselves.¹⁹⁷

In addition to financial and physical settlement, the applicant must be able to participate in clearing. The applicant firm may do it directly (by being the central counterparty’s counterparty in clearing transactions) or indirectly (by being a clearing member’s client). The firm is not eligible as an exchange member unless it is eligible as a counterparty in clearing transactions under the applicable clearing rules.

On Elspot and Elbas, a member must fulfil the following conditions to be eligible as a counterparty to clearing transactions. It must: “a. have appointed a clearing responsible; b. have established one or more Trading Portfolio(s); c. have established one or more Cash Account(s) for settlement purposes to be either a Pledged or Non-pledged Cash Account; d. have established one or more Clearing Account(s); e. have established Collateral as a Pledged Cash Account or a On-Demand Guarantee, and have met its Collateral Call; and f. not have its access to Clearing suspended or terminated in accordance with the Trading Rules”.¹⁹⁸ The member must at all times be able to document that it fulfils the criteria.¹⁹⁹

On EPEX Spot, exchange members must take part in clearing on ECC. A clearing member must have concluded a Clearing Agreement with European Commodity Clearing AG, and a non-clearing member with a clearing member.²⁰⁰

In addition to rules on access to trading, the exchange operator adopts rules on the listing and delisting of contracts and decides on the admission of contracts to trading.

Nord Pool Spot AS (NPS) decides which instrument series will be listed on Elspot. NPS also decides on the removal (delisting) of a listed instrument series.²⁰¹

In the physical market of N2EX, NPS decides which products will be listed and on their removal (delisting). However, delisting may not be effected for physical products which have an open Interest with the clearing house other than zero (0).²⁰²

In the EPEX Spot market, EPEX Spot SE decides on admission to trading, suspension, and delisting.²⁰³ Suspension and delisting are possible for an important reason, such as where orderly exchange trading is jeopardized.²⁰⁴ In both cases, the decision requires approval by the Exchange Council of EPEX Spot SE.²⁰⁵

Different trades are settled at different prices when bids on the spot exchange are matched continuously like in securities markets.

N2EX. The N2EX Prompt Market (with delivery taking place up to 7 days ahead)²¹³ and the N2EX Spot Market (with delivery normally taking place within the next 48 h period)²¹⁴ are markets for continuous trading. Transactions are matched automatically when concurring orders are registered in the market operator’s system for electronic trading (ETS). Transactions resulting from orders being matched in the ETS are automatically and mandatory registered for clearing. The Auction Market is not a market for continuous trading.²¹⁵

Elbas. Elbas is a market for continuous trading. Trading takes place every day around the clock until one hour before delivery. Concurring orders—the highest buy price and the lowers sell price are matched on a first-come, first-served basis.

EPEX Spot. Transactions on EPEX Spot are effected by matching bids either continuously (meaning that bids are entered into the order book for immediate execution) or by auction (meaning that there is an accumulation period during which bids are entered in the order book but not executed).²¹⁶ Continuous trading is used in intraday markets (in addition to intraday auctions for the German market area).²¹⁷ During the trading session, orders are then executed “at the best price available in the system”: the best orders in the order book are matched automatically with same-priced orders entered in the order book.²¹⁸

The opposite of continuous trading is the matching of bids by auction. In this case, bids are accumulated in the order book during an accumulation period. Different bids are then matched at the same price.²¹⁹

There can be various kinds of orders (bids) in auctions depending on the trading rules of the exchange. Orders can thus be qualified.

First, one can distinguish between single contract orders and block orders. The basic form is the single contract order that is limited to electricity supply during a certain hour. Block orders are aggregate bids for several hours, with a fixed price and volume throughout these hours.

For instance, a block of consecutive hours might allow an electricity producer to spread out the start-up costs and also to offer lower prices. An industrial firm as the end consumer might prefer to submit a block order for the start-up of an energy-intensive production process.²²⁰

One can also distinguish between various kinds of order types based on how an order is executed.

There are various order categories in continuous trading on EPEX Spot. Buy or sell orders can be “limit orders” (that carry a price limit and can only be executed at this price or at a better price) or “market sweep orders” (that are matched with several contracts).²²¹

Moreover, EPEX Spot allows parties to use the following execution restrictions in continuous trading: “immediate-or-cancel” (IOC, market sweep orders are restricted in this way); “fill-or-kill” (FOK); “linked fill-or-kill” (LFOK); and “all-or-none” (AON). Orders can also be entered with the following validity restrictions: “good for session”; “good till date”; and “iceberg” or hidden-quantity. There are restrictions on how these restrictions may be combined.²²²

On Elspot, orders are hourly orders, flexible hourly offers, block orders, or linked block orders.²²³ Block orders cover a minimum of three consecutive hours subject to the block order volume limit. In the Elspot market, block orders are “all-or-nothing orders” but can also be “linked blocked orders”.²²⁴

In the Elbas market, the launch of the Elbas 4 trading system in November 2014 increased the number of order types. The previous rules provided for “block orders” and “fill orders”. A block order was an “all-or-nothing order” covering one or more consecutive hours. The volume could also be limited in various ways.²²⁵ A “fill order” meant an order that may be matched for the full volume or part of the volume. Both order types are still available. The launch of Elbas 4 made it possible for Nord Pool Spot to introduce three new order types: “Immediate-or-Cancel” (that resembles “Fill-and-Kill”), “Fill-or-Kill” and “Iceberg”.²²⁶

There is some variation in the N2EX market depending on the product.²²⁷ For the Prompt Market and the Spot Market with continuous trading, the order types are “Fill”, “Fill-and-Kill” (that resembles “Immediate-or-Cancel”),²²⁸ “Fill-or-Kill”, “Stop Order”,²²⁹ and “All-or-Nothing”. For the Auction Market, the order types are “Hourly Orders”, “Flexible Orders”, “Block Orders”, and “Exclusive Groups”.²³⁰

Second, exchange rules may even provide for other types of qualified orders to increase a closer alignment of orders with market participants’ technical or commercial requirements.

It is possible to use price steps to combine prices and volumes on Elspot.²³¹ Consequently, there can be hourly orders²³² and flexible hourly offers. A flexible hourly offer is defined as an “offer in the Elspot Market specifying which volume of electricity a participant would be willing to sell at a specified price in any Delivery Hour within the relevant Delivery Day”.²³³

Third, exchange rules may facilitate gross bidding. When they do, a member may sell its full production volume on the exchange and purchase the full outbound sales volume on the exchange without the internal netting of volumes.

For a member, cross bidding is partly a “make or buy” question (Sect. 2.​3.​5). The member could choose to buy or sell net volumes and use internal invoicing for intra-firm transactions. If the member chooses cross bidding, the need for internal invoicing is reduced and it becomes easier for the member to benefit from the flexibilities of generation and sales.²³⁴ On the other hand, there are fees for trading.

Cross bidding can be facilitated by lower fees for amounts that net to zero. The operator of the exchange may offer lower fees for gross bidding as it increases traded volumes and contributes to the liquidity and transparency of the power market.

Nord Pool Spot used to make its gross bidding service available for members in the Participant category only. From 1 February 2015, the gross bidding service was expanded to include the Client member category.²³⁵

The Gross Bidding Agreement includes additional provisions regarding Trading in Elspot by Participants with both sales portfolios and purchase portfolios. The agreement applies only to the area of one TSO.²³⁶ The Participant undertakes to carry out gross bidding for all sales portfolios and purchase portfolios and to refrain from internal netting/matching of purchase interests in the purchase portfolio(s) with sales interest in the sales portfolio(s).²³⁷ The Participant is entitled to a reduced fee. A reduced fee is paid for the amount of purchase and sales volumes that nets to zero. Standard fees are paid for the remaining volume.²³⁸

The Gross Bidding Agreement—Clients contains similar provisions for the Client member category.²³⁹

The choice of the auction method can be combined with a system price. In the day-ahead market, bids to supply are ranked in ascending order of price for every hourly (or sometimes half-hourly) period of the following day. Offers to purchase are then ranked in descending order of price. The point where supply and demand intersects is the system (marginal) price for the entire geographic region covered by the electricity pool.

Trading on Elspot is based on a system price and area prices. There are general rules on the matching of hourly orders at the point of intersection between the aggregated offer and bid curves²⁴⁰ and particular rules on the procedure to be applied in the event that a point of intersection between the purchase and sales curves is not achieved.²⁴¹

After market participants have submitted bids indicating the amount of power they want to buy or sell at different price levels and the gate is closed,²⁴² Nord Pool Spot draws demand and supply curves for each hour based on the submitted prices and volumes.²⁴³ All trades are settled at the price for the point where these curves meet (the intersection point, the system price). The results are subject to final confirmation in accordance with the applicable NWE Price Coupling procedures.²⁴⁴

This is nevertheless just the simplified main rule. Price calculation is made more difficult by the permission to submit various kinds of orders—hourly orders, flexible hourly offers, block orders, linked block orders, and convertible block offers²⁴⁵—and by transmission capacity constraints. The existence of transmission capacity constraints may require market splitting and area prices (Sect. 5.​2).²⁴⁶ Moreover, where a point of intersection is not achieved (“non-matching”), various actions will become necessary.²⁴⁷

When bids on EPEX Spot are matched by auction (rather than continuously), supply and demand orders are matched after an accumulation period during which orders are entered in the order book.²⁴⁸ The orders sent to EPEX Spot SE by exchange members remain in the order book unless they are executed, modified, or cancelled.²⁴⁹ Once the order book is closed, orders may not be modified or cancelled and are irrevocable.²⁵⁰ The auction takes place after the order book has closed.

The price determination algorithm aims at optimising “total welfare, i.e. the Seller Surplus, the Buyer Surplus and the Congestion Rent including tariff rates on interconnectors”.²⁵¹ The price determined by the algorithm at the time of auction is the price at which all trades will be executed.²⁵² The price is the price at the intersection point of the supply and demand curves, that is, the aggregate supply and demand curves of exchange members’ single orders and block orders for each contract. The existence of conditional bids makes it a bit more complicated to determine the intersection of the supply and demand curves.²⁵³

The particular provisions on volume market coupling on the German/Austrian auction segment are no longer necessary as EMCC has been replaced by NWE price coupling.²⁵⁴

The merit order principle means two things. First, all trades are settled at the same clearing price. Second, bids are matched in the order of merit.

The merit order is the order in which generation capacity is utilised. In practice, the merit order ranking of a certain utility depends on its variable costs. Combined with competition in the electricity markets, the merit order principle could lead to the most efficient use of generation resources. Electricity with the lowest variable generation costs is used first (wind power, hydropower, nuclear power). Installations with higher variable costs are not used until required by demand.

Merit order rankings can be determined in different ways. (a) There could be a centralised way to determine them based on each utility’s variable costs. (b) Alternatively, the merit order could be determined based on the buy or sell orders submitted by rational market participants. This is the method used by Nord Pool Spot and one of the two methods used by EPEX Spot. (c) The ranking of utilities can also be manipulated by legislation.

The manipulation of merit order rankings by legislation would influence the use of generation resources and the allocation of investment in generation resources. The scope of the market that is based on the merit order principle can also be reduced by increased use of other mechanisms. The merit order principle benefits intermittent generation technologies with low (zero) variable costs. Merit order rankings could be manipulated, for instance, to increase investment in electricity produced from waste or the production of CHP. On the other hand, the scope of the market that is based on the merit order principle is partly reduced by the preferential treatment of RES-E.

Member States of the EU have a duty to ensure that TSOs and DSOs (a) guarantee the transmission and distribution of RES-E and (b) provide for its priority access or guaranteed access to the grid. What applies to RES-E applies to electricity produced from waste or the production of CHP.²⁵⁵ Feed-in tariffs are manipulated under EU law and Member States’ national laws.

In Germany, the biggest market in Europe, preferential treatment is facilitated by EEG 2014.²⁵⁶ (a) EEG 2012²⁵⁷ required TSOs to purchase renewable power at fixed feed-in tariffs.²⁵⁸ They were compensated by electricity undertakings further down the chain.²⁵⁹ Final consumers ended up paying the difference between market prices and the fixed feed-in tariffs.²⁶⁰ (b) According to EEG 2014, small installations continue to benefit from fixed feed-in tariffs (Einspeisevergütung) and do not have to sell on the market.²⁶¹ Other producers of RES-E are supported by market premiums (Marktprämie) paid on top of the market price.²⁶² The TSO still has a duty to purchase RES-E.²⁶³

The rules of the exchange can set out: at what point in time the matching of bids results in a binding contract; how long bids remain binding; whether bids are revocable²⁶⁴; and whether trades may be cancelled. There can also be different kinds of bids (order types) depending on the matching method (how an order is executed).

The matching of bids in the spot market is more difficult compared with the matching of bids in securities markets. To mitigate its own risk exposure, the operator of the exchange may want to increase its discretion to refuse orders and reduce its liability to bidders.

It is customary to distinguish between flow-related activities and securities-related activities in securities markets. Flow–related activities start after the matching of bids and end with the transfer of securities, cash, or both between final market participants. Securities–related activities are independent of the completion of transactions. For example, they include establishing securities in book-entry form, deposit, account providing, and asset servicing.²⁷⁰

While similar flow-related activities are used in electricity spot markets, one can distinguish between activities relating to financial flows and physical flows. (a) Clearing activities relating to physical flows play an important role in electricity spot markets. Such electricity-related clearing activities relate to the maintenance of balance in the grid. The fact that there are electricity-related clearing activities influences the organisation of clearing and settlement. (b) Clearing activities relating to financial flows can be defined as the process of establishing settlement positions, including the calculation of net positions, and the process of checking that the necessary electricity, collateral, and cash are available.²⁷¹ (c) In electricity spot markets, securities-related activities are limited to collateral and can thus be called collateral–related activities.

The various post-trading functions can be integrated or unbundled. This leads to questions about the market participant’s counterparty. Should the clearing house be the central counterparty? Can the clearing house be the central counterparty regarding physical flows?

EMIR provides that the central counterparty is responsible for the operation of the clearing system.²⁷² The voluntary European Code of Conduct for Clearing and Settlement is based on the assumption that the functions of central counterparty and clearing house should be combined. However, the Code recommends the unbundling of the functions of trading venue (exchange operator) and central counterparty.²⁷³

The integration of the functions of clearing house and central counterparty, and the separation of the functions of exchange operator and clearing house, might be explained by issues relating to the management of risk, information, and costs. There are nevertheless differences between financial flows and physical flows.

There are issues for and against combining the roles of clearing house, central counterparty, and provider of settlement services for financial flows.

On one hand, combining the roles can reduce systemic risk and transaction costs by increasing access to information. As an information hub, the clearing house receives and produces information. Access to this information enables it to assess counterparty risk and its own risk exposure as central counterparty. One of the basic ways to manage systemic risk is to collect sufficient collateral from market participants in the form of margins and otherwise. Information costs (transaction costs) can be reduced if the same entity acts as a central counterparty, clearing house, settlement agent, and collateral agent.

On the other hand, it may be easier to manage systemic risk, if the clearing house is separate from the exchange operator. The separation of functions makes it necessary to exchange information. If the clearing house is not the exchange operator responsible for the access of market participants and the matching of bids, the operator and the clearing house should exchange information about: compliance with the terms of market access²⁷⁴; and matching bids.²⁷⁵ The separation of functions can facilitate mutual monitoring. The exchange of information and mutual monitoring can increase transparency.

While the clearing house is often the party that acts as central counterparty for financial flows, it can neither supply nor extract electricity in its capacity as clearing house. The same can be said of the exchange operator. It does not matter whether the operator or the clearing house has a contractual obligation to supply or extract electricity. Neither the operator nor the clearing house can direct physical electricity flows. Physical flows must be managed by the TSO.

If the central counterparty for financial flows nevertheless acts as the central counterparty for physical electricity flows, it is exposed to the risk that the agreed flows will not happen because of the TSO’s actions. This risk is addressed in the trading rules and clearing rules (Sect. 4.5.6).

As regards the central counterparty for financial flows, EMIR provides that the central counterparty is responsible for the operation of the clearing system.²⁷⁶ The voluntary European Code of Conduct for Clearing and Settlement recommends the unbundling of the functions of trading venue (exchange operator) and central counterparty.²⁷⁷

The spot exchanges studied here have designated the clearing house as the central counterparty, but the party designated as the clearing house/central counterparty can be either the exchange operator (Nord Pool Spot) or a third party (EPEX Spot and N2EX in the past).

EPEX Spot SE (a French company) has designated European Commodity Clearing AG (a company with its seat in Leipzig) as the clearing house. The clearing house acts as the central counterparty for payment and delivery of the contracts traded or registered at the exchange.²⁷⁸

The physical markets of Nord Pool Spot share the same operator, Nord Pool Spot AS (a Norwegian company). Nord Pool Spot AS is the counterparty for trading in the Elspot market and (since 1 January 2011) in the Elbas market (after replacing its subsidiary Nord Pool Finland Oy as the counterparty at Elbas).²⁷⁹

In the past, Nord Pool Spot AS was neither the clearing house nor the central counterparty for trading on N2EX. The clearing house and central counterparty was NASDAQ OMX Stockholm AB (a Swedish company).²⁸⁰ Since 1 October 2014, Nord Pool Spot AS is the central counterparty and clearing house in the physical market of N2EX.²⁸¹

If there is a central counterparty, there must also a contractual mechanism to ensure that once the bids are matched into a trade, the trade gives rise to two contracts with the central counterparty as there is no bilateral contract between the two market participants. If the exchange operator is the central counterparty (Nord Pool Spot), information flows are easier to manage. If the exchange operator is not the central counterparty (EPEX Spot), information flows must be regulated in more detail. To reduce risk in the latter case, clearing must be initiated by the exchange operator that matches the bids, and it must be initiated automatically.

The mechanism is relatively simple on Elspot, because Nord Pool Spot AS is both the exchange operator and the central counterparty/clearing house: “Clearing is initiated by NPS entering into a Transaction as central counterparty and registering the Transaction on the Clearing Accounts of the Account Holders involved”.²⁸²

More regulation was needed in N2EX when Nord Pool Spot AS acted as the exchange operator and NASDAQ OMX Stockholm AB was the central counterparty/clearing house.²⁸³ Transactions concluded on the trading system are now automatically subject to clearing.²⁸⁴

On the derivatives market of EPEX Spot, contracts are deemed to have been concluded between European Commodity Clearing AG (ECC) as the central counterparty and each of the trading participants when corresponding orders are matched.²⁸⁵ Spot market transactions are deemed to have been concluded both between ECC and ECC Lux (European Commodity Clearing Luxembourg S.a.r.l.) and between ECC Lux and the trading participant in the same way.²⁸⁶ The clearing conditions of the central counterparty and clearing house focus on financial flows.²⁸⁷

One may ask whether the central counterparty for financial flows can act as the central counterparty also regarding physical electricity flows. Physical flows must be managed by the TSO. If the central counterparty for financial flows acts as the central counterparty for physical electricity flows, it is exposed to the risk that the agreed flows will not happen because of actions by the TSO.

There are various complementary ways to mitigate risk and agency costs in the relationship between the central counterparty and the TSO. They include, among others: information management; the alignment of interests; and risk management through contracts: (a) One can improve the TSO’s chances to do its job properly by improving the quality of information and by making even market participants responsible for balancing and coordination. (b) Generally, agency costs between the central counterparty and the TSO could can be reduced where their interests are aligned through contracts, share ownership, or otherwise. (c) The central counterparty’s risk exposure can be mitigated through contracts. First, the central counterparty’s risk exposure can be mitigated by limiting or excluding its liability to trading participants in various ways: the responsibility for the physical settlement of trades can be allocated to a third party; the central counterparty can assume best efforts obligations instead of obligations to achieve a result; or the liability of the central counterparty for loss or damage relating to physical settlement or actions attributable to the TSO can be limited or excluded. Second, the TSO can be made party to a three-party or multi-party contract relationship.

There are many examples of such practices in the spot markets studied here.

In the physical markets of Nord Pool Spot, all shares of the operator (Nord Pool Spot AS) are owned by the Nordic and Baltic TSOs. The operator acts as the clearing house and central counterparty. The TSOs’ interests are therefore aligned with those of the clearing house and central counterparty.

However, there is no share ownership between the operator (Nord Pool Spot AS) and the relevant TSOs in the physical market of N2EX. Neither does the operator function as the central counterparty and clearing house. This requires a more detailed contractual framework that market participants must comply with.

Like the physical market of N2EX, the EPEX Spot market requires a detailed contractual framework with the TSOs. (a) There are multi-party agreements called balance agreements between the TSO, trading participants, the central counterparty/clearing house, and the party responsible for settlement.²⁸⁸ Moreover, some participants in the EPEX Spot market are balance responsible parties responsible for balance groups.²⁸⁹ (b) The liability of the central counterparty (European Commodity Clearing AG, ECC) is limited in various ways. First, the central counterparty (ECC) is not responsible for the physical fulfilment of trades. It only guarantees fulfilment. Second, its subsidiary (European Commodity Clearing Luxembourg S.a.r.l., ECC Lux) has assumed responsibility for the physical settlement of trades. Third, clearing members have a duty to settle all obligations arising from the matching of orders or registered OTC transactions²⁹⁰ (and each clearing member is liable as a guarantor towards ECC Lux for non-clearing members’ financial liabilities).²⁹¹ Fourth, ECC and ECC Lux exclude their liability for the actions of the TSO, and for their own actions to the extent that they are based on the TSO’s actions.²⁹²

There are many potential forms of collateral and other credit enhancements.⁴³² In principle, there can be cash collateral and non-cash collateral. The quality of collateral is regulated by EMIR⁴³³ and a Commission Delegated Regulation laying down the main rules.⁴³⁴ (These requirements are discussed in Sect. 4.4.5). Within such limits, market participants may be given some discretion to choose the form of collateral. The level of discretion depends even on the exchange. For operational reasons and for the sake of liquidity and transparency, central counterparties prefer to limit collateral to cash deposits and/or on-demand guarantees. There is nevertheless variation between exchanges.

On Nord Pool Spot, members (that is, participants, client representatives, and clients)⁴³⁵ must provide collateral through any one, or a combination, of the permitted forms of collateral.⁴³⁶ The permitted forms of collateral are pledged cash accounts or demand guarantees.⁴³⁷ A member must have one or more cash accounts for settlement purposes. A cash account is either a pledged or a non-pledged cash account.⁴³⁸ A member may also provide as collateral “any security instrument accepted by NPS under an Aggregated Collateral Arrangement with the Member”.⁴³⁹

These Aggregated Collateral Arrangements allow members who trade in both Elspot and N2EX markets to have their collateral requirements calculated on an aggregate basis and enable them to provide a single aggregated pool of collateral as security for their total exposure to Nord Pool Spot. This reduces their overall collateral costs and working capital requirements.

In the N2EX market, each account holder is subject to collateral calls.⁴⁴⁰ Collateral can consist of cash, a letter of credit or bank guarantee, or of other collateral.⁴⁴¹ For instance, collateral for daily margin calls must be furnished in the form of cash or otherwise.⁴⁴² The value of cash collateral and bank guarantees has been defined in advance. The value of other acceptable collateral is determined by the clearing house.⁴⁴³

In the EPEX Spot market, each clearing member must deposit margins “in cash or in securities or stock loan rights accepted by ECC”,⁴⁴⁴ and a non-clearing member must deposit margins at its clearing member.⁴⁴⁵ On EPEX Spot, the clearing house thus specifies the kind and amount of collateral that must be deposited by a clearing member.⁴⁴⁶ ECC also determines their collateral value.⁴⁴⁷

Each exchange participant must deposit the required margins and the daily settlement payments in the EEX Power Derivatives Market.⁴⁴⁸ A clearing member must deposit collateral in cash, securities, or book-entry security. Emission rights are not regarded as securities or book-entry security.⁴⁴⁹ However, even they will be pledged by a trading participant.⁴⁵⁰

Nasdaq Commodities defines collateral as “assets in the form of cash in the eligible currencies and/or the eligible securities and/or Bank Guarantees, as specified in the Collateral List from time to time”.⁴⁵¹ The Collateral List⁴⁵² sets out what collateral is eligible and how eligible collateral is valued. To illustrate, securities cannot be accepted as collateral unless they have daily prices available via Reuters. Market participants that are non-financial counterparties under EMIR are permitted to provide as collateral a demand guarantee issued by a bank.

The Auctioning Regulation distinguishes between futures and forwards based on margining. Futures are subject to cash variation margining. Forwards are variation margined through non-cash collateral.⁴⁵³

There are various kinds of margin calls (or collateral calls). The customary forms are (a) initial or basic margin (collateral) calls and (b) variation margin (collateral) calls. In addition, (c) cross-margining and collateral groups can be used.

EMIR provides that the central counterparty must collect margins “on an intraday basis, at least when predefined thresholds are exceeded”.⁴⁵⁴ Regulated margins include initial margins and variation margins.⁴⁵⁵

EMIR also requires payments to a default fund to cover losses arising from the default of one or more clearing members when they exceed the losses to be covered by margin requirements.⁴⁵⁶ The central counterparty decides on the size of the contributions.⁴⁵⁷

The purpose of initial margins (often referred to as base or basic margins) is to cover within-day price volatility and is payable at the time the contract is concluded.⁴⁵⁸ Whenever a position is opened, a trading participant thus has to deposit this margin with its clearing member and the clearing member in turn has to deposit this margin with the clearing house. The more volatile the contract is, the greater is the initial margin requirement.⁴⁵⁹

The clearing house of Nasdaq Commodities (NASDAQ OMX Clearing AB) will set the base collateral requirement for each clearing account when the account is initially established. The clearing house will take into consideration the account holder’s financial soundness, expected volume of transactions, the default fund requirement, and other factors which the clearing house deems relevant.⁴⁶⁰

Nord Pool Spot requires minimum collateral from all members. The minimum collateral call can be adjusted at NPS’s discretion. It can also be set individually. The minimum collateral must be established prior to the commencement of trading.⁴⁶¹

On N2EX, the clearing house determines the base collateral call for each clearing account when clearing accounts are initially established.⁴⁶²

ECC Clearing Conditions lay down the method for the calculation of the different margin requirements for derivatives market transactions (EEX) and for spot market transactions (EPEX Spot).⁴⁶³

On EEX, a SPAN® Initial Margin must be furnished for the costs of closing out net positions in futures and options.⁴⁶⁴ On EPEX Spot, a Spot Initial Margin must be furnished to cover the default of net payers for ECC.⁴⁶⁵ Moreover, there are contributions to the Clearing Fund and Additional Margins.

Contributions to the Clearing Fund concern Clearing Members. The Clearing Conditions of ECC provide that a clearing licence cannot be granted unless the institution contributes to the Clearing Fund.⁴⁶⁶ A Clearing Member must contribute to the Clearing Fund regardless of other margins. ECC can utilise these funds in the event of a default of the Clearing Member.⁴⁶⁷ Contributions to the Clearing Fund are complemented by intraday supplementary margins.⁴⁶⁸

On EPEX Spot, the basic margin (initial margin) is called the Additional Margin. It covers the risk of the maximum costs incurred for closing out all open positions of a trading participant on the next exchange trading day subject to the assumption of the most unfavourable development of prices. The Additional Margin is fixed for the entire term of the contract. ECC establishes the amount of the Additional Margin.⁴⁶⁹

Variation margin is charged during the life of the contract. It is designed to mitigate replacement risk and settlement risk (or counterparty credit risk). Additional collateral must be posted by the party holding a position that is loss-making against current market prices.⁴⁷⁰

Variation margin calls can be very substantial in times of significant price volatility. Market participants need to have sufficient capital available to cover such margin calls if they wish to trade. This can act as a constraint on trading activity.

Ofgem gives the following example: “[I]f a forward contract was struck at £50/MWh, but prices have risen to £80/MWh, the variation margin call on the seller would be £30 for every MWh delivered under the contract (in addition to the initial margin)”.⁴⁷¹

Variation margins can consist of daily margin calls and extraordinary margin calls. In addition, there can be other variation margins. Variation margins can also be called close-out margins.

On Nasdaq Commodities, daily margins⁴⁷² are complemented by extraordinary margins. The clearing house may issue an extraordinary margin requirement for special circumstances.⁴⁷³

On Elspot, there are collateral calls each clearing day in addition to the minimum collateral. Their amount is “the total purchase price for each Member’s net electricity purchase in trading during a period of days decided by NPS, including VAT”.⁴⁷⁴ There are also extraordinary margin calls.⁴⁷⁵

The modalities have been regulated in more detail for the N2EX market. In addition to base collateral calls, there are daily margin calls and extraordinary margin calls. Account holders must on each clearing day provide collateral for any daily margin calls.⁴⁷⁶ Daily margin calls consist of several components. On one hand, there are both intraday margin calls and end-of-day margin calls.⁴⁷⁷ On the other, the clearing house considers the following: a billing margin, a delivery margin, an initial margin, and a variation margin.⁴⁷⁸

ECC has adopted separate rules for establishing the amount of collateral for derivatives transactions and spot market transactions. Clearing members must request collateral at least to the amount established based on the calculation method of ECC from their non-clearing members.⁴⁷⁹

On EPEX Spot, a clearing member must furnish collateral to the clearing house in the form of contributions to the clearing fund⁴⁸⁰ and margins.⁴⁸¹ In addition to the initial margin (the Additional Margin), various kinds of margins are used.

A clearing member must furnish margins on each ECC Business Day to secure risks from its own transactions or transactions guaranteed by it,⁴⁸² and request collateral at least to the amount established based on the calculation method of ECC from their non-clearing members.⁴⁸³ A clearing member must furnish supplementary margins when the clearing house (ECC) demands it, and a non-clearing member when the clearing member demands it.⁴⁸⁴ In the spot market, a trading participant must furnish an initial margin.⁴⁸⁵

Various kinds of margins are used on EEX, that is, in the derivatives market.⁴⁸⁶ In addition to daily margins⁴⁸⁷ and supplementary margins,⁴⁸⁸ the clearing rules distinguish between additional margins,⁴⁸⁹ premium margins,⁴⁹⁰ and delivery margins.⁴⁹¹ The Premium Margin is required for open short positions in options (and not required for open long options). It resembles the Additional Margin for futures.⁴⁹² The Delivery Margin is used for gas contracts rather than electricity contracts.⁴⁹³

The use of cross-margining or collateral groups depends on the exchange.

Cross-margining means that margin requirements are applied over the lines of different kinds of products or entities. According to MiFIR, it fosters “non-discriminatory and transparent access to CCPs” and “effective competition between trading venues for derivatives”.⁴⁹⁴ EMIR permits “portfolio margining”.⁴⁹⁵

ECC uses collateral groups. Collateral is divided into different groups based on the obligations that the collateral is designed to secure in the event of a clearing member’s default.⁴⁹⁶

There must be a calculation method for margins. The question is addressed by the EMIR framework.⁴⁹⁷ However, to ensure that central counterparties duly manage the risk they face, it does not specify the approach which they should take.⁴⁹⁸ Various methods can thus be used to protect the “resilience” of the central counterparty depending on the exchange.⁴⁹⁹

NASDAQ OMX Clearing AB (“NOMX Clearing”) uses various models. It uses a Nordic SPAN model for commodities.⁵⁰⁰ Many of the features of its SPAN model differ from the original SPAN design.⁵⁰¹

In the physical markets of Nord Pool Spot, the clearing house/central counterparty has discretion to determine the required amount of collateral.⁵⁰²

In the N2EX market, there are base collateral calls, daily margin calls, and extraordinary margin calls. (a) The amount of base collateral is in the discretion of the clearing house/central counterparty (Nord Pool Spot AS) that considers “relevant factors”.⁵⁰³ (b) Moreover, account holders must on each clearing day provide collateral for any daily margin calls.⁵⁰⁴ The clearing rules define how intraday and end-of-day margin calls are calculated.⁵⁰⁵ The clearing house considers several components when calculating a daily margin call.⁵⁰⁶ However, the relative weight of the calculation parameters is in the discretion of the clearing house.⁵⁰⁷

On EPEX Spot, the amount of margins is specified by the clearing house/central counterparty.⁵⁰⁸ Margins are deposited to secure the contract obligations guaranteed by ECC.⁵⁰⁹ ECC must use a method for the calculation of the margin.⁵¹⁰ The amount of the margin is based on the default risk of a clearing member and of its non-clearing Members.⁵¹¹ A non-clearing Member must deposit margins at its clearing member at least to the amount established based on the calculation method of ECC.⁵¹²

In principle, the required amount of collateral could reflect the bargaining position of the parties. Where the amount of collateral is in the discretion of the clearing house, the interests of the clearing house or the reduction of systemic risk have a higher relative weight. Where the amount of collateral is low or set out in advance and limited, or where its quality is low, the interests of electricity producers, buyers, or other market participants have a higher relative weight.

Because of the benefits of holding collateral, the holding of collateral signals a stronger position than not holding it. Possession of collateral reduces risk exposure, increases the efficiency of the use of capital (as the party does not furnish collateral itself or, if it does, may recollateralise collateral that is in its possession), and may even increase income (as assets used as collateral are re-invested).⁵¹³ For the same reasons, there can be an incentive to hoard collateral.

The fact that collateral is furnished to the clearing house signals that the reduction of systemic risk has a higher relative weight. Where collateral is furnished to clearing members, one can assume that the interests of clearing members have a higher relative weight.

In the physical markets of Nord Pool Spot, members and clients provide collateral to the clearing house/central counterparty.⁵¹⁴

On EPEX Spot, a clearing member furnishes collateral to the central counterparty/clearing house (European Commodity Clearing AG)⁵¹⁵ and a non-clearing member to its clearing member.⁵¹⁶

Systemic risk can rise to unacceptable levels where the amount of collateral held by the central counterparty is too low because of a change in circumstances or otherwise. For this reason, the clearing house/central counterparty must have discretion to make extraordinary margin calls.

In the physical markets of Nord Pool Spot, NPS may call for extraordinary and immediate posting of collateral. The collateral call can be set individually, according to member category, or for all members. NPS also has discretion to “apply any other risk calculation procedure that the NPS considers appropriate under the relevant circumstances”.⁵¹⁷

On N2EX, NPS may issue an extraordinary margin call to an account holder if it decides that extraordinary circumstances so require. Extraordinary circumstances are matters that indicate a higher credit risk in respect of the account holder.⁵¹⁸

On EPEX Spot, ECC has the right to demand a supplementary margin at any time on account of the risk assessment which it carries out.⁵¹⁹

When employed on electricity exchanges, the content of set-off and netting tends to be influenced by: the nature of the contractual obligations; the nature of the relationship between market participants; the event; and the bargaining power of the parties.

First, there are various kinds of contractual obligations. On physical electricity exchanges, contracts are settled both physically and financially, and there are payment obligations due to collateral calls. To achieve the purpose of set-off and netting, it is necessary for the operator of the exchange and the central counterparty to regulate all three aspects—physical, financial, and collateral-related aspects—of set-off and netting.

Second, there are different kinds of relationships between market participants. To begin with, there are different kinds of market participants. For instance, trading participants range from clearing and non-clearing members to clients, and each trading participant may belong to a group of companies. The functions of a central counterparty can be allocated to one entity or divided between a central counterparty and a sub-CCP. Moreover, the obligations of a party can be owed to one or more different market participants. For instance, there are obligations owed to the TSO, the CCP, and trading participants. It is therefore necessary to regulate payments in different kinds of party relationships.

Third, situations vary. One can distinguish between: normal business relationships; default; and insolvency.

Fourth, set-off and netting rules can reflect the bargaining power of the parties. There are differences between financial flows and physical flows.

As regards financial flows, the central counterparty would prefer to net at least all accounts receivable and accounts payable towards any clearing member. However, it would be customary for the central counterparty to ensure that the obligation to provide collateral cannot be set off against the central counterparty’s payment obligations. The central counterparty and the TSO tend to reserve a unilateral set-off right in the event of a party’s default, and they use close-out netting in the event of insolvency.

As regards physical flows, whether physical off-take or supply obligations can be netted depends on the rules of the TSO. This can be illustrated with the practices of Elspot, N2EX, and EPEX Spot.

In the Elspot market of Nord Pool Spot, the previous trading rules setting out the central counterparty’s right to set off obligations⁵²³ have been replaced with netting rules. The older provisions on the central counterparty’s right to set off obligations continue to apply in Nord Pool’s physical gas market.⁵²⁴

According to the new rules, cash settlement amounts are netted cash amounts and the open balance in each product series is a netted value, either a purchase position (a positive value) or a sales position (a negative value).⁵²⁵ Collateral requirements are determined on a net basis for the whole group of companies.⁵²⁶

The central counterparty/clearing house may instruct a client representative to close out and net positions and set off obligations in the event of a client’s non-compliance event.⁵²⁷

The N2EX market shows the complex nature of set-off and netting rules. In the N2EX market, one must distinguish (a) between the legal framework of the TSO on one hand and the legal framework of the central counterparty/clearing house on the other, and (b) between payment obligations on one hand and the physical supply or off-take obligations on the other.

Physical supply and off-take obligations will be netted. Only the net position will be reported by the clearing house.⁵²⁸

Also payments cleared by the clearing house will be netted,⁵²⁹ and the amount of daily margin calls is partly based on net positions.⁵³⁰

However, collateral calls and cash settlement amounts will be calculated separately. They will not be set off or netted against each other.⁵³¹

Upon the occurrence of a material default event, the clearing house may close out and net the position of the account holder.⁵³²

Similar netting and set-off rules are applied to payments to or payable by the BSC Clearer. They will be netted “and replaced by a single obligation upon the Party or the BSC Clearer (as the case may be) who would have had to pay the larger aggregate amount to pay the net amount (if any) to the other”.⁵³³ However, while each party waives set off rights in relation to the BSC Clearer,⁵³⁴ the BSC Clearer does not waive its own rights in the event of a party’s default. In the event of a party’s default, the amount owing by the BSC Clearer will be set off against the amount(s) in default.⁵³⁵

In the EPEX Spot market, the clearing house will net accounts receivable and accounts payable from spot market transactions. There are rules on netting: (a) by the clearing house/central counterparty (ECC) in relation to any clearing member and the Sub-CCP⁵³⁶; (b) by ECC Lux in relation to a trading participant⁵³⁷; and (c) by ECC Lux in relation to ECC.⁵³⁸

In the event of a clearing member’s default, the clearing house/central counterparty may close out and net the clearing member’s positions.⁵³⁹

There are close-out netting provisions applicable in the event of the insolvency of a clearing member. Clearing members may conclude similar close-out netting agreements with their non-clearing members.⁵⁴⁰

Market participants need to comply with the market conduct regime. They also need to organise compliance to ensure that their representatives comply with the applicable rules.⁵⁴² Particular compliance programmes help the firm to manage legal risk in advance.

Because of the piece-meal approach, the market conduct regime that market participants must comply with has many sources. It has four main components. (a) One of them is the market conduct and market abuse regime of the governing law. (b) The provisions of the governing law must implement the EU market conduct regime. (c) In addition, the exchange operator may have adopted ethical guidelines and market conduct rules. (d) EFET’s Principles of Good Conduct for energy trading can help to determine what behaviour is acceptable market practice.

The limited scope of the EU market conduct regime has obviously contributed to the limited scope of mandatory legal regulation in the past. However, the fact that a sector or market is unregulated at EU level does not mean that it would be totally unregulated. There is industry self-regulation. Many aspects have been regulated by the operator of the electricity exchange and through contracts. For example, the prohibition of insider trading, the prohibition of market manipulation, and market conduct obligations, may also have been based on electricity exchanges’ codes of conduct in the absence of mandatory regulation.⁵⁴³

The EU market conduct regime is nevertheless more important than its limited scope would imply. There is a spill-over effect. EU law influences the regulation of market conduct either directly or indirectly. On one hand, EU law can regulate the activities of market participants (such as investment firms, operators of regulated markets, central counterparties, or electricity firms) directly. On the other, sectoral regulation can influence behaviour outside its original scope.

Exchange operators and firms are often active in regulated sectors or markets and sectors or markets still unregulated at EU level.⁵⁴⁴ (a) It is possible that part of the business of the operator of a power exchange falls within the scope of MiFID II (as the operation of a financial derivatives exchange⁵⁴⁵ or an exchange for trading in emission rights fall within the MiFID II regime⁵⁴⁶). For instance, many marketplaces have fallen within the scope of the MiFID regime because the MiFID regime applies to various kinds of marketplaces that have rules (regulated markets and multilateral trading facilities are defined as marketplaces operated in accordance with non-discretionary rules).⁵⁴⁷ (b) Exchange operators have adopted particular market conduct rules as part of organisational requirements under MiFID⁵⁴⁸ and MiFID II⁵⁴⁹ and monitor compliance with them.⁵⁵⁰ (c) On the other hand, part of the business may remain outside of the directive’s scope (as intraday or day-ahead spot electricity contracts for the physical supply of electricity and balancing contracts are not financial instruments,⁵⁵¹ the operation of a spot exchange for electricity contracts that must be settled physically is not an investment service,⁵⁵² and the operator of such a spot exchange is not regarded as an investment firm under MiFID II⁵⁵³). (d) It would not be practicable for a market participant to adopt different internal compliance programmes and different ethical guidelines and market conduct rules for similar activities depending on whether an activity falls within the regulated or the unregulated area. If an exchange operator has to comply with the MiFID regime or a similar national regime anyway, the operator may require compliance with the same standards in a spot marketplace that does not fall within those regimes as such. (e) Moreover, to use EU law as a model or “platform” can help to reduce transaction costs where market participants are active in both regulated and unregulated areas and have a legal duty to comply with both regulatory regimes.

Consequently, the ethical guidelines and market conduct rules of the exchange operator are bound to be aligned with the rules and principles of the EU legal regime even in markets that do not fall within its scope.⁵⁵⁴ There is convergence of the regulation of market conduct. Convergence is not driven by the bodies of the EU or Member States alone, or just by financial regulators in the US, the EU, or the Member States of the EU. It is also driven by exchange operators and market participants that voluntarily comply with regulation.

The harmonisation of regulation and the convergence of rules can bring several benefits according to ISDA⁵⁵⁵:

The EU legal regime for the regulation of market conduct consists of several components: MiFIR/MiFID II (replacing MiFID); REMIT (Regulation on wholesale energy market integrity and transparency)⁵⁵⁶; MAR (Regulation on insider dealing and market manipulation)/MAD II (Directive on criminal sanctions for insider dealing and market manipulation)⁵⁵⁷ (both replacing MAD)⁵⁵⁸; and the Money Laundering Directive.⁵⁵⁹

Electricity exchanges fall within the scope of the MiFID II/MiFIR regime because of the definition of regulated markets, multilateral trading facilities, and organised trading facilities⁵⁶⁰ (in combination with the definition of multilateral systems⁵⁶¹ and financial instruments). The operator of an electricity exchange must adopt particular market conduct rules as part of organisational requirements under MiFID II⁵⁶² and monitor compliance.⁵⁶³

Specific abusive practices affecting wholesale energy markets are prohibited in three main ways: through general financial markets legislation; through prohibitions of specific abusive practices in wholesale energy markets; and through competition law. (1) The general market integrity and disclosure regime for financial markets applies to investment firms (MiFIR⁵⁶⁴), issuers (MAR, the Prospectus Directive⁵⁶⁵), and a large group of other persons (MAR). The scope of this regime depends on the field of activity of the firm, the nature of contracts, to whom they are offered, and other things. (2) Specific abusive practices in wholesale energy markets are addressed by REMIT. The rules laid down by REMIT are aligned with those applicable in financial markets but consider the specific characteristics of wholesale energy markets.⁵⁶⁶ In the future, similar rules may be adopted for carbon markets.⁵⁶⁷ (3) REMIT is without prejudice to MAR/MAD II and MiFIR/MiFID II, including the application of European competition law.⁵⁶⁸ The third alternative is thus competition law.

REMIT was adopted in 2011, because the earlier regulatory regime for financial markets did not properly address market integrity issues for electricity markets. Behaviour that undermined the integrity of electricity markets was not clearly prohibited.⁵⁶⁹ The scope of the regime for financial markets was too limited as it only applied to financial instruments. Neither did it consider the electricity market’s sector-specific conditions, in particular the connection between the derivatives markets and the underlying physical market.⁵⁷⁰

While few electricity producers have an obligation to comply with the MiFIR/MiFID II regime, many must comply with provisions implementing MAR, and all electricity wholesale market participants must now comply with REMIT.

Laws are complemented by industry self-regulation such as the EFET Principles of Good Conduct. All new EFET member companies have to sign up to ten principles before their membership application can be accepted.⁵⁷¹

Market participants need to organise compliance to ensure that their personnel comply with the market conduct regime.⁵⁷² Particular compliance programmes help the firm to manage legal risk in advance by reducing bad practices. The firm can also try to mitigate or avoid risk by means of safe harbours (Sects. 4.7.4 and 4.7.5). In electricity markets, REMIT influences the organisation of compliance. MAR lays down similar requirements.⁵⁷³

REMIT requires “persons professionally arranging transactions” to take action against inside trading and market manipulation. Such persons include at least trading venues like energy exchanges and brokers.⁵⁷⁴ First, they must “establish and maintain effective arrangements and procedures to identify breaches” of the two prohibitions. Second, “any person professionally arranging transactions in wholesale energy products” who “reasonably suspects” that a transaction might breach the prohibition of inside trading or the prohibition of market manipulation must notify it to the national regulatory authority without further delay.⁵⁷⁵

Therefore, these persons should pay attention to transactions that look suspicious.⁵⁷⁶ ACER has given guidance on suspicious-looking transactions.⁵⁷⁷

The Market Surveillance of North Pool Spot must report (1) any suspected cases of market manipulation and insider trading to the national regulatory authority under the REMIT and (2) any suspected breaches of other laws and regulations affecting the North Pool Spot market according to the terms of the market place licence from NVE.

In practice, most actual breaches relate to disclosure obligations and cases of market manipulation and insider trading are relatively rare.⁵⁷⁸

MiFID II lays down open standards the operators of regulated markets, multilateral trading facilities, and organised trading facilities, and for investment firms dealing with customers.

The MiFID II/MiFIR regime requires, directly or in effect, because of the spill-over effect or after the adoption of its rules as legal transplants, exchange operators to apply the following rules:

There is a similar regime in the US. The Commodity Exchange Act lays down business conduct standards for swap dealers.⁵⁸⁴

The MiFID II/MiFIR regime is not the only regulatory regime that lays down fairness requirements. Fairness requirements can be found in other parts of financial markets regulation and the regulation of electricity markets.

In the electricity sector, fairness requirements are particularly important because of the existence of natural monopolies,⁵⁸⁵ the high volatility of spot prices, and the system’s reliance on the integrity of market participants.

The question of fairness has been addressed in three main ways in EU electricity markets law. First, the regulator should determine or approve rules for the electricity sector according to the Third Electricity Directive. When doing so, it should try to ensure that the electricity sector operates in a fair and economically efficient manner.⁵⁸⁶ Second, wholesale market participants must comply with the provisions of REMIT. REMIT is based on the general notion of fairness in dealings with other market participants and clients.⁵⁸⁷ As regards financial markets, MiFID II focuses on fairness to clients and the adoption of rules for fair trading.⁵⁸⁸ One can also note that an earlier proposal for EMIR contained a fairness obligation for central counterparties.⁵⁸⁹ Third, the growing regulation of market coupling addresses fairness in many respects.⁵⁹⁰

Obviously, Member States’ laws may lay down fairness obligations applied in contract or in tort. Civil liability of general application complements the specific obligations based on sectoral regulation. There is plenty of variation depending on the Member State.⁵⁹¹

The EFET Principles of Good Conduct are designed to reflect the following values: integrity of action; respect for others; open communication; professionalism; and observing the spirit of a truly open and sustainable wholesale marketplace. According to the wording of the ten principles, EFET member companies have a contractual duty to:

All these issues on open ethical standards, good business conduct, and fairness have even been addressed in rules adopted by the operators of electricity exchanges. There can be a difference between physical markets and financial markets. While physical electricity exchanges need rules that ensure the operation of physical electricity markets, financial electricity exchanges need rules on conduct in relation to clients. This can again be illustrated with the physical markets of EPEX Spot and Nord Pool Spot, and the financial markets of Nasdaq Commodities and EEX.

The operator of EPEX Spot (EPEX Spot SE) has adopted a Code of Conduct. The Code applies not only to exchange members but also to the operator itself.⁵⁹²

Exchange members must comply with the Code when doing business in the market. The Code reflects REMIT⁵⁹³ but is not limited to matters governed by it. All instructions and rules of the relevant supervisory authorities, including EPEX SPOT SE are part of the Code.⁵⁹⁴

Generally, an exchange member must not take actions that “are detrimental to the orderly operation of the market”. Failure to comply with the prohibitions of the Code is punished by a warning, a suspension, or the withdrawal of exchange membership.⁵⁹⁵ The sanctions are cumulative.⁵⁹⁶ The operator of the market may also seek compensation for damage.⁵⁹⁷

Like the EPEX Spot Code of Conduct, the EEX Code of Conduct is focused on market abuse and transparency.⁵⁹⁸ In addition, it regulates the way to treat clients.

Nord Pool Spot has adopted ethical guidelines (that are no longer in force after a major change in October 2014)⁵⁹⁹ and market conduct rules (that are in force).⁶⁰⁰ Before Nord Pool Spot took over the N2EX market in the UK, the ethical guidelines and market conduct rules applied to all physical markets of Nord Pool.

The market conduct rules lay down compliance obligations for all members of Nord Pool Spot’s physical markets.⁶⁰¹ Each member must comply with them itself⁶⁰² and adopt internal rules for any person involved in trading and/or clearing on its behalf.⁶⁰³ The market conduct rules are without prejudice to obligations under any applicable law⁶⁰⁴ but prevail over other provisions of the Trading Rules. This means that they will influence the interpretation of more specific rules and can be used to fill gaps.⁶⁰⁵

The market conduct rules reflect the contents of REMIT. In addition, they lay down a general obligation to observe good business conduct. The general obligation consists of an open prohibition (members must not “apply unreasonable business methods” when trading on NPS)⁶⁰⁶ and a dynamic duty (members must “seek to act in accordance with good business practice”).⁶⁰⁷ These open duties are complemented by particular dynamic duties and particular prohibitions.

The general good business conduct obligations laid down by the market conduct rules are dynamic also in the sense that members must:

In addition, the market conduct rules prohibit certain activities:

The market conduct rules require a member to disclose information to the public⁶¹⁶ and to provide information to NPS.⁶¹⁷ The rules on public disclosure are based on REMIT and applied to the Nordic and Baltic electricity markets. A member is required to publicly disclose “information relating to the Nordic or Baltic electricity market” regarding its business or facilities.⁶¹⁸ Public disclosure is limited to certain type of information “relevant to facilities for production, consumption or transmission of electricity”. For instance, a member must disclose information about outages.⁶¹⁹

There are disciplinary sanctions for non-compliance with the market conduct rules.⁶²⁰ A breach can result in disciplinary sanctions that include a daily charge, a warning, or a violation charge. The choice of sanctions is in the discretion of the board of Nord Pool Spot AS.⁶²¹

Nord Pool Spot used to have Ethical Guidelines. They were removed from the Nord Pool Spot rulebook from 27 October 2014. According to Nord Pool Spot, the Ethical Guidelines were no longer necessary as their subject matter was, to a large extent, covered by other parts of the Nord Pool Spot rulebook. Moreover, the Ethical Guidelines were explicitly stated to be “non-sanctionable” and Nord Pool Spot was of the opinion that the rulebook should only contain legally binding documents.⁶²² One can also note that there were no ethical guidelines for the N2EX market in the past and that it was necessary to align the regulation of all physical markets of Nord Pool Spot.

In any case, the previous Ethical Guidelines can still give information about the general ethical requirements applicable to market participants.

The ethical guidelines for Nord Pool Spot were binding but, unlike market conduct rules, there were no formal sanctions for their breach. Sanctions could be enforced only in case of breach of law, administrative provisions, or the rules of the exchange.⁶²³ The purpose of the ethical guidelines was to increase trust in the market, that is, to make people expect that Nord Pool, its participants, and clearing customers observe good standards of conduct and act in an ethical manner.⁶²⁴

The ethical guidelines laid down several general principles that probably still apply. They apply either to categories of parties or transactions.

Many of the principles apply to participants and clearing customers:

Moreover, there are general principles applicable to all transactions made in Nord Pool’s markets:

Some general principles apply to investment firms dealing with clients. In practice, they must reflect the MiFID II regime.⁶³⁵ There are also organisational requirements relating to: compliance by the board and the management⁶³⁶; the appointment of a compliance officer⁶³⁷; and internal ethical guidelines.⁶³⁸

In the N2EX market, the Market Conduct Rules apply to market participants, account holders, and brokers (Market Conduct Parties).⁶³⁹ They cannot trade in the N2EX market without having to comply with the provisions of the Market Conduct Rules and the applicable law.⁶⁴⁰ All contractual obligations are governed by English law.⁶⁴¹

Where a Market Conduct Party grants trading system access to a third party, it must ensure that the third party complies with the Market Conduct Rules as if they applied to the third party. The third party must sign an adherence form.⁶⁴² The Market Conduct Rules are enforced by the Market Surveillance Unit of Nord Pool Spot AS.⁶⁴³

In addition to a general obligation to comply with the provisions of the applicable law including information-related duties, the Market Conduct Rules lay down a general prohibition to apply “unreasonable business methods”, and a general duty to “seek to act in accordance with good business practice”.⁶⁴⁴

Like N2EX, Nasdaq Commodities requires market participants not to apply “unreasonable business methods” and to “seek to act in accordance with good business conduct” according to its Market Conduct Rules.⁶⁴⁵ The rules contain detailed disclosure requirements relating to market participants’ own business or facilities or the business or facilities of clients.⁶⁴⁶