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21 July 2015

Introduction – another fine mess?

‘Time….’, they say, ‘….waits for no-one’. And neither does ACER. On ACER’s REMIT Portal, the clock inexorably counts down the days until October 7th, the first day of Phase 1 reporting of OMP orders and contracts.

Recently, ACER published their progress report on RRM registration, announcing the application of around 60 ‘3rd party’ RRMs and 250 ‘market participant’ RRMs.

ACER’s announcement added fuel to the flames of the current debate about fragmentation, data standards, contractual arrangements, level playing fields, and a ‘spaghetti’ landscape for REMIT data routing.

How have we arrived at this situation, how will it pan out in the last three months to REMIT, and what should market participants do?

Why are there so many RRMs?

The ‘RRM’ has always been ACER’s preferred way of receiving data, introducing a much-needed level of data aggregation between itself and thousands of market participants and trading venues, mediated by a small and manageable number of RRMs.

However, 300+ RRMs is a number neither small nor manageable. But the number and fragmentation we see now was always going to happen for several good reasons:

  • Market participants and OMPs are responsible for the quality of their own data;
  • OMPs and market participants may appoint 3rd party RRMs, and there is no compelling reason for them all to choose the same one;
  • OMPs may register as RRMs, opting to self-report orders and transactions;
  • Market participants can opt to self-report their non-OMP trades, but must use 3rdparty RRMs for their OMP orders and trades;
  • Self-reporting isn’t technically difficult for companies used to submitting balancing data to TSOs, or trading venues reporting transaction data back to market participants;
  • OMPs and market participants originating from the financial sector are likely to ask their financial reporting service providers to act as their RRM.
  • Financial reporting services fearful of losing market share are likely to add REMIT to their EMIR and MiFID services.

Between themselves, OMPs and market participants have opted to self-report or appoint 3rdparty RRMs from the energy and financial sectors in their hundreds. The surprise lies in not the number ‘300’, but in the fact that the number is as low as 300 at this stage.

So, for good reasons we have arrived at the current diversity of RRMs originating from the energy and financial sectors. This has created the ‘spaghetti’ routing of inter-RRM data exchanges, as data flows from source, through RRMs, to ACER ARIS.

The diversity in RRMs had lead to hot debate on data standards, costs, validation, and reconciliation, leading to confusion among market participants about what reporting mechanism to choose. So, from a market participant’s point of view, what are the issues?

Will there be a single data standard across the RRMs?

It is a relief to all market participants that submitted data must at leastarrive at ACER ARIS in a single format – ACER XML. Either by accident or design, ACER has created a de facto data standard that all RRMs must meet. So, if the output of all RRMs’ data processing is ACER XML, this format ought to form the basis of inter-RRM communications when they output data to each other.

Another de facto standard is CpML, forming the basis of electronic confirmations and other automated back office processes used by significant numbers of energy market participants under EFETnet standards.

So in theory, the ‘spaghetti’ could still work if market participants insisted on their RRM’s support for ACER XML and CpML, and shunned alternative or proprietary formats. Alarm bells should sound if the RRM declines to support these formats, or if an OMP offers compliant data formats to the market participant only if it chooses the OMP’s ‘in-house’ RRM, but offers something different if the market participant chooses its own RRM.

Cost – where’s my free lunch?

Regulatory reporting is never truly ‘free’ and cannot be. All ARMs, Trade Repositories, and RRMs etc., have to meet exacting technical and business standards set by their regulators, and these requirements are certainly not ‘free’ to meet.

Reporting services may be offered free to clients at point of use, but rest assured that the true cost will show up somewhere else in the value chain, and somebody, probably the market participant, will have to pay eventually.

Also, ESMA generally forbids the financial reporters from cross-subsidising new reporting services from existing product lines, hindering like-for-like cost comparisons across the energy and financial sectors. ACER has finally recognised this situation in their latest REMIT Guidelines, calling for a ‘level playing field’, but how they will enforce it is another matter.

The last thing a market participant wants to be is the victim of an RRM who loses the ‘low-cost’ war, and exits the market, leaving the market participant scrambling for a replacement RRM.

Cliché it may be, but you do get what you pay for.

Should I fear the ‘Day of the MiFIDs’?

And on energy’s sunny horizon lies the clouds of MiFID II and MiFIR…

For the energy sector, the game-changer will be MiFID II and the degree to which energy market participants will get drawn into the mire of MiFIR. Simply put, MiFIR itself introduces more reporting requirements around transactions, positions, and orders. If the energy sector gets drawn into MiFIR, they will incur a heavier EMIR burden (by being classed as ‘Financial Companies’) in addition to their new MiFIR reporting obligations. The centre of gravity of their transaction and orders reporting will likely shift from REMIT to MiFIR-EMIR.

In that case, market participants will be seeking out a reporting service that can function as a single point of aggregation and reconciliation for EMIR, MiFIR, and REMIT data. In addition, that service should be the penultimatedestination for the data, with the next stop being ESMA, ACER, and national regulators, and not the entrance to a labyrinth of other service providers and an ensuing reconciliation headache.

Choosing an RRM

Choosing an RRM in this climate is a potential minefield. Market participants should ensure that their chosen RRM:

  • Supports ACER XML and CpML data formats;
  • Performs technical validation of input data to ACER standards;
  • Enables them to view the status of their submissions;
  • Provides a clear process for error-management and correction;
  • Allows them the option of receiving active alerts of errors;
  • Provides a clear process for the reporting of trade lifecycle events;
  • Offers a transparent and sustainable fees model;
  • Offers a transparent SLA, detailing its obligations and liabilities for data processing, especially in cases where it may be in a ‘chain’ of RRMs.
  • Could bundle REMIT, EMIR and/or MiFID II/MiFIR reporting as a single service.

The current ‘spaghetti’ data-flows between market participants, their RRMs, OMPs, and their RRMs need urgent rationalisation. However, the emergence of ACER XML and CpML as format standards should lessen the technical burden of handling diversity.

Will we see the emergence of a ‘super-RRM’ that achieves this aim? Possibly, but MiFID II is a real potential game-changer, meaning it’s more likely that a broad-spectrum ‘super-RM’ appears. If the reporting emphasis for the energy sector becomes driven by EMIR and MiFIR, that ‘super-RM’ is unlikely to come from the energy or commodity sectors.

Whatever the case, market participants must take a holistic view of their compliance requirements and their supporting IT and service providers. They must also insist on a level playing field in the choice of reporting services.

Senior Consultant, Abide Financial

Mark Earthey