BATE (aka “Swiss REMIT”) Published in Federal Gazette

The Swiss authorities have published (click here) the Federal Act on Supervision and Transparency in Wholesale Energy Markets, otherwise known by its German acronym “BATE”, in the Federal Gazette.

What is it about?

• BATE is the Swiss-equivalent of REMIT/REMIT 2 and generally maintains close proximity to REMIT, although with material divergences in some areas. Notably, there is no explicit recognition of persons professionally arranging transactions and, by extension, no requirement for market participants to establish and maintain effective arrangements, systems and procedures to monitor and report suspicious activity as is required under Article 15 of REMIT 2. The precepts of market manipulation also differ in some key areas, and Hydrogen and LNG are not explicitly enumerated in BATE as they are in REMIT 2;
• Despite some differences, BATE adopts several of the elements introduced into REMIT 2 including obligations placed on algorithmic traders in wholesale energy products, and on providers of direct electronic access. Following REMIT 2, BATE also requires the designation of a local representative in Switzerland to be eligible to trade Swiss gas and power, and the manipulation of inputs into a benchmark has been included as an explicit element of BATE’s interpretation of market manipulation;
• The date of entry into force of BATE will be decided at some later point by the Federal Council. At present, BATE is eligible for further challenge under public referendum. This is a feature of the Swiss legislative process where citizens can challenge new laws by collecting 50,000 signatures within 100 days of its official publication. It seems likely that the Federal Council will wait until the end of this period before announcing go-live dates. There is also the need for implementing provisions for which no timetable has been publicly announced. Given that BATE is substantially shorter than REMIT 2 on paper, the need for detailed guidance and clarifications is paramount.

Below we provide a high-level overview of BATE from the perspective of market participants and, where appropriate, we contrast the relevant provisions against REMIT 2.

The commentary is expressly not a full legal analysis but rather commentary for those wishing to understanding the general provisions of BATE and where it overlaps with its EU counterpart legislation.

On a general level, BATE is far less detailed than REMIT 2 and lacks any implementing provisions (which are understood to be work in progress) or detailed guidance which is already in place for REMIT 2. Nonetheless, below we focus on many of the main provisions likely to be of interest to market participants trading in Swiss wholesale energy markets. Note that all page numbers referenced below relate to the Swiss German version of the rules.

Scope:

• Article 2 defines the scope of BATE;
• BATE applies to persons, including professional intermediaries, both resident in or outside of Switzerland that trade or place orders in Swiss wholesale energy products or Swiss wholesale energy products (WEPs - see below);
• Article 2(1)(b) also includes Swiss persons “…who conclude transactions or place trading orders on such markets that relate to wholesale energy products within the meaning of EU regulations (participants in the European market)” creating a link with REMIT and EU wholesale energy markets (WEMs).
• The definition of Swiss WEPs is less detailed and deviates from the REMIT 2-equivalent definitions – notably hydrogen and LNG are not explicitly enumerated. The concept of the transportation of electricity and gas “through” Switzerland is explicitly included. While contracts to distribute supply to consumers are included, no threshold is specified;
• Article 2 also explicitly notes that BATE does not apply to unauthorized market conduct on the wholesale energy markets that also violates the Financial Market Infrastructure Act (FMIA) or “FinfraG”, the Swiss hybrid equivalent of the EU’s Market Abuse Regulation (MAR) and EMIR.

Definitions - Article 3:

• Insider trading is defined as “confidential and precise information relating directly or indirectly to a Swiss wholesale energy product which, if disclosed, could significantly influence the price of this product, in particular fundamental data on investments” and is substantially less detailed than the REMIT 2 definition;
• Market manipulation is not defined under Article 3 but is instead described under Article 20 of BATE (see page 14/26 as numbered);
• Both algorithmic trading and direct electronic access (DEA) are defined (see page 3/26 as numbered). Both definitions are broadly the same as for REMIT 2, although the published guidance under REMIT 2 provides a higher degree of certainly over both;
• In another divergence from REMIT 2, BATE does not define person professionally arranging or executing transactions (i.e. PPAETs) as defined under Article 2(8)(a) of REMIT 2. However Article 2 of BATE refers to intermediaries as “persons who professionally broker transactions” (which are analogous to person professionally arranging transactions or “PPATs”) and Article 18 outlines the obligations of “intermediaries”;
• Several other definitions are analogous to REMIT 2 including “Platform for insider information” (inside information platform or IIP under REMIT 2) and “Organized market” (organised marketplace or OMP underREMIT 2);
• Articles 13 - 15 of BATE deals with “reporting mechanisms” for transaction reporting (analogous to “registered reporting mechanisms” or “RRMs” under REMIT 2) but does not define the term;
• Generally speaking, the terms defined under BATE are far less numerous and are generally less detailed than those under REMIT 2. Refer to pages 2/26 – 4/26 (as numbered) for further info.

Exploitation and disclosure of insider information – Article 19

• Article 19 of BATE is analogous to Article 3 of REMIT 2 - while less detailed it touches on most of the same explicit prohibitions and exclusions;
• The provision below, which was added to Article 3(1) of REMIT 2, is notably absent from BATE as is any mention of hydrogen (in addition to power and gas) which was added in REMIT 2:

The use of inside information by cancelling or amending an order, or any other trading action concerning a wholesale energy product to which the information relates, where the order was placed before the person concerned possessed the inside information, shall also be considered to be insider trading.

• Rather, BATE provides for the Federal Council to issue provisions for the permissible use of inside information for certain scenarios, including to cover direct physical losses due to unplanned unavailability (Article 19(5)).

Market manipulation – Article 20

• Article 20 of BATE is analogous to Article 5 of REMIT 2 (although most of the detail behind what constitutes market manipulation is found in the REMIT 2 definitions);
• The core elements of market manipulation definition remain mostly aligned between BATE and REMIT 2 with the addition that the person “knows or should have known” – a test not applicable under REMIT 2 – the full excerpt is reproduced as follows (please bear in mind that there may be interpretational differences in the translated text from the meaning of the intended original text):

a. Publicly disseminate information of which they know or should know that they:

1. are false or misleading, and

2. give or could give false or misleading signals about the supply, demand or price of Swiss wholesale energy products;

b. Conclude transactions, place, amend or withdraw trading orders or take other actions relating to Swiss wholesale energy trading products and which they know or ought to know involve Swiss wholesale energy trading products:

1. give, or are likely to give, false or misleading signals as to the supply of, demand for, or

2. influence or could influence the price of one or more Swiss wholesale energy products in such a way that an unjustified artificial price level is achieved, unless the action is taken for legitimate reasons and is in line with acceptable market practice on the wholesale energy market concerned;

c. Transmit information relating to a benchmark concerning Swiss wholesale energy products which they know or ought to know is false or misleading, or commit any other act which they know or ought to know manipulates the calculation of such a benchmark.

• Notably absent from Article 20(b) of BATE is the element of market manipulation describing the use of a “fictitious device” as is found in Article 2(2)(a)(iii) of REMIT 2;
• Although equally as notably, BATE does however include the manipulation of the calculation of a benchmark in Article 20(c) which itself was a new addition to REMIT 2 under Article 2(2)(c).

Registration of Market Participants:

• Article 4 of BATE requires firms to register with the Swiss Federal Electricity Commission (ElCom);
• If a firm is already registered with ACER, they only have to provide ElCom with the information that they have already submitted in accordance with the EU rules (including their ACER identifier);
• ElCom will maintain a Register of market participants under Article 5, aligned to the analogous requirement under Article 9 of REMIT;
• The Swiss authorities have followed the same approach as the one employed under Article 9 of REMIT 2, requiring a local representative to be designated for all market participants trading in Swiss WEMs. Article 6 of BATE requires that a representative in Switzerland be “designated by means of a written mandate and be authorized to act on behalf of the participant on the Swiss market”;
• Article 6 also states that the Federal Council regulates the details of the designation procedure and may also grant exemptions from this requirement.

Algorithmic trader obligations:

• Article 16 of BATE specifies the obligations for market participants that engage in algorithmic trading, and is broadly analogous to Article 5a of REMIT 2 albeit less detailed;
• As for REMIT 2, market participants using algorithms to trade must notify ElCom;
• Market participants using algorithms must also have effective systems and risk controls in place that are resilient and which can handle “peak order” (assuming to mean the maximum message throughput), are subject to trading limits/thresholds and prevent the transmission of erroneous orders;
• Under BATE, algorithmic trading systems must be “fully audited” regularly to ensure the above resilience and business continuity measures must be in place;
• Elcom can request detailed information on a market participant’s algorithmic trading strategies and on their systems and risk controls (under REMIT 2, NRAs have the option to require this information either on a set regular or ad hoc basis);
• Algorithmic trading records must also be kept for five years under BATE (i.e. the same requirement as for REMIT 2);
• Requirements for DEA providers using algorithmic trading apply in similar vein to Article 5a of REMIT 2 but are set out in Article 17 of BATE which deals with DEA obligations (see below).

DEA provider obligations:

• Article 17 of BATE requires market participants offering DEA services to notify Elcom – both involving the Swiss market and those offering DEA to EU markets;
• As for the algorithmic trader obligations, in-scope market participants must have effective systems and risk controls in place to prevent market disruptions;
• Elcom can request that market participants provide detailed information about their systems and risk controls in relation to DEA on request;
• Market participants must also ensure that records of all relevant information pertaining to DEA activities are kept for five years.

Transaction and fundamental data reporting – Article 12

• Article 12 of BATE is broadly analogous with Article 8 of REMIT 2 but is less detailed;
• Market participants must report their trade and order data relating to their Swiss WEPs, as well as fundamental data (assumed to be capacity and use of facilities) to Elcom using an “approved reporting mechanism” (the Swiss equivalent of an RRM);
• Article 12 also requires that, in respect of the transaction and fundamental data reporting outlined above, that:

Participants in the European market must provide ElCom simultaneously and in identical form with the information that they are required to make available to the authorities of the EU or an EU member state in accordance with EU regulations…

• “Organized markets”, the BATE equivalent of OMPs under REMIT 2, must report order book data to ElCom;
• Balancing market transaction data for both power and gas must be reported by the relevant grid operator(s). For power, BATE references the Federal Act on Electricity Supply (Electricity Supply Act or StromVG) – specifically reporting must be done in accordance with Article 4(1) and Article 18;
• Article 12(9) of BATE allows for the Federal Council to require market participants to provide Elcom with “risk position” information broken down by wholesale energy product. This is taken to be analogous with the Article 8(1) requirement under REMIT 2 to provide exposure information;
• Further, Article 12 provides that the Federal Council regulates the details of the specific information to be reported, presumably via implementing provisions, and may also grant exemptions from reporting under certain specified cases (such as intragroup transactions). The Federal Council will also specify deadlines for reporting;
• Articles 13 – 15 of BATE address various aspects of the registration and administration of reporting mechanisms.

Publication of insider information – Article 7 and 8

• Article 7 of BATE is analogous with Article 4 of REMIT 2, and sets out the obligation to publish inside information (although REMIT 2 explicitly requires the publishing of inside information relating to hydrogen and LNG facilities which BATE does not). Fun fact – Switzerland is currently commissioning an LNG regasification facility in the Port of Geneva;
• BATE follows REMIT 2 with the requirement that inside information must be published on an authorised inside information platform;
• Articles 9 – 11 of BATE addresse issues related to the registration and authorisation of such inside information platforms;
• Inside information platforms that are registered with, and approved by, ACER are deemed to have been approved by ElCom;
• Article 8 of BATE allows for the delayed publication of inside information as provided for in Article 4(2) of REMIT 2.

Obligations of the intermediaries – Article 18

• BATE sets out requirements for market intermediaries to ensure that “suspicious transactions and trading orders can be identified and reported” – this is analogous to Articles 15(1) and 15(3) of REMIT 2 where PPATs have similar obligations.

Notably, BATE does not obligate market participants (i.e. PPETs) to establish and maintain effective arrangements, systems and procedures to identify market manipulation or insider trading as is required under Article 15(2) and 15(3) of REMIT 2.

Penalty Provisions

• Articles 44 and 45 of BATE outline the penalties infringements for insider trading and market manipulation respectively;
• For insider trading or market manipulation offences, a custodial sentence not exceeding three years or a monetary penalty can be imposed;
• Where ill-gotten gains (i.e. pecuniary advantages) exceed one million Swiss Francs, the penalty is higher with a custodial sentence of up to five years or a monetary penalty.

Finally, Article 51 notes that the Federal Council will issue the implementing provisions taking “particular account of EU regulations”. These will no doubt approximate, if not directly reference, much of the REMIT 2 guidance in several key areas.