Preparing for new EU data requirements

As the European Union moves towards mandatory fundamental and post-trade data reporting obligations, Alex Davis examines whether the energy industry is ready for the task

On December 8 last year, the European Commission (EC) released its proposals on improving integrity and transparency in the energy markets. Long in discussion, the new regulations were believed to be necessary to close gaps that existed in the Market Abuse Directive as it applied to the energy sector.

One of the key elements is the requirement for energy companies to provide the new Agency for the Cooperation of Energy Regulators (ACER) with a record of transactions in wholesale energy products. ACER begins operations in March and although the proposals have yet to be passed by the European Parliament and European Council, they are expected to become law by 2012.

Running parallel to this is the process to update the Markets in Financial Instruments Directive (Mifid). The EC released a public consultation for industry feedback on various amendments that have been suggested, also on December 8, and it is widely expected that the suggestion to mandate post-trade data reporting for over-the-counter derivatives will become law.

Even though the EC estimates that the gas and electricity markets are only responsible for around 10,000 trades a day that would fall under the reporting requirements (compared to the many millions conducted in interest rate and foreign exchange markets), the sheer breadth and individuality of the commodity products makes data management an extremely complex process and data reporting a daunting prospect.

"Even without regulation, data management is still the biggest challenge many of our clients face," says Stuart Cook, senior manager at consultancy Baringa Partners. "Having centralised, accurate and timely data in their systems – be it trade, positional or external data that they can collate and report on that in a consistent way is definitely an on-going challenge for most companies."

The good news is that for many industry participants the capabilities for data reporting appear to be in place, even if it does create more work for firms.

"I think fundamentally, most companies will have the data that needs to be reported. I don't think it's a case of them necessarily needing to replace systems but it's definitely an additional burden over and above what they currently have to do," says Baringa's Cook. "The reality at the moment is if a company is a bit late

on providing reports or it doesn't quite look how management would like it, it's not the end of the world, but obviously if they are mandated to provide this data in this format at this time every day, there could be penalties and repercussions if they can't do that."

Ian Gordon, director of business development, European markets at software firm ZE PowerGroup, believes that the on-going deregulation in Europe's energy markets has led to a major amount of investment in IT systems even before the new regulatory requirements.

"Companies have had this environment in place for some time. Ten years ago, a lot of companies created internal systems for the data they needed to track. There is now a sort of next generation of investment being made to enhance, improve and re-develop these internal systems," says Gordon. "A lot of it has come about because of deregulation across European markets – cross-border deregulation, the way that companies are trading, moving from domestic to pan-European markets, which has placed much more complex requirements on their systems. For example, we've got new exchanges from 10 years ago."

Choosing the right system

With the growth of the markets forcing the hand of industry participants somewhat, one of the stark choices facing energy firms is the perennial argument about buying an ‘off-the-shelf' IT systems solution or creating your own in-house system. Either way, the unavoidable fact is that the cost is going to be in the hundreds of thousands of euros at the very least.

"The challenge is whether you try to do it in-house or go external and try and find firms that can provide the service," says ZE PowerGroup's Gordon. "To finish a process end-to-end, you are talking quite a few months of work. Even for a medium-sized company, it's not just a matter of capturing the data, it's actually creating the system. If you're doing it yourself, you have to build the environment and it always has to be integrated with the other systems – downstream risk management systems, front-office systems maybe, back-office accounting systems."

Indeed, it is this need for a holistic approach to data management that has made the process a complicated one. ZE PowerGroup's Gordon points out that for a large energy firm, having 100 data feeds into a system is a very average amount and that even smaller companies will have at least 30 or 40 different sources of data to keep an eye on. Diana Higgins, risk reporting manager at Centrica Energy, speaking in a personal capacity, outlines how the individuality of commodity products further complicates holistic aggregation.

"Each commodity has certain rules that are slightly different from each other. Many companies have different trade capture systems for each commodity so when you combine the two together, you have a lot of data to describe a portfolio of transactions with a particular company," she says. "So when you want to aggregate data across all commodities or calculate metrics that are connected to this data, it becomes a complex exercise. The company needs to have very strong procedures around how to integrate the systems between front, middle and back office so information is consistent across all commodities and counterparties."

It is an arduous logistical challenge that necessitates a painful attention to detail across all aspects of a business.

"A lot comes down to having a very clear idea of what data fits in which systems and ensuring that data has been validated and cleansed and everybody is very confident that you've got the right systems architecture," says Baringa's Cook.

By way of illustration, Centrica's Higgins reveals how what would seem to be a banal and inconsequential lack of consistency in record-keeping and maintaining so-called 'clean' or 'cleansed' data results in obstructions to holistic and centralised aggregation.

"You could call a company 'BP ltd' in one system and in another 'BP limited'. Machines are machines and they will understand these as different companies, so when you come to aggregate to one data repository, differences may cause problems," she says. "If you have to report everything in one place, a company will have problems if data is not consistent right across the board."

Implementing a system with the data reporting capabilities suitable for the regulators will take at least three months even if all of the data is clean. For companies lagging in their updating process, the concern is that to iron out these inconsistencies across various systems and cleanse the data could take an additional six months. With ACER officially opening its doors in two months' time, this may be a cause of alarm for some.

Overlapping requirements

A cause of alarm for many is the continuing uncertainty over just what exactly the regulators will demand from the energy sector. One constantly repeated fear has been that companies will have to report post-trade data to both ACER and the European Securities and Markets Authority (ESMA), with the overlapping regulatory jurisdictions arising out of the energy markets transparency and integrity reforms and the Mifid reforms.

The EC did make clear in its December proposal that duplicate reporting would be avoided by ensuring that ACER has several channels available for reporting, while Philip Lowe, director-general for energy at the EC, outlined in November how, certainly for derivatives, reporting would be done to ACER who would then pass on relevant information to ESMA.

However, this remains only one aspect of the duplicate reporting fear and at the moment it appears to be a monumental task for ACER to handle all of Europe's energy data reporting and distribute it to relevant parties.

"The key is to ensure that the reporting obligations are not duplicated and are consistent," says Colin Lyle, head of the gas committee at the European Federation of Energy Traders (EFET). "There already are some obligations to keep data – for example, in the UK there is an obligation to keep trade data for five years. The interesting thing is how the data will then be reported and be done in a way which doesn't end up with 27 different energy regulators, financial regulators, competition authorities, all requiring the data."

EFET's Lyle believes that the reporting process will only work if there is a pan-European standard and he wants to see absolute reporting standards in order to facilitate automation and ease the burden on company time.

"The data reporting needs to be properly defined so it can be properly automated. The sort of data request that many companies are used to dealing with, maybe a query from an energy regulator, will tend to need bespoke responses. Even if they have the data, it will take them a long time to set it out in a format that will respond to the query," he says. "But what we're talking about here is the provision of standardised trading information on a very regular basis and in a very automated way. It's a different type of reporting and in a world where regulators ask for these different types of information quite frequently, the important thing is to get it properly decided what is really necessary."

Deciding on just what exactly is necessary is not straightforward. Consider the very nature of the commodity markets and the difficulty, as outlined by Centrica's Higgins, which companies face just keeping holistic track of data internally for individual commodity products. Never mind Europe-wide standardisation, is it possible to have commodity-wide standardisation?

Besides this, even though reporting basic post-trade data information might be an easily automated process, how does ACER or indeed ESMA set out a framework for every company to report on pre-trade positions?

"As a first step, one should report only the basic information of the transaction – volume, price, commodity, counterparty, start and end date, trade date – which is information that cannot be argued," says Centrica's Higgins.

"But if they [regulators] start asking you to report mark-to-market, then you will start having differences across companies," she says.

This is only one of many headaches facing both ACER and the EU. For instance, another problem is deciding how fundamental data will be made available across the region. There are two main options. Either an entirely new central platform will have to be built or, again, there will need to be Europe-wide harmonisation across current platforms available through exchanges such as the European Energy Exchange and Nord Pool.

Either option will mean more time and effort will be required by companies to update and integrate their systems to conform with the new standards.

Learning curve

The key for firms, certainly at the outset, is to be flexible, to adapt depending on what is eventually required by the regulators. It is inevitable that as everybody finds their feet, progress is time-consuming, costly and cumbersome but a lack of flexibility will magnify these troubles. It will be unlikely that ACER unveils iron-clad rules because with deregulation continuing and so many relatively new markets, it is very hard to decide on what information is absolutely necessary without trial and error.

"I think this is going to be an on-going iterative, developing process over the next few years. I think the regulators will also be learning in terms of what data they can receive from organisations," says Baringa's Cook. "It will be more expensive in terms of teams set up to enable reporting and to maintain it.

I would expect a lot of companies are going to have to do an element of ad hoc reporting and rely on manual processes, at least initially, to collate and bring together the data in the required format."