Physical Commodity Trading – Guest Post

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For more than a quarter of a century, commodity market participants who did not hold a banking license flew largely under the regulatory radar. This has progressively changed during the last four or five years as a result of the financial crisis. However, the next piece of legislation to go live throws a net over part of the physical commodity market. It also mandates that prices be set in a fair and competitive manner ensuring an absence of market abuse.

The scope not only covers derivative contracts which are already captured under EMIR as noted abovebut also contracts related to the underlying physical commodity itself, in addition to the transportation and storage agreements that firms execute to deal with the custody of the commodity in question. There is a final layer physical oil and gas commodity trading complexity on the reporting side with the requirement to report orders to trade as well as the executed trades themselves.

Given the low latency of market price change in the electronic information age, there is likely to be a large amount of data associated with entering, amending and cancelling pre-trade orders, which will be a challenge for market participants to capture. Compliance with all three strands will require a data model comprising a specified field set for transaction reporting, plus some form of physical oil and gas commodity trading method of monitoring and creating alerts when this data suggests errant trader behavior.

Once the Implementing Acts are in place, the ownership of the registration and enforcement of market participants will be assumed by the National Regulatory Authorities NRAs who will in turn be coordinated at an EU level by ACER, completing the circle.

ACER is then responsible for the analysis of submitted data. For the UK, the relevant NRA will be Ofgem, which is already actively regulating the distribution network and supplies of power and gas to retail customers. As the nominated NRA in the UK, Ofgem will now find itself overlapping with the Financial Conduct Authority FCAwho will continue to own transparency and market behavior enforcement in the derivatives part of power and gas portfolios.

As a result, firms under the influence of REMIT will also need to meet the requirements of yet another regulator. ACER is in the process of locking down its user manuals for market participants, potential regulatory reporting mechanisms RRMs and system operators.

They are currently out for review and will be published along with the adoption of the implementing standards. ACER physical oil and gas commodity trading that the onus for the delivery of data should fall on the various system operators: If market participants wish to report their own data, they will first have to complete the registration process to act as an RRM.

There is a provision within REMIT for firms to use third-party RRMs physical oil and gas commodity trading act on their behalf; however, experience with the outsourcing of reporting responsibility under Dodd-Frank and EMIR suggests that there will be no delegation to third parties until firms who generate reportable data are able to audit the custody capabilities of RRMs.

As a result of its discussions with the industry, ACER currently expects that at least entities will register as an RRM to fulfill their responsibilities. Given the resourcing constraints within ACER, the approval and onboarding of this many RRMs between adoption of the implementing acts and the go-live date will be difficult. ACER appears to be taking a phased approach to bringing the legislation to life, initially capturing standard contracts traded on organized market places OMPs. This will be followed by a second go-live at a time to be determined, which captures standard and non-standard contracts, however and wherever they may be executed.

Similarly, the OMP definition is fairly wide and includes bilateral trades done through brokers via voice. The only scenario not captured in phase one would be direct peer-to-peer trades not involving any third-party agency. The regulation drives many firms into a data management model that they have not previously had to consider. Assuming the capture problem can be resolved, the next challenge is configuring IT systems to transmit and reconcile the order, trade and fundamental data to ensure the integrity of information in repositories.

Finally, firms will need to decide how to manage the monitoring of trader behavior to recognize activity which constitutes a breach in terms of insider trading or market manipulation. One favorable element of ACER is that firms do not have to report trades that have already been reported to a trade repository in compliance with EMIR legislation.

This will reduce the volume of Physical oil and gas commodity trading derivative trades, but will not include the orders which led to physical oil and gas commodity trading trades. This order reporting requirement is one of the more challenging. Orders to trade are not currently reportable under EMIR legislation, so although the exemption for trades already submitted is useful, the requirement to report the orders related to those trades under REMIT introduces a significant problem.

Tracking and flagging the order data for EMIR-reported trades for further reporting to a different database could prove to be an enormous task. ACER guidance is clear in trying to place the main burden on system operators rather physical oil and gas commodity trading market participants; however, firms often express concerns regarding the passing of data across third-party platforms instead of direct to the repository itself.

A proportion of physical oil and gas commodity trading data reported is commercially sensitive, so there is apprehension related to any lack of security physical oil and gas commodity trading protect their client or the exposure of valuable proprietary information to the third party. Add in the reconciliation burden of using one or more third-party RRMs, and it is clear that firms have some decisions to make.

Even though there are many moving parts with REMIT, firms should be asking the following questions now rather than waiting for the Implementing Acts:. Is the internal plan in place to be compliant in the nine-month window between the adoption of the Implementing Acts and the go-live of REMIT reporting? Firms need to deal with REMIT delivery promptly to prevent stacking of programs to meet the next wave of regulation.

Requirements related physical oil and gas commodity trading REMIT may not be the end of the story—firms should continue to keep themselves abreast of the intentions of Norwegian and Swiss regulators. Although they are not bound directly by EU statutes, they are driven to ensure alignment with European regulatory efforts, particularly in cross-border markets such as the coupled power market.

Plans are being drawn by both to have parallel repository schemes to collect data in their respective jurisdictions. A lack of prompt action could mean that firms will not be ready by the time legislation goes live, leaving them able to execute only non-compliant trades. A large number of market participants and infrastructure providers are uncertain about their readiness to meet ACER delivery expectations.

Many firms appear to be dormant in their preparations, with some waiting for the adoption of the Implementing Standards before committing to a course of action. As the wider global program of legislation continues to roll, most if not all firms will have to change their trade execution approach and enhance the management of data records.

To date, firms have taken a tactical approach to complying with regulations but this will ultimately lead to an inability to scale up to meet new business opportunities. Firms will need to begin to carry out strategic planning across the trade lifecycle and focus on some key areas including development in deal representation, standardization of data field values, enterprise-wide reconciliation of data and consolidation of system architecture to support margin and collateral optimization.

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One of the key objectives of the EITI is to shed light on the return that a country gets in exchange for its oil, gas and minerals. In many resource-rich countries, payments by companies to the government for rights to extract resources happen in-kind, through physical transfers of oil, gas and minerals, rather than transfers of money.

Physical revenues can also occur because the state or a state-owned enterprise SOE owns shares in a producing license. The state or the SOE then sells these physical resources, often to trading companies or domestic refineries. In order for governments implementing the EITI to fully account for all revenues received from natural resources , it is therefore necessary to know how much revenue the state or SOE gets from the sales of these resources as well as whether these sale proceeds are transferred to the budget.

This includes exports sales as well as sales to domestic buyers and refineries, and any other actors. In some countries, like Iraq, the buyers of the oil from the government also disclose how much they pay to the government, allowing for reconciliation of these figures.

Implementation of this requirement has been particularly challenging for many EITI member countries. The objective is to assist implementing countries with significant commodity trading activities in identify and consider innovative mechanisms to increase transparency in revenues received from the commodity sales. Several EITI countries are part of the targeted effort to further transparency in commodity trade:. Chad recently confirmed its official participation in the targeted effort, and is considering reporting on the long-term agreement between the Government of Chad and Glencore that includes a USD 1.

A national working group has been established to prepared reporting templates. GNPC sells its production share and royalties collected in-kind from other companies on behalf of the state to commodity trading companies. Ghana committed to participate in EITI's targeted efforts to improve commodity trading transparency during the Anti-Corruption Summit in London May , and GHEITI has prepared a programme for their work on commodity trading transparency outlining the following objectives:.

Pertamina then transfers payments to the treasury. On 1 January , Pertamina started conducting its import and sales export activity of crude oil and refined products through the Integrated Supply Chain ISC. The procurement and sales are done either through direct negotiation or closed tender to business partners that are registered with Pertamina. Presently, Nigerian SOE NNPC publishes production, lifting and sales values in aggregates but does not disclose details on off-takers and the beneficial owners operating in commodity trading.

As such, the commodity trading report will aim to:. The Treasury already publishes monthly reports on the state's sales of in-kind oil revenues, but the EITI Report will explain the operations of the Chinguetti partners' pricing committee, biennial procurement of the marketing agent and sales of quarterly cargos.

Additional information including product type, price, market and sales volumes will also be disclosed. A working group has been established to support the targeted effort, consisting of international trading companies, NGOs, and SOE representatives.

The guidance has three intended audiences: This paper is a stocktake of commodity trading transparency in select EITI implementing countries, aiming to shed light on the extent to which the level of transparency about the first sales have improved as a result of the EITI's increased focus on commodity trading transparency.

This would include countries developing innovative approaches on transparency in commodity trading that go beyond the minimum requirements. The objective is to help the EITI become as effective a vehicle as possible for advancing the broader aim of improving transparency of commodity trading. To achieve this, a multi-stakeholder working group on transparency on commodity trading has been created. Working group participants are committed towards playing a demonstrable role in strengthening government and company systems, informing public debate, and enhancing trust.

Skip to main content. Please enable JavaScript for full use of this site. Targeted effort on commodity trading transparency. Several EITI countries are part of the targeted effort to further transparency in commodity trade: Albpetrol receives profit share in-kind from licensees in exchange for their rights to produce oil, as well as equity oil as a return on investments from the projects that Albetrol has decided to participate in.

Volumes of oil sold and revenue received, including quantities forecasted to be traded under the contract - k tons in - as well as actual quantities sold during FY , notably 85k tons. The actual sales values and price are disaggregated by month. Information about the process for selecting buyers, including an overview of how auctions are conducted. A summary of the auctions in , and are disclosed, including the forecasted sales volume of the annual contract, the auction starting price, the winning bid, the name of the company winning the bid, the name of non-winning applicants and links to further information.

Explanation of the pricing system. The auction start price is set with reference to Brent oil prices through a formula that considers quality of oil to be delivered, access to international markets etc. The price includes adjustments for the transport costs in consideration to the delivery point. Transfer and expenditure of oil sale proceeds.

According to the report, it seems like Albpetrol retains the revenue from both the sale of profit oil and the sale of equity oil. View case study on Albania Visit Albania's country page. Chad Chad recently confirmed its official participation in the targeted effort, and is considering reporting on the long-term agreement between the Government of Chad and Glencore that includes a USD 1. Ghana committed to participate in EITI's targeted efforts to improve commodity trading transparency during the Anti-Corruption Summit in London May , and GHEITI has prepared a programme for their work on commodity trading transparency outlining the following objectives: A commodity trading report is expected in October Link to work programme Visit country page.

The commodity trading report is expected in August As such, the commodity trading report will aim to: Case studies, new and events. Related documents on commodity trading. Commodity trading transparency stocktake Published Date: ToR for a targeted effort on transparency in commodity trading Published Date: Guidance note 26 - Reporting on first trades in oil Published Date: Guidance note 26 — Requirement 4.

A brief on how the EITI can be a tool for improving transparency in the oil trading business. Terms of Reference for the working group on transparency in commodity trading Published Date: