The electricity derivatives market has grown significantly during the last few years. This applies to all commodity derivatives (options, futures and forwards) based on electricity and traded either on the Nord Pool Exchange or bilaterally between single parties. The growth of the derivatives market has led to an increasing need for relevant regulation and monitoring.
In this report, ECON describes how common financial regulation (e.g. Sweden’s Securities Operations Act) affect power sector companies and how the electricity derivatives market is being monitored by the Swedish and the Norwegian financial supervisory authorities. The aim of the report is to give ideas about possible future research projects about the electricity derivatives market.
In Sweden, commodity derivatives based on electricity are generally considered to be 'financial instruments' according to The Trading in Financial Instruments Act. At least this seems to be the case with contracts traded on Nord Pool and bilateral contracts that can be subject to clearing by Nord Pool.
Companies offering services regarding financial instruments in the Swedish market sometimes need a special license from the Swedish Financial Supervisory Authority. Services that require a special permit are: trading financial instruments, in one’s own name, on behalf of another party, brokering of contacts between purchasers and sellers, trading in financial instruments on one’s own account, management of another party’s financial instruments, and underwriting or other participation in issuances of securities or offers to purchase or sell financial instruments directly to the public.
A licence to conduct a securities operation implies certain mandatory capital requirements. Securities operations should also be conducted in such a manner that public confidence is maintained in the securities markets. Regulation should ensure, for example, that insider trading is not possible.
At present, less than ten Swedish power sector companies hold a licence to conduct securities operations, while another five or so have applied for a licence. The Swedish Financial Supervisory Authority is responsible for supervising the securities markets and monitoring compliance. So far, however, the authority seems to have given low priority to the financial side of the electricity market.
The European Council Directive on investment services in the securities field does not apply to commodity derivatives. This means that electricity derivatives market regulation differs between European countries. Norway, for instance, has a less strict regulation than Sweden. A major difference is that Norwegian companies that offer commodity derivatives don’t need a special licence.
The report ends by listing a number of questions that the authors feel justify further investigation:
- In what way is competition affected by the fact that different countries within the common Nordic electricity exchange area have different financial regulation?
- What are the costs of having different financial regulation within the common Nordic electricity exchange area?
- Since Nord Pool in Norway will soon be able to act as a securities exchange: What are the differences between Swedish and Norwegian exchange regulation? How do these differences affect NordPool?
- Are there financial contracts traded bilaterally between single parties that are not considered to be financial instruments? If so, what are the consequences?
- Are there actors without licences on the Swedish market offering investment services of a kind that really should require a licence?
- Do the monitoring activities of the Swedish and the Norwegian financial supervisory authorities differ in any significant way?