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January 12, 2012
Brattle Economists Author Issue Brief Addressing the Need for Greater Clarity of Market Manipulation Under REMIT

In an issue brief released today, Brattle economists Dan Harris and Shaun Ledgerwood suggest that a more cohesive set of principles that define market manipulation is still needed to turn the Regulation on Wholesale Energy Market Integrity and Transparency (REMIT) into a workable piece of legislation. While the Guidance on the application of the definitions of REMIT recently issued by the Agency for the Cooperation of Energy Regulators (ACER) is a welcome approach at better defining what constitutes manipulation, the authors agree that greater clarity is still required. ACER’s Guidelines on REMIT attempt to better define market manipulation by citing several concrete examples of manipulation that have occurred in the past, and by describing behaviors that National Regulatory Authorities (NRAs) should take into account in determining whether or not certain acts constitute market manipulation. Mr. Harris and Dr. Ledgerwood identify two specific weaknesses with the Guidelines. First, the authors observe that there is still room for significant doubt about circumstances not covered by the examples stated in the Guidelines. Second, the examples given could occur as a sign of manipulation, but could equally arise during legitimate trading activity. In response to a need for better clarification, the authors propose a general framework for defining market manipulation that separates manipulation into three components: trigger, target, and nexus. The primary benefit of the proposed framework, according to the authors, is that it paints a clearer picture of behavior that is not manipulative. By thinking about manipulation in a more all-encompassing manner than by the specific examples included in ACER’s Guidelines, Mr. Harris and Dr. Ledgerwood believe market participants would benefit from greater certainty to the type of behavior that should or should not be considered manipulative. In addition, compliance with REMIT would improve as a result, benefitting traders, their companies, and regulators. The issue brief, “Completing the Puzzle: Defining Manipulation Under REMIT,” is available for download below.