LONDON (ICIS)--Bulgarian power exchange IBEX is planning to introduce a requirement for a minimum number of counterparty agreements a company would need in order to be able to trade on the exchange’s centralised market for bilateral contracts (CMBC) with physical delivery.
This is to address market concerns that current trading rules do not entirely protect companies from potential market manipulation.
The CMBC has three separate screens and IBEX used to be a central counterparty to the deals done on CMBC’s auction screen – the most liquid one. But since new rules came into effect at the start of 2018, this is no longer the case.
As a result companies were required to sign bespoke counterparty agreements between each other if they were to trade on that screen but there is no minimum requirement for the number of such agreements.
“If you have agreements with certain companies only, you can manipulate the market as you only trade between each other….and it would be legal,” one Bulgarian trader said.
A second trader agreed that this was indeed a loophole.
“There were some strange deals on the exchange, a fairly unknown company bought a product at leva (Lv) 72.00/MWh and it was selling a slightly modified version of the product the next day at Lv89.00/MWh,” a second trader said.
“If the rules say that you can only trade with companies you have counterparty agreements with, there is always the possibility that certain companies trade only between each other.”
Nevertheless there was a mechanism which allowed a company to arrange a counterparty agreement with an auction initiator if 24 hours before an auction, the trader added.
The market could not be easily manipulated, according to IBEX’s head Konstantin Konstantinov but he acknowledged the fact that there could be a need for a change of the trading rules.
“There is no real opportunity for manipulation but we will introduce a minimum threshold for number of counterparty agreements,” Konstantinov said.
At the moment on average registered participants have agreements with at least five counterparties, according to IBEX’s records.
“Maybe we can make an official rule and put a threshold at eight counterparty agreements for example,” Konstantinov said.
Bulgarian participants have been wary of suspicious market behaviour ever since some deals involving Kozloduy nuclear power plant went through on another CMBC screen in August 2017.
Energy regulator EWRC said at the time that it suspected those deals could have been prearranged but it did not have the power to take action against the parties involved due to a gap in the country’s legislation.
Recent law changes have given EWRC the power investigate and penalise companies for REMIT breaches.
“The best option still remains for the exchange to have a clearing house and to be the intermediary between all participants – everyone to trade with everyone,” the second trader said.