By Rich Heidorn Jr.

Seeking to improve its ability to unravel complicated market manipulation schemes, FERC last week proposed a new way for identifying connections between companies and individuals.

The commission issued a Notice of Proposed Rulemaking requiring RTOs and ISOs to begin registering market participants through common alpha-numeric identifiers, with lists of their “connected entities” and a description of their relationships (RM15-23).

The proposal would use a new system called Legal Entity Identifiers (LEIs), which are already used by the Commodity Futures Trading Commission and Securities and Exchange Commission to track swaps trades. FERC previously dropped use of the Data Universal Numbering System (DUNS), saying it was not effective for its purposes.

FERC said the new requirements will help the Office of Enforcement police market manipulation by providing a “more complete view of the relationships between market participants and the incentives underlying their trading activities.” The initiative would also help RTO market monitors in probes of cross-market manipulation, FERC said.

The office’s Division of Analytics and Surveillance runs automated screens to detect potential market manipulation. The office also has access to e-Tags, RTO trading data and information from the CFTC, including its Large Trader Report.

“Nonetheless, despite increased access to trading data, the commission cannot fully utilize this information in order to detect and deter market manipulation because of uncertainty regarding the identity of a given market participant, which may trade under different identifiers in different markets and venues,” FERC said. “The commission also lacks a clear window into the relationships between market participants and other entities, which can be complex. Without an understanding of which companies share ownership or debt interests, or who may function in key employment or other contractual roles (such as asset management), it can be difficult to ascertain which individuals or companies may benefit from a given transaction or, indeed, who may be jointly participating in a common course of conduct.”

‘Connected Entities’

The rule would require companies to identify all “connected entities,” a new term defined as those that have certain ownership, employment, debt or contractual relationships. It would replace current affiliate disclosure requirements contained in RTO and ISO tariffs unless the markets request their continuation.

FERC said it wanted a new definition “free of any associations that have developed around the term ‘affiliate,’ and one that is uniform across all of the RTOs and ISOs.”

Connected entities would include companies controlling more than 10% of another, as well as top executives and traders. The scope would extend beyond corporate affiliations, including contractual relationships such as tolling and asset management agreements and debt structures that are convertible to ownership interests.

FERC estimated that about 90% of reported wholesale electricity sales under commission jurisdiction are captured in Electric Quarterly Report data and affiliation information obtained from market-based rate filings and other sources. It sought comment on whether non-RTO market participants should also be required to make filings.

Companies would be required to file their connected entity data before being permitted to participate in RTO markets, and to verify their accuracy annually. FERC and the RTOs would be able to audit the filings to ensure compliance.

FERC said the change may ease compliance for market participants in multiple markets.

But in a concurring statement, Commissioner Cheryl LaFleur expressed concern that the rule “would create a significant new reporting regime for all market participants, as well as the RTOs and ISOs.” LaFleur said she might oppose the final rule if she concludes that “the benefits offered by new compliance obligations outweigh the burdens that will be faced by market participants.”

Comments on the rule will be due 60 days following publication in the Federal Register.