We have passed March 29th and it is still most unclear if the British parliament will vote through a Brexit agreement or if the United Kingdom (UK) leaves the European Union (EU) on 12 April 2019 at midnight without a withdrawal agreement in place. Regardless of outcome the impact on the industry will be widespread. ESMA have made a public statement in case of a no-deal Brexit, addressing some key effects on MiFIDII/MiFIR. In case of a no agreement the MiFID II “C(6) carve-out” and the trading obligations of derivatives will be affected. Not mentioned by ESMA, but something we would like to highlight at the potential effects on Transaction Reporting under Article 26 of MiFIR.
Wholesale energy products to be considered as financial instruments
To be eligible to the exemption set out in Section C(6) of Annex I of MiFID II and not to be considered as a financial instrument, a derivative contract must meet three conditions
- it must qualify as a wholesale energy product
- it must be traded on an OTF and
- it must be physically settled.
Post-Brexit a derivative contract related to electricity or natural gas that would be exclusively produced, traded and delivered in the UK would no longer qualify as wholesale energy product as under Article 2(4) of REMIT and could no longer be eligible to the C(6) carve-out under MiFID II, even if traded on an EU27 OTF.
Where a derivative contract based on electricity or natural gas would no longer be eligible to the C(6) carve-out under MiFID, it may become a financial instrument under Section C(6) if traded on an EU regulated market or MTF or EU OTF without meeting the REMIT definition. A derivative contract no longer eligible to the C(6) carve-out may also become a financial instrument under Section C(7) of Annex I of MiFID II if, among other things, it has the “characteristics of other derivative financial instruments” as further defined in Article 7 of Commission Delegated Regulation 2017/565.
Trading obligation for derivatives
Currently, most trading venues that allow for the execution of instruments subject to the trading obligation in the EU are based in the UK. Moreover, the large majority of trading in derivatives subject to the trading obligation are concluded on UK trading venues. As ESMA concludes, most UK trading venues are now in the process of establishing new trading venues in the EU27. Thereby, they will continue to offer its clients the same product portfolio in the EU27 as they are currently offering in the UK. Meaning their EU27 clients still will be able to meet their trading obligation as required under Article 28 of MiFIR.
Transaction Reporting post Brexit
Brexit will also affect clients subject to transaction reporting under Article 9 of EMIR. When trading with a UK counterparty (CP), post-Brexit, the UK based leg of the trade will not be reported by the EU27 counterparty. Meaning, when trading with a UK CP transaction reporting under EMIR will be one-sided for EU27 clients. Clients will then have to adapt the matching and pairing processes as well as their reconciliation processes.
For EU27 based clients, reporting under Article 26 of MiFIR, with an UK branch there will be further implications as they will have to report all UK executed trades to both its local NCA/TR and to the FCA. Causing implications to clients regulatory reporting solutions.
Contact us if you have any questions on how Brexit may affect your transaction reporting obligation,