The 2018 working year starts today for most, which provides a good opportunity to consider the months ahead.
Start of year
The end of 2017 has unsurprisingly busy, with several pieces of news posted since our “end of year” entry. In addition to today being the first day on which Swiss “FC-” and “NFC+” entities are to report under Finfrag, tomorrow sees the start of MiFID II. Those who require authorisation from a National Competent Authority (NCA) have had a great deal of work to carry out over the past years. The start of MiFID II has thus been widely reported, for example here on the FT web site. Most are reported to not be completely ready across all streams, as reported here on the City AM web site.
In energy and commodities, many firms will be able to rely on the ancillary activity exemption found in MiFID II Article 2(1)j and specified in RTS 20 (see here). It is necessary for those using the exemption to notify their NCA, and many have been providing such notifications over the past weeks. There has also been a focus on position limits and reporting, with many limits being set only recently (see here) , and many changes in position reporting (see here).
For those exempt, it is also necessary to ensure that no other activity takes place which may prevent an exemption being used, and also to ensure that “applicable to all” rules such as those relating to algorithmic trading are adhered to. The start of MiFID II also sees the start of the “Emissions Allowance Market Participant” regime under MAR, for which details are finally starting to emerge (see here).
While the end of this week will see the passing of these deadlines, we can expect a great deal of activity under MiFID II for the first part of the year, and possibly further applications for authorisation from the sector as time goes on.
Consolidation, maturity, enforcement and surveillance
What of the year ahead for those in energy and commodities? The last few years have seen an avalanche of new rules, such as EMIR, REMIT, MAR and MiFID II. The coming year sees fewer such new rules scheduled for application, although that does not mean that there are none, as we will discuss below. Regulatory bodies in Europe as well as in the US and elsewhere have begun to focus on making the rules actually work. This involves fine tuning of current rules, scope changes and simplifications. All of these involve change. And in any case, the rules themselves evolve, either through new answers from regulators, revisions such as last year’s EMIR reporting changes or the forthcoming REMIT changes, or more fundamental changes such as those found in the EMIR review.
The rules have been coming for several years now. As a result we see an increased focus on compliance and regulatory best practice emerging in energy and commodities, with several papers published over the last year (for example see here). At the same time, we see regulators beginning to focus on ensuring that rules are complied with, not only by providing new answers, but also by enforcement. Last year saw the first large fine for EMIR misreporting (see here), and also an increased number of investigations under REMIT (see here) as well as warnings about increased MAR enforcement (see here).
Taken together, we therefore are likely to see several strands of activity in the coming year:
Firstly, we will see the compliance departments of energy and commodity companies continue to mature, and focus on ensuring correct resourcing, processes, governance and technology. We can expect the “compliance culture” of organisations as a whole to continue to mature in several ways, be it on the trading side or on the side of physical assets.
Secondly, we will see increased efforts to “stay on top” of existing rules and properly ensure compliance, as enforcement continues. Even the “simplifications” mentioned above require careful change management. Being on top of the ever evolving regulatory landscape will be key.
Thirdly, we can expect the focus on anti abuse activity to continue to increase. This focus spans best practice, process, training and also the implementation of surveillance systems. There has been a significant increase in the implementation of such systems in the sector, and this is likely to increase further in 2018.
As mentioned above, some existing rules will undergo changes in 2018, for example REMIT reporting changes which will likely take place towards the end of the year or possibly at the beginning of next. Similarly the EMIR review will take effect if not in 2018, then in early 2019. While SFTR (Securities Financing Transaction Reporting) is only to start in 2019, it will likely impact some in the commodities sector and we can expect more news on this front.
The Global Data Protection Regulation starts in May of 2018. This will apply to every company, and will in some cases require careful thought. This article on the Finance Magnates web site by Adinah Brown of Leverate looks at the interaction between GDPR and MiFID II compliance.
Those who are based in the UK, or who trade with UK counterparties will quickly need to pay attention to “Brexit”. The date of Brexit is set at the end of March 2019 and preparations will need to soon be made to deal with the real changes that will occur on that date. There has been notable discussion on a “transition” arrangement. However, whatever the status after the deadline , it is likely that various forms of preparation will need to take place.
This year also see the start of the European Benchmark Regulation, as well as the extension to the UK Senior Managers Certification Regime. We also see the Clean Energy package continue to evolve and we can expect solid progress to be made in 2018.
New technology has been occupying a greater proportion of discussion recently. Starting from next week, this blog will cover developments in the “blockchain” world from a regulatory perspective. This will cover the crypto-currency world, the issues around “Initial Coin Offerings” and also the general use of blockchain technology for various purpose. In each case, the regulatory implications and considerations are significant, and must be contemplated alongside any activity.
We will attempt to provide timely and objective updates from this blog whenever possible, covering the rules mentioned here as well as the impact of new technology. It is intended that the blog will be provided free of charge for 2018.
This blog is the non commercial offering of ETR Advisory, whose services will occasionally be mentioned. We particularly draw readers’ attention to ETR’s Regulatory Support Service, which offers on demand help, tailored news, customised in person updates specific to each business and analyst reports, for a fixed fee. More details can be found here.
In summary, 2018 is likely to be a year when the rules start to work, via better practice, enforcement, structured change management and technology. All this, and less than 24 hours to go until the next major deadline…