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Brexit update – Security of supply, MiFID II and more

There has been a great deal of political activity since our last post on Brexit (see here), with the next important summit taking place tomorrow (see here on the Reuters web site). At the same time, there have been several documents and statements released that are relevant for those in energy and commodity trading:

Technical Notices relating to “Hard Brexit”
The Department for Exiting the EU has been adding Technical Notices over the past few weeks, with the latest batch added on Friday.  These look at the possible impact of a hard Brexit on different parts of the economy. The latest batch included notices relating to the power markets (here) and the  gas markets (here).

The statements outline many points that will be of concern to market participants:

  • They discuss the possible impact on the Irish ISEM market – stating that the two areas may diverge possibly leading to security of supply issues (this has been picked up by the press, for example here on the Belfast Telegraph web site).
  • Mention is made of re registration under REMIT.
  • There are statements about alternative arrangements for inter connector use.
  • There will be network code changes.

A separate notice refers to the possible withdrawal from the Emissions Trading Scheme, and can be found here.  The document reminds that the UK government has brought forward the surrender date for the rest of the next phase from a UK perspective, and also that the government intends to continue monitoring and verification in the UK. There is a warning of loss of access to the ETS registry and a prompt to re register. An earlier update included guidance on the use of Guarantees of Origin, which can be found here.

The list of notices in its entirety can be found here.

Draft Statutory Instruments(SIs)
Draft SIs have been issued (here) together with explanatory notes (here) so that MiFID II and MiFID can be brought into UK law. In terms of financial instruments, the SIs continue with the physical forward definition found in MiFID II, recognising the “REMIT carve out” for physical gas and power trades on an Organised Trading Facility (including in the EU) and also continuing with the Ancillary Activity test, with a market size that includes the EU. This is in contrast to the possible EU position, which is referred to on the ISDA paper mentioned below. EUAs will also continue to be Financial Instruments from a UK perspective.

A draft SI was also issued in relation to EMIR trade repositories (here), and one relating to changing REMIT (here).

FCA consultation papers
In parallel to the draft SIs, the FCA has issued consultation papers relating to handbook changes and the temporary permissions regime. They can be found here and here. The FCA has also issued this document giving guidance on how EEA based venues may apply to become a “Recognised Overseas Investment Exchange” from a UK perspective.

ISDA Hard Brexit Document
ISDA has published this document which outlines different impacts of a hard Brexit. These include commodity related items and also point out that EU based entities may have difficulty in accessing UK based CCPs after a hard Brexit. The document urges that the proper agreements be put in place.

Bank of England Statement
The Bank of England recently published this statement which looks at different scenarios, and also possible changes to the prudential regime, as well as other impacts to the wider economy, It outlines some measures taken in terms of temporary regimes etc.

ESMA letter on Third Country access and speech
ESMA wrote this open letter to the Commission expressing concerns regarding the third country regimes and ability for member states to have varying regimes, with respect to the offering of investment services to eligible counterparties and professional clients. It is suggested that a MiFIR/MIFID II compliance requirements be added to relevant third country entities offering such services, and/or central registration. There is also concern expressed around third country firms and “reverse solicitation” and a request for more oversight of such activity. Steven Maijoor, chair of ESMA, made this speech, in which the current approach to Brexit is discussed.

Looking forward
With less than six months to go, many market participants are now ramping up their planning for a “no deal scenario”. We can expect the news to provide new items on an almost daily basis in the near future, both about Brexit and also other events expected in the UK next spring, announced yesterday.

About avivhandler

Aviv is the Managing Director of ETR Advisory, a niche consultancy focused on the regulation of the commodity, energy and financial markets. He has more than 23 years of experience in the financial, energy and commodity markets, covering regulatory compliance, credit, risk and financial technology. Prior to founding ETR, he was Partner at SunGard Global Services, where he built a Centre of Excellence in European Energy and Commodity Regulation. Before that, he founded Coherence, a consulting firm specializing in credit risk in commodity and energy trading as well as software product management. The credit practice ultimately became part of Sirius Solutions, where he was the Managing Director of Europe. He has also held management roles at KWI and Iris Financial, among other organizations. Mr. Handler holds a degree in computer science from Imperial College, University of London.


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