As the working year of 2019 opens, it is worth taking a few moments to consider what will keep us busy in the regulatory world of energy and commodity trading over the coming months. As usual on this blog, we will focus on Europe, with an eye on the rest of the world.
The era of “making it work” continues
The opening of 2018, with the start of MiFID II on 3rd January, in many ways brought to a close the “era of new rules”, that saw the sector subjected to a stream of new regulations over a number of years. As the slew of new rules slowed down, we found that the focus had moved to making the existing rules work. This has manifested itself in many ways, for example:
An increase in enforcement cases – 2018 saw a rise in enforcement cases, in particular in the anti abuse sphere (a worldwide activity), but also in other areas, for example some REMIT reporting and registration cases (see here) and others. It is likely that this trend will continue not only on the anti abuse side under REMIT, but also in other areas. This could include MAR activity, reporting and other areas, relating to rules that have been in place for some time.
The focus on anti abuse activity – The start of MAR in mid 2016, and the increased anti abuse activity under REMIT, has led to a wider increase in anti abuse activity, on several other fronts: Many in energy and commodities have either completed or are in the process of upgrading their anti-abuse technology. For the most part, this involves the implementation of trade (and order) surveillance systems, an activity that is often time consuming and challenging. Some also look at a wider set of anti abuse technology, such as communications surveillance. There is also a great deal of discussion around the definition of abuse in the energy and commodity sectors. This spans the application of MAR to commodities (for example, the insider trading rules) as well as physical types of activity such as “capacity hoarding” (see here). An “open anti abuse forum” will be run in March to allow these matters to be discussed with all connected parties (see here). Some modifications to the format will be announced shortly.
Changes to existing rules – Several of the rules have been in place for some time and it is therefore no surprise that a stream of “tweaks” will continue to arise. The “REFIT” changes to EMIR may well be finalised soon (see here) as well as possible changes to the REMIT reporting formats as well as inside information disclosure. Other changes may arise out of questions and answers and precedent rules. As time goes on and the rules age, the stream of such changes will likely increase.
A focus on organisation and culture – As the industry has absorbed regulatory change, so the compliance function of market participants has begun to mature. Last year saw a focus on “culture” in the financial services industry (see here). It is very possible that with the maturation of compliance in energy and commodities, we will see a similar set of discussions.
Brexit – how can we prepare?
On March 29th, the United Kingdom is scheduled to leave the European Union. While political activity is well documented, and can be expected to reach ever great levels of intensity over the coming weeks, Brexit has a very real impact of how the rules covered on this blog apply. Possible changes will affect not only those in the UK, but also those who trade with entities based in the UK, and those who trade on venues domiciled in the UK.
The challenge for most is that even with less than 3 months until the date, the “type of Brexit” that will apply is still not finalised. As a result, market participants need to prepare for several scenarios, spanning the application of the “Withdrawal Agreement” that will soon be brought before the UK Parliament, a “no deal” scenario where nothing is agreed between the UK and the EU, or something else. For most, the approach is to make plans for a “no deal” scenario, which can be considered the “worst case”. However, over-preparation can risk “regret spent” should a deal be reached. Both the UK and EU have now begun to take steps to ease the possible burden of a “no deal” scenario. Never the less, there is a difficult few weeks ahead in order to be prepared for whichever scenario emerges. It is therefore likely that we will see many posts on this topic in Q1.
Over the last year, a stream of this blog covered the regulatory application of blockchain technology, in terms of both the use of blockchain for regulatory compliance as well as the regulatory implications of blockchain use. This area has been less active in the second half of the year. While coverage of relevant blockchain developments will continue, there are several other areas of interest that see a growing focus, as well as the general sphere of “Regtech”, which will be covered:
There is an increased use of algorithmic trading, especially in gas and power. This has several regulatory implications, both in terms of rules such as parts of MiFID II, as well as requiring anti abuse measures and monitoring, and proper governance.
The use of machine learning and other types of artificial intelligence is also increasing in the sector. Again, this has both regulatory implications, and also applications in compliance, with several being looked at in anti abuse activity. As the industry better understands anti abuse methods, it is likely that we will see more work on applying machine learning models. We may also see more work in the area of Anti Money Laundering activity.
Data reporting tools in the sphere of Regtech can also be expected to move forward. Initiatives in financial services such as the FCA’s “digital regulatory reporting” project (see here) may well find applications in this sector.
Other new rules
While the stream of new rules may have slowed down, they have not stopped completely. Work around SFTR will increase in the financial services sector this year, as the final deadlines become known (see here). There will be some activity for this rule set in energy and commodities as well. Other rules such as changes to prudential regulations for those in scope will also need to be monitored as they evolve.
The types of post on this blog have evolved over the past year – partly as a function of the move to “making it work” (as opposed to “news” about new rules). This style will likely continue in 2019. As before, the blog will continue to be provided free of charge for 2019, with a planned overhaul of some cosmetic aspects over the course of the year. There will be occasional posts announcing the commercial services of ETR Advisory who run this blog, although these will be limited and as before no sponsorship or other advertising will be permitted. Those who wish to have customised updates as well as personalised support and updates would be welcome to find out more about ETR Advisory’s Regulatory Support Service (see here).
As the sector’s approach to regulatory compliance evolves, and activity continues, we can expect many more pieces of regulatory news and items of interest to come to light in 2019. We therefore look forward to sharing many of these on this blog over the coming year.