EU to Assess UK Trading Venues to Clarify Post-Brexit Position for Post-Trade Transparency and Position Limits Regime

The European Securities and Markets Authority has published updated statements on the impact of Brexit on the application of the Markets in Financial Instruments package and the EU Benchmark Regulation. ESMA issued statements in 2019 to clarify the position in a no-deal scenario. These latest statements provide updates to take into account the Withdrawal Agreement and the end of the Brexit transition period on December 31, 2020.

ESMA's statement on MiFID II obligations covers:

1) The application of the "REMIT carve out" to U.K. energy derivatives

The Markets in Financial Instruments Directive provides that derivatives that: (i) qualify as wholesale energy products; (ii) are traded on an organized trading facility; and (iii) are physically settled, will not be classed as financial instruments. The classification means that activity involving such derivatives will be outside the scope of the MiFID II requirements. ESMA has confirmed that derivatives contracts based on electricity or natural gas that are traded on a U.K. OTF would no longer fall within this exclusion at the end of the Brexit transition period (i.e., from January 1, 2021) and so would fall to be regulated under MiFID and no longer under REMIT.

2) Post-trade transparency and position limits regime

ESMA intends to conduct an assessment of U.K. trading venues for the purposes of the post-trade transparency and position limits regime. Without a positive assessment, EU27 investment firms will be required to make transactions executed on a U.K. trading venue public in the EU27 via an EU Approved Publication Arrangement. In addition, without a positive assessment, commodity derivatives traded on U.K. trading venues could be considered as economically equivalent OTC contracts for the EU position limits regime. ESMA has also confirmed that EU27 investment firms trading with U.K. counterparties will be required to make public OTC transactions via an EU APA.

3) Eligible collateral: main indices and recognized exchanges

The EU Capital Requirements Regulation requires a bank to hold sufficient capital to cover the risks associated with its business and prescribes how the credit risks of collateral should be treated. Securities that will be regarded as eligible as collateral are equities and convertible bonds that are constituents of a main index and debt securities that are listed on a recognized exchange. The Implementing Technical Standards set out a list of the main indices and recognized exchanges for the purpose of the CRR (Commission Implementing Regulation 2016/1646). In December 2019, ESMA submitted to the European Commission two versions of proposed amended ITS. The first includes U.K. exchanges as recognized exchanges, which would be the situation if there were an equivalence decision; the second does not include U.K. exchanges, which would cover the situation of no equivalence. ESMA confirms that the Commission has not adopted either version of its proposed amended ITS.

Benchmark administrators

ESMA's statement on the EU BMR confirms that it will remove all U.K. benchmark administrators from its register of EU administered benchmarks because the administrators will no longer be EU administrators but will be third-country administrators, for which different provisions apply. However, the transitional provision in BMR, which expires on December 31, 2021, will apply to U.K. benchmarks, allowing EU supervised entities to use those benchmarks, even if they are not included in ESMA's register or otherwise approved as third country benchmarks. In the absence of an equivalence decision, U.K. administrators will have until the end of the BMR transitional period to apply for recognition or endorsement in the EU, which will enable their benchmarks to be used. Similarly, during the BMR transitional period, EU27 supervised entities will be able to use third-country benchmarks that have been endorsed or recognized in the U.K. prior to the end of the Brexit transition period and which will also be deleted from ESMA's register.

View ESMA's updated statements on MiFID II and the BMR.

View details of ESMA's October 2019 statement.

View details of ESMA's March 2019 statement.

View details of the proposed draft amended CRR ITS on main indices and recognized exchanges.

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