On 7 March 2019, the European Securities and Markets Authority (ESMA) published a statement on its approach to the application of some key MiFID II / MiFIR and Benchmark Regulation (BMR) provisions in the event that the UK exits the EU without a deal.
Specifically the statement covers:
- the MiFID II C(6) carve-out. 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: (i) it must qualify as a wholesale energy product; (ii) it must be traded on an organised trading facility; and (iii) it must be physically settled. ESMA explains in the statement how a no-deal Brexit will impact the first two conditions;
- trading obligation for derivatives. ESMA does not have, at this point in time, any evidence that market participants will not be able to continue meeting their obligations under the trading obligation for derivatives in case of a no-deal Brexit and in the absence of an equivalence decision by the European Commission covering UK trading venues;
- ESMA opinions on post-trade transparency and position limits. In order to avoid double-reporting and including commodity derivatives contracts traded on third-country trading venues in the position limit regime, ESMA published in 2017 two opinions on third-country trading venues in the context of MiFID II/MiFIR (ESMA70-154-467, ESMA70-156-466). Since the UK is currently a member of the EU, ESMA has not assessed any UK trading venue against the criteria set out in the two opinions so far. However, ESMA stands ready, based on requests from EU27 market participants, to carry out such assessments. Pending the publication of the outcome of such assessments, EU27 investment firms will not be required to make transactions public in the EU27 via an EU Approved Publication Arrangement (APA) that are executed on an UK trading venue. Commodity derivatives contracts traded on those trading venues will not be considered as EEOTC contracts for the EU27 position limit regime;
- post-trade transparency for over-the-counter (OTC) transactions between EU investment firms and UK counterparties. In case of a no-deal Brexit investment firms established in the UK will no longer be considered EU investment firms but will fall into the category of counterparties established in a third country. In consequence, EU investment firms are required to make public transactions concluded OTC with UK counterparties via an APA established in the EU27. This approach ensures that all transactions where at least one counterparty is an EU investment firm will be made post-trade transparent in the EU27; and
- BMR and the ESMA register of administrators and third country benchmarks. During the BMR transitional period (as defined in Article 514 BMR) EU supervised entities can use third country benchmarks even if they are not included in the ESMA register. This would be applicable to the benchmarks provided by the UK administrators deleted from the ESMA register because of a no-deal Brexit. Similarly, the BMR transitional period is applicable to third country benchmarks. During this period EU27 supervised entities would be able to use third country benchmarks that were endorsed or recognised in the UK before the date of a no-deal Brexit.