knowledge 17 October 2019 |

ESMA Publishes No-Deal Brexit Update

ESMA has issued the following updated statements (here) to reflect a “no-deal Brexit”:

• Public Statement - Use of UK data in ESMA databases and performance of MiFID II calculations in case of a no-deal Brexit on 31 October 2019 (updating the communication issued on 5 February 2019);
• Public Statement - Impact of a no-deal Brexit on the application of MiFID II/MiFIR and the Benchmark Regulation (BMR) (which addresses, from a MiFID II/MiFIR perspective, the C(6) carve-out, ESMA opinions on third-country trading venues for the purpose of post-trade transparency and position limits and post-trade transparency for OTC transactions, from a BMR perspective, ESMA register of administrators and third-country benchmarks calculations and, from a Capital Requirements Regulation perspective, the ITS on main indices and recognised exchanges, and which updates the communication issued on 7 March 2019); and
• Public Statement – ESMA’s Data Operational Plan under a no-deal Brexit scenario on 31 October 2019 (which relates to ESMA databases and IT systems and updates the communication issued on 19 March 2019).

Public Statement on the use of UK data

ESMA’s statement on the publication of databases and IT systems, including the update on 28 March 2019, informed the public of ESMA’s approach concerning the various transparency calculations in the event of a no-deal Brexit.

The updated statement reiterates that, in such an event, the UK’s Financial Conduct Authority (the “FCA”) will stop sending data to ESMA and will no longer have access to ESMA’s IT applications and databases.  From 1 November 2019, ESMA will not receive or process any new UK-related data or publish such data on its website.  ESMA has indicated that, to accommodate this change, it will re-determine the relevant competent authority (“RCA”) for all financial instruments that remain available for trading in the EU and for which the FCA is currently the RCA to ensure that the RCA is within the EU.

The updated statement informs stakeholders of ESMA’s approach to all ESMA IT applications and databases in case of a no-deal Brexit on 31 October 2019 and focuses in particular on the publications performed by the various ESMA databases under the MiFID II¹/MiFIR² (Financial Instruments Reference Database (FIRDS), Financial Instruments Transparency System (FITRS), double volume cap mechanism data (DVC system)) as well as the annual ancillary activity calculations.

Public Statement on the impact of a no-deal Brexit

This statement updates the issues covered in the statement published on 7 March 2019 and covers the following MiFID II aspects:

• the C(6) carve-out;
• the ESMA opinions on third-country trading venues for the purpose of post-trade transparency; and
• the position limits regime and post-trade transparency for over-the-counter (“OTC”) transactions.

This statement also covers the ITS on main indices and recognised exchanges under the Capital Requirements Regulation³ (the “CRR”) and the ESMA register of administrators and  third-country benchmarks under the Benchmark Regulation⁴ (“BMR”).

The C(6) carve-out

To be eligible for 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:

• qualify as a wholesale energy product;
• be traded on an Organised Trading Facility (“OTF”); and
• be physically settled.

A no-deal Brexit will have an impact on the first two conditions.

Consequently, following a no-deal Brexit certain derivative contracts relating to electricity or natural gas may become financial instruments for the purposes of MiFID II where, given the terms of C(6) and related delegated legislation, they will cease to benefit from the C(6) carve-out.

ESMA Opinions on post-trade transparency and position limits

In case of a no-deal Brexit, with effect from 1 November 2019, trading venues established in the UK will no longer be considered EU trading venues. Transactions concluded on such venues will therefore be considered OTC transactions and must be reported by the EU investment firm, pursuant to the post-trade transparency requirements set out in Articles 20 and 21 of MiFIR.

Furthermore, commodity derivatives traded on UK trading venues could, subject to meeting certain conditions, be considered as economically equivalent over-the-counter (“EEOTC”) contracts for the EU27 position limit regime meaning that such contracts will be subject to that regime.

In order to avoid double-reporting and include 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 which clarified that:

• investment firms trading on third-country trading venues meeting a set of criteria are not required to make transactions public in the EU via an approved publication arrangement (“APA”); and
• commodity derivatives contracts traded on third-country trading venues meeting a set of criteria are not considered as EEOTC contracts for the position limit regime.

ESMA has not yet assessed any UK trading venue against the criteria set out in the two opinions. However, pending the publication of the outcome of such assessments, EU27 investment firms will not be required to make transactions that are executed on an UK trading venue public in the EU27 via an EU APA. Moreover, 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 OTC transactions between EU investment firms and UK counterparties

Under Articles 20 and 21 of MiFIR, an EU investment firm must publish transactions in instruments that are traded on a trading venue (TOTV) via an APA, including OTC transactions involving an EU investment firm and a counterparty established in a third-country.

In the event of a no-deal Brexit, UK-established investment firms will be categorised as counterparties established in a third-country, and consequently, EU investment firms will be required to make public OTC transactions concluded with UK counterparties via an APA established in the EU27.

CRR: ITS on main indices and recognised exchanges

The CRR tasks ESMA with defining the concepts of “main indices” and “recognised exchanges” in the specification of eligible collateral. These concepts are key for the calculation of credit risk by credit institutions and investment firms to which the CRR applies. Commission Implementing Regulation 2016/1646 (the “ITS”) sets out a list of the main indices and recognised exchanges for the purpose of the CRR.

In the case of a no-deal Brexit, UK exchanges will no longer be included in the list of recognised exchanges.  While third-country trading venues may be included in the list of recognised exchanges subject to a European Commission equivalence decision, ESMA has indicated that it will only be in a position to decide on including or excluding UK exchanges once there is more certainty on the timing and conditions of Brexit.

BMR: ESMA register of administrators and third-country benchmarks

In case of a no-deal Brexit, UK administrators included in the “ESMA register of administrators and third-country benchmarks” (the “ESMA register”) before 31 October 2019 will be deleted from the ESMA register.  Similarly, if some third-country benchmarks were included in the ESMA register before the date of a no-deal Brexit following a recognition or an endorsement status granted in the UK, those third-country benchmarks will be deleted from the ESMA register on that date.

However, during the BMR transitional period, this change of the ESMA register will not impact the ability of the EU27 supervised entities to use the benchmarks provided by those UK administrators or the relevant third-country benchmarks.

Public Statement on Operational Plans

This Statement complements the Public Statement on the use of UK data in ESMA databases and performance of MiFID II calculations and provides information and instructions to market participants on the operational use of ESMA’s IT systems in the period following 31 October 2019.  It covers actions relating to the Financial Instruments Reference Data System (FIRDS), the Financial Instrument Transparency System (FITRS), the Double Volume Cap System (DVCAP), transaction reporting systems and ESMA’s registers and data.  ESMA has indicated that it will issue further communications to stakeholders before commencing the Brexit implementation actions outlined in the Statement and again upon their successful conclusion.