On March 7, the European Securities and Markets Authority (ESMA) published a statement outlining its approach to the application of key provisions of the revised Markets in Financial Instruments Directive (MiFID II), Markets in Financial Instruments Regulation (MiFIR) and the Benchmarks Regulation (BMR), in the event that the United Kingdom leaves the European Union without a withdrawal agreement (no-deal Brexit).

The statement covers MiFID II and MiFIR provisions relating to the following:

  • MiFID II C(6) carve-out: ESMA identifies that derivative contracts based on electricity or natural gas produced, traded or delivered in the UK may no longer be eligible for the carve-out in C(6) of Annex I of MiFID II, as they will not fall within the “wholesale energy product” definition. Such contracts could therefore be considered “financial instruments” for the purposes of MiFID II and MiFIR.
  • Trading obligation for derivatives: Post-Brexit, trading venues established in the UK will be considered to be third-country trading venues for EU purposes. While noting that the large majority of trading in derivatives subject to the trading obligation (Article 28 of MiFIR) is concluded on UK trading venues, ESMA states that it has no evidence that market participants will be unable to continue complying with such obligation in the event of a no-deal Brexit and in the absence of an equivalence decision by the Commission covering UK trading venues. Nevertheless, ESMA will continue to closely monitor how liquidity develops post-Brexit.
  • ESMA opinions on third-country trading venues for the purpose of post-trade transparency and the position limits regime: ESMA has not yet assessed any UK trading venue against the criteria set out in the opinions it gave in 2017 for the purposes of post-trade transparency and the position limits regime (for further information, see the January 5 edition of Corporate & Financial Weekly Digest), but will do so on the request of EU market participants.
  • Post-trade transparency for OTC transactions: ESMA considers the obligations under Article 20 and 21 of MiFIR in the context that investment firms established in the UK post-Brexit will no longer be EU investment firms, but will fall within the category of counterparties established in a third country. EU investment firms will therefore be required to make transactions concluded over the counter with UK counterparties public in the EU.

The statement also covers the removal of UK administrators from ESMA’s register of administrators and third-country benchmarks under the BMR and the application of the BMR transitional period defined in Article 51.

Given the uncertainty surrounding Brexit, ESMA states that it may adjust its approach if the timing and conditions of Brexit change, and will announce any changes to its approach as soon as possible.

ESMA’s statement is available here.