FIA Webinar. Brexit Impact on Power, Gas and Commodity Markets 8 March (0) (0)

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1 FIA Webinar Brexit Impact n Pwer, Gas and Cmmdity Markets 8 March 2017 Chris Brg, Partner Brett Hillis, Partner + 44 (0) (0) cbrg@reedsmith.cm bhillis@reedsmith.cm

2 Tday s talk Overview f withdrawal Sme financial regulatry effects Other matters affecting cmmdity markets Market structure fr energy, emissins and related prducts

3 Current psitin Tday: UK remains EU Member State Rights and bligatins f EU membership cntinue t apply t the UK N Article 50 ntificatin given but expected shrtly N changes s far t UK law t reflect the Referendum result Cnsequences f withdrawal under Article 50: Depends f agreements reached with EU Agreements between EU and third cuntries (e.g. as t trade) wuld cease t apply t the UK Phasing-ut f EU financial prgrammes Treatment f acquired rights f EU citizens living in UK and UK citizens living in EU

4 Pssible Mdels fr Pst-Brexit EU Market Access EEA Membership Ready-made package Gives EEA-wide Single Passprt rights, withut EU membership Ruled ut by UK gvernment under hard Brexit apprach Equivalence (e.g. under MiFIR) Culd underpin sme rights f access. Dependent n EU Cmmissin s discretin (fr grant & maintenance) EU Cmmissin wrking paper Timing issues, if equivalence decisin nt available in time. Territrial Scpe Argument Ad hc analysis: nt a cmprehensive slutin. Subject t nging plitical risk. Smething new Wuld take time t negtiate. Likely need fr transitinal arrangement in the meantime

5 Equivalence under MiFID2/MiFIR a Clser Lk Crss-brder Access Regime fr TC firms Fr business with ECPs/Per Se Prfessinals nly. EU Cmmissin may determine a TC is equivalent : TC firms may prvide services crss-brder int EU Member States with n branch establishment requirement, where: authrised at hme (fr all relevant business); and registered with ESMA (180 days t prcess an applicatin). (Fr first 3 years after equivalence determinatin firms may cntinue t access MS n basis f natinal plicies) NB EU Cmmissin has n bligatin t make equivalence determinatin and may revke it n shrt ntice. Member States may impse branch registratin requirements fr business with retail clients/elective prfessinal clients.

6 Other MiFID2/MiFIR implicatins when UK is nt in the Unin Ancillary Business Exemptin Hw culd TC firms claim the exemptin? Level 1 (Cnditin fr exemptin): annually ntify the relevant cmpetent authrity. Which NCA is the relevant ne? Is there ne? Level 2 (ESMA: DP Dec 2014 & FR Sep 2015): firms in a third cuntry shuld make the ntificatin t the cmpetent authrity f the Member State where their branch is situated. N prvisin fr TC firms withut a branch in an EU Member State. Cmes dwn t Member State implementatin?

7 Other MiFID2/MiFIR implicatins when UK is nt in the Unin Ancillary Business Exemptin If threshlds are calculated by reference t GNV r capital in the Unin : Trading activity & verall market size excludes UK Main business & capital emplyed excludes UK Retrspective effect r nt? Pssible lng-term incentive fr EU firms t trade FIs n UK trading venues thrugh UK/Nn-EU affiliates?

8 REMIT implicatins when UK is nt in the Unin REMIT definitin f whlesale energy prduct : Cntracts fr the supply f electricity r natural gas where delivery is in the Unin Derivatives relating t electricity r natural gas, prduced, traded r delivered in the Unin Cntracts relating the transprtatin f electricity r natural gas in the Unin Derivatives relating t the transprtatin r electricity r natural gas prduced, traded r delivered in the Unin

9 MiFID2 & REMIT Scpe Impact ANNEX I, SECTION C C(5): Cash-settled cmmdity derivatives C(6): Physically-settled cmmdity derivatives n a RM, MTF r OTF C(7): Other physically-settled cmmdity derivatives C(10): Extics Derivatives C(11): Emissin allwances

10 MiFID2: Delegated Act - C(6) & C(7) REMIT EXEMPTION Whlesale energy prducts Traded n an OTF Must be physically settled Carved ut f C(6) and C(7) categries Pst-Brexit NBP/GTMA frwards (and LNG fr delivery in UK) are nt WEPs S nt eligible fr REMIT exemptin Vlume in these wuld be included in ancillary threshld calculatin where traded by EU entities/n EU TVs Psitin limits etc. wuld apply if traded n EU TVs Wuld be financial instruments fr all ther purpses, including EMIR and MAR

11 MiFID2/R: Psitin Limits Impact Net psitin Persn Cmmdity derivatives n trading venues (CDTV) Ecnmically equivalent OTC cntracts (EEOTC) psitin limits n the size f a net psitin which a persn can hld at all times in cmmdity derivatives traded n trading venues and ecnmically equivalent OTC cntracts MiFID2, art 57(1)

12 MiFID2/R: Psitin Limits Scpe Cmmdity derivatives n trading venues Trading Venues defined as regulated markets (RMs), multilateral trading facilities (MTFs) and rganised trading facilities (OTFs) EU entities by definitin EEOTC : Very narrw scpe intended. MiFID2 Psitin Limits wuld nt apply t Cmmdity Derivatives n UK TVs but equivalence ruling may require crrespnding UK regime. Wuld UK withdraw frm MiFID2 architecture fr psitin limits gvernance?

13 And s much mre Third cuntry firm treatment fr EMIR purpses Revisit transactin reprting under REMIT, EMIR and MiFID2 UK CCPs t be recgnised instead f authrised under EMIR UK-based benchmark administratrs t revisit basis fr EU access (recgnitin/endrsement) Liquidity assessments fr transparency purpses under MiFID2/MiFIR

14 UK dmestic law cnsequences Under UK dmestic law, primacy f EU law based n Eurpean Cmmunities Act 1972 Sectin 2(1) gives effect t the Treaties under UK law Sectin 2(2) gives authrity t Gvernment t make regulatins implementing EU bligatins (e.g. Directives) Sme EU bligatins implemented under Acts f Parliament Repeal f ECA 1972 prvisins ( The Great Repeal Bill ) Will place law made under ECA 1972 n new legal fting by way f new Act(s) f Parliament, prbably giving UK gvernment brad pwers t make law by way f statutry instrument. Need t review existing legislatin These will be massive tasks!

15 Tax Issues fr cmpanies trading in gds between UK and EU/ Rest f Wrld lss f access t EU Custms Unin (pwer and gas = gds) Impsitin f custms and imprt tariffs n gds traded between the UK and the EU. Trade in gds between the UK and the RW may als be subject t higher custms and imprt tariffs, because the UK will lse access t the EU s free trade agreements with ther cuntries/regins. The precise utcme will depend n what alternative arrangements are negtiated. Grup structures with UK and EU entities in direct relatinships Tax efficiency f prfit extractin under their structures UK hlding cmpanies UK perating subsidiaries

16 English jurisdictin and enfrcement f judgments Legal basis supprting English jurisdictin clauses will change. Specific issues: Revisit jurisdictin clauses drafted by reference t EU legislatin e.g. ISDA Master Agreements Service f prcess inclusin f a prcess agent clause Ptential enfrcement issues in certain Member States lcal law advice may be helpful t assess any risk UK curts wuld n lnger autmatically recgnise and enfrce judgments f curts f EU Member States Arbitratin may becme mre attractive ptin ability t btain anti-suit injunctins, enfrcement thrugh NY Cnventin

17 Netting, cllateral and inslvency UK has had statutry regime fr set-ff n inslvency supprting clse-ut netting f mutual dealings since at least 1869 D nt expect any change in this Crss-brder recgnitin f prceedings The EU Regulatin n Inslvency (EUIR) Financial cllateral arrangements Imprtant particularly fr IM under new margining regime fr FCs and NFCs+

18 Data UK Data Prtectin Act implements existing EU data prtectin laws General Data Prtectin Regulatin = a seismic change t the existing laws and is due t cme int frce n 25 May 2018 Depending n timing f exit, GDPR culd cme int frce in the UK prir t withdrawal; Thereafter the UK may decide t enact laws t keep it (r culd remain bund, e.g. under an EEA-type arrangement) In any event, even if the GDPR itself did nt frm part f UK law, the UK is likely t enact dmestic legislatin tracking GDPR requirements in rder t achieve adequacy status frm the EU EU Cyber Security (NIS) Directive due t cme int frce in mid 2018 (cncerns security f natinal infrastructure, cmpulsry breach reprting and cperatin n threat intelligence): wuld require implementatin by the UK in rder t apply

19 EU Sanctins Sanctins require EU unanimity Traditinally the UK has been a sanctins hawk in the EU: Nthing will change until the UK frmally leaves the EU Cnsideratin will need t be given t existing EU sanctins regimes and their being carried frward n a new legal basis Pssible the UK will adpt a plicy mirrring apprach t align itself t EU sanctins when it withdraws frm the EU Cf s many mre areas

20 FIA Webinar Brexit Impact n Pwer, Gas and Cmmdity Markets 8 March 2017 Chris Brg, Partner Brett Hillis, Partner + 44 (0) (0) cbrg@reedsmith.cm bhillis@reedsmith.cm