ICIS View: Brexit vote muddies the financial regulation waters for energy traders

This article was originally published on the ICIS Energy Connections blog on Monday 27th June. The blog can be accessed here .

The Monday after the Friday before, and what the UK electorate’s decision for Brexit means is still unclear. If anything, it seems more unclear now than on Friday morning, when the shock of the result made it seem like the exit would be swift. That seems unlikely now.

One of the more interesting questions, for regulation anoraks at least, is what happens to the wave of financial regulation that has already hit or was due to hit the energy trading sector based out of the UK.

Top of that list is the second markets in financial instruments directive or MiFID II, due to come into force at the start of 2018.

Energy companies have argued against being subjected to the directive, believing its impact would be disproportionate to the systematic risk they pose – could the Brexit vote give some a way out?

The UK needs to notify the EU of its intention to leave, triggering a two-year period of negotiation. MiFID II will come into force before that two-year period is finished. And until a deal to leave is signed, sealed and delivered, the UK will still be obliged to apply all EU directives and regulations. How strictly that law is applied is another question, for a different day.

‘Rule taker?’

It is highly likely the UK will end up in a position where either it becomes a ‘rule taker’ and still implements EU law, or in certain instances would need equivalent legislation, to allow UK-registered firms access to the EU market. Switzerland, for example, already has legislation that mirrors regulation in the EU.

Even if the UK ended up in a position where it did not have to apply EU rules and regulations, it is still unlikely the country’s Financial Conduct Authority or the Treasury would support a “fin reg bonfire”, as one source said.

For now at least, everything is in limbo. But given the cross-border aspect to most energy traders’ businesses, a Brexit is unlikely to create a clear way out of EU financial regulation , no matter what happens.

PS… Some other fallout comes from commissioner Jonathan Hill resigning his position as head of the European Commission’s directorate-general for financial stability, financial services and capital markets union, because he felt the result left his position untenable. Hill was overseeing MiFID II as well as a review of EMIR, among many other areas. Hill will remain long enough to ensure an orderly handover, but it remains to be seen if his departure leads to a new tone at the department. fionn.oraghallaigh@icis.com