The United Kingdom’s (UK) departure from the European Union (EU) on January 31, 2020 and the subsequent expiry of the transitional provisions on December 31, 2020 has profound implications for trading activities in financial instruments and physical commodities. This includes trading in wholesale electricity and gas products, both physically and financially settled. Following the UK’s departure from the EU, trading activities in wholesale energy products are governed by two distinct, albeit still very similar, regimes.
In this note, we provide an overview of the main issues that market participants, based both in the EU and in the UK, should be aware of when engaging in such trading activities, following Brexit.
Introduction to EU REMIT and UK REMIT
- In the EU, trading in wholesale energy products continues to be governed by the Regulation on Wholesale Energy Market Transparency and Integrity (EU REMIT)1 and the corresponding Commission Implementing Regulation on Data Reporting (CIR)2. The vast body of supplementing non-binding guidance issued by the Agency for Cooperation of Energy Regulators (ACER) equally remains applicable (the ACER Guidance).
- In the UK, and pursuant to the EU-UK Withdrawal Agreement, EU REMIT constitutes part of the retained EU law (UK REMIT). That said, the Electricity and Gas (Market Integrity and Transparency) (Amendment) (EU Exit) Regulations 20193 (REMIT SI), as amended, address deficiencies of the retained EU REMIT in order to make the UK REMIT regime operational in the UK following the expiry of the transitional period. Among other changes, the REMIT SI amends the statutory instruments that provide Ofgem with investigatory and enforcement powers to apply UK REMIT, instead of EU REMIT, and to monitor (instead of ACER) wholesale trading activity in UK markets.
- In respect of Northern Ireland, and pursuant to the provisions of the Ireland/Northern Ireland Protocol to the Withdrawal Agreement and Section 3 of the European Union (Withdrawal) Act 2018, EU REMIT continues to apply. This outcome was further confirmed by The Electricity and Gas etc. (Amendment) (EU Exit) Regulations 20204.
Key issues (EU): Re-registration and REMIT carve-out
- Contrary to the position taken by Ofgem (as set out below), ACER does not recognise the registrations of existing UK market participants’ as valid for the purposes of EU REMIT. Market participants that are established or resident in the UK that wish to enter into transactions or place orders in EU wholesale energy markets must register with a national regulatory authority (NRA) of one of the EU-27 Member States in which they are ‘predominantly active’.5 The registration obligation also applies to market participants established or resident in the UK who are obliged to report lifecycle events to transactions that were entered into before December 31, 2020.
- The above re-registration requirement equally applies to a non-UK/non-EU market participant that was previously registered with Ofgem and that wishes to enter into a transaction in respect of a wholesale energy product that is reportable in accordance with EU REMIT.
- Market participants that were required to follow the re-registration procedure must comply with the EU REMIT reporting requirements by using their new ACER code. This new code must be used in respect of the reporting of records of transactions entered into and orders to trade placed as of January 1, 2021. Any delay in compliance with the reporting obligations must be communicated to ACER by Registered Reporting Mechanisms (RRMs) via a contingency report.
- In respect of the exemption of certain wholesale energy products from the EU definition of “financial instrument” under the Directive on Markets in Financial Instruments6 (the so-called REMIT carve-out), a derivative contract related to electricity or natural gas that would be exclusively produced, traded and delivered in the UK no longer qualifies as a wholesale energy product. It is no longer eligible to apply for the REMIT carve-out under MiFID II, even if it is traded on an EU OTF.7
- Conversely, derivatives relating to UK gas or power that continue to be traded on a spot trading platform in the EU, would continue to qualify as “wholesale energy products” within the meaning of REMIT and could therefore benefit from the REMIT carve-out, since such wholesale products are traded in the EU.
Key issues (UK): Business as usual?
- Ofgem has stated that the key EU REMIT obligations, including the definition of ‘inside information, ‘market manipulation’ and ‘attempting to manipulate the market’, will remain the same for the purposes of its monitoring and enforcement responsibilities. It will continue to use the ACER Guidance when exercising such responsibilities and will consider whether there is a need for UK specific REMIT guidance in due course.
- Pursuant to an Ofgem direction published at the start of this year8, a market participant that is registered with the Northern Ireland Authority or with a National Regulatory Authority in one of the EU-27 Member States is exempt from the requirement to register with Ofgem. Ofgem stated that it was taking such an approach in order to minimise potential disruption to the wholesale energy markets in the UK and to reduce the registration burden on market participants.
- ACER will no longer collect trade and fundamental data relating to the UK wholesale energy markets and there is currently no equivalent reporting regime in place in the UK. Rather, Ofgem will consider whether to implement such a regime and it is required to provide at least three months’ notice to the industry before doing so. In the meantime, Ofgem will monitor the wholesale energy markets in the UK for possible market abuse using existing data sources, including trade and order data that is collected directly from brokers and exchanges.
- At the practical level, UK market participants would be well advised to consider their REMIT compliance position more generally in the light of UK REMIT. Even though Ofgem has not yet issued any specific guidance for the UK energy markets, it took enforcement action against a number of market participants during 20209. The well-publicised enforcement notices provide useful pointers to firms on regulatory expectations, particularly in the context of the disclosure of inside information obligation and the market manipulation offences. Accordingly, a re-examination of compliance policies, systems and controls and training would be useful to factor into the compliance work programme for 2021.
- The changes in the registration and reporting requirements also provide a good opportunity for UK market participants to assess their arrangements in this area. While there is not yet a specific UK reporting regime in place, UK market participants are still required to meet the reporting requirements in respect of EU wholesale energy products. Accordingly, they should satisfy themselves that they are meeting the regulatory requirements (with reference to the ACER Guidance and Open Letters10) and that their ongoing review and reconciliation processes allow any issues to be identified and addressed. This will stand UK market participants in good stead ahead of the introduction of any new UK-specific regime in the future.
- Finally, it is important to remember the important linkages between REMIT and other financial services legislation. In particular, the REMIT carve out to the definition of financial instruments in MiFID II now has a different meaning in EU and UK legislation and could make a difference to threshold calculations for authorisation and obligations on OTC derivatives in EMIR11.
How we can help
Our team has extensive experience in advising all types of European, UK and third-country participants in commodity derivative markets, including wholesale energy products. We help clients to prepare for legislative change by advising on legal and regulatory requirements, as well as on practical aspects of their application from the perspective of operational systems and controls adaptation. We also assist clients with internal investigations and responses to potential enforcement action by the regulatory authorities. Unlike most other law firms, Norton Rose Fulbright offers a blend of advisory and contentious legal, compliance and government relations skills in one cohesive team.