The week in outline:
There were further announcements and publications about the financial services (FS) regulatory regime that would apply in a no-deal scenario i.e. if the UK leaves the EU without the transition period (TP) under the proposed Withdrawal Agreement (WA) (the ND regime). Details of the ND regime can be found in our RegZone no-deal database here.
Further EU/UK MoUs have now been concluded for the ND regime (see Document 2 below). (Details of earlier ND regime MoUs can be found in previous updates here and here). One MoU is between the UK regulators (PRA and FCA) and EIOPA; the other MoU is multilateral and also includes the national competent authorities (i.e. the domestic insurance regulators) of the EU-27 and EEA-3 states.
The Financial Policy Committee(FPC) of the Bank of England (BoE) published the record of its meeting on 26th February (see Document 3 below). The FPC looked again at the risks to financial stability posed by Brexit under the ND regime. The FPC had published a report on this topic in November 2018. In broad terms, the FPC confirmed that UK legislation for the ND regime for FS, which would be completed by 29th March, would allow continuing access by EU firms and thus eliminate/mitigate any adverse risk to financial stability. The position was different on the EU side where measures to continue access were much more limited and significant adverse risks remained; the disruption would impact (UK firms access to) EU business but the FPC was concerned about spill-back effects for the UK in terms of financial stability.
The FPC published a summary table by sector reviewing the ND regime measures that were in place. On the UK side there was a complete set of measures in each sector. On the EU side (where the table covered measures at the EU level and at member state level) the FPC highlighted gaps in every sector - OTC derivatives (cleared), insurance contracts, asset management,banking services, OTC derivatives (uncleared) and data. The FPC summarised the restructuring for the ND regime as follows - 'UK and global banks are transferring activities to EU-incorporated entities, but are not yet in positions to provide the full range of wholesale banking services to EU clients. The process of migrating businesses, assets and contracts in a short period also poses operational risks, which could disrupt services in the EU. Banks in EU countries, which have not passed relevant legislation, and their UK counterparty banks will also be less able to manage the risk arising from their uncleared derivative positions'.
Ten leading FS trade associations (UK and European) have written to the European Commission (see Document 1 below) highlighting the ‘disruptive impact on EU27 market participants and European derivatives markets if the Commission does not take urgent action with respect to the recognition of UK derivatives trading venues under EMIR and MiFIR’.This concerns the lack of equivalence decisions under Article 2a of EMIR and Article 28(4) of MiFIR. They highlighted -
- ‘the impact of the reclassification of UK-exchange-traded derivatives as OTC derivatives… which may require non-financial counterparties to reduce or limit their positions in UK exchange-traded derivatives so as not to exceed EMIR clearing thresholds after Brexit and may significantly restrict small financial counterparties ability to invest or risk manage its activities’;
- ‘the potential inability of EU27 counterparties to satisfy the MiFIR derivatives trading obligation by trading on UK venues… meaning EU27 counterparties, banks and investment firms would lose access to commercially attractive services provided through UK venues sources, global liquidity would become fragmented and EU27-UK transactions may become subject to conflicting requirements’;
ESMA published a statement on a variety of ND regime issues relating to the lack of transitional measures/equivalence decisions in various areas under MiFID II/MiFIR and the Benchmark regulation (see Document 4 below). These include the second issue raised by the trade associations above. ESMA suggests firms will be able to meet their regulatory obligations without an equivalence decision for UK venues. It says – ‘ESMA understands that most UK trading venues that offer trading in derivatives subject to the trading obligation are in the process of establishing new trading venues in the EU27 and plan to offer the same product portfolio in the EU27 as they are currently offering in the UK. In addition, there are already trading venues in the EU27 offering trading in derivatives subject to the trading obligation.’
FCA announced that its domestic FIRDS is ready for testing by firms (see Document 5 below). Firms and trading venues currently use ESMA’s FIRDS to submit instrument reference data. Under the ND regime (from exit), firms and trading venues will use the new domestic system in the UK.
Finally, the UK’s Department for Exiting the EU (DExEU) published an update on the progress that HMG has made in agreeing with third countries that international agreements (such as free trade agreements) with the EU will be ‘rolled-over’. In the absence of a roll-over agreement, the UK would cease to be covered by these agreements after it leaves the EU under the ND regime. (Roll-over would also cover the position after the end of the TP if the WA takes effect. HMG’s position is that roll-over is not necessary under the TP, but the WA only provides for the EU to request third countries to treat the UK as an EU member during the TP; it seems that generally there is no legal obligation on third countries to do so.)
DExEU has published a webpage with an online tracker of various international agreements by area (Aviation, Trade, Fisheries etc.). These indicate whether the roll-over agreement is expected to be in place by 29th March or not (and, in the latter case, whether ‘engagement is on-going’ or whether roll-over will definitely not be possible by that date). The tracker database only has 2 FS specific agreements – these are the 2 insurance agreements which have been rolled over with Switzerland (concerning branches of non-life insurers) and with the US on prudential measures in insurance and reinsurance (see earlier updates). In FS, most DRC/mutual recognition is not on a treaty basis. For example, the UK/EU derivatives package (see our update for the previous week) has been concluded on an ‘MoU’ basis i.e. with reciprocal DRC, but without a treaty or international agreement. There is no database or tracker (or any comprehensive information from HMG) concerning the roll-over/continuation of current DRC/mutual recognition that benefits UK firms in third countries; such DRC may be lost when the UK leaves the EU, particularly under the ND regime.
1. IMA/AIMF/EBF/EFET/FIA/IA/ICI Global/ISDA/SIFMA: Brexit – equivalence of UK derivatives trading venues under EMIR and MiFIR
Various trade associations (FIA, the International Swaps and Derivatives Association, the Alternative Investment Management Association, the Association for Financial Markets in Europe, Associazione Intermediari Mercati Finanziari - ASSOSIM, the European Banking Federation, the European Federation of Energy Traders, ICI Global, the Investment Association and the Securities Industry and Financial Markets Association’s Asset Management Group (the "Associations")) have written to the EC in order to set out their concerns with regard to the recognition of UK derivatives trading venues under EMIR and MiFIR in the event of a no-deal Brexit.
The letter states: 'In particular, the Associations welcomed the Commission's adoption of temporary equivalence decisions with respect to UK central counterparties (CCPs) and central securities depositories and the measures to facilitate novations of derivatives transactions from UK to EU27 counterparties.'
'However, the Associations remain concerned about the disruptive impact on EU27 market participants and European derivatives markets if the Commission does not take urgent action with respect to the recognition of UK derivatives trading venues under EMIR and MiFIR in a 'no-deal' scenario, i.e., where the UK leaves the EU without concluding a withdrawal agreement providing for a transition period.'
'There should be no obstacle to the Commission making a determination as to the equivalence of the UK's legal, supervisory and enforcement regime with respect to UK trading venues under EMIR and MiFIR. Under the UK European Union (Withdrawal) Act 2018, the regulatory requirements currently applicable to UK trading venues will continue to apply after the UK leaves the EU in a 'no-deal' scenario, with necessary modifications to reflect the UK's status outside the EU.
'Therefore, we urge the Commission to prepare the necessary implementing acts to recognise the equivalence of UK derivatives trading venues under Article 2a of EMIR and Article 28(4) of MiFIR with a view to those acts taking effect at or very shortly after the UK leaves the EU without concluding a withdrawal agreement providing for a transition period. If necessary, the Commission could consider a temporary or limited equivalence decision such as that made with respect to UK CCPs and central securities depositories.'
2. RA/FCA/EIOPA: Memorandum of Understandings
PRA, FCA and EIOPA have announced that they have agreed two MoUs regarding supervisory cooperation and information-sharing arrangements with respect to UK and EU/EEA insurance companies in the event of a no-deal Brexit. The first of these, a multi-lateral MoU, covers supervisory cooperation, enforcement and information exchange between UK and EU/EEA national supervisors and the second is an MoU with EIOPA covering information exchange and mutual assistance between the UK authorities and EIOPA in the field of insurance regulation and supervision. Texts of the MoUs have not been published, however the BoE and FCA's, and EIOPA's new releases can be accessed here and here.
'The European Insurance and Occupational Pensions Authority (EIOPA) and all National Competent Authorities (NCAs) of the European Economic Area (EEA) with competencies in insurance have agreed Memoranda of Understanding (MoUs) with the Bank of England in its capacity as the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) of the United Kingdom (UK).
'The MoUs take effect should the UK leave the European Union (EU) without a withdrawal agreement, the so-called "No-deal" Brexit scenario.
'These MoUs ensure cooperation in the fields of insurance prudential and conduct supervision ('supervisory cooperation'), for mutual assistance and regular exchange of information with the aim:
- To maintain sound prudential and conduct supervision over (re)insurance undertakings and groups based either in the UK or in an EEA member state, with cross-border business activities in the EEA or the UK respectively
- To maintain financial stability of the financial markets within the EEA and/or the UK
The MoUs provide for the reciprocal flow of appropriate and reliable information to ensure risk-based and effective supervision of (a) cross-border (re)insurance establishments incorporated either in the UK or in an EEA member state, (b) cross-border groups, or (c) special purpose vehicles established in the UK or in an EEA member state.'
3. BOE: Financial policy summary and Record of FPC meeting on 26 February 2019
The summary provides the Financial Policy Committee's ('FPC') statements with regard to Brexit and financial stability and provides the record of its recent meeting. The topics discussed included Brexit and bank and cyber stress tests.
The committee notes, among other things, that:
'Most risks to UK financial stability that could arise from disruption to cross-border financial services in a no-deal Brexit have been mitigated.
- 'Extensive legislative and other preparations have been made by UK authorities to ensure UK households and businesses can use existing and new services from EU financial institutions. EU authorities have mitigated risks of material disruption to cleared derivatives markets.
- 'However, some disruption to cross-border services is possible and, in the absence of other actions by EU authorities, some potential risks to financial stability remain. Although these would primarily affect EU households and businesses, they could also be expected to spill back to the UK in ways that cannot be fully anticipated or mitigated.
- 'UK and global banks are transferring activities to EU-incorporated entities, but are not yet in positions to provide the full range of wholesale banking services to EU clients.
- 'The process of migrating businesses, assets and contracts in a short period also poses operational risks, which could disrupt services in the EU.
- 'Banks in EU countries, which have not passed relevant legislation, and their UK counterparty banks will also be less able to manage the risk arising from their uncleared derivative positions.'
'The core banking system is strong enough to withstand the economic shocks that would accompany a worst case disorderly Brexit'.
4. ESMA: Impact of Brexit on MiFID II/MiFIR and the Benchmark Regulation
ESMA has published a statement on its approach to the application of some key MiFID II/MiFIR and Benchmark Regulation provisions in the event of a no-deal Brexit. These are: the MiFID II C(6) carve-out; trading obligation for derivatives; ESMA opinions on post-trade transparency and position limits; post-trade transparency for OTC transactions between EU investment firms and UK counterparties and ESMA’s register of administrators and third country benchmarks.
Key points from the statement are:
'There is still uncertainty as to the final timing and conditions of Brexit. Should the timing and conditions of Brexit change, ESMA may adjust the approach and would inform the public of the adjusted approach as soon as possible.'
'ESMA understands that most UK trading venues that offer trading in derivatives subject to the trading obligatiosn are in the same process of establishing new trading venues in the EU27 and plan to offer the same product portfolio in the EU27 as they are currently offering in the UK. In addition, there are already trading venues in the EU27 offering trading in derivatives subject to the trading obligation.'
'ESMA does not have, at this point in time, any evidence that market participants will not be able to continue meeting their obligations under the trading obligation for derivatives in case 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 monitor closely how liquidity develops post-Brexit and whether markets will be sufficiently liquid to allow EU27 market participants to execute transactions in derivatives subject to the trading obligation on eligible trading venues.'
5. FCA: FIRDS
FCA has announced that the system it has built to replace ESMA FIRDS in the event of a no-deal Brexit will be open for firms to test from 14 March 2019. The full instructions for firms can be found here
The announcements sets out that 'from 14 March 2019, firms will be able to test FCA FIRDS’s publishing solution, which enables firms to download full and delta reference files. Firms will need to test using the FCA FIRDS production publishing system (not the FCA FIRDS industry testing publishing system which is currently being restricted as we complete some format and data verification).'
'Firms will be able to download FCA FIRDS delta files and compare them to the files from ESMA FIRDS.'
'FCA FIRDS will check that the reference data for each instrument identifier is consistent with the reference data in the relevant master record for that identifier. FCA FIRDS master record is determined by a logic that assigns priority to submissions from UK trading venues rather than the existing ESMA approach. As a result, firms may notice divergence in the published data between FCA FIRDS and ESMA FIRDS.'
'FCA FIRDS is open before Brexit for testing purposes only. ESMA FIRDS is the primary source for files until the exit day.'
Other publications from the RegZone Brexit news feed
PMO: Speech by Theresa May
Text of Theresa May's speech of 8 March 2019 can be found here.
HoC European Scrutiny Committee: The draft EU/UK Withdrawal Agreement: key legal and political questions
This report sets out the interim findings of the Committee's inquiry examining the process and outcomes ofthe UK’s exit negotiations; together with an analysis of the draft Withdrawal Agreement. The report can be accessed here.
HoL: Brexit: recent developments
Ahead of a debate scheduled for 11 March 2019, this HoL library briefing covers recent Brexit developments. The briefing can be accessed here.
The Data Protection, Privacy and Electronic Communications (Amendments etc) (EU Exit) (No. 2) Regulations 2019/485
This SI has now been made and can be found here.
TSC: Economic crime – anti-money laundering supervision and sanctions implementation
TSC's report sets out a number of recommendations to the Government, including: introducing a more frequent system of public review of the UK’s AML supervision and law enforcement; reviewing the fragmentary nature of AML supervision (suggesting that OPBAS become a "supervisor of supervisors"); ensuring that, post-Brexit, the Government "does not bow to buccaneering deregulatory pressures and maintain its intentions to lead in the fight against economic crime"; considering legislation that would mean that a company would be guilty of the substantive criminal offence if a person associated with it commits a certain offence and a new offence of failing to prevent economic crime; creating a centralised database of PEPs for the use of those registered by AML supervisors. The report can be found here and the announcement can be found here.
TSC: FCA/BoE/PRA approach to amendments to financial services legislation under the EU (Withdrawal) Act
TSC has now published the texts of letters from the regulators, in relation to their announcements with regard to its preparations in the event of a no-deal Brexit. The letters can be found here and here.
HoC: UK adoption of EU external agreements after Brexit
This HoC library briefing looks at how many international agreements the EU has; "mixed" agreements; the rollover of EU's international trade agreements and international agreements during the transition phase. The briefing paper can be found here.
ECB: Speech by Andrea Enria: Supervising banks – Principles and priorities
Text of this speech, given on 7 March 2019 follows, in which Andrea Enria discusses aspects of EU banking supervision. He notes: "to me, one thing is clear: post-Brexit, withholding cooperation is no solution. UK and EU supervisors must find ways to work together towards a safe and sound banking sector. And I can reassure you that constructive solutions are being found". The full text of the speech can be found here.
The Data Protection, Privacy and Electronic Communications (Amendments etc) (EU Exit) Regulations 2019/419
This SI has now been made and can be accessed here.
EBA: Move to Paris
EBA has noted that it is its headquarters agreement with the French authorities. From 30 March 2019, all meetings of EBA's governing bodies will be held in Paris. EBA is expected to close its London office on 31 May 2019. The announcement can be accessed here.
PSR: Onshoring EU regulatory technical standards under the Interchange Fee Regulation
PSR has adopted the EU Exit instrument onshoring the RTS Regulation supplementing Article 7(1)(a) of the EU Interchange Fee Regulation and has published this policy statement, which can be accessed here.
ESMA: Securities and Markets Stakeholder Group
ESMA has now published a note of SMSG's meeting of 5 February 2019. Topics include: Brexit; ESMA's work programme; supervisory convergence and the performance and cost of retail investment products. The note can be accessed here.
The European Union (Withdrawal) Act 2018 (Commencement No. 2) Regulations 2019/399 (C9)
These Regulations are the second commencement regulations made under the Act and can be accessed here.
HoC: Financial Services (Implementation of Legislation) Bill
HoC has published an updated version of this briefing paper following Committee Stage (which took place on 26 February 2019). The updated briefing paper can be accessed here.
FCA: Statements of policy on the operation of the MiFID transparency regime
The FCA's document contains its directions with regard to the pre- and post-trade MiFID transparency regime. The FCA's webpage form where the policy can be downloaded can be accessed here. Alternatively the policy document can be downloaded directly here.
CMA: Draft procedural guidance on state aid notifications and reporting
The CMA has published draft guidance which provides information on the processes it intends to use when examining and investigating notified aid in the event of a no deal Brexit and information on the reporting, monitoring and transparency obligations for certain types of state aid. Responses are required by 18 March 2019. The guidance can be accessed here.
CMS RegZone publishes weekly updates (available via email, on-line and via Twitter) on Brexit developments for financial services firms. These provide analysis and commentary on significant developments during the week in question. A daily digest of Brexit news (without analysis or commentary) is also available by email here and online via the RZ news wizard here (both of these can be filtered using the Brexit topic). Links to publications are contained in each update; publications released before the updates commenced in April 2018 can be found in a bibliography here. CMS RegZone publication ‘Where we stand’ provides an overview of the current position in a single report; this is updated regularly to take account of the key developments from the weekly updates.