Brexit update week ending 15 March

United Kingdom

In outline:

The ND regime

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.

The FCA published:

  • An extensive supervisory statement about the operation of the on-shored MiFID transparency regime (see Document 2 below). FCA, which will operate the UK transparency regime, will not have the necessary technology in place on 29th March. It will not therefore be able to make all the assessments/publish all the data, as ESMA does under MiFID. FCA will therefore make use of the ND regime temporary powers (which last for 4 years) and the statement explains how FCA will operate the UK regime in this context.

  • A statement on the reporting of derivatives under the ND regime/on-shored EMIR (see Document 3 below). UK counterparties will be required to report in scope transactions to an FCA registered, or recognised, trade repository (TR). They are encouraged to liaise with their TRs to understand their plans in relation to the UK under the ND regime (see our previous update on this aspect). UK reporting under the on-shored EMIR will apply to branches of UK institutions in both EU/EEA and of non-EEA countries (and to non-UK Alternative Investment Funds managed by an Alternative Investment Fund Manager that is registered under the on-shored UK Alternative Investment Fund Managers Directive); UK reporting will not apply to UK branches of EU/EEA and other foreign firms.

  • An announcement that it has found EU credit rating regulation to be ‘as stringent’ as the UK on-shored version, so that UK credit rating agencies (CRAs) can endorse affiliated EU CRAs and then use their ratings for regulatory purposes. ESMA also made an announcement in relation to the EU ND regime (including their mirror assessment of the UK regime and the recent MoU). The tone is rather different and ESMA notes that 4 UK CRAs were members of groups which already had an EU-27 CRA which would endorse the ratings of their UK CRA and that 2 UK CRAs had established new CRAs in an EU-27 state for the purposes of endorsing the ratings of the UK CRA. (See Documents 4 below).

  • A statement (see Document 5 below) on MiFID position limits regime, post-trade transparency requirements, derivatives trading obligation and the Benchmarks Regulation (following the ESMA statement on these issues – see our previous update).

The PRA made an announcement (see Document 6 below) about the recent ND regime legislation on Part VII insurance business transfers underway pre-exit; this allows up to two years for the parties to obtain a court order sanctioning the scheme under the pre-exit Part VII regime. Insurers with EEA business contemplating undertaking a Part VII transfer that is not already underway, should make immediate contact with PRA.

Other developments – EMIR 2.2 (see Document 1 below)

The Council of the EU announced that the Presidency and the European Parliament had reached political/provisional agreement on the reforms to EMIR known as EMIR 2.2 and the related changes to the statue of the European system of central banks and the ECB. The UK had signified its objection to the legislation (and the changes relating to third country CCPs) by abstaining; the legislation is now due to be adopted on first reading.

You can read our previous commentary on EMIR 2.2 here. The EU press release summarises the relevant changes:

“The text also strengthens the existing system for recognising and supervising third country clearing houses. In particular, it introduces a "two tier" system differentiating between non-systemically important CCPs and systemically important CCPs (so-called "Tier 2" CCPs). ESMA would assess the systemic importance of CCPs according to specific criteria, among which the nature, size and complexity of the CCP's business, its membership structure or the availability of alternative clearing services in the currency concerned.

Tier 2 CCPs would be subject to stricter rules in order for them to be recognised and authorised to operate in the EU, including:

  • compliance with the necessary prudential requirements for EU-CCPs while taking into account third-country rules;
  • confirmation from the relevant EU central banks that the CCP complies with any additional requirements set by those central banks;
  • the agreement of a CCP to provide ESMA with all relevant information and to enable on-site inspections, as well as the necessary safeguards confirming that such arrangements are valid in the third country.

On the basis of a fully reasoned assessment, ESMA would also be able to recommend that a CCP or some of its clearing services are of such substantial systemic importance that the CCP should not be recognised. The Commission could decide, as a measure of last resort, that the CCP will need to establish itself in the EU. The third country CCP would then need to establish itself in the EU in order to be able to operate.”

A letter was published from John Glen (Economic Secretary to the Treasury) updating the HoC European Scrutiny Committee on EMIR 2.2. This letter was written before the EU announcement. Glen confirmed UK concerns about the regime for third country CCPs and the localisation policy (see above) in particular. He reported in detail on one aspect of the changes, namely Art. 25(7)(f). This is one of a series of requirements relating to cooperation/MoUs with equivalent third countries (necessary for ESMA recognition of third country CCPs). 

ESMA must establish cooperation arrangements which include (in the most recent published Council text of November 2018) “the procedures for third country authorities to assure the effective enforcement of decisions adopted by ESMA according to Articles 25b, 25c, 25d, 25e, 25f, 25g, 25h, 25i, 25j, 25m and 25n.” The referenced sub-articles contain a range of measures which ESMA can take in relation to CCPs including the imposition of fines and periodic penalty payments. As Glen explains - “[…] Article 25(7)(f) of the Council text goes too far in requiring country supervisors to “assure” the enforcement of ESMA’s decisions as part of a memorandum of understanding. This could be interpreted as meaning that ESMA’s decisions would be binding on third country supervisors, and may even require third country supervisors to enforce decisions that could potentially conflict with their own statutory objectives or which are contrary to their own supervisory view.”

The main reaction to the political agreement has been the reports of concerns at the European Central Bank (ECB) that the changes to their statutes had not gone far enough[1]. The text of the legislation as agreed by Parliament and the Presidency has not yet been published, so one cannot check whether there have been any changes to the provisions quoted above.

On the same day as the press release by the Council of the EU, there was also a joint statement issued by the EU and the US Commodity Futures Trading Commission. It confirmed that the CFTC would be contributing to the consultation on the delegated acts under EMIR 2.2. It concluded with the interesting statement that – “We expect the implementation of EMIR 2.2 and the CFTC’s ongoing review of both its swaps regulatory framework and its cross-border approach will result in more deference between the CFTC and the EU supervisors than is currently the case.”

In addition to our weekly Brexit updates, CMS offices have recently published articles on various Brexit related topics:-

  1. What about VAT after Brexit? (link) (Belgium)

  2. Brexit window open for REACH changes (link) (UK)

  3. Belgium braces for Hard Brexit with draft law (link) (Belgium)

  4. Confirmation of continued UK access to the WTO’s Government Procurement Agreement (link) (UK)

1. EC/HMT: Supervision of EU and third country CCPs

The Presidency and the Parliament have reached a provisional agreement on how EU and third country clearing houses should be supervised in the future, taking into particular account the effects of Brexit on the European financial system. The new rules will be implemented through amendments to EMIR and the statute of the European system of central banks and the ECB. The EC text can be accessed here.

HMT has also published a text of a letter to the HoC European Scrutiny Committee follows which discusses the EMIR supervisory regime for EU and third country CCPs. The letter can be accessed here.

The US Commodity Futures Trading Commission (CFTC) has also commented on the political agreement on EMIR 2.2. The CFTC statement can be accessed here.

2. FCA: Supervisory statement on the operation of the MiFID transparency regime post-Brexit

FCA has published this supervisory statement which sets out how it will operate the pre- and post-trade transparency regime for the secondary trading of financial instruments in the event of a no-deal Brexit. The supervisory statement can be accessed here.

“This Supervisory Statement (’Statement’) sets out how we will operate the pre- and post-trade transparency regime for the secondary trading of financial instruments if the UK leaves the European Union on 29 March at 11pm without a withdrawal agreement. Under the UK legislation that will then take effect we will be responsible for many of the tasks the European Securities and Markets Authority (ESMA) currently undertakes under the EU legislation, MiFID II (the Markets in Financial Instruments Directive and Markets in Financial Instruments Regulation (MiFIR)).  We will not, by 29 March, have fully developed and implemented the technology to make the relevant calculations and assessments that ESMA currently undertakes and to publish the results. The onshored legislation gives us various temporary powers, for a period of up to 4 years, to help us run the transparency regime in the meantime. This Statement explains our approach to operating the UK transparency regime over that period.  Should conditions change we may revise our approach and give notice accordingly.”  

3. FCA statement: Reporting of derivatives under the UK EMIR regime in a no-deal scenario 

FCA's statement sets out what trade repositories and the UK counterparties that use them should do to ensure that they are compliant with their EMIR reporting obligations after Brexit. The full statement can be accessed here.

What changes for TRs?

We will become the UK authority responsible for the registration and ongoing supervision of TRs operating in the UK.

TRs who want to offer services from the UK immediately following Exit are required to have a UK legal entity registered by us. The TR SI provides both a conversion regime and a temporary registration regime to ensure TRs can be registered and operational from Exit day.

Further details on the options available for TRs can be found on the our TR webpage. UK counterparties are encouraged to engage with their TRs to understand the choices their TR has made and how this will affect them.

A list of the TRs who intend to offer services in the UK will shortly be made available on the our website.

What changes for UK counterparties?

After Brexit, all UK firms that enter into a derivative contract (both over-the-counter (OTC) and exchange-traded derivatives) are in scope of the UK EMIR regime and required to report details of those transactions to an FCA-registered, or recognised, TR according to the UK EMIR regime.

UK branches of third-country firms (including branches of firms from EU27 countries after Brexit) are not in scope of the UK EMIR reporting regime and so do not have to report under the onshored UK regime.

Third-country (after Brexit, including EU27) branches of UK established firms are in scope of the UK EMIR reporting regime and must report details of their derivative transactions to an FCA-registered, or recognised, TR.

Non-UK Alternative Investment Funds (AIFs) are generally classified as third-country entities and so are not in scope of the UK EMIR reporting regime. However, where a non-UK AIF is managed by an Alternative Investment Fund Manager (AIFM) that is registered under the onshored UK Alternative Investment Fund Managers Directive (UK AIFMD), it will be reclassified as a Financial Counterparty for the purposes of the UK EMIR regime and in scope of the reporting requirements.”

4. FCA/ESMA: Credit ratings in the event of a no-deal Brexit

The regulators have published press releases setting out their positions with regard to UK and EU credit rating agencies in the event of a no-deal Brexit. The FCA publication can be accessed here and the ESMA publication here.

FCA statement:

“The FCA has assessed the European Union (EU) regulatory and supervisory regime to be ‘as stringent as’ the UK’s regime for the purposes of allowing UK-registered Credit Rating Agencies (CRAs) to endorse credit ratings into the UK from affiliated EU CRAs for regulatory use under the Credit Rating Agencies Regulation (CRAR), as amended by The Credit Rating Agencies (Amendment etc.) (EU Exit) Regulations 2019.”

ESMA statement:

“If the UK leaves the European Union (EU) without a withdrawal agreement (hereinafter: “no-deal Brexit scenario”), UK-based CRAs will no longer meet the conditions for registration and their registrations will be withdrawn changing their status to third-country CRAs. In this event, the outstanding credit ratings of UK-based CRAs will only continue to be usable for regulatory purposes in the EU if the credit ratings are “endorsed” by a CRA which is located in an EU Member State (hereainafter: “an EU27 CRA”). Where the outstanding credit ratings of UK-based CRAs are not endorsed by an EU27 CRA, these credit ratings will cease to be usable for regulatory purposes in the EU as set out in Article 24(4) of Regulation 1060/2009 on CRAs.”

5. FCA: Statement on various MiFID obligations and benchmarks regulation if the UK leaves the EU without an implementation period

FCA has published this statement on the recent ESMA statement on its approach to aspects of the MiFID position limits regime, post-trade transparency requirements, derivatives trading obligation and the Benchmarks Regulation in the event of a no-deal Brexit. The statement can be accessed here.

Post trade transparency and position limits

The Treasury’s approach to the onshoring of EU legislation into UK law means that UK and EU trading venues will operate to the same set of standards on day 1 after the UK leaves the European Union.

Consequently, if the UK leaves the EU without an implementation period we will not require UK investment firms to make public, through a UK Approved Publication Arrangement (APA), transactions conducted on EU trading venues in instruments which are also traded on a trading venue in the UK.

In addition, commodity derivative contracts traded on EU trading venues should not be considered as economically equivalent OTC contracts and so will not count towards the UK position limit regime.

[…]

Trading obligation for derivatives

Our approach to the trading obligation for derivatives is set out in the onshored MIFID and the associated binding technical standards (BTS). This means that investment firms will need to conclude transactions in certain derivatives only on regulated markets, multilateral trading facilities or organised trading facilities established in the UK or on third-country venues in jurisdictions for which the UK has adopted an equivalence decision.

Benchmarks

We will be setting up a UK public register of benchmarks and administrators authorised in the UK. The UK’s approach to bringing the EU Benchmarks Regulation into UK law, including the transitional period and the register of administrators and benchmarks, is set out in full in the UK Government’s Statutory Instrument (SI) and is summarised in an explanatory policy note. We will provide further information shortly on the operation of the UK benchmarks register.”

6. PRA: Part VII transfers

PRA has asked any insurers with EEA business contemplating undertaking a Part VII and whose transfer is not already underway to make immediate contact with their PRA supervisory contact. The PRA statement can be accessed here.

“On 7 March 2019, the Government legislated to allow Part VII of FSMA insurance business transfers underway pre-exit, up to two years (from exit day) for the parties to obtain a court order sanctioning the scheme under the pre-exit Part VII regime. Details of the criteria to be met by firms looking to use the Saving Provisions are available in the Financial Services (Miscellaneous) (Amendment) (EU Exit) Regulations 2019. Any insurers with EEA business contemplating undertaking a Part VII and whose transfer is not already underway, should make immediate contact with their PRA supervisory contact, or email the PRA Part VII Transfers team.”

 

Other publications from the RegZone Brexit news feed

BIS: Speech by Sharon Donnery: The departure of the UK from the EU - implications for the Irish economy and financial system

BIS has now published this speech given by the Deputy Governor of the Central Bank of Ireland on 5 March 2019. The speech can be accessed here.

The Financial Regulators’ Powers (Technical Standards etc.) and Markets in Financial Instruments (Amendment) (EU Exit) Regulations 2019/576

This SI has now been made and can be accessed here.

The Counter-Terrorism (Sanctions) (EU Exit) Regulations 2019/577

This SI has now been made and can be accessed here.

FCA: Board minutes

FCA has published the minutes for its 23/24 January 2019 board meeting.  Topics include: Brexit and PPI. The minutes can be accessed here.

Department for Exiting the EU: EU exit – parameters of extending Article 50

The Department for Exiting the EU has published this short note on setting out the parameters of extending Article 50. The note can be accessed here.

HoC: The UK's EU Withdrawal Agreement

An updated version of this HoC library briefing has been published. It can be accessed here.

HoL: The "Strasbourg package"

This HoL library briefing discusses the results of the meeting held on 11 March 2019 between the UK Government and the EU which resulted in a package of interpretations' and clarifications of the Withdrawal Agreement. The briefing paper can be accessed here.

PMO: Statement by Theresa May

Text of Theresa May's statement of 13 March 2019 to HoC can be accessed here.

The Financial Services (Distance Marketing) (Amendment and Savings Provisions) (EU Exit) Regulations 2019/574

This SI has now been made and can be accessed here.

PMO: Statement by Theresa May

Text of Theresa May's statement to HoC on 12 March 2019 which can be accessed here.

HMT: Banking, insurance and other financial services if there’s no Brexit deal

HMT has updated its guidance documents which can be accessed here.

HMT: Spring Statement

It is noted that, following consultation later this year, the Government "will legislate as necessary to ensure that in the immediate period after we leave the EU, the UK can maintain world-leading financial services regulatory standards, remain open to international markets, and realise new trading opportunities" The Government is to set out its approach in a consultation on how to ensure the UK financial services regulatory framework adapts outside the EU. The statement can be accessed here and the accompanying speech here.

EC: Delegated Regulations in relation to EMIR

The following have now been published in the Official Journal: Commission Delegated Regulation (EU) 2019/396 of 19 December 2018 amending Delegated Regulation (EU) 2015/2205, Delegated Regulation (EU) 2016/592 and Delegated Regulation (EU) 2016/1178 supplementing Regulation (EU) No 648/2012 as regards the date at which the clearing obligation takes effect for certain types of contracts and Commission Delegated Regulation (EU) 2019/397 of 19 December 2018 amending Delegated Regulation (EU) 2016/2251 supplementing Regulation (EU) No 648/2012 as regards the date until which counterparties may continue to apply their risk-management procedures for certain OTC derivative contracts not cleared by a CCP.

EC: Speech by Michel Barnier

Text of Michel Barnier's speech of 13 March 2019 can be accessed here.

EC: Speech by Frans Timmermans

Text of a speech by Frans Timmermans on behalf of Jean-Claude Juncker of 13 March 2019 can be accessed here.

HoC Exiting the EU Committee: Response to the 12 March 2019 vote on the Withdrawal Agreement and Political Declaration

The Committee's report states that "Parliament must now be given the chance to hold a series of indicative votes as quickly as possible or else we will not find out what there might be support for as an alternative to the Prime Minister’s deal which has now been rejected twice by large majorities". The report can be accessed here.

HoC European Scrutiny Committee: 57th Report of Session 2017-19

Section 13 of the report considers the issue of improving cross-border law enforcement access to financial information. This matter has now been cleared from scrutiny by the Committee. The full report can be accessed here.

The Equivalence Determinations for Financial Services and Miscellaneous Provisions (Amendment etc) (EU Exit) Regulations 2019/541

This SI has now been made and can be accessed here.

NAO: Contingency preparations for exiting the EU with no deal

This briefing describes the Civil Contingencies Secretariat's contingency preparations for the UK exiting the EU without a deal. It can be accessed here.

The Transparency of Securities Financing Transactions and of Reuse (Amendment) (EU Exit) Regulations 2019/542

This SI has now been made and can be accessed here.

EC/PMO: Statements by Jean-Claude Juncker and Theresa May

Statements by Jean-Claud Juncker and Theresa May following their meeting on 11 March 2019 follow. Juncker’s statement can be accessed here and May’s statement here.

TSC: EU exit preparations

TSC has published correspondence from HMT and the Department for Exiting the EU which can be accessed here and here.

TSC: Work of the PSR

Further to an evidence session held in February 2019, TSC has published correspondence from and to PSR on follow-up points, including with regard to Brexit preparations. The correspondence can be accessed here and the PSR statement here.

HoC: Extending Article 50: could Brexit be delayed?

This updated HoC library briefing considers scenarios in which an Article 50 extension could be made and whether it could lead to the UK taking part in the European Parliament elections. The briefing paper can be accessed here.

Department for Exiting the EU: 11 March Withdrawal Agreement and Political Declaration laid before Parliament following political agreement/Legal Opinion

A Government statement confirming that political agreement has been reached on the withdrawal agreement, and the framework for the future relationship between the UK and the EU and the Legal Opinion follow. The UK government statement can be accessed here and the legal opinion here.



[1] Financial Times, “ECB attacks EU plans for boosting supervision of clearing houses” (17.03.2019)