Brexit update for financial services firms - week ending 15 March 2019

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. The first Delegated Regulation can be accessed here and the second one here.

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.

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.