Brexit update for financial services firms - week ending 1 March 2019

06 March 2019

In outline:

Once again, most of the interesting publications this week relate to the regulatory regime for a no-deal scenario i.e. exit without a transitional period (TP) under the proposed withdrawal agreement (WA) (the ND regime). These relate to UK ‘near final’ regulatory rules, deposit protection arrangements and a UK/US ‘roll-over’ agreement for UK and US derivative market regulation.

The ND regime.  


FCA, PRA and the Bank of England (BoE) published a set of near final rules, policy, guidance and directions for the ND regime (see Documents 2 and 3 below). These publications provide feedback and policy following the earlier consultations by the UK regulators (as previously reported). Formal adoption of the regime would be completed on 28th March, if the ND regime is to take effect at exit on 29th March. These changes cover various areas including modifications under section 8 of European Union (Withdrawal) Act 2018 (EUWA) to rules/handbooks, FMI rules, resolution statements of policy, and on-shored binding technical standards, as well as the UK regulatory regime for credit rating agencies, trade repositories and securitisation repositories and provisions under the UK’s transitional arrangements for EEA firms – such as the Temporary Permission Regime and the Financial Contracts Regime - and policy/draft directions (lasting 15 months from exit) under the temporary transition power[1]. The BoE EU withdrawal webpage has been updated and includes new pages on transitioning to post-exit rules and standards and transfer of roles and responsibilities to the bank.

Our RegZone ND regime database now covers the above and can be accessed here. 

The new US/UK derivative package. 

On 25th February, HMT and UK/US regulators issued a joint announcement (the announcement) that they were taking ‘measures to ensure the UK’s withdrawal from the EU, in whatever form it takes, will not create regulatory uncertainty regarding derivatives market activity between the UK and US’ (see Document 1 below). In essence, this will roll-over current EU/US DRC[2] arrangements on a UK/US basis. These arrangements will apply under the ND regime, but, as the quote above suggests, some of these arrangements may also be applicable during the TP (if the UK leaves the EU under the WA).

The new US/UK derivative package is an example of reciprocal DRC arrangements. Unlike the recent Swiss/UK and US/UK insurance agreements (and the EU agreements which they roll-over), there is no bilateral treaty involved. In that sense, each side may be said to be acting autonomously, but the DRC arrangements are clearly being introduced on a reciprocal basis. In our April 2017 report we referred to DRC arrangements of this kind as being ‘on an MoU[3] basis’. The relevant regulators of the UK and US derivatives markets are the BoE (including the PRA), the Financial Conduct Authority (FCA) and the Commodity Futures Trading Commission (CFTC). These regulators already have relevant MoUs in place – a September 2009 MoU on cooperation and exchange of information for the supervision of cross-border clearing organisations, and 2 further MoUs dated July 2013 (re the supervision of covered entities in the alternative investment fund industry) and October 2016 (re supervising covered firms). These MoUs are now being updated for the new DRC arrangements.

The reciprocal arrangements will roll-over existing DRC that currently applies in favour of the US entities under the EU regime (which currently applies in the UK as an EU member) and in favour of EU entities (which currently includes UK entities) under the US regime. The US DRC currently consists of 5 CFTC no action letters[4] and 3 CFTC substituted compliance and exemption orders[5] in favour of EU entities. These would cease to apply to UK entities under the ND regime, as we reported in our previous update.

The announcement says - ‘The CFTC staff will issue new no-action letters to UK market participants confirming the continued application of existing no-action letters directed at EU market participants. These no-action letters will permit UK market participants to rely on longstanding CFTC staff relief related to a series of issues including, but not limited to, introducing broker registration, swap data reporting, and the trading and clearing of inter-affiliate swaps.Similarly, The CFTC intends to grant new substituted compliance and exemption orders to confirm that existing orders directed at the EU also will be accompanied by new orders directed at the UK. These orders will permit firms to satisfy certain CFTC entity-level and transaction level requirements and margin requirements for uncleared swaps by complying with relevant UK laws, and to satisfy CFTC trade execution requirements by using eligible UK trading venues. In order to ensure there is no interruption in the applicability of such relief at the time of the UK’s withdrawal from the EU, the CFTC staff will, if necessary, issue temporary no-action relief to cover a transition period until the relevant CFTC orders can be finalized. During this transition period, the CFTC will prioritize the completion of such orders.’ ‘The CFTC also has confirmed that UK CCPs currently registered with the CFTC will be able to continue providing services in the US on the same basis they do now.’

The current EU DRC measures comprise 4 European Commission implementing decisions[6] on the equivalence/recognition of US regulation/supervision/markets under EMIR[7] and MiFIR.[8] These will continue to apply in the UK during the TP but would not apply under the ND regime. 

For the ND regime, the UK’s EUWA has on-shored EMIR and MiFIR and these have been modified by various SIs[9] under section 8 of the EUWA. European Commission implementing decisions (as EU tertiary law) are also on-shored under the EUWA, although some of the on-shored EMIR decisions have been revoked by the relevant SI.[10] The announcement confirms that:
 

  • some EU equivalence decisions relating to the US will apply in their on-shored form as UK decisions
  • other DRC for US entities will be dealt with by fresh UK equivalent decisions (presumably to replace the revoked decisions); and
  • the UK’s temporary recognition regime under the ND regime is available and, if necessary, will be used to grant recognition to US CCPs. 

Deposit Protection. Details of the FSCS ND regime can be found here and here. One key impact is that, from exit/30th March, depositors at branches of UK banks in EU-27/EEA-3 states would cease to be covered by the FSCS and the UK deposit protection scheme. The EBA published an opinion on this issue (see Document 5 below). It urges national competent authorities to ensure that EU branches of UK banks join an EU-27 deposit guarantee scheme and that consumers are informed about any changes to protection. 

Further to our update last week, ESMA has announced that under the ND regime Euroclear Ireland and UK Ltd and DTCC Data Repository (Ireland) PLC will be recognised, respectively, as a third country central securities depository and a third country trade repository (see ‘Other documents’ below). 

EU investment firm review – third country equivalence

The European Commission announced that political agreement had been reached between the Council and Parliament on the proposed legislation that followed the review of the prudential regulation of investment firms (see Document 4 below). The legislation comprises a regulation and directive on the prudential regulation/supervision of investment firms (amending the MiFID2/MiFIR and CRD IV/CRR legislation). We have reported in previous updates on these proposals. As well as changes to the regulation of EU investment firms, the legislation makes changes to the regime for an equivalence-based DRC/passport for third country investment business via mode 1/cross-border services. Our commentary in our update for the week ending 11th January looked at these changes. These are part of Brexit-driven reforms which give the EU greater powers to restrict access and to require closer matching of EU rules. The changes are not part of the ND regime: the legislation will thus apply to the UK whether it becomes a third country under the ND regime or upon leaving the single market at the end of the TP. When HMG abandoned its original proposal for reciprocal preferential access in FS (under an EU/UK FTA), it suggested that UK access to the EU would still be satisfactory on account of EU measures to liberalise third country equivalence-based access. The EU is currently making (Brexit-driven) changes in the opposite direction. Will HMG be able to get the EU to reverse its current policy and liberalise access for firms from the UK and other equivalent third countries?

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

  1. Brexit relocations: The view from CMS France, Germany and Luxembourg (link). (France, Germany, Luxembourg)
  2. Polish Financial Supervision Authority speaks about Brexit for the first time (link). (Poland)
  3. Brexit - Financial institutions wishing to continue doing business in the UK must apply for permission by 28 March 2019 (link). (Belgium)
  4. Draft Bill on the regulation of UK providers of financial services passed in the Czech Republic (link). (Czech Republic, UK)
  5. Polish Financial Supervision Authority speaks about Brexit for the first time (link). (Poland)


1. BoE/PRA/FCA/CFTC: Joint statement by UK and US authorities on continuity of derivatives trading and clearing post-Brexit 

The authorities have published this statement which sets out details of their commitment to close cooperation with regard to derivatives trading post-Brexit. Measures include the extension of existing CFTC relief and comparability for the UK and UK equivalence for the US. The FCA statement can be accessed here
“CFTC intends that existing regulatory relief granted by the CFTC to EU firms, including UK firms, will be extended to UK firms at the point of the UK’s withdrawal from the EU by means of the following measures;
  • The CFTC staff will issue new no-action letters to UK market participants confirming the continued application of existing no-action letters directed at EU market participants. These no-action letters will permit UK market participants to rely on longstanding CFTC staff relief related to a series of issues including, but not limited to, introducing broker registration, swap data reporting, and the trading and clearing of inter-affiliate swaps.
  • The CFTC intends to grant new substituted compliance and exemption orders to confirm that existing orders directed at the EU also will be accompanied by new orders directed at the UK. These orders will permit firms to satisfy certain CFTC entity-level and transaction level requirements and margin requirements for uncleared swaps by complying with relevant UK laws, and to satisfy CFTC trade execution requirements by using eligible UK trading venues. In order to ensure there is no interruption in the applicability of such relief at the time of the UK’s withdrawal from the EU, the CFTC staff will, if necessary, issue temporary no-action relief to cover a transition period until the relevant CFTC orders can be finalized. During this transition period, the CFTC will prioritize the completion of such orders.
  • The CFTC also has confirmed that UK CCPs currently registered with the CFTC will be able to continue providing services in the US on the same basis they do now.”


2. FCA: PS19/5: Brexit Policy Statement: feedback on CP18/28, CP18/29, CP18/34, CP18/36 and CP19/2 

FCA has published near-final rules and guidance that will apply in the event the UK leaves the EU without an implementation period and highlights the draft Financial Services and Markets Act 2000 (Amendment) (EU Exit) Regulations 2019. PS19/5 (sets out responses to feedback on proposals set out in the CPs and provides the texts of near-final instruments. The proposals concern: amendments to the Handbook to correct deficiencies created by Brexit; amendments to Binding Technical Standards to correct deficiencies; the establishment of a temporary permissions regime for EEA entities operating in the UK; a financial services contracts regime for EEA entities seeking to service existing business, but not undertake new business, in the UK after Brexit; the establishment of regulatory regimes for credit rating agencies, trade repositories and securitisation repositories; EU Level 3 material; non-Handbook guidance and forms. FCA expects its Board to make the instruments on 28 March 2019 if a withdrawal agreement has not been ratified by the UK and the EU. FCA notes that the temporary transition power, which would give it the ability to waive or modify changes to regulatory requirements amended under the EU (Withdrawal) Act, will be used so firms and other regulated entities do not generally need to prepare now to meet new UK regulatory obligations. In most cases, FCA plans to allow firms a period of 15 months to adapt to these changes. The policy statement can be accessed here and the news publication here.

Additionally, FCA has published two "near final" draft transitional directions (FCA Transitional Direction and FCA Prudential Transitional Direction) relating to the use of its temporary transitional power discussed PS19/5. These can be accessed here and here. The directions are effective from exit day until 30 June 2020.


3. BoE/PRA: Amendments to financial services legislation under the European Union (Withdrawal) Act 2018 - transitioning to post-exit rules and standards

BoE has published its policy statement (BoE PS/PRA PS5/19) which provides feedback and near-final policy with regard to PRA's CP25/18, CP26/18, CP32/18 and BoE's CPs "UK withdrawal from the EU: Changes to FMI rules and onshored Binding Technical Standards" and "UK Withdrawal from the EU: The Bank of England’s approach to resolution Statements of Policy and onshored Binding Technical Standards". In addition, BoE has published a webpage setting out the legal and regulatory framework which would be expected to operate following the UK withdrawal from the EU without an implementation period in place and includes links to various key documents, including draft directions that will implement transitional relief for a period of 15 months from exit day, subject to limited exceptions. The BoE policy statement can be accessed here. The BoE transitioning to post-exit rules and standards can be accessed here and the BoE’s approach to financial services legislation under the EUWA here

Specific publications can be accessed in the following places: BoE and PRA's joint Statement of Policy on BoE and PRA approach to interpretation of EU Guidelines and Recommendations after exit can be accessed here; BoE's Supervisory Statement in relation to Financial Market Infrastructure Supervision can be accessed here; PRA's Supervisory Statement in relation to interpreting reporting and disclosure requirements and regulatory transactions forms can be accessed here; PRA's Supervisory Statement in relation to the PRA's approach after exit can be accessed here; and PRA's updated Supervisory Statement in relation to depositor and dormant account protection can be accessed here.

Additionally, BoE and PRA have each published "near final" draft transitional directions (Direction made by the PRA and Direction made by the Bank of England) similar to those published by the FCA discussed above. These can be accessed here and here
. The directions are effective from exit day until 30 June 2020.

4.EC: Investment Firms Regulation and Directive 

The Romanian presidency of the Council and the European Parliament has reached a provisional agreement on a package of measures, composed of a regulation and a directive, setting out new prudential requirements and supervisory arrangements for investment firms. The deal will now be submitted for endorsement by EU ambassadors. Amongst other matters, the agreement strengthens the equivalence regime that would apply to third country investment firms. The council press release can be accessed here and the commission press release here

"The agreement further strengthens the equivalence regime that would apply to third country investment firms. It sets out in greater detail some of the requirements for giving them access to the single market and grants additional powers to the Commission. In particular, the Commission is charged with assessing capital requirements applicable to firms providing bank-like services to make sure that those are equivalent to those applicable in the EU. In addition, in case the activities performed by third country firms are likely to be of systemic importance, the new regime allows the Commission to apply some specific operational conditions to an equivalence decision to ensure that ESMA and national competent authorities have the necessary tools to prevent regulatory arbitrage and monitor the activities of third country firms.”

5. EBA: Opinion on deposit protection issues stemming from the withdrawal of the UK from the EU

In this Opinion, EBA calls on deposit guarantee schemes designated authorities to ensure that depositors in branches of UK credit institutions in the EU are adequately protected by the EU deposit guarantee schemes in the event of a no-deal Brexit. The opinion can be accessed here

In October 2018, the UK’s Bank of England published a consultation paper, which proposes that EEA branches of UK credit institutions will no longer be protected by the UK DGS. This would be in line with the UK’s current policy of not covering branches of UK credit institutions in third countries. The consultation closed on 2 January 2019, and on 28 February 2019 the Bank of England confirmed their intentions in the ‘near-final’ post-exit rules and standards.

[…]

Therefore, assuming that the UK chooses not to protect branches of UK credit institutions in the EU, such branches should be required to join a local (EU) DGS subject to the requirements of the national law, making use of the option granted under the second subparagraph of Article 15(1) of the DGSD. This is based upon the assumption that, if no protection is provided to these branches by the UK DGS, that would clearly mean that their protection is not equivalent to the protection offered by the DGSD, and so no further checks of equivalence would be needed.

[…]

In the light of the above-mentioned framework and given the unprecedented case of a Member State leaving the EU, the EBA recommends that, in order to ensure that depositors are clearly informed which DGS protects and will protect their deposits, if they have not already done so, competent authorities should promptly engage, directly or indirectly through the relevant national supervisory authorities, with DGS member institutions and:
  • In the event that it is already known which DGS the institution will be joining and when, request that institution to inform depositors about it as soon as possible, but at least 1 month before the end of their current DGS affiliation, including any actions the institution is taking to prevent any detriment to the depositors.
  • In the event that it is not yet known which DGS the institution will be joining or when, allow that institution, on the ground of financial stability, to inform depositors less than 1 month before the end of their current DGS affiliation or at the point of the UK’s withdrawal from the EU, whichever is earlier.


6.
The Sanctions (Amendment) (EU Exit) (No 2) Regulations 2019/380

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

 

Other publications from the RegZone Brexit news feed

The Solvency 2 and Insurance (Amendment, etc.) (EU Exit) Regulations 2019/407

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

The Financial Services Contracts (Transitional and Saving Provision) (EU Exit) Regulations 2019/405

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

The Packaged Retail and Insurance-based Investment Products (Amendment) (EU Exit) Regulations 2019/403

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

Draft Financial Services (Miscellaneous) (Amendment) (EU Exit) (No. 2) Regulations 2019

A draft SI and draft explanatory memorandum have been published. The explanatory memorandum can be accessed here and the SI here

ESMA: Third country CSD

ESMA has announced that, in the event of a no-deal Brexit, the CSD established in the UK (Euroclear UK and Ireland Limited) will be recognised as a third country CSD to provide its services in the EU in order to allow the UK CSD to serve Irish securities and to avoid any negative impact on the Irish securities market. The announcement can be accessed here.

ESMA: Trade repositories

ESMA has registered DTCC Data Repository (Ireland) PLC as a trade repository under EMIR, with effect from 1 March 2019, noting that this registration is part of the DTCC Group strategy in response to a no-deal Brexit.  ESMA has also announced the withdrawal of Bloomberg Trade Repository Ltd (UK) from the list of trade repositories under EMIR, effective at 1 March 2019. The announcement can be accessed here

Financial Services (Implementation of Legislation) Bill 

A new draft of the Bill has been published. The Bill is now due to have its report stage and third reading on 4 March 2019. The Bill can be accessed here

The Money Market Funds (Amendment) (EU Exit) Regulations 2019/394 

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

HMT: Financial Services Trade and Investment Board Annual Report 2018 

The report details the work of government and industry in 2018 to maintain and strengthen the UK’s position as a leading global financial centre. The annual report can be accessed here

HoL: Further Brexit discussions with the EU 

This briefing pack contains a selection of material relevant for the debate on further discussions with the EU taking place on 27 February 2019, updated from last week. The briefing pack can be accessed here

HMG: Implications for business and trade of a no deal exit on 29 March 2019 

This document sets out the Government’s latest assessment of the implications for business and international trade in the UK in the case of a no-deal Brexit. Paragraphs 41 and 42 of the document discuss the financial services sector. The publication can be accessed here

PMO Statement by Theresa May 

Theresa May's statement to HoC on 26 February 2019 can be accessed here.

FMLC: Credit institutions winding-up and reorganisation 

FMLC's paper discusses aspects of the Credit Institutions and Insurance Undertakings Reorganisation and Winding Up (Amendment) (EU Exit) Regulations 2019 raising concerns over legal uncertainties and urging HMT to publish guidance to clarify issues. The paper can be accessed here

FCA: Brexit – updated information for regulated firms 

FCA has published updated information intended to help support regulated firms in finalising their preparations for Brexit, highlighting its approach to changes to UK legislation, implications for cross-border data sharing, and the consequences of the loss of passporting. Links to webpages for specific information in relation to banking and payments; life insurance, pensions and retirement income; GI; retail investment and wholesale banks, markets and asset manager sectors are provided. The publication can be accessed here.

Draft Electronic Commerce and Solvency 2 (Amendment etc.) (EU Exit) Regulations 2019

Draft Regulations laid before Parliament under paragraph 1(1) of Schedule 7 to the European Union (Withdrawal) Act 2018, for approval by resolution of each House of Parliament. The SI can be accessed here

Department for Exiting the EU: Ministerial Forum communiqué 

This communiqué summarises the eighth meeting of the Ministerial Forum (EU Negotiations), held on 25 February 2019. The press release 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.



[1] Under the Financial Services and Markets Act 2000 (Amendment) (EU Exit) Regulations 2019)

[2] Dual recognition coordination (DRC) is explained in Chapter 1 of our April 2017 Report. DRC is a broad term to cover a variety of techniques such as “mutual recognition”, “home state recognition/supervision”, “deference”, “substituted compliance” and “passporting”.

[3] Memorandum of Understanding

[4] Letter 12-70: Relief for Certain Swap Dealers, De Minimis Dealers, Agent Affiliates, and Associated Persons from Registration as an Introducing Broker under Section 4d or a Commodity Trading Advisor under Section 4m of the Commodity Exchange Act, and Interpretation that Certain Employees of De Minimis Dealers are not an Introducing Broker as defined in Section 1a(31) of the Commodity Exchange Act.


Letter 13-45: No-Action Relief for Registered Swap Dealers and Major Swap Participants from Certain Requirements under Subpart I of Part 23 of Commission Regulations in Connection with Uncleared Swaps Subject to Risk Mitigation Techniques under EMIR.


Letter 17-64: Extension of Time-Limited No-Action Relief from Certain Requirements of Part 45 and Part 46 of the Commission’s Regulations, for Certain Swap Dealers and Major Swap Participants Established under the Laws of Australia, Canada, the European Union, Japan or Switzerland.


Letter 17-66: No-Action Relief from Certain Provisions of the Outward-Facing Swaps Condition in the Inter-Affiliate Exemption from the Clearing Requirement.


Letter 17-67: Extension of No-Action Relief from Commodity Exchange Act Section 2(h)(8) for Swaps Executed Between Certain Affiliated Entities that Are Not Exempt from Clearing Under Commission Regulation 50.52.

[5] Substituted compliance for EU entity-level and transaction-level requirements (December 27, 2013).


Substituted compliance EU margin requirements for uncleared swaps (October 18, 2017).


Exemption of multilateral trading facilities and organized trading facilities authorized within the EU from the requirement to register as swap execution facilities (December 8, 2017).

[6] Commission Implementing Decision (EU) 2016/377 of 15 March 2016 on the equivalence of the regulatory framework of the United States of America for central counterparties that are authorised and supervised by the Commodity Futures Trading Commission to the requirements of Regulation (EU) No 648/2012 of the European Parliament and of the Council.


Commission Implementing Decision (EU) 2016/1073 of
1 July 2016 on the equivalence of designated contract markets in the United States of America in accordance with Regulation (EU) No 648/2012 of the European Parliament and of the Council.


Commission Implementing Decision (EU) 2017/1857 of
13 October 2017on the recognition of the legal, supervisory and enforcement arrangements of the United States of America for derivatives transactions supervised by the Commodity Futures Trading Commission as equivalent to certain requirements of Article 11 of Regulation (EU) No 648/2012 of the European Parliament and Council on OTC derivatives, central counterparties and trade repositories.


Commission Implementing Decision (EU) 2017/2238 of
5 December 2017 on the equivalence of the legal and supervisory framework applicable to designated contract markets and swap execution facilities in the United States of America in accordance with Regulation (EU) No 600/2014 of the European Parliament and of the Council.

[7] Regulation (EU) No 648/2012 on OTC derivatives, central counterparties and trade repositories

[8] Regulation (EU) No 600/2014 on markets in financial instruments and amending Regulation (EU) No 548/2012

[9] Central Counterparties (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2018; Central Securities Depositories (Amendment) (EU Exit) Regulations 2018; Equivalence Determinations for Financial Services and Miscellaneous Provisions (Amendment etc) (EU Exit) Regulations 2019; Over the Counter Derivatives, Central Counterparties and Trade Repositories (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2018; Trade Repositories (Amendment and Transitional Provision) (EU Exit) Regulations 2018

[10] Central Counterparties (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2018

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Agency Database

Future Dates

* Estimated date

  • 1 December 2019

    End of four-year transitional period for RTS on risk-mitigation techniques for OTC derivatives contracts not cleared by a CCP under EMIR.

  • 9 December 2019

    PRA Consultation CP20/19 closes. 

  • 9 December 2019

    The changes set out in the appendices of PRA PS20/19, implementing changes to the prescribed responsibility for recovery and resolution under SM&CR,  will come into force.