Sir Jon Cunliffe, deputy governor financial stability at the Bank of England, has written today to chief executives of overseas clearing houses and central securities depositories confirming that pending UK legislation will include a temporary authorisation regime to allow them to continue operating in the UK after the country leaves the European Union.
On 22 October the UK Treasury published draft regulations covering over-the-counter derivatives, clearing houses and trade repositories, together with an explanatory memorandum, as part of its its contingency planning for a no-deal Brexit.
Cunliffe’s letter to the chief executives of overseas clearing houses said: “The exact timelines for these actions are subject to the parliamentary process and the Bank will notify you of these in due course. In the interim we remain open to continue discussions on an informal basis as we have been over the course of this year.”
He continued that the UK central bank expects the proposed legalisation to come into force in the final quarter of this year, subject to parliamentary approval. The legislation will establish a temporary recognition regime for non-UK CCPs to allow them to continue providing clearing services in the UK for a limited period after the UK’s withdrawal from the EU if certain criteria are met.
“Following this, non-UK CCPs will be able to submit formal applications for recognition to the Bank,” he added. “The statutory instrument will provide the Bank with powers to receive applications (both in advance of, and after, the UK’s withdrawal from the EU) as well as to assess and make decisions on the recognition of non-UK CCPs, with any decisions then taking effect when the UK leaves the EU.”
Cunliffe has written a similar letter to chief executives of central securities depositories. The legislation also includes a transitional regime, which will allow non-UK central securities depositories currently providing services in the UK to continue to do so before being recognised, regardless of the outcome of negotiations between the EU and the UK.
The European Union’s Central Securities Depositories Regulation (CSDR) requires a CSD to be authorised in an EU member state or to be recognised by the European Securities and Markets Authority. After Brexit, recognition of non-UK CSDs will become the responsibility of UK authorities to allow them to provide CSD services in the UK.
“HM Treasury has confirmed that the Bank of England will be given functions and powers in relation to non-UK CSDs, and that HM Treasury will be responsible for assessing the equivalence of the regulatory regimes in other jurisdictions,” wrote Cunliffe. “The UK Government has now published the draft legislation that will amend the CSDR in order to implement it in UK law.”
The letters are part of a package that the Bank of England has released today updating firms on its regulatory and supervisory approach in relation to its work on EU withdrawal.
“The position remains that in all but certain limited exceptions – as set out in today’s announcement - UK regulated firms do not need to take action now to implement changes in UK law arising from the UK’s withdrawal by March 2019,” said the Bank.
The package also sets out changes to rules for all firms authorised and regulated by the Prudential Regulation Authority.; European Economic Area firms undertaking cross-border activities into the UK from the rest of the EU; and UK financial market infrastructures regulated by the Bank of England.
Proposed legislation
Hannah Meakin, partner, and Simon Lovegrove, head of financial services knowledge - global, at law firm Norton Rose Fulbright said in a blog that the draft UK legislation intends to ensure that the requirements imposed by Emir, the EU regulation covering central clearing, continue to apply in the UK after Brexit and transfers the functions from EU institutions to the appropriate UK authorities.
“In relation to the Emir equivalence regime, HM Treasury will take on the Commission’s function of making equivalence decisions for third-country regimes,” added the law firm. “Where the Commission has taken equivalence decisions for third countries before exit day, these will be incorporated into UK law.”
In addition the power to make equivalence decisions for trade repositories is transferred from the Commission to HM Treasury and the power and functions to recognise non-UK trade repositories from Esma to the FCA.
The blog said: “The UK reporting obligation will be onshored and the existing requirements will continue as defined in Article 9(1) Emir. Counterparties and CCPs will continue to report trades entered into before, and that were outstanding on, 16 August 2012 and trades entered into on and after that date. CCPs and counterparties, in meeting this obligation will be expected to report modifications or terminations of outstanding trades only to a trade repository that has been registered or recognised by the FCA.”
Norton Rose Fulbright continued that the FCA is given powers, in the scenario where no registered or recognised UK trade repository is available, to suspend the reporting obligation for a period of up to one year with the agreement of HM Treasury. Margin obligations will also continue to apply to firms trading in the UK after Brexit.
Changes to transaction reporting
Christian Voigt, senior regulatory adviser at Fidessa, also highlighted in a blog this week that the FCA has published two lengthy consultations on Brexit.
Voigt said: “The regulator provides some detailed guidance on selected issues where IT changes are needed irrespective of the type of Brexit.”
He noted that amongst all the changes, the FCA will publish its own list of instrument reference data, which will determine a new scope for transaction reporting.
“Also on reporting, UK branches of EU27 investment firms need to start reporting to the FCA directly, something they just stopped doing with the introduction of MiFID II,” he added. “And finally, the FCA points out that UK trading venues have to start transaction reporting on behalf of their EU27 members, something that wasn’t necessary before.”