UK Financial Markets Law Committee (FMLC)

Legal Uncertainty Arising Out of the Clause 3 of European Union (Withdrawal) Bill 2017-2019: FMLC Publishes Letter

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On August 31, 2017, the Financial Markets Law Committee (“FMLC“) published a letter containing comments on clause 3 of the European Union (Withdrawal) Bill 2017-2019 following a request from the UK’s Ministry of Justice to discuss the Bill.

The FMLC considers clause 3, in the context of direct EU legislation, which applies section by section and includes the application of implementing technical and regulatory standards. In its letter, the FMLC made a number of recommendations, including that:

  • The UK government should clarify which UK bodies (if any) are to take on the role of the European Supervisory Authorities, how this role will be defined and how this will be resourced as soon as possible;
  • More thought should be given to the operation and mechanics of clause 3. The provisions of direct EU legislation that apply before the day that the UK exits the EU and those which do not must be managed.
  • The UK government should plan for instances where certain technical or regulatory standards are necessary to enable domestic legislation to function effectively. For example, the revised Directive on payment services in the internal market  (EU 2015/2366) will apply from January 13, 2018, yet measures on regulatory standards are not due to come into force before the UK exits the EU and will not be received into UK domestic legislation. Without the regulatory standards, market participants will struggle to implement the Directive effectively.

The FMLC declined to comment further on the Bill, stating that it can most usefully contribute research and analysis once the statutory instruments set out in the Bill are published.

FMLC Publishes Letter to European Commission on Reporting and Transparency of Securities Financing Transactions

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On February 10, the UK Financial Markets Law Committee (FMLC) published a letter to the Director-General for Financial Stability, Financial Services and Capital Markets Union of the European Commission.

The letter discusses the proposed Regulation on Reporting and Transparency of Securities Financing Transactions. The proposed regulation would introduce a transparency regime in the context of securities financing transactions (typically repurchase agreements (repos), securities lending activities, and sell/buy-back transactions) by requiring their reporting to trade repositories and disclosure to fund investors.

The FMLC is concerned that the proposed regulation fails adequately to reflect the difference between a title transfer financial collateral arrangement (TTFCA) and a security financial collateral arrangement (SFCA), pointing out that such failure adequately to differentiate had been flagged in comments by the ECB. To allay these concerns the FMLC recommends that the proposed regulation is amended to make it explicit that TTFCAs are excluded from Article 15 of the proposed regulation which states that counterparties shall have the right to rehypothecation only if the counterparty is informed in writing of the potential risks and has granted its prior express consent. Since a TTFCA (unlike a SFCA) involves the transfer to the receiving counterparty of the ownership of the assets in question, it is incongruous to say that the receiving counterparty has the right to use the assets transferred to him only if certain conditions are satisfied because the right to use them is a necessary incident of the ownership of the assets. Similarly, the FMLC points out that only assets transferred by means of a SFCA constitute “client assets” for the purposes of the receiving party as the transferor retains an equitable interest.  Letter.