Brexit

The Position on Equivalence Post Brexit

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Context and Background

On October 22, the House of Commons European Scrutiny Committee (the Committee) published its first report of session 2019/20 (the Report). In section 10, this includes consideration of the UK’s access to the EU financial services markets after Brexit and, more specifically, the European Commission’s recent review of the EU law on equivalence.

The notion of equivalence, and its importance in this context, was explained by the European Commission in a Press Release dated July 29 where it stated that:

“EU equivalence has become a significant tool in recent years, fostering integration of global financial markets and cooperation with third-country authorities. The EU assesses the overall policy context and to what extent the regulatory regimes of a given third country achieves the same outcomes as its own rules. A positive equivalence decision, which is a unilateral measure by the Commission, allows EU authorities to rely on third-country rules and supervision, allowing market participants from third countries who are active in the EU to comply with only one set of rules.”

However, the Report notes that, in light of Brexit, the financial industry of the UK will face a number of hurdles in relation to the provision of services to EU based customers. It is explained that the “current, automatic right of market access for banks, insurers and investment firms based on their UK-issued licence (known as ‘passporting’) will automatically fall away when EU law ceases to apply to and in the UK.”

Consequences

Where these rights fall away and, to the extent EU law ceases to apply in the UK, UK firms and business providing these services will have to comply with local regulations to access any of the EU’s national markets. Alternatively, the UK will need to apply for equivalence. Concerning the European Commission’s recent review of the use of equivalency, the Report notes on the one hand that “the EU would be wary of granting the UK equivalence in the most economically-important sectors (especially investment services) without safeguards that it will not substantially diverge from EU regulations.” On the other, however, it is stated that by not seeking equivalency, the UK runs the risk of seeing economic activity shift from the UK to the EU if UK firms are no longer able to provide services to their EU customers.

Equivalency is and has been addressed in the Political Declarations as annexed to the Withdrawal Agreements. Boris Johnson has indicated that parts of this document are to be renegotiated and it remains to be seen, whether equivalency is one of these points.

In the Report, the Committee asks the Economic Secretary to clarify, by October 31, if the government is seeking any changes to the sections of the political declaration related to financial services. He is also asked to confirm if the government is considering seeking equivalence under EU law post-Brexit and, if so, which specific pieces of EU legislation the equivalence is being prioritized under. In anticipation of the response, the Committee cleared the Commission’s equivalence review from scrutiny. Report. Press Release.

ESMA Announces Recognition of UK CSD in Event of No-Deal Brexit

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On March 1, the European Securities and Markets Authority (ESMA) published a press release announcing that in the event of a no-deal Brexit, it will recognize Euroclear UK and Ireland Ltd, the UK central securities depository (UK CSD), as a third country CSD under the Central Securities Depositories Regulation (909/2014) (CSDR).

ESMA has adopted this recognition decision in order to allow the UK CSD to serve Irish securities and to avoid any negative impact on the Irish securities market. ESMA has previously communicated that its board of supervisors supports continued access to the UK CSD.

The UK CSD will be recognized to provide its services to the EU, having been assessed as meeting the recognition conditions under Article 25 of the CSDR.

The recognition decision would take effect on the date following Brexit date, under a no-deal Brexit scenario.

ESMA Publishes Statement on No-Deal Brexit Contingency Plans of CRAs and Trade Repositories

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ESMA published a statement on the contingency plans of credit rating agencies (“CRAs“) and trade repositories (“TRs“) in the context of Brexit (ESMA80-187-149) on November 9.

ESMA has published the statement to raise market participants’ awareness of the readiness of CRAs and TRs for the possibility of there being a no-deal Brexit. ESMA states that entities using services provided by CRAs and TRs need to consider the scenario of a no-deal Brexit and the consequences of TRs and CRAs established in the UK losing their EU registration when the UK leaves the EU. READ MORE →

AFME Calls on Authorities to Urgently Address Brexit Cliff Edge Risks for Financial Services Sector

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On October 22, the Association for Financial Markets in Europe (“AFME“) published a press release on avoiding a Brexit cliff edge in financial services, these concerns were reiterated in a letter to the European Commission, urging the Commission along with member states and regulators to provide steps that will be taken to address these risks. In particular, it outlined three risks that need addressing urgently:

  1. Continued access to central counterparties (“CCPs“) – It has been suggested that EU27 banks could move positions to EU CCPs, however this seems unrealistic in the time frame and it is questionable whether the market alone could supply sufficient liquidity for such significant shifts of positions between CCPs. Also, there is currently no available alternative for clearing some products in the EU27. In the absence of clarity, there is a risk that UK CCPs may have to start delivering termination notices to their EU27 clearing participants as early as December 2018.
  2. Continued servicing of existing contracts – firms should be able to continue to perform contractual obligations under existing OTC derivatives contracts in most member states, however it might not be possible to perform essential “life cycle” events (such as exercising options or transferring collateral) and transferring legacy clients onto new contracts ahead of Brexit would be hugely challenging, especially in a no-deal scenario.
  3. Cross border data transfers – the ability to transfer data is vital to support cross-border business and essential for maintaining day to day operations.

OTC Derivative Brexit Issues Considered by AFME and ISDA

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A paper was jointly published by AFME and ISDA on July 30, 2018 which considered the potential contractual continuity issues which may influence OTC derivative contracts following Brexit.

As has been widely discussed, Brexit will bring an end to the single market passport. The passport currently allows regulated activities to be carried out by the UK in EU countries without additional local licenses. This however will no longer be in place following Brexit. Given that a number of contracts will have been entered into prior to Brexit and will continue thereafter, there is a risk that entities may be carrying out regulated activities in other jurisdictions without having the relevant local licensing requirements in place following Brexit.

The report, the full version of which is available here, looks at possible solutions both for UK entities, as well as regulators, in order to minimize disruption following Brexit.

European Commission Publishes Memo on Preparing for Brexit

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The communication, published on July 19, 2018, points out that citizens, businesses, state bodies and others will be affected by Brexit and that a joint effort from all parties is required in order to be fully prepared.

The communication warns to prepare for two main scenarios:

  • If the Withdrawal Agreement is ratified before March 30, 2019, EU law will stop applying to the UK after the agreed transition period of 21 months, that is on January 1, 2021.
  • If the Withdrawal Agreement is not ratified before March 30, 2019, there will be no transition period and EU law will stop applying to the UK on March 30, 2019.

There will be consequences for many industries and the Commission has published more detailed preparedness notices on a sector-by-sector basis. These notices can be found here.

In terms of next steps, the Commission will ask the European Parliament and the European Council to prioritize the adoption of its Brexit proposals, so that they will be in force by the withdrawal date.

There is another Brexit meeting on October 18, 2018, after which the European Council will review the situation again.

ICMA Highlights Cliff-Edge Risks of Brexit

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The International Capital Markets Association (“ICMA“) published an open letter to Jean-Claude Juncker and Theresa May on June 22, 2018. In the letter the ICMA outlined concerns around potential “cliff-edge risks” which may arise upon the UK leaving the EU.

Some of the issues highlighted in letter include data-sharing, restrictions on cross-border fund management and the continuity of contracts. The ICMA states that it is unfeasible for companies to account for the various potential issues. They also explain that many of the risks highlighted in the letter cannot be resolved by unilateral decisions and will require both the EU and UK to take action.

The ICMA requests either the grandfathering of cross-border financial contracts between the EU and UK following Brexit or a separate agreement addressing the various potential risks.

The full letter is available here.

AFME Publishes Paper on Brexit Cliff-Edge Risks in Wholesale Financial Services

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On January 22, 2018, the Association for Financial Markets in Europe (“AFME“) published a paper on cliff-edge risks in wholesale financial services resulting from Brexit. It defined a ‘cliff edge risk’ as one that is likely to cause severe disruption to markets and commercial activity on the day of Brexit if no regulations or legislation are in place.

The focus of AFME was on areas which are not easily resolved by businesses and therefore need intervention at policy level. It believes that the Withdrawal Agreement between the UK and EU is the best way to address the following risks:

  • Personal data transfers across multiple countries;
  • Continuity of cross-border contracts;
  • Ability to choose jurisdiction and enforcement of judgements;
  • UK Central Counterparties (CCPs) should be recognized under EMIR (Regulation 648/2012) and be allowed to continue servicing EU banks; and
  • Recognition of resolution actions.