Brexit Watch #4: A snapshot of how the financial services regulators are reacting

Brexit preparation is one of the largest undertakings that regulators and market participants have ever done, considering the uncertainty and the impact it carries.

Many financial institutions have stopped waiting for lawmakers to finalise negotiations over the terms of the exit and are already working towards contingency plans. Banks and brokers are setting up new entities in mainland Europe, a process that carries high operational risk, particularly given the accelerated timescale for its completion.

Regulatory bodies in the UK and EU have also been making final arrangements for a no-deal Brexit, with the authorities continuing their focus on information sharing, in order to enable a smooth transition within the financial services industry.

Will the UK and EU continue sharing information post-Brexit?

It was announced on 20 March 2019 that the Financial Conduct Authority (FCA), Prudential Regulation Authority (PRA) and the European Banking Authority (EBA) have agreed a Memorandum of Understanding (MoU) template regarding the future of supervisory co-operation and information sharing post-Brexit. The aim of this template is to ensure that the EU and UK continue to co-operate on supervisory matters in the event of a no-deal exit, preventing the flow of information being interrupted.

Will EU Credit Rating Agencies be recognised by UK regulators and reversely?

The FCA has endorsed Credit Rating Agencies (CRAs) from the EU into the UK for regulatory purposes, in the event of a ‘hard Brexit’. The FCA assessed the EU regulatory and supervisory framework to be as rigorous as that of the UK’s, in order to allow UK registered CRAs to endorse credit ratings into the UK from affiliated EU CRAs.

At the same time, the European Securities and Market Authority (ESMA) issued a statement setting out the implications for UK CRAs, including the endorsement of UK credit ratings, in a no-deal scenario. It concluded that the foreseenUK legal and supervisory framework for CRAs meets the conditions for endorsement. However, ESMA added that “the decision to endorse some or all of the credit ratings issued by UK based CRAs lies exclusively with the EU27 CRAs.”

Is there further guidance in relation to MIFID II/ MiFIR and other regulatory regimes?

In relation to MIFID/ MIFIR and Benchmark provisions, ESMA has published a statement on its approach to the application of some of the key aspects under a no-deal scenario:

  • The MiFID II C(6) carve-out
  • Trading obligation for derivatives
  • ESMA opinions on post-trade transparency and position limits
  • Post-trade transparency for OTC transactions between EU investment firms and UK counterparties
  • Benchmark Regulation: ESMA register of administrators and 3rd country benchmarks

Furthermore, FCA has developed a new Benchmarks Register which will replace the ESMA’s Register for the UK supervised users. The new UK Benchmarks Register will also include benchmark administrators and third-country benchmarks.

What is the guidance in relation to the issue of overlapping of MIFIR trading obligations?

Following the requests received from many institutions, ESMA has provided guidance on the application of the trading obligation for shares in the absence of an equivalence decision by the European Commission, in a ‘hard Brexit’ scenario.

ESMA’s approach may lead to an overlap of trading obligations for a number of shares and potentially a greater level of fragmentation of trading, should the UK apply an identical approach. However, ESMA considers that not providing a clarification would, by default, lead to the application of the MiFIR to every share traded in the EU27. ESMA’s approach seeks to limit potential market disruption while also ensuring Article 23 MiFIR is adequately and consistently applied across the EU.

The FCA, whilst acknowledging the need for clarification, believes that a comprehensive approach is still required in order to prevent the overlapping of obligations and therefore considers that further dialogue is needed on this subject in order to minimise the risks of disruption.

How is the political negotiation timeline affecting the application window for the Temporary Permissions Regime (TPR)?

The TPR is a process that allows relevant institutions which passport into the UK, to continue providing business in the UK when the regime falls away on the exit day.

Since the EU Council and the UK Government have decided to delay the exit process, the FCA has extended the notification window for TPR (previously set to 28 March 2019) to 11 April 2019.

What is the FCA’s opinion and what are they doing to prepare?

The FCA has been working closely with firms to ensure that Brexit related risks are dealt with and mitigated in the hope that the overall process runs smoothly.

The FCA has emphasised their commitment to London maintaining its position as a successful global financial centre and is therefore preparing for all possible scenarios, including hard Brexit.