HM Treasury has published a draft of The Over the Counter Derivatives, Central Counterparties (CCPs) and Trade Repositories (TRs) (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2018 (the draft Regulations) together with an explanatory memorandum.
This is part of the wider work the government is undertaking to prepare for the UK’s withdrawal from the EU. It is not intended to make policy changes, other than to reflect the UK’s new position outside the EU, and to smooth the transition.
The draft Regulations sit alongside the Central Counterparties (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2018 and the Trade Repositories (Amendment and Transitional Provision) (EU Exit) Regulations 2018 that were previously published in draft form by HM Treasury.
The draft Regulations are intended to ensure that the requirements imposed by the European Markets Infrastructure Regulation (EMIR) continues to apply in the UK and transfers the functions under it from the 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. Where the Commission has taken equivalence decisions for third countries before exit day, these will be incorporated into UK law.
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 TRs from the European Securities and Markets Authority (ESMA) to the FCA.
The draft Regulations ensure that the requirements imposed by EMIR continue to apply in the UK and transfers responsibilities in this regard to the UK regulators. For example:
- UK firms will be obliged to continue to clear certain derivative contracts through authorised or recognised CCPs by the Bank of England (the Bank) after exit. For all financial and non-financial counterparties, the power to set the clearing obligation for different types of asset classes will be transferred from ESMA to the Bank. The Bank will also have the power to specify the timing for any phase-in of any new clearing obligations to apply to entities regulated by the PRA, while the FCA will have the power to specify the timing of entry of any changes to the clearing obligation for other counterparties;
- UK firms and CCPs entering into derivatives will be obliged to report details of those trades to a TR that has been registered, or recognised, by the FCA after exit. Responsibility for further specifying reporting requirements will be transferred from the EU institutions to the relevant UK regulators. The Bank will be responsible for setting them for CCPs and the FCA will be responsible for all other firms;
- the FCA is given powers, in the scenario where there is no registered or recognised UK TR available, to suspend the reporting obligation for a period of up to one year and with the agreement of HM Treasury;
- 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;
- margin obligations will continue to apply to firms trading in the UK after exit and rule setting powers are transferred from the EU institutions to the PRA and FCA;
- a temporary intragroup exemption regime is established to ensure that intragroup transactions can continue to be exempted from EMIR requirements where this is the case to date. This regime will last three years and may be extended by HM Treasury in certain circumstances; and
- in relation to pension schemes arrangements, should the EMIR Regulatory Fitness and Performance (REFIT) proposal come into force before the UK leaves the EU, the EU exemption will be onshored and continue to apply to UK pension funds.
For EMIR, the relevant Binding Technical Standard (BTS) mandates will be brought into UK law with responsibility transferred to the Bank, FCA and PRA as appropriate. These authorities will have responsibility for correcting deficiencies in the EMIR BTS so that they operate effectively from day one of exit, and will be then responsible for ensuring these BTS remain fit for purpose after exit.
The Bank and FCA will be updating their rulebooks and relevant BTS to reflect the changes introduced through this SI, and to address any deficiencies as a result of the UK leaving the EU. The Bank and FCA have confirmed their intention to consult on these changes.
HM Treasury plans to lay the draft Regulations before Parliament before exit.
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Please Note: This publication is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to. Readers should take legal advice before applying the information contained in this publication to specific issues or transactions.