The following posts provide a snapshot of the principal U.S., European and global financial regulatory developments of interest to banks, investment firms, broker-dealers, market infrastructures, asset managers and corporates.
UK Financial Conduct Authority Launches Survey for EEA Firms Operating in the UK Under Single Market Passports
The UK Financial Conduct Authority has launched a short online survey seeking information from European Economic Area firms currently operating in the UK under a passport. The information obtained will identify those firms for which a “temporary permission” may be relevant following the UK’s withdrawal from the European Union. The possibility of a “temporary permission regime” was raised by HM Treasury in December 2017 as a means by which firms previously operating under a passport would be able to enter into new business and fulfil existing contracts with UK customers for a period of time after exit day, while seeking full authorization in the UK. HM Treasury has not yet prepared legislation relating to the temporary permissions regime, and EU-UK negotiations are in any event ongoing, however the FCA believes that it is likely that firms operating under a passport would need to inform it of their intention to operate under the temporary regime via a straightforward notification process in advance of the UK’s withdrawal.
UK Prime Minister Speech on the UK’s Future Economic Partnership with the EU
The U.K. Prime Minister delivered her third major speech on the future partnership between the U.K. and the European Union following Brexit. In it, the Prime Minister restated the key elements and provided greater detail about the U.K.’s aims for a free trade agreement with the E.U. post-Brexit.
The Prime Minister was candid about the fact there are some “hard facts” to be accepted, one of which is that access to each other’s markets may in certain ways be less than it is now. Two key aspects of the speech are of particular interest for financial services businesses and their advisers.
European Securities and Markets Authority Outlines 2018 Work Programme for Credit Rating Agencies, Trade Repositories and Monitoring of Non-EU CCPs
The European Securities and Markets Authority has published a document combining its 2017 Annual Report and 2018 Work Programme in relation to Trade Repositories, Credit Rating Agencies and third-country Central Counterparties.
ESMA is the single direct supervisor of Credit Rating Agencies and Trade Repositories in the European Union. It also has direct responsibilities regarding the registration, supervision and recognition of TRs based outside the EU. The 2017 Annual Report highlights its direct supervisory activities and key achievements in 2017 in respect of eight registered TRs, 26 registered CRAs and four certified CRAs. ESMA recognised 10 third-country CCPs in 2017 and conducted monitoring of the activities and services provided by those third-country CCPs in the EU.
ESMA has conducted a supervisory risk assessment regarding CRAs and TRs in the EU. The 2018 Work Programme sets out the supervisory priorities for the year ahead that ESMA has identified for CRAs and TRs and also highlights issues affecting both CRAs and TRs where ESMA will be conducting further work. These areas include Brexit, fees charged by CRAs/TRs, internal control frameworks, cloud computing and guidelines for periodic information.
European Securities and Markets Authority Outlines 2018 Plans for EU Supervisory Convergence
In addition to the key priorities, the 2018 programme also sets out ESMA key objectives and main planned outputs in relation to a number of thematic and cross-cutting issues, including: investor protection and intermediaries; secondary markets; investment management; market integrity (including market abuse and benchmarks); post-trading (including CCPs, securities financing and settlement); corporate finance (in particular the new prospectus regime); corporate reporting; market data; financial innovation; IT infrastructure; and peer reviews.
The European Securities and Markets Authority has published its Supervisory Convergence Work Programme for 2018. It highlights a total of five key priorities for its work on supervisory convergence in 2018, comprised of three ongoing priorities (application of the revised Markets in Financial Instruments framework, data quality and investor protection) and two new priorities (Brexit and financial innovation).
European Commission Publishes Position Paper on Brexit Transitional Period
The European Commission has published a position paper, titled "Transitional Arrangements in the Withdrawal Agreement", which has been prepared by its Task Force for the Preparation and Conduct of the Negotiations with the United Kingdom.
A transitional period was agreed in principle in December 2017. The stated aim of the position paper is to outline in legal terms how arrangements for the transition period following Brexit should be given effect in the eventual Withdrawal Agreement. Draft clauses for the Withdrawal Agreement relate to the duration of the transition period, the application of EU law to the UK during the transition, the extent to which the UK Parliament and the Bank of England can participate in the EU institutions and the extent to which the UK can participate in the EU's international activities or conclude its own international agreements.
The position paper also contains a draft clause giving jurisdiction to the European Court of Justice to rule on disputes during the transition period. A footnote to the draft clause calls for a mechanism to be put in place within the Withdrawal Agreement whereby the EU would be allowed to "suspend certain benefits deriving for the United Kingdom from participating in the internal market" in circumstances where the EU considers that the ECJ would not provide remedies within an appropriate timeframe.
The negotiations between the UK and EU will resume in March 2018.
View the position paper.
Andrew Bailey, Head of the Financial Conduct Authority Discusses Brexit
The Chief Executive of the Financial Conduct Authority, Andrew Bailey, gave a speech on Brexit at the Future of the City dinner. Mr. Bailey called for a joint commitment by the political authorities to a defined implementation period before the end of March this year and confirmed that the FCA regards Brexit as a top priority. He discussed the operational issues that may arise as a result of Brexit, for example, contractual continuity for derivatives and insurance contracts, UK CCP clearing services and the holding and sharing of data. He also highlighted that mutually agreed and enacted provisions in both the UK and the EU were needed to properly address these matters. The FCA is working with the UK Government to ensure that the UK has a functioning regulatory regime on the date of Brexit and during any transitional period. The UK Government has confirmed that it will introduce draft legislation, if needed, to ensure an interim regulatory permissions regime and to ensure contractual continuity.
In addition, Mr. Bailey discussed the advantages to both the EU and the UK of adopting a mutual recognition regime post-Brexit which continues the existing open financial markets. He noted that during the EU's negotiations with the US on the Transatlantic Trade and Investment Partnership, the EU proposed the inclusion of financial services in the trade agreement, which was based on mutual recognition and close regulatory cooperation, and suggested that the proposal could be used as a starting point for the EU and UK to agree a framework for mutual recognition.
View the text of the speech.
Nausicaa Delfas Appointed as Executive Directive of International at the Financial Conduct Authority
The Financial Conduct Authority has appointed Nausicaa Delfas as Executive Directive of International. The appointment creates a new role at the FCA and highlights the importance of developing the FCA's strategy for international engagement, especially in the lead up to the UK's withdrawal from the EU.
View the FCA's press release.
UK Regulators Confirm Approach to Authorization and Supervision of International Banks, Investment Firms, Insurers and CCPs Post-Brexit
The Bank of England, the Prudential Regulation Authority and the Financial Conduct Authority have published consultations and planning considerations affecting international banks, investment firms, insurers and CCPs conducting cross-border activities into and from the UK. The UK Government has also made an announcement that, if necessary, it will legislate to enable EEA firms and funds operating in the UK to obtain a “temporary permission” to continue their activities in the UK for a limited period after withdrawal. Alongside the temporary permissions regime, it will also legislate, if necessary, to ensure that contractual obligations, such as insurance contracts, which are not covered by the temporary regime, can continue to be met. It will also bring forward secondary legislation to empower UK authorities to carry out functions currently carried out by EU authorities relating to CCPs, central securities depositaries, credit rating agencies and trade repositories.
UK Government's Strategy for the UK's Asset Management Industry
HM Treasury has published the second UK Investment Management Strategy which sets out the UK Government's long-term strategy for ensuring that the UK remains a globally competitive location for asset management. The Government believes that action should be taken now to respond to the challenges and the opportunities for the asset management industry arising out of Brexit, and that this is the best time to renew the 2013 Strategy, which focused mostly on fund domicile issues.
EU Proposed Regulation Moving the European Banking Authority to Paris Due to Brexit
The European Commission has published a proposed Regulation to formalize the decision to move the European Banking Authority from London to Paris as a result of the decision by the UK to leave the EU. The proposed Regulation will apply from the date on which the European Union Treaties cease to apply to the UK or from March 30, 2019, whichever is earlier. The proposed Regulation only confirms the move and does not address any of the operational aspects.
Feedback on the proposed Regulation is possible until January 29, 2018.
View the proposed Regulation.
UK Financial Stability Report Published
The Financial Policy Committee of the Bank of England has published the latest UK Financial Stability Report. The FPC notes that the UK banking system is resilient and that UK banks are stronger than they were 10 years ago. The results of the stress test show that no bank needs to improve its capital position. However, as a result of the stress test, the FPC has decided to raise the UK countercyclical buffer rate from 0.5% to 1% from November 28, 2018. In addition, the Prudential Regulation Committee will set capital buffers for individual banks. The FPC will reconsider the countercyclical buffer rate during the first half of 2018.
The FPC continues to assess the risks posed by Brexit and concludes that Brexit presents a material risk to the provision of financial services to customers in both the UK and the EU. Three main risks are discussed: risks associated with bringing EU legislation into UK law through the Great Repeal Bill, risks to the continuity of outstanding cross-border contracts and risks presented by barriers to cross-border financial services provision.
The FPC considers that the extent and nature of the changes to be brought in through the Great Repeal Bill will depend on the terms of the UK's withdrawal agreement and there is a tight timeframe in which it all needs to be achieved. In addition to the Great Repeal Bill, secondary legislation is needed, and the regulators will need to change their rulebooks. Firms will also need to make changes to comply with the amended legal framework.
European Central Bank Highlights Challenges for Smaller Eurozone Firms
The European Central Bank has published a Report on the supervision of less significant institutions under the Single Supervisory Mechanism. The SSM is made up of the ECB and national regulators of Eurozone member states, and is responsible for the prudential supervision of all banks in the euro area. The ECB directly supervises the larger firms, classified as significant institutions, and national regulators directly supervise the less significant institutions, subject to the oversight of the ECB. The ECB is also responsible for certain common procedures, such as the granting and withdrawal of authorization and the acquisition of qualifying holdings in SSM firms. The ECB can issue guidelines, regulations or general instructions to the SSM national regulators or even take over the direct supervision of a less significant institution (at its own initiative or at the request of the national regulator).
The ECB's Report discusses the main concerns for less significant institutions, which include competition, and suggests that less significant firms may choose to consolidate businesses to improve profitability. The Report also sets out the steps that the SSM supervisory functions have taken towards harmonizing supervisory approaches to level the playing field, and highlights that the key challenge that needs to be addressed is the use of different accounting systems because that hinders comparability of data between the firms. Finally, the ECB indicates that it is developing specific policy positions and operational guidance on issues relevant to Brexit and the likely relocation of some activities of UK firms moving into the Eurozone.
View the report.
US Regulator Warns EU about Proposed Extraterritorial Overreach
The Commodity Futures Trading Commission Chairman J. Christopher Giancarlo has authored an opinion piece in the Wall Street Journal warning of potential consequences if the European Union mishandles Britain's impending exit from the EU. The European Commission's proposed amendments to the European Market Infrastructure Regulation and the regulation establishing the European Securities and Markets Authority would provide ESMA and the European Central Bank with greater supervisory powers over third-country CCPs. Specifically, Chairman Giancarlo argued that the European Commission’s proposed rulemaking that would authorize regulation of financial entities outside the EU by the European Central Bank and ESMA would result in overlapping and uncoordinated regulation in US financial markets. Chairman Giancarlo believes this lack of harmonization and clear jurisdictional limitations could prove expensive and damaging to US economic growth and ultimately impact job growth. Additionally, Chairman Giancarlo suggests that submitting to European rules could set a dangerous precedent going forward which could result in further imposition of European costs and regulatory burdens on the US economy.
View the article.
Brexit: European Banking Authority Warns Against Letter-Box Entities
The European Banking Authority has published an Opinion on issues relating to Brexit where a UK firm seeks to establish an entity within the EU27. The Opinion is addressed to the European Commission, national regulators of member states, the European Central Bank in its role as bank prudential supervisor for entities established in the eurozone and to national regulators in Norway, Lichtenstein and Iceland (as per the EEA Agreement). The Opinion is intended to provide guidance on supervisory expectations and to address regulatory and supervisory arbitrage issues that may arise as firms consider establishing entities within the EU27 before the date of the UK's exit from the EU. The Opinion covers areas such as the authorization process, equivalence access for investment services, internal model approvals, resolution and deposit scheme issues and internal governance and risk management. In particular, the Opinion addresses outsourcing and risk transfers using back-to-back or intragroup transactions. The EBA states that 'letter-box' or 'empty shell' entities do not meet the existing regulatory requirements and that national regulators should assess whether outsourcing is being used solely as a means of obtaining an EU passport. The EBA also considers that a group with a new EU27 entity that uses back-to-back or intragroup transactions to transfer risk must have enough capital, risk management and operational capabilities to absorb any material unhedged or unsecured portfolio in the event of the default of the group entity to which the risks have been transferred.
View the EBA's Opinion.
EU Final Draft Technical Standards on the Trading Obligation for Derivatives Published
The European Securities and Markets Authority has published a final Report and final draft Regulatory Technical Standards on the trading obligation for derivatives under the Markets in Financial Instruments Regulation. The trading obligation is applicable to classes of derivatives that: (i) have been declared subject to the clearing obligation under the European Market Infrastructure Regulation, (ii) are admitted to trading or traded on at least one EU trading venue (a regulated market, multilateral trading facility, organized trading facility or a third country equivalent trading venue) and (iii) are sufficiently liquid. The trading obligation will apply to financial counterparties and to non-financial counterparties. Where ESMA determines that a class of derivatives should be subject to the MiFIR trading obligation, third country trading venues would only be permissible for trading by EU entities when determined to be equivalent by the European Commission.
The final draft RTS on the trading obligation provide for the trading obligation to apply to fixed-to-float interest rate swaps denominated in euros, US dollars and pound sterling and to index credit default swaps (iTraxx Europe Main and iTraxx Europe Crossover). The trading obligation for both IRS and CDS will apply from January 3, 2018, unless the clearing obligation for a particular class of derivatives has not yet entered into force.
European Commission Legislative Proposals for Enhanced Powers for European Supervisory Authorities and the European Systemic Risk Board09/20/2017
The European Commission has published legislative proposals designed to strengthen and further integrate the supervisory framework of the European Union. The proposals build on contributions to the Commission's public consultation in autumn 2016 on the European Systemic Risk Board and its public consultation in spring 2017 on the European Supervisory Authorities – the European Banking Authority, the European Securities and Markets Authority and the European Insurance and Occupational Pensions Authority.
European Banking Authority Issues Final Draft Regulatory and Implementing Technical Standards on Applications for Authorization of Credit Institutions
The European Banking Authority has published its final draft Regulatory Technical Standards setting out a comprehensive list of the information that must be provided to national regulators by firms applying for authorization as a credit institution under the Capital Requirements Directive. The final draft RTS are accompanied by final draft Implementing Technical Standards which set out the various procedures and requirements for making applications, along with a template to be used and guidance on how national regulators should deal with incomplete applications. The next step is for the European Commission to consider the draft RTS and ITS with a view to making a decision whether to endorse them via delegated legislation. In an accompanying press release, the EBA urges the Commission to consider adopting the RTS and ITS at the earliest opportunity to enable processing of applications from entities seeking to relocate to continental Europe in the context of the UK's withdrawal from the European Union.
View the EBA Final Report.
View the Press Release.
Great Repeal Bill Introduced to UK Parliament
The draft legislation for the exit of the UK from the European Union has been introduced to the House of Commons. The European Union (Withdrawal) Bill 2017-2019, which has previously been referred to as the Great Repeal Bill and also as the Repeal Bill, is a legislative measure which performs four main functions. It will: (i) end the supremacy of EU law in UK law by repealing the European Communities Act 1972; (ii) convert EU law as it stands at the moment of exit into domestic law before the UK leaves the EU; (iii) create powers to make secondary legislation, including temporary powers to enable corrections to be made to the laws that would otherwise no longer operate appropriately once the UK has left the EU and to implement the withdrawal agreement under Article 50 of the Treaty on European Union; and (iv) maintain the current scope of devolved decision making powers in areas currently governed by EU law. The Bill must pass through both Houses of Parliament before it can receive Royal Assent.
View the European Union (Withdrawal) Bill 2017-2019.
View the Explanatory Notes to the Bill.
View webpage for the Bill.
View the Shearman & Sterling Client Briefing.
European Securities and Markets Authority Issues Sector-specific Principles on Relocations from the UK to EU27 in the Context of the UK's Exit from the EU
The European Securities and Markets Authority has published three Opinions setting out sector-specific principles for Brexit-related relocations in the sectors of investment management, investment firms and for secondary markets. These sector-specific Opinions build on a cross-sector Opinion published in May 2017. The principles do not set out any new legal requirements, but they are intended to serve as practical tools to support supervisory convergence among national regulators in EU27 countries when approached by UK market participants seeking to relocate in the content of the UK's exit from the EU. The Opinions have been published in the wake of reports that some member state regulators have been marketing their jurisdictions as locations for business and it has been thought that some regulators may have been offering a lighter-touch form of regulatory and especially "presence" standards than others.
The Opinions, which assume (without prejudice to ongoing negotiations) that the UK will become a third country on exit from the EU, highlight particular issues national regulators in EU27 should consider when considering applications from relocating market participants. Factors for close consideration include governance structure and internal control, the impact and influence of group membership, the nature and extent of proposed outsourcing arrangements and the need to mitigate the risk of letter-box entities. ESMA also recommends that national regulators consider co-operation arrangements with third country regulators where appropriate.
View Opinion on Investment Firms.
View Opinion on Investment Management.
View Opinion on Secondary Markets.
European Commission Recommends Draft Brexit Negotiation Directives
The European Commission has adopted a Recommendation for a Council Decision authorizing the Commission to open Article 50 negotiations with the United Kingdom. This Recommendation includes a draft negotiation directive in the Annex, which covers the first phase of the negotiations and prioritizes matters which have been identified as important to ensure an orderly withdrawal.
View the Recommendation.
View the draft negotiation directive.
EU Publishes Guidelines for Brexit Negotiations
The European Council has published Guidelines outlining the proposed framework and stances for its negotiations with the UK under Article 50 of the Treaty on the European Union and setting out the overall positions and principles that the EU will seek. The UK gave notification of its intention to leave the EU on March 29, 2017.
View the Guidelines.
View the related European Commission press release.
UK Government Consults on the UK's Legal Framework for Financial Sanctions upon Brexit
The UK Government has published a consultation on the UK's future legal framework for imposing and implementing financial sanctions upon Brexit. The UK currently adopts sanctions through EU legislation, which is effective via the European Communities Act 1972.
UK Regulator Requests Brexit Contingency Planning Assurance
The Prudential Regulation Authority has published a letter to CEOs and branch managers of all banks, insurers and designated investment firms undertaking cross-border activities between the UK and the remainder of the EU, including branches of EU firms operating in the UK, concerning the need for contingency planning for the UK's withdrawal from the EU. The PRA has requested that each firm provides, by July 14, 2017, written confirmation that it has considered its contingency plans, a short summary of the plans, assurance that the plans address an appropriately wide range of scenarios and whether any new authorization or regulatory engagement is required. EU branches operating in the UK which have significant retail or SME transactional deposits should consider, among other things, whether they need to convert their operation into a UK subsidiary. The Financial Policy Committee will be overseeing the plans to mitigate any risks to financial stability.
View the letter.
Prime Minster Theresa May Triggers Article 50 Brexit Negotiations
UK Prime Minster Theresa May formally notified the European Council of the UK's intention to withdraw from the European Union in accordance with requirements set out in Article 50 of the Treaty on the European Union. Prime Minister May sent a letter to the President of the Council, Donald Tusk, which sets out the approach the UK Government seeks to take in discussing its exit from the European Union over the next two years.
View the letter.
You might like to view our Brexit resource page, which is available here.
UK Financial Policy Committee Post-Brexit Referendum Financial Stability Report
The Bank of England published its latest Financial Stability report. In the Report, the Financial Policy Committee explains the key risks affecting the UK financial system, how it is addressing these risks and the developments since the Brexit referendum. The Report also includes a summary of the results of the Bank of England's 2016 bank stress test.
The first part of the Report outlines in detail the Committee’s analysis of major risks posed to the stability of the UK economy and the action it is taking in light of such risks. The second part of the Report contains a summary of the Committee’s analysis of those risks and of the resilience of the financial system. The Committee comments that since the Referendum, financial stability in the UK has been maintained despite a challenging period of uncertainty around the domestic and global economic outlook. For example, there have been significant movements in asset prices, including a 12% fall in the sterling exchange rate index. The Committee also comments that the outlook for financial stability in the UK remains challenging as the economy has entered into a period of adjustment. Since July, vulnerabilities that stem from the global economic environment and financial markets have further increased, such as the expected expansionary fiscal policy that could follow the recent US election. The Committee comments that the UK banking system is capitalized to sustain the provision of financial services when faced with severe stresses. Since the global financial crisis, UK banks have built up capital resources with the aggregate common equity Tier 1 capital held by major UK banks now at 13.5% of risk-weighted assets (as at September 2016).
UK Bank of England Governor Set to Stay Through Brexit Transition
The Governor of the Bank of England, Mark Carney, announced that he would be extending his term of office at the Bank by a year to the end of June 2019. Mr. Carney commented that the extension of his term of office would go beyond the expected time for Brexit which should help to contribute to a smooth transition to the UK's new relationship with the EU.
View the announcement.
European Commission Establishes Brexit Negotiation Task Force for UK Exit Negotiations
The European Commission established a task force to prepare and conduct negotiations with the United Kingdom. The Task Force will assist the Commission on all strategic, operational, legal and financial issues related to the negotiations. Sabine Weyand, currently Deputy Director-General in the Commission's trade department (DG TRADE) will become the Deputy Chief Negotiator as of 1 October 2016. The announcement follows the appointment of Michel Barnier as Chief Negotiator on July 27, 2016. Mr. Barnier will commence his role from October 1, 2016. The Commission noted that once the UK triggers the process to leave the EU, Mr. Barnier will then make the necessary contacts with the UK authorities.
View the press release.
You might like to view our Brexit resource page, which is available here.
UK's Financial Policy Committee Responds to Brexit Vote by Eliminating the Countercyclical Buffer for Bank Capital
The Bank of England published its latest Financial Stability Report in which the Bank's Financial Policy Committee sets out the key risks to the UK's financial system and weighs them against the resilience of the system. In March 2016, the FPC had identified areas through which there could be increased risk to the UK's financial stability as a result of the vote by the UK public to leave the EU. Such areas include financing of the UK's large current account deficit, the commercial real estate market, the high level of household indebtedness, limited growth in the global economy and vulnerabilities in the functioning of the financial markets. The FPC states that there is evidence that some of these risks have begun to crystallize and that the current outlook for financial stability is challenging. The FPC is monitoring closely the risks of, amongst other things, further deterioration in investor appetite for UK assets, adjustments in commercial real estate markets tightening credit conditions and reduced and fragile liquidity in core financial markets.
To support the supply of credit and in support of market functioning, the FPC has reduced the UK countercyclical capital buffer rate from 0.5% to 0% of banks' UK exposures with immediate effect. This rate is expected to remain in effect until June 2017, and will reduce regulatory capital buffers by £5.7 billion. The FPC continues to monitor the risks closely.
View the report.
You may like to view our client publications and webinar materials on the impact of Brexit, available here.
US Federal Reserve Board Governor Powell Delivers Speech on the Impact of Brexit
US Federal Reserve Board Governor Jerome Powell delivered remarks to the Chicago Council on Global Affairs, highlighting the impact of Brexit on the outlook for the US economy.
Governor Powell voiced concern that the Brexit vote has the potential to create new headwinds for economies around the world, including the United States. He noted that while it may be “far too early to judge the effects of the Brexit vote,” it will be important to assess implications for the US economy, and for the stance of policy to foster continued progress towards the objectives of maximum employment and price stability in the United States.
Governor Powell noted that for some time, the principal risks to the US labor market recovery and economic growth have been from abroad. Due to the high and continuously appreciating trade-weighted value of the US dollar, the economy inevitably “imports” trading partners’ weak economic performances and financial volatility. Powell stated that to successfully contain the impact of the British referendum, the Federal Reserve Board is “prepared to provide dollar liquidity through existing swap lines” with central banks to address pressures in global funding markets. Powell also noted that while financial conditions have “tightened” since the Brexit vote, markets have continued to function in an “orderly” manner and the US financial markets remain resilient.
View Governor Powell’s speech.