Shearman & Sterling LLP | Financial Regulatory Developments Focus | UK Draft Legislation to Onshore the European Market Infrastructure Regulation Published
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  • UK Draft Legislation to Onshore the European Market Infrastructure Regulation Published
    10/22/2018
    HM Treasury has published in draft format the Over the Counter Derivatives, Central Counterparties and Trade Repositories (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2018 – the U.K.'s draft statutory instrument that would implement a post-Brexit EMIR regime, together with explanatory guidance. The draft EMIR Regulations will affect CCPs, clearing members, their clients, Trade Repositories, TR users and U.K. persons entering into derivatives contracts. They will also, like EMIR, have impacts for persons around the world which enter into derivatives with U.K. persons, through U.K. clearing members or that are ultimately held with CCPs that are regulated or recognized in the U.K.

    The draft EMIR Regulations have been prepared to ensure that there continues to be an effective regulatory framework for OTC derivatives, CCPs and TRs in the U.K. after exit day. Onshoring of EMIR has been dealt with in three separate pieces of legislation. The draft EMIR Regulations should be read in conjunction with the Central Counterparties (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2018 the Trade Repositories (Amendment and Transitional Provision) (EU Exit) Regulations 2018, which were published in draft form on July 24, 2018 and October 5, 2018 respectively.

    The draft EMIR Regulations make a number of amendments to fix deficiencies in the onshored version EMIR.
    1. Transfer of functions: provisions in the draft EMIR Regulations ensure that EMIR requirements will continue to apply in the U.K., transferring responsibilities to the Bank of England, Prudential Regulation Authority and/or Financial Conduct Authority as appropriate.
    2. Regulation of CCPs: authorization or recognition of CCPs will be the responsibility of the BoE after exit (this is dealt with in the CCP regulations).
    3. Clearing Obligation: The power to set the clearing obligation for different types of asset classes will be transferred from the European Securities and Markets Authority to the BoE. The BoE will also be empowered to specify the timing for any phase-in of any new clearing obligations to apply to PRA-regulated entities (the FCA will be similarly empowered in relation to FCA-regulated entities).
    4. Reporting Obligation: registration or recognition of Trade Repositories will be the responsibility of the FCA after exit (as set forth in the separate Trade Repositories regulations). The draft EMIR Regulations empower the FCA to suspend the reporting obligation for a period of up to one year, with the agreement of HM Treasury, if there is no registered or recognized TR available. The BoE will be responsible for further specifying reporting requirements for CCPs and the FCA will be responsible for such standards as they apply to all other firms.
    5. Margin Obligations: EMIR's risk mitigation provisions for uncleared derivatives will continue to apply to firms trading in the U.K. after exit. The draft EMIR Regulations transfer rule-making  powers from EU institutions to the PRA and FCA.
    6. Equivalence: the power to make third country regime equivalence determinations is transferred from the European Commission to HM Treasury.
    7. Intragroup Transactions: After exit, permanent intragroup exemptions between U.K. and EU firms (which will become third country firms), and all temporary intragroup exemptions granted before exit day, will no longer apply in the U.K. The draft EMIR Regulations establish a temporary intragroup exemption regime to ensure that intragroup transactions can continue to be exempted from EMIR requirements. The temporary regime will initially last for three years after exit.
    8. EMIR processes: The draft EMIR Regulations amend or delete various processes or requirements for cooperation between U.K. and EEA regulators. This includes revoking and replacing EMIR provisions on TR disciplinary processes, appeals, fines, supervisory fees, penalties and other supervisory requirements. TRs were previously subject to central regulation and enforcement by ESMA. These procedures will in the future be covered by existing regulatory enforcement powers in the Financial Services and Markets Act 2000.

    HM Treasury intends to lay the draft EMIR Regulations before Parliament before exit day.

    View the draft Regulations and explanatory guidance.

    View details of the draft CCP regulations.

    View details of the draft trade repositories regulations.

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