Shearman & Sterling LLP | Financial Regulatory Developments Focus | UK Legislation Published for a Post-Brexit Recognition Regime for CCPs
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  • UK Legislation Published for a Post-Brexit Recognition Regime for CCPs
    07/24/2018
    A draft of the Central Counterparties (Amendment, etc., and Transitional Provisions) (EU Exit) Regulations 2018 has been laid before Parliament. The finalized Regulations will come into force partly on the day after the day they are made and fully on the day the U.K. withdraws from the EU.

    The draft Regulations have been prepared using the power under the European Union (Withdrawal) Act 2018 to address failures of retained EU law to operate effectively or other deficiencies arising from the withdrawal of the U.K. from the EU. These draft Regulations deal with "onshoring" certain aspects of the European Market Infrastructure Regulation that relate to the regulatory framework for CCPs. The Bank of England wrote to non-U.K. CCPs in December 2017 outlining how it envisaged that non-U.K. CCPs will be recognized to provide services in the U.K. once the U.K. has withdrawn from the EU. Recognized status under EMIR enables third-country CCPs to provide clearing services to clearing members or trading venues established in the EU. The BoE explained in its letter that U.K. domestic law requirements for the recognition of non-U.K. CCPs would be substantially the same as the current requirements under EMIR, although references to international MoUs being in place would change, such that these must be established between third countries and relevant U.K. authorities.

    The draft Regulations:
    1. Transfer to HM Treasury the European Commission's function to make equivalence determinations under EMIR. An equivalence determination in respect of a third-country jurisdiction is a necessary precondition for CCPs from that jurisdiction to obtain recognized status. The draft Regulations revoke Commission Implementing Acts that relate to third-country equivalence under EMIR; however, the expectation is that third countries already declared equivalent by the Commission for the purposes of EMIR are likely to be re-designated as equivalent under the U.K.'s post-Brexit EMIR law.
    2. Empower the Bank of England with the functions, currently held by the European Securities and Markets Authority, of recognizing third-country CCPs. BoE recognition will enable third-country CCPs to provide these services to U.K. clearing members and venues.
    3. Create a temporary recognition regime, designed to act as a backstop in the event of a "no deal" scenario, in which the transition, or "implementation" period (March 29, 2019 to December 31, 2020) agreed in principle between the U.K. and the EU is not ratified under the Withdrawal Agreement that is currently under negotiation. Under the temporary regime, CCPs providing clearing services in the EU by virtue of recognized status under EMIR would be deemed to have recognized status and be able to continue their activities in the U.K. for a limited period after the date of the U.K. withdrawal, subject to prior notification to the BoE. The temporary regime would remain in place for three years, subject to a power for HM Treasury to extend the regime's duration by increments of 12 months.
    4. Give power to the BoE to charge fees from non-U.K. CCPs that are providing services in the U.K.

    Two further pieces of secondary legislation planned for publication in 2018 will deal with onshoring other provisions of EMIR. These are: (i) the Trade Repositories (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2018; and (ii) the Over the Counter Derivatives, Central Counterparties and Trade Repositories (Amendment) (EU Exit) Regulations 2018.

    The EU (Withdrawal) Act 2018 sets out an enhanced scrutiny procedure for secondary legislation used to amend certain retained EU law. This means that the draft Regulations will require the approval of both Houses of Parliament before they are made.

    View the draft Regulations.

    View the explanatory memorandum.

    View the Bank of England's December 2017 letter to CCPs.

    View details of the proposed approach to onshoring EU legislation.

    View details of the EU (Withdrawal) Act 2018.