Shearman & Sterling LLP | Financial Regulatory Developments Focus | UK Releases Draft Legislation to Onshore EU Regulatory Capital Requirements Legislation Post-Brexit
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  • UK Releases Draft Legislation to Onshore EU Regulatory Capital Requirements Legislation Post-Brexit
    HM Treasury has released another draft statutory instrument in preparation for Brexit, the Capital Requirements (Amendment) (EU Exit) Regulations 2018 - the draft Capital Requirements Regulations. The EU regulatory capital requirements framework for banks, building societies and investment firms comprises the Capital Requirements Regulation, the Capital Requirements Directive and secondary legislation in the form of technical standards. The CRD is implemented into U.K. law through various sector-specific legislation, for example, the Regulated Covered Bonds Regulations 2008, the Capital Requirements Regulations 2013, the Capital Requirements (Country-by-Country Reporting) Regulations 2013, and the Capital Requirements (Capital Buffers and Macro-prudential Measures) Regulations 2014 as well as through PRA and FCA rules. The CRR and the technical standards are directly applicable across the EU.

    This draft Capital Requirements Regulations will amend the CRR to ensure that it continues to operate effectively in the U.K. when the U.K. leaves the EU. The domestic legislation implementing CRD is also amended to ensure that it continues to function as intended. The Prudential Regulation Authority and the Financial Conduct Authority will be responsible for amendments to the technical standards and for updating their rulebooks. They are expected to consult in Autumn 2018 on these aspects.

    The draft Capital Requirements Regulations will, among other things, operate as follows:
    • Group consolidation

    CRR provides for consolidated liquidity requirements for EU banking groups on a cross-EU basis only (i.e., the requirements do not also apply at national level). The result is that U.K. sub-groups with an EU parent do not currently have a U.K. level of consolidated liquidity supervision. The draft Regulations will subject an EU bank sub-group operating in the U.K. to a new layer of U.K. consolidated liquidity supervision overseen by the PRA.

    Under CRR, consolidated capital requirements are already calculated on both a national and EU basis. Both U.K. and EU groups are already conducting capital consolidation under the U.K. parent and therefore the draft Regulations make no changes in this regard.
    • EU27 exposures

    The CRR specifies the level of capital and liquidity that firms must hold against different types of exposures, for example, to CCPs or central banks. EU assets and those of third countries deemed equivalent by the European Commission, are given preferential (generally 0%) treatment and no capital needs to be held against such exposures. After Brexit, EU27 sovereign and CCP exposures which do not benefit from an equivalence decision will no longer receive preferential capital treatment under the U.K.'s capital framework.
    • Equivalence

    The Commission's function of making equivalence decisions for third country regimes will be transferred to HM Treasury. The PRA will become responsible for providing HM Treasury with technical assessments of third country regimes.

    Existing EU equivalence decisions will be incorporated into U.K. law by the EU Withdrawal Act and will continue to apply to the U.K.'s regulatory and supervisory relationship with those third countries. EU equivalence decisions under CRR for exposures to third-country banks, investment firms, exchanges, governments and "large financial sector entities" have been granted for several countries, including the U.S., Japan, Brazil, Singapore, Saudi Arabia and South Africa.
    • Macroprudential measures

    The U.K. regulators will maintain their existing powers to address macroprudential or systemic risk and the Financial Policy Committee will undertake its role as the macroprudential authority for the U.K.

    In addition, the functions of the EU authorities will be adopted by U.K. bodies. Unilateral obligations on the U.K. to share information or cooperate with the EU under the CRR will be removed by the draft Capital Requirements Regulations. Furthermore, the draft Capital Requirements Regulations include grandfathering provisions for any decisions made under CRR on or before Exit Day by a body other than the PRA or FCA and those decisions will continue to stand post-Brexit. The PRA and FCA will assume powers for those decisions after the U.K. leaves the EU.

    Where cross-references are included in the CRR to other EU legislation for which the U.K. has not yet developed onshoring legislation, those cross-references will be dealt with in legislation to be published at a later date. In addition, the draft Capital Requirements Regulations do not onshore the changes to CRR as a result of the EU Securitization Regulation and references to the European Market Infrastructure Regulation will be dealt with in later legislation.

    HM Treasury intends to lay the draft Regulations before Parliament in Autumn 2018. The Regulations will come into force mostly on the day the U.K. withdraws from the EU, either on March 29, 2019 or, if the implementation period is ratified, on December 31, 2020.

    As discussed in our previous posts and client note, HM Treasury has also published draft secondary legislation and proposals in other areas, such as a temporary permissions regime for EEA firms, a temporary recognition regime for non-U.K. CCPs, short selling regulations and deposit guarantee arrangements. Information about the proposed new framework for U.K. settlement finality designation has also been published. Further draft financial services legislation is expected to be published in the lead up to Brexit.

    View the draft regulations and explanatory guidance.

    View other developments relating to Brexit for financial services.

    View the existing equivalence decisions under CRR.

    View our client note on recent Brexit developments, including the draft regulations published to date.

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