Shearman & Sterling LLP | Financial Regulatory Developments Focus | UK to Adopt EU Equivalence Decisions for Exchanges and Bank Exposures in No Deal Brexit
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  • UK to Adopt EU Equivalence Decisions for Exchanges and Bank Exposures in No Deal Brexit
    01/17/2019
    HM Treasury has laid before Parliament a draft of the Equivalence Determinations for Financial Services and Miscellaneous Provisions (Amendment etc) (EU Exit) Regulations 2019. The draft Regulations grant HM Treasury temporary powers to make equivalence determinations in relation to any EEA state for EU legislation that is being onshored. The retained EU law includes the Benchmark Regulation, the Capital Requirements Regulation, the European Market Infrastructure Regulation, the Markets in Financial Instruments Regulation, the Credit Rating Agencies Regulation, the Prospectus Directive, the Transparency Directive, the Securities Financing Transaction Regulation, the Short Selling Regulation and Solvency 2. The powers will enable HM Treasury to make equivalence decisions before Brexit that come into force on exit day in a no deal scenario. These powers are distinct from the powers granted to HM Treasury to make equivalence decisions post-Brexit under the specific sectoral onshored legislation and apply in parallel to relevant temporary permissions or registration regimes. The temporary powers would expire 12 months after exit day. The Bank of England, the Prudential Regulation Authority and the Financial Conduct Authority are tasked with providing advice to HM Treasury for equivalence assessments of the relevant third-country regimes. These provisions will come into force the day after the final Regulations are made. The derivatives industry would welcome equivalence decisions for EEA regulated markets under EMIR as this would avoid derivatives that are currently classified as Exchange Traded Derivatives being categorized as OTC derivatives. OTC derivatives and ETDs are subject to different requirements and any such reclassification may affect whether entities must comply with the clearing obligation, the trading obligation and how their derivatives transactions are reported.

    Furthermore, the draft Regulations correct a number of deficiencies in EU equivalence decisions made under the retained EU laws listed above and which will themselves be retained. These decisions relate to regulated markets under MiFIR and EMIR and the treatment of bank exposures under CRR. These provisions will come into force on exit day. Equivalence decisions relating to third-country CCPs will be revoked by The Central Counterparties (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2018 (SI 2018/1184). However, the U.K. has created a temporary recognition regime to ensure the continuity of services provided by third-country CCPs in the U.K. There is no similar temporary recognition regime for regulated markets. EEA market operators that engage in regulated activities when providing their U.K. members with access to their markets will need to apply for recognized overseas investment exchange (ROIE) status, unless they can rely on the U.K.'s overseas persons exclusion. The FCA published a direction on September 14, 2018 setting out its expectations for EEA market operators.

    Finally, the draft Regulations revoke the EU Regulations establishing the European Systemic Risk Board and the European Supervisory Authorities - the European Securities and Markets Authority, the European Banking Authority and the European Insurance and Occupational Pensions Authority. These revocation provisions will come into force on exit day.

    View the draft Equivalence Determinations for Financial Services Regulations and Explanatory Memorandum.

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