Policy paper

HM Treasury equivalence decisions for the EEA States – 9 November 2020

Published 9 November 2020

On 9 November 2020 the Chancellor announced that the UK will be granting a package of equivalence decisions to the European Economic Area (‘EEA’) States, including the Member States of the European Union (‘EU’). To provide clarity and stability to industry and reflecting the Government’s commitment to be as open as possible HM Treasury announced as many decisions as we can in advance of the end of the Transition Period provided for under the agreement on the UK’s withdrawal from the EU (the Transition Period) on 31 December 2020. Granting these equivalence decisions provides a range of benefits, including supporting well regulated open markets, facilitating effective pooling and management of risk, and supporting UK and EEA clients’ access to financial services and market liquidity.

Further detail on each of the decisions the UK is making is provided below. These will be laid before Parliament on 10 November 2020. The UK Government confirmed it is not ruling out further equivalence decisions for the EEA States in the future as it continues to believe that comprehensive mutual findings of equivalence between the UK and the EEA States are in the best interests of both parties, however, the UK awaits clarity from the EU about their intentions.

Due to the nature of the powers by which HM Treasury can grant equivalence during the Transition Period, 16 of the equivalence decisions are being made by directions under The Equivalence Determinations for Financial Services and Miscellaneous Provisions (Amendment etc) (EU Exit) Regulations 2019 (S.I. 2019/541) and one equivalence decision is being made by Statutory Instrument (‘SI’) - under The Central Counterparties (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2018 (S.I. 2018/1184). Each decision will come into force immediately following the end of the Transition Period and, at that time, they shall each have effect as if made under the relevant provisions of retained EU law, whether they were granted by direction or SI.

HM Treasury, having taken into account advice received from the Bank of England, the Prudential Regulation Authority (‘PRA’) and the Financial Conduct Authority (‘FCA’), has carried out equivalence assessments on the EEA States. For the decisions below, both the legally binding requirements, and the effectiveness of the regulation and supervision of adherence to these requirements, have been deemed equivalent on an outcomes basis.

The European Market Infrastructure Regulation (Article 13) Equivalence Directions 2020 will grant equivalence to the EEA States for the intragroup exemption in Article 13 of the European Market Infrastructure Regulation which will form part of UK law at the end of the Transition Period (‘EMIR’). We are granting a partial Article 13 decision in relation to the intragroup exemption in regard to activities subject to the clearing obligation (Article 4) and Over The Counter (‘OTC’) derivative margin requirements (Article 11). This decision paves the way for UK firms to seek or apply an exemption from the requirement to clear through a Central Counterparty (‘CCP’) or meet margin requirements for transactions with an EEA State entity in the same group. Granting this decision means these exposures can qualify as intragroup exposures in the credit valuation adjustment (CVA) calculation, ensuring that UK firms will in many cases not have to capitalise CVA on OTC exposures to EEA State affiliates.

The European Market Infrastructure Regulation (Article 2A) Equivalence Directions 2020 will grant equivalence to the EEA States for the purposes of Article 2A of EMIR. This will enable UK firms to continue to treat derivatives traded on EEA regulated markets as exchange-traded derivatives rather than OTC derivatives. Facilitating this continuity for firms minimises the disruption they will experience following the end of the Transition Period.

The Capital Requirements Regulation Equivalence Directions 2020 will grant equivalence to the EEA for Articles 107 (3),114(7), 115(4), 116(5), 132(3), 142(2) and 391 of the Capital Requirements Regulation which will form part of UK law at the end of the Transition Period. This direction covers 7 equivalence decisions. For UK firms, these equivalence decisions will ensure they will not be subject to increased capital requirements as a result of their EEA State exposures.

The Solvency 2 Regulation Equivalence Directions 2020 will determine that for the purposes of Articles 378, 379 and 380 of the Solvency II Regulation, which will form part of UK law at the end of the Transition Period (‘Solvency II’), the EEA States are equivalent. This direction covers all 3 equivalence decisions covering both reinsurance and group capital treatment. A full set of Solvency II equivalence decisions for the EEA States is beneficial for the UK by providing certainty and continuity.

The Central Securities Depositories Regulation Equivalence Directions 2020 will determine that central securities depositories (‘CSDs’) in each EEA State are equivalent to Article 25 of the Central Securities Depositories Regulation which will form part of UK law at the end of the Transition Period (‘CSDR’). With equivalence granted, the Bank of England can then assess CSDs in the EEA for recognition (subject to establishing co-operation arrangements with the relevant EU authorities), allowing those CSDs, once recognised, to continue to service UK securities and to exit the transitional regime contained in onshored Article 69 CSDR and Part 5 of The Central Securities Depositories (Amendment) (EU Exit) Regulations 2018.

The Benchmarks Regulation Equivalence Directions 2020 will determine that benchmark administrators in each EEA State comply with legal requirements which are equivalent to the Benchmarks Regulation which will apply in UK law at the end of the transition period and are appropriately supervised in the relevant EEA Member State. This equivalence decision acts as a mechanism to enable such administrators to be added to the FCA’s benchmarks register, and to enable them to provide benchmarks to supervised entities in the UK. The UK Government intends to extend the transitional period for all overseas benchmarks from end-2022 to end-2025 in the Financial Services Bill which has recently been introduced in Parliament. During the transitional period for third country benchmarks, UK supervised entities are permitted to use all third country benchmarks.

The Credit Rating Agencies Regulation Equivalence Directions 2020 will determine that, for the purposes of Article 5 of the Credit Rating Agencies Regulation which will form part of UK law at the end of the Transition Period, the EEA States are equivalent. This means non-systemic credit rating agencies (‘CRAs’) authorised or registered in the EEA States will be able apply to be certified in the UK, subject to certain regulatory requirements. Endorsement also allows for the cross-border use of ratings between the UK and the EU. This allows UK-registered CRAs to endorse credit ratings issued from affiliated EU CRAs which allows them to be used for regulatory purposes by UK firms. One condition for endorsement is that the EU regulatory and supervisory framework is deemed to be ‘as stringent as’ the UK framework. The FCA concluded a positive endorsement assessment in March 2019.

The Short Selling Regulation Equivalence Directions 2020 will determine that EEA States markets are equivalent for the purposes of Article 17 the Short Selling Regulation which will form part of UK law at the end of the Transition Period (‘SSR’). This means that EEA market makers will be eligible to make use of the exemption in Article 17 of SSR (which disapplies certain short selling restrictions and reporting requirements) subject to complying with certain regulatory requirements.

The Central Counterparties (Equivalence) Regulations 2020 will grant equivalence to central counterparties (‘CCPs’) established in EEA States. Therefore, subject to entry into an appropriate cooperation arrangement between the Bank of England and the relevant national competent authority in that EEA state, and a CCP-specific recognition determination by the Bank of England, after the end of the transition period UK firms will be able to continue using EEA CCPs. This equivalence decision does not exclude EEA CCPs from the Temporary Recognition Regime (‘TRR’). Until recognition decisions are made, EEA CCPs who meet the relevant eligibility criteria will remain in the TRR, which is due to last until December 2023 and may be extended by HMT.

The Department for Business, Energy and Industrial Strategy will be laying The Statutory Auditors and Third Country Auditors (Amendment) (EU Exit) (No. 2) Regulations 2020 to grant audit equivalence to the EEA States and approve as adequate their audit competent authorities.

The decisions are in addition to the directions already made by HM Treasury in 2019 which granted equivalence and exemption decisions to the EEA States. In 2019 HM Treasury made The Prospectus Regulation and Transparency Directive Directions 2019 which granted equivalence to the EEA States in respect of Article 29(3) of the Prospectus Regulation and the relevant UK law implementing Article 23 of the Transparency Directive.

In addition, HM Treasury also made directions which granted exemptions in respect of the central banks of the EEA States as follows:

• the Market Abuse Exemption Directions 2019 and the Market Abuse Exemption (No.2) Directions 2019
• the Markets in Financial Instruments Exemption Directions 2019
• the OTC Derivatives, Central Counterparties and Trade Repositories Exemption Directions 2019 and The OTC Derivatives, Central Counterparties and Trade Repositories Exemption (No.2) Directions 2019
• the Transparency of Securities Financing Transactions and of Reuse Exemption Directions 2019 and The Transparency of Securities Financing Transactions and of Reuse Exemption (No.2) Directions 2019