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This publication is available at https://www.gov.uk/government/publications/draft-benchmarks-amendment-and-transitional-provision-eu-exit-regulations-2019/the-benchmarks-amendment-eu-exit-regulations-2018-explanatory-information
The European Union (Withdrawal) Act 2018 (EUWA) repeals the European Communities Act 1972 on the day the UK leaves the EU and converts into UK domestic law the existing body of directly applicable EU law. The purpose of the EUWA is to provide a functioning statute book on the day we leave the EU.
The EUWA also gives Ministers powers to make Statutory Instruments (SIs) to prevent, remedy or mitigate any failure of EU law to operate effectively, or any other deficiency in retained EU law. We refer to these contingency preparations for financial services legislation as ‘onshoring’.
HM Treasury is using these powers to ensure that the UK continues to have a functioning financial services regulatory regime in any scenario.
This SI is part of the wider work the government is undertaking to prepare for the UK’s withdrawal from the EU. It is not intended to make policy changes, other than to reflect the UK’s new position outside the EU, and to smooth the transition. The changes made in this SI would not take effect on 29 March 2019 if, as expected, we enter an implementation period.
The SI is intended to provide Parliament and stakeholders with further details on our approach to onshoring financial services legislation. The draft instrument is still in development. The drafting approach, and other technical aspects of the proposal, may change before the final instrument is laid before Parliament.
3. Policy background and purpose of the SI
3.1 What does the underlying EU regulation and UK law do?
Benchmarks are used in a wide range of markets to help set prices, measure performance, or work out amounts payable under financial contracts. Financial benchmarks play a key role in the financial system’s core functions of allocating capital and risk and impact huge volumes of credit products and derivatives.
The primary objective of the EU Benchmarks Regulation (BMR) is to ensure the accuracy, robustness and integrity of financial benchmarks after a number of high profile misconduct cases, including the attempted manipulation of crucial interest rate benchmarks the London Interbank Offered Rate (LIBOR) and the European Inter Bank Offered Rate (EURIBOR). The BMR places requirements on administrators, supervised users of, and supervised contributors to, benchmarks. These relate to a range of issues including benchmark methodology, governance and transparency.
Only benchmarks which are approved for use via one of the prescribed routes set out in the BMR may continue to be used within the EU after the end of a transitional period on 1 Jan 2020 (or slightly later for in flight applications from EU administrators).
Routes to approval are as follows:
- EU administrators must apply for either authorisation or registration;
- third country administrators may become approved via equivalence, recognition or endorsement.
Approved administrators and/or benchmarks are placed onto the publicly available European Securities and Markets Authority (ESMA) Benchmarks Register.
3.2 Deficiencies this SI remedies
This SI will make amendments to retained EU law related to the BMR to ensure that it continues to operate effectively in the UK once the UK has left the EU.
UK-located benchmark administrators seeking authorisation or registration will continue to apply to the FCA. However, this SI:
- Clarifies that the scope of the onshored Regulation (and thus of authorisation or registration by the FCA) is the UK, and not the whole of the EU; and
- Ensures that EU located administrators are subject to the onshored third country regime, which requires third country administrators or benchmarks to become approved via recognition or endorsement applications to the FCA to allow use of their benchmarks in the UK by supervised entities (unless and until an equivalence determination is made).
Changes introduced in this SI include:
Creating a UK register of benchmarks
Currently, when a national competent authority in an EU member state approves an application under the BMR, the benchmark or administrator is added to the centrally held and publicly accessible ESMA register of benchmarks.
Consistent with the general onshoring approach to transfer functions under the BMR from ESMA to the FCA, this SI makes a change to refer to a UK register of benchmarks which the FCA will have the responsibility for maintaining from EU exit day. The UK BMR use restriction will therefore apply to UK supervised entities such that they may, subject to the transitional provisions of the UK BMR, only use benchmarks which are on the UK register.
Migrating UK approved benchmarks and benchmark administrators onto UK register on exit day
This SI provides that on exit day, administrators that have already been authorised or registered in the UK by the FCA will be automatically migrated to the UK register without the need to submit a new application to the FCA under the onshored BMR. This SI makes the same provision for third country benchmarks and/or administrators that have been recognised by the FCA, or endorsed by UK administrators or supervised entities (with such endorsement authorised by the FCA) prior to exit day.
Temporarily migrating EU27 approved benchmarks onto the UK register on exit day
Benchmark administrators that are located outside the UK will be subject to the onshored third country regime which will require the administrator or benchmark to become approved by equivalence, recognition or endorsement in the UK to be added to the UK register. This will apply to third country benchmarks/administrators even if they already appear on the ESMA register (unless they appear there as the result of an FCA decision, as set out in the preceding paragraph).
However, we want to avoid any market disruption which could result from a sudden loss of UK access at the end of the transitional period in the BMR to benchmarks which already appear on the ESMA register at exit day, or benchmarks provided by administrators which already appear on the ESMA register at exit day. This SI therefore contains an additional transitional provision which temporarily migrates over to the UK register for a 24-month period any benchmarks or administrators which appear on the ESMA register at exit day as a result of a successful application outside of the UK. This will automatically enable continued use of these benchmarks, or benchmarks provided by these administrators, by UK supervised entities for 24 months after exit day, unless and until an application for approval in the UK is refused. These third country administrators or benchmarks must become approved by the FCA through equivalence, recognition or endorsement to enable their continued use within the UK beyond this 24-month period.
Where a benchmark or benchmark administrator subject to this transitional provision is removed from the ESMA register after exit day, it will also be removed from the UK register, unless the FCA considers that doing so would not be compatible with the FCA’s strategic objective or would have a material adverse effect on the advancement of the FCA’s s operational objectives.
Maintaining pre-exit day application refusal decisions
The BMR stipulates that where an EU administrator has had its application for authorisation or registration refused, it falls out of scope of the EU BMR’s transitional provision and use becomes prohibited within the EU until the point at which the administrator makes a subsequent successful application. This SI contains a provision to maintain after exit day those prohibiitons which were in place on exit day as a result of refused authorisation or registration applications from administrators located within the EU. These prohibitions will remain valid in the UK until an application is approved in the UK.
Transfer of Functions
To ensure that the UK’s standalone benchmarks regime will work effectively, certain key functions carried out by EU institutions will need to be transferred to appropriate UK bodies. Non-legislative functions will be transferred to the FCA, as the competent authority. Any legislative functions, such as the Commission’s power to adopt delegated acts, will be transferred to the Treasury. This includes the power to update the list of critical benchmarks.
Cooperation and Information Sharing
When the UK is no longer part of the single market, it would not be appropriate for UK supervisors to be unilaterally obliged to share information or cooperate with EU authorities, without any guarantee of reciprocity. As such, provisions in legislation relating to cooperation and information sharing have been removed. However, this will not preclude UK supervisors from sharing information with EU authorities where necessary, as the existing domestic framework for cooperation and information sharing with countries outside the UK already allows for this on a discretionary basis.
Correcting deficiencies in Commission Delegated Acts
This SI makes minor amendments to delegated acts pertaining to the EU Benchmarks Regulation to ensure they function after exit day. This includes amending the list of critical benchmarks to remove benchmarks administered in the EU.
3.3 Relevant Rulebook and Binding Technical Standard changes
The FCA will be updating its Handbook and relevant Binding Technical Standards to reflect the changes introduced through this SI, and to address any deficiencies as a result of the UK leaving the EU.
The SI will affect UK located benchmark administrators, as well as third country benchmark administrators who intend to provide benchmarks for use within the UK. The SI will also affect supervised users of benchmarks in the UK, who will need to consult the UK register rather than the ESMA register for details on UK-approved benchmark administrators or benchmarks after the UK leaves the EU. HM Treasury will engage with industry bodies where possible to ensure awareness of these changes. The intention of the SI is not to make policy changes, other than to reflect the UK’s new position outside the EU, and to smooth the transition to this position.
The SI will not include provisions that may be necessary to ensure Gibraltarian financial services firms’ continued access to UK markets in line with the UK Government’s Statement in March 2018, and other provisions dealing with Gibraltar more generally. Where necessary, provisions covering Gibraltar will be included in future SIs.
4. Next steps
HM Treasury plans to lay this instrument before Parliament before exit.
5. Further information
If you have queries regarding this instrument, email FSlegislationEUWA@hmtreasury.gov.uk.