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This publication is available at https://www.gov.uk/government/publications/draft-trade-repositories-amendment-and-transitional-provision-eu-exit-regulations-2018/trade-repositories-amendment-and-transitional-provision-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 attached draft 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
Following the global financial crisis, G20 leaders agreed that more trades should be cleared through central counterparties (CCPs) to make over-the-counter (OTC) derivatives markets safer and more transparent. The European Market Infrastructure Regulation (EMIR) is the EU response to this G20 commitment. It covers OTC derivatives, CCPs, and trade repositories (TRs). The regulation is directly applicable in EU member states and came into force on 16 August 2012.
EMIR ensures that information on all European derivative transactions is reported to TRs and accessible to supervisory authorities, including the European Securities and Markets Authority (ESMA), to give policy makers and supervisors a clear overview of activity in financial markets.
All TRs established in the EU are required to be registered and supervised by ESMA. ESMA ensures TRs are compliant with the TR requirements and the reporting requirements set out in both the level 1 text and level 2 text of EMIR. ESMA also provides guidance on how these requirements are meant to be interpreted. The UK currently has a significant market share of trade repository reporting services with 5 of 8 registered EU TRs located in the UK.
This instrument is intended to ensure that the UK’s legal framework for reporting of derivatives trades to TRs will continue to operate effectively after the United Kingdom withdraws from the European Union, resolving deficiencies arising from that withdrawal.
Provisions related to European Market Infrastructure Regulation are also covered in two other SIs related to this draft Trade Repositories statutory instrument. The continuation of the regulatory framework in EMIR for CCPs in the UK is covered by the draft Central Counterparties (Amendment and Transitional Provision) (EU Exit) Regulations 2018, which was laid before parliament in July 2018. The remaining provisions related to EMIR will be covered by a third SI, which also be published ahead of its laying date in autumn.
3.1 Deficiencies this SI remedies
The main deficiency that the SI seeks to amend is the European Securities and Markets Authority (ESMA) functions concerning the registrations of within the European Union, including UK TRs.
Changes introduced by this SI include:
Transfer of functions relating to registration requirements
Part 2 of the draft Statutory Instrument transfers ESMA’s functions relating to the requirements for the registration of TRs. It amends, and transfers registration functions carried out by ESMA to the FCA. Part 2 also sets out data sharing requirements for trade repositories. Data sharing in relation to equivalence will be addressed in the SI with the remaining EMIR provisions.
Applications for registration by the FCA in advance of exit day
Part 3, chapter 1 sets out provisions which allow trade repositories to submit applications for registration by the FCA in advance of exit day. This includes pre-exit powers for the FCA to accept and assess an application. The chapter also sets out that an application must be submitted to the FCA before exit day and should demonstrate that the TR meets the Title VII requirements in EMIR. The FCA will have 20 working days to assess that application and deem it complete or incomplete. If the application is incomplete the FCA will request further information from the applicant. Once a TR’s application is deemed complete, the FCA has 40 working days to assess it and make a registration decision.
Temporary registration regime
Part 3, Chapter 2 sets out the details of the temporary registration regime. The regime is to allow existing UK and EU TRs who wish to establish a new UK legal entity to benefit from temporary registration whilst their application is being considered by the FCA. It will last for three years from exit day.
To enter this regime, eligible TRs will be required to submit an advance application to the FCA and meet the requirement that they are an entity which forms part of a group which includes an ESMA-registered TR. Part 3, chapter 2 also gives the FCA the power to withdraw an entity from the temporary regime if the TR does not achieve full compliance with the requirements, set out by the FCA, which align with those in EMIR by the end of the regime.
Part 3, Chapter 3 of the SI creates a conversion regime whereby UK TRs who are currently registered by ESMA are registered as authorised UK TRs by the FCA from exit day.
Part 3, Chapter 4 of the SI sets out general provisions relating to terminology used in the SI. It also applies the criminal offence in section 398 of the Financial Services and Markets Act (FSMA) 2000 (misleading a regulator) to the requirements for TRs to provide information to the FCA in accordance with any pre-exit day application.
3.2 Relevant Rulebook and Binding Technical Standard changes
The powers to make technical standards in Article 56(3) and 56(4) is transferred to the FCA. The FCA have been given power in The Financial Regulators’ Powers (Technical Standards etc.) (Amendment etc.) (EU Exit) Regulations 2018 to make any necessary amendments to existing technical standards made under this provision to deal with deficiencies arising out of exit (see regulation 3 of, and paragraphs 8 and 9 of the Schedule to, that instrument).
The key stakeholders are current ESMA-authorised trade repositories in both the UK and the EU who are planning to continue servicing the UK market. UK firms and third-party service providers who are required to report derivatives contracts to a TR under this regime, will also want to know how their reporting requirements will be affected.
This SI does 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.
HM Treasury has engaged with industry bodies where possible to ensure awareness of these changes. As already noted, the intention of this 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.
4. Next steps
HM Treasury plans to lay this instrument before Parliament in the autumn.
5. Further information
If you have queries regarding this instrument, email FSlegislationEUWA@hmtreasury.gov.uk