101 UK Brexit Notes

Connemara Programme October 16 2018 pg. 47 Many UK financial services firms who currently passport into the EEA are taking steps to ensure that they could continue to operate after exit, for example by establishing a new EU-authorised subsidiary. This would allow the UK firm to offer new services after exit through its EEA subsidiary, and in some cases existing contracts could be transferred to the new entity. Financial services firms and funds HM Treasury is continuing to engage with stakeholders as it drafts the legislation, under the EU Withdrawal Act 2018, to ensure that there is a fully functioning financial services regulatory framework at the point where the UK leaves the EU. At this stage, firms should continue to plan on the basis that an implementation period will be in place from March 2019 to December 2020, and continue to follow guidance from the regulators. The regulators have set out what action EEA firms and funds currently operating or marketing in the UK via an EEA passport will need to take, and will provide further details in due course. For any firm that does not wish to continue carrying out regulated activities in the UK, or is unsuccessful in applying for authorisation, provision will be made for them to discontinue their UK regulated activities in an orderly manner. Unless the EU acts to maintain continuity, then UK financial services firms passporting into the EEA will lose the ability to do that at the point of exit. This may have implications for their ability to meet contractual obligations with EEA-based clients, where to do so without EEA permissions would breach relevant member state rules and any applicable EU rules that apply to third countries. The government has committed to taking unilateral action, if necessary, to resolve this issue on the UK side. However, this is not sufficient to fully address the risks, and coordinated action with the EU is necessary. An example of this is derivatives contracts between UK and EU financial firms, where permissions may be necessary from both sets of regulators to support continuity of service provision. The government is committed to working with EU partners to identify and address such risks. Under EU legislation it is possible for fund managers to delegate portfolio management services to a third party in another country, including countries outside the EU. In relation to funds and managers authorised under the relevant EU legislation, there are requirements for cooperation between the supervisory authorities in the relevant EU member state and the non-EU country concerned. The UK authorities are ready to agree cooperation arrangements with their EU counterparts as soon as is possible, which is a technical exercise to bring the UK into line with other third countries. Unless the EU confirms it does not intend to put such arrangements in place, asset management firms can continue to plan on the basis that the delegation model will continue. Financial Market Infrastructure (FMI) There will be no need for UK-based clearing members (and for example UK-based clients of UK clearing members) using UK central counterparties (CCPs) to take any action as a result of EU exit. To ensure that there will be no significant impact for UK-based users of non-UK CCPs (including EEA CCPs) as a result of EU exit, the government has provided for a temporary regime that will enable non-UK CCPs to continue to provide services to the UK for a period of up to three years. To enter into the temporary regime, non-UK CCPs will simply have to notify the Bank of England before Exit that they would like to continue to providing clearing services in the UK. The Bank of England will provide further detail on this in due course. However, without EU action, EEA clearing members and trading venues will no longer be able to use UK CCPs to provide their clearing services. In addition, EEA customers could no longer meet the requirement to centrally clear for some products that are in scope of the clearing obligation by clearing through UK CCPs, such as interest rate swaps. The UK’s Central Securities Depository (CSD) currently provides services to both the UK and Irish markets. For customers settling UK securities at the UK CSD there will be no change as a result of exit. If no action is taken by the EU authorities and EU countries, EU securities may no longer be able to be directly settled in the UK. To ensure that there is no significant impact on UK customers of non-UK CSDs, including those within the EU, the government is bringing forward legislation that will allow these CSDs to benefit from transitional provisions. These CSDs will be able to continue to provide services to the UK until both equivalence and recognition decisions are made. Further details on this regime are expected to be provided by HM Treasury and the Bank of England in September 2018. There will be no need to take any action for FMIs that are already designated on Exit day under the UK Settlement Finality Regulations (SFR). Their designation in respect to UK insolvency will carry on. When the UK leaves the EU, it will no longer be a part of the EU Settlement Finality Directive (SFD) framework which allows designated Financial Market Infrastructures (FMIs) to benefit from protections from insolvency actions. The government has announced that it intends to bring forward legislation to continue protections granted by the SFR which implement the SFD. This legislation would allow designations of financial market infrastructure (FMIs) that are outside of the UK and give powers to the Bank of