European Union: Draft UK Post-Brexit Legislation To Onshore The EU Markets In Financial Instruments Package

On October 11, 2018, HM Treasury published a draft of the Markets in Financial Instruments (Amendment) (EU Exit) Regulations 2018, along with explanatory information. The draft Regulations are primarily relevant for MiFID II-authorized firms including investment banks, stock and futures exchanges, broker-dealers, investment advisers and investment managers.

The draft Regulations have been prepared in preparation for a "no-deal" scenario, in which the U.K. exits the EU on March 29, 2019 without a ratified Withdrawal Agreement. The no-deal scenario would mean that there would be no transitional period following Brexit and that the U.K. would be treated as a third-country after exit day. The changes set out in the draft Regulations will not take effect if the U.K. enters a transition period.

The draft Regulations have been prepared to ensure that U.K. financial markets and their participants continue to operate under essentially the same regulatory regime after EU withdrawal. To ensure that the MiFID II regime operates effectively after exit day, the draft Regulations also remove deficiencies in: (i) the EU legislation being retained on Brexit, namely the Markets in Financial Instruments Regulation and related Commission Delegated Regulations; and (ii) the U.K. legislation that implemented or has been affected by the MIFID II package, namely the Markets in Financial Instruments Regulations 2017, the U.K.'s Financial Markets and Services Act 2000 (Regulated Activities) Order 2001 and certain other U.K. Statutory Instruments.

The draft Regulations make the following changes to U.K. and retained EU legislation to correct deficiencies:

  1. Transfer of functions. The draft Regulations transfer the functions under MiFID II that were carried out by the European Securities and Markets Authority to the Financial Conduct Authority and the PRA. Certain MiFID II functions carried out by the European Commission are to be transferred to HM Treasury.
  2. Binding Technical Standards (BTS). The FCA and PRA will be empowered by HM Treasury—under the Financial Regulators' Powers (Technical Standards etc.) (Amendment etc.) (EU Exit) Regulations 2018—to correct deficiencies in the BTS for Brexit and to maintain them afterward. The PRA will be proposing changes to the relevant parts of the MiFID II BTS for which it is responsible in due course. The FCA has already launched a consultation on its proposed onshoring of and changes to the MiFID II BTS for which it is responsible. That consultation closes on December 7, 2018.
  3. Information sharing and cooperation requirements between UK and EEA regulators. The draft Regulations remove obligations imposed by MiFID II on U.K. authorities to cooperate and share information with EEA authorities. After Brexit, U.K. authorities will still seek to cooperate and share information with EEA authorities where appropriate, but this would presumably take place under memoranda of understanding.
  4. Third-country equivalence. The draft Regulations make provision for HM Treasury to take on the European Commission's function of making equivalence decisions for third-country regimes after Brexit. Equivalence determinations that have been made by the Commission prior to exit day will be carried through into U.K. law.
  5. Temporary permissions regime - MiFID II firms. EEA Firms that are currently providing services in the U.K. by means of a passport under MiFID II will be eligible (along with firms exercising passport rights under certain other EU legislation) to enter the TPR (to be introduced by the EEA Passport Rights (Amendment, etc., and Transitional Provisions) (EU Exit) Regulations 2018 (the TPR Regulations)), which were laid before Parliament in September 2018). The draft Regulations introduce the possibility of "substituted compliance" with MiFID II's rules in cases where not doing so could lead to conflicts of law. The effect of substituted compliance will be that a firm operating under the TPR will not be deemed to be in breach of the U.K.'s MiFID II rules if it can demonstrate that it complies with corresponding provisions in the EU's MiFID II rules. The draft Regulations will disapply some requirements or rights for firms operating under the TPR that would not be workable without a negotiated agreement with the EU.
  6. Data Reporting Services Providers (DRSPs). EEA-authorized DRSPs will fall outside the scope of the TPR and will need to seek U.K. authorization to continue to operate in the U.K. after Brexit. The draft Regulations amend the U.K.'s Data Reporting Services Regulations 2017 to establish transitional arrangements for EEA-authorized DRSPs that meet certain conditions, enabling them to be granted temporary authorizations to continue to provide data reporting services in the U.K. for a period of up to one year. The FCA has made information available on its website for EEA DRSPs wishing to obtain temporary authorization.
  7. Recognition of EU firms, instrument scopes and market data. To facilitate a smooth transition, the draft Regulations make a number of exceptions to the baseline approach of treating the EU as a third-country after exit day. The exceptions relate to EEA emission allowances, the treatment of energy forwards that must be physically settled, the so-called, "Ancillary Activities Exemption" for commercial firms trading commodity derivatives and the treatment of Undertakings for Collective Investment in Transferable Securities (UCITS) in the EU as automatically non-complex by U.K. firms.
  8. MiFID II transparency regime. The draft Regulations grant temporary powers to the FCA which will allow some flexibility over how the MiFID II transparency regime is operated during a transitional period of up to four years, including power to: (i) amend certain transparency calibrations (which are otherwise frozen on exit day); (ii) direct the application of the Double Volume Cap Mechanism; and (iii) freeze the obligation to publish trading information for certain instruments. The draft Regulations also introduce other changes that will enable the FCA to take into account trading data from countries other than the U.K. when setting transparency thresholds.
  9. MiFID II transaction reporting regime. The draft Regulations will require U.K. branches of EU firms to provide post-trade transaction reports to the FCA (rather than, as currently, to their home state regulator) so that the FCA can obtain reporting from all U.K. established firms and monitor for potential market abuse. The scope of the reporting obligation will not change—reports must be submitted on trades in financial instruments admitted to trading, or traded, on trading venues in the U.K. and in the EU.

HM Treasury intends to lay the draft Regulations before Parliament in the autumn. It is intended that provisions in the draft Regulations that relate to temporary authorizations for DRSPs will come into force on the day after the day on which the Regulations are made, with the remainder of the Regulations coming into force on exit day in the event that there is a no-deal scenario. MiFID II-authorized firms will also be impacted by further Brexit-related amendments to other U.K. legislation which remain to be published. This includes forthcoming legislation to amend the Financial Services and Markets Act 2000, non-MiFID II aspects of the RAO and the Financial Services and Markets Act 2000 (Recognition Requirements for Investment Exchanges and Clearing Houses) Regulations 2001.

The draft Regulations are available at:
  and the explanatory information is available at:

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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