European Union: UK Draft Regulations Governing Financial Market Infrastructure In Preparation For Brexit

On November 30, 2018, HM Treasury published a new draft statutory instrument, the draft Investment Exchanges, Clearing Houses and Central Securities Depositories (Amendment) (EU Exit) Regulations 2018. The draft instrument is part of its work to ensure that the U.K.'s financial services laws are operative on exit day. The related explanatory information was published on November 22, 2018. The draft Regulations amend relevant parts of the Financial Services and Markets Act 2000 and the Recognition Requirements for Investment Exchanges, Clearing Houses and Central Securities Depositories Regulations 2001/995. This U.K. legislation set out the regulatory regime for recognized investment exchanges, EEA market operators, clearing houses, CCPs and CSDs operating or offering services in the U.K., including:

  1. the exemption allowing RIEs, clearing houses, CCPs and CSDs to carry out a regulated activity in the U.K. without authorization;
  2. the recognition and supervisory powers of the FCA, over RIEs, and BoE over clearing houses, CCPs and CSDs;
  3. rules governing the acquisition of control of RIEs;
  4. the passporting rights of EEA market operators and of U.K. RIEs operating in the EEA;
  5. the FCA's powers and responsibilities on the suspension and removal of financial instruments from trading in the U.K. and the EEA; and
  6. provisions on the winding up, administration or insolvency of recognized clearing houses and CSDs.

The draft Regulations function to:

  1. Make changes to the relevant U.K. legislation to replicate amendments made to retained EU law through the Markets in Financial Instruments (Amendments) (EU Exit) Regulations 2018, the Central Counterparties (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2018 (referred to as the CCRs), the Central Securities Depositories (Amendment, etc., and Transition Provision) (EU Exit) Regulations 2018 and the Over the Counter Derivatives, Central Counterparties and Trade Repositories (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2018.
  2. Enshrining the temporary permissions regime for EU27 CCPs and CSDs and the way in which these entities would become fully U.K.- authorized in due course.
  3. Remove from FSMA the provisions on passport rights of EEA market operators in the U.K. and RIEs operating in the EEA. A temporary recognition regime for EEA market operators is not being put in place at this time. Instead, EEA market operators that currently passport into the U.K. and that do not fall within the overseas persons exclusion must apply to the FCA for recognition as a recognized overseas investment exchange (ROIE) and will need to attain that status prior to Brexit. Similarly, there is no U.K. legal provision providing for non-OTC treatment for EEA exchanges for purposes of the U.K.'s EMIR.
  4. Transfer the responsibility for recognizing and supervising third-country CSDs to the BoE and amending the definition of third-country CDS to refer to any CSD located outside the U.K.

HM Treasury intends to lay the draft Regulations before Parliament in the autumn. The BoE and the FCA will be updating their rules and relevant Binding Technical Standards to address any related deficiencies that may arise as a result of Brexit.

The draft regulations and explanatory information are available at: https://www.gov.uk/eu-withdrawal-act-2018-statutory-instruments/the-investment-exchanges-clearing-houses-and-central-securities-depositories-amendment-eu-exit-regulations-2018 and details of other draft onshoring legislation are available at: https://finreg.shearman.com/focus?categoryID=1013&yearmonth=0.

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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