Brexit update for financial services firms - week ending 8 February 2019

Lord Hill equivalence minus

Brexit update for financial services firms – week
ending 8 February 2019
In outline:
With the Withdrawal Agreement stand-off unresolved, the evolution of the regulatory regime for a no-deal scenario
(the ND regime) continued. The flow of publications, however, has now slowed.
Two further Memoranda of Understandings (MoUs) for the ND regime were concluded this week – these are
between ESMA and the Bank of England (BoE) (see Document 1 below). The MoUs concern the supervision of
central counterparties (CCPs) and central securities depositories (CSD).
Looking at CCPs, by way of example, the conclusion of the MoU satisfies one of the four conditions for the
recognition of UK CCPs; the other conditions being a letter from the BoE confirming UK CCPs are subject to
effective supervision and prudential requirements, that the UK is not on the list of third countries with deficient anti-
money laundering/anti-terrorism financing regimes and the adoption of ‘equivalence’ decisions recognising the UK
regime for the regulation of CCPs. The European Commission has already adopted an Implementing Decision on
19th December 2018 - see our previous commentary here. The decision only applies in the context of the ND regime
and is temporary in nature and time limited to 12 months.
ESMA is in touch with UK CCPs and will now review their applications for recognition under Article 25 of EMIR with
a view to recognition being granted in time for 30th March.
ESMA again emphasises that recognition is being granted in the context of the ND regime only to limit the risk of
disruption in central clearing and to avoid any negative impact on financial stability. It also highlights that this will
allow the UK CCP (Euroclear UK and Ireland Ltd, which operates the Crest settlement system) to continue to serve
Irish securities. EU transitional measures in FS are not, however, driven by a policy of assisting UK institutions to
adjust to Brexit.
ESMA have also published a supervisory briefing for national competent authorities (NCAs) in relation to non-EU
branches of investment firms under MiFID II (see Document 2 below). This briefing is part of ESMA’s Supervisory
Coordination Network (SCN) for NCA coordination; it is essentially concerned with investment firms which are
seeking authorisation/are authorised in the EU-27 but which have retained/will have UK operations in the form of a
UK branch of the EU incorporated/authorised firm. This branch structure may be attractive as a way of combining
an EU-wide passport (after the UK leaves the single market), whilst retaining significant operations in the UK.
A previous ESMA opinion of 13th July 2017 was concerned with groups which were relocating from the UK into the
EU-27 as a consequence of Brexit/the UK leaving the EU single market; it looked at the requirements for EU
authorisation/supervision and expressed doubts about artificial structures designed to maintain operations in the
UK (see our previous commentary here). The new briefing expands on paragraph 49 of the previous opinion which
concerned non-EU (i.e. UK) branches of EU-27 investment firms – ‘NCAs should be satisfied that the use of non-
EU branches is based on objective reasons linked to the services provided in the non-EU jurisdiction and does not
result in situations where such non-EU branches perform material functions or provide services back into the EU.
For example, the set-up of a branch in a non-EU country by a firm would make sense when the firm intends to
provide services in that non-EU jurisdiction or to require local marketing support’. The briefing looks in detail at
MiFID requirements in this context. The briefing is designed to enforce a consistent approach by NCAs but
technically is non-binding (as ESMA recognises in the document).
There was further progress on the completion of UK statutory instruments for the ND regime – see Documents 3,
4 and 5 below. You can access full details of the ND regime (including the documents above) in the RegZone “no
deal” database.

1.         BOE/ESMA: MOUS
BoE and ESMA have agreed MoUs for the recognition of CCPs and central securities depositories in the event of
a no-deal Brexit. Texts of the MoUs have not been published. The BoE press release can be accessed here and
the ESMA press release here.
ESMA:
“ESMA has previously communicated, in its public statements of 23 November and 19 December2018, that its
Board of Supervisors supports continued access to UK CCPs and to the UK CSD, in order to limit the risk of
disruption in central clearing and to avoid any negative impact on the financial stability of the EU. It will also allow
the UK CSD to continue to serve Irish securities, and to limit the risk of disruption to the Irish securities market.
ESMA aims to recognise UK CCPs and the UK CSD in a timely manner, where the four recognition conditions
under Article 25 of EMIR, and the four recognition conditions under Article 25 of CSDR are met, respectively. The
conclusion of MoUs between ESMA and the BOE satisfies the third recognition condition - establishment of
cooperation arrangements - under both regulations.
The MoUs are a statement of intent to consult, cooperate and exchange information in connection with ESMA’s
immediate access, on an on-going basis, to all information it requests regarding the CCPs and CSD. They are
based on the standard template for the recognition of third country CCPs and amended to reflect the relevant
conditions in the two equivalence decisions of the European Commission. The MOUs set out in detail the scope
of cooperation and information-sharing arrangements between ESMA and the BOE.
The MoUs ensure that cooperation arrangements have been established regarding the CCPs and CSD and provide
ESMA with adequate tools to monitor their ongoing compliance with the recognition conditions and to assess any
material risk they pose, directly or indirectly, to the EU or any of its Member States, including to their financial
stability.”

2.         ESMA: MIFID II SUPERVISORY BRIEFING ON THE SUPERVISION OF NON-EU
           BRANCHES OF EU FIRMS PROVIDING INVESTMENT SERVICES AND
           ACTIVITIES
This supervisory briefing covers the following topics: supervisory expectations in relation to the authorisation of
investment firms; ongoing activities of non-EU branches including reporting and collection of information; and
supervisory activity and cooperation with non-EU competent authorities. It also provides information on the
implementation of the MiFID II provisions and of the recommendations expressed in the ESMA's Opinion on
investment firms published in July 2017. The full publication can be accessed here.
“One of the main concerns in the three ESAs’ Opinions published in preparation to the UK withdrawal from the EU
relates to the possibility that firms relocating into the EU from the UK would be managed as empty shells or letter
box entities.
The recommendations expressed in the ESMA Opinion on investment firms reflected and stressed existing EU
legislative sectorial frameworks and principles according to which applicants submitting a request for authorisation
to an EU CA should describe and explain (inter alia) the proposed organisational structure, the governance
regime, and the expected geographical organisation of the business.
According to paragraph 49 of the ESMA Opinion, CAs should be satisfied that the use of non-EU branches is
based on objective reasons linked to the services provided in the non-EU jurisdiction and does not result in
situations where such non-EU branches perform material functions or provide services back into the EU. For
example, the set-up of a branch in a non-EU country by a firm would make sense when the firm intends to provide
services in that non-EU jurisdiction or to require local marketing support.
In order to assess the abovementioned objective reasons and to assess that non-EU branches do not perform
material functions or provide services back into the EU, CAs should consider with attention the programme of
operations that applicants will submit in the context of the authorisation procedure under Articles 5 et seq. of
MiFID II. In particular, CAs should make their judgment on the substance of the business activity, the
organisation, the governance and the risk management arrangements of the applicant in relation to the
establishment and the use of branches in non-EU jurisdictions. To enable the identification of hurdles that could
prevent the effective exercise of their supervisory functions, CAs should take into account the complexity and
clarity of the applicant’s organisational arrangements, the geographical location of the branches of the firm, the
activity that the latter would perform and the relationship of the applicant and its branches with other entities of the
group.”

3.         DRAFT FINANCIAL SERVICES (MISCELLANEOUS) (AMENDMENT) (EU EXIT)
           REGULATIONS 2019
The SI amends various UK legislation and retained EU law relating to financial services, in order to address
deficiencies arising from Brexit. An explanatory memorandum has been published alongside the text of the SI.

The documents can be accessed here. [The government has subsequently withdrawn this draft SI from
consideration].

4.         DRAFT EUROPEAN UNION BUDGET, AND ECONOMIC AND MONETARY
           POLICY (EU EXIT) REGULATIONS 2019
The SI revokes retained EU law relating to the EU budget, and revokes and partially restates EU law relating to
economic and monetary policy. An explanatory memorandum has been published alongside the text of the SI. The
documents can be accessed here.

5.         THE EUROPEAN UNION (WITHDRAWAL) ACT 2018 (CONSEQUENTIAL
           MODIFICATIONS AND REPEALS AND REVOCATIONS) (EU EXIT)
           REGULATIONS 2018
This SI has been laid before Parliament under the affirmative procedure. The SI can be accessed here.

Other publications from the RegZone Brexit news feed
The Occupational and Personal Pension Schemes (Amendment etc.) (EU Exit) Regulations 2019/192
This SI has been published, along with an explanatory memorandum which can be accessed here.
The Occupational and Personal Pension Schemes (Amendment etc.) (Northern Ireland) (EU Exit)
Regulations 2019/193
This SI has been published, along with an explanatory memorandum which can be accessed here.
HoC: Financial Services (Implementation of Legislation) Bill
A HoC library briefing paper has been prepared for the second reading of the Bill on 11 February 2019. The full
publication can be accessed here.
HoL EU Financial Affairs Sub-Committee: Brexit-related treaties
The Committee is scrutinising Brexit-related treaties within its remit (including treaties relating to insurance) and is
inviting comments from interested parties. The full publication can be accessed here.
Financial Services (Implementation of Legislation) Bill
The Bill has completed its HoL stages and has now presented to HoC. A link to the draft Bill as presented to HoC
follows. The draft bill can be accessed here.
PMO/EC: Joint statement by Theresa May and Jean-Claude Juncker
Text of the statement given on 7 February 2019 can be accessed here.
EC: Joint statement by Jean-Claude Juncker and Leo Varadkar
Text of the statement given on 6 February 2019 can be accessed here.
HMT: Draft Gibraltar (Miscellaneous Amendments) (EU Exit) Regulations 2019
Draft Regulations laid before Parliament under paragraph 1(3) of Schedule 7 to the European Union (Withdrawal)
Act 2018, for approval by resolution of each House of Parliament. The SI can be accessed here.
EC: Statement by Donald Tusk
Text of Donald Tusk's statement following his meeting with Leo Varadkar on 6 February 2019 follows. The full text
can be accessed here.
FCA: Approach to MiFID transparency calculations
Further to ESMA's announcement with regard to the use of UK data in ESMA databases and the performance of
MiFID II calculations in the event of a no-deal Brexit, FCA's press release notes that it expects to set out its approach
to using its temporary powers to operate MiFID II in the UK by the end of February 2019. The full publication can
be accessed here.
HoC: Brexit timeline: events leading to the UK’s exit from the EU
An updated HoC library briefing has been published. The briefing paper can be accessed here.
ESMA: Statement on the use of UK data in ESMA databases and the performance of MiFID II calculations
under a no-deal Brexit
ESMA’s statement sets out the approach it will take on all ESMA IT applications and databases in the event of a
no-deal Brexit. The full publication can be accessed here.
CMA: Effects of a "no deal" EU exit on CMA's functions

CMA has published draft guidance on its functions in the event of a no-deal Brexit, which covers, amongst other
matters, consumer protection law enforcement. Responses are required by 25 February 2019. The full publication
can be accessed here.
CMS RegZone publishes weekly updates (available via email, on-line and via Twitter) on Brexit developments for
financial services firms. These provide analysis and commentary on significant developments during the week in
question. A daily digest of Brexit news (without analysis or commentary) is also available by email here and online
via the RZ news wizard here (both of these can be filtered using the Brexit topic). Links to publications are
contained in each update; publications released before the updates commenced in April 2018 can be found in a
bibliography here. CMS RegZone publication ‘Where we stand’ provides an overview of the current position in a
single report; this is updated regularly to take account of the key developments from the weekly updates.

Contact
                                Paul Edmondson
                                Partner (UK)
                                +44 (0)20 7367 2877
                                paul.edmondson@cms-cmno.com

8 February 2019

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