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Special report – UK and EU withdrawal agreement text confirmed

Special report – UK and EU withdrawal agreement text confirmed

14 November 2018 5:00pm EST

The UK and the European Union have today confirmed the provisional text for the Brexit withdrawal agreement. This sets out plans for addressing a range of key issues including citizens' rights, customs arrangements, the UK's financial settlement to the EU and a transition period out to the end of 2020.

Separately, on 13 November the European Commission published a communication to the European Parliament, the European Council and other key European bodies entitled "Preparing for the withdrawal of the United Kingdom from the European Union on 30 March 2019: a Contingency Action Plan."

The plan includes proposed measures on how the Commission will address key financial services issues, such as maintaining access to UK CCPs, in the event of a no-deal Brexit. While the Commission does not consider contingency measures are necessary for insurance and uncleared OTC derivatives and that there will be no single-market access from the UK in a no-deal scenario, there is positive news for cleared derivatives.

No single-market access

The European Commission confirms in the communication that there will be no single-market access from the UK in a no-deal scenario. It states that the transfer of activities relating to client clearing services from the UK to EU27 is "ongoing and should be accelerated."

EU access to UK CCPs

The EC stated the following (emphasis added by FIA):

"As regards cleared derivatives, it appears that there might be risks to financial stability in a no deal scenario, deriving from a disorderly close out of positions of EU clearing members in the UK central counterparties. There might also be potential risks in relation to certain services provided to Union operators by UK central security depositories which cannot be replaced in the short-term. In these areas, the existing systems of equivalence provide appropriate tools, which can be swiftly deployed. The time remaining until 30 March 2019 should be used in this respect. Should the Commission need to act, it will only do so to the extent necessary to address financial stability risks arising from a withdrawal without an agreement, under strict conditionality and with limited duration. Should no agreement be in place, the Commission will adopt temporary and conditional equivalence decisions in order to ensure that there will be no disruption in central clearing and in depositaries services. These decisions will be complemented by recognition of UK-based infrastructures, which are therefore encouraged to pre-apply to the European Securities and Markets Authority (ESMA) for recognition."

UK trading venues and trade repositories

The Commission's statement that "These decisions will be complemented by recognition of UK-based infrastructures" requires further clarification that such "infrastructures" include UK-based trading venues and trade repositories. The only infrastructures referred to are UK CCPs and CSDs.

In the absence of such equivalence and recognition, EU27 firms will not be able to use UK trading venues to meet their mandatory trading obligation for derivatives nor to report new trades to UK trade repositories after 29 March 2019, in a no-deal scenario.

This also gives rise to the various issues that result from UK Exchange Traded Derivatives being treated as OTC derivatives under MiFID II and EMIR in that scenario.

Withdrawal agreement

The UK government is now taking steps to sign off a draft agreement on its withdrawal which, if approved by Cabinet today, could give rise to an extraordinary EU Summit on 25 November for EU27 leaders to finalise the agreement. Such an agreement would also require approval from the UK Parliament and the European Parliament.

The provisional text, announced by London and Brussels today, establishes a transition period until the end of 2020, which can be extended for an unspecified one-off period by mutual agreement. To come into force, the deal needs to be approved by the UK cabinet, an EU summit, the UK House of Commons and the European Parliament, in that order.

Other guidance

In its annex, the Commission also set out helpful minimum timelines for adoption of second-level legal acts – 2 or 3 days, depending upon the type of act.

FIA welcomes yesterday's communication from the European Commission. While we recognise that clarity is still required in some areas, we are particularly encouraged by the steps set out in the plans for addressing continued access to UK CCPs in the event of a hard Brexit.

The EC is encouraging UK infrastructures to pre-apply to the European Securities and Markets Authority (ESMA) for recognition before 30 March.

FIA has been communicating its concern to European and UK policy makers around the impact of the sudden removal of access to clearing in the event of a hard Brexit and will work with its industry partners in the coming weeks and months to ensure minimum disruption to the centrally cleared derivatives industry in the event that no agreement is reached between the UK and the EU before 30 March.

Noting the European Commission's statement that "These decisions will be complemented by recognition of UK-based infrastructures," we would welcome further clarification that such "infrastructures" include UK-based trading venues and trade repositories."

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