Brexit Broadcast: Financial market infrastructure

Simon: Hello everyone, and welcome to our latest financial services video on Brexit. Today we are going to focus specifically on financial market infrastructure but before doing so, Jonathan we have seen a lot of draft SIs from HM Treasury this summer but what is the most important point to remember?

Jonathan: I think it is really important to remember that, in the paper the government brought out last week and there have been a couple of SIs, particularly on CCPs but we haven’t seen all of the other SIs but we have got an indication of the approach. It is all assuming no-deal. If there is a deal, then I think our assumption and you can see this in the draft agreement that has been 80% or more agreed that basically everything will be rolled over to the end of the transitional period. So the rest of the discussion in this video will be all about a no-deal scenario.

Simon: and now turning specifically to the draft SI itself. Hannah, let’s kick-off with the draft SI on central counterparties CCPs.

Hannah: I think the most important thing that the draft SI on CCPs does, is to create a temporary permission regime for European but non-UK CCPs. So as long as they notify the Bank of England before Brexit day, they will be able to continue to provide their services to UK market participants for three years after Brexit provided they also submit a full application to the Bank of England after Brexit day.

One of the conditions to being recognised as a CCP in the UK will be that the third country, or the other country in which you are located is deemed to be equivalent and that decision on equivalence under the UK regime will be made by HM Treasury.

Simon: And Jonathan, what about the settlement finality CPs of the CCP regime.

Jonathan: Well we have got two different issues here. So on CCPs, there’s the question of settlement finality where they have actually made some clear statements, very similar to what Hannah was saying, where there will be a temporary regime, effectively, for non-UK infrastructure that wishes to be recognised under the UK implementation of settlement finality. There will be temporary regime and then a permanent regime that follows. It is interesting to note that this temporary regime is a three year regime so it is actually longer than the proposed transitional period. So I think it is designed to give quite a generous period for transition and then you apply for your final application. This is all in line with the idea of creating certainty in the market.

Let’s be frank about it, as they say in the Government Paper, that only deals with the inward problem, it does not deal, of course, with UK infrastructure looking outwards to the rest of Europe but that is not something that the UK can do unilaterally .

Simon: Other critical infrastructure is, of course, exchanges. There has been some discussion in the market about the temporary permission regime.

Hannah: Yes, I think it is really interesting, in relation to trading venues of all types actually. Although we have got the draft SI setting out the new temporary permissions regime which you would think should apply for MTF and OTF operators, at least where they are investment firms, because they are relying on passports at the moment. Given some of the things that the government has said subsequently to publishing that draft SI, it is not clear whether that is their intention in relation to trading venues. The alternative for trading venues, or at least for MTF and OTF operators, is obviously the overseas person exclusion but even that is not necessarily clear cut in this area because those types of trading venues are most likely doing the regulated activity of arranging transactions and although the overseas person exclusion does cover arranging, it is not quite as generous in relation to arranging as it is in relation to other regulated activities.

The other type of trading venue is obviously the regulated markets. I don’t think it was ever the intention that the temporary permissions regime would apply to them because they do not rely on passports in quite the same way as MTF and OTF operators. It also looks like the UK is expecting that they will actually become regulated overseas investment exchanges under the regime that is already in place in the UK. In fact it will be interesting to see whether that ROYE regime might be used by some of the MTF and OTF operators as an alternative to the overseas person exclusion and potentially the temporary permission regime.

Simon: Jonathan, turning to other market infrastructures, things like CSDs, RANs, APAs etc. What are your thoughts?

Jonathan: Well I think there, interestingly, and it contrasts with what Hannah was saying on trading platforms, the Government has been pretty clear, there will be an interim permission, “grandfathering regime”, it’s three years, which is also interesting because that isn’t the same period as the transition as we mentioned earlier. It is very clear that basically, as long as they notify by March next year, they will get that sort of rollover and this is their intention to apply ultimately to the UK to become an ARM or an APA or whatever they are.

There are a couple of interesting points to pick up on that, it is not entirely clear that whether during the interim period they will be subject to the UK rules or their existing rules. Obviously at the moment they are identity but if there were to be any divergences, that’s something to think about because certainly there is a very clear distinction on the interim permission regime for firms between licencing questions and substance of rules questions so that is something to note.

The second thing to be aware of, is the whole timeline thing and how that actually works and I think a lot is going to depend on the relationship with the regulator whether it is the FCA or the bank or the PRA and just effectively negotiating or at least speaking to them but the good news is that it is a clear market systemic stabilising kind of approach where the UK is taking this. Of course it only helps the inward and it doesn’t help the outward. It’s that “it takes two to tango” problem.

Simon: Hannah, to finish off with, the draft SIs only give us part of the story, we haven’t seen all of them yet but also as well there is the FCA and the PRA to consider particularly consultation on Brexit related rules.

Hannah: Yes that is right, it is really important to remember that we are expecting the PRA and the FCA to be publishing further detail about how these interim permission regimes are going to work in the autumn and part of that should be those regulators explaining to us which of their rules are going to apply to firms that are relying on those interim permission regimes.

Simon: Thanks Jonathan, thanks Hannah. That concludes this financial services video, but before we go, if you can join us, we have a special 40 minute briefing on 5 September which will look at Brexit and will involve speakers from HM Treasury. I hope to see you there, goodbye.