The primer “Brexit and its Impact on the Cleared Derivatives Market” was released last week by the Futures Industry Association (FIA). The primer, prepared by law firm Allen & Ovary LLP, outlines at a high-level the near-term consequences and appropriate next steps for the cleared derivatives industry, as the United Kingdom (UK) approaches its departure from the European Union (EU) on the 31st December 2020.
The primer summarizes the key impacts of Brexit in regard to both the UK and EU legislative frameworks, and pays particular attention to the how the UK – European Economic Area (UK-EEA) services and financial market infrastructure access will be affected after the implementation of Brexit.
Following the UKs exit from the EU, the UK will become a third-country to the EU (and, vice versa) and will be bound by the third country rules. Subsequently, this is where “Equivalence” becomes a pivotal component; as defined in the primer: “Equivalence is the mechanism contemplated under certain EU legislation by which the EU or the UK can recognise that aspects of the regulatory or supervisory regime of a third country is equivalent to the corresponding EU or UK regime.”
Following the completion of Brexit at the end of the year, UK CCPs will no longer be authorized under the European Market Infrastructure Regulation (EMIR), and will instead need to be ‘recognized’ under EMIR in order to continue providing clearing services in the EU. The “EMIR 2.2” regime is set change the existing recognition regime under EMIR which sets out new criteria for the European Securities and Markets Authority (ESMA) to apply when recognizing third country CCPs. UK CCPs will need to adhere to these new requirements if they wish to continue providing clearing services in the EU. A similar framework will also be required from UK/EU Trade Repositories (TRs).
In order for EU-based CCPs to provide clearing services to the UK, the entity must be recognized under UK onshored EMIR. The UK has already implemented transitional arrangements in order to temporarily recognize third country CCPs which are already authorized under EMIR to continue providing clearing services in the UK for a period of three years after the implementation period.
FIA mentions on the release note that they will “continue to expand its support for members during this process of change, providing information, webinars, thought leadership and advocacy on behalf of members throughout the transition process and afterwards”.
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