Legal Shorts 15.11.19 including statement on MiFID II inducements and research

FCA statement on the reporting of derivatives under the UK EMIR regime in a no-deal scenario

On 7 November 2019, the FCA issued a statement setting out what Trade Repositories, and UK counterparties using them, should do to make sure they are compliant with their EMIR reporting obligations after the UK leaves the EU, announcing the publication of UK EMIR validation rules. The FCA confirmed that these rules should be used when submitting derivative transactions from 11pm on 31 January 2020 onwards.

From exit day, the FCA will require UK counterparties to report details of their derivative trades to an FCA-registered, or recognised, TR. It will also require UK TRs to provide UK authorities access to data reported to them by UK counterparties. The FCA has decided not to grant transitional relief in relation to these requirements.

Statement on MiFID II inducements and research

The FCA issued a statement on 8 November 2019, stating that it welcomes the US Securities and Exchange Commission’s (US SEC) extension of no-action relief relating to the Markets in Financial Instruments Directive II (MiFID II) inducements and research provisions.

The US SEC has announced an extension of the SEC staff ‘no action letter’, which addresses the potential conflict between US regulation and MiFID II, until 3 July 2023. The existing relief was due to expire on 3 July 2020. During the remainder of the current period and the extended period of the no-action relief, broker- dealers subject to the US regime may receive payments for unbundled research from firms subject to MiFID II or equivalent rules of EU member states without being considered an investment adviser under US law. This will also apply to UK firms in the event of EU withdrawal before or during the extended period.

The FCA’s own multi-firm review findings published in September 2019 found that rules have improved asset managers’ accountability over costs, saving millions for investors. The FCA stated that it will carry out further work in 12-24 months’ time to assess firms’ ongoing compliance with its rules and developments in the market for research.

Investment Association operational and enterprise risk principles for asset managers

On 11 November 2019, the Investment Association published guidance on operational and enterprise risk principles for asset managers. The guidance has been developed to help firms implement a robust enterprise risk management (ERM) framework, including a well-resourced operational risk function. Its aims are to help to ensure firms’ continued financial strength and durability, to prioritise resources in firms, and to organise functions, teams and processes. According to the guidance, this is achieved by providing senior management and the board with an accurate view of the risk environment in which their company is operating, articulating their risk appetite and using it to inform decisions taken by the business at all levels.

The Investment Association has produced the guidance to assist member firms when implementing or reviewing their ERM programme. It is not intended to replace the FCA rules. The guidance states that it is important for firms to review their own particular circumstances and the risks that they face. As all firms are different, all firms will face different risks and be affected by those risks differently, and all firms will manage their risks differently. In the guidance, the Investment Association also tries to identify areas of operational risk that do not, or are unlikely to, apply to asset managers, with explanations of why this is so.

Chapters in the guidance relate to matters including culture, governance and operational risk modelling, illustrative examples and scenarios. The Investment Association notes the overlap between this guidance and its guidance on the internal capital adequacy assessment process and explains that it has tried to avoid direct duplication.

ECB warns banks on operational risks from delays to implementation of Brexit plans

On 13 November 2019, the European Central Bank (ECB) published an article (which can be found here) on banks’ preparations for Brexit, following the extension of the Article 50 period until 31 January 2020.

In the article, the ECB warns banks that delays to the implementation of their Brexit plans may lead to heightened operational risks. It calls on banks to:

  • accelerate the implementation of their Brexit plans to meet deadlines for substantial actions to have been taken by the end of 2020, in line with past commitments made to supervisors. It has found that banks are delaying transfers of assets and customers and necessary changes to their IT systems, operations and organisational set-up. It warns that the involvement of third parties in these actions could create significant bottlenecks leading to co-ordination failures, if banks need to find they need to implement largescale measures at the last minute;

  • take action in all areas of the ECB’s supervisory expectations: internal governance, business origination and access to financial market infrastructures (FMIs), booking models, intragroup arrangements, and IT infrastructure and reporting;

implement effective mitigating actions concerning uncleared cross-border derivatives contracts, including novations of the contracts. It states that banks are making insufficient progress with the novation of uncleared cross-border derivatives contracts as a consequence of, among other things, reliance on member states’ temporary contingency measures and difficulties in negotiations with clients.

Trade associations call on European Commission to extend Brexit temporary equivalence for UK CCPs

On 12 November 2019, the Association for Financial Markets in Europe published a letter that it has sent jointly with 13 other trade associations (including the European Banking Federation and the International Swaps and Derivatives Association to the EC on temporary equivalence and recognition in relation to UK central counterparties (CCPs).

Commission Implementing Decision (EU) 2018/2031, which allows ESMA to recognise temporarily UK CCPs to allow these CCPs to continue to provide clearing services in the EU for a limited period after Brexit, will expire on 30 March 2020. In the letter, the trade associations call on the EC to amend the Implementing Decision to extend the temporary recognition for UK CCPs until ESMA has completed its scheduled review of recognition decisions in existence as at entry into force of the EMIR 2.2 Regulation.

EMIR 2.2 introduces a recognition regime under which ESMA will have the ability to review existing CCP recognition decisions and to assess the systemic importance of non-EU CCPs providing services under the Article 25 EMIR recognition regime. The deadline for ESMA to complete its evaluation of the systemic importance of non-EU CCPs is 18 months after the likely date of entry into force of the relevant Commission delegated acts under EMIR 2.2 (which is likely to be 1 July 2022 at the earliest). The trade associations call for the temporary equivalence for UK CCPs to be extended until three months after that date to allow UK CCPs to serve termination notices to EU clearing members if their recognition is withdrawn following this review.

The trade associations request the EC to confirm its approach to the amendment as soon as possible before the end of 2019. Without such a confirmation, UK CCPs will need to start serving members termination notices in December 2019 to comply with the three-month notice period requirements in time for 30 March 2020.