Eugene Grygo, Chief Content Officer, FTF News
The U.K. and E.U. negotiations over Brexit appear to be at a critical moment as the negotiators for both sides have just presented a preliminary agreement. U.K. Prime Minister Theresa May will unveil the deal to her cabinet and England this week. However, the initial pushback to the agreement has ranged from negative to skeptical, so by no means is it a slam dunk for the U.K. government.
In the meantime, European Securities and Markets Authority (ESMA) officials have been thinking about Brexit’s impacts upon derivatives.
On Nov. 9, ESMA officials issued a statement targeting “market participants’ awareness on the readiness of credit rating agencies (CRAs) and trade repositories (TRs) for the possibility of no agreement being reached in the context of the United Kingdom (U.K.) withdrawing from the European Union (E.U.).” In other words, if England has a hard Brexit, there are certain measures that the E.U. government must consider.
By the way, those measures are likely to impact the following CRAs and TRs in England that ESMA oversees: AM Best Europe-Rating Services Ltd.; DBRS Ratings Ltd.; Fitch Ratings Ltd.; Fitch Ratings CIS Ltd.; Moody’s Investors Service Ltd.; Moody’s Investors Service EMEA Ltd.; The Economist Intelligence Unit Ltd.; DTCC Derivatives Repository Plc.; UnaVista Ltd.; CME Trade Repository Ltd.; ICE Trade Vault Europe Ltd.; and Bloomberg Trade Repository Ltd.
“As there is no assurance that a transition period will be agreed, entities using services provided by CRAs and TRs need to consider the scenario where a no-deal Brexit would take place on 30 March 2019. Derivatives subject to the reporting obligation under the European Market Infrastructure Regulation (EMIR) must be reported to a registered E.U.-established TR or a recognized third-country TR,” according to ESMA.
ESMA officials also want CRAs to have “a legal entity registered in the E.U. and supervised by ESMA, in order for their ratings to be used for regulatory purposes in the E.U. In a no-deal Brexit scenario, TRs and CRAs established in the UK will lose their EU registration as of the U.K.’s withdrawal date.”
ESMA officials have noted the CRAs and TRs based in England and registered with ESMA have “contingency plans in preparation of a no-deal Brexit scenario.” Yet despite these “significant steps” ESMA notes that “some actions still need to be completed.”
Some of those steps involve “engaging on a continuous basis” with supervised entities to make certain that the “agreed Brexit contingency plans are fully executed by March 2019 in case of no-deal Brexit, including the finalization of pending applications for registration. ESMA is currently assessing a number of CRAs and TRs applications, submitted as part of the firms’ Brexit contingency plans,” ESMA officials say.
ESMA officials stress that approval of a registration application “ultimately depends on the completeness and the quality of the application file and on the applicant’s compliance with the relevant regulations,” according to ESMA. “Given the cross-border nature of both industries, after Brexit, ESMA intends to have in place with the U.K. Financial Conduct Authority (FCA) a MoU [memorandum of understanding] in order to allow information exchange for effective supervision and enforcement.”
For the CRA industry, the MoU is “a precondition to allow registered CRAs to endorse — under certain circumstances — ratings issued from the U.K. and in turn to allow the use of those ratings for regulatory purposes in the EU27. Taking the wider negotiations between the EU and UK into account, ESMA plans to start negotiations with the UK FCA with the intention to have MoUs in place sufficiently in time before the end of March 2019,” according to the E.U.
In addition to concerns about CRAs and TRs, ESMA officials say that E.U. counterparties and central clearing counterparties (CCPs) “must report details of derivative contracts to a registered E.U.-established TR or a recognized third-country TR. All counterparties must ensure that this requirement continues to be fulfilled. ESMA invites market participants to contact their TR to verify whether continuity of service will be ensured after Brexit.”
Regardless of how the current negotiations turn out, ESMA officials have begun “preparing for the eventuality that some counterparties may need to request their existing UK TR to port their data to a EU27 TR,” according to the ESMA statement. “Ensuring data quality in the transfer of EMIR data from one TR to another is key.”
Given that the situation is fluid, ESMA wants market participants to closely watch the “public disclosures made by CRAs and TRs in the context of Brexit,” and is insisting that counterparties and their reporting entities “fully adhere” to the latest reporting requirements to:
- “better enable” the transfer of data once the U.K. withdraws;
- and “to ensure continuous compliance with the EMIR reporting obligation.”
Ultimately, ESMA has told CRAs and TRs that “any registered TR and CRA in the EU27 should comply with minimum substance requirements and relevant outsourcing conditions to ensure that the post-Brexit set-up in the EU27 is as strong as the pre-Brexit set-up in the EU.”
What ESMA officials and others have left unsaid is that everyone hopes that there will be clarity soon on the Brexit front.
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