Brexit adds to the burden
Aka – Not another bloody Brexit article
Aka – A look at the Consultation Paper on changes to the FCA handbook
We find ourselves in strange and uncertain times. Times where two rugged Russian blokes holiday in the ‘wonderful’ town of Salisbury to see ‘delightful’ cathedral spires. Times where the most powerful man in the world, Dear Donald, provides a superman cape for legend in his own lunchtime, Kanye West. Times where Jean Claude Juncker tries to outdance the dancing queen Prime Minister Theresa May. Strange and uncertain times.
Don’t worry, I’m not going to rant about Brexit. Drop me a line and buy me a pint if you want to experience that delightful (as delightful as a Salisbury spire) experience. I’m also going to refrain for once from one of my more common themes – the continued regulatory reporting challenge for the banks and asset managers. Let’s instead spare a thought and some overdue consideration for a different constituency. The overworked and often unappreciated souls on the other side of the equation. No, not the bloody politicians. The regulators.
Don’t let them be misunderstood
Over the years I’ve often heard complaints along the lines of (insert regulator name as appropriate) ‘does not understand, is being unreasonable, hasn’t thought it through’ etc. Some of these complaints have some merit, others less so. In my experience dealing with regulators – be they from the BoE, the FCA, ESMA or one of the continental NCAs – I have without fail been impressed at both the calibre of the individuals and the thoughtful and professional approach of their organisations. They may from time to time get things wrong. But let’s be honest. It’s an extremely hard job they take on and – for the most part – they perform it admirably under very demanding conditions.
For every ‘do you know how difficult this will be for my firm to implement’ there is an equal and opposite ‘do you realise how much work went into evaluating, arriving at and balancing this rule’.
Within the realm of European Trade and Transaction reporting, ESMA and the 28 EU nations NCAs already had EMIR (3 updates to the Q&A so far this year, as well as an update to the Validation rules), MiFIR (2 updates to the Q&A, the FIRDS rollout, the SI calculations) and the not so small matter of SFTR. Suffice to say, these guys were not sitting around on the internet looking at Dilbert cartoons and wondering how to fill the remainder of their day. Throw in Brexit and the uncertainty on both sides of the English Channel around what agreements may or may not be in place by the 29th of March and that remit just got even tougher.
If you’ll forgive a quick digression, Brexit won’t actually happen on the 29th of March. The 29th of March is amongst other things a Friday, so in practise, any new Transaction Reporting rules or arrangements will really kick in on the following Monday, which very fittingly happens to be the 1st of April. Ha! You could not have made that one up!
Place your bets
Many of the most recent Brexit notifications issued by the FCA and other regulators have been caveated with: “We are preparing for a number of different scenarios”. The simple fact is that the regulators, much like you and I, do not know exactly what is going to happen and have no alternative other than to plan for a few different outcomes based on what deal is agreed, ranging from a soft, hard or squishy Brexit.
One such announcement, and one of the most detailed to date, was published by the UK’s FCA on the 10th of October – and is this 781 thrilling page-turner:
Input to the consultation closes on the 7th of December.
Same-Same but Different
One interesting aspect is that the UK government will be adopting all EU law onto the UK lawbooks as part of the European Union Withdrawal Act (EUWA). Although I prefer Theresa May’s ironic name for it, ‘The Great Repeal Act’. So the level 1 (legislation) and level 2 (Regulatory & Implementation Technical Standards – RTS/ITS) will become UK law and be adopted wholesale for both EMIR and MiFIR.
Two questions I’ve pondered. What about SFTR? And what about the level 3 measures (such as Q&As, opinions, reporting instructions and additional guidance)?
For SFTR, and in keeping with the ongoing mystery of Brexit, no one really knows yet. As well-known philosopher Danny Dyer so eloquently described it, Brexit is “a big mad riddle”. Well put Danny! A big mad riddle I will attempt to address in an upcoming SFTR short, so stay tuned for that.
Coming back to the question of the Level 3 guidance, the FCA consultation paper sheds little more light as it sets out how it will tackle these. The FCA makes the following statements:
we recognise the value of existing Level 3 material within the current regulatory structure and consider that this material will continue to be relevant after exit day
we expect financial institutions and other market participants to continue to apply ESA Guidelines and recommendations as they did before exit day
We will not carry out a detailed, line-by-line review of all existing Level 3 materials to identify and resolve provisions which no longer have their intended effect. Instead, we expect financial institutions and other market participants to interpret all EU Level 3 material sensibly and purposively
Essentially, the Level 3 guidance issued to date by ESMA will still be considered to apply (unless specifically stated otherwise) but won’t be legally binding. This approach isn’t all that different to the current situation where the Level 3 texts inhabit a bit of a grey area on the periphery of the legislation.
More guidance is expected though as the consultation paper also makes the commitment that the FCA intends to publish:
non-Handbook guidance on our approach after exit day to existing Level 3 material
Doing it by the book
As well as covering the FCA Handbook and Binding Technical Standards (BDS) changes to areas outwith my trade reporting purview such as Credit Rating Agencies, Capital Requirements, Fund Management, and Short Selling, the consultation paper also discusses EMIR and MiFIR.
For EMIR, the paper addresses the BTS relating to the registration and supervision of Trade Repositories (TRs), another constituency additionally burdened by the Brexit process. Indeed TRs now need to decide if they wish to provide services for UK trade reporting under EMIR, for EU (27 remaining EU countries reporting) under EMIR, or for both. They then need to apply to the FCA or ESMA to ensure they are registered and authorised to do so, in line with their chosen business models.
The three biggest EMIR Trade Repositories (DTCC, UnaVista, and REGIS TR) have all started applications to ensure they would be able to offer support for both the UK ‘FCA’ flavour of EMIR and the European ‘ESMA / remaining EU27’ flavour. CME, thanks to its acquisition of NEXs Post Trade business, finds itself with the luxury of already owning two TRs – CME ETR and NEX Abide. The CME ETR will become the UK TR for EMIR and Stockholm-based Abide will take on the continental duties. ICE Tradevault appears to be bucking the trend and may only offer UK TR support for reporting to the FCA. Finally, Poland’s KDPW with its distinctly Eastern European focus is unlikely to seek registration in the UK.
For MIFIR, the consultation paper contains a lot more information. It states that there are 44 BTSs related to MiFID II and commits the FCA to provide more detail on some of those in due course. If we focus on RTS 22 and Transaction reporting, the FCA makes the following points:
UK trading venues will have to report transactions on their venue by EEA firms as they will become third-country firms and will not have an obligation to report to the FCA. They should not, however, report for UK branches of EEA firms as after exit day these should be reporting to the FCA. Trading venues will therefore need to distinguish trading by the UK branch from elsewhere where the branch is not executing
A UK firm will no longer be able to meet the conditions for transmission if they transmit orders to an EEA firm. They will therefore have to either report transactions themselves or ensure their transmission arrangements are with firms that have obligations to report to the FCA
The FCA will publish consolidated data on instruments traded on UK
Whilst the burden is shared with the regulators, the first two items result in more heavy lifting for the reporting firms as they will have to be the ones to revisit and probably revise their reporting arrangements in both cases. The last item however entails a lot of work for the FCA as it now needs to collate and publish this data. But coincidently, reporting firms will need to make arrangements to consume this data from either the FCA, ESMA or both depending on their trading footprints.
In terms of changes to the FCA handbook, the consultation paper identifies and proposes approaches for areas including:
- The position of EU law and how it relates to our Handbook
- The loss of passporting rights
- References to EU institutions18
- References to ‘other member/EEA states’ and ‘other competent authorities’
- References to information sharing with the European Supervisory
- Authorities or ‘other competent authorities’
For me to try and dissect all these here would be slightly unpractical, but to provide an illustration, the paper contains discussions around terms such as ‘regulated markets’ and ‘authorised firms’. These terms are commonplace and well understood in the current EU regulatory framework. But now an additional layer of complexity is required to deal with whether we’re talking about ‘EU Regulated Markets’ or ‘UK Regulated Markets’. Likewise, ‘MiFID II Authorised’ firms gets more complex when it becomes ‘EU MiFID II Authorised firms’ versus ‘FCA Authorised firms’ for the purposes of the UK version of MiFID II.
So unfortunately for the regulators, the task of transposing these regulations onto the UK lawbooks is a lot more complicated that CTRL+F to replace ESMA with FCA. A lot more consideration and diligence is needed.
And of course, with all the uncertainty in these strange times we find ourselves in, no one knows whether there will be any equivalence or mutual recognition.
What is clear is that the FCA and the other UK and EU regulators have a considerable job on their hands, especially given the uncertainty over the final outcome of the Brexit negotiations and what the final deal might look like. At least with the festive season fast approaching, there should be opportunities to unwind and perhaps dance to ABBAs Dancing Queen. If that does help, I hear Salisbury is wonderful this time of year.
Alan McIntyre is Senior BA and Industry Relations Lead (Europe) for RegTek Solutions. Prior to joining the Validate.Trade team at Regtek, Alan was a Senior Business Analyst on DTCC’s Global Trade Repository programme and led the development and implementation of many of the EMIR reporting deliverables including Collateral & Valuation reporting, the ESMA Level 1 & Level 2 validations and the Inter/Intra TR Reconciliation. Prior to DTCC Alan has a wealth of experience across banking and asset management including roles at Barclays Capital, Omgeo, State Street Bank and BlackRock.