Reed Smith Client Alerts

From 11pm on 31 December 2020 (Exit Day), the UK ‘onshored’ financial services regime will apply to EEA firms that conduct business in the UK. This alert summarises what both EEA and UK firms (who are also directly impacted by these changes)  need to do to prepare for Exit Day and beyond.

Authors: David Calligan Claude Brown Emily Balment

The European Union (EU) (Withdrawal) Act 2018 converts the body of directly applicable EU law that the UK will retain, with amendments, and existing UK laws that implement EU obligations (e.g., the Markets in Financial Instruments Directive II (MiFID II)), with certain amendments, into UK domestic law. This process, referred to as ‘onshoring’, involves amending the relevant legislation and regulatory requirements so that they operate in a UK-only context. Although, at first glance, the changes may appear to be superficial (e.g., changing references from EU to UK and from EU regulators to UK regulators), they do represent meaningful change, which may have implications for the arrangements that firms have in place with respect to market infrastructure, as well as impacting the obligations that they perform for client counterparties. For example, in-scope UK derivatives counterparties subject to the UK onshore regime will be required to report details of their derivatives transactions to a trade repository (TR) registered with the Financial Conduct Authority (FCA), rather than a European Securities and Markets Authority (ESMA) registered or recognised TR, as is currently required under the EU’s European Markets Infrastructure Regulation (EMIR).

To ensure a smooth transition to the onshored regime, HM Treasury has granted the FCA and the Bank of England the power to make transitional provisions to the onshored regime, known as the Temporary Transitional Power (TTP). The FCA has indicated that it intends to use the TTP on a broad basis from Exit Day until 31 March 2022. This means that firms will have additional time to prepare for full compliance with many of the changes brought about by the UK onshored regime. However, some requirements will apply immediately from Exit Day.

What do firms need to do now?

The requirements set out below will apply immediately from Exit Day.

  • MIFID II transaction reporting requirements – Firms must continue to report details of transactions relating to financial instruments traded on a trading venue to the FCA. However, firms will need to comply with additional connected obligations, such as the requirement to submit financial reference data. Trading venues will be required to report to the FCA any transactions on their platforms by their European Economic Area (EEA) members and by EEA firms that operate under the temporary permissions regime through a UK branch.
  • EMIR reporting obligations – UK financial counterparties (FCs) and non-financial counterparties (NFCs) that enter into derivatives transactions will be required to report details of those transaction to an FCA registered TR rather than an ESMA registered TR. It should be possible for UK counterparties or firms operating under delegated reporting arrangements with EU counterparty clients to continue to report details of those transactions on behalf of those clients to an ESMA registered TR.
  • Securities Financing Transactions Regulation (SFTR) reporting obligations – All UK FCs that enter into securities financing transactions (SFTs) will be required to report the transaction details to an FCA registered TR. The UK will not require NFCs to report. Therefore, UK FCs will not be required to report details of SFTs for small NFCs under the UK SFTR, as will be required under Article 4 of the EU SFTR from early next year. Of course, EU NFCs will be required to report under the EU SFTR and UK counterparties should be able to contractually agree to report details of the SFTs on the EU NFCs’ behalf to the relevant ESMA registered TR.
  • Certain requirements under the Market Abuse Regulations (MAR) – Issuers that have securities admitted to trading or traded on UK markets (and persons discharging managerial responsibilities within the issuer) will be required to submit new information to the FCA, notwithstanding any existing EU obligations. Further, persons professionally arranging or executing transactions will be required to file Suspicious Transaction and Order Reports (STORs) with the FCA if they are registered in the UK, or have their head office or a branch in the UK. This will be regardless of any obligations under EU law to file STORs.
  • Issuer rules – Issuers that have securities admitted to trading on UK regulated markets will be required to submit information to the FCA and disclose information to the market.
  • Contractual recognition of bail-in – Firms will need to include contractual recognition of bail-in terms in all new or materially amended liabilities governed by the law of an EEA state, except for unsecured liabilities that are not debt instruments.