Views on improving the integrity of global capital markets
10 October 2019

The EU Looks Ready for a Halloween Brexit

Posted In: Market Structure

Since the formation of a new government led by Prime Minister Boris Johnson in Westminster, the likelihood of a no-deal exit of the United Kingdom from the EU on 31 October seems to have risen exponentially. Hence, the EU is accelerating its preparation for this scenario and recently published its 6th Brexit Preparedness Communication to explain how the Commission is getting ready for a disorderly exit.

Despite highlighting that a deal is still a possible outcome, the Communication urged all businesses and stakeholders in the EU27 to be fully prepared for a no-deal Brexit. All insurance firms and other financial services institutions that have not yet done so should complete their preparations for a cliff-edge Brexit by 31 October.

The Commission document includes a detailed Brexit Preparedness checklist designed to help companies conducting business in the EU or in the United Kingdom check the state of their preparations before 31 October. Although the checklist is not exhaustive, complementary guidance can be found in the previous Brexit preparedness notices, which have been published by the European Commission in the past months. After Brexit, the recognition of UK-incorporated companies in the EU will depend on the national law for third-country incorporated companies.

Last March, the European Securities and Markets Authority announced two contingency measures in the financial services sector. The first was to temporarily recognise three British central counterparties (CCPs): LCH Limited, ICE Clear Europe Limited, and LME Clear Limited. Such CCPs would be able to continue providing their services in the European Union after Brexit, even in the event of a no-deal scenario. The second measure concerned the recognition of two Central Securities Depositories (CSDs), established in the United Kingdom: Euroclear UK and Ireland Limited. The recognition for both CCPs and CSDs is temporary and valid, respectively, until 30 March 2020 and 30 March 2021.

These two temporary measures were designed for the departure of the United Kingdom from the EU on 29 March (granting a recognition of one year for CCPs and two years for CSDs). The recent Commission Communication on Brexit preparedness excludes the possibility of new contingency measures pertaining to the recognition of UK CCPs and CDSs. Therefore, an adjustment to the current measures that considers the new timeline for Brexit is not expected.

Brexit also seems to have affected the EU strategy with regard to granting the equivalence regime to third-country organisations that want to access European markets. The conditions attached to the equivalence regime are likely to be stricter and based on the systemic risk in financial institutions. According to the rationale of this strategy, third-country entities that are considered systemically a threat to market stability would be forced to relocate in the EU27 if they want to provide services in the bloc. Furthermore, such institutions also would be subject to EU supervision and, in the case of banks, to meet capital requirements.

Another possible EU policy could require institutions to be aligned with the long-term global warming target and the specific goals of the Paris agreement as one of the key conditions to grant an equivalence regime. The next European Commission plans to be the global frontrunner in the fight against climate change and in the adoption of climate-neutrality measures to achieve climate-neutrality targets by 2050. One of Frans Timmermans’ (first executive vice-president and commissioner-designate for a European Green Deal) priorities would be to spread a new climate culture throughout Europe to encourage a change in behaviour across society. Hence, low-carbon emission requirements could be one of the conditions requested by the EU to grant equivalence to third-country entities that want to operate in the single market.

Furthermore, over the past two years, the EU has started to grant more time-limited equivalence decisions. A case in point was the 12-month equivalence recognition of trading venues in Switzerland as eligible under the Markets in Financial Instruments Directive (MiFID II) share-trading obligation rules. This was the first case in which a third country that had been completely equivalent to the EU was granted temporary equivalence. The motivation behind this shift in the EU approach was to have greater leverage in a separate negotiation with Switzerland regarding reciprocal access for EU agrifood and other service providers. 

Recently, the relations between the EU and the Swiss have gone south, as Switzerland did not swiftly ratify an agreement that would regulate the adoption and application of a series of bilateral agreements with the EU. Consequently, the EU decided not to renew the equivalence recognition, and as of 1 July, shares that are traded in the EU cannot be traded in Swiss exchanges.

The feeling is that this new approach (i.e., granting a temporary equivalence and attaching conditions to it to gain leverage on other negotiations) could be replicated by the EU for the possible future relationship with the United Kingdom (should a withdrawal agreement be ratified by both parties). Let us not forget, however, that not all EU regulations and directives include a third-country regime and, therefore, some regulatory frameworks have limited scope for market access. For example, the Undertakings for the Collective Investment in Transferable Securities (UCITS) rules on marketing and cross-border management of UCITS funds do not provide an equivalence regime.

We should have greater certainty as to what kind of Brexit the UK will be heading towards at the next European Council meeting on 17 and 18 October. In the event no agreement is reached between the two parties or no extension is given, a hard Brexit will be almost inevitable. 

Image Credit: ©Pattrayut

About the Author(s)
Roberto Silvestri

Roberto Silvestri is EU Policy Specialist, Capital Markets Policy EMEA at CFA Institute. He helps reach out to regulators and stakeholders about the positions that CFA Institute holds and unravel the complexities of EU regulation for CFA Institute members.

Leave a Reply

Your email address will not be published. Required fields are marked *

By continuing to use the site, you agree to the use of cookies. more information

The cookie settings on this website are set to "allow cookies" to give you the best browsing experience possible. If you continue to use this website without changing your cookie settings or you click "Accept" below then you are consenting to this.