AFME Warns On No-Deal Brexit

Since the UK voted to leave the European Union there has been debate over whether UK clearers and central securities depositories would be granted equivalence by EU regulators.

The UK’s exit from the European Union without a deal still poses significant risks for the financial services sector, despite the preparations that have been made, according to the Association for Financial Markets in Europe.

AFME said in a report that following the extension of the departure date to 31 October 2019, banks are continuing to implement their contingency plans for a no-deal Brexit scenario due to the ongoing political uncertainty.

Continued access to UK central clearing counterparties and central securities depositories for remaining EU member states, and vice versa, was an area highlighted by the report.

Since the UK voted to leave the European Union there has been debate over whether UK clearers and central securities depositories would be granted equivalence by EU regulators. EU authorities have argued that their substantial activities pose a risk to EU financial stability and so they need increased oversight.

In February this year the European Securities and Markets Authority granted temporary equivalence to three UK CCPs – LCH, ICE Clear Europe and LME Clear – and the UK CSD in the event of a no-deal Brexit, so they can continue to serve EU-based clients and minimise disruption to financial markets.

Simon Lewis, AFME

Simon Lewis, AFME

AFME, led by Simon Lewis, welcomed the temporary recognition but noted that it expires on 30 March 2020.

“Unless certainty is provided as to the extension of recognition, UK CCPs might be required to start off- boarding processes for EU27 members by the end of 2019,” said the report. “We note the European Commission’s recent statement that it would consider whether adjustments are needed to contingency measures to take into account the new timeline following the extension to Article 50 and encourage the European Commission to do so in this instance.”

European regulators are also due to define a new process for determining equivalence for countries outside the EU.

“This is of pivotal importance given the significant threat that the start of an off- boarding process by UK-based CCPs would pose for EU financial stability,” added AFME.

Trading obligations

Esma and the UK Financial Conduct Authority have already clashed over their respective share trading obligations.

In March Esma announced that after Brexit EU firms will have to trade certain shares and derivatives on EU or equivalent venues, even if most liquidity is currently in London.

Nausicaa Delfas, FCA

Nausicaa Delfas, FCA

Nausicaa Delfas, executive director of international at the UK Financial Conduct Authority, warned at the time that this would conflict with the UK’s own share trading obligation.

She said: “This has the potential to cause disruption to market participants and issuers of shares based in both the UK and the EU, in terms of access to liquidity and could result in detriment for client best execution. We have therefore urged further dialogue on this issue in order to minimise risks of disruption in the interests of orderly markets.”

As a result, in May Esma said the share trading obligation would not be applied to 14 UK shares included in its previous guidance.

AFME added: “We also recommend that the UK and EU27 authorities put in place necessary arrangements to ensure continued access of members from both UK and EU27 to infrastructures under their supervision.”

The association also noted similar issues with the derivatives trading obligation.

Continued servicing of existing contracts

The report continued that a further area of focus has been ensuring that existing cross-border contracts can continue to be serviced effectively, including the performance of common lifecycle events.

“While we remain disappointed that this was not addressed at EU level, we strongly welcome the efforts made at national level in many member states and the UK to enable lifecycle events to continue to be performed, at least for a temporary period,” added AFME.

Reporting

The study also highlighted the risk of double reporting under post-trade transparency reporting and transaction reporting requirements.

After Brexit when an EU27 investment firm trades with a UK investment firm, each will have reporting obligations which will lead to a misleading impression of volumes.

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