The week in outline:

The political turmoil at Westminster continued to dominate the headlines. The UK Government (HMG) and the EU published the text of the Withdrawal Agreement (WA) endorsed at the summit on 25th November with the full text of Article 132 provision on the extension of the transitional period (TP) (see document 1 below). (The relevant date in the previous draft of the WA had been left blank.) As expected, the maximum available under the WA is an extension of 2 years ending on 31/12/22. The decision on whether to extend is made by the joint committee i.e. an extension requires agreement of both the EU and the UK. The new wording of Article 132 is strange, in that rather than just inserting the end date - which would have read ‘…. a single decision extending the transition period up to 31/12/22’’ - Article 132 now reads ‘… extending the transition period for up to one or two years’. The words ‘one or’ appear to be legally redundant and confusing. Perhaps these were added to improve the ‘optics’ for HMG?

There were developments of the ‘no deal’ regime for FS. ESMA published a draft RTS[1] amending bilateral margin requirements for OTC derivative contracts (see Document 2 below). This is a short-term measure (for 12 months) to facilitate the novation of OTC contracts from UK to EU-27 counterparties in the event of a no deal exit. This complements the previous ESMA proposal to facilitate novation by the waiver of central clearing obligations as reported in our update ending the week of the 9 Nov 2018. ESMA says – ‘….As regards non-centrally cleared OTC derivative contracts, these two measures will be the only regulatory measures the ESAs intend to propose to help address the legal uncertainty raised by the withdrawal of the UK from the EU’.

HMG published a policy note on a new piece of ‘no deal’ legislation in FS – the Financial Services (Implementation of Legislation) bill (see Document 3 below). This would provide a supplement to the FS regime under the European Union (Withdrawal) Act 2018 (EUWA) and the NtA[2] SIs under section 8 EUWA. The EUWA regime provides for the onshoring of the EU acquis and the modification of this retained EU law (as explained in detail in our previous updates). The purpose of the new bill is to provide a similar system to cover certain EU FS legislation/measures which would fall outside the scope of the EUWA because the relevant EU legislation/measures would not have been brought into effect at the date of exit. These so called ‘in flight files’ include not only measures in EU legislation which is completed but not in effect at exit, but also legislation which is completed within 2 years after exit. HM Treasury (HMT) can make SIs under the bill and can select which parts of the listed measures to onshore/add to the NtA regime and can make modifications, as it can under section 8 of the EUWA.

The new bill covers a list of specific provisions in existing EU legislation which are yet to come into operation and another list of 15 European Commission proposals for future financial services legislation (both lists can be accessed here). If, after a no-deal exit, HMG wishes to implement/follow other subsequent EU measures, it will not be able to do so via secondary legislation under the EUWA, this bill or under the European Community Act 1972 (which is to be repealed by the EUWA). It may be possible to introduce new EU derived requirements (as modified for the UK domestic regime and stripped of DRC[3]) under existing powers – e.g. powers delegated to HMT or the UK regulators under the Financial Services and Markets Act 2000 and under onshored EU legislation which gives the UK regulators on-going responsibility for technical standards under the procedure provided for in Part 3 of the Financial Regulators’ Powers (Technical Standards etc.) (Amendment etc.) (EU Exit) Regulations 2018. In other cases, primary legislation may be required.

Our ‘no deal’ FS database now covers UK measures - primary legislation, HMG SIs and PRA/FCA instruments - and EU measures.

  1. Department for Exiting the EU: Withdrawal Agreement and Political Declaration laid before Parliament following political agreement.

    The UK government has endorsed the UK-EU Withdrawal Agreement. This includes the final wording on the extension of the transition period. The statement can be accessed here.

    Article 132:

    “Notwithstanding Article 126, the Joint Committee may, before 1 July 2020, adopt a single decision extending the transition period for up to one or two years.*

    * In case of extension, the Union will notify other parties to international agreements thereof.”

  2. ESAs Propose to amend bilateral margin requirements to assist Brexit preparations for OTC derivative contracts

    The draft regulatory technical standards (RTS) proposes to introduce a limited exemption in order to facilitate the novation of certain OTC derivative contracts to EU counterparties during a specific time window. The press release can be accessed here.

    “The draft RTS propose, in the context of the United Kingdom's (UK) withdrawal from the European Union (EU), to introduce a limited exemption in order to facilitate the novation of certain OTC derivative contracts to EU counterparties during a specific time-window. The amendments would only apply if the UK leaves the EU without the conclusion of a withdrawal agreement – a no deal scenario. The draft RTS complement the similar proposal published by ESMA on 8 November with respect to the clearing obligation.

    The draft RTS allows UK counterparties to be replaced with EU ones without triggering the new procedures defined in the bilateral margin RTS. This limited exemption would ensure a level playing field between EU counterparties and the preservation of the regulatory and economic conditions under which the contracts where originally entered into. Its scope, time and intent are aligned with the draft RTS regarding the clearing obligation that ESMA published on 8 November.

    The window for the novation of OTC derivative contracts which fall under the scope of this amending regulation and the one published by ESMA would be open for twelve months following the withdrawal of the UK from the EU. Counterparties can however start repapering their contracts ahead of the application date, making the novation conditional upon a no-deal Brexit, given the conditional application date of these two amending regulations.

    The ESAs and other EU authorities and institutions have been clear on the importance for market participants to be prepared for Brexit, including the possibility of a no-deal scenario. These draft RTS provide regulatory solutions to support counterparties' Brexit preparations and to maintain a level playing field between EU counterparties, while addressing potential risks to orderly markets and financial stability.

    As regards non-centrally cleared OTC derivative contracts, these two measures will be the only regulatory measures the ESAs intend to propose to help address the legal uncertainty raised by the withdrawal of the UK from the EU and to ensure a level-playing field between EU counterparties.

    Counterparties should start negotiating as soon as possible the novations of their transactions which are in the scope of these amending regulations, given the twelve month timeframe to benefit from it.”

  3. HMT: The Financial Services (Implementation of Legislation) Bill – policy note

This bill would provide the power, in a no-deal scenario, for the UK to implement and make changes to a specified list of ‘in-flight files’. These are pieces of European Union financial services legislation agreed or in negotiation at the point of exit, with implementation dates falling in the two years after exit. The policy statement can be accessed here.

“The Bill consists of one substantive clause which will allow the Government to implement aspects of key pieces of EU financial services legislation known as ‘in-flight files’. These have either i) been published in the Official Journal of the EU, but are not operative immediately before exit day and so are not transferred onto the UK statute book by the EUWA, or are operative but reliant on non-operative clauses, and so have not been transferred onto the UK statute books by the onshoring process, or: ii) are currently in negotiation, and may enter into the Official Journal up to two years after the UK leaves the EU. 

Only those ‘in-flight files’ considered necessary for UK financial services following exit are within the scope of the power. These are specified on the face of the Bill. In many cases the UK has played a leading role in shaping them over a number of years for the benefit of consumers and industry. For example, the UK strongly supported the Bank Recovery and Resolution Directive II, which will provide regulators with an updated resolution framework and enable the UK to meet international commitments, and the Prospectus Regulation, which will cut the cost to businesses of producing a prospectus in the UK. 

In a no-deal scenario, it is important that the Government has the power to both implement these and other files, and to make sure they serve the interests of the UK outside the EU, rather than accepting EU law wholesale. The Bill will therefore provide the Government with the power to i) choose to implement only those EU files, or parts of those files, which are both appropriate and beneficial for the UK, and ii) adjust and improve the legislation as it is brought into UK law to ensure that it works better for UK markets. This will be critical to protecting and enhancing the reputation and competitiveness of the UK as a global financial services centre.”