European Commission contingency action plan for a no deal Brexit

The European Commission issued a contingency action plan for a no deal Brexit. It covered many topics of interest, including financial services.

  • The withdrawal of the UK results in the loss of the right for UK financial operators to provide services in the EU27 Member States under EU financial services passports. Activities of EU operators in the UK will be subject to UK law. The Commission believes that risks in this sector linked to a no deal scenario have diminished significantly.
  • Not-cleared ʻover-the-counterʼ derivative contracts between EU and UK counterparts will, in principle, remain valid and executable until maturity. Certain life-cycle events (such as contract amendments, roll-overs and novations) may in some cases require an authorisation or an exemption, given that the counterparty will no longer be an EU firm. Market participants are encouraged to continue preparing for this situation by transferring contracts and seeking the relevant authorisations.
  • For cleared derivatives, in a no deal Brexit, the Commission will adopt temporary and conditional equivalence decisions in order to avoid disruption in central clearing and in depositaries services. These decisions will be complemented by recognition of UK-based infrastructures, which are encouraged to pre-apply to ESMA for recognition.
  • The European Supervisory Authorities (ESAs) are encouraged to start preparing cooperation arrangements with UK supervisors to ensure that exchange of information about financial institutions is possible immediately after a no deal Brexit.

ESMA draft RTS for counterparties to uncleared OTC derivatives in a no deal Brexit.

ESMA published a final report with draft regulatory technical standards (RTS) proposing to amend the three Commission Delegated Regulations on the clearing obligation under EMIR.

The draft RTS propose to introduce a limited exemption in order to facilitate the novation of some non-centrally cleared OTC derivative contracts to EU counterparties during a specified time-window. The amendments would only apply in a no deal Brexit. In a no deal Brexit scenario, where a UK counterparty may no longer be able to provide some services across the EU, counterparties in the EU may want to novate their non-centrally cleared OTC derivative contracts by replacing the UK counterparty with an EU counterparty. However this may trigger the clearing obligation for these contracts, therefore incurring costs that were not accounted for when the contract was originally entered into.

The draft RTS allows UK counterparties to be replaced with EU ones without triggering the clearing obligation. The window for this novation of non-centrally cleared OTC derivative contracts would be open for twelve months following the no deal Brexit. Counterparties can start repapering their contracts, making the novation conditional upon a no-deal Brexit.

Steven Maijoor, Chair, said: "Counterparties should negotiate as soon as possible the novations of their transactions which are in the scope of this amending regulation, given the twelve month timeframe to benefit from it."

The draft RTS have been submitted to the European Commission for endorsement, and are also subject to the scrutiny of the European Parliament and of the Council.

The ESAs are currently considering a similar approach to facilitate the novation of legacy contracts to EU counterparties as that novation may also trigger the application of bilateral margin requirements.

ESMA statement on EMIR's clearing obligation and MiFIR's trading obligation and the 21 December deadline

ESMA issued a statement relating to the challenges that certain groups, as well as certain non-financial counterparties above the clearing threshold (NFC+), would face on 21 December 2018 to start CCP clearing some of their OTC derivative contracts and trading them on trading venues.

ESMA recommends, pending the entry into force of EMIR Refit and amending RTS, that competent authorities apply risk-based supervisory powers in the day-to-day enforcement of applicable legislation (i.e. EMIR's clearing obligation and MiFIR's trading obligation) in a proportionate manner.

ESMA statement on central clearing in the event of a no-deal Brexit

ESMA issued a statement to address the risks of a no-deal Brexit scenario in the area of central clearing.

  • ESMA supports the continued access to UK Central Counterparties (CCPs) to limit the risk of disruption in central clearing and to avoid negatively impacting EU financial market stability.
  • ESMA welcomes the communication Preparing for the withdrawal of the United Kingdom from the European Union on 30 March 2019: a Contingency Action Plan, published on 13 November 2018, discussed above, where the EC stated that it will act, to the extent necessary, to address financial stability risks in the EU arising from the withdrawal of no deal Brexit. In such a scenario the EC has stated that it will adopt a temporary and conditional equivalence decision in order to ensure that there will be no disruption to central clearing.
  • Therefore, ESMA is engaging with the EC to plan, as far as possible, the preparatory actions for the recognition process of UK CCPs, in case of a no-deal Brexit.
  • ESMA has already started engaging with UK CCPs to carry out preparatory work. The aim is to ensure continued access to UK CCPs for EU clearing members and trading venues as of 30 March 2019, should all the conditions in EMIR, including any conditions set out in the equivalence decision, be fulfilled.

ESMA consultation on future guidelines for money market funds' disclosure

ESMA is holding a Consultation paper on draft guidelines on the reporting to competent authorities under article 37 of the MMF Regulation. From the end of Q1 2020, European MMFs will have to disclose certain information under the Money Market Fund Regulation to their National Competent Authorities. There will be no requirement to retroactively provide historical data for any period prior to this date.


The ESAs issued consultation paper on targeted amendments to the Delegated Regulation covering the rules for the Key Information Document (KID) for Packaged Retail and Insurance-based Investment Products (PRIIPs).

This follows the ESA letter to the European Commission (discussed in our October bulletin). The letter suggests that legislative changes are needed to avoid a situation where retail investors would have to receive both a PRIIPs KID and UCITS KIID from 1 January 2020, and to tackle some issues that have arisen on the PRIIPs KID.

The consultation addresses amendments to the information regarding investment products' performance scenarios. It does not address all the concerns abour PRIIPs KIDs.

The deadline for submission of feedback is by Thursday, 6 December 2018.

Industry reports suggest that the application of the PRIIPs Regulation to UCITS will be delayed by two years.

IOSCO consults on framework for assessing leverage in investment funds

The International Organization of Securities Commissions (IOSCO) is holding a consultation on a proposed framework to help measure leverage used by investment funds which in some circumstances could pose financial stability risks. The consultation closes on 1 February 2019.

The consultation follows Financial Stability Board (FSB) recommendations to address structural vulnerabilities from asset management activities. Recommendation 10 asks IOSCO to develop measures of leverage in funds to facilitate meaningful monitoring of leverage for financial stability purposes

The consultation outlines a two-step process. The first step sets out how regulators would filter out funds that are unlikely to create stability risks to the financial system. The second step would require further analysis of the funds which could pose a risk to financial stability.

The consultation aims to balance between achieving precise leverage measures and devising simple, robust metrics that can be applied in a consistent manner to a wide range of funds in different jurisdictions. It also addresses synthetic leverage by including exposure created by derivatives, considers different approaches to analysing netting and hedging and the directionality of positions, and includes approaches that limit model risk.

ECB Vice-President identifies regulatory actions to mitigate financial stability risks in the investment fund sector

The ECB published a speech given by Luis de Guindos, its Vice-President, on the role of the investment fund sector for financial stability in the euro area.

Mr de Guindos notes that, over the past decade, the investment fund sector has almost tripled in terms of total assets and has taken on more risk. It therefore deserves greater attention from a financial stability perspective. He proposes some regulatory actions that, he suggests, could contribute to mitigating risks arising from interconnectedness, liquidity and leverage in the sector:

  • Work is needed on the different layers of interconnectedness between exchange-traded funds (ETFs) and their counterparties. Regulatory action might include enhanced rules to limit counterparty risk exposure of ETF investors, and measures that provide more transparency around ETF liquidity provision.
  • The macro-prudential framework should be extended beyond banks to encompass the asset management sector.
  • Macro-prudential authorities' powers should be complemented with ex ante tools targeting liquidity risks at system level.
  • European supervision of investment funds should be strengthened while ensuring a globally consistent approach to monitoring. Mr de Guindos calls for an exploration of the case for bringing investment fund supervision and the potential activation of macro-prudential tools to the European level.

This follows a recommendation of the European Systemic Risk Board (ESRB) (dated 7 December 2017) on liquidity and leverage risks in investment funds. Its sets out recommendations (with timelines) on:

  • Liquidity management tools for redemptions
  • Additional provisions to reduce the likelihood of excessive liquidity mismatches
  • Stress testing
  • UCITS reporting
  • Guidance on Article 25 (leverage and systemic risk) of AIFMD.

Anti-Money Laundering/ Combating the Financing of Terror/ Corruption


  • The November edition of the FATF Business Bulletin provides a brief update on outcomes from the October 2018 FATF plenary meeting that are relevant for the private sector
  • The FATF Risk-Based Approach Guidance for the Securities Sector aims to support the design and implementation of the risk-based approach for securities products and services, by providing specific guidance and examples for securities providers and their supervisors.


ESA Consultation

Egmont Group

The Egmont Group published