European regulators are issuing clarifications on data sharing as Brexit’s March 29 deadline draws closer, but there are still deep concerns, should the UK exit the EU in a no-deal scenario. 

On February 5, the European Securities and Markets Authority (Esma) announced that should the UK leave the EU without an agreement in place, the UK’s Financial Conduct Authority (FCA) would stop sending data to Esma and would no longer have access to Esma’s IT applications and databases. That means Esma will not receive or process UK data post-Brexit, nor will it publish UK data on the Esma website. The disruption is set to particularly impact transparency calculations of both the revised Market in Financial Instruments Directive (Mifid II) and the Markets in Financial Instruments Regulation, raising questions about the regulatory oversight of the UK and EU markets.

“There is still a high level of uncertainty as to the final timing and conditions of Brexit,” the statement reads, and the regulator indicated that if the timing and conditions change, Esma will adjust its approach. 

Steps have been taken in some areas. On February 1, the FCA agreed memoranda of understanding (MoUs) with Esma and EU member state national regulators to enable the continued cooperation and exchange of cross-border information, in the absence of a withdrawal agreement. The MoUs are expected to provide a temporary framework for supporting cross-border market supervision, enforcement, the flow of data and information sharing. 

Additionally, MoUs will be placed between the FCA and Esma to allow for the continued supervision of credit rating agencies and trade repositories (TRs). 

Regulators had been concerned that, without these agreements, the flow of data between the UK and the EU would be abruptly cut off, should a no-deal Brexit occur on March 29. In that scenario, information critical to various regulatory activities would become difficult, if not impossible. 

Although these regulatory efforts have helped to alleviate some cross-border concerns on a regulatory level, industry experts say more steps should be taken to address more practical issues. 

“It could have been more helpful,” says Michael Thomas, a partner at law firm Hogan Lovells. “What they could have done is assess the UK TRs as being equivalent from a third-country perspective and provided even greater continuity with the existing regime.” 

Brexit is proving a challenge for all types of trading and reporting firms, which are faced with relocating operations from the UK to within the EU27, migrating systems, transferring reporting data, moving personnel and heavily investing in no-deal contingency plans.

“I don’t think it has allayed any concerns [for industry firms] as far as I can see,” says Virginie O’Shea, research director at Aite Group. “It’s more for the regulators, for the transparency of information between them.” 

She says the real concerns involve operational factors, rather than regulatory reporting. As firms are left scrambling to deal with the increasing cost of Brexit, little time or budget is left for anything else. For many, in the lead-up to April, the priority is to safeguard core business functions and continue servicing UK and EU clients. 

“It’s more about the operational aspects of Brexit rather than the regulatory reporting aspects that have worried people. No one worries about the regulatory reporting side unless you are going to get caught and fined for it,” O’Shea adds.

Alex Dorfmann, senior product manager at SIX, says a no-deal withdrawal poses huge operational risks because no one is certain the exact impact this will have, or knows exactly how they should prepare. 

SIX receives data from UK venues and UK manufactures, but the processes and analytical systems will all need to change to reflect data transactions made solely in the UK and in the EU without the UK. In addition, SIX will be responsible for informing UK clients about data calculations on control systems, benchmark ratios, and calculations that are constantly shifting based on the market. These calculations will be based on different data and different assumptions, and with data missing, this will not be possible. 

“If something like [a no-deal Brexit] happens, then all of a sudden a chunk of data is not usable, or you need to alter the data, then it is not only that the data changes, but the whole set of analytical systems and workflows and processes that come with the data also changes,” Dorfmann says. 

Rebecca Healey, head of EMEA market structure and strategy at Liquidnet, says in a scenario where there’s a post-Brexit data pause, firms need to ensure that they still have market access and the ability to perform regulatory obligations for trade and transaction reporting. For instance, European firms should confirm that they have licenses in place, and should provide employees with the direction and resources necessary to meet regulatory requirements. She also recommends that firms open a dialogue with local regulators and regulators that will oversee the firm in the future to help with clarifications for firms that set up operations outside of the UK. 

Withdrawal Woes On

On February 1, Esma released a statement on reporting obligations under the European Market Infrastructure Regulation (EMIR), in the event of a no-deal Brexit. The release covers issues regarding reconciliation, data sharing, portability, reporting and aggregation of derivatives positions. Esma has confirmed—as previously reported by WatersTechnology—that UK and EU TRs will have to be treated as separate legal entities following Brexit, requiring counterparty firms to split their reporting obligations between the two jurisdictions. 

Hogan Lovells’ Thomas says that although industry firms are continuing to enact their contingency plans, and the MoUs will look to minimize market disruption, third-country equivalence for EMIR reporting would avoid the breakup of reporting entities and ease uncertainty surrounding cross-border data-sharing between TRs. 

“It still does require an equivalence agreement to be taken,” he adds. “It requires international agreements on access and exchange of information. So it is good to know that part of the process is being completed in terms of the MoUs, but there is still other stuff to be put in place as well. The issue is the timing for when those additional pieces are to be put in place and whether there is going to be any gap after March 29.” 

Firms still need to consider every factor without clarification from Esma in order to prepare, she says, although once the Brexit deal is struck, there may be time to lobby Esma for further delays, if necessary. 

Esma’s public statement affirms that EU TRs will have to cease inter-TR reconciliation activity with UK TRs, remove relevant derivatives associated with UK reconciliation, and terminate UK-related record-keeping beyond March 29. Additionally, UK TRs will have to be recognized within the EU to have access to EU EMIR data, and under Esma’s guidelines on portability, will have to transfer all UK TR data to a EU27 TR before the deadline. After Brexit, UK-based TRs will no longer be recognized as EU legal entities and will have to be authorized by the FCA to continue servicing their UK clients. Similarly, TRs hoping to service the EU market will have to be licensed as Esma-regulated entities ahead of the UK’s departure from the bloc. 

, senior business analyst at RegTek Solutions, says data-sharing pains will largely be the most burdensome for TRs, who will be responsible for terminating all reports submitted by UK counterparties and central counterparty (CCP) clearinghouses with outstanding derivatives one month following the Brexit date. Another “mammoth” task will be removing all the EU27-to-UK, UK-to-EU27, and UK-to-UK derivatives from reconciliation, he says, which is expected to be completed four months after Brexit. 

“This year was already going to be a busy year for transaction reporting teams as most start to get their Securities Financing Transactions Regulations (SFTR) projects off the ground and now Brexit is only adding to the burden,” he says. “Regulators might be trying to make the transition as seamless as possible, but all these changes still add to the complexity and widen the scope for data quality issues.”

Cornish says the FCA’s plan to require UK trading venues to report for EEA members who are not operating through a UK branch are likely to pile onto the data problems, as the influx of that data could result in additional data quality failures. 

Although the Esma statement has shed some light on EMIR compliance post-Brexit, many questions remain over reporting obligations for EU counterparty firms. One example is dual-sided reporting, in which both sides of a trade are responsible for reporting the details of that transaction—as opposed to other jurisdictions, such as the US, where the tradition is single-sided reporting from the senior regulated counterparty. 

Joris Hillebrand, a managing director at Synechron Business Consulting, who heads up the firm’s regulation practice, highlights that regulatory clarity is needed to understand the treatment of the UK as a non-European Economic Area (EEA) country after Brexit. 

The FCA announced on February 1 that it is set to onshore “EU legislation and rules into the UK rulebook for a maximum of two years from exit,” to minimize market disruption for firms, but as time is running out, concerns have emerged as to how or whether EU counterparties will have to report a UK counterparty’s side of a trade going forward.  

“After Brexit, the UK is not considered as an EEA country. So the question is whether they still have to report that trade or if they should submit a correction on the outstanding trade. As it is [currently] reported as an EEA counterparty, it will become a non-EEA counterparty [following Brexit]. I have not read or seen any guidance on that topic,” says Hillebrand.

Healey says that with each clarification issued by Esma, new challenges come to light. For instance, what will happen with shared trading obligations without equivalence of trading venues? How will European instruments be traded, and on what venues? And how will that work on behalf of European funds? 

“It’s moving away from the lawyers and going to the actual applications of the law—and that’s where some of these challenges are emerging,” she says. 

Some of these challenges are already beginning to manifest. While Esma has concluded some MoUs with UK authorities to ensure that critical entities, such as CCPs, will be recognized as equivalent under EU law in a timely fashion—thus preventing a possibly catastrophic dislocation of the European derivatives market—it has said that it is planning to suspend some crucial functions until the dust can settle, in the event of a no-deal Brexit.

In particular, Esma will, it said in the February 5 statement, freeze its quarterly determinations of bond liquidity and its monthly threshold calculations under the double-volume cap, implying that the quarterly systematic internalizer (SI) determinations will also be affected. While this freeze is envisaged to last only two months, Esma warned that it could be longer, should the quality of the data is receives to perform said number-crunching not be up to the required standard.

Healey says regulators are keenly aware of the potential data issues that could arise following Brexit. Delaying quarterly calculations for SI determinations for equities and bonds scheduled in May to August is one example, outlined in Esma’s February 5 statement, of how the regulator is trying to quell problems. 

“Esma recognizes that there is continued concern for the quality and completeness of data,” she says. “The industry would welcome any delay that would allow time to make sure the data is complete and accurate in a very similar way that Esma took that pragmatic approach to the double volume cap at the start of Mifid II, but right at this moment in time we don’t know what we’re dealing with.”

Although she says the industry welcomes any type of clarification due to the degree of uncertainty, the political environment in the UK is not ideal for Esma, which relies on clarification from politicians. Without the UK Parliament’s final decision, the entire financial services industry in Europe is left to grapple with unpredictability. But for now, preparing for a worst case scenario is the wisest plan. 

Hamad Ali and Jamie Hyman provided additional reporting for this story.