In February, UK and EU regulators signed agreements to enable data sharing post-Brexit, but industry experts say the latest announcement falls short of lifting the real burden on affected firms.

European regulators have inked agreements to ensure the wheels don’t come off the markets if the UK leaves the EU without an exit deal, but market participants say watchdogs making deals among themselves does little to ease concern—and increasing frustration—over the Brexit process.

On February 1, the UK’s Financial Conduct Authority (FCA) agreed memoranda of understanding (MoUs) with the European Securities and Markets Authority (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.

Regulators had been concerned that, without these agreements, the flow of data between the UK and the EU27 would be abruptly cut off, should a no-deal Brexit occur on March 29. In that scenario, information critical to various regulatory activities—including the calculation of transparency thresholds and general market oversight—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 trade repositories (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.

[Reporting] 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.

Michael Thomas, Hogan Lovells

“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,” she adds.

Withdrawal Woes

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 what was previously reported by WatersTechnology, in 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.”

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 an Esma-regulated entity ahead of the UK’s departure from the bloc.

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 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.