FCA statement on the reporting of derivatives under the UK EMIR regime in a no-deal scenario

For the purposes of this statement, ‘UK counterparties’ includes UK firms and UK Central Counterparties (CCPs) who will be subject to the UK EMIR reporting regime.

UK EMIR validation rules

In the event that the UK withdraws from the EU without an agreed deal on 31 January 2020, UK reporting counterparties and UK TRs should use the UK EMIR validation rules[2] when submitting derivative transactions entered into from 11.00pm on 31 January 2020 onwards.

Background

The European Union (Withdrawal) Act 2018 (EUWA) converts existing directly applicable EU law into UK law at the point of the UK’s exit from the EU. The EUWA also allows for amendments to this ‘onshored’ legislation so that it continues to operate effectively in the UK once the UK leaves the EU. It is not intended to make policy changes, other than where appropriate to reflect the UK’s new position outside the EU.

To ensure a smooth transition for UK counterparties fulfilling their derivative reporting obligations and TRs who wish to continue to offer services in the UK, amendments to the European Market Infrastructure Regulation (EMIR) and transitional provisions are provided for in 2 Statutory Instruments (SIs):

• The Trade Repositories (Amendment and Transitional Provision) (EU Exit) Regulations 2018[3] (TR SI)
• The Over the Counter Derivatives, Central Counterparties and Trade Repositories (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2018[4] (EMIR SI)

In addition, following Consultations in October[5] and November[6] 2018, we will be amending the following Binding Technical Standards (BTS) for the reporting requirements under the UK EMIR regime:

• TR registration (Commission Delegated Regulation (EU) 150/2013 and Commission Implementing Regulation (EU) 1248/2012) 
• Data to be made available to authorities (Commission Delegated Regulation (EU) 151/2013 as amended by Commission Delegated Regulation 2017/1800)
• The format and frequency of data to be reported to TRs (Commission Delegated Regulation (EU) No 148/2013 as amended by Commission Delegated Regulation (EU) No 2017/104 and Commission Implementing Regulation (EU) No 1247/2012 as amended by Commission Delegated Regulation (EU) No 2017/105)

The near-final amended BTS and accompanying Policy Statement[7] were published on 28 February 2018.

We expect firms and market participants to continue to apply non-legislative materials (such as ESMA Q&As and guidelines) as they did before Exit day, to the extent that they remain relevant. These materials should be interpreted considering Brexit and the associated legislative changes that are being made so that the regulatory framework operates appropriately. Further details on our approach to pre-Exit non-legislative material can be found in Appendix 3 of FCA CP 18/28[5].

The Treasury has also published draft legislation[8] that would temporarily enable us (and the Bank of England/Prudential Regulation Authority) to make transitional provisions if the UK leaves the EU without an implementation period (a no-deal scenario). In this scenario, we intend to use this power so that certain firms and other regulated entities do not generally need to prepare now to meet the changes to their UK regulatory obligations that are connected to Brexit.

However, UK TRs and UK counterparties cannot make use of this transitional relief[9]. From Exit day:

• UK counterparties must report details of their derivative trades to an FCA registered, or recognised, TR.
• UK TRs must provide UK authorities access to data reported to them by UK counterparties from Exit day. It is crucial for UK authorities to access this data from Exit day so that they have oversight of derivatives markets and can effectively monitor systemic risk.

UK TRs and UK counterparties are encouraged to familiarise themselves with the onshored EMIR legislation and relevant communications to ensure compliance with the UK EMIR regime from Exit day. 

What changes for TRs?

We will become the UK authority responsible for the registration and ongoing supervision of TRs operating in the UK.

TRs who want to offer services from the UK immediately following Exit are required to have a UK legal entity registered by us. The TR SI provides both a conversion regime and a temporary registration regime to ensure TRs can be registered and operational from Exit day.

Further details on the options available for TRs can be found on the our TR webpage[10]. UK counterparties are encouraged to engage with their TRs to understand the choices their TR has made and how this will affect them.

A list of the TRs who intend to offer services in the UK will shortly be made available on the our website.

What changes for UK counterparties?

After Brexit, all UK firms that enter into a derivative contract (both over-the-counter (OTC) and exchange-traded derivatives) are in scope of the UK EMIR regime and required to report details of those transactions to an FCA-registered, or recognised, TR according to the UK EMIR regime.

UK branches of third-country firms (including branches of firms from EU27 countries after Brexit) are not in scope of the UK EMIR reporting regime and so do not have to report under the onshored UK regime.

Third-country (after Brexit, including EU27) branches of UK established firms are in scope of the UK EMIR reporting regime and must report details of their derivative transactions to an FCA-registered, or recognised, TR.

Non-UK Alternative Investment Funds (AIFs) are generally classified as third-country entities and so are not in scope of the UK EMIR reporting regime. However, where a non-UK AIF is managed by an Alternative Investment Fund Manager (AIFM) that is registered under the onshored UK Alternative Investment Fund Managers Directive (UK AIFMD), it will be reclassified as a Financial Counterparty for the purposes of the UK EMIR regime and in scope of the reporting requirements.

Regulation 11 of the Gibraltar (Miscellaneous Amendments) (EU Exit) Regulations 2019[11] is intended to ensure that relevant matters in relation to Gibraltar can be treated as they were before Brexit, with any necessary modifications to take into account the UK and Gibraltar’s withdrawal from the EU. No action is required by UK TRs in relation to Gibraltar counterparties (unless it is requested by those parties). However, TRs should confirm their position with the Gibraltar FSC in relation to the obligations imposed by the law of Gibraltar

After Brexit, UK authorities will no longer have access to data reported under the following circumstances. These trades will not be in scope of the UK EMIR reporting regime:

• Derivative transactions entered into by 2 EU27 counterparties that are traded on a UK Trading Venue.
• Derivative transactions entered into by 2 EU27 counterparties denominated in GBP.
• Derivative transactions entered into by 2 EU27 counterparties where the reference entity of the derivative contract is located in the UK or where the reference obligation is UK sovereign debt.

The Bank of England will remain responsible for supervising the UK EMIR reporting requirements for UK central counterparties (CCPs). We will continue to be responsible for supervising these requirements for all other UK counterparties.

Reporting of new and outstanding trades under the UK EMIR reporting regime by counterparties in scope

All new derivative trades entered into by UK counterparties on or after 11.00pm on Exit day are in scope of the UK EMIR reporting regime and are required to be reported to an FCA-registered, or recognised, TR.

All outstanding derivative trades entered into by UK counterparties on or after 16 August 2012, need to be held in an FCA-registered, or recognised, TR on Exit day.

• For outstanding trades between UK and EU27 counterparties at the point of Exit, only the UK report of the trade needs to be ported to, or to remain in, a UK TR post Exit. Any updates to these trades post Exit will only be required by UK counterparties.
• In relation to those outstanding trades that need to be ported to a UK TR post Exit, TRs will be required to ensure the porting of all outstanding trades on behalf of UK counterparties to an FCA-registered, or recognised, TR in time for Exit day. However, UK counterparties are encouraged to engage with their TRs to understand how the porting will be executed and to ensure all their relevant trades are captured.
• UK counterparties currently using EU27 based TRs are encouraged to engage with their TR to ensure all outstanding trades are ported to a UK TR of their choice by Exit day.

Historic EMIR data

UK-based TRs seeking conversion under the TR SI have been instructed to maintain a copy of all historic EMIR data (ie derivative trades reported under EMIR that are no longer outstanding) to which we and Bank of England currently have access.

EU27 based TRs that establish a new TR in the UK and seek temporary registration under the TR SI have been requested to hold a copy of the historic EMIR data to which the FCA and Bank of England currently have access to in that UK TR group entity. This is to enable us and Bank of England to continue to access these data after Brexit based on our current mandates under the EMIR regime. 

Firms are encouraged to engage with their TR to ensure they continue to have the relevant access to their historic EMIR data after Brexit, if required.

Inter-TR reconciliation

We recognise the importance of inter-TR reconciliation in enhancing data quality. However, we will not require UK TRs to undertake inter-TR reconciliation, or provide inter-TR reconciliation statistics to UK authorities, from Exit day. After Brexit we will work with all UK TRs on ways in which we fulfil this requirement in future. 

There will be no requirement for UK TRs to ‘back report’ any inter-TR reconciliation statistics once an approach towards UK inter-TR reconciliation has been agreed (ie whatever is agreed will not apply retrospectively). This approach is subject to any further statements that we may issue. 

The UK EMIR reporting regime will also require UK TRs to regularly, and in an easily accessible way, publish aggregate positions by class of derivatives, on the class of derivatives reported to them. However, we recognise that these reports will, for a period, reflect our approach to revisiting inter-TR reconciliation at a later date, after Brexit.

Data access for authorities

From Exit day, UK TRs will only be required to provide access to data reported by UK counterparties (based on individual mandates) to us, the Bank of England and other UK authorities listed within the EMIR SI.

Suspension of the reporting requirements

The EMIR SI introduces a new power for us to suspend the reporting obligation for a period of up to one year, with the agreement of the Treasury.

The use of this suspension power is limited only to the event that there are no FCA-registered, or recognised, TRs available for UK counterparties to report to. As we have taken appropriate steps to provide a conversion and temporary registration regime to facilitate UK TRs being available from Exit day, we do not envisage using this new power.

EMIR REFIT

EMIR REFIT looks to amend certain EMIR reporting requirements, reducing the burden of reporting for certain counterparties.

The majority of requirements under EMIR REFIT came into force in the EU on 17 June 2019. These requirements will be onshored under the EUWA via the Over the Counter Derivatives, Central Counterparties and Trade Repositories (Amendment, etc., and Transitional Provision) (EU Exit) (No. 2) Regulations 2019. This Exit SI is currently in draft form but expected to be made by Exit. Certain requirements under EMIR REFIT in relation to the reporting requirements are unlikely to be in application on exit day and therefore may not be onshored via the EUWA. Firms are encouraged to keep abreast of developments post exit, as to how these requirements will be brought into UK legislation.

Further information

If UK counterparties, or other relevant stakeholders, have questions not answered by this statement please contact us: [email protected].

TRs are encouraged to engage with their regular FCA policy and supervision contacts with any further queries.

We may amend this statement over time if we find there are common questions that it does not address.

This supervisory statement is to be used only in a no-deal scenario. Firms should check our website[12] for the latest information.