On 29 March 2017, the United Kingdom (UK) notified the European Council of its intention to withdraw from the European Union (EU), a process known as Brexit.
The European Securities and Markets Authority (ESMA) is making preparations to ensure that it continues to deliver its mission to enhance investor protection and promote stable and orderly financial markets after the UK leaves the EU on 29 March 2019.
ESMA has initiated a systematic analysis of the potential impact of Brexit for European securities markets and for ESMA as an organisation, and is preparing for the different possible scenarios linked to the UK’s withdrawal, including the possibility that the UK leaves on 29 March without a deal.
Therefore, ESMA urges all market participants, investors as well as consumers to ensure contingency planning with a view to prepare for a potential no-deal Brexit.
Clearing and Settlement – Access to UK Central Counterparties (CCPs) and UK Central Securities Depositories (CSDs)
ESMA supports continued access to UK CCPs, in order to limit the risk of disruption in central clearing and to avoid any negative impact on the financial stability of the EU. Following the European Commission’s (EC) equivalence decisions on UK CCPs and the UK CSD, ESMA aims to recognise UK CCPs as third-country CCPs in a timely manner, where the four recognition conditions under Article 25 of the European Markets Infrastructure Regulation (EMIR) are fulfilled.
ESMA also supports continued access to the UK CSD to allow it to service Irish securities and to avoid any negative impact on the Irish securities market. ESMA will follow a similar process as described for UK CCPs, for the recognition of the UK CSD as a third-country CSD.
ESMA is working closely with the Bank of England in these areas.
Credit Rating Agencies (CRAs) and Trade Repositories (TRs)
In the EU, all derivatives subject to the reporting obligation under EMIR must be reported to a registered EU-established TR or a recognised third-country TR. Similarly, CRAs need to have a legal entity registered in the EU and supervised by ESMA, in order for allow the use of their ratings for regulatory purposes in the EU.
In a no-deal Brexit scenario, TRs and CRAs established in the UK will lose their EU registration as of the UK’s withdrawal date.
UK-based CRAs and TRs currently registered with ESMA have implemented contingency plans in preparation of a no-deal Brexit scenario. ESMA has noted significant steps forward by both industry sectors in terms of preparedness, however, some actions still need to be completed.
ESMA is engaging on a continuous basis with the relevant supervised entities to ensure that the agreed Brexit contingency plans are fully executed by 29 March in case of a no-deal Brexit, including the finalisation of pending applications for registration.
If the UK leaves on 29 March without any agreed transition arrangements in place, it is essential that EU securities regulators can continue to meet their mandates regarding investor protection, orderly markets, and stability. In that context, having Memoranda of Understanding (MoU) in place allowing the exchange of supervisory information is essential. A number of these MoUs currently exist with third countries.
ESMA and European securities regulators have agreed MoUs with the Financial Conduct Authority (FCA) of the UK. In addition, ESMA has agreed MOUs with the Bank of England (BoE) for the recognition of CCPs and of the CSD established in the UK. The MoUs form part of authorities’ preparations should the UK leave the EU without a withdrawal agreement, the no-deal Brexit scenario.
Given the prominent role of the United Kingdom in the EU single market, ESMA is working to ensure a consistent supervisory approach to safeguard investor protection, the orderly functioning of financial markets and financial stability in the context of the UK’s withdrawal from the EU. More information on the convergence related work of ESMA’s Brexit activities is presented here.