On 19 December, the European Commission began implementing its “no deal” Brexit Contingency Action Plan. This came in the context of the continued uncertainty surrounding the ratification of the Withdrawal Agreement agreed between the EU and the UK on 25 November 2018 and last week’s call by the European Council (Article 50) to intensify preparedness work against the backdrop of a potential “no deal” Brexit.
This delivers on the Commission’s commitment to adopt all necessary “no deal” proposals by the end of the year, as outlined in its second preparedness Communication of 13 November 2018. The package includes 14 measures in a limited number of areas where the Commission considered a “no-deal” scenario would create major disruption for citizens and businesses in the EU27, one of which was financial services.
The Commission noted that only a “limited number” of contingency measures was necessary to safeguard financial stability in the EU27. These policies are intended to mitigate financial stability risks only in those areas where preparedness actions from market operators alone are “clearly insufficient” to address these risks by the withdrawal date.
In the financial services context, the measures focus on contract continuity for derivatives. The measures outlined below will apply from 30 March 2019 if the Withdrawal Agreement is not ratified:
- A temporary and conditional equivalence decision for 12 months to allow the European Securities and Markets Authority to recognise temporarily central counterparties currently established in the UK. This is designed to ensure that EU27 companies do not experience any disruption in the central clearing of derivatives in the aftermath of Brexit.
- A temporary and conditional equivalence decision for 24 months to allow UK central securities depositories to continue providing notary and central maintenance services to operators in the EU. This is designed to ensure there will be no disruption in services provided by UK central securities depositories.
- Two delegated regulations[1] facilitating novation, for a fixed period, of certain over-the-counter derivatives contracts with UK counterparties. This is to ensure that such contracts can be transferred to an EU27 counterparty while maintaining their exempted status and therefore not become subject to clearing and margining obligations under the European Market Infrastructure Regulation.
The Commission also took the opportunity to highlight that financial operators established in the UK would lose the right to provide their services in the EU27 under existing EU financial services passports in the event the Withdrawal Agreement is not ratified. The Commission warned financial institutions that wish to provide banking or insurance services in the EU that they should take all necessary steps to be properly authorised on the withdrawal date, including by establishing a presence in the EU27. It also noted in its Q&A that payment institutions authorised by UK competent authorities would not be allowed to provide payment services in the EU under their current authorisations following a “no deal” Brexit.
This contrasts with the FCA’s temporary permissions regime, which would allow inbound passporting EEA firms and funds to continue operating in the UK if the passporting regime falls away abruptly in the event of a “no deal” Brexit.
The Commission recommended that firms continue to take all the necessary steps to mitigate risks, with firms encouraged to actively inform clients about the steps they have taken and how they are implementing them.
Footnote 1: (i) Commission Delegated Regulation (EU) amending Commission Delegated Regulation (EU) 2015/2205, Commission Delegated Regulation (EU) 2016/592 and Commission Delegated Regulation (EU) 2016/1178 supplementing Regulation (EU) No 648/2012 of the European Parliament and of the Council as regards the date at which the clearing obligation takes effect for certain types of contracts (C(2018) 9122); and
(ii) Commission Delegated Regulation (EU) amending Delegated Regulation (EU) 2016/2251 supplementing Regulation (EU) No 648/2012 of the European Parliament and of the Council as regards the date until which counterparties may continue to apply their risk-management procedures for certain OTC derivative contracts not cleared by a CCP (C(2018) 9118).
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