On 9 November 2020, the HM Treasury announced it would grant equivalence decisions for member states of the European Economic Area (EEA) across a number of financial services areas. Following this, the Financial Conduct Authority (FCA) has updated its webpage providing useful guidance on how this equivalence framework will work.
The equivalence decisions will cover the following:
- European Market Infrastructure Regulation (EMIR) – intragroup transactions exemption: UK firms dealing with EEA counterparties within their group will be able to apply for the clearing and/or margining exemption for such intragroup transactions. This means that UK subsidiaries of EU financial institutions and others can continue to deal in London and then back their positions to their European affiliates without EMIR obstacles. Importantly, to be able to do so, UK firms must submit an application for the margin exemption or a notification for the clearing exemption to the FCA.
- EMIR – regulated markets: EEA trading venues will continue to be treated as “regulated markets” for the purposes of the UK EMIR regime. Consequently, derivatives traded on EEA exchanges will continue to be “exchange-traded” and will not become “OTC” by definition and so count towards the clearing thresholds.
- Credit Rating Agencies Regulation (CRAR) – certification: EEA CRAs will be able to apply for certification with the FCA (provided they are not systemically important for the UK financial system). In addition, UK-registered CRAs will be able to “endorse” credit ratings issued by their EEA affiliates. UK firms will be permitted to use such ratings of EEA CRAs for regulatory purposes.
- Benchmarks Regulation – EEA benchmarks administrators may be added to the FCA’s register if they notify the FCA accordingly. UK regulated firms will be able to use benchmarks published by registered EEA administrators. Moreover, the UK government intends to extend the current transitional period in respect of all third country benchmarks to the end of 2025 (instead of the end of 2022), which means that UK firms will be able to use all third-country benchmarks until then.
- Capital Requirements Regulation (CRR) – EEA exposures: The UK will grant seven equivalence decisions in this area. The overall effect is that UK firms will not need to allocate additional capital to their EEA exposures.
- Short Selling Regulation (SSR) – market making exemption: EEA firms that are members of an EEA trading venue will be able to benefit from the market maker exemption under the UK SSR regime, without needing to become members of a UK trading venue. Firms will simply be required to notify the FCA of their intention to make use of the exemption 30 days before they wish to do so.
The equivalence decisions have been granted on the basis of the equivalence of EEA legal requirements to the relevant UK requirements, as well as effectiveness of supervision.
Each equivalence decision will come into effect immediately after the end of the Brexit transitional period, on 31 December 2020.
The UK’s position contrasts starkly with the EU’s – which has only made one, limited, temporary, equivalence decision, to permit EU firms to continue using UK Central Counterparties (CCPs) until the middle of 2022.
The UK equivalence decisions, alongside the availability of broad temporary permissions regimes for EEA authorised firms, are designed to ensure continuity of business beyond 31 December 2020 for EEA firms providing services in the UK in the event that no free trade agreement is put in place. The position for UK authorised firms servicing EU customers beyond 31 December 2020 is less certain and based largely on EU member state national approaches.