“Given the wide reach of EU-derived legislation and the complexities of unpicking it, it would be very difficult for the UK to have determined which EU-derived legislation it wishes to keep and which it wishes to repeal or amend by the time the UK leaves the EU,” said Mark Brown, partner at Linklaters, speaking on a press briefing webinar hosted by the International Swaps and Derivatives Association (ISDA) on June 29.
“It is therefore likely that the UK government would pass some form of continuity legislation or savings provisions, keeping all or a majority of EU-derived legislation in place, so far as practicable, until such time as it is specifically repealed or amended.”
For derivatives and foreign-exchange trading specifically, implementation of the European Market Infrastructure Regulation (EMIR), which includes provisions on central clearing and trading reporting, is already under way, while the recast Markets in Financial Instruments Directive (Mifid II) is due to come into force in 2018.
In a statement on June 24, the UK Financial Conduct Authority advised firms they should continue with implementation plans for forthcoming legislation, but it recognized that the long-term impact of Brexit on the UK regulatory framework will depend, in part, on the relationship the UK seeks with the EU.
However, given that many EU rules, including EMIR and Mifid II, derive from international standards set by bodies including the G20, Basel Committee and Financial Stability Board, the UK would be unlikely to repeal those laws altogether once it has left the EU.
“Many of the [EU] rules are consistent in any event with UK policy, and so even were there time to rewrite our financial regulatory settlement, perhaps some of these areas would be unlikely to change,” said Peter Bevan, global head of Linklaters’ financial regulation group. "It’s unlikely, for instance, that we will decide that to give a competitive advantage to financial markets in the UK we will legislate to permit insider trading.”
Plagued by uncertainties
However, the finer details of EMIR and Mifid II compliance post-Brexit remain plagued by uncertainties. Even if the UK does pass some form of continuity legislation, for example, the European Securities and Markets Authority (ESMA) has responsibility for key components of those rules, including the authorization of central counterparties (CCPs) and trade repositories.
“There are a number of areas where the regulations are supplemented by guidance from ESMA," said Bevan. "There will be a question over time over whether that guidance will continue to be seen as authoritative here in the UK, or whether we will choose to apply a different interpretation to regulations.”
CCPs and trade repositories that operate in London face the threat of being cut out of the European market after the UK’s departure. That might put those infrastructures on a similar footing to US organizations, which have had to battle to gain access to the European market by seeking equivalence determinations from regulators.
|Scott O’Malia, ISDA|
“In the best-case scenario, there is a negotiated agreement that deals with equivalence or authorization and maintains the same status quo we have today, then clearly life can continue as it did before,” said Mark Drury, partner at Linklaters. "But the worst-case is that the UK exits the EU and it becomes a third country – potentially its CCPs and trade repositories then need to apply for equivalence and there is a period of uncertainty."
For its part, ISDA conducted analysis on the contractual implications of Brexit earlier this year and it has set up a Brexit working group in the wake of the referendum, to which members are being invited to sign up.
“It is ISDA’s top priority that we work with the UK and EU banking authorities, as well as other affected jurisdictions to resolve cross-border differences and harmonize the new rules and legal framework to ensure a safe and efficient marketplace,” said Scott O’Malia, chief executive of ISDA.