June 24, 2016

Brexit and the Markets

The best case scenario is that some or all of the EU regulations and laws which apply are transposed into UK law. Worst case, UK becomes an outsider and the focus for financial services moves on-shore into Europe.

Here is a round-up of Brexit analysis, no doubt compliance departments will be requesting continued or increased budget in the coming years:

  • ISDA​
  • Ashurst analysis
    • MiFID II: There is no common third country regime under MiFID and each Member State has its own rules, so any third country bank wishing to provide services in a particular EU jurisdiction must either (i) itself be established as an authorised entity in that Member State and authorised under MiFID or (ii) establish an authorised subsidiary in a Member State and rely on passporting rights across the EU.
    • MiFID II: If the UK did not retain EEA membership following a Brexit (and thus did not maintain full access to the internal market), the position of UK banks under CRD would be far from straightforward. As under MiFID, the automatic EU passport for banking services would be lost. UK banks would therefore require new licences in multiple EU jurisdictions.
    • EMIR: It is therefore likely that the UK would transpose EMIR and its related secondary legislation into domestic legislation wholesale, with any necessary conforming amendments, so obligations which apply to banks under EMIR would continue to apply post-Brexit (albeit under a different, domestic, piece of legislation)
    • Custody services: UK banks currently providing custody services to certain clients may find that they are no longer able to do so if the UK leaves
      the EU. The Alternative Investment Fund Managers Directive (the AIFMD) restricts which entities can act as a depository for EU-incorporated alternative investment funds (AIFs); EC credit institutions and investment firms automatically qualify but third country entities do not, meaning that an AIF which currently uses a UK-based bank to provide its custody services may be required to move its business elsewhere if that UK-based bank ceases to be an EC credit institution or investment firm.
    • TRs and CCPs: UK-based TRs and CCPs would need to apply for recognition from ESMA in order to continue to provide services to EU counterparties. This should not be fundamentally problematic as they are already EMIR-compliant, but obtaining recognition has taken longer than expected for other non-EU entities, notably US-based CCPs, which took several years. Delays may also be exacerbated if negotiations between the UK and the EU around Brexit more generally have not gone well.
  • ClarusFT
  • Davis Polk Analysis
    • See PDF attachment below

We've added a Brexit category as a 'regulation', to tag content going forward. Use the black Filters button on the home page to zoom in on this topic over the coming years.


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