As part of our summer regulatory series, Julia Smithers Excell, managing director and UK Head of Financial Markets Legal at ING Bank N.V. London branch, offers a mid-year update to her December article on Brexit and the possible impact on derivatives.
By way of update to my December 2021 DerivSource post on this topic, I’d cite again the UK regulators’ useful UK regulatory initiatives grid which helps firms track and co-ordinate the cumulative impact of the myriad changes serving to develop the UK’s post-Brexit regulatory regime for markets.
The grid was updated at the end of May 2022 – from the derivatives perspective the update includes 4 main initiatives:
- UK European Market Infrastructure Regulation (EMIR) Margin: the UK regulators’ July 2022 consultation on UK EMIR margin changes including expanding the UK list of eligible collateral to EEA UCITS, and introducing a 6 month implementation period for firms coming into immediate scope of margin arrangements,
- Phase 6 Initial Margin: implementation of bilateral margin obligations phase 6 on 1 September 2022,
- USD LIBOR derivatives clearing obligation (CO): the Bank of England’s (BoE) proposed changes to the USD interest rate swap CO to reflect ongoing USD interest rate benchmark transition, including adding from 31 October 2022 Overnight Index Swaps (OIS) referencing the Secured Overnight Financing Rate (SOFR), and subsequently (likely Spring 2023) removing contracts referencing USD LIBOR around the same time as central counterparties (CCPs) render them ineligible for clearing, and
- UK EMIR Reporting: finalisation of amendments to UK EMIR reporting standards via a policy statement scheduled for Q4 2022.
UK CCP Resolution: The grid also mentions the March 2022 HM Treasury (HMT) response to feedback (including from derivatives market participants) on its consultation on the proposed expansion of the UK CCP resolution regime, to be implemented by the Financial Services and Markets Bill (see further below).
Non-UK CCPs: In the CCP context, I’d also mention that the BoE published in June 2022 its final policy on its post-Brexit approach to tiering non-UK CCPs providing services into the UK, emphasising its deference to and informed reliance on their home regulators and supervisors (where a sufficiently deep and cooperative relationship enables this). The Financial Services and Markets Bill also contains expanded BoE powers in this context.
UK regulators to address recent stresses impacting derivatives markets: Finally in the CCP and financial market infrastructure context, I’d also cite the BoE’s ongoing consideration of lessons learned from the impact on UK derivatives markets of CCP margin calls, commodity markets price moves and other developments during Q1 2020 (pandemic) and Q1 2022 (Russia).
Financial Services and Markets Bill: Market focus is now very much on the UK Financial Services and Markets Bill introduced in Parliament on 20 July 2022, on its passage through Parliament during the rest of this year and into 2023, and on its provisions implementing many of the UK’s post-Brexit Future Regulatory Framework Review and Wholesale Markets Review reform proposals and anticipating further consultations from the UK regulators exercising their new powers. At a high level, those of its provisions impacting the derivatives market include:
- various UK EMIR and UK Markets in Financial Instruments Regulation (MiFIR) changes aligning the derivatives trading obligation (DTO) with the CO, exempting post-trade risk reduction services more broadly from the DTO (and potentially the CO), further empowering the Financial Conduct Authority (FCA) to amend or suspend the DTO, re-scoping the transparency and position limits regimes, and changing how systematic internalisers are defined,
- introducing a new Designated Activities Regime under the Financial Services and Markets Act 2000 (FSMA) to regulate certain retained EU law activities (including some related to derivatives contracts) not otherwise regulated by FSMA, and
- facilitating the future revocation of retained EU law, including UK EMIR and UK MiFIR.