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1. Background

The European Market Infrastructure Regulation (EMIR) came into effect in 2012 and sets out various rules on 鈥榦ver-the-counter鈥� (OTC) derivatives, central counterparties (CCPs) and trade repositories (TRs).

1. EMIR permits non-UK CCPs to provide services to UK firms only if they are EEA located and 鈥榓uthorised鈥� by their home regulatory authority, or if they are non-EEA (鈥榯hird-country鈥�) located and 鈥榬ecognised鈥� by the European Securities and Markets Authority (ESMA).

2. EMIR requires all information on European derivative transactions to be reported to trade repositories that are registered or recognised by ESMA.

2. Services provided by non-UK Central Counterparties

In a no deal scenario, non-UK CCPs would be unable to provides services to UK firms until they are 鈥榬ecognised鈥� under a UK regime for third country CCPs. A separate SI, the (the 鈥淐CP SI鈥�), which became law on 13 November 2018, addresses deficiencies in the retained EMIR third-country CCP regime by:

• creating a temporary recognition regime, which enables non-UK CCPs to continue to provide services to UK firms for a limited period (three years) after exit day if they notify the Bank of their intention to do so and are currently permitted to provide those services in the EU

• the regime provides additional time for recognition applications to be processed, thereby ensuring continuity of services from non-UK CCPs to UK firms

In this way, the CCP SI establishes a UK domestic regime for recognition of third country CCPs and mitigates risks that firms and the broader financial system would otherwise be exposed to in the event of a disruption to services from non-UK CCPs to UK firms.

Building on the CCP SI, it is important to facilitate a run-off of services in the event that non-UK CCPs do not enter the temporary recognition regime or do not gain permanent recognition under retained EMIR. This SI, therefore, inserts provisions into the CCP SI to establish a 鈥楥CP run-off regime鈥� to allow UK firms time to wind down relevant contracts and business with non-UK CCPs in an orderly manner.

In order to do this, this SI provides that non-UK CCPs shall be taken to be recognised under Article 25 of retained EMIR in the following two scenarios:

• a non-UK CCP was eligible for, but does not enter, the temporary recognition regime. For example, because it did not notify to the Bank of its intention to enter the temporary regime

• a non-UK CCP entered the temporary recognition regime but exits the regime without the necessary permanent recognition to allow it to continue to provide services in the UK. For example, the CCP鈥檚 application for full UK recognition may be unsuccessful

In the first scenario, this SI provides recognition for a period of one year (non-extendable) beginning on exit day. In the second scenario, the Bank of England shall determine a period for recognition that is no longer than one year (non-extendable) beginning on the day on which the relevant CCP ceases to be taken to be recognised under the temporary recognition regime.

CCPs as described in both scenarios will be automatically entered into the run-off regime. CCPs in the run-off regime are not able to enter (or re-enter) the temporary recognition regime, and they will only be permitted to carry on the range of services they were permitted to carry on immediately before entering the run-off regime.

Without run-off recognition, UK firms would face 鈥榗liff-edge鈥� risks similar to those which the temporary recognition regime mitigates, i.e. a disruption to services from non-UK CCPs introducing operational, legal, and stability risks.

3. Services provided by Trade Repositories

A separate SI, (the 鈥淭R SI鈥�), became law on 6 December 2018. To ensure that the UK鈥檚 legal framework for reporting derivatives trades to TRs continues to operate effectively following exit day, the TR SI establishes a temporary registration regime, while also providing the FCA with pre-exit powers to accept applications from TRs who wish to enter the temporary registration regime.

The purpose of the regime is to allow EU registered TRs, who have set up a new legal entity in the UK, to benefit from temporary registration for a time limited period (three years) after exit day, while their application is being considered by the FCA. To enter this regime, eligible TRs will be required to submit an application before exit day to the FCA and meet the requirement that they are an entity which forms part of a group which includes an ESMA-registered TR.

This SI establishes a 鈥楾R run-off regime鈥�, the purpose of which is to mitigate risks faced by UK firms in the event that a TR is removed from the temporary registration regime. This SI, therefore, provides that a TR shall be taken to be registered under Chapter 1 of Title 6 of retained EMIR if the TR is removed from the temporary registration regime without the necessary permissions to continue to provide services to UK firms. For example, the FCA can remove a TR from the temporary regime because its application for full registration has been refused.

Registration shall be provided for a period of one year (non-extendable) unless the FCA sets a shorter period, beginning with the day on which the relevant TR ceases to be registered under the temporary regime. The reason for providing registration to TRs for this run-off period is to allow UK firms time to make alternative arrangements with another registered or recognised TR in order to satisfy the reporting obligation set out within retained EMIR. It also allows the FCA to impose requirements on the TR exiting the market to ensure that the data collected by it is transferred to another registered or recognised TR to ensure it remains available to the regulators.

Without run-off registration, UK firms would face 鈥榗liff-edge鈥� risks similar to those which the temporary registration regime mitigates, i.e. a disruption to services from registered TRs, introducing legal risks whereby UK firms are unable to fulfil their reporting requirements under EMIR.