European Union: EU Commission Notices To Stakeholders

On the 8 February 2018, the EU Commission issued two Notices to Stakeholders in connection with the withdrawal of the United Kingdom from the EU, titled "Withdrawal of the United Kingdom and EU rules in the Field of Banking and Payment Services" and "Withdrawal of the United Kingdom and EU rules in the field of Post-Trade Financial Services" respectively.

This Article provides highlights of the Notices to Stakeholders which commence with the Commission's statement that, unless a ratified withdrawal agreement, establishes another date, all EU primary and secondary law will cease to apply to the United Kingdom from 30 March 2019, 00:00 hrs (CET) (the "Withdrawal Date") at which time the United Kingdom will become a third country.

In view of the considerable uncertainties, in particular concerning the content of a possible withdrawal agreement, the Commission reminds stakeholders of legal repercussions, which need to be considered when the United Kingdom becomes a third country.

It adds that, subject to any transitional arrangement that may be contained in a possible withdrawal agreement, as of the Withdrawal Date, the EU rules in the field of banking and payment services1 and financial markets2 will no longer apply to the United Kingdom.

The Commission deals with the following consequences of the foregoing:

Withdrawal of the United Kingdom and EU rules in the field of banking and payment services

1. Authorisations

UK entities providing banking and payment services, as well as e-money issuing, will no longer benefit from the authorisation to provide those services and activities in the Union and will be treated as third-country entities with regard to their possibility to establish branches or agents in the Member States. They will lose the so-called "EU passport", which means that those entities will no longer be allowed to provide services in the EU on the basis of their current authorisations.

Entities authorised by United Kingdom competent authorities which have established branches in other Member States will have to comply, as of the Withdrawal Date, with the rules of the host Member State applicable to branches of entities having their head office in a third country, including the requirement to be validly authorised by the relevant competent authority of the host Member State in accordance with these rules. According to the Commission, this may imply the need to submit an application for authorisation as a branch or subsidiary and potentially result into changes for depositors, for instance where deposit guarantee arrangements would need to change. Payment institutions authorised by United Kingdom competent authorities, as of the Withdrawal Date, will not be allowed to provide payment services in the territory of the EU cross-border or through the use of branches located in the Member States.

Entities authorised by the competent authorities in the EU, including their branches, have to comply with the conditions of their authorisation on a continued basis. Where entities authorised by a competent authority in the EU have established branches in the United Kingdom, these branches will have to comply with the scope of the authorisation granted to the entities of which they are an integral legal part.

2. Arrangements and Exposures

Arrangements which may affect the ability of entities authorised in the EU to have an autonomous risk management and control framework, and sufficient operational resilience, including trading and hedging capabilities, in crisis will have to be assessed by the competent authority which has granted the authorisation.

The prudential treatment of exposures to third parties established in the United Kingdom will also be affected as of the Withdrawal Date. Similarly, in the resolution framework, as of the Withdrawal Date, the assessment of the eligibility of liabilities for the minimum requirement for own funds and eligible liabilities may be affected for those liabilities issued under UK law.

3. Contracts

Contract continuity for relationships between parties established in the EU and in the United Kingdom will be affected by the loss of the single passport, as this will impair the ability of UK based entities to continue performing certain obligations and activities and ensure service continuity with regard to contracts concluded before the Withdrawal Date. As of the Withdrawal Date, the EU rules on conflicts of laws and jurisdictions will no longer apply to the United Kingdom.

Withdrawal of the United Kingdom and EU rules in the field of post-trade financial services

1. Derivatives

As of the Withdrawal Date, derivatives traded on a UK regulated market will no longer fulfil the definition of exchange traded derivatives (ETDs) under EU law. Thus, under EU law, as of the Withdrawal Date, ETDs traded on a UK regulated market will be over-the-counter (OTC) derivative contracts.

An ETD that becomes an OTC derivative will thus become subject to all EMIR requirements applicable to OTC derivatives transactions: all OTC derivatives transactions count towards the calculation of the clearing threshold in accordance with the provisions of EMIR and will be subject to the EMIR clearing obligation where one has been adopted as well as certain risk mitigation techniques (notably the exchange of margins).

OTC derivatives that are subject to the clearing obligation must be cleared by a central counterparty (CCP) which is authorised and established in a Member State of the EU or a CCP established in a third-country and which is recognised by the European Securities and Markets Authority (ESMA) under Article 25 of EMIR to clear that class of OTC derivative. As of the Withdrawal Date, CCPs established in the United Kingdom will be third-country CCPs which would need to be recognised under EMIR before they could be used to fulfil the clearing obligation. Counterparties will not be able to fulfil their clearing obligation under EMIR in CCPs established in the United Kingdom as long as those CCPs are not recognised by ESMA under EMIR.

The loss of EU authorisation of CCPs established in the United Kingdom will affect their ability to continue performing certain activities (e.g. compression) and fulfilling certain obligations (e.g. default management) with regard to contracts concluded before the Withdrawal Date.

A higher capital charge will apply to exposures resulting from positions in derivatives held by credit institutions and investment firms established in the EU and their subsidiaries in non-recognised CCPs established in the EU. This is because only authorised CCPs established in the EU and recognised CCPs established in a third country are qualifying CCPs (QCCPs) which have a favourable treatment under CRR.

2. Trade Repositories and Reporting

Derivatives or securities financing transactions which are subject to the reporting obligation under EMIR or SFTR must be reported by counterparties to an EU registered trade repository or to a third-country trade repository recognised by ESMA under Article 77 of EMIR. As of the Withdrawal Date, trade repositories established in the United Kingdom will be third-country trade repositories.

The obligation to report a derivative contract to a duly registered or recognised trade repository is addressed to the counterparties. All counterparties, be they financial or non-financial, must ensure that this requirement is fulfilled. Where reporting to a trade repository is delegated to a third party, counterparties should ensure that their contract guarantees compliance with all applicable legal requirements in EMIR and/or SFTR.

Systems will no longer be able to be designated by the United Kingdom under the Settlement Finality Directive. As of the Withdrawal Date, systems currently designated by the United Kingdom will lose their designation under the Settlement Finality Directive along with the rights and benefits that entails for them and their participants.


[1] Including Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms (CRD); Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms (CRR); and Directive (EU) 2015/2366 of the European Parliament and of the Council of 25 November 2015 on payment services in the internal market (PSD).

[2] Regulation (EU) No 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories4 (EMIR); Regulation (EU) No 600/2014 of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Regulation (EU) No 648/20126 (MIFIR); Regulation (EU) 2015/2365 of the European Parliament and of the Council of 25 November 2015 on transparency of securities financing transactions and of reuse and amending Regulation (EU) No 648/20127 (SFTR); Directive 98/26/EC of the European Parliament and of the Council of 19 May 1998 on settlement finality in payment and securities settlement systems8 (SFD).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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