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Brexit Statutory Instruments: secondary impactsMinds made for shaping Financial Services

September 2019

1 | Brexit Statutory Instruments: secondary impacts September 2019

IntroductionAs part of ensuring the appropriate implementation of the Brexit Withdrawal Bill, the UK Government is in the process of establishing 78 statutory instruments (SIs), each of which adapts European legislation for implementation in the UK for Financial Services.

SIs are a type of legislation which allow the provisions of an Act of Parliament to be brought into force or amended without Parliament having to pass a new act. The current series of SIs have been written in the context of a potential No-deal Brexit scenario with immediate Day 1 implications. Should the UK leave the EU with a deal, the current SIs would need to be amended to reflect the new covenant, although the change is expected in the implementation timeline and not in their core requirements.

The amendments introduced by the SIs must be complied with by all firms operating in the UK. While some SIs may seem immaterial, such as a “simple change of regulatory authorizer”, many will have far reaching technical and operational impacts for Financial Services firms.

Non-compliance with these regulatory changes poses risk for firms that their ability to carry on certain activities will be interrupted, access to markets could be restricted and/ or capital requirements could be increased.

EY teams have practical experience helping clients to assess and respond to the operational impact the SIs — both on exit day and in the longer term. This publication will share some of the key EY insights and suggestions for how to tackle the question of what alignment with the SIs could mean for your business.

2Brexit Statutory Instruments: secondary impacts September 2019 |

Government’s minimum target of SIs

SIs laid before Parliament to date

SIs impacting Banking and Capital Markets institutions to date

On 1 February 2019, the FCA published 7 SIs which it considered a priority for Financial Services firms to assess, Firms will not be granted any transitional relief to achieve compliance with the changes in these 7 SIs in a No-deal Brexit scenario. Despite the delays, it is likely that these same SIs will continue to be a focus in the run up to the revised Brexit date.

Given expected Day 1 compliance, firms are focusing on identifying:

• Where the immediate Day 1 impact/risks could occur and implementing appropriate mitigating actions

• Ensuring that implementation plans take into account downstream impacts — for example data changes which impact multiple systems and processes, necessary policy and procedures changes, location strategies regarding specific client relationships and market activity in particular products or services which may include potential policy

Ultimately, changes resulting from the SIs should be implemented in a consistent and complete manner to ensure the business can continue to operate effectively.

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Key statistics


A summary of the 7 FCA priority SIs is set out below, along with the key headline implications.

1. MiFID II:

Markets in Financial Instruments (Amendment) (EU Exit) Regulations 2018.

Reference Data: Instrument reference data needs to be split between UK and EEA financial instruments which includes FIRDS (Financial Instruments Reference Data System), ToTV (Traded on Trading Venue), limits and thresholds.

2. EMIR:

The Over the Counter Derivatives, Central Counterparties and Trade Repositories (Amendment, etc., and Transitional Provision [EU Exit] Regulations 2018).

Clearing: Onboarding of FCA registered UK CCPs (which are currently registered with ESMA) may not be completed where required in order to fulfil clearing obligations.

3. Short Selling (Amendment)

Financial instrument scope: The scope of financial instruments in the current EEA Short Selling Regulation (SSR) will become restricted to securities traded on a UK trading venue.

4. Securitization (Amendment)

Reporting: originators, sponsors, and Securitization Special Purpose Entities (SSPE) must report information relating to their public securitization to repositories located in the EU and authorised and registered with the ESMA. As ESMA will no longer have jurisdiction in the UK post-Brexit, this responsibility will be transferred to the Financial Conduct Authority (FCA).

5. Credit Rating Agencies (Amendment)

Risk Management: Non-endorsed Credit Ratings can no longer be used for Regulatory Risk calculation.

6. BRRD

The Bank Recovery and Resolution and Miscellaneous Provisions (Amendment) (EU Exit) Regulations 2018.

7 FCA priority SIs

Legal Terms: Following the withdrawal of the UK from the EU, it will be treated as a third country state and changes to legal contractual terms in respect of new and materially-amended liabilities will be required.

7. Issuer Rules:

Official Listing of Securities, Prospectus and Transparency (Amendment) (EU Exit) Regulations 2019.

Authorization: Post Brexit, all prospectuses for securities that are offered to the public in the UK or admitted to trading on a UK regulated market, must be approved by the FCA.

A broader regulatory consideration must be taken into account for this SI as the prospectus regime is due to change on 21 July 2019 (Prospectus Directive III). Therefore, firms involved in prospectus issuances will need to revise their procedures.

4Brexit Statutory Instruments: secondary impacts September 2019 |

Cases of Direct Impact on Financial Services for the 7 FCA priority SIs

1. Immediate considerations from the direct impact of the SIs

• As the FCA has indicated they expect compliance on exit day, in the absence of any other agreed arrangements between the UK and the EU, it will be critical for firms to:

• Implement change wherever possible

• Carry out a full impact review and prepare a clear plan of action/ remediation to demonstrate reasonable steps to the FCA.

• Initiate remediation delivery

2. Longer term Day 2 Considerations (Broader intent of the regulation)

• The impact assessment of the changes referred to in the SIs and the Day 1 initiatives may identify downstream impacts on FS firms.

• We have mapped some of the downstream impacts for the 7 priority SIs listed by the FCA and other significant non-priority SIs across various areas.

• Identifying downstream impacts will require careful consideration of connected processes, multiple uses for individual datapoints, and interactions between activities and the associated risk and capital implications

• These impact categories include:

Longer term (Day 2) consideration Downstream impact areas

Capital Risk Management

Technology Operating Model

Legal / Contractual framework and Clients and customers

Prio

ritiz

ed S

Is

MiFID II

EMIR

Short Selling (Amendment)

Securitization (Amendment)

Credit Rating Agencies (Amendment)

BRRD

Issuer Rules

Other SIs e.g., CRR (Capital Requirement Regulation)


Potential challenge areas not covered by the Sl

Sl Direct Impacts identified by the Regulator

Trading Obligations

Best Execution Reporting

Commodities Reporting

Post Trade Transparency

Elements of MiFID II not

covered by the SI

Reference Data Instrument

Reference Data Counterparty

Transaction Reporting

FIRDS Reporting

Downstream Impact of SI on MiFID II processes

The SI covering MIFID II has a number of examples of potential secondary impacts. For example, the direct requirement to update financial instrument reference data to create separate UK and EU 27 reference data sets will impact multiple trading processes and associated systems which rely on reference data to identify the need to apply other MIFID requirements.

Trading obligations trading obligations are based on reference data associated with a given financial instrument, and after

the change there may be two instruments, one associated with UK venues and one associated with EU27 venues. Trading obligations connected to particular instruments which may now be bifurcated between UK and EU27 versions of the instrument.

See the below example of the downstream impact of SIs on the MiFID II processes

Why EY Teams?

EY contacts

• We have advised clients on the regulations covered in both the priority and secondary SIs, and assist you with anticipating potential operational impacts (MiFID II, EMIR, MLD, PSD2, etc.).

• We have undertaken impact assessments for the SIs specifically and Brexit generally for multiple large financial services institutions, giving us practical insight into areas of focus and potential impact.

• We have helped clients prepare their project set-up and operational roadmap for implementation of the SI impact supported by technical and operational EY analysis.

• We understand the importance of tracing the SI requirements through impacted business and functional areas in order to clearly demonstrate actions required to be taken. These should be readily updated given potential requirements and implications change due to either external or internal drivers.

Wilfrid Hounton

Senior Manager, Banking and Capital Markets Ernst & Young LLP

Email: [email protected]

Kara Cauter

Partner, Banking and Capital Markets Ernst & Young LLP


Tom Groom

Partner, Banking and Capital Markets Ernst & Young LLP


Liam McLaughlin

EY EMEIA Brexit Lead Partner, Ernst & Young LLP


Vera Kukic

EY EMEIA FSO Brexit Market Lead Associate Partner, Ernst & Young LLP


Brexit Statutory Instruments: secondary impacts September 2019 | 6

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