Do UK firms still have to care about EMIR and MiFID II after Brexit?
With the Breixt referendum leading to a ‘leave’ vote, it puts doubt on the future of financial reporting requirements for UK firms. Notably, EMIR regulation, which went into effect in 2014 and is part of the global wave of derivative reporting initiatives, as well as MiFID II, which is slated for 2018, are EU led rules which may become obsolete were the full Brexit to take place.
So the question is, do UK firms still have to care about EMIR and MiFID II now that Brexit voting has taken place? The short answer is yes.
For their part, the UK’s Financial Authority (FCA) addressed the Brexit vote with a statement shortly after the vote results became finalized. The FCA stated that until changes are made, any financial regulation that in the UK that was derived from the EU is still in place. As such, reporting requirements that are part of EMIR and MiFID regulation continue to be in place. In addition, as the Brexit process will take at least two years to complete after a formal withdrawal request from the EU is presented, MiFID II will already have been put into effect.
In a speech by John Griffith-Jones, Chairman of the FCA last week to TheCityUK’s annual conference, he echoed the FCA’s statement. He began his speech by stating that in the regulator’s eyes, nothing has changes and that their job is to enforce supervisory of any current financial regulation that is in place.
Future of new UK financial rules
Due to the proximity of the UK with mainland Europe, and their current financial trade relations, practically no one expects a huge overhaul of UK financial regulation to take place. This is especially true as many exchanges and trading facilities operating in the EU will require non-EU participants to abide by financial rules to be set in place when MiFID II goes into effect. In addition, despite being EU led directives, the FCA has had input in regards to EMIR and MiFID II which they wouldn’t be expected to abandon with the Brexit.
A simplified future for EMIR?
What we do know now is that EMIR reporting requirements for derivative trades as we know it, remains in effect in the UK. With no fines being applied yet to firms required to report (more on potential EMIR fines), there is debate as to whether the FCA will actually go ahead and penalize any firm for EMIR reporting breaches until there is more clarity of what derivative reporting laws will come into place as a replacement for EMIR.
Regardless of the present, the future of derivative reporting in the UK will probably get easier in the post-Brexit period. This is due to negative feedback of the current EMIR framework, which the FCA and UK legislators will be able to use when building new reporting laws.
An overall complaint of EMIR regulation is that it is difficult to comply with due to confusion of what needs to be reported. Currently there are over 150 possible data fields that exist for each trade. However, most trades require less than 40 fields of information. As such, before implementing a process to handle how reports are delivered to EU sanctioned trade repositories, firms need to figure out what they in fact have to report (how delegated reporting simplifies this process).
Also of note is the requirement for double-sided reporting, meaning each side of a derivative trade needs to send a trade report. This differs from derivative reporting regimes in the US under Dodd-Frank, which use a single sided reporting process, with the sell-side and trading facilities doing the bulk of reporting.
Due to the added complexity, pressure has been rising towards ESMA to reformat EMIR regulation to become single sided reporting, with the buy-side especially leading this movement. While ESMA continues to believe double sided reporting provides more value to the overall reports of derivative exposure, the single sided movement has gotten backing from some key members of EU Parliament.
What this probably means is that we can expect to see a simpler derivative framework in the UK when new legislation is created to replace EMIR. Potential areas of change will be a move to single sided, from double sided reporting, fewer data fields to be reported and possibly higher minimum thresholds of risk exposure needed before firms are required to report their derivatives trades.
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