The ESMA memoranda of understanding seek to combat the risks of loss of delegation and recognition for UK financial markets firms in Europe post Brexit and are potentially a first step to dealing with the loss of passporting rights under EU single market directives.
In an effort to avoid disorder in cross border financial business post-Brexit, on 1 February 2019, the European Securities and Markets Authority (ESMA) announced that it has negotiated and agreed Memoranda of Understanding (MoU) with the UK Financial Conduct Authority (FCA) and the Bank of England (BoE).
The signing of the MoUs is particularly important bearing in mind the significant changes that Brexit may cause to European financial markets. In the context of funds and asset management, pending any transitional arrangement Directive 2011/61/EU on Alternative Investment Funds Managers (the AIFMD) and Directive 2009/65/EC on Undertakings for Collective Investment in Transferable Securities (UCITS) will no longer apply in the UK post-Brexit. As a result, UK UCITS management companies and UK AIFMs will no longer benefit from the pan-European “passport” authorisation but will instead be treated as third-country AIFMs losing their ability to manage funds in the EU.
Allied to this, under Article 20 of the AIFMD, managers may only delegate portfolio management services to third countries (such as the UK post-Brexit) where cooperation agreements are in place between the supervisory authorities in the relevant EU member state and the third country in question.
Similar impacts will occur in other single market directive regimes from investment services and insurance through to banking, clearing and payment services.
The ESMA-FCA MoU includes:
- provision between ESMA and the FCA for the exchange of information relating to the supervision of credit rating agencies (CRAs) and trade repositories (TRs) which will ensure investor protection, orderly markets and financial stability in the EU; and
- provision for a multilateral MoU, between EU/EEA securities regulators and the FCA, covering supervisory cooperation, enforcement and information exchange between individual regulators and the FCA, enabling portfolio management services to continue to be carried out by UK based entities on behalf of counterparties based in the European Economic Area (EEA).
As relevant to the fund industry, the MoU with the FCA focusses on securing post-Brexit portfolio management delegation for UK asset managers. The MoU is expected to take effect in the event of a no-deal Brexit scenario to ensure the smooth continuity of portfolio management delegation and the cooperation and exchange of information between asset managers in the event the UK leaves the EU without a withdrawal agreement and implementation period. Andrew Bailey, Chief Executive of the FCA, confirmed that the MoUs will “minimise the potential for disruption, which is particularly important for the investment management sector, credit rating agencies and trade repositories”.
ESMA negotiated and agreed the MoU and the remaining 27 EU Member State regulators approved and signed it in order for it become fully effective in case of a no-deal Brexit scenario.
CySEC’s reaction on the ESMA-FCA MoU
In a press release published on 7 February 2019 the Cyprus Securities and Exchange Commission (CySEC) welcomed the agreement on the MoU reached with the FCA as a step to maintain investor protection and supervision as well as on other investment and fund management issues in the event of a no-deal Brexit scenario. Demetra Kalogerou, Chairwoman of CySEC acknowledged that: “This is of particular relevance for the delegation of collective portfolio management functions by Cypriot fund managers and self-managed funds to entities domiciled in the UK.”, as the existence of appropriate cooperation agreements between the respective competent authorities is, where applicable, a prerequisite under the EU Law, where such delegation takes place towards entities domiciled in a third country”.
On 4 February 2019, ESMA announced an agreement with the BoE for the recognition of Central Counterparties (CCPs) and the Central Securities Depository (CSD) established in the UK by ESMA under the European Market Infrastructure Regulation (EU) No 648/2012 (EMIR) and Central Security Depositories Regulation (EU) No 909/2014 (CSDR) in the event of a no-deal Brexit.
Importantly the ESMA-BoE MoU provides that UK CCPs and the UK CSD will be eligible to continue servicing EU clearing members, trading venues and also providing notary and settlement services for securities issued under EU law. ESMA has stressed on a number of occasions leading to the signing of the MoU, the importance of dealing with financial stability risks faced by the EU following a no-deal Brexit, particularly in the area of central clearing. The MoU now highlights ESMA’s readiness to continue to recognise UK CCPs and CSDs whatever happens with Brexit.
By way of background the conclusion of the ESMA-BoE MoU satisfies the third recognition condition – establishment of cooperation arrangements – under both EMIR and the CSDR. More specifically, it is understood that the recognition requirements set out under Article 25 of EMIR, and Article 25 of the CSDR are respectively met in the ESMA-BoE MoU.
If you have any questions, please contact Aki Corsoni-Husain, Katerina Katsiami or your usual Harneys contact.