Brexit: The Final Countdown - A Checklist for UK Investment Managers
With just days to go to the end of the transition period for the UK’s departure from the EU, here are some key reminders for UK investment managers on how they need to prepare. Although, at the time of writing, the possibility of a trade agreement is still alive, there seems little prospect of a comprehensive deal covering arrangements for financial services. While there remains hope of last-minute announcements offering relief in some areas of detail, in this note we assume none.
Marketing funds in the EEA
UK AIFMs marketing AIFs in EEA member states will, with some state-by-state exceptions, generally see their current registrations under Article 36 of AIFMD automatically lapse from 31 December 2020. At that point, the UK becomes a “third country” under AIFMD and hence AIFMs will have to re-register their AIFs in each EEA country that they wish to market under the National Private Placement Regime (Article 42). Note that Article 42 carries the additional burden of Annex IV reports being required in each and every country where the AIF is registered (as well as the AIF001/002 reports to the FCA). AIFMs should proceed with these registrations as soon as possible to avoid being unable to market their AIFs for an interim period.
The above summary covers the most prominent challenge for alternatives managers marketing funds post-Brexit. For a full survey of all the permutations of location of AIFMs, AIFs, and prospective investors please download here.
Offering other financial products and services in the EEA
Current passporting arrangements for UK financial firms offering their products and services in EU member states lapse on 31 December 2020. The FCA has set up a webpage offering links to all Brexit webpages hosted by EEA regulators. These contain details of any transitional measures offered in each jurisdiction and the implications of such schemes. Some jurisdictions appear to be more helpful than others (for example, Norway, Sweden and Liechtenstein), but nowhere is there a scheme as comprehensive as the UK’s Temporary Permissions Regime. Local counsel will be required to navigate this patchwork quilt.
UK transaction reporting under EMIR and SFTR
On 24 November 2020, the FCA updated its statement on its expectations of UK counterparties and Trade Repositories (TR) in respect of their reporting obligations under UK EMIR. From 1 January 2021, UK managers (including AIFMs) will be required to report transactions to an FCA-registered or FCA-recognised TR.
UK AIFMs managing EEA AIFs will have a dual reporting obligation under EMIR – they will need to report to both an EU and UK TR for these AIFs. Most UK TRs will have EU affiliates and affected firms should get in touch with their existing TRs to make sure that the reporting requirements for their EEA AIFs are mapped correctly to reflect changes in reporting obligations post-31 December 2020.
Similarly, on the same day, the FCA published a statement regarding the position for UK counterparties reporting positions under the UK Securities Financing Transactions Regulation (UK SFTR). Given the narrower scope of UK SFTR (i.e. it will, post-31 December 2020, apply to UK AIFMs managing UK AIFs (rather than EEA AIFs) that undertake securities financing transactions), this is less relevant for most UK managers.
Transaction reporting and post-trade transparency under UK MiFIR
It should be noted that the scope of transaction reporting under UK MiFIR remains the same in respect of covering all relevant EU financial instruments. Conversely, post-trade transparency obligations (where these are relevant) under UK MiFIR revert to a UK-only base. In both cases, reporting must be made through a UK Approved Reporting Mechanism (ARM) or a UK Approved Publication Arrangement (APA)
UK EMIR clearing threshold
The FCA recently updated its EMIR webpage clarifying the requirement on UK Financial Counterparties (FC) and Non-Financial Counterparties (NFC). These firms will need to calculate their aggregate group, month-end, average position of OTC derivatives in each asset class for the previous 12 months and notify the FCA if they exceed clearing thresholds laid down by Article 4 of UK EMIR. A first notification to the FCA will be required by all UK counterparties subject to the clearing obligation, regardless of whether they choose to calculate their OTC derivative positions. This initial notification must be made via Connect between 1 January and 21 June 2021. As noted here, firms were first required to perform this calculation and make this notification upon implementation of EMIR REFIT on 17 June 2019.
Short selling – the UK regime
UK investment managers will, from 1 January 2021, be subject to both EU and UK short-selling regimes, as indeed are investment managers on a global basis (i.e. wherever they are located). From this date, the FCA will publish its own FIRDS which lists the shares covered (those whose principal trading venue is in the UK). Please see our recent note for further details. The obligation to report short positions above certain thresholds in EU jurisdictions remain unchanged, as do restrictions on uncovered short sales in both the UK and EU.
Recent ESMA statement on DTO
On 25 November 2020, ESMA published its Final View on the Derivatives Trading Obligation (“DTO”). This confirms that EU investment firms (including the UK branches of EU firms) must trade relevant derivative contracts on EU trading venues as opposed to UK trading venues, unless or until the latter are deemed equivalent under the relevant provisions of Article 28 of MiFIR. Whilst there is clearly a political dimension to this, the statement confirms fears of a split in the liquidity of derivative contracts between the UK and EU or, worse still, a migration of such liquidity to alternative jurisdictions already deemed equivalent (e.g. the US).
The FCA’s TTP
As reported in our recent note, there is better news for UK firms looking to revise their compliance frameworks to reflect the post-Brexit FCA Handbook and relevant onshored legislation. The FCA will apply a Temporary Transition Power (TTP) to allow firms to continue to comply with the existing Handbook until 31 March 2022 – or move to the new version at their preference.
For further assistance regarding the above points, please speak to your ACA consultant.
How we help
We have a wide range of Brexit solutions designed to help global firms find solutions to overcome their Brexit challenges and continue to access the UK markets. These include:
- FCA authorization project management
- EEA to third party country branch
- ACA Mirabella tied agent MiFID-passporting solution
- Ongoing compliance support, including MIFID II reviews and SM&CR support and implementation