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Diversified reporting in no-deal Brexit scenario

Oct 14, 2020

The United Kingdom (UK) left the European Union (EU) on 31 January 2020. A transition period is now in place until 31 December 2020. If UK leaves the EU without an agreement (no-deal Brexit), it is important to ensure transaction reports are submitted to the correct Trade Repository (TR) and/or Approved Reporting Mechanism (ARM).

At the moment there are no indications that Brexit deal will be concluded. Despite the result of transaction period, companies are required to handle European Market Infrastructure Regulation (EMIR), Markets in Financial Instruments Regulation (MiFIR) and Securities Financing Transactions Regulation (SFTR) requirements.

Investment companies regulated in EU currently must submit their trades/transactions for EMIR, MiFIR and SFTR to an ARM and TR. TRs are authorised by ESMA at an EU level. ARMs are authorised by the local National Competent Authority. However, any TR or ARM authorised by the Financial Conduct Authority (FCA) or established in the UK will no longer be part of the EU from 1 January 2021 and ESMA confirmed.

In this case UK based TR or ARM will not be a compliant for EMIR, MIFIR and SFTR reports for investment firms that are within the EU on 1 January 2021 in a no-deal Brexit situation. Whereas EU based TR or ARM will not be a compliant destination for FCA regulated firms from 1 January 2021.

To adjust to a worst case scenario (no-deal Brexit), many TRs and ARMs have established new entities and obtained registration for a second TR and ARM. Many companies have separate UK-based and EU-based ARMs and TRs to overcome this problem.

Others will be required to report trades and transactions to the right place in a no-deal Brexit. If company’s reporting obligation is to FCA only, trades/transactions reports must be submitted with UK TR/ARM. In case company’s reporting obligation is to other EU National Competent Authorities only, report must be submitted to an EU-based TR/ARM. In a situation where company have dual reporting obligations, report must be submitted to the respective UK and EU TR/ARM.

Considering that, all investment companies need to review their current arrangements and ensure they are suitable in the event of a no-deal Brexit. This may mean setting up a new contract and reporting arrangements with a new TR/ARM which may or may not be related to the one currently being used. Firms using a delegated reporting provider should check that the appropriate arrangements are being made.

According to the FCA the main idea is that all companies should continue to prepare for all Brexit scenarios given the state of negotiations. Negotiations are going on informally between the EU and the UK but the next step EU Council will take place in mid-October. The UK Prime Minister has announced before that if no agreement is reached by then, the UK is heading for a no-deal Brexit.

In case of a no-deal Brexit, reporting obligations in the UK will be the same as those under MiFIR/MiFID II as they have been adopted locally by the UK parliament, but the UK is looking to make changes and separate from the EU requirements.

However, EU based companies that has executed its transactions through a UK branch, are obligated to report dually. The FCA announced that the branch will no longer be able to discharge the reporting obligations by transmitting orders to the other entities. In no-deal Brexit scenario, the EMIR reports will need to be split by the jurisdiction of the investment firms rather than the location of its branches.

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