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From the C to the B - Putting the B back in Brexit

Do you remember when Brexit dominated almost every element of the daily discourse? Every headline, every TV news story, every social media link involved the B-word. Half of all conversations touched upon or outright focussed on the latest B-news. You could barely look a computer, a billboard or dare I say a bus without seeing B-stuff. It was almost a relief when you looked at a news outlet and something dramatic had happened because at least it afforded some slight respite from bloody Brexit!

Then in true Sesame Street fashion, the next episodes of life were brought to us by the letter C and as well as the actual pandemic there was a pandemic of coverage. C-themed stories were everywhere and the deluge of C-topics washed away all those B-stories. Ok, this is not entirely true as there were one or two B-C-stories such as our transition deal membership of the EU keeping UK food supplies moving, the contribution of EU nurses to our heroic NHS frontline and the failure to accept the EUs help with PPE. But I’m sailing dangerously close to the political line that business commentators are best avoiding. In an effort to navigate back to safer waters and reinforce my theme, let’s just agree that pesky C pushed troublesome B off of the agenda.

Bringing it

Well the good news is that I’m bringing back Brexit!

Admittedly, this is probably only good news if you are totally fed up with crummy COVID (almost certainly yes). Are nostalgic for all the Brexit talk (pretty sure you’re not). Or involved in banking and wondering how to dispose of that excess budget this year (guess that’s probably nope too).

So why do we want to discuss Brexit? Simple. It’s the end of July. That simple really. The real question is why aren’t we discussing Brexit?

Barring a spectacular change in direction (though 2020 so far has taught me not to rule anything out) this Brexit business happens in 5 short months. The remainder of this article focuses on what that means for regulatory transaction reporting.

The bamboo chopping board of fate

At the 30,000 feet level, there is currently an EU-wide implementation of EMIR, MiFIR and SFTR that covers the 27 EU countries plus the UK. At the stroke of midnight on December 31st the hand of fate takes a meat cleaver and chops each of these three regimes into two very similar, but nonetheless distinct versions. Whilst many are raising their festive glasses to the new year, UK/FCA versions of EMIR, SFTR & MiFIR will come into being.

The following morning when many are nursing sore heads, the ESMA or EU-27 countries versions of these three regulations will similarly be facing the hangover of being greatly diminished and disrupted by the departure of Britannia. 28 minus one might not seem a big margin but it’s hard to overstate the contribution of the UK financial markets in the European context. With all due respect London is more comparable to New York or Tokyo, than say Paris, Frankfurt or Madrid.

Infantile problems

Phases 1 & 2 of SFTR went live earlier this month so it’s basically a newborn, screaming a lot and causing sleepless nights. Phase 3 goes lives in October. By December SFTR is a toddler at best. Many firms will still be busy with early remediation items and bedding down the controls, data and processes around SFTR. But nonetheless it will be split into UK-SFTR and EU-SFTR and many of those firms will need to adapt to a new landscape.

The Trade Repositories will offer separate UK and EU TR businesses. Each with separate connectivity, onboarding, reports and so on. The regulation itself insists upon ‘Operational Separation’ so the firms running the TRs have no choice but to separate them out. Adapting your brand new reporting solution to start sending some transaction reports to a different TR and integrating all the responses and reports back from the new TR is a considerable undertaking. Especially for the firms that have yet to catch their breath from the October phase going live.

The EMIR regulation also gets split into European EMIR and UKMIR. Ok I might have made that last bit up and UK-EMIR or FCA-EMIR is more accurate nomenclature for the UK slice. But in these crazy times I’m not sure I’d fully rule out the UK tabloids campaigning to kick the E out of our sovereign Market Infrastructure Regulation.

Splitting their EMIR reporting into two versions is slightly less fraught for the reporting firms compared to SFTR, as EMIR is a much more mature regulation. But as well as separate UK/EU Trade Repositories, connectivity and so forth there are other challenges to consider. What about the impact on Delegated Reporting for firms either offering a delegated service or firms utilizing such a service? What about the explicit permissions that was implemented earlier this year? Firms need to ensure they have the appropriate explicit permissions at each TR for the appropriate clients.

Fitting in the REFIT

And what about the EMIR REFIT’s introduction of Mandatory Delegated Reporting which, as of last month, means the FC (Bank or large dealer) selling OTC derivatives to an NFC- (small non-financial firm below the clearing threshold) has a mandatory obligation to report on behalf of the smaller firm. This was introduced to make the burden on the smaller firms more appropriate. But what happens when the Bank/Dealer finds themselves on a different EMIR jurisdiction to their NFC- client? For example, a London based bank facing a small continental based manufacturing company where the bank falls under the UK-EMIR and their client falls under the EU-EMIR. The mandatory element is gone but the desire to service the client surely remains.

The REFIT is also very much an inflight initiative with many more changes coming including potentially new fields and the introduction of an ISO 20022 schema that I’ve been predicting for the last four years. On the 1st of January 2021 the EU & UK versions of EMIR will be essentially carbon copies of each other. But each jurisdiction has the potential to diverge and any of the many firms caught with obligations to report to both will need to deal with any divergence. The REFIT is the most obvious example of potential divergence but it only takes an update to the ESMA EMIR Q&A’s, the ESMA validation rules or the FCA to publish its own guidance and the two versions will be branching off in different directions. There is a slight possibility the FCA and ESMA try to collaborate and agree any changes in common but that looks like a slim chance currently.

The Cheeseboard

And last but by no means least there is the MiFIR regulation or rather the reporting components of the MiFID 2 regulation. The Brexit cheese wire will split this regulation into UK cheddar and EU mozzarella slices. Under MiFIR Transaction Reporting, firms have the option of reporting directly to their home country regulator or reporting via an Approved Reporting Mechanism (ARM).

This reporting directly to the home regulator will alleviate a lot of the disruption to MiFIR reporting firms. However, the ARMs and the firms using them are impacted similarly to the TRs under EMIR & SFTR and in order to provide ARM services for EU firms the ARM needs to be located within an EU country. Many of the ARMs will need to split their offerings into a UK based one and an EU based one.

Anyone familiar with MiFIR reporting will also be aware that firms are dependent on data aggregated by the various regulators across the EU and published by ESMA. For example the Financial Instrument Reference Data (FIRDs) or Financial Instrument Transparency System (FITS) data which ESMA is mandated to publish are key inputs into firms MiFIR reporting. Brexit impacts a few things here. Firstly, the UK data that currently feeds into this system will end and needs decoupled. Secondly the FCA needs to start publishing the UK only version of this data to support UK firms with their UK-MiFIR reporting obligations. The firms themselves need to adapt and configure their systems appropriately for the new data feeds landscape.

And that’s just the summary

All the issues mentioned above are the simplified big picture items. In a globalised world with the European financial infrastructure so closely interlinked, the reality will be a lot more complicated for most firms. Very few of the medium to bigger sized firms will have the luxury of falling neatly into UK regulations or EU regulations. The majority will need to deal with both after the Brexit bifurcation.

I’m frankly curious why this topic is not getting more coverage. Part of me wonders if some firms are in denial, given how much work and expenditure went into preparing for the previous 2019 March 29th date. [Though I still think the go-live date of April 1st 2019 is the more apt date for that one]. Is there a danger that having put so much work into something that didn’t happen that firms are awaiting another Hail Mary event to postpone the pain? Or is it more a case that the heavy lifting was done for the previous deadline and firms are simply dusting down the previous plans and updating them?

Regardless, it’s time to start discussing the B word again. And no, I don’t mean Boris!

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