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Financial Services for the EEA: Ministerial Equivalence and Exemption Directions

Volume 683: debated on Tuesday 10 November 2020

The Equivalence Determinations for Financial Services and Miscellaneous Provisions (Amendment etc) (EU Exit) Regulations 2019 (S.I. 2019/541) provides powers for the Treasury to make equivalence directions and exemption directions for the European Economic Area (“EEA”) states, including the member states of the European Union (“EU”), before the end of the transition period.

I have today laid before Parliament eight directions which exercise the powers across an extensive range of areas. The directions cover 16 equivalence decisions in total, which serve to maintain the stability and openness of the UK financial services sector beyond the end of the transition period.

For the decisions below, it is both the legally binding requirements, and the effectiveness of the regulation and supervision of adherence to these requirements in the EEA states, which have been deemed equivalent on an outcomes basis.

The European Market Infrastructure Regulation (Article 13) Equivalence Directions 2020 determine that, for the purposes of paragraphs 1 and 2(a) and (d), of article 3 of the European market infrastructure regulation (intragroup transactions), the legal, supervisory and enforcement arrangements of EEA states are equivalent to articles 4 and 11 of the European market infrastructure regulation, as it will form part of UK law at the end of the transition period (“EMIR”). This decision paves the way for UK firms to seek or apply an exemption from the requirement to clear through a CCP or meet margin requirements for transactions with an EEA entity in the same group. The granting of this decision means these exposures can qualify as intragroup exposures in the credit valuation adjustment (“CVA”) calculation, ensuring that UK firms will in many cases not have to capitalise CVA on over the counter (“OTC”) exposures to EEA affiliates.

The Capital Requirements Regulation Equivalence Directions 2020 determine that each EEA state (i) applies prudential, supervisory and regulatory requirements equivalent to those applied in the UK, for the purposes of article 107(3) and 391 of the capital requirements regulation as it will form part of UK law at the end of the transition period (“CRR”); and (ii) applies supervisory and regulatory arrangements equivalent to those applied in the UK, for the purposes of articles 114(7), 115(4), 116(5), 132(3) and 142(2) of CRR. For UK firms, equivalence here ensures they will not be subject to increased capital requirements as a result of their EEA exposures.

The Solvency 2 Regulation Equivalence Directions 2020 determine that for the purposes of Commission Delegated Regulation (EU) 2015/35 (supplementing the solvency II directive on the taking-up and pursuit of the business of insurance and reinsurance): (i) the solvency regime of each EEA state that applies to certain reinsurance activities is equivalent to that laid down in the relevant UK law; (ii) the solo prudential regime of each EEA state is equivalent to that laid down in the relevant UK law; and (iii) the groups prudential regime of each EEA state is equivalent to that laid down in the relevant UK law. In doing so, The Solvency 2 Regulation Equivalence Directions 2020 cover all three solvency II equivalence decisions, i.e. articles 378, 379 and 380 of the solvency II regulation. Solvency II is an EU regime which will form part of retained EU law in the UK from 11pm on 31 December 2020 (in accordance with the European Union (Withdrawal) Act 2018) so that it continues to apply in the UK.

The European Market Infrastructure Regulation (Article 2A) Equivalence Directions 2020 determine that, for the purposes of article 2A of the EMIR, markets in each EEA state comply with legally binding requirements which are equivalent to the requirements laid down in UK law, and are subject to effective supervision and enforcement in each such EEA state. This will enable UK firms to continue to treat derivatives traded on EEA regulated markets as exchange traded derivatives rather than OTC derivatives. Facilitating this continuity for firms minimises the disruption they will experience following the end of the transition period.

The Central Securities Depositories Regulation Equivalence Directions 2020 determine that central securities depositories (“CSDs”) in each EEA state comply with legal requirements which are equivalent to the central securities depositories regulation as it will form part of UK law at the end of the transition period (“CSDR”) and are appropriately supervised in the relevant EEA state. With equivalence granted, the Bank of England can then assess CSDs in the EEA for recognition (subject to establishing co-operation arrangements with the relevant EEA authorities), allowing those CSDs, once recognised, to continue to service UK securities and to exit the transitional regime contained in onshored article 69 CSDR and part 5 of The Central Securities Depositories (Amendment) (EU Exit) Regulations 2018.

The Benchmarks Regulation Equivalence Directions 2020 determine that benchmark administrators in each EEA state comply with legal requirements which are equivalent to the benchmarks regulation as it will apply in UK law at the end of the transition period (“BMR”), and are appropriately supervised in the relevant EEA state. This equivalence decision acts as a mechanism to enable such administrators to be added to the FCA’s benchmarks register, and to enable them to provide benchmarks to supervised entities in the UK.

The Credit Rating Agencies Regulation Equivalence Directions 2020 determine that, for the purposes of article 5 of the credit rating agencies regulation as it will form part of UK law at the end of the transition period (“CRAR”), the legal and supervisory framework of each EEA state ensures that credit rating agencies (“CRAs”) authorised or registered in each EEA state (i) comply with legally binding requirements which are equivalent to the requirements resulting from CRAR; and (ii) are subject to effective supervision and enforcement in each such EEA state. This means non-systemic credit rating agencies authorised or registered in the EEA can apply to be certified in the UK.

The Short Selling Regulation Equivalence Directions 2020 determine that EU markets are subject to the appropriate law and supervision for the purposes of article 17 the short selling regulation as it will form part of UK law at the end of the transition period (“SSR”). This means that EEA market makers will be eligible to make use of the exemption in article 17 of SSR (which disapplies certain short selling restrictions and reporting requirements) subject to complying with certain regulatory requirements.

Alongside the above directions, today I am also laying before Parliament The Central Counterparties (Equivalence) Regulations 2020 pursuant to regulation 14(1) of the Central Counterparties (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2018 (S.I. 2018/1184). The former statutory instrument specifies that the regulatory framework for central counterparties in EEA states is equivalent to the UK’s framework. After the end of the transition period, these regulations will have effect as if made under article 25(6) of EMIR. Therefore, subject to entry into an appropriate co-operation arrangement between the Bank of England and the relevant national competent authority in that EEA state, and a CCP-specific recognition determination by the Bank of England, after the end of the transition period UK firms will be able to continue using EEA CCPs and to exit the transitional regime contained in part 6 of The Central Counterparties (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2018 (S.I. 2018/1184).

The Department for Business, Energy and Industrial Strategy will be laying The Statutory Auditors and Third Country Auditors (Amendment) (EU Exit) (No. 2) Regulations 2020 to grant audit equivalence to the EEA states and approve as adequate their audit competent authorities.

To provide clarity and stability to industry, we are announcing as many decisions as we can in favour of openness, and where it makes sense to do so. The granting of these equivalence decisions provides a broad range of benefits in terms of having open markets that are well regulated, facilitating firms’ ability to pool and manage risks effectively, and supporting UK and EU clients’ access to financial services and market liquidity.

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