On 5 October 2018, HM Treasury published a draft of the Markets in Financial Instruments (Amendment) (EU Exit) Regulations 2018 together with an explanatory note.

The draft Regulations are made in exercise of the powers in section 8 of the European Union (Withdrawal) Act 2018 in order to address failures of retained EU law to operate effectively and other deficiencies arising from the UK’s withdrawal from the EU.

The draft Regulations amend:

  • The Financial Services and Markets Act 2000 (Regulated Activities) Order 2001;
  • The Financial Services and Markets Act 2000 (Markets in Financial Instruments) Regulations 2017; and
  • The Data Reporting Services Regulations 2017.

The draft Regulations also amend: (i) MiFIR; (ii) Commission Delegated Regulation 2017/565/EU supplementing MiFID II as regards organisational requirements and operating conditions for investment firms and defined terms; and (iii) Commission Delegated Regulation 2017/567/EU supplementing MiFIR with regard to definitions, transparency, portfolio compression and supervisory measures on product intervention and positions.

The explanatory memorandum to the draft Regulations notes that:

  • the policy approach set out in MiFID II legislation will not change after the UK has left the EU;
  • the functions under MiFID II / MiFIR that are carried out by the EU authorities are transferred to the UK authorities. The functions of the European Securities and Markets Authority are transferred to the FCA or the PRA and the functions of the European Commission are transferred to HM Treasury;
  • responsibility for MiFID II / MiFIR binding technical standards (BTS) is being transferred to the FCA and the PRA. HM Treasury is transferring responsibility for making BTS to the UK regulators, the basis of this is the Financial Regulators’ Powers (Technical Standards etc) (Amendment etc) (EU Exit) Regulations 2018;
  • the MiFID II obligations on UK authorities to cooperate and share information with EEA authorities is removed. Instead, the UK authorities will be able to continue to cooperate and share information with EEA authorities in the same way as they do with third country authorities;
  • HM Treasury will take on the Commission’s function of making equivalence decisions for third country-regimes. Where the Commission has taken equivalence decisions for third countries before Brexit day, these will be incorporated into UK law and will continue to apply to the UK’s regulatory and supervisory relationship with those third countries;
  • special provisions are made for EEA firms which intend to operate in the UK under the temporary permissions regime (TPR) by introducing the possibility of ‘substituted compliance’ in cases where not doing so could lead to conflicts of law. A firm operating under the TPR will not be deemed to be in breach of the UK’s MiFID II rules if it can demonstrate that it complies with corresponding provisions in the EU’s MiFID II rules;
  • substituted compliance will not be available for all aspects of MiFID II (for example where supervisory responsibility is reserved to the host state regulator);
  • certain requirements or rights for firms operating under the TPR are dis-applied where they would otherwise be unworkable without a negotiated agreement with the EU. For example, EU trading venues in the TPR will not have the right to request access to a UK central counterparty (UK CCP) in the way that a UK trading venue can do under the open access regime, unless an equivalence decision is made by HM Treasury relating to EU trading venues;
  • amendments are made to the UK’s Data Reporting Services Regulations 2017 to put in place a transitional arrangement in which EU-authorised data reporting services providers that meet the required conditions will be granted temporary authorisations to continue providing data reporting services in the UK for a period of up to one year;
  • the EU is generally treated as a third country but with certain exceptions. This includes: (i) EEA emission allowances will continue to be a financial instrument; (ii) energy forwards that must be physically settled and are traded on organised trading facilities in the EU will continue to be excluded from the definition of financial instruments; (iii) the ancillary activities exemption will continue to be based on UK and EU market data. There will be a separate statutory instrument to fix the Regulated Activities Order, which will maintain the current provision granting firms an exemption from the general prohibition on carrying out a regulated activity, until they can perform the annual calculation determining whether they still meet the terms of the ancillary activities exemption; and (iv) UK firms will be able to treat UCITS in the EU as automatically non-complex instruments;
  • powers are granted to the FCA with the intention of preserving the transparency regime as far as possible;
  • the FCA is granted temporary powers with regards to the transparency regime during a transitional period. These temporary powers include the ability, in specified circumstances, to: (i) amend certain transparency calibrations; (ii) direct the application of the Double Volume Cap Mechanism; and (iii) freeze the obligation to publish trading information in respect of certain instruments. In addition, certain transparency calculations (such as the requirement to publish trading carried out under the waivers) could be suspended for the duration of the transitional period. The FCA will publish a statement of policy on how these temporary powers will be used; and
  • UK branches of EU firms will be required to send transaction reports to the FCA (as opposed to their home regulator), in the same way as UK branches of third country firms. UK branches of EEA firms will need to adapt their reporting systems accordingly.

The explanatory memorandum adds that MiFID investment firms and market operators should also have regard to amendments made in separate statutory instruments, which will be published in due course. These will include, amongst others, amendments to the Financial Services and Markets Act 2000, the Regulated Activities Order, and the Recognition Requirements for Investment Exchanges and Clearing Houses Regulations 2001.

A separate statutory instrument will address the deficiencies which arise from Brexit in the retained Market Abuse Regulation. A draft statutory instrument will be published in due course.