By Matt Smith, CEO, SteelEye

Ever since the Brexit trade deal was signed on 30 December 2020, the UK and EU have been locked in discussions about the future of financial services, with the aim of signing a Memorandum of Understanding (MoU) on post-Brexit regulatory cooperation.

Discussions were concluded at the end of March and it is understood that formal steps still need to be taken on both sides before the MoU can be signed. However, in a statement the UK’s Treasury Department said “it is expected that this can be done expeditiously.”

Once officially signed, the European Commission has stated that the MoU will “create the administrative framework for voluntary regulatory cooperation in financial services between the UK and the EU” and “establish the Joint UK-EU Financial Regulatory Forum, which will serve as a platform to facilitate dialogue on financial services issues.”

The final agreement is thought to be similar to the existing framework between the EU and the US, which includes a commitment from both sides for regulators from the two jurisdictions to meet regularly to share information and discuss future rule making.

How is the FCA managing transaction reporting post-Brexit?

When the transition period ended on 31 December 2020, ESMA switched off the FCA’s access to its MIFID systems. The two key systems being:

1. ESMA FIRDS (Financial Instruments Reference Data System) – which provides reference data for all MiFID instruments that are Traded on a Trading Venue (TOTV) in the EU.
2. ESMA FITRS (Financial Instruments Transparency System) – which publishes reference data, liquidity, waiver thresholds and quantitative data on instruments that fit the above criteria and helps firms assess their trade reporting and tick size obligations.

In response, the FCA has built two equivalent systems called FCA FIRDS (which includes UK and EU TOTV instruments) and FCA FITRS, both of which were available for testing prior to the switch-over.

To make things as easy as possible for UK Investment firms in a post-Brexit reporting environment, both FCA FIRDS and FITRS have been designed to be as similar as possible to the ESMA systems.

What does this mean for EMIR and MiFIR reporting?

Fundamentally, the core reporting obligations under EMIR/MiFIR and UK EMIR/MiFIR are the same, as they have been adopted locally by the UK parliament. While there are some changes in the scope of reporting based on the location of investment firms, their branches and the nationality of clients, the changes introduce ‘dual reporting’ for many transactions.

Prior to Brexit, UK investment firms regulated by the FCA could submit their transactions under MiFIR and EMIR to an Approved Reporting Mechanism (ARM) or Trade Repository (TR) based in the EU. This is no longer possible as TRs and ARMs based in the EU are not a compliant destination for EMIR reports submitted by UK-based firms.

Therefore, it is crucial that investment firms operating in both regions understand their reporting obligation and how this will change depending on whether they are trading from a branch or head office so that when (and if) an EEA branch has been involved in a transaction they are able to report that trade in the EU, the UK, or both. The same will apply for an EEA investment firm operating through its UK-based branch.

As ever, there are exceptions. For example, if a UK branch of an EEA investment firm has been involved in a transaction and the instrument is traded on a trading venue (TOTV) in the UK only, the transaction does not need to be reported into the EEA investment firm’s NCA, just to the FCA.

However, if an EEA branch of a UK investment firm is involved in a transaction where the instrument is traded on a trading venue in the EEA, it may be required to report to both the FCA and ESMA.

How can UK investment firms ensure they are meeting dual reporting obligations?

Following Brexit, TRs and ARMs need separate registrations with the ESMA and the FCA while investment firms will need to set up a new contract and reporting arrangements with TR/ARMs in both regions – if they trade in both.

Once this has been established, firms will then need to make an assessment on every single trade to confirm whether the transaction needs to be reported in the EU, UK or both – adding yet another responsibility for investment firms in what is already a complicated regulatory landscape.

The easiest, most reliable and secure way for UK investment firms to ensure they are meeting their reporting obligations post-Brexit is to unify compliance on a single platform, rather than trying to implement different technologies (and internal processes) for different regulations and jurisdictions.

For example, working with TRs, ARMs and service providers that operate in the UK as well as the EU can reduce the impact of these changes by automating aspects like the dual reporting requirements.

And, by using a single technology platform to capture all of the data required for reporting and other regulatory obligations, firms can also future-proof operations for further changes down the line, while also benefitting from a multitude of opportunities unlocked by having access to additional data.

Switching to an automated data platform for compliance in the short-term will not only help UK investment firms navigate the changes imposed by Brexit, but will also lower costs, increase efficiency and enable compliance teams to be far more agile in this ever-changing, increasingly complex regulatory environment.

Ends

 

Matt Smith, SteelEye CEO:

Matt is the CEO of SteelEye and has over 20 years of technology and management expertise throughout North America, Europe and Asia. As a senior RegTech product manager at Bloomberg, Matt was instrumental in evolving the product strategies for a range of compliance solutions, and trading and analytics platforms. Prior to this, he was the Chief Information Officer at Noble Group, where he oversaw regulatory technology and the deployment of big data, trading and analytics platforms.