The UK’s Financial Conduct Authority (FCA) has said that the Securities Financing Transactions Regulation (SFTR), the European Market Infrastructure Regulation (EMIR) and MiFID II will be under UK rule after 31 December.
For UK entities, this means they will no longer fall under the Temporary Transitional Period (TTP) which maintains the status quo for several other regulatory frameworks and runs until 31 March 2022.
The regulator also confirmed that given the “scale, complexity and magnitude of some of the changes” it does not intend to take enforcement action against firms that are not fully compliant as of 1 January 2021.
It said that entities or persons that are not able to not meet all requirements straight away but can show evidence they took “reasonable steps” to prepare to meet the new obligations by 31 December 2020 will be shown clemency.
It added, “Where firms and other regulated persons are not fully prepared by that date, we would expect them to comply with the new obligations as soon as reasonably practicable.”
Breaking it down, the UK SFTR will be identical to the EU version which came into effect in stages throughout the year but will not include phase four, which relates to non-financial counterparties.
SFTR phase four goes live in January 2021 and therefore falls outside the transition period. The UK made a similar commitment to not onshore the Central Securities Depositories Regulation’s settlement discipline regime for the same reason.
Under UK SFTR, all financial counterparties, including third-country branches, central securities depositories (CSDs) and central counterparties (CCPs) who enter SFTs must report to an FCA-registered trade repository (TR).
In addition, TRs will be required to provide the relevant UK authorities with access to that data.
As for MiFID II, there will changes connected to the reporting of financial reference data. For example, trading venues will need to report transactions to the FCA on their venues by their European Economic Area (EEA) members, and EEA firms in the temporary permissions regime who operate through a UK branch.
Under EMIR, like SFTR, firms and CCPs handling derivative transactions will also need to report to an FCA-registered TR.
As the divorce from the EU becomes official tomorrow, the UK’s financial services industry is hoping for equivalence with the bloc in the not too distant future. However, this is unlikely to happen and in the meantime, firms will need to efficiently manage the two new regulatory regimes, according to Volker Lainer, vice president of product management and regulatory affairs, GoldenSource.
“While some key elements of financial market structure have been agreed – for now – the different approach of the FCA and ESMA to market rules and regulations may result in divergence in the near future,” he says.
Lainer adds, “As a result, firms operating in both jurisdictions will need to have better data segregation to respond to the split regulatory reporting. The recovery from 2020 will be tricky enough and market participants can’t rely on any agreement in early 2021 to resolve the issues stemming from this.”