Cappitech explores how the UK’s exit from the EU affects transaction reporting under the EMIR, MiFIR and SFTR
In this month’s Cappitech Compliance Corner, with the Brexit transition period coming to a close, we take a look at how the UK’s exit from the EU affects transaction reporting under the European Market Infrastructure Regulation (EMIR), the Markets in Financial Instruments Regulation (MiFIR) and the Securities Financing Transactions Regulation (SFTR). While the EU plans to operate similar versions of the existing EU regulation, there are a number of key points firms need to consider.
Dual regimes
When reviewing the effect of Brexit, the first item to keep in mind is that the UK now becomes a third party country under EMIR, MiFID II and SFTR. The result is that UK firms will no longer fall under scope of the transaction reporting aspects of the EU regulation. This includes cases where a UK firm faces an EU counterparty in a trade. While the EU counterparty has an EU reporting requirement, the UK firm does not.
This does not mean that the UK firm is absolved from reporting, but their submissions now fall under the sperate UK based regime of EMIR, MiFID II and SFTR. In cases where a UK firm and EU firm face each other, they both have their own similar reporting requirements but to different regimes. If the product traded is only under scope in one regime, it will lead to only one of the two firms having a reporting requirement (see FIRDS divergence below).
Which TR or ARM do you submit to?
The above feature of two separate but similar regimes affects where submissions are made. From an operational standpoint, submission changes are one of the biggest changes following Brexit. The result is that UK firms now must ensure that their submissions are sent to a UK approved reporting mechanism (ARM) or trade repository (TR) and vice versa for EU companies.
Practically speaking this means that if an EU company is submitting to a UK TR, they now need to contract with that TR’s EU entity. They may also be directed to submit files to a new sFTP location. Also, firms planning on operating dual entities due to Brexit need to keep in mind that all of their reports need to be split and submitted separately after 1 January.
How delegated reporting is affected?
One specific area where the dual regimes and split of submissions affects is the flow for delegated reporting. Currently, many sell-side firms provide delegated reporting under EMIR for their clients. To continue to provide delegation, companies will need to identify their clients scope of whether they fall under the EU or UK version of EMIR and report accordingly to the correct TR.
Also, following EMIR REFIT in June, financial counterparties became obligated to report on behalf of their NFC- counterparties. Following Brexit, as UK companies fall out of scope of the EU version of EMIR, they will no longer have a requirement to report for any EU NFC- counterparties. The same holds for EU investment firms now exempt from reporting for their UK NFC- customers. As such, NFC- firms need to be aware of how these changes could affect delegation being provided for them in the future.
NFC’s are exempt in the UK under SFTR
Another change affecting NFC firms following Brexit pertains to SFTR. The UK has stated non-financial firms won’t fall under scope of their version of SFTR come 1 January. With NFC firms set to fall under scope of SFTR in the EU on 13 January , the UK exemption is one of the first forms regulatory divergence applied between the UK and EU regimes.
FIRDS divergence
Elsewhere, another area where divergence following Brexit is expected to be realised quickly is around the EU and UK versions of the FIRDS lists of products under scope for MiFID II transaction reporting.
Product scope under the regulation is based on whether a product trades or has an underlying instrument that is listed on a trading venue. Following Brexit, EU trading venues will become out of scope to UK MiFID II and vice versa of EU venues to EU’s MiFID II.
This will ultimately create two classifications of products under scope for the two regimes.
