ESMA cuts UK rating agencies; impacts OTC trade reporting

Darren Sinden

The agencies that have had their registration withdrawn include Fitch Ratings and Moody’s Investors Services, with trade reporting in procedure for FX firms also affected


ESMA the European Securities and Markets Authority (ESMA) has decided to withdraw the registrations of certain UK businesses in light of the UK leaving the European Union, without a formal deal in place over financial services.

The removal of the registrations comes about because of rules within the EMIR, CRA and SFTR regulations, which demand that a firms registration be withdrawn if they no longer meet the criteria with which they were originally registered.

ESMA’s Credit Rating Agency(CRA)  regulations mean that ratings issued by UK rating agencies can no longer be used in the EU without an additional endorsement from an EU domiciled agency though nearly all of the UK agencies put contingency plans in place for such endorsements well ahead of the December 31st deadline.

The agencies that have had their registration withdrawn include Fitch Ratings and Moody’s Investors Services, two of the most respected and widely recognised rating agencies in the City of London.

Credit ratings play a key role in determining lending decisions and the pricing and valuation of corporate bonds and government bonds. Given the steps that the UK based agencies have taken it seems likely that it will be something akin to business as usual for the likes of Moody’s and Fitch as far issuing ratings and upgrading or downgrading existing scores are concerned.

However, the fact that their registrations have been removed at all shows how much work there is to be done to create a workable deal between the City of London and EU member states.

Another area which has fallen foul of the ESMA rulings is derivatives and securities financing trade reporting.

Counterparties to a reportable trade in EU instruments can no longer use a UK domiciled trade reporting venue. They must instead report to an established EU reporting venue.

Somewhat ironically three of the four trade reporting facilities that have had their registration withdrawn are subsidiaries of US organisations they are DTCC Derivatives Repository Plc, the CME Trade Repository Ltd and ICE Trade Vault Europe Ltd.

UnaVista limited which is owned and operated by the London Stock Exchange Group was the fourth trade reporting services to have its registrations withdrawn.

ESMA has shown a degree of flexibility elsewhere, however. For example, back in September 2020, it agreed to recognise the ree UK based central counterparties allowing them to continue to offer their services within the EU. Central counterparties are playing an increasingly important role in the centralised clearing of OTC derivatives something that regulators were very keen to encourage in the wake of the 2008 global financial crisis.

Even here the recognition is not indefinite and was issued with an 18-month life cycle so the clock is ticking. Those 18 months are intended to give ESMA the opportunity to conduct what it called a comprehensive review of the systemic importance of UK CCPs and their clearing services or activities to the Union and take any appropriate measures to address financial stability risks.

Though ESMA has not specified a timetable within which it will conduct that review, which it says it will complete in due time.

Markets hate uncertainty and the somewhat disorganised withdrawal of UK markets from Europe and the European authorities reticence towards the UK are in danger of creating just that.

I’m That’s something that the City minister John Glen and his colleagues need to impress upon their European counterparts, once talks over the future relationship between the UK’s financial services sector and Europe begin in earnest.

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