HM Treasury outlines “in-flight files” subject to UK amendments in no-deal Brexit scenario

Maria Nikolova

The ‘in-flight files’ are pieces of EU financial services legislation agreed or in negotiation at the point of exit, with implementation dates falling in the two years after exit.

HM Treasury has earlier today posted a policy note concerning the Financial Services (Implementation of Legislation) Bill.

The Bill would provide the power, in a no-deal scenario, for the UK to implement and make changes to a specified list of ‘in-flight files’. These are pieces of European Union financial services legislation agreed or in negotiation at the point of exit, with implementation dates falling in the two years after exit. This policy note outlines the bill’s purpose, and provides detail on the ‘in-flight files’ specified in the bill itself.

The list of such files includes:

  • Articles 6 and 7 of the Central Securities Depositories Regulation and the Delegated Cash Penalties Regulation;
  • Articles 37 and 38(2) of the Markets in Financial Instruments Regulation (MiFIR);
  • The Provisions of the Prospectus Regulation that apply from 21 July 2019;
  • Article 4(1) of the Securities Financing Transactions Regulation (SFTR);
  • Capital Requirements Regulation II (CRR II), Capital Requirements Directive V (CRD V);
  • Bank Recovery and Resolution Directive II (BRRD II);
  • Central Counterparty Recovery and Resolution Regulation (CCP R&R);
  • European Market Infrastructure Regulation (Regulatory Fitness and Performance) (EMIR REFIT);
  • European Market Infrastructure Regulation 2.2;
  • Investment Firms Review (IFR);
  • Cross-Border Distribution of Funds Regulation & Directive;
  • Covered Bonds Regulation and Directive;
  • Sustainable Finance: Low Carbon Benchmarks;
  • SME Growth Markets Regulation;
  • European Supervisory Authority Review.

Let’s take a closer look at some of these “in-flight files”.

The EMIR 2.2 proposal, for instance, updates the supervisory framework for third country CCPs, creating a broad set of tools to manage third country CCPs, helping to manage the financial stability risks posed by systemic third country CCPs.

HM Treasury notes that the systemic importance of CCPs within the financial system has significantly grown in the period following the implementation of the post-crisis reforms, and they can have a significant impact on countries outside their home jurisdiction. That is why, HM Treasury argues it is important to ensure that UK regulators have the tools available to manage financial stability risks posed by systemic third country CCPs.

However, there are some tools currently proposed that the UK considers unhelpful should they be included in the final version of the proposal. In particular the so called “location policy” is not seen to be an improvement on the current framework. A “location policy” would cut off links to global liquidity pools, and ultimately raise costs for businesses.

With regard to the Investment Firms Review (IFR), it is poised to deliver a new and more proportionate prudential regime tailored to investment firms. “Investment Firms” are defined as a person or business providing investment services to third parties, and are currently governed by the Capital Requirements Directive and the Capital Requirements Regulation.

This regime was developed for banks and is inappropriate for all but the largest and most systemically-important investment firms. The application of banking rules to investment firms has an impact on efficiency, market integrity, and competition. The proposal also includes amendments to the current Markets in Financial Instruments Regulation (MIFIR) regime for granting equivalence for certain cross-border activities carried out by investment firms.

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