EU regulators prepare to close Brexit loopholes

Isda AGM: new guidelines aim to prevent EU brass plates with large London operations

Old-letterbox-Portugal_Getty-web
No letterboxes please, we’re European

Two leading European Union regulators have indicated they are already working on rules designed to prevent financial firms with large UK operations from obtaining EU licences while maintaining most of their actual presence in London after the likely departure of the UK from the single market in March 2019.

“There would be the risk of having letterbox entities or not sufficiently substantive entities in the EU27, and then [firms could] on the basis of outsourcing and delegation keep most of the activities in the UK. This risk is recognised by my board, which has discussed it intensively,” said Steven Maijoor, chairman of the European Securities and Markets Authority (Esma), speaking at the International Swaps and Derivatives Association’s annual general meeting in Lisbon on May 9.

Maijoor indicated that Esma is already developing EU-wide principles for delegation and outsourcing to be adopted across the EU27. These will be published in a general opinion document in mid-2017.

“These are the principles the EU27 national regulators need to take into account when a UK market participant seeks to relocate some of its activities to the EU27. They will reflect on issues like delegation and outsourcing, but also on what extent you can take the position of the UK regulator into account when you take a decision as an EU regulator,” said Maijoor.

Alongside the general opinion, Esma intends to publish a set of three specialised papers on the same issues, focusing separately on asset managers, investment firms and secondary market-trading venues.

Also speaking at the Isda AGM, Giuseppe Siani, deputy head of the European Central Bank’s (ECB) directorate general IV, which is responsible for policy decisions at the single supervisory mechanism, indicated his institution is engaged in similar preparations. The ECB published detailed guidelines earlier this month on its expectations for banks relocating to the banking union after Brexit.

“We looked at the issues, we developed some principles, and then we developed a much more granular policy stance and we have started to talk to banks. There are very concrete issues we have started to look at. For sure, we do not like empty shells. We want to have banks that have adequate staff, not only in numerical terms, but in terms of quality. We want to have robust governance – if there are risks there, then you should also have proper risk governance, otherwise it is impossible to monitor and supervise,” said Siani.

There would be the risk of having letterbox entities… in the EU27, and then [firms could] on the basis of outsourcing and delegation keep most of the activities in the UK
Steven Maijoor, European Securities and Markets Authority

He said the ECB would also focus on intra-group exposures to understand the booking model for a wholesale banking operation, on internal risk-based capital models, and on the implications of post-Brexit structures for recovery and resolution planning. Responsibility for the latter is shared with the single resolution board in Brussels.

“We see a proliferation of new structures… for banks and for the broker-dealer model, so we want to understand the impact of the new structure on recoverability,” said Siani.

He said the ECB recognised the difficulties posed by uncertainty about the final shape of the Brexit deal, but added that the situation requires long-term strategic planning – hence the reason why the single supervisor has already started work with the banks.

“This is really a double challenge: we need to plan earlier, but we know there are still a lot of moving pieces. From our perspective, our ultimate objective is to ensure all banks are treated the same [and] are subject to the same supervision. We need to implement our standards,” said Siani.

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