EU permissions regimes could reduce no-deal risks

Isda AGM: UK firms could still trade with EU clients on exit, but solutions are complex and temporary

Brexit dividing line

Read all our coverage from the Isda AGM here.

The patchwork of new European permissions regimes could reduce the risk that UK-based entities will be unable to trade with EU clients on day one of a no-deal Brexit, but it is not a long-term solution, regulatory experts say.

“Most EU member states have now put in place some kind of temporary permissions regime, which makes it increasingly possible to carry on trading at least for a limited period of time through UK entities in Europe,” said Tamsin Rolls, assistant general counsel in JP Morgan’s derivatives team, speaking on a panel at the International Swaps and Derivatives Association’s annual meeting in Hong Kong today (April 10).

UK entities would lose the EU financial passport in a no-deal Brexit, and local law in most European jurisdictions requires firms to obtain a licence if, for instance, a London-based derivatives salesperson wants to contact a firm in that jurisdiction.

Last year the UK published details of its own temporary permissions regime that would allow EU firms to continue to passport into the UK after Brexit with minimal disruption. However the European Commission has yet to reciprocate with a similar EU-wide regime. Instead, it has asked UK firms to submit an application for authorisation to the relevant member state where they want to conduct business.

This is why individual European countries have had to come up with their own version of passporting frameworks – which may be a stop-gap measure until the UK and EU can devise a more comprehensive arrangement.

“These have all been designed to lead towards a transitional period that ranges from between one and two years in most places, during which time these kind of arrangements can be regulated [at EU level],” said Chris Bates, a partner at law firm Clifford Chance, also speaking on the panel.

But while it might be possible to remain in London and continue to trade with EU entities via the new national regimes, this comes with a warning: many of them are complex and can tie firms in red tape as they try to comply with different frameworks.

“These temporary permissions regimes are not necessarily straightforward,” said JP Morgan’s Rolls. “Some of them include prudential requirements, some of them include very baroque application processes. So although this has kind of increased optionality and flexibility, in some ways it has made things more difficult by giving people more choices.”

Rolls held out Ireland as one country that does have a less bureaucratic approach to temporary equivalence, simply by making sure that firms to conform to local know-your-customer rules.

Some smaller firms are thought to have held back on the Brexit preparations or decided against opening an EU entity. Large dealers, however, have clients in multiple countries, meaning they would have to comply with numerous national regimes. As a result, they are less likely to rely on these national regimes and instead have spent the past two years creating or beefing up existing EU entities to allow them to continue trading with local clients in a no-deal scenario.

For years, JP Morgan relied on a single entity, based in London, to conduct its cross-border derivatives business in Europe. Once the UK started to talk about leaving the EU, Rolls said, JP Morgan, like other global banks, started to flesh out contingency plans for how it would continue to operate in a post-Brexit world. Such advance planning has become even more important as the chance of the UK crashing out of the EU without a deal has increased.

“The initial stage of planning was very much about working out what sort of entity we might use in the future and where in continental Europe that might be based,” said Rolls.

“There was a lot of discussion around employment law, tax considerations, insolvency regimes and these kind of things. That then led to a mass repapering exercise and I think that we, like many other banks, are keen that clients repaper with us so they have the maximum ability to trade given the uncertainty around Brexit.”

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