After Brexit, is it Time for BREMIR?

A nationally legislated British version of EMIR might reasonably be expected.

A few UK clients have asked me in recent months whether, in the event of Brexit, they could forget about the reporting requirements of MiFID and EMIR and live in unregulated bliss.  The answer of course was no, and now that the Leave side has prevailed in the UK referendum, it is worth a more serious review of likely reporting requirements in the future (with apologies to non-UK readers whose obligations will of course be unchanged).

The first thing to consider is that the formal conclusion of exit negotiations is likely to take at least two years and all EU rules will remain in full force until a formal exit is concluded.  This means that UK firms, like their continental peers, will need to prepare for and implement both Level 3 EMIR changes in 2017 and the completely separate MiFID 2 reporting requirements in January of 2018.

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As far as MiFID 2 is concerned it is highly likely that the UK will adopt something which looks pretty similar to the current EU proposals, for two main reasons:

– The FCA has a high level of commitment to the planned reporting rules and seems to have had a big hand in crafting their detail, since many aspects of current UK practice have been enshrined in them (including the ARM regime and systems and control requirements).

– The UK will need to maintain an appearance of equivalence of regulations designed to prevent and detect market abuse in order to preserve the City of London’s reputation as a safe place to do investment business.

In the meantime MiFID 1, being a directive rather than a regulation, was enacted in the UK by national legislation, so will continue in force until explicitly repealed.

EMIR on the other hand is an EU regulation, in force in the UK only by dint of the UK’s membership of the EU.  It would cease to be directly applicable as soon as that membership is relinquished.  However the UK was one of the signatories to the G20 accord which inspired EMIR and, in its absence, would be expected to implement something along the same lines.  So a nationally legislated British version of EMIR (BREMIR? – you heard it here first) might reasonably be expected.

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Perhaps rather than drafting BREMIR as a carbon copy of EMIR, the UK regulator could take the chance to address some of the industry’s concerns about the EU regulation and make a few of the most obvious changes, for example:

– Omission of Exchange Traded Derivatives from the reporting obligation, given that ETDs are already subject to a high degree of transparency as to open interest and market pricing.

– Changing to a one-sided reporting obligation, in the same way as implemented by the Dodd Frank Act in the US, to switch focus from trade matching to reporting compliance.

– Implementing a de minimis threshold for notional amount, below which trades would not be reportable, thereby removing much of the ‘noise’ in the trade repositories caused by reporting of micro-contracts executed with retail clients (such as index spread bets and rolling spot forex).

Even the above modifications would drastically simplify and streamline the reporting obligations for UK firms, while keeping the basic EMIR structure in place.  However, more radical options could be considered if the regulator were to go back to the aims of the G20 accord in identifying and monitoring systemic risk in the financial markets.

The central aim of the national authority should be to get a clear picture of each firm’s uncollateralised exposures by counterparty and asset.  If participants in the professional OTC derivative markets were asked to summarise these key details in a standardised format for delivery to a trade repository or competent authority, then eighty percent of the value of EMIR reporting might be delivered at perhaps ten per cent of the cost.

The most likely form of any BREMIR reporting structure will be a carbon copy of what will by then exist for EMIR.  But the regulator taking the chance to rationalise those reporting structures might be an unexpected silver lining to this particular cloud.

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