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Today New City Initiative is comprised of 43 leading independent asset management firms from the UK and the Continent, managing approximately £500 billion and employing several thousand people.

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A Brexit Breather for U.K. Fund Managers

Published by Charles Gubert

The risk of a no-deal Brexit has now become unacceptably high for financial market regulators. Conscious that the uncertainty was fuelling instability, European and UK regulators signed two significant MOUs (memorandum of understanding) at the beginning of February 2019 in what should help ease industry concerns about the risk of a Hard Brexit. Both MOUs will only take effect if there is no deal in place ahead of March 29, 2019.

The first MOU, which was announced on February 1, 2019, applies to fund management. In short, it is a multilateral MOU between European market regulators and the UK’s Financial Conduct Authority (FCA) covering exchange of information and delegation of portfolio management to UK authorised firms. This comes more than six months after the FCA announced its temporary permissions regime (TPR) for EEA funds passporting into the UK.

The fact that European securities market regulators have reciprocated on the FCA’s TPR is a positive development, as it confirms that existing delegation frameworks can be retained should there be no deal. Not only does this give UK managers a degree of continuity in the event of a Hard Brexit, it also safeguards fund hubs such as Luxembourg and Ireland. These MOUs will therefore help insulate asset managers in the EU and UK from significant disruption, and it is something which is strongly supported by New City Initiative (NCI) and its constituents.

In its statement, the European Securities and Markets Authority (ESMA) also confirmed an MOU concerning information exchanges about the supervision of credit rating agencies and trade repositories had also been signed too and would cover a no-deal Brexit. Given the EMIR (European Market Infrastructure Regulation)-mandated oversight role that trade repositories play in monitoring the on-exchange and over-the-counter (OTC) derivative markets, this MOU will help regulators in their efforts to prevent build-up of systemic risk.

Last week, ESMA also announced a further MOU had been agreed with the Bank of England (BOE) whereby it confirmed it would recognise UK CCPs (central counterparty clearing houses) and CSDs (central securities depositories). This MOU was expected, particularly as ESMA had repeatedly acknowledged at the end of 2018 that it supported continued access to UK CCPs and CSDs in order to limit any possible disruption post-Brexit. Ensuring the continuation of clearing and settlement activities post-Brexit was critical to market stability.

While some European leaders insisted that certain derivative transactions be cleared inside the EU post-Brexit, the practicalities of forced relocation never made much sense. Firstly, repatriation of euro-denominated clearing risked sparking a protectionist battle between major economies (i.e. US and Japan) whose currencies are overwhelmingly cleared outside of their home markets. Secondly, the policy would have caused fragmentation at CCPs inflating margin costs, a point made by a number of EU derivative users themselves.

Even though the EU has some CCP infrastructure of its own, it does not come close to rivalling London in terms of product solutions and talent depth. This was – again – an argument made by some pragmatists within the EU. The final issue impeding repatriation of clearing was politics (of course) whereby some markets insisted euro-denominated clearing take place in Eurozone economies only, a demand that was met with fierce opposition from non-Eurozone countries such as those in Scandinavia and Poland.

The MOU covering CSD recognition was also urgently required, mainly because only CSDs regulated under CSDR (Central Securities Depository Regulation) could settle EU trades, an issue that was likely to prove awkward for the Irish. Ireland is something of an oddity within the EU insofar as it does not have its own national CSD, because its securities’ market is so small. Instead, Irish securities are settled on Euroclear UK’s CREST platform. The MOU assuages Ireland’s securities market and precludes the country from setting up its own CSD.