Draft Central Counterparties (amendment, etc., and Transitional Provision) (EU Exit) Regulations 2018

John Glen Excerpts

Monday 5th November 2018 General Committees

[The Economic Secretary to the Treasury (John Glen)]

I beg to move,

That the Committee has considered the draft Central Counterparties (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2018.

It is a pleasure to serve under your chairmanship, Mr Bailey.

As part of contingency preparations for a no-deal scenario, the Treasury is laying between 60 and 70 statutory instruments under the European Union (Withdrawal) Act 2018, to ensure that, in the unlikely scenario of the UK leaving the EU without a deal or an implementation period, a functioning legislative and regulatory regime will continue to be in place for the UK financial services sector. The SIs will do that by fixing deficiencies in applicable EU law that would be transferred directly on to the UK statute book at the point of exit, and in existing UK law to ensure that it continues to operate effectively after exit day. The SIs do not change policy; instead, they are intended to provide continuity as far as possible at the point of exit by maintaining current legislation.

Where existing EU legislation would not operate properly in a UK context in a no-deal scenario, we need to amend it, to ensure that it works effectively after we leave. The regulations deliver on a commitment made last December, when the Treasury announced that it would give the Bank of England functions and powers in relation to non-UK central counterparties and establish a temporary regime to enable those firms to continue to operate in the UK for a limited period after exit. That is similar to the approach we have taken to the European economic area firms that currently operate in the UK under the financial services passport, creating a temporary permissions regime that will allow them to continue operating in the UK for a limited period after exit, while they apply for authorisation. The debate on the instrument implementing that regime took place on 24 October.

Central counterparties stand between counterparties in financial contracts, becoming the buyer to every seller and the seller to every buyer, and they guarantee the terms of trade even if one party defaults on the agreement, reducing counterparty risk. As such, they are central to the UK and global financial system, reducing risk and making the system as a whole more resilient.

UK firms currently receive services from non-UK central counterparties under the framework set out within the European market infrastructure regulation. Under EMIR, non-UK central counterparties are permitted to provide services to UK firms if they are either located in the EU and authorised by their home regulatory authority, or located in a third country that has been deemed equivalent by the European Commission and the central counterparty is recognised by the European Securities and Markets Authority.

Should the UK leave the EU without a deal or an implementation period, it would be outside the single market for financial services, meaning that non-UK central counterparties would be unable to provide services to UK firms until they were recognised under the UK’s domestic regime. Given that many UK firms rely on non-UK central counterparties to provide clearing services and for mitigating transaction risks, such a sudden dislocation in the provision of services would introduce risks to those UK firms and financial stability risks to the broader financial system. The draft regulations therefore introduce measures to mitigate the risks and ensure a smooth continuation of services from non-UK central counterparties to UK firms.

First, the draft SI establishes a UK framework for recognising non-UK central counterparties while maintaining the same regulatory criteria for non-UK central counterparties to provide services in the UK. To do that, the European Commission’s responsibility for determining the equivalence of a third country jurisdiction’s regulatory and supervisory framework in respect of EMIR is transferred to the Treasury, and the Bank of England may provide technical advice from the Treasury on such decisions, in the same way as the European Securities and Markets Authority may, and does, provide such advice to the Commission currently.

In addition, functions of the European Securities and Markets Authority that relate to recognising individual central counterparties located in third countries will be transferred to the Bank of England, including the mandate to make technical standards specifying the information to be provided by CCP applicants. The Bank is the appropriate authority to take on that role, as it is already responsible for the authorisation of UK central counterparties.

Secondly, the statutory instrument will provide powers to the Bank to consider recognition applications ahead of exit day, so that the necessary steps to recognise non-UK central counterparties can be taken as soon as possible after exit day. In response to a point raised by Baroness Bowles when the SI was debated in the other place last week, I note that central counterparties are not required to apply for recognition ahead of exit day. Although they are able to do so and are encouraged to engage with the Bank on such matters as soon as possible, they will also be able to apply for full recognition after exit day.

Finally, the draft regulations will establish a temporary recognition regime for central counterparties. The regime will provide temporary recognition for a period of three years to non-UK central counterparties that intend to continue providing clearing services in the UK. The purpose of temporary recognition is to allow additional time for applications to be processed and for equivalence decisions to be made by the Treasury. Although non-UK CCPs are encouraged to engage with the Bank as early as possible, the TRR will ensure continuity of services in the event that a recognition decision cannot be made ahead of exit day. The statutory instrument also gives the Treasury a power to extend the regime for 12 months at a time if it is

“satisfied that it is necessary and proportionate to avoid disruption to…financial stability”.

The SI is essential to ensure that we have a functioning financial services regime in a no-deal scenario. It provides reassurance for non-UK central counterparties and the UK businesses and customers they serve that they will continue to be able to operate here, no matter the outcome of negotiations. The importance of the SI’s provisions is reflected in our announcement last December, which made it clear to industry well in advance of exit day that the Treasury would introduce legislation to deliver such a regime. The Bank of England is in the process of engaging with industry to ensure that the regime functions properly when the UK leaves the EU.

It should be noted that if, as expected, we enter an implementation period when we leave in March 2019, non-UK central counterparties that meet the current requirements will continue to be able to provide services to UK firms, because access to each other’s markets will remain the same during the implementation period. However, it remains prudent to continue to prepare for a no-deal scenario to provide certainty to the financial services sector that we are ready for all outcomes. In that context, the measures in the SI are a pragmatic approach to ensuring that UK firms can continue to access non-UK central counterparties if the UK leaves the EU without a deal.

I hope that colleagues from all parties will join me in supporting the draft regulations. I commend them to the Committee.

--- Later in debate ---

[John Glen]

I shall do my best to answer the questions that have been raised. I think it would also be helpful if I were to set the context with respect to powers under the European Union (Withdrawal) Act 2018. What is being done through the statutory instruments may be disputed by the Opposition, but it is ultimately a matter of the legislation that was passed. I am using the provisions to do everything I can to ensure that we have the right arrangements should there be a no-deal scenario. I recognise the points about the unusual nature of the process—the large number of statutory instruments. That is why I am committed to doing everything I can to facilitate meaningful scrutiny, dialogue and exchange of information in advance of Committee sittings.

The regulations are tightly constrained to fix deficiencies, not to make wider changes; this is not a power grab. The temporary recognition regime and other transitional arrangements are in line with the expectations of the industry, which needs certainty. It needs the contingency arrangements. I propose to go through the six questions and the additional points raised by the hon. Member for Glasgow Central and, I hope, answer them meaningfully.

First, as to the consultation, it is right to say that there has been long-standing engagement. It is done case by case, on the basis of the most appropriate mechanism. We announced it in December 2017 and published three letters over the course of this year. Engagement with relevant stakeholders in the industry has to vary according to different statutory instruments. In the case we are considering, I think it is fair to say that the arrangements we have undertaken have been well received by the industry, which welcomes the certainty we have given. Obviously there are a small number of players, and we have done what is necessary.

Secondly, the hon. Member for Oxford East is correct about the alignment of the Commission to the Treasury and the transmission of the ESMA powers to the Bank of England. The Treasury will make the equivalence decision, but the authorisation process will be carried out at a technical level with the appropriate skills in the Bank of England. That is purposefully aligned to the same distribution of roles from the Commission to ESMA.

Thirdly, on the question whether, if there were a need for an extension, it would be appropriate for the Treasury to make that provision using the negative procedure, that is an administrative, managerial decision. It is not based on any extension of the existing powers. It would be on the basis of a clear need to do so. The principle of what we are doing and the criteria for doing it are being discussed now; it is a translation of what already existed. The three years plus one arrangement is designed with industry convenience in mind.

Fourthly, as to the scope of EMIR and any changes, we are retaining most of EMIR as it currently applies in the EU and are unable to make significant policy changes, as I said, under the 2018 Act, so the legislation provides a good basis for discussions on equivalence with the EU. The hon. Lady raised the issue of regulation 14(1)(a) and the equivalence, as compared to EMIR,

“as it has effect in EU law as amended from time to time”.

Regulation 14 applies only before exit day. After exit day our approach to equivalence will be to compare third-country regimes to EMIR as onshored and part of domestic law. We will not necessarily as a matter of policy be following changes to EMIR in EU law; but equally it would not be our aspiration to deviate wilfully. There is obviously a lot of alignment. We start from a common starting point, and obviously we anticipate securing a deal on the basis of the alignment that currently exists.

Fifthly, the hon. Lady rightly pointed out the need for clarity the other way, in how the Commission deals with trades carried out through UK CCPs. It is welcome that, according to Tuesday’s Financial Times, Vice-President Dombrovskis has indicated a willingness to act to mitigate. That outcome is a function of the technical group dialogue that has been going on since April, and it has been welcomed in the City. More details are needed, but we have acted proactively to give as much assurance as we can, and that significant step forward is very welcome.

Sixthly, the hon. Lady asked about the mechanism to switch off the regulations. The SI itself does not include provision for switching itself off in the event of a deal, but the White Paper on the withdrawal agreement Bill confirmed that it would contain provisions to allow SIs like this one to be repealed, delayed or amended should a deal be secured. In the circumstances of a deal, we will do whatever is appropriate, and clearly this SI would not be necessary. The hon. Lady is looking at me quizzically.

[Anneliese Dodds]

I am grateful to the Minister for that explanation. Are we to understand that the decision whether to switch off any SI produced in the context of the withdrawal Act is ultimately in the gift of Ministers?

[John Glen]

To be honest, I will have to write to the hon. Lady to clarify that detail. The essential point is that the statutory instrument is for a no-deal scenario; if we get a deal, we will not need the SI because we will be in a close working partnership and we will have the implementation period. I will need to write to her about the precise mechanism that we would use to get rid of the SI or withdraw its provisions, but that is my attempt to answer her six questions.

The hon. Member for Glasgow Central asked about fees and, quite reasonably, echoed a number of other points. There has been dialogue with the industry on the fees, which will be proportionate to the process that the Bank of England will need to go through. In practice, these firms do not exist in massive numbers. I cannot give her the cost in pounds and pence, but it will be aligned to industry expectations and will not impede the choice to register.

[Alison Thewliss]

Can the Minister give any indication whether the fees will start straight away, or be phased in over a longer period?

[John Glen]

On the fees that will be necessary to go through the process of authorisation with the Bank of England, it would be best if I wrote to the hon. Lady to give clarity on how they will be applied.

I have had conversations with the relevant people in the Bank of England and am confident that it is making adequate preparations and effectively allocating resources ahead of March 2019. As demonstrated by the letters published in December 2017 and in March and October this year, the Bank will continue to work closely with CCPs to provide guidance on applications with a view to making the process run as smoothly as possible.

The hon. Lady made a wider point about resourcing and skills. I have checked the position, after previous debates in which the right hon. Member for North Durham made similar reasonable points, and there is provision for regulators to extend their resources if required.

I hope that I have adequately responded to points raised, that the Committee has found this afternoon’s sitting informative, and that it will join me in supporting the draft regulations.

Question put and agreed to.

Resolved,

That the Committee has considered the draft Central Counterparties (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2018.