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Digital Subscriptions > The Hedge Fund Journal > Issue 140 – Apr | May 2019 > In Principle: 10 Things Authorised Firms Need To Know For 2019 Part 2

In Principle: 10 Things Authorised Firms Need To Know For 2019 Part 2

This was originally published in January 2019

Introduction

In the 2018 edition of this publication, we ended the introduction with the line, “We can only hope that we will enter 2019 with greater certainty than 2018 as to how the regulatory landscape will look”.

Unfortunately, certainty still remains in rather short supply. With Brexit now (at least in theory) a matter of weeks away, it remains unclear what will happen: the government’s original proposed Withdrawal Agreement has been decisively rejected, but Parliament has indicated that it would support that agreement if the “Irish Backstop” provisions are renegotiated. The Prime Minister has therefore been mandated to return to negotiations on this point, in the face of statements by European Union leaders that there is no prospect of such negotiations going ahead. At the same time, Parliament has signalled that it “rejects” a no-deal Brexit, but not agreed to a proposal which would have made this rejection binding. Further Parliamentary proceedings are now planned for the middle of February. Whether there is a hard, soft or no Brexit, there remain a number of issues beyond Brexit that authorised firms will have to consider in the year ahead. Including Brexit, here are 10 things that authorised firms need to know for 2019.

Executive Summary

1. EU Securities Financing Transaction Regulation

The Securities Financing Transaction Regulation (SFTR) is one of the major pieces of post-inancial crisis legislative reforms and introduces a reporting and transparency regime applicable to firms that parallels the over-the-counter (OTC) derivatives reporting requirements under the European Market Infrastructure Regulation (EMIR). All counterparties are required to report details of any securities inancing transactions that they have concluded, modiied or terminated to a registered or recognised trade repository. Whilst the reporting obligation under the SFTR is not expected to take full effect until 2020 at the soonest, for firms that regularly deal with repos and buy-sellback transactions, this piece of legislation should be firmly on the radar, given the requirement to build operational infrastructure to support the new reporting requirement.

2. Amendments to the European Market Infrastructure Regulation

EMIR is subject to a signiicant reform proposal, the EMIR “reit,” which includes a number of changes that are expected to become effective in 2019. These are, in some way or other, likely to impact all firms currently subject to EMIR. EMIR is proposed to be extended in scope by clarifying that all alternative investment funds (AIF) should be considered to be financial counterparties (FC), which has caused some confusion as to the proper classiication of non-EU AIFs with non-EU managers. The reit seeks to alleviate some of the regulatory burden for smaller counterparties by introducing an FC+ and FC- concept to exclude the below-threshold FCs from the scope of the clearing obligation and by making NFC- reporting the responsibility of counterparty FCs. A number of the amendments that are likely to take effect in 2019 therefore seek to address issues raised by industry since before EMIR was published in 2012. Clearing and margin requirements established under the current EMIR regime will also continue to be phased in during 2019, thereby completing the phase-in requirements for all counterparty categories subject to clearing.

3. EU Benchmarks Regulation and LIBOR Cessation

We are now in the “transitional period” of the Benchmarks Regulation (BMR), whereby EU-based existing “users” of benchmarks may continue to use non-EU-administered benchmarks in financial instruments until 1 January 2020, notwithstanding that such benchmarks are not listed on the European Securities and Market Authority’s (ESMA)s register of “approved benchmarks.” Post-1 January 2020 treatment of non-EU benchmarks is unclear, given the lack of available “routes” into the EU for non-EU-administered benchmarks under the BMR: No jurisdiction has, for example, been declared “equivalent” to the EU such that benchmarks administered in that jurisdiction may continue to be used. An additional wrinkle to 2019 compliance is that LIBOR is expected to cease to exist from the end of 2021. The FCA has stated that, from that time, it no longer expects panel banks to contribute to LIBOR; thus, it is expected to disappear. The impact of this is that, to the extent that users of benchmarks currently reference LIBOR in financial instruments and wish to continue to do so, the fact of LIBOR’s possible cessation will need to be addressed in “robust written plans”, which users of benchmarks are expected to prepare and, on request, make available to the FCA. As explained in the following, the FCA has also indicated that benchmark supervision is an important supervisory priority for this year.

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