Regulatory Relations

Negotiations between the EU and UK over a free trade agreement are going down to the wire as the two sides struggle to find common ground on a level playing field, governance and fisheries. 

Media sources suggest that an agreement must be struck this week for there to be enough time for the European Council and various parliaments to ratify it. This suggests that either a deal will be announced this week or the talks will collapse and the UK will leave the EU’s economic arrangements on December 31, with trade between the two to be conducted on World Trade Organization terms. 

In exchange for a deal, the EU is demanding that the UK mirror its rules, be subject to strict compliance procedures and grant continued access to UK waters for its fishing fleets. It believes the first two terms are necessary for fear the UK will use deregulation and subsidies to outcompete EU firms. The UK argues that such terms are not part of any trade agreements and do not recognise its sovereignty. It is understood that around 95% of the deal is already agreed.

Meanwhile, the UK is to reintroduce its controversial internal market bill to parliament after it was rejected by the upper house as it breaches international law. The bill pertains to trade between the Northern Ireland and the rest of the UK, which the government believes is necessary to safeguard trade between the two. However, the EU sees the bill as a red line saying its reintroduction will badly sour relations. 

The status of the talks, which could disintegrate into acrimony, is worrying financial services professionals.

A certain amount of EU financial services business can be conducted in the UK from January 1, 2021 under the country’s temporary permissions regime. However, the European Commission is holding out on granting equivalence to UK financial services beyond clearing. It said it is still forging a new equivalence regime that will not be ready until the summer. 

This could leave loose ends from regulatory perspective, which may, for example, see London branches of EU banks having to route derivatives trades via New York (the US is recognised as equivalent by the EU) if the Commission does not recognise the UK’s regime. The Derivatives Trading Obligation states that the most actively traded derivatives must go through an EU-recognised trading venue.

The US Commodity Futures Trading Commission issued no-action relief allowing market participants to transfer certain swaps to an affiliate without them becoming subject to its swap clearing requirement or uncleared swap margin requirement. EU and UK regulators are trying to find a legal solution to the problem.  

Meanwhile, House of Commons Treasury Committee is asking for evidence by January 8 on issues such as over how UK financial services regulation should be set and parliament’s powers to scrutinise it.

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