UK EMIR- tomAto tomAHto

This year’s “transition” period has inevitably devolved into a slow game of “Chicken”- it’s yet to be seen whether it will result in a complete car crash. Whatever the extension/shadow deal/no deal final outcome; the City and financial services have been excluded from consideration. Absent any imminent prospect of equivalence decisions; ISDA has yesterday published the 2020 UK EMIR Portfolio Reconciliation, Dispute Resolution and Disclosure Protocol (UK EMIR Protocol),  and a revised Master Regulatory Disclosure Letter, including a new UK Appendix (MRDL). This note will highlight the main features of both.

Background

The UK technically left the EU on 31 January 2020, a one year transition/implementation period was agreed during which EU law would continue to broadly apply. The Implementation Period Completion Day is 31 December 2020, on which existing EU law will be retained, adjusted for its new context. The Protocol and the MRDL make the necessary adjustment for UK-specific application.

UK EMIR Protocol

Purpose:  In order to transition to UK EMIR (still confusing, and a hostage to Scottish independence, but better than “BREMIR”), the Protocol makes two main changes:

• “Relevant Transaction” – a trade subject to the EMIR portfolio reconciliation and dispute reconciliation requirements is amended to refer to UK EMIR
• The Part II confidentiality reporting and recordkeeping waiver of the EMIR Protocol is amended to reference UK EMIR. Note that  this will not apply to other jurisdictions

Scope: “Protocol Covered Agreements” covers ISDA Master Agreements that are subject to UK EMIR (including the new-ish French and Irish 2002 versions). It also covers all transactions in “derivatives” or “derivative contracts” (as per UK EMIR) that are not expressly excluded. If you are subject to UK EMIR or face a counterparty that is you will need to adhere to the Protocol or agree compliant terms bilaterally

Adherence:

• Open to all entities- member and non-members alike, regardless of jurisdiction
• The “Effective” date for adherence is 31 December 2020 or ISDA’s acceptance of an adherence letter thereafter
• No current closing date for adherence but they reserve the right etc.
• Adherence is by submission of a signed adherence Letter via the Protocol Management section of the ISDA website. ISDA Amend is not currently available as an adherence platform
• Details required: Institutional Name, Portfolio Data Sending Entity / Data Receiving Entity, Local Business Day details (if required)
• Optional details (if different from default):
  • Full legal name of any Affiliate  acting as your agent
  • Ability to sue a third party provider
  • Contact details for  Portfolio Data, discrepancy notices and Dispute Notices (optional for discrepancy between these and details in the agreement) (optional, to the extent that your institution wants these contact details to be different to those specified in Protocol Covered Agreement),

• Completing identification codes, other contact details and the signature block

• Fee: the “usual” $500 adherence per entity. Note that as per usual Investment Managers and Agents can adhere in one instance on behalf of multiple funds and there are various options to adhere on behalf of multiple clients by way of Appendix

• Revocation: annual Revocation period 1 October to 31 October in a given year- as usual revocation will only apply in respect of  future Adhering counterparties

MRDL

Purpose: to repurpose the questionnaire for the brave post-Brexit world

Scope: EEA (mainly) entities using derivatives who aren’t explicitly exempted- central banks, CCPs, trade repositories, multilateral development banks etc

Changes: The (optional) Disclosure Letter enables a standard form of communication between counterparties with regard to margin FC, FC-, NFC+, NC- status; clearing categorisation and options for entities such as pension schemes to declare that they are currently exempt,. He MTDL updates the EMIR Disclosure Letter with reference to UK EMIR

Further Brexit Amendables

ISDA intends to publish further documentation in connection with Brexit in due course, including:

• A template amendment agreement to amend an ISDA Master Agreement governed by English law, to provide for exclusive submission to the jurisdiction of the English courts (to be published in early January)
• The 2020 UK (PRA Rule) Jurisdictional Module to the ISDA Resolution Stay Jurisdictional Modular Protocol (to be published once the PRA rule becomes available)

Conclusion

Arguably- despite a 10% contribution to the UK tax take, the City has been thrown overboard the cross-Channel ferry. Political negotiation on both sides has been wilfully blind to the financial services elephant in the room- preferring to concentrate on the aquarium.  

However- outside of operational reporting issues, the immediate legal effects of a “no financial deal” that require documenting are relatively minimal for the derivatives industry; the same cannot be said of market fragmentation consequent on differing DTO obligations. UK EMIR replaces EMIR (for the UK) and requires repapering – mainly effected by the Protocol

In advance of the “Implementation Completion Period Day” the UK has already signalled its intention to divert from (ignore) s71a BRRD 2 and phase III of the CSDR. European financial integration is still in its early stages- the early course of travel looks like UK(?)-EU divergence ahead.

There are Governing Law and BRRD amendments which will (almost certainly) have to be made in short order. Expected and urgent(ish) repapering to come, but ISDA and the market as a whole deserves at least one pat on the back.

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