Will Brexit lead to a TRexit?
I spent some time last weekend catching up on the arguments for and against a Brexit. It got me thinking about the implications for reporting for firms in the UK. Now that the UK has voted to leave, will it have a major impact reporting-wise? Will obligations significantly reduce? I’ve come to the conclusion that in the main, I think Brexit will have very little impact on regulatory reporting. Here’s why:
A transparent market is the ultimate aim
Having seen the regulatory process and the development of transaction reporting legislation from inside the (then) FSA, my thinking is this: the UK needs clean markets to attract capital. To that end, the FCA has been at the forefront in establishing the transaction reporting regime in Europe as well as its shape under MiFID II. Clean capital markets will be even more important to the UK under a Brexit scenario so I fully expect that the UK would maintain a near identical transaction reporting regime. This could even include negotiating the ongoing exchange of transaction reports with our European neighbours under the existing MiFID model assuming that MiFID II is not adopted in full as a member of the EEA.
Where an impact is more likely is for firms passporting into Europe today and they will be anxious about the future of their licence. Dependent on the outcome of negotiations on transaction reporting exchange, passported firms may have to report to their local competent authority (as today under MiFID I) and may lose the benefits of centralised reporting set out under MiFID II.
Similarly, incoming branches to the UK may end up with a double reporting obligation to the UK and to their home competent authority. This would be more of a challenge were reporting obligations to differ between the UK and Europe but if they remain harmonised it reduces to a routing rather than a reporting problem. These risks I feel, will be addressed with a practical solution. After all, transaction reporting exchange is in place to provide that holistic view of activity on our markets. Without an agreed exchange, the FCA is likely to require market operators to report for members who do not have a UK transaction reporting obligation and similarly from the EU’s perspective.
What about EMIR?
For EMIR it is a similar story. EMIR needs to be global, not just European, if the data is to be useful for identifying emergent risks to the financial system: its primary aim. ESMA is currently working with Trade Repositories to standardise how information is made available to the array of regulators that have access rights to this information. Creating a UK specific regime, however well designed, would be an unwelcome complication for firms and Trade Repositories.
Dual-sided vs single-sided
Recent EMIR discussions have been around dual-sided vs single-sided reporting. My view is very pro dual-sided between financial counterparties as this goes a long way to promoting reporting quality. That said, for those non-financial counterparties delegating reporting to their broker, there is very little benefit for reporting quality of dual-sided reporting so this could easily be dropped. Similarly, many of the larger firms have created centralised reporting solutions and would not welcome divergence from the EU requirements, creating yet another distinct reporting obligation.
So all in all, due to the added complications, and the UK having been a chief instigator in tougher reporting measures, I expect that the reporting world will continue very much in the same vein despite the UK voting to leave the EU.