What a difference a week in politics makes. Less than two days after Prime Minister Johnson declared Brexit negotiations all but over, Michel Barnier and David Frost agreed to 'intensify' negotiations to secure a final agreement by the middle of November. Now meeting in person around the clock, negotiations have entered 'the tunnel', with both sides now working on agreeing on the final legal text. This, however, is still subject to a broader agreement on fisheries and level-playing field obligations. While the chances of a deal have now increased again, a breakthrough on both of these issues is needed in the next three weeks if an agreement is to be ratified in time. In this note, we update members on the state of negotiations, new guidance on the EU STO, and essential guidance from the FCA concerning no-deal preparations and fund documentation.
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The state of negotiations - Light at the end of the tunnel?
With just over eight weeks remaining until the end of the transition period, and after the chance of a negotiated agreement all but evaporated following the latest European Council Leaders' Summit on 15 - 16 October, a renewed sense of momentum has entered the talks. We understand that the EU team travelled to London over the weekend to continue negotiations and will remain in London until tomorrow. On Thursday, the two sides will switch over with the UK team heading to Brussels to work on the final legal text of the agreement. As such, we should expect both sides to dial down the briefings and the rhetoric over the next few weeks, as the hard work of negotiating, drafting, and agreeing the legal text will be done in relative silence. If this continues, it will be a good sign.
The middle of November is now increasingly seen as the deadline for a deal to be concluded. We understand, however, the EU is keen to extend negotiations into late November to increase pressure on the UK, with 26 November the last moment the European Parliament can receive the final agreement and ratify it in time. Equally, the European Parliament has noted it will not consider any final agreement whilst the UK continues to progress its controversial Internal Markets Bill. It is likely mid-November is being touted as the new deadline to give some space for ratification around the Christmas break – but any progress towards a deal will continue to be governed by the substance agreed, not process.
In our discussions with members, several have queried whether the Brexit transition period could be extended to allow more time to ratify a deal. We assess that this is an improbable scenario. Prime Minister Johnson, facing growing pressure over his Government's COVID-19 response, is unlikely to want to give his opponents additional ammunition over a failure to 'Get Brexit Done' on time.
Share trading obligation – ESMA issues its 'final' guidance:
This week, the European Securities and Markets Authority issued final guidance to clarify the application of the EU's Share Trading Obligation in the event of a no-deal/no equivalence scenario. Recalling the difficulty caused by overlapping obligations for UK branches of EU investment firms and for EU branches of UK investment firms based on its previous guidance of 29 May 2019, ESMA narrowed the EU STO further to a consideration of local currency by confirming that the trading of shares with an EEA ISIN on a UK trading venue in GBP will not be subject to the EU's STO. In making this judgement, ESMA noted that such activity - because it covers approximately 50 shares or 1% of total trading activity in Europe - occurs on 'a non-systematic, ad-hoc, irregular and infrequent basis' and is therefore exempt under Article 23 of MiFIR.
Ireland had been pushing for a broader exemption for UK venues to allow euro-denominated trades of EU shares amid concerns about potential problems for its largest companies. ESMA, however, has said it has now done the 'maximum possible' to clarify the scope of the EU STO. Of course, the final big unknown remains how the UK authorities will themselves clarify the scope of the UK STO post-Brexit, and whether they also exclude EEA ISINs from the scope of the UK STO. We expect UK authorities to come forward with a statement in the coming days – based on a similar approach to that adopted by ESMA, but critical of the use of currency as a way to divide markets – a signal that this is not their intended long-term approach.
In making its announcement, ESMA made clear that the proposal put forward will only effectively avoid overlaps in STOs if the UK adopts an approach that does not include EEA ISINs. Equally, ESMA noted that its announcement was only meant to clarify the application of the EU STO with an EEA ISIN and address the specific circumstances of trading of EEA ISIN shares on UK trading venues in GBP. The application of the STO to shares with a different ISIN should continue to be determined taking into account the previous ESMA guidance published on 13 November 2017.
Updates to fund documentation:
The FCA have confirmed that fund managers should review their fund documentation ahead of Brexit and ensure these are ‘fair, clear and not misleading’. The action required will depend on the specific fund, what has already been covered in the fund documentation, and the needs of the underlying investors. We encourage members to review their documentation ahead of exit day both for necessary legal or definitional changes (such as UK UCITS vs EEA UCITS), as well as any necessary clarification on investments within, and outside of, the EU. If members are satisfied that the existing provisions in the prospectus are 'fair, clear and not misleading', then any post-Brexit updates can wait until the next review point. However, if changes are required to remove statements that will be unclear or misleading etc post-Brexit, then these should be addressed before the end of this year.
Member webinar on marketing and distribution:In response to growing member demand, and with thanks to Simmons and Simmons, the IA will be hosting a special member webinar on 13 November looking at marketing and distribution options post-Brexit for firms wanting to access the EU. Absent an over-arching equivalence determination, the webinar will also be a chance to discuss the availability of national regimes and what to do in jurisdictions not offering temporary relief for UK-based firms. For more information, and to register, please check out our website here.