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Implications of Brexit on Cyprus Investment Firms (“CIFs”)

05/08/2020
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MNK Risk Consulting > Regulatory Developments > Implications of Brexit on Cyprus Investment Firms (“CIFs”)

 Date: 5th August 2020

The United Kingdom (“UK”) formally left the European Union (“EU”) on the 1st of February 2020. Currently, a transition period is in place until the 31st of December 2020, during which all EU rules and laws will continue to apply to the UK.

The UK and the EU are negotiating their new relationship on the terms on which companies in the EU will be able to do business in and with the UK after the transition period.

At the end of the transition period, the UK will be considered as a third country with regards to the implementation and application of EU Legislation in the EU Member States.

Investment firms shall take into consideration the legal situation and practical implications that the end of the transition period will have on their business activities and take appropriate actions, including the following:

  • ensuring that the necessary authorisations are in place, and that the necessary actions for any relocation, corporate reorganisation or contractual adaptations have been taken;
  • informing their clients and counterparts on the implications of the end of the transition period on their business and contractual relationships and on any impact of related measures that the investment firm has taken or intends to take;
  • establish business adaptations and investment strategies for the investment firm and underlying clients in order to be ready for non-equivalence being in place by the end of the transition period.

After the end of the transition period, Directive 2014/65/EU of the European Parliament and of the Council of 15th May 2014 on Markets in Financial Instruments (“MiFID II”), and Regulation (EU) No 600/2014 of the European Parliament and of the Council of 15th May 2014 on Markets in financial instruments (“MiFIR”) will no longer apply to the UK, entailing the following consequences:

 

A             AUTHORISATIONS

  • Entities established and authorised by United Kingdom competent authorities (hereafter “UK investment firms”) will no longer be allowed to provide services in the EU on the basis of their MiFID authorisations; they will lose their “EU passport” and become third-country firms.
  • EU subsidiaries controlled by or affiliated to UK investment firms can continue to operate as EU investment firms provided they have obtained a MiFID authorisation in one of the EU Member States.
  • Branches in the EU of UK investment firms will become branches of third-country investment firms and will need to comply with national requirements applicable in the Member State where the branch is established.UK market operators/investment firms operating a trading venue or execution venue will no longer benefit from the MiFID authorisation. UK based regulated markets (RMs), multilateral trading facilities (MTFs) or systematic internalisers (SI) will thus cease to be eligible venues for trading shares subject to the MiFIR share trading obligation; EU counterparts can no longer undertake trades in shares subject to the share trading obligation on such platforms. Similarly, UK based RMs, MTFs or organised trading facilities (OTFs) will cease to be eligible venues for the purposes of the MiFIR derivatives trading obligation and EU counterparts will no longer be able to undertake trades on these platforms.
  • The end of the transition period will also have an impact on the exemption set out inSection C (6) of Annex I of MiFID II (the “MiFID II REMIT- carve-out”). In order not to be considered as a financial instrument, a derivative contract must meet three conditions: i) it must qualify as a wholesale energy product, (ii) it must be traded on an Organised Trading Facility (OTF), and iii) it must be physically settled. The end of the transition period will have an impact on the first two conditions i.e. where a wholesale energy product would not be traded on an EU OTF, it would cease to be eligible to the C (6) carve-out under MiFID II.
  • UK based trading venues and central counterparties (CCPs) will no longer benefit from the open and non-discriminatory access to EU trading venues and EU CCPs and to EU benchmarks respectively.

 

B             CONTRACTS

  • The loss of MiFID authorisations may also impact relationships with EU clients/counterparts and may affect the ability of UK established firms to continue performing certain obligations and activities deriving from existing contracts.

 

C             OTHER ASPECTS

  • The outsourcing of certain operational functions to UK providers may be undertaken only when it is compliant with relevant MiFID requirements (Article 16(5) of MiFID II).
  • In light of MiFID obligations on disclosure of information to clients, firms providing investment services are required to provide clients or potential clients with accurate disclosure, in good time and in any case before clients are bound by any contract, on the impact on the provision of services and investors’ rights that may emerge from the end of the transition period including the upcoming loss by the firm of its MiFID authorisation.
  • According to Article 59 of MiFID II, the provision of data reporting services requires an authorisation by the home Member State competent authority. UK based data reporting service providers which have not obtained a MiFID authorisation by a competent authority established in the EU will have to cease to serve EU markets.

 

For advisory and support with regards to your CIF business post Brexit compliance you may contact us at info@mnkriskconsulting.com