The key client categories under EMIR - “financial counterparties” and “non-financial counterparties” - refer to undertakings "established in the Union" (except in the case of AIFs, where it is the AIFMD status of the manager that is relevant). Since, post-Brexit, a UK undertaking will no longer be "established in the Union", under EMIR, UK undertakings which are currently financial counterparties or non-financial counterparties will become third country entities (TCEs).
UK undertakings will not be able to avoid EMIR altogether, as a number of its provisions have extraterritorial effect, including in relation to key requirements such as margin for uncleared trades and mandatory clearing. The reporting obligation, however, does not apply to third country undertakings, but it must be expected that HM Government would introduce similar requirements domestically - particularly given the size and importance of the UK derivatives market.
If UK undertakings became TCEs, they will be required to determine what their status would be if they were established in the EU, an exercise which, on the face of it, would appear relatively straightforward as the status would only recently have changed.
In any event, UK undertakings subject to the clearing and margin requirements of EMIR while the UK is an EU Member State, will remain subject to such requirements when entering into derivatives transactions with EU firms post-Brexit. Importantly, for UK pension scheme trustees who currently benefit from an exemption from the forthcoming mandatory clearing requirement, that exemption will cease to apply if such schemes become TCEs as it only applies to EU entities. An equivalent exemption may be introduced in any future UK domestic legislation, but a UK TCE pension scheme will not be able to rely on the EMIR exemption when facing an EU counterparty.
The City of London hosts some of the world’s largest clearing houses (CCPs), and a UK CCP authorised by the Bank of England (following the process set out in EMIR) is permitted to provide clearing services to clearing members and trading venues throughout the EU. Following the UK’s departure from the EU, however, a UK CCP will become a third-country CCP.
Under EMIR, a CCP established in a third country can only provide clearing services to clearing members or trading venues established in the EU where that CCP is recognised by ESMA. This would require, amongst other things, clearing houses operating out of London to apply to ESMA for recognition, the Commission to pass an implementing act on the equivalence of the UK’s regime and relevant co-operation arrangements to be in place between the EU and the UK. Such arrangements are likely to take some time. Given the size and importance of UK CCPs, an interim solution would need to be reached to ensure that London clearing houses can continue to provide their services into the EU.
A further point to consider is whether London clearing houses will be permitted to continue handling significant Euro-denominated transactions. The original stance of the European Central Bank (ECB) was to require that all clearing houses which handle a large volume of Euro-denominated trades were based in the Eurozone. Following the UK’s challenge, the EU General Court ruled against the ECB, saying that the location policy was ultra vires. That decision seemed to make the location issue go away, but there may now be some in Europe who would push for it to be revisited.