Exceptions to the Bank’s general approach
The Bank and PRA have identified three key exceptions where the TTP will not be used to delay onshoring changes to firms’ obligations. The Bank and PRA consider that granting transitional relief in these areas could undermine its statutory objectives. This would mean that firms will need to be ready to comply with these onshoring changes from the end of the transition period.
The three key areas where transitional relief is not available are:
a) Contractual recognition of bail in rules: The Bank and PRA do not intend to grant transitional relief in respect of liabilities that are intended to count towards a firm’s minimum requirement for own funds and eligible liabilities (MREL), as this could undermine resolvability. In order to act proportionately, however, the Bank and PRA do intend to use the TTP in relation to phase two liabilities, as these have a lower potential impact on resolvability. Accordingly, firms will be required to include contractual recognition of bail-in terms in all new or materially amended liabilities, other than phase two liabilities, from the end of transition period.
b) Contractual stays: The PRA does not propose to use the TTP in respect of new or materially amended non-UK EEA law governed financial arrangements in scope of the Stay in Resolution Part of the PRA Rulebook. This reflects the importance of these instruments in executing a resolution.
c) Financial Services Compensation Scheme (FSCS) protection: The PRA is not intending to grant transitional relief to onshoring changes made to the Depositor Protection and Policyholder Protection Parts of the PRA Rulebook, which will take effect from the end of the transition period. To deliver effective FSCS protection, deposit takers must be able to deliver a Single Customer View (SCV) to enable payout by the FSCS in the case of failure; depositors must be aware of the changes in protection; and FSCS levies must be calculated on the basis of the changed scope. Otherwise, the aims of the FSCS regime and benefits to the stability of the financial system could be undermined.
The interaction between the TTP and other transitional or saving provisions
The TTP will not apply to any area where there is already a specific transitional or saving provision. This notably includes the temporary recognition and permission regimes, the financial services contract regime, and the use of Credit Ratings.
Specific transitional relief for firms in the TPR and SRO
For firms in the TPR and SRO, a specific set of transitional provisions will apply. For more detail please see the ‘transitional relief for firms in TPR’ section of the TPR webpage and, the ‘transitional relief for firms in SRO’ section of the FSCR webpage.
Specific transitional relief relating to credit ratings
The use of Credit Ratings is also subject to specific use of the TTP. Firms will be provided with a run-off period in which they can continue to use, for regulatory purposes, credit ratings issued or endorsed and not immediately withdrawn, before the end of the transition period, by EU credit ratings agencies without an affiliate which has registered with the FCA or applied for registration before the end of the transition period.
In this specific area, transitional relief would only be provided for a period of 12 months after the end of the transition period. This time period aligns with the existing transitional provision in the Credit Rating Agencies (Amendment, etc.) (EU Exit) Regulations 2019 (the CRA SI), which provides for the continued regulatory use of ratings issued or endorsed, and not withdrawn, by EU CRAs with a group affiliate registered or applying for registration in the UK at the end of the transition period.
The cumulative effect of the run-off period applied by the transitional power and the separate transitional provision in the CRA SI is that UK firms may, for a period of one year after the end of the transition period, use a credit rating for regulatory purposes if it was issued or endorsed, and not withdrawn, by an EU credit rating agency before the end of the transition period.
Specific transitional relief for bilateral margining
To provide clarity, the PRA has replicated the effect of the application of the general transitional power with specific amendments within the regulatory technical standard (RTS) on bilateral margining under EMIR. Firms can therefore continue to rely on existing operational and legal arrangements for compliance with this RTS.
The PRA is currently consulting on its proposals to update the end date of the specific transitional relief to Thursday 31 March 2022 in CP13/20 to maintain alignment with the duration of the overall TTP period.
The Bank and PRA highlight two aspects:
- Counterparties may choose to comply with the narrower onshored RTS requirements at any point during the transitional period. In many cases, the RTS already provides firms discretion in how to comply with the requirements. For instance, firms may already accept a more limited range of collateral than permitted under the RTS. This approach also allows firms to spread the operational challenges over the TTP period (ie 15 months) rather than concentrated at a single end date.
- The RTS supplements transitional provisions provided for in the CRA SI (and the general use of the transitional tool with respect to credit ratings as set out above) to extend the transition for use of regulatory ratings to apply to non-financial firms. The specific transitional period within the RTS is aligned with that of the CRA SI (ie 12 months).
Specific transitional relief for credit unions’ investments in the EEA
The PRA has made a change to PRA rules so that credit unions will be able to hold EEA investments made before the end of the transition period to maturity (maximum of 5 years) but any (non-UK) EEA investments made after the end of the transition period cannot have a maturity that exceeds the TTP period.
The PRA is currently consulting on its proposals to update the fixed end date of the transitional relief for credit unions’ investments in the PRA Rulebook to Thursday 31 March 2022, to maintain alignment with the duration of the broad temporary transitional power.
Additional exceptions specifically relating to PRA-regulated firms
Obligations relating to the Securitisation Regulation
The amendments made to the Simple, Transparent and Standardised (STS) framework in the onshored Securitisation Regulation already achieve the intended objective of the transitional power by removing barriers to a UK STS market which would be introduced after the end of the transition period. The PRA does not consider these onshoring changes to be disruptive for firms, and therefore obligations relating to STS securitisation are exempt from the use of the transitional power. This includes the modifications to Article 270(a) CRR and introduction of 270(aa) to the onshored version of CRR.
The transitional power will also not be used in relation to obligations relating to securitisation repositories. This is to ensure that UK regulators are able to exercise appropriate oversight of the UK securitisation market after the end of the transition period. Therefore, firms will be required to make information on securitisations which are not ‘private’ available through a securitisation repository registered by the FCA (where one exists) rather than to repositories based in the EU after the end of the transition period.
Accounting and audit legislation
References in PRA rules and onshored legislation to International Accounting Standards (IAS) should be read as references to EU-adopted IAS for the duration of the TTP period, until a firm moves from EU-adopted IAS to UK-adopted IAS for statutory accounting purposes. This exception to the use of the transitional power has been made in order to avoid firms needing to potentially refer to two separate accounting requirements: one for statutory accounts purposes and another for the purpose of complying with PRA rules and relevant legislation.
Technical information produced by EU authorities
EU authorities are currently responsible for the publication of various registers, lists and technical information. For example, the European Insurance and Occupational Pensions Authority (EIOPA) is responsible for publishing technical information under Article 77e of the Solvency II Directive that insurers use for regulatory valuations.
Where the PRA will be responsible for publishing that information after the end of transition period, firms should use information published by the PRA, rather than continuing to rely on the EU information published by EIOPA. Therefore, transitional relief will not apply to firms’ obligations to use technical information published by the PRA after the end of the transition period.
Additional exceptions specifically relating to FMIs
Central counterparty (CCP) obligations under the Markets in Financial Instruments Regulation (MiFIR)
The transitional power does not apply to any relevant obligations for CCPs under MIFIR and relevant BTS. The Bank and PRA will not use the transitional power in relation to areas in the onshored MiFIR where the effect of the transitional power could be achieved by HM Treasury making an equivalence decision or direction.
Specific CCP obligations under EMIR
The transitional power does not apply to any relevant obligations for CCPs relating to the definition of over-the-counter (OTC) derivatives in Article 2 of EMIR. The Bank and PRA will not use the transitional power in relation to areas in onshored EMIR where the effect of the transitional power could be achieved by HM Treasury making an equivalence decision or direction.
The transitional power does not apply to the arrangements that the UK has put in place for the temporary and permanent recognition of CCPs. Specifically:
- The transitional power does not apply to the requirement for a third-country CCP to notify the Bank of any material changes affecting the conditions of its recognition under Article 25(4) of EMIR or the requirement for a third-country CCP to submit a reasoned request to be assessed against Article 25a of EMIR.
- The transitional power does not apply to the CCP temporary recognition regime. Third-country CCPs providing clearing services under this regime will be ‘deemed recognised’ under Article 25 of EMIR, and any relevant obligations will need to be complied with as set out therein.
- The transitional power does not apply to third-country CCPs providing clearing services under the ‘run-off regime’ set out in the Financial Services Contracts (Transitional and Savings Provision) (EU Exit) Regulations 2019 (the FSCR SI).
Amended settlement finality regulations and the temporary designation regime
The transitional power does not apply to the arrangements that the UK has put in place to extend settlement finality protection to FMIs not governed by UK law and to certain third-country central banks. Specifically, the Financial Markets and Insolvency (Amendment and Transitional Provision) (EU Exit) Regulations 2019 are exempt from the use of the transitional power. These regulations give the Bank powers to grant permanent designation to FMIs that are not governed by UK law, and establishes a temporary designation regime for FMIs that are currently designated in other EEA states. The Bank also has the ability to extend UK settlement finality protection for collateral security to certain third-country central banks.
Central Securities Depositories Regulation (CSDR)
The transitional power does not apply to the arrangements that the UK has put in place for the recognition of third-country Central Securities Depositories (CSDs). Specifically:
- The transitional power does not apply to the requirement for a third-country CSDs to notify the Bank of any material changes affecting the conditions of its recognition under Article 25(6A) of CSDR.
- Article 69 of CSDR, as amended by the Central Securities Depositories (Amendment) (EU Exit) Regulations 2018, is exempt from the transitional power. This exempts the transitional regime for third-country CSDs, which allows for continuity of settlement services following the UK’s withdrawal from the EU.