EXPLANATORY MEMORANDUM TO THE
MARKETS IN FINANCIAL INSTRUMENTS, BENCHMARKS AND
FINANCIAL PROMOTIONS (AMENDMENT) (EU EXIT) REGULATIONS 2021
2021 No. [XXXX]
1. Introduction
1.1 This explanatory memorandum has been prepared by HM Treasury and is laid before
Parliament by Act.
1.2 This memorandum contains information for the Sifting Committees.
2. Purpose of the instrument
2.1 This instrument is being made to address deficiencies in retained EU law in relation to
the non-discriminatory access regime for exchange-traded derivatives (ETDs), which
requires trading venues and central counterparties to grant each other nondiscriminatory access. In addition, this instrument amends the low carbon benchmarks
regime, which sets out requirements and voluntary standards for firms that administer
benchmarks under the Benchmarks Regulation. Finally, this instrument makes
technical amendments to certain exemptions to the financial promotions regime for
relevant markets to ensure that they apply to UK markets following the UK’s
departure from the EU.
3. Matters of special interest to Parliament
Matters of special interest to the Sifting Committees
3.1 This SI is be laid for sifting by the Sifting Committees.
Matters relevant to Standing Orders Nos. 83P and 83T of the Standing Orders of the House
of Commons relating to Public Business (English Votes for English Laws)
3.2 As the instrument is subject to negative resolution procedure there are no matters
relevant to Standing Orders Nos. 83P and 83T of the Standing Orders of the House of
Commons relating to Public Business at this stage.
4. Extent and Territorial Application
4.1 The territorial extent of this instrument is the United Kingdom.
4.2 The territorial application of this instrument is the United Kingdom.
5. European Convention on Human Rights
5.1 The Economic Secretary to the Treasury (John Glen) has made the following
statement regarding Human Rights:
“In my view the provisions of the Markets in Financial Instruments, Benchmarks and
Financial Promotions (Amendment) Regulations 2021 are compatible with the
Convention rights.”
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6. Legislative Context
6.1 The European Union (Withdrawal) Act 2018 converted EU law as it stood at
IP completion day into domestic law. It also confers temporary powers on the
Government to make secondary legislation, to enable corrections to be made to the
laws that do not operate appropriately in a UK only context, now that we have left the
EU. This instrument relies upon those correcting powers to make changes
to Regulation (EU) No 600/2014 on markets in financial instruments (MiFIR),
Regulation (EU) 2016/1011 on indices used as benchmarks in financial instruments
and financial contracts or to measure the performance of investment funds (the
Benchmarks Regulation), and to the Financial Services and Markets Act 2000
(Financial Promotion) Order 2005 on references to relevant markets.
Amendments relating to MiFIR
6.2 MiFIR forms part of retained EU law, and was amended with effect from IP
completion day by the Markets in Financial Instruments (Amendment) (EU Exit)
Regulations 2018 (S.I. 2018/1403). However, the 2018 Regulations did not deal with
deficiencies in relation to the non-discriminatory access regime for exchange-traded
derivatives. This instrument therefore makes amendments to MiFIR Articles 35 and
36.
6.3 This instrument also makes consequential changes to Commission Delegated
Regulation (EU) 2017/581 supplementing Regulation (EU) No 600/2014 with regard
to regulatory technical standards on clearing access in respect of trading venues and
central counterparties (the Delegated Regulation), which was made under MiFIR. The
Delegated Regulation was amended with effect from IP completion day by the
Technical Standards (Markets in Financial Instruments Regulation) (EU Exit) (No. 2)
Instrument 2019, using powers conferred by the Financial Regulators’ Powers
(Technical Standards etc.) (Amendment etc.) (EU Exit) Regulations 2018 (S.I.
2018/1115).
Amendments relating to the Benchmarks Regulation
6.4 The Benchmarks Regulation forms part of retained EU law. The Benchmarks
(Amendment and Transitional Provision) (EU Exit) Regulations 2019 amended the
EU Benchmarks Regulation and related EU tertiary legislation to make sure that the
UK continued to have an effective regulatory framework for benchmarks after EU
exit.
6.5 Regulation 2019/2089 amended the EU Benchmarks Regulation (2016/1011) as
regards EU Climate Transition Benchmarks, EU Paris-aligned Benchmarks and
sustainability-related disclosures for benchmarks, introducing the low carbon
benchmarks regime. The Financial Services (Miscellaneous Amendments) (EU Exit)
Regulations 2020 addressed deficiencies in this regime, to ensure that the UK can
continue to have an effective regime to enhance the transparency and comparability of
low carbon benchmarks, now that the EU Exit Transition Period has finished.
6.6 On 23 December 2020, three European Commission Delegated Acts for Regulation
(EU) 2019/2089 on EU Climate Transition Benchmarks, EU Paris-aligned
Benchmarks and sustainability-related disclosures for benchmarks came into force:
6.7 Commission Delegated Regulation (2020/1816) supplementing regulation (EU)
2016/1011 as regards the explanation in the benchmark statement of how
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environmental, social and governance factors are reflected in each benchmark
provided and published.
6.8 Commission Delegated Regulation (2020/1817) supplementing regulation (EU)
2016/1011 as regards the minimum content of the explanation on how environmental,
social and governance factors are reflected in the benchmark methodology.
6.9 Commission Delegated Regulation (2020/1818) supplementing regulation (EU)
2016/1011 as regards minimum standards for EU Climate Transition Benchmarks and
EU-Paris aligned Benchmarks. These three delegated regulations form part of retained
EU Law. This instrument makes consequential changes to the Commission Delegated
Regulation (2020/1816) and Commission Delegated Regulation (2020/1818) to
remedy deficiencies and provide for the effective operation of these regulations after
EU Exit. No such consequential changes are required for Commission Delegated
Regulation (2020/1817).
Amendments relating to exemptions in the Financial Promotion Order
6.10 The Financial Services and Markets Act 2000 (Financial Promotion) Order 2005
specifies exemptions to the financial promotion restriction set out in section 21 of the
Financial Services and Markets Act 2000. This includes a number of exemptions
(Articles 37, 41, 67, 68 and 69) which concern communications relating to relevant
markets (specified in Part 1 of Schedule 3 of the Order). This instrument makes
amendments to ensure that the UK is also included in the definition of relevant
markets.
7. Policy background
What is being done and why?
Amendments relating to MiFIR
7.1 This instrument removes the non-discriminatory access regime for ETDs because the
regime, which was originally designed to operate cross-border, is unsuitable in a UKonly context. Although intended to increase competition, the Government has decided
that it is ineffective at doing so when only in force domestically.
Amendments relating to the Benchmarks Regulation
7.2 This instrument also remedies deficiencies in two European Commission Delegated
Regulations to ensure that the UK has an effective regulatory framework for the
transparency and comparability of low carbon benchmarks. These Delegated
Regulations set out technical regulations necessary for the operability of the low
carbon benchmarks regime under the Benchmarks Regulation.
Amendments relating to the Financial Promotion Order
7.3 This instrument also remedies deficiencies in the Financial Promotion Order 2005 to
ensure that the definition of relevant markets in several exemptions in that Order
includes UK markets. Currently, deficiencies in drafting mean that only markets based
in the EU and Gibraltar can rely on exemptions relating to relevant markets.
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Explanations
Amendments relating to MiFIR
What did any law do before the changes to be made by this instrument?
7.4 Articles 35 and 36 of MiFIR contain provisions which enable access on a nondiscriminatory and transparent basis between central counterparties (CCPs) and
trading venues (TVs) for all financial instruments except over-the-counter
(OTC) derivatives. They require CCPs and TVs to accept all requests for
access, except where the operational risk and complexity arising from granting access
would cause undue risk.
7.5 The non-discriminatory access regime for equities entered into force in the
EU in 2018. However, a transitional provision was used to postpone the regime
for ETDs until July 2020.
7.6 Ahead of the transitional provision expiring, in June 2020 the EU announced that they
would postpone the implementation of the access regime for ETDs further through
an amendment to MiFIR included in Regulation (EU) 2021/23 on a framework for the
recovery and resolution of central counterparties (CCP R&R Regulation). This was
because there were concerns that CCPs and TVs would not have capacity to deal with
access requests because of disruption caused by Covid-19. However, because the CCP
R&R Regulation entered into force on 11 February 2021, after IP completion
day, it does not form part of retained EU law.
Why is it being changed?
7.7 The non-discriminatory access regime for ETDs was originally designed to improve
cross-border capital markets by increasing competition and facilitating access across
the EU’s single market; however, it does not work effectively when only in force
domestically.
7.8 This instrument therefore makes amendments to MiFIR to remove the regime
for ETDs to ensure that retained EU law operates effectively.
7.9 This instrument also makes consequential amendments to the Delegated Regulation to
reflect the removal of the open access regime for ETDs from MiFIR.
What will it now do?
7.10 This instrument removes the non-discriminatory access provisions
in MiFIR for ETDs. It will not impact the non-discriminatory access regime for other
instruments, which remains in Articles 35 and 36 of MiFIR; benchmarks, which is
contained in Article 37 of MiFIR; or the equivalent regime for OTC
derivative contracts, which is contained in Articles 7 and 8
of Regulation (EU) 648/2012 on OTC derivatives, central counterparties and trade
repositories. The level of public interest in this policy change is low.
Amendments relating to the Benchmark Regulation
What did any law do before the changes to be made by this instrument?
7.11 Commission Delegated Regulation (EU) 2020/1816, Commission Delegated
Regulation (EU) (2020/1817) and Commission Delegated Regulation (2020/1818) set
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out technical standards necessary for the implementation of the low carbon
benchmarks regime under the Benchmarks Regulation.
7.12 Commission Delegated Regulation (EU) (2020/1816) sets out how Environmental,
Social and Governance factors should be reflected in the benchmark statement for
each benchmark or family of benchmarks. Under Article 27 of the Benchmarks
Regulation, benchmark administrators are required to publish a statement which
explains how environmental, social and governance factors are reflected in each
benchmark or family of benchmarks it administers.
7.13 Commission Delegated Regulation (EU) (2020/1817) sets out how benchmarks
administrators should explain the way in which environmental, social and governance
factors are reflected in the benchmark methodology. Article 13 of the Benchmarks
Regulation requires benchmark administrators to explain how environmental, social
and governance factors are reflected in the methodology of each benchmark that it
administers.
7.14 Commission Delegated Regulation (EU) (2020/1818) sets out minimum standards that
a benchmark must comply with in order to be labelled as either an EU ClimateTransition Benchmark or an EU Paris-Aligned Benchmark. These are voluntary
standards which aim to support investors who wish to pursue climate-conscious
investment strategies.
Why is it being changed?
7.15 This instrument makes amendments to Commission Delegated Regulation (EU)
(2020/1816) and Commission Delegated Regulation (EU) (2020/1818) to remedy
deficiencies and provide for the effective operation of these technical regulations in a
UK-only context.
What will it now do?
7.16 This instrument remedies deficiencies to ensure that the technical standards
introduced by the Commission Delegated Regulations for low carbon benchmarks
operate effectively in a UK-only context. Specifically, Regulations 5 and 6 replace
references to the “EU” with references to the “UK” and replace references “national
law” with reference to “UK law”. Regulations 5 and 6 also replace references to the
Statistical Classification of Economic Activities in the European Community (NACE)
with relevant references to the UK Standard Industrial Classification of Economic
Activities (SIC). Relevant references to definitions in EU Regulations are retained and
written out in Regulations 5 and 6. The substance of the technical regulations is not
changed by this instrument.
Amendments relating to the Financial Promotion Order
What did any law do before the changes to be made by this instrument?
7.17 Part 1 of Schedule 3 of the Financial Promotion Order defines the concept of ‘relevant
market’. This concept is used in five articles of the Financial Promotion Order
(Articles 37, 41, 67, 68 and 69) to provide for exemptions to the financial promotions
restriction (set out in section 21 of the Financial Services and Markets Act 2000).
Currently relevant markets are defined as those where the head office of the market is
situated in an EEA State or in Gibraltar, and are subject to requirements in the state in
which they are situated.
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7.18 Article 37 exempts promotions communicated by a relevant market where those
communication relate to facilities provided by the relevant market.
7.19 Article 41 exempts promotions communicated by a body corporate (A) directed at
persons entitled to bearer instruments issued by A (or a parent or subsidiary
undertaking of A) where the communication is required or permitted by the rules of a
relevant market to be communicated to holders of instruments of a class which
consists of or includes the bearer instruments in questions.
7.20 Article 67 exempts promotions which relate to an investment which is permitted to be
traded or dealt in on a relevant market and which is required or permitted to be
communicated by the rules of that market, the body which regulates the market or the
body which regulates offers or issues of investments traded on such a market.
7.21 Article 68 exempts promotions which are required to be communicated by a relevant
EEA market before an investment can be admitted to trading on that market and
which, if included in a prospectus, would be subject to prospectus rules. These
communications must not be accompanied by any information other than information
which is required or permitted to be published by the rules of the market.
7.22 Article 69 exempts promotions communicated by a body corporate (A) which relate
only to relevant investments issued to be issued by A or by another body corporate in
the same group if those investments are permitted to be traded on a relevant market.
Why is it being changed?
7.23 The exemptions relating to relevant markets were designed to apply to EEA markets
(including markets in the UK and Gibraltar). Following our departure from the EU it
is no longer possible for firms to rely on the exemptions set out above which relate to
relevant markets in the EEA and Gibraltar in so far as they relate to UK markets.
7.24 These exemptions are important to the way that firms trading on relevant markets do
business. The proposed changes resolve the deficiency that arises from our departure
from the EU.
What will it now do?
7.25 The instrument makes amendments to ensure that the definition of relevant markets
includes UK markets as they did prior to the UK’s exit from the EU. It will not change
the status of the exemption with regards to EEA markets or markets headquartered in
Gibraltar.
8. European Union Withdrawal and Future Relationship
8.1 This instrument is being made using the power in section 8 of the European Union
(Withdrawal) Act 2018 in order to address failures of retained EU law to operate
effectively or other deficiencies arising from the withdrawal of the United Kingdom
from the European Union. In accordance with the requirements of that Act the
Minister has made the relevant statements as detailed in Part 2 of the Annex to this
Explanatory Memorandum.
9. Consolidation
9.1 HM Treasury does not intend to consolidate the relevant legislation at this time.
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10. Consultation outcome
Amendments relating to MiFIR
10.1 HM Treasury engaged with a cross section of industry participants between January
and May 2021 in order to determine that the non-discriminatory access regime is
unsuitable in respect of ETDs in a UK-only context. A full public consultation was
not undertaken as the non-discriminatory access regime for ETDs has not been used in
the UK.
10.2 HM Treasury has also consulted the Financial Conduct Authority and the Bank of
England to inform the development of this instrument.
Amendments relating to the Benchmarks Regulation
10.3 A public consultation was not undertaken for the low carbon benchmarks delegated
regulations onshoring instrument. The changes made by the EU to their delegated
regulations were informed by the EU’s Technical Expert Group on sustainable
finance.
10.4 HM Treasury has also consulted the Financial Conduct Authority and the UK
Statistics Authority to inform the development of this instrument.
Amendments relating to the Financial Promotion Order
10.5 A public consultation was not undertaken for these amendments to the Financial
Promotion Order as this is a small technical amendment to ensure that these
exemptions continue to apply to UK markets as they did prior to the UK’s exit from
the EU.
10.6 HM Treasury has consulted the Financial Conduct Authority on this issue.
11. Guidance
Amendments relating to MiFIR
11.1 HM Treasury published guidance on gov.uk on 5 May 2021 stating its intention to
bring forward legislation to permanently remove the non-discriminatory access
regime for ETDs. This was an update to guidance originally published on 30
December 2020 which clarified that the regime would continue to apply in the UK
after IP completion day, and announcing HM Treasury’s intention to review the
regime in a UK-only context.
11.2 HM Treasury does not propose to provide any further guidance in relation to this
instrument.
Amendments relating to the Benchmarks Regulation
11.3 HM Treasury does not propose to provide any guidance in relation to this instrument.
Amendments to the Financial Promotion Order
11.4 HM Treasury does not propose to provide any guidance in relation to this instrument.
12. Impact
12.1 There is no, or no significant, impact on business, charities or voluntary bodies.
12.2 There is no, or no significant, impact on the public sector.
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12.3 An Impact Assessment has not been prepared for this instrument because the impact
of this SI is small (the cost to businesses is < £5m per year). A de minimis Impact
Assessment is submitted with this memorandum and published alongside the
Explanatory Memorandum on the legislation.gov.uk website.
13. Regulating small business
13.1 The legislation applies to activities that are undertaken by small businesses.
Amendments relating to MiFIR
13.2 The basis for the final decision not to take action to mitigate the impact on small
businesses is that no access arrangements have been granted under the nondiscriminatory access regime for ETDs since it entered into force, and therefore there
will be no change to the operational practices of small businesses.
Amendments relating to the Benchmarks Regulation
13.3 The basis for the final decision not to take action to mitigate the impact on small
businesses is that the amendments made by this instrument will have a negligible
impact on the operational practices of a small number of highly specialised
businesses.
Amendments relating to the Financial Promotion Order
13.4 The basis for the final decision not to take action to mitigate the impact on small
businesses is that the amendments made by this instrument are not expected to have
an impact on small businesses.
14. Monitoring & review
14.1 As this instrument is made under the European Union (Withdrawal) Act 2018, no
review clause is required.
15. Contact
15.1 Ciara Mitchell at HM Treasury ciara.mitchell@hmtreasury.gov.uk, Merlin Veron at
Her Majesty’s Treasury merlin.veron@hmtreasury.gov.uk, or Fraser Macleod at Her
Majesty’s Treasury fraser.macleod@hmtreasury.gov.uk can be contacted with
any queries regarding the instrument regarding non-discriminatory access, low carbon
benchmarks respectively, or financial promotions respectively.
15.2 Tom Duggan, Deputy Director for Securities and Markets, at HM Treasury can
confirm that this Explanatory Memorandum meets the required standard.
15.3 John Glen, Economic Secretary to the Treasury at HM Treasury can confirm that this
Explanatory Memorandum meets the required standard.
