HANSARD
Over the Counter Derivatives, Central Counterparties and Trade Repositories (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2020
- Motion to Approve
- 2:16 pm
- Moved by
- That the draft Regulations laid before the House on 24 March be approved.
- My Lords, your Lordships will be aware that, since July 2018, HM Treasury has put in place legislation, using powers under the European Union (Withdrawal) Act 2018, as amended by the European Union (Withdrawal) Act 2020, to ensure that the UK has an independent and coherent financial services regulatory regime at the end of this year when the UK leaves the transition period. This SI is part of that programme of work, and the approach aligns with the general approach established by the EU (Withdrawal) Act 2018, providing continuity by retaining existing legislation at the end of the transition period, but amending where necessary to ensure that it continues to function and is effective in a UK-only context.The SI makes deficiency fixes to a new piece of EU legislation that has recently become applicable relating to the European market infrastructure regulation, hereafter referred to as EMIR. EMIR implemented the G20 Pittsburgh commitments, agreed in the aftermath of the financial crisis in 2009, regulating over-the-counter derivative markets and, in particular, requiring some derivatives to be cleared in a central counterparty, known as a CCP, to manage risk between users of derivative products. EMIR has been effective in increasing the safety and transparency of derivatives markets, thereby reducing the associated risks users may face. UK CCPs play an essential role in reducing systemic risk and ensuring the efficient functioning of global financial markets. Parliament has previously approved several EU exit instruments to ensure that EMIR continues to function at the point of the UK’s withdrawal from the EU.EMIR was updated by a regulation known as EMIR 2.2 on 1 January this year. This regulation modifies the third-country, or non-EU, CCP supervision framework so that EU authorities have greater oversight over third-country CCPs that are systemically important to the EU. Most of these changes are made to the recognition framework for CCPs outside the EU. Each CCP has to be individually recognised by the European Securities and Markets Authority, known as ESMA.
- 2:24 pm
- I declare my interests as in the register as a director of the London Stock Exchange plc.I have forgotten how many of these Treasury statutory instruments I have done, but it must be around a half-century innings so far. With each one my past flashes before my eyes and, although EMIR 2.2 was done after my time in the European Parliament, the content is familiar.I support the UK taking an open stance on location policy, at least for now. I successfully negotiated away attempts at its introduction in the original EMIR because it was then intended to be used in a protectionist way to undermine the financial single market, and the European Court agreed. Brexit changes that protection for the UK. Now that we are on the outside, it comes down to balancing fear and retaliation—fear that massive moving of contracts is itself a systemic risk, fear of extra costs to industry, and perpetual EU pressure on decisions and location of key personnel. Maybe, in the end, it will be the attractiveness of London and London business that wins out—as it has done for the Unilever listing—but no one should underestimate the effort that involves.Do I object to one of the Commission powers being given to the Bank of England rather than the Treasury? No, that is where the skill lies—although anyone following exchanges between me and Mark Carney on the Economic Affairs Committee will know that I think it has been overoptimistic about how its regulatory relationships will win over EU demands. I do not dispute the good relationships or technical correctness, but this issue has political overtones.I hugely regret that there is no way that this Parliament gets a say anything like that which the European Parliament has, particularly at primary level. Everything is delegated away from accountable objectivity or the ability for Parliament to steer or understand our largest industry.
- 2:27 pm
- My Lords, I declare my interests as in the register. I broadly welcome this instrument; it comes in extraordinary times, and we do not really have enough time to debate it, but we are at a critical point in our negotiations with the EU during the transition period. This is an incredibly technical instrument, and I am glad to be among the notable Peers who have far more expertise than I do on this matter.In the limited time, I will focus on questions of sovereignty, because a lot of this has been picked off by our exiting the EU. I have had some contact with both the financial services industry and this area of derivatives, which, though often castigated in public, is crucial to our future as a financial hub. It is a growth sector and, as the world becomes riskier, we need to cement our position in this kind of trading globally to help reduce risk for businesses, organisations and markets around the world.I have a couple of concerns for my noble friend the Minister to address. She may not have time to fully answer them all, so I would be happy to have a letter placed in the Library in response. My concerns are about sovereignty and how governance may shift over time, particularly in the course of our negotiations—and if they perhaps break down—and post this transition period. As mentioned, we are giving quite a bit of leeway to the Bank of England. What provision has been made, or what guidelines exist, to ensure that the Bank of England does not give away any powers during this period, given the freedoms it has around regulating and bringing in third parties to that regulation?My second question is on human rights. We are obviously in a period when financial services are being pulled into discussions about past slavery and practices within supply chains. I would be interested to know how the sovereignty in this instrument works with third parties and the question of who decides about human rights. This could very much complicate these markets, which are huge.
- 2:30 pm
- My Lords, at one level these regulations could be seen as a technical set to see us through to the end of the year in order to be compliant during transition. However, they raise some very substantive issues which set a pathway with much greater significance.What we are legislating for here is derived precisely from the legislation which the EU will use in dealing with the United Kingdom from 1 January next, onwards. Unless there is some major shift in governing policy, the EU form of these regulations will be the rules which govern the activities of UK entities within the 27 member states of the European Union. All of the tightened EMIR 2.2 regime rules on the over-the-counter derivatives market will be applied to us a third country. In the context of the Government’s aim not to be within the single market, a primary concern must be whether our regulatory regime will be regarded as equivalent by the 27 member states of the EU next year.It is through this lens that we must assess the adequacy of these regulations. I am afraid that all the signs of what will happen next year to our relationship with the EU look increasingly gloomy. As written, the Explanatory Memorandum is either very misleading or incredible in its paragraph 7.1, depending on your view of its literal meaning. Its opening words state:“The UK has left the EU with a deal”,yet the EU, as we know, has said that we are not even negotiating effectively on the agreement—the political declaration which the UK reached at the end of last year. What was achieved was leaving with an agreed declaration on the future issues to be negotiated. I suspect that the terms of this bald statement in paragraph 7.1 of the EM refer to a much narrower arrangement than the one currently cited by all sides and the media, including our own Prime Minister, as leaving with a deal. Can the Minister tell the House what deal the Government are referring to in this statement, and which terms of that deal are relevant to these regulations?
- We can see you, Lord Mann, but we cannot hear you.
- 2:33 pm
- My Lords, you should be able to see me. I thank the Minister for and congratulate her on the clear way in which she introduced this statutory instrument. I have three questions. First, have the FCA and the Bank of England identified to Treasury Ministers any specific systemic risks that the House should be aware of? Secondly, are there any ongoing concerns within the FCA and the Bank of England over inter-trade repository reconciliations? Thirdly, does the power remain to suspend reporting obligations for 12 months and, if so, what criteria will the Treasury use to enact it? Can this power be rolled over for a further 12 months, beyond the initial 12?
- 2:35 pm
- My Lords, I support this statutory instrument. I welcome it and congratulate my noble friend on her introduction. It is of course important that derivatives are increasingly cleared through CCPs since the lessons that we learned in 2009. The security of global derivatives markets is vital to the functioning of the financial system and the stability of institutions such as pension funds and insurers, which use derivatives widely nowadays in their risk management processes.Extending the Bank of England’s supervision of domestic CCPs to global CCPs is necessary as we depart the EU; likewise, ensuring that it can continue to maintain its responsibilities for safeguarding financial stability and systemic risk is important. However, does my noble friend feel that the Bank of England has sufficient resources to deal with these wide-ranging new responsibilities and technical standards, especially if we leave the EU without any formal agreement or continuation of the transition, should that be necessary at the end of this year?I also welcome the fact that the Treasury will take responsibility for location policy, because that is where such responsibility should rightly lie in the post-Brexit environment. I do not believe that the Bank of England would be the appropriate place, especially given all its other extra duties. Has consideration been given to the concerns expressed that this may become a political issue, with a trade-off of competing interests? Finally, what scrutiny will Parliament have over this broad extension of powers to the Treasury and the Bank of England? It seems of concern, as other noble Lords have suggested, that this is to be subject to the negative procedure should changes be made. I did hope that Parliament would have more of a say.
- 2:37 pm
- My Lords, it is a pleasure to speak on these regulations and I join other noble Lords in congratulating my noble friend on the way in which she introduced them. Making the complex clear is no mean feat, given the number of acronyms in them. I am sure she would agree that we have a world-leading financial services sector in the City of London, given its ecosystem, geography and regulator.I note—other noble Lords have commented on this—the shift in responsibility for CCPs to the Bank of England. Does my noble friend believe that the Bank has the breadth of experience to make decisions on CCPs? I am sure that it has the specific, narrow understanding but, in wanting the decisions to be made in line with broad government policy, what discussions have the Government had with the Bank of England on this issue? Can she also say something about discussions with the Bank over the level of resourcing that she believes it currently has to exercise this task?As has already been said by other noble Lords, the regulations are required for compliance at the end of this year. Post that, does my noble friend believe that these regulations will enable not only compliance but optimisation? Does she believe that, post-Brexit, more could be done to ensure that we have an optimised OTC derivatives market in the UK?Finally, on the role of the Bank of England—which, again, is wider than these regulations—I ask the Minister to update the House, in writing if necessary, on the current progress on a central bank digital currency. She talked, quite rightly, about financial stability. If a social media platform launched a cryptocurrency that took hold in any nation state, that could have a significantly detrimental effect on financial stability. Can she update noble Lords on the Bank’s current discussions and consultation on CBDC?
- 2:40 pm
- My Lords, I congratulate my noble friend on introducing the regulations and thank her for the opportunity to consider them. I have a number of queries.I share the concern of the noble Baroness, Lady Bowles. If it is difficult for the Treasury to know where all the instruments are, how on earth are industry and investors expected to keep on top of all the changes as a result of our exiting the European Union? I make particular reference to paragraph 2.15 of the Explanatory Memorandum. Can my noble friend explain why the functions previously held by the European Commission have been split between the Treasury and the Bank of England? It would be helpful to know the thinking behind that.Derivatives are perhaps the most complex area of financial services. We have moved a great deal away from passporting or equivalence. In this regard, what will the status of industry and investors be going forward? Will we enjoy the same protections in the UK under the statutory instrument set out today as if we were still a member of the European Union? Also, what will be the impact of the location policy described by my noble friend on the City of London and its ability to compete on equal terms and on a level playing field with its erstwhile partners and competitors in the European Union?Finally, can my noble friend put my mind at rest that, while it might suit the industry to have a weaker overview and oversight of the regulations, the protections for consumers and investors in these instruments will be safeguarded? I would like an assurance on that.