Brexit – The Italian regulator provides new guidance to UK firms and trading venues operating in Italy
Now that a “Brexit deal” has been finally agreed, CONSOB has published three warning notices (richiami di attenzione) to clarify the regime currently applicable to UK firms and trading venues operating in Italy (and to Italian trading venues operating in the UK) and to set out which measures they should adopt to secure business continuity at the end of the transitional period.
The need for new regulatory guidance
Up until recently, the Italian Government and supervisory authorities have provided transitional rules that would have only applied in the event of a “no-deal” scenario, to avoid potential disruptions in the business continuity of UK entities in Italy (the so-called cliff-edge risk).
However, with the UK and EU authorities finally reaching a withdrawal agreement, the provisions of the “Brexit Law Decree” no. 22 of 25 March 2019 (described here) have never come into effect, and the relevant implementing measures issued by CONSOB (see Communications no. 4/2019, 8/2019 and 10/2019 and Warning Notice no. 5/2019) have consequently become outdated. Equally, the notices sent by the UK firms to CONSOB pursuant to these measures are no longer valid.
To regulate the current scenario, on 26 March 2020 CONSOB published three Warning Notices (n. 3/20, n. 4/20 and n. 5/20) addressing “Brexit with the withdrawal agreement”: the first one on the measures for UK firms providing investment services and activities in Italy, and the other two on the measures to ensure the operation, respectively, of UK trading venues in Italy and of Italian trading venues in the UK.
We set out below a summary of these warning notices - their full text is publicly available on the CONSOB website.
Provisions on the business continuity of UK firms
Rules on access to the Italian market
UK firms operating in Italy will continue to be subject to the rules applicable to EU firms (passporting rights included) until the end of the transitional period agreed in the withdrawal agreement, i.e. until the date of 31 December 2020 (or further date, if the transitional period is extended).
After that date, UK firms will become third country firms in all respects. The rules on their access to the Italian market will therefore depend on whether the European Commission has, in the meantime, adopted an equivalence decision on the requirements in force in the UK i.e., if it has resolved that the legal and supervisory arrangements of the UK provide that UK firms comply with prudential and conduct of business requirements having equivalent effect to the ones set out in the CRD and MiFID frameworks (as recently reinforced by Directive (EU) 2019/2034 and Regulation (EU) 2019/2033) - in the political declaration accompanying the withdrawal agreement, the EU and the UK have agreed to work towards concluding the equivalence assessments by the end of June 2020. In particular for what concerns investment firms:
- if an equivalence decision is adopted, UK firms will be able to register in the register of third-country firms kept by ESMA (if the other conditions set out in articles 46 and 47 MiFIR are also met) and as such they will be permitted to operate in Italy on a cross-border basis under the supervision of their home authorities, although only with respect to Italian eligible counterparties and/or per se professional clients;
- in the absence of an equivalence decision, UK firms wishing to operate in Italy on the basis of having the freedom to provide services (provided they can do so only with respect to eligible counterparties and/or per se professional clients) will have to obtain an authorisation from CONSOB under article 28(6) of D.Lgs. 58/1998 (the Italian Consolidated Law on Finance, or “TUF”); and
- irrespective of any equivalence decision being taken, UK firms wishing to operate with Italian retail and/or elective professional clients or, in any case, to establish a branch will have to obtain CONSOB’s authorisation under article 28(3) TUF.
In the absence of the prescribed registration with ESMA or authorisation from CONSOB, from the end of the transitional period UK firms will no longer be able to continue providing investment services and activities in Italy.
Focus on OTC derivatives
In addition to clarifying the above, CONSOB has made a specific remark on the regime applicable to OTC derivative contracts at the end of the transitional period.
In particular, CONSOB has stated that, if a UK firm does not get registered/authorised and does not transfer to a different EU entity any OTC derivative contracts it may have in place with Italian counterparties, not only could some of the servicing activities relating to those contracts qualify as abusive provision of investment services and activities (which in Italy is criminally sanctioned), but there could also be an impact on the contracts themselves, especially in terms of their early termination.
The measures required by CONSOB
As a result, with Warning Notice n. 3/20 CONSOB has urged UK firms currently operating in Italy to either (i) take all measures necessary to ensure continuity of their Italian business at the end of the transitional period or, (ii) if they are instead determined to cease activities in Italy, to prepare for an orderly exit from the domestic market.
UK investment firms must also promptly notify CONSOB of their interest in continuing to operate in Italy or of their intention to cease all activities once the transition period will have expired.
Moreover, UK firms have been prompted to provide their Italian customers with updated information on the consequences of the changes to their operating conditions as a result of Brexit, including the specific implications for any existing OTC derivative contracts.
Provisions on the business continuity of UK trading venues in Italy, and vice versa
Rules on the operation of trading venues
The current regime of mutual recognition of authorisations and supervision, which has been extended by law until (at least) 31 December 2020, includes secondary markets.
However, by the end of the transitional period trading venues must obtain certain regulatory approvals if they want to avoid disruption in their operations. In particular:
- for UK trading venues, to continue operating in Italy (i.e. to continue allowing access of Italian participants):
(i) in the case of MTFs or OTFs, their operating firm must obtain CONSOB’s authorisation to operate in Italy, pursuant to article 28 TUF; and
(ii) in the case of markets, they must obtain CONSOB’s recognition (riconoscimento) pursuant to article 70(1) TUF and article 51 of CONSOB Markets Regulation.
- Likewise, for Italian trading venues to continue operating in the UK (i.e. to continue allowing access of UK participants):
(i) in the case of MTFs operated by an Italian investment firm, that firm must obtain CONSOB’s authorisation to operate in the UK, pursuant to Article 26(6) TUF; and
(ii) in the case of regulated markets and MTFs operated by a market operator, they must obtain CONSOB’s clearance (nulla osta) to extend their activity in the UK, pursuant to article 70(2) TUF.
All these measures will be adopted by CONSOB if, inter alia: (i) it actively conducts an assessment on the equivalence of the UK and the Italian regulatory framework; and (ii) it enters into a cooperation agreement with the UK’s Financial Conduct Authority.
The measures required by CONSOB
With Warning Notices n. 4/20 and n. 5/20, CONSOB has therefore invited the operators of UK and Italian trading venues to timely apply for CONSOB’s authorisation/recognition/clearance (as the case may be), in accordance with the above-mentioned regimes.
It is also worth noting that:
- the operators which have already received the necessary measure from CONSOB must nevertheless re-apply (reference is made to, e.g. (i) the authorisation to EuroTLX SIM S.p.A., which operates the MTF EuroTLX; (ii) the clearance related to all the regulated markets operated by Borsa Italiana S.p.A. and all the MTFs operated by Borsa Italiana S.p.A. and by MTS S.p.A.; and (iii) the recognition of the UK market ICE Futures Europe, all granted by CONSOB in early 2019 to avoid cliff-edge risks). Indeed, these measures never came into effect as they were all subject to a 'no-deal' scenario which did not materialise. Accordingly, CONSOB will have to issue new measures, taking effect from 1 January 2021 (unless the transition period is further extended).
- the operators which have already submitted an application that is still under CONSOB’s evaluation will have to (i) confirm their interest to obtain the relevant measure and (ii) report any changes and/or amendment to the information provided in their original filing.
What happens next?
As detailed above, UK firms and trading venues shall promptly comply with the requests made by CONSOB in relation to their business continuity in Italy (the same applies to Italian trading venues) and shall at all times keep their Italian customers duly informed.
We remain available for any clarification on the CONSOB Warning Notices and to assist in implementing the measures required thereunder.