Brexit update on trends and developments for Debt Capital Markets

The economic forecast for the debt capital markets in Ireland during the next 12 months is considerably more positive than it has been since the COVID-19 outbreak escalated to become a global pandemic in the early months of 2020. We have seen a significant upturn in activity since the final quarter of last year and expect this positive trajectory to continue as the vaccine rollout continues to gather pace leading to greater certainty amongst market participants both domestically and internationally.

We have summarised below two Brexit related topics currently relevant in the Irish market and which we expect will continue to be an area of focus in the short-to-medium term.

Brexit – EU/UK Divergences 

The Brexit transition period ended with effect from midnight on 31 December 2020. At the end of the transition period, EU legislation that was already directly applicable to the UK prior to that date was "onshored" under the United Kingdom's (UK) withdrawal legislation. Notwithstanding this onshoring process, parties to new and existing structured finance transactions need to be conscious that the regulatory landscape post-Brexit may be quite different and the EU and UK financial services regimes will likely diverge in the months and years ahead. 

Of immediate relevance are the EU Securitisation Regulation and the UK Securitisation Regulation which, while very similar, are not identical and are distinct regimes. For example, as at the date of writing, the definition of "sponsor" under the EU Securitisation Regulation captures (i) both EU and third country credit institutions; and (ii) EU investment firms however it is unclear if the definition extends to capture third country investment managers. Under the equivalent UK legislation, the definition of "sponsor" covers UK as well as third country investment firms. This divergence will impact on which entities can act as an eligible risk retention holder under the different regimes and is of particular relevance where a transaction is designed to comply with both the EU Securitisation Regulation and the UK Securitisation Regulation (and we have already seen this as a live issue on a number of transactions involving Irish issuers and originators). Further divergences of interpretation and implementation can be expected in the years ahead.

Brexit – MIFID II – "overseas-person exemption"

Another hot topic in the run-up to and following Brexit is the ability of UK situate "investment firms" to continue to provide certain investment services to Irish customers post-Brexit. In its legislation implementing the Markets in Financial Instruments Directive (MiFID II), Ireland retained the so-called "overseas-person exemption" (the OPE) from its original MIFID legislation (and the old Irish Investment Intermediaries Act). The OPE continues to apply post-Brexit so that where an investment firm which (i) has no branch in Ireland and (ii) only provides investment services to professional clients/eligible counterparties in Ireland, it should not require an authorisation in Ireland under MiFID II. Many UK based entities that provide regulated services in Ireland have been able to rely on this exemption to continue their usual business functions post-Brexit (in particular where they are providing discretionary investment management services to certain Irish customers (such funds or structured finance vehicles)).

As a result of Brexit, many UK based financial institutions migrated a number of their business lines to Ireland. More recently we have seen a number of account banks migrate their accounts from London to Dublin. Many structured finance transactions involving Irish issuers have had to be amended to facilitate these migrations and we now regularly see Irish law account bank agreements (and related Irish law account security) where the market standard previously would have been for those documents to be governed by the laws of England and Wales (on the basis that the relevant accounts were located in London).

For further information in relation to this topic, please contact Peter Walker, Sinéad O'Connor, Jack Sheehy, Finance Partners, or any member of ALG’s Capital Markets Debt team.

Date published: 29 June 2021