On March 29, the UK House of Commons rejected, for the third time in three months, a draft withdrawal agreement for a negotiated exit of the UK from the European Union. The UK now has until April 12 to present the EU with a new exit proposal. The lack of a negotiated transition for the UK (a “no-deal Brexit”) could present uncertainty for participants in the global derivatives markets. In response to concerns over such potential uncertainty, regulators on both sides of the Atlantic are taking measures to reassure the markets that U.S.-UK derivatives activity will continue with minimal interruption.
In February, a joint statement was issued by the CFTC, the Bank of England and the UK Financial Conduct Authority regarding the continuity of derivatives trading and clearing on a no-deal Brexit. The joint statement can be found here. Regulators highlighted measures including continued information sharing and supervisory cooperation between the U.S. and UK, the extension to UK firms of relief and comparability made available by the CFTC to the EU, and UK adherence to EU equivalency decisions for the US.
The CFTC also recently issued an interim final rule to provide relief from margin requirements for legacy non-cleared swaps that are transferred outside of the UK on a no-deal Brexit. These are swaps that existed before the compliance date under the CFTC margin rules and thus were not subject to those requirements. In the case of a no-deal Brexit, market participants may prefer or need to move derivatives contracts to an affiliate outside of the UK to ensure continued access to services needed for those contracts. This might arise if the current EU passporting regime is no longer available to the UK. The CFTC rule would allow a legacy swap to be transferred and amended without revising the swap date, which would otherwise subject the swap to margin requirements. The relief is available for transfers of legacy swaps solely in connection with a no-deal Brexit and would not support an amendment of the swap’s economic terms. If a legacy swap is amended outside of the bounds of the CFTC rule then that swap would be subject to the margin requirements of the CFTC. The CFTC interim final rule can be found here. It is open for comment and would take effect only if a no-deal Brexit occurs.
If we can answer any questions about these developments or assist you with any other derivatives matters, please contact Nina Bianchi Skinner, Shareholder.
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