EU eases Brexit derivatives deal tensions
(7 November 2018 - Europe) The European Union (EU) has granted a year-long extension to derivatives deals to avoid Brexit chaos.
EU regulators are planning to grant exemptions to prevent disruption to multitudes of uncleared derivatives contracts if the UK experiences a ‘Hard Brexit’ and departs the EU without a political agreement. The European Securities and Markets Authority (ESMA) declared it planned to give banks reprieve until November 2019 that would adversely impact interest rate and credit derivatives.
ESMA highlighted that the new rules would only be triggered if the UK and EU fail to reach a Brexit withdrawal agreement. Financial industry lobby groups have warned that shifting contracts worth trillions of dollars in notional value could create significantly expensive operational challenges. Banks would have to alter or novate many deals by replacing an authorised UK counterparty with an EU counterparty. In the event of a ‘no-deal’ Brexit, some contracts that are traded privately between banks may be legally required to be routed through clearing houses, increasing charges substantially. ESMA is proposing a 12-month exemption noting that the measures are the only set that regulators plan to alleviate the growing level of legal uncertainty brought about by an uncertain Brexit outcome. The proposals have been submitted to the European Commission and will need to be further approved by the European Parliament and the Council.
ESMA chairman Steven Maijoor said “The proposed regulatory change supports counterparties’ Brexit preparations and maintain a level playing field between EU counterparties, while addressing potential risks to orderly markets and financial stability.”