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Ben Cole

ISDA/AFME paper on contractual continuity in OTC derivatives

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Ben Cole

The International Swaps and Derivatives Association (ISDA) and the Association for Financial Markets in Europe (AFME) have released a paper on the issue of contractual continuity in the over-the-counter (OTC) derivatives markets following Brexit.

In the context of Brexit, contractual continuity relates to existing transactions and refers to both the ability to perform contractual obligations agreed under existing transactions and the ability to perform other important lifecycle events (including risk management activities) for such transactions.

In order to relocate business to an EU affiliate, many firms with legacy contracts might rely on statutory mechanisms that facilitate a transfer of legacy contracts without the need to seek the consent of each affected client or counterparty. In circumstances where statutory mechanisms are inappropriate or unavailable, firms may choose to novate the rights and obligations of a UK firm to an EU affiliate in advance of Brexit.

The challenges faced by firms in novating legacy contracts have led ISDA and AFME to consider that there is a strong case for action to address these risks through the Withdrawal Agreement between the EU 27 and the UK or by legislative or regulatory actions by the EU or individual Member States.

ISDA and AFME members intend to provide more detailed proposals to EU and UK regulators in due course on measures which might be considered by both sides which would facilitate the transfer or novation of legacy contracts. ISDA and AFME will share more concrete proposals for such measures as they are developed.

 

https://www.isda.org/a/EEjEE/Contractual-Continuity-in-OTC-Derivatives-Challenges-with-Transfers.pdf

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Rory McMillan

It sounds like allowing firms to continue existing contracts until they've run their course would be the least disruptive option for policy makers to pick.. Is this realistic? 

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Luuk Jacobs

The problem might be that these contracts have been drawn up under common EU regulation and they might not be valid or can no longer be applicable under UK law post Brexit, to simply because one of the counter parties has decided to move the overall activity with existing contracts to the EU. For example HSBS has started this process already and equally Deutsche Bank has moved 50% of its euro clearing to Frankfurt

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Ben Cole

I’d like to think some form of gandfathering or rolling of open OTC contracts would apply in this instance, especially with >£29 trillion of contracts in the balance. Its in nobodies interest to allow the derivatives market to fall off a cliff edge come March next year.

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Colin Ng

on the topic of grandfathering, the FCA will introduce a Temporary Permissions Regime which will allow EEA firms to continue to market EU UCITS in the UK if the passporting regime falls off a cliff at the end of March (which it most probably will judging from May's speech at Chequers). Firms will need to notify and seek permission from the FCA to enter this regime but the stack of draft SIs just released last week does not cover financial services so we will have to wait for the next round of SIs in the fall before we get anymore clarity on what is needed for the application. 

i suspect there will be some mad rush come end of year/q1 next year to apply - to be prudent firms should already start to gather a list of EU funds they want covered 

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