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08 November 2018

ESMA proposes a regulatory change to support the Brexit preparations of counterparties to uncleared OTC derivatives


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The draft RTS propose, in the context of UK withdrawal from the EU, to introduce a limited exemption in order to facilitate the novation of certain non-centrally cleared OTC derivative contracts to EU counterparties during a specific time-window.


The amendments would only apply if the UK leaves the EU without the conclusion of a withdrawal agreement – a no deal scenario.  

In the context of the on-going withdrawal negotiations between the EU and the UK, and to address the situation where a UK counterparty may no longer be able to provide certain services across the EU, counterparties in the EU may want to novate their non-centrally cleared OTC derivative contracts by replacing the UK counterparty with an EU counterparty. However, by doing this, they may trigger the clearing obligation for these contracts, therefore facing costs that were not accounted for when the contract was originally entered into.

Limited exemption from the clearing obligation to facilitate novations

The draft RTS allows UK counterparties to be replaced with EU ones without triggering the clearing obligation. This limited exemption would ensure a level playing field between EU counterparties and the preservation of the regulatory and economic conditions under which the contracts where originally entered into.

The window for the novation of non-centrally cleared OTC derivative contracts which fall under the scope of this amending regulation would be open for twelve months following the withdrawal of the UK from the EU. Counterparties can however start repapering their contracts ahead of the application date, making the novation conditional upon a no-deal Brexit, given the conditional application date of this amending regulation.

Steven Maijoor, Chair, said: “ESMA and other EU authorities and institutions have been clear on the importance for market participants to be prepared for Brexit, including the possibility of a no-deal scenario. 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. Counterparties should negotiate as soon as possible the novations of their transactions which are in the scope of this amending regulation, given the twelve month timeframe to benefit from it.”

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