Post-Brexit Derivatives Clearing
Derivatives Trading in the Context of Brexit
In last week’s feature in Winston’s Financial Services Update, “EU and UK Regulators Brace for No-Deal Brexit,” we provided an update on cooperation between European Union (“EU”) and United Kingdom (“UK”) financial services regulators in the context of a “no deal” Brexit (referred to, politely, as having the UK “crash out” of the EU). While the British government announced on February 26, 2019, that it was willing to put Brexit “on pause” if the government’s deal is voted down (which, as things stand, it is likely to be), to avoid a crash-out scenario, it is still a very real risk weighing on the minds of regulators in both the EU and UK. In this context, the United States (“US”) is also working with the EU and UK to ensure financial services are as stable as possible in any Brexit scenario. Last week’s update touched briefly on the arrangements relating to derivatives trading, but given the importance and complexity of this market, we have provided some additional information below on the potential effects of Brexit, specifically with regard to relatively recent steps taken by financial services regulatory authorities in the UK, the EU, and the US.
One of the key concerns for the European Securities and Markets Authority (“ESMA”) and the Bank of England, including the Prudential Regulation Authority (together, the “BoE”) (and others) has been the question, applicable particularly to the derivatives trading industry, of post-Brexit recognition by EU financial services firms in the UK. Similarly applicable to the derivatives trading industry is the recognition of UK financial services firms in the EU. Given the importance of the European market for US parties, the US has a vested interest in ensuring things are as smooth as possible when Britain leaves the EU. One key question is: how will international derivatives traders access clearinghouses if the UK leaves without a common framework (say, on a no-deal basis)? As mentioned in last week’s newsletter, recent regulatory updates from the UK and the EU about co-recognition have been welcome news in the derivatives trading industry. Since last week, we have seen continued focus on this area with the U.S. Commodity Futures Trading Commission (“CFTC”), the BoE, and the UK’s Financial Conduct Authority (“FCA”) issuing a joint statement regarding derivatives trading and clearing activities between the UK and the US after the UK’s withdrawal from the EU (the “US-UK Joint Statement,” discussed further below).