On 25 February 2019, the Bank of England (BoE), the Financial Conduct Authority (FCA) and the US Commodity Futures Trading Commission (CFTC) published a joint statement setting out their plan to ensure the continuity of derivatives trading and clearing post-Brexit (Joint Statement).
The Joint Statement aims to address regulatory uncertainty around UK-US derivatives market activity in light of the UK’s withdrawal from the EU. Commenting on the announcement, J. Christopher Giancarlo, Chairman of the CFTC, highlighted that “London is, and will remain, a global center for derivatives trading and clearing”. He also added that the package of measures will “provide a bridge over Brexit through a durable regulatory framework upon which the thriving derivatives market between the United Kingdom and the United States may continue and endure.”
Derivatives clearing and trading in the event of a no-deal Brexit
Under the Joint Statement, the UK and US authorities have agreed on the following measures to address risks from a no-deal Brexit:
- Continued supervisory co-operation: The authorities will put in place information-sharing and cooperation arrangements, including updating the Memorandum of Understanding (MoU) on clearing activity between the BoE and CFTC as well as the MoUs between the FCA and the CFTC relating to certain firms in the derivatives and the alternative investment fund industry.
- Extension of existing CFTC relief and comparability for the UK: The CFTC will extend existing regulatory relief, presently available to EU firms, to ensure that it continues to cover UK firms after exit day. In particular, the CFTC will issue new no-action letters to UK market participants so that they can continue to rely on regulatory relief for issues such as broker registration, swap data reporting and the trading and clearing of inter-affiliate swaps. Additionally, the CFTC will grant new substituted compliance and exemption orders directed at the UK. This will allow UK firms to meet a number of CFTC entity-level and transaction level requirements and margin requirements for uncleared swaps and to satisfy CFTC trade execution requirements. Until such orders are finalised, the CFTC may grant temporary no-action relief. Moreover, the CFTC confirmed that UK CCPs will also be able to provide their services in the US after exit day.
- UK equivalence for the US: The UK authorities will also take measures to ensure that US trading venues, firms and CCPs are able to provide their services in the UK post-Brexit. More specifically, HM Treasury confirmed that the equivalence decisions issued by the EU Commission in relation to the CFTC regulatory framework on risk mitigation requirements and trading venues will remain in force, as a matter of UK law. This means that UK firms will still be able to apply CFTC margin rules for contracts with US counterparties regulated by the CFTC. They may also still access CFTC regulated trading venues to meet regulatory requirements, such as derivatives trading obligations. Furthermore, the BoE and the CFTC are working on producing equivalence and recognition decisions for CFTC-registered CCPs as a matter of priority. In light of the relevant EU equivalence decisions that already exist, it is expected that HM Treasury will also find US clearing regimes equivalent. Meanwhile, US CCPs may use the UK temporary permissions regime for non-UK CCPs to continue providing their services in the event of a no-deal Brexit. It is noted that the BoE has already received notifications from four CFTC-registered CCPs wishing to enter the regime.
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