EU regulator proposes derivatives fix in case Brexit talks fail

The EU financial markets regulator has proposed new rules that would prevent disruption to uncleared derivatives contracts in the event of the UK and the EU failing to agree a deal for the former’s exit from the bloc.

The European Securities and Markets Authority (ESMA) yesterday proposed amending regulations to allow investors to replace a UK counterparty with EU ones without this “novation” triggering an clearing obligation.

The exemption would be temporary and only apply if Brexit negotiations were unsuccessful – a ‘no deal’ scenario.

The window for the transfer of relevant uncleared, over-the-counter derivatives contracts would be open for 12 months following the withdrawal of the UK from the EU.

However, the watchdog suggested counterparties should start preparing now, “repapering their contracts” to make the counterparty switch conditional upon a no-deal Brexit.

Steven Maijoor, ESMA’s 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 maintains a level playing field between EU counterparties, while addressing potential risks to orderly markets and financial stability.”

ESMA has submitted its proposed rule changes to the European Commission for sign-off. It said it had not conducted an open public consultation given the “urgent” need for a regulatory solution to facilitate the transfer of contracts to EU counterparties in light of Brexit.

Regulators in different EU countries have been drawing investors’ attention to the implications for derivatives from a ‘hard’ Brexit. Last year Cardano warned that such an outcome could cost Dutch pension schemes hundreds of millions of euros.

UK prime minister Theresa May needs to get cabinet ministers to back her negotiating position, in particular on her plan for the Irish border question. The UK national press is reporting that May will be seeking her ministers’ agreement ahead of a targeted special cabinet meeting early next week.