CFTC Announces Hard-Brexit Swaps Contingency Plan

The US regulator has put measures in place for uncleared swaps from UK entities.

The United Kingdom might have bought itself some time for Brexit, but that doesn’t mean it’s not still on the forefront of everyone’s minds. One financial regulator who is still putting contingency plans in place is the Commodity Futures Trading Commission (CFTC).

Should a so-called hard Brexit occur, that is, if the UK leaves the European Union without a deal in place, the American regulator confirmed that certain uncleared swaps would not suddenly face CFTC margin requirements from which they were previously excluded.

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On Monday, the CFTC unanimously approved an interim final rule, which will allow an uncleared swap to retain its legacy status under the CFTC Margin Rule or Prudential Margin Rule when transferred. However, this will only come into play if the UK leaves the bloc without a negotiated withdrawal agreement in place.

J. Christopher Giancarlo of CFTC
J. Christopher Giancarlo
Source: CFTC

Commenting on the measure, CFTC Chairman J. Christopher Giancarlo said: “Today the Commission takes another important step to bring certainty to the global derivatives markets. Consistent with actions already taken by U.S. prudential regulators, we are providing regulatory certainty regarding the transfer of uncleared legacy swaps to facilitate global swaps market participants’ needs in the event that the UK withdraws from the EU without a negotiated withdrawal agreement.”

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CFTC Measures to Reduce Regulatory Uncertainty in a Hard Brexit

The final interim rule allows UK entities to transfer legacy swaps to an affiliate, regardless of its location, without losing their legacy status under the watchdog’s margin regulation. Therefore, they can transfer swaps to an EU entity, allowing them to be serviced under European Union law after a hard Brexit.

“These measures show that UK and U.S. authorities are committed to taking measures to ensure the UK’s withdrawal from the EU, in whatever form it takes, will not create regulatory uncertainty regarding derivatives market activity between the UK and [the] United States,” continued Giancarlo.

“These measures will help support financial stability and the sound functioning of financial markets.  They also will give confidence to market participants about their ability to trade and manage risk through these markets.”

Yesterday’s announcement follows on from the US regulator announcing, in conjunction with the Financial Conduct Authority and Bank of England, that US trading venues, central counterparties (CCPs) and firms will be able to continue to provide services in the UK, regardless of a hard-Brexit, as Finance Magnates reported.

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