ESMA Predicts No Major Change to Derivatives Trading Post-Brexit

After MPs rejected a deal with the EU, the pan-European regulator envisages minimal problems in the OTC and derivatives markets

The European Securities and Markets Authority (ESMA) released a document this Tuesday detailing its plans for implementing certain MiFID II regulations if a no-deal Brexit occurs.

More specifically, the document deals with reporting requirements for derivatives trading.

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ESMA’s rules mean that firms have to conclude transactions in many derivatives with specific, regulated facilities.

Many of these facilities, whether they are multilateral trading facilities or organized trading facilities, are based in the UK.

If Britain does leave the European Union without a deal, that will make executing derivatives transactions more difficult.

But, as ESMA pointed out in its statement, most of these firms have opened subsidiaries in the EU already.

Thus, the regulator said that it is not concerned that there will be a lack of liquidity in the market following Brexit.

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“ESMA does not have…any evidence that market participants will not be able to continue meeting their obligations under the trading obligation for derivatives in case of a no-deal Brexit,” said the regulator.

Having said that, the pan-European regulator added that it would be monitoring the market to ensure participants have adequate liquidity and are able to trade.

Derivatives good, OTC fine

Also unlikely to change in the wake of Brexit are reporting requirements for firms performing over-the-counter transactions.

Currently, any public OTC trades must be published via an approved publication arrangement.

This is true even if one of the counterparties in the trade is not based in the EU.

That means that, even if British investment firms cease to be connected to the EU in any way, they will simply be reclassified as “counterparties established in a third country.”

As a result, and to the great joy of compliance professionals everywhere, any OTC trades that a European firm carries out with a UK counterparty will still have to be reported under ESMA’s regulations.

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