Reed Smith Client Alerts

With potential Brexit looming, trillions of dollars’ worth of derivatives and commodities trades between the United States and the UK will be affected by the UK’s departure from the EU. The U.S. CFTC took preventative measures intended to mitigate any potential dislocation to commodities and derivatives markets.

Autores: Peter Y. Malyshev Christine Parker Ilene K. Froom Justin J. Mirabal Joseph M. Motto

On March 29, 2017, the United Kingdom (UK) provided formal notice of its intention to withdraw from the European Union (EU). The deadline for concluding a withdrawal agreement with the EU has been extended twice, and is currently scheduled to occur by October 31, 2019. Following the UK’s withdrawal, financial entities based in the UK will no longer be able to provide financial services involving swaps to U.S. market participants in reliance on existing substituted compliance determinations and other forms of exemptive relief provided to non-U.S. swap market participants by the U.S. Commodity Futures Trading Commission (CFTC).1 Furthermore, UK intermediaries will fall outside the scope of other cross-border agreements that have been negotiated between the CFTC and the UK based on the UK’s compliance with EU regulations.

In preparation for the withdrawal date of the UK from the EU (Brexit),2 the CFTC had considered two possibilities: (1) an orderly withdrawal when, for a period of time, EU law will apply in the UK (“Soft” Brexit), and (2) Brexit without a previously negotiated deal between the UK and the EU (“No-Deal” or “Hard” Brexit).3 In the event of a Hard Brexit, UK entities would immediately lose access to U.S. market participants; however, in the event of the ratification of the current draft withdrawal agreement by the UK and EU (i.e., the Soft Brexit scenario), the current exemptive regimes would continue for a transitional period.

The CFTC has taken three steps to prepare for Brexit (see the appendix below for a summary of other actions undertaken by the CFTC). First, following similar relief by U.S. Prudential Regulators,4 the CFTC issued an interim final rule allowing UK swap dealers to treat as legacy swaps certain uncleared swaps executed before the relevant compliance dates under the CFTC’s margin rules.5 Second, the CFTC issued a no-action letter extending existing regulatory relief available to EU entities to UK entities.6 Third, the CFTC provided time-limited no-action relief extending the availability of substituted compliance under the CFTC’s comparability determinations and exemption orders, which were originally issued to EU entities, to UK entities post Brexit.7 The CFTC will need to finalize its guidance pertaining to the effects of Brexit on derivatives clearing organizations (DCOs) and further assess additional relief to make sure that there will remain no regulatory gaps.8 Further, even though the U.S. regulators, such as the CFTC, have taken actions to ensure the smooth transition, participants should continue taking their part in preparation for Brexit by reviewing their agreements with UK counterparties to ensure continued compliance (e.g., see ISDA Brexit guidance).9