Shearman & Sterling LLP | Financial Regulatory Developments Focus | European Commission Adopts Measures in Preparation for a No Deal Brexit
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  • European Commission Adopts Measures in Preparation for a No Deal Brexit
    12/19/2018
    The European Commission has published a Communication on Implementing the Commission's Contingency Action Plan for a no deal Brexit and has adopted all the legislative proposals and delegated acts announced in its November 2018 Contingency Plan. The actions relevant to the derivatives industry are the adoption by the Commission of:
    1. A temporary and conditional equivalence decision for CCPs already established and authorized in the U.K. CCPs established in third countries (which the U.K. will become on exit day) whose supervisory and legal regimes have been deemed to be equivalent to the EU regime may provide clearing services to clearing members or trading venues established in the EU. Such a CCP must be recognized by the European Securities and Markets Authority in accordance with the processes outlined in the European Market Infrastructure Regulation. The adopted decision would grant equivalence to the regulatory and legal regimes of the U.K. and Northern Ireland in relation to CCPs. The Commission's equivalence decision would apply for 12 months from exit day. ESMA remains to designate various U.K. CCPs.
    2. A temporary and conditional equivalence decision for central securities depositories already established and authorized in the U.K. Third-country CSDs must obtain recognition from ESMA before they provide certain services under the Central Securities Depositories Regulation. The decision will permit U.K. CSDs to continue to provide notary and central maintenance services to operators in the EU for a period of two years after exit day. ESMA remains to designate various U.K. CSDs.
    3. A draft Delegated Regulation to amend the existing Regulatory Technical Standards on margin requirements for uncleared OTC derivative contracts. The draft RTS would introduce a 12-month exemption from the margin exchange obligations to facilitate the novation of uncleared OTC derivative contracts to EU counterparties in the event of a "no deal" Brexit. The exemption would apply for bilateral OTC derivatives contracts that have either been entered into or novated before the margin obligation became applicable. The exemption would only apply to a novation from a U.K. counterparty to an EU counterparty and would be available for a period of 12 months following the U.K.'s exit from the EU to provide firms with time to negotiate any novation and complete any necessary repapering.
    4. A draft Delegated Regulation to amend the existing RTSs that establish the clearing obligation under EMIR - the RTS on the clearing obligation for IRS denominated in G4 currencies (RTS 2015/2205), the RTS on the clearing obligation for CDS (RTS 2015/592) and the RTS on the clearing obligation for IRS denominated in certain other currencies (RTS 2016/1178). The draft Delegated Regulation would introduce a time-limited exemption from the clearing obligation for bilateral OTC derivatives contracts that have either not yet become subject to the clearing obligation or have not been novated after a clearing obligation has arisen. The exemption would only apply to a novation to a new EU counterparty and would not apply to other life-cycle events performed by the parties to a derivatives contract. The exemption would be available for a period of 12 months following the U.K.'s exit from the EU.

    Neither the equivalence decisions nor the two exemptions will come into effect if the EU and U.K. agree the terms of the U.K.'s exit and the withdrawal agreement has entered into force. Similarly, they will not apply if the EU and the U.K. agree to extend the two-year negotiation period under the terms of the Treaty on European Union.

    The two adopted equivalence decisions are not subject to legislative scrutiny by the European Parliament and the Council of the European Union. However, the amendments to the Delegated Regulations are and will require the approval of both of these bodies.

    ESMA has published a statement on the same day that confirms that it was ready to assess applications for recognition from U.K. CCPs and CSDs. ESMA stated that it intends to adopt the decisions well in advance of exit day and that its recognition decisions would apply from the day after exit day.

    View the Commission's Communication.

    View the adopted CCP equivalence decision.

    View the adopted CSD equivalence decision.

    View the adopted Delegated Regulation on risk management procedures.

    View the adopted Delegated Regulation on the clearing obligation.

    View ESMA's related statement.

    View details of the Commission's November 2018 Contingency Plan.

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