In a joint report, ISDA and the Association for Financial Markets in Europe (collectively, the "associations") analyze the post-Brexit challenges around contractual continuity in over-the-counter ("OTC") derivative contracts for UK and EU firms and their clients.
The analysis shows that regulatory uncertainty would ensue as a result of the different legal and regulatory approaches across each individual EU-27 Member State. The associations contend that due to the anticipated loss of EU financial passporting rights after Brexit, many UK firms are considering how to continue their cross-border operations and, for example, may be planning to transfer their legacy cross-border OTC derivative contracts to a licensed EU affiliate. The associations point out that such transfers have challenges, such as the need to seek the individual consent of each client or counterparty to the transfer of the rights and obligations of the UK firm. Further, the associations note that the scale and complexity of such a process is significant and there may be several reasons why some clients would delay or even refuse their consent to a novation.
The report contains strategies for protecting cross-border OTC derivative contracts. The associations note that these mechanisms are not suited for all firms and urged UK and EU policymakers and regulators to take legislative or regulatory actions that would protect financial market participants from disruptions of their businesses, and from potential financial instability resulting from Brexit.
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