On February 25, 2019, the US Commodity Futures Trading Commission (CFTC) and the Bank of England, including the Prudential Regulation Authority (BoE), and the UK’s Financial Conduct Authority (FCA) issued a joint statement (“Statement”) regarding derivatives trading and clearing activities between the UK and the US after the UK’s withdrawal from the European Union (“Brexit”), which is currently scheduled for 11:00 p.m. GMT on March 29, 20191. The Statement is not a legal document, but expresses the intentions of the CFTC and UK regulators to take certain measures by the end of March 2019, in addition to reaffirming their commitment to close cooperation, to maintain the continuity of derivatives trading and clearing activities after Brexit.
Specifically, the Statement notes that the BoE, FCA, and CFTC have in place information-sharing and cooperation arrangements to support the effective cross-border oversight of derivatives markets and participants and to promote market orderliness, confidence, and financial stability, and that the BoE, FCA, and CFTC are in the process of updating the memoranda of understanding that reflect these arrangements, in light of Brexit.
The Statement goes on to list the specific actions the CFTC, BoE, and FCA each individually will take. According to the Statement, the CFTC intends that existing regulatory relief granted by the CFTC to EU firms, including UK firms, will be extended to UK firms at the point of Brexit through the following measures:
- The CFTC staff will issue new no-action letters to UK market participants, confirming the continued application of existing no-action letters directed at EU market participants. These no-action letters will permit UK market participants to rely on longstanding CFTC staff relief related to a series of issues including, but not limited to, introducing broker registration, swap data reporting, and the trading and clearing of inter-affiliate swaps2.
- The CFTC intends to grant new substituted compliance and exemption orders to confirm that existing orders directed at the EU will also be accompanied by new orders directed at the UK3. These orders will permit firms to satisfy certain CFTC entity-level and transaction-level requirements and margin requirements for uncleared swaps by complying with relevant UK laws, and to satisfy CFTC trade execution requirements by using eligible UK trading venues.
- In order to ensure there is no interruption in the applicability of such relief at the time of Brexit, the CFTC staff will, if necessary, issue temporary no-action relief to cover a transition period until the relevant CFTC orders can be finalized, which finalization the CFTC will prioritize during this transition period.
- The CFTC has also confirmed in the Statement that UK CCPs currently registered with the CFTC will be able to continue providing services in the US on the same basis they do now.
The UK authorities have confirmed in the Statement that US trading venues, firms, and CCPs will be able to continue providing services in the UK. The basis on which these trading venues, firms and CCPs currently provide services in the EU and to EU firms is the result of various decisions made by the European Commission in declaring the relevant CFTC regulatory frameworks equivalent. The Statement notes that UK firms will continue to be able to access these entities on the same basis as EU firms do today, by means of the following measures:
- HM Treasury has confirmed that the European Commission’s decisions declaring the CFTC regulatory framework equivalent in relation to risk-mitigation requirements, including margin requirements for un-cleared derivatives, and in relation to trading venues, will continue to apply as a matter of UK law after the UK’s withdrawal from the EU. The Statement expresses the view that these measures will provide critical continuity, including the ability for UK firms to apply CFTC margin rules for contracts with US counterparties regulated by the CFTC. UK firms will also be able to access and use CFTC-regulated trading venues to satisfy their regulatory obligations, including derivatives trading obligations.
- According to the Statement, HM Treasury, the BoE, and the CFTC are co-operating closely on the process of making equivalence and recognition decisions in relation to CFTC-registered CCPs. UK authorities have already stated their presumption that clearing regimes, which have been found to be equivalent by the European Commission, will be found to be equivalent by HM Treasury. In light of the systemic importance of the clearing activity provided by CFTC-registered CCPs to UK firms, HM Treasury and the BoE expect to announce these decisions regarding the CFTC regime and CFTC-registered CCPs as a matter of priority.
- In the meantime, the Statement notes that the BoE has confirmed that, if the UK withdraws from the EU with no deal, US CCPs will be able to continue providing services in the UK and to UK firms on the same basis as they do now using the UK’s new ”temporary recognition regime” for non-UK CCPs. To date, four CFTC-registered CCPs have notified the BoE of their intention to enter this regime, which lasts for up to three years and is extendable if required.
1 The Statement is available at https://www.cftc.gov/PressRoom/PressReleases/7876-19?utm_source=govdelivery.
2 The applicable existing no-action letters referenced in the Statement that will be applied to UK market participants are CFTC Letter 12-70 (Relief for Certain Swap Dealers, De Minimis Dealers, Agent Affiliates, and Associated Persons from Registration as an Introducing Broker under Section 4d or a Commodity Trading Advisor under Section 4m of the Commodity Exchange Act, and Interpretation that Certain Employees of De Minimis Dealers are not an Introducing Broker as defined in Section 1a(31) of the Commodity Exchange Act); Letter 13-45 (No-Action Relief for Registered Swap Dealers and Major Swap Participants from Certain Requirements under Subpart I of Part 23 of Commission Regulations in Connection with Uncleared Swaps Subject to Risk Mitigation Techniques under EMIR); Letter 17-64 (Extension of Time-Limited No-Action Relief from Certain Requirements of Part 45 and Part 46 of the Commission’s Regulations, for Certain Swap Dealers and Major Swap Participants Established under the Laws of Australia, Canada, the European Union, Japan or Switzerland); Letter 17-66 (No-Action Relief from Certain Provisions of the Outward-Facing Swaps Condition in the Inter-Affiliate Exemption from the Clearing Requirement); and Letter 17-67 (Extension of No-Action Relief from Commodity Exchange Act Section 2(h)(8) for Swaps Executed Between Certain Affiliated Entities that Are Not Exempt from Clearing Under Commission Regulation 50.52).
3 The Statement notes that the relevant orders are substituted compliance for EU entity-level and transaction-level requirements (December 27, 2013); substituted compliance for EU margin requirements for uncleared swaps (October 13, 2017); and exemption of multilateral trading facilities and organized trading facilities authorized within the EU from the requirement to register as swap execution facilities (December 8, 2017).
Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.
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