In a white paper published by the Futures Industry Association (FIA), the impact of Brexit on the cleared derivatives industry in the event that the U.K. and the European Union (EU27) fail to reach an agreement prior to April, 2019 is explored. At the onset, the paper titled The Impact of a No-Deal Brexit on the Cleared Derivatives Industry, identifies the potential losses resulting from a no-deal scenario.
The absence of full market access for both U.K. and EU27 businesses and participants could lead to significant increases in costs for pension funds, asset managers, insurers, and other businesses as well as negative impacts on the real economy. The paper also considers ways in which policymakers and participants in the cleared derivatives industry could seek to mitigate the impacts of a no-deal scenario during a transition period.
In the white paper, FIA makes seven key recommendations in order to minimize disruption and maintain end user access to these global and interwoven markets. They are as follows.
- Transitional arrangements. The U.K. and EU27 should, as soon as possible, agree to a transitional arrangement comprised of a standstill period and a two-year adaptation period. Given the significant volume of adjustments required, an adaptation period of at least two years is needed to provide the industry with sufficient time take the actions required;
- European authorities grandfather and recognize U.K. CCPs. The parties should agree to grandfather U.K. CCPs, trading venues and trade repositories to preserve their European Market Infrastructure Regulation (EMIR) authorization and qualified central counterparty status before exit day;
- U.K. grant equivalence and recognition to European institutions. The parties should agree that UK regulatory authorities grant equivalence and recognition under English law effective on exit day to EU27 CCP’s authorized under EMIR, EU27 trading venues authorized under the Markets in Financial Instruments Directive II (MiFID II); and EU27 trade repositories registered under EMIR;
- Cooperation arrangements. The European Securities and Markets Authority (ESMA) and U.K. regulatory authorities should enter into arrangements to promote bilateral access to one another’s markets. As a result, clients in both the EU27 and U.K. could be serviced by execution and clearing brokers located in the other’s jurisdiction;
- EC grants equivalence for UK firms. The EC should grant equivalence to the U.K. under Markets in Financial Instruments Regulation (MiFIR) so that UK firms can register with ESMA as third country firms and, thereby, enable such firms to continue offering their services to EU27 clients from the U.K.;
- U.K. grants corresponding permission to EU27 firms. The U.K., under English law, should grant permission to EU27 firms so as to enable them to continue to offer their services to U.K. clients from the EU; and
- U.K. replaces bilateral recognition arrangements with third countries. Once exit day occurs, the U.K. will not be able to rely on the bilateral recognition arrangements previously struck between the EU and third countries. Accordingly, the U.K. should replace bilateral arrangements with such third countries in order to avoid loss of market access to and from such countries.