Chairman Giancarlo speaks out as Brexit zero-hour approaches

By Brad Rosen, J.D.

CFTC Chairman J. Christopher Giancarlo issued a statement expressing his serious concerns with regard to the U.K.’s exit from the European Union. Giancarlo noted the uncertainty surrounding Brexit and its effect on the U.K. and the EU member states (EU27) financial markets, as well as the substantial impact it is already having on entities and markets regulated by the CFTC.

The Chairman called on the U.K. and EU27 to settle "the terms of Brexit in a manner that provides sufficient legal and regulatory certainty to market participants." He went on to warn that if the Brexit-related uncertainties are not dispelled, global derivative markets may become destabilized.

Further assurances and clarifications are needed. Giancarlo noted that derivatives market participants need to have greater detail and clarity from European authorities with respect to the following matters:

• specifying the timing of when the proposed equivalence decision for the U.K. and recognition decision for U.K. CCPs will be made;
• whether the equivalence and recognition decisions will apply to all cleared products or only to derivatives; and
• whether the equivalence and recognition decisions will apply to both new and existing cleared transactions.

Chairman Giancarlo further advocated that relevant legal and regulatory decisions made by European authorities should be for a reasonable duration and with limited conditions. He noted that this additional clarity and certainty are necessary to limit substantial operational and market risks that will result from the sudden transfer of potentially trillions of euros in swap exposures in the remaining weeks before a possible no-deal Brexit scenario.

Some recent statements from European authorities are welcome. Notwithstanding his concerns, the chairman is encouraged by recent statements from various European bodies, including the European Commission (EC) and the European Securities and Market Authority (ESMA), that they will act to ensure EU market participants can continue to clear through U.K. central clearinghouses (CCPs) after March 29, 2019, in the case of a no-deal Brexit.

Giancarlo also characterized the EC’s decision to allow a "temporary and conditional" equivalence regime for U.K. CCPs, along with ESMA’s call for U.K. CCPs to apply for recognition as a responsible first step in limiting the risk of market disruption. He observed such actions send the message that European authorities do not wish for the political discussions over Brexit to threaten the integrity and continued operation of markets for derivatives and other financial products.

Regulatory and legal certainty are paramount. Giancarlo also indicated that the CFTC stands ready to consider all necessary actions including use of no action relief to provide certainty and clarity to participants in European derivatives markets. He concluded by calling on relevant U.K. and European authorities to take immediate and fully effective action to provide market participants with the necessary legal and regulatory certainty to manage their operations and activities after Brexit.

A view from London—the zero-hour rapidly approaches. Nathaniel Lalone, a financial services partner in Katten Muchin Rosenman’s London office, had this to say about the chairman’s cautionary statement: "Chairman Giancarlo is saying publicly what many are thinking privately: we are rapidly approaching zero-hour for implementing hard Brexit contingency plans. The only way to avoid the worst fallout is for the European authorities to publish, clearly and unambiguously, detailed legislation that provides the means of avoiding potentially significant financial stability concerns."

The UK is currently scheduled to leave the EU on Friday, March 29, 2019, at 11 p.m. U.K. time. It can be extended if all EU members agree, but at the moment all concerned parties are focusing on March 29 as being the key one.