Brexit is unlikely to have any impact on the contractual certainty of derivatives trades, but could affect some trade lifecycle actions, according to International Derivatives and Securities Associations (ISDA) CEO, Scott O’Malia.
In an online post today O’Malia reveals that ISDA recently conducted analysis on one the ability of banks and investment firms to perform existing contractual obligations under transactions between the 27 European Union (EU) member states and UK counterparties that were entered into before Brexit. Specifically, this analysis focused on six jurisdictions – France, Germany, Italy, the Netherlands, Spain and the UK.
According to O’Malia, the analysis shows that it is unlikely that there will be an impact on the performance of contractual obligations on existing trades – which includes payments, settlements, transfer of collateral and the exercise of pre-agreed options.
However, he notes that it did show that certain events or actions that occur during the lifecycle of a transaction, and which are outside of contractual obligations, could be affected – although the exact impact differs country to country, based on the law of the applicable jurisdiction.
He notes: “For instance, a novation, certain types of portfolio compression, the rolling of an open position (extending the maturity of a trade), material amendments and some types of unwind may be classed as a regulated activity. That means that, without passporting rights under the Markets in Financial Instruments Directive (Mifid), investment firms, credit institutions and branches would either need to rely on an equivalence decision or an exemption, or obtain a local license in the relevant jurisdiction in order to continue to perform these lifecycle events. That could be time-consuming and pose a significant operational burden on firms, which could potentially result in disruption to financial markets.”
O’Malia says that the sheer volume of derivatives trades between counterparties in the EU and the UK, combined with the fact that many of these lifecycle events are common and, in some cases, required by regulation, means that it is “critical” that firms in both jurisdictions be able to carry out the full range of actions agreed in the trading contract.
“It’s clearly in everyone’s interest – whether they are located in Munich, Milan or Manchester – that performance of these lifecycle events on existing cross-border trades isn’t interrupted post-Brexit,” says O’Malia.
He concludes: “As a result, we think it’s important that provisions are put in place that allow EU and UK counterparties to manage their transactions after Brexit. We would encourage policy-makers to consider all available options now, including coordinated legislative action, insertion of language into a separation agreement, or ultimately wording within the EU-UK withdrawal agreement that allows entities to continue to perform a wide range of lifecycle events. This isn’t about winners or losers. It’s about ensuring the safety and efficiency of this market post-Brexit for both EU and UK counterparties.”