Contingency Plans for Financial Services in a No-Deal Brexit
The good news is that, as of the 13 November 2018, it looks like there might be a Brexit deal. The bad news is that there might not. The European Commission has published a Contingency Action Plan (“Plan”) (here) which outlines a number of contingency measures that the Commission is envisaging to mitigate the effects of the UK withdrawing from the EU without a withdrawal agreement.
In so far as financial services are concerned, only one such measure is proposed, in the case of cleared derivatives. The Commission has expressly stated in the Plan that it does not consider it necessary to adopt contingency measures in respect of insurance or uncleared over-the-counter (OTC) derivative contracts.
Regarding cleared derivatives, the Commission recognises that there might be risks to financial stability in a no-deal scenario, deriving from a disorderly close out of EU clearing members’ positions in UK central counterparties. It has also identified potential risks in relation to certain services provided to EU27 operators by UK central security depositaries which cannot be replaced in the short-term. Should no agreement be in place, the Commission intends to adopt temporary and continued equivalence decisions, under existing equivalence regimes, in order to ensure that there will be no disruption in central clearing of derivatives and in depositaries services. It anticipates that these decisions will be complemented by recognition of UK-based infrastructures, which it has encouraged to pre-apply to ESMA for recognition. The Commission also recommends that the European Supervisory Authorities start preparing cooperation arrangements with UK supervisors to ensure that exchange of information related to financial services and actors is possible immediately after the withdrawal date in the case of a no-deal scenario.
In so far as uncleared OTC derivative contracts are concerned, the Commission is of the view that there does not appear to be any generalised problem of contract performance in the case of a no-deal scenario. It acknowledges that certain “life-cycle events” (eg contract amendments, roll-overs and novations) may require a party to such a contract to hold an EU authorisation or benefit from an exemption post-Brexit and recommends that market participants should continue preparing for this situation by transferring contracts and seeking the relevant authorisations, as appropriate. In this context the Commission makes reference to ESMA’s proposal to amend the EMIR clearing obligation so as to allow EU27 counterparties to novate contracts with UK counterparties to other EU27 counterparties without triggering the EMIR clearing obligation in the event of a no-deal Brexit (see our briefing here). It does not, however, indicate whether it proposes to endorse that proposal.
This document has been prepared by McCann FitzGerald LLP for general guidance only and should not be regarded as a substitute for professional advice. Such advice should always be taken before acting on any of the matters discussed.