ESMA Proposes Regulatory Change To Support the Brexit Preparations of Counterparties to Uncleared OTC Derivatives
On November 8, the European Securities and Markets Authority (ESMA) published a final report proposing new draft regulatory technical standards (RTS) contained in a draft Delegated Regulation that would amend the three European Commission Delegated Regulations on the clearing obligation under the European Markets and Infrastructure Regulation (EMIR).
The draft RTS propose, in the context of the UK’s withdrawal from the European Union, to introduce a limited exemption from the EMIR clearing obligation, in order to facilitate the novation of certain non-centrally cleared over-the-counter (OTC) derivative contracts to EU counterparties during a specific time-window. Without the exemption, contracts resulting from novations from UK to EU counterparties might be subject to clearing obligations that were not applicable at the time the original contracts were signed. The amendments contained in the RTS would only apply if the United Kingdom leaves the EU without the conclusion of a withdrawal agreement (No-Deal Brexit).
The exemption would only apply to the novation of an OTC derivative to a new EU counterparty, which would not trigger the EMIR clearing obligation, and would not extend to other life-cycle events performed by the parties in relation to such contract. The exemption would also be time-limited to twelve months after a No-Deal Brexit, to allow for the repapering exercise.
In order to fully utilize the exemption, ESMA states that parties should start negotiating the novations of their transactions within the scope of the proposed exemption as soon as possible, given the limited time period available. If the parties agree on the terms of a novation before the date of application of the RTS, they should provide that such novations will only take effect upon the occurrence of Brexit.
ESMA has sent the final report to the European Commission to submit the draft RTS for endorsement. Once the European Commission has endorsed them, they will be passed to the European Parliament and the Council of the EU for consideration and adoption, after which they will be published in the Official Journal of the EU.
The final report is available here.