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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.

©2018 Katten Muchin Rosenman LLP

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John Ahern, Financial Attorney, London, Katten Law Firm
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John Ahern, partner at Katten Muchin Rosenman UK LLP and head of the London Financial Services group, focuses his practice on banking, financial services, UK and European financial markets, and related regulations. His background in private practice and as in-house counsel at a global investment bank provides him with perspective on the unique regulatory issues facing the wholesale and private banking sectors. John advises multilateral trading facilities, broker-dealers and banks on trading, clearing and settlement as well as custody of securities—both physical and...

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Carolyn H. Jackson, International Attorney, Katten Muchin law firm
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Carolyn Jackson is a partner in Katten Muchin Rosenman UK LLP and is a Registered Foreign Lawyer. She provides US financial regulatory legal advice to a broad range of market participants, including commercial banks, investment banks, investment managers, broker-dealers, electronic trading platforms, clearinghouses, trade associations and over-the-counter derivatives service providers.

Carolyn guides clients in the structuring and offering of complex securities, commodities and derivatives transactions and in complying with US securities and commodities laws and regulations. 

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Nathaniel Lalone, Katten Muchin Law Firm, Financial Institutions Attorney
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Nathaniel Lalone, a partner at Katten Muchin Rosenman UK LLP, has a broad range of experience in the regulation of financial products and financial markets, and frequently provides regulatory and compliance advice to trading venues, clearing houses and buy-side firms active in the over-the-counter (OTC) derivatives, futures and securities markets. He is actively involved in advising clients on the implementation of MiFID 2 and MiFIR in the European Union as well as the international reach of US financial services regulation. He also has significant experience with structuring...

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Neil Robson, private equity fund managers counselor, Katten Law Firm, London
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Neil Robson, a regulatory and compliance partner with Katten Muchin Rosenman LLP, focuses his practice on counseling hedge and private equity fund managers and other investment advisers on operational, regulatory and compliance issues. He regularly addresses Financial Conduct Authority (FCA) and EU authorization and compliance under both the EU Alternative Investment Fund Managers Directive (AIFM Directive) and MiFID, cross-border issues in the financial services sector, market abuse, anti-money laundering and regulatory capital requirements, formations and buyouts of...

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