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November 29, 2018

ESAs published the final report containing the proposed regulatory technical standards to amend the Delegated Regulation (EU) 2016/2251 on risk mitigation techniques for over-the-counter (OTC) derivatives not cleared by a central counterparty, or CCP, (bilateral margin requirements) under the European Market Infrastructure Regulation (EMIR). The Regulation shall enter into force on the day following that of its publication in the Official Journal of the European Union.

The regulatory standards propose, in the context of Brexit, to introduce a limited exemption to facilitate the novation of certain OTC derivative contracts to EU counterparties during a specific time-window. The amendments would only apply if UK leaves EU without the conclusion of a withdrawal agreement. In the context of the ongoing withdrawal negotiations between EU and UK and to address the situation where a UK counterparty may no longer be able to provide certain services across EU, counterparties in EU may want to novate their OTC derivative contracts by replacing the UK counterparty with an EU counterparty. However, by doing this, they may trigger the clearing obligation or the bilateral margin requirements for these contracts, thus facing costs that were not accounted for when originally entering into the contract. The draft regulatory technical standards allow UK counterparties to be replaced with the EU ones, without triggering the new procedures defined in the bilateral margin regulatory standards.

This limited exemption would ensure a level playing field between EU counterparties and the preservation of the regulatory and economic conditions under which the contracts where originally entered into. The scope, time. and intent pf this exemption are aligned with the draft regulatory standards on clearing obligation, which ESMA published on November 08, 2018. The window for the novation of OTC derivative contracts that fall under the scope of this amending regulation and the one published by ESMA would be open for twelve months, following the withdrawal of UK from EU. Counterparties can, however, start repapering their contracts ahead of the application date, making the novation conditional upon a no-deal Brexit, given the conditional application date of these two amending regulations.

ESAs and other EU authorities and institutions have been clear on the importance for market participants to be prepared for Brexit, including the possibility of a no-deal scenario. These draft regulatory technical standards provide regulatory solutions to support Brexit preparations of counterparties and to maintain a level playing field between EU counterparties, while addressing potential risks to orderly markets and financial stability. This final report is sent to EC to submit the draft technical standards for endorsement in the form of a Commission Delegated Regulation, that is, a legally binding instrument applicable in all EU member states. Following the endorsement, they will be then subject to the review of the European Parliament and of the Council.

 

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Keywords: Europe, EU, UK, Banking, Securities, Insurance, EMIR, Bilateral Margin Requirements, OTC Derivatives, Brexit, Novated Contracts, ESAs 

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