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    US Agencies on Legacy Swaps Affected by Brexit and Swap Margin Rule

    December 11, 2020

    FED and OCC issued a joint statement explaining that they will exercise discretion and will not recommend taking enforcement action if a covered swap entity is a party to a legacy swap that was amended under certain conditions, consistent with the intent of Swap Margin Rule. The no-action statement would allow legacy swaps—those entered into before the firm’s compliance date with the Swap Margin Rule—to maintain grandfathered treatment if transferred out of UK to EU or US, subject to specific conditions and time limitations.

    The US Agencies (namely, Farm Credit Administration, FDIC, FED, FHFA, and OCC) had amended the Swap Margin Rule, in July 2020, to assist covered swap entities as they prepared for the withdrawal of UK from EU. This Brexit amendment to the Swap Margin Rule was intended to address a covered swap entity’s ability to service cross-border clients in the event that UK withdrew from EU without a Withdrawal Agreement; if that happens, the Brexit amendment provides that any legacy swap that is exempt from the Swap Margin Rule would not become subject to margin requirements by virtue of being modified solely for the purpose of transferring such swap from a UK entity to an affiliate located in EU or U.S. The relief does not apply if UK and EU enter into a Withdrawal Agreement because the agencies formulated the Brexit amendment on the premise that a Withdrawal Agreement would preserve passporting rights between UK and EU. FED and OCC believe it is appropriate to provide certainty to covered swap entities operating in the affected jurisdictions regarding the legacy status of transferred swaps, in light of the uncertainty about whether EU will agree to a free trade agreement granting UK companies passporting rights related to financial services. Therefore, FED and OCC staff would not recommend that their respective agencies take action if a covered swap entity is a party to a legacy swap that was amended under the conditions specified in the joint statement.



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    Keywords: Americas, US, Banking, Securities, Swap Margin Rule, Legacy Swap, Brexit, EU, UK, US Agencies

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