ESMA Proposes Relief from EMIR Clearing Obligation in No-Deal Brexit

In the event of a no-deal Brexit, ESMA’s proposal would give EU firms 12 months to replace UK counterparties in legacy derivative contracts without triggering the EMIR clearing obligation. 

ESMA (European Securities and Markets Authority) has published a report proposing relief for EU counterparties that have non-cleared derivative agreements with UK entities, in the event of a no-deal Brexit.

A no-deal Brexit would mean that UK firms may no longer be able to provide clearing services across the EU, forcing EU firms to change or novate existing contracts to replace UK counterparies with EU ones.

However, under EMIR (European Market Infrastructure Regulation), novation of a legacy derivative contract triggers a clearing obligation which would make “the overall performance of the contracts more costly for the parties”.

“This may put the EU counterparties facing UK counterparties at a disadvantage compared to EU counterparties facing other EU counterparties,” the report said.

In the event of a no-deal Brexit, ESMA’s proposal would give EU firms 12 months to replace UK counterparties without triggering the EMIR clearing obligation.

“ESMA 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,” said ESMA chair Steven Maijoor. “The proposed regulatory change supports counterparties’ Brexit preparations and maintain a level playing field between EU counterparties, while addressing potential risks to orderly markets and financial stability.”

The proposal would have to be endorsed by the European Commission before it is subject to the European Parliament and European Council for voting and subsequent implementation.

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