European Commission Unveils No-Deal Brexit Contingency Plan

The 14-point plan includes conditional equivalence for UK CCPs and CSDs as well as delegated regulations to facilitate the novation of OTC derivatives contracts.

The EC (European Commission) has released a contingency action plan detailing 14 measures it is taking to prevent major disruptions in the event of a no-deal Brexit 100 days from now.

The announcement follows a draft decision issued by the EC last week and calls from industries bodies for greater clarity on temporary equivalence and recognition of UK-based CCPs.

The EC’s package includes:

  • one year of conditional equivalence for UK CCPs, which allows EU customers to continue clearing OTC derivatives in the UK;
  • two years of equivalence for UK CSDs (central securities depositories), to ensure there is no disruption for EU operators currently using UK operators; and
  • two delegated regulations to facilitate, for a period of one year, the novation of certain OTC derivatives contracts being transferred from a UK to an EU counterparty.

In announcing the measures, the EC emphasised that they will not mitigate the overall impact of a “no-deal” scenario and do not compensate for the lack of stakeholder preparedness, nor do they replicate the full benefits of EU membership or the transitional terms provided for in the draft Withdrawal Agreement, which “continues to be the objective and priority of the Commission”.

“[The measures] are limited to specific areas where it is absolutely necessary to protect the vital interests of the EU and where preparedness measures on their own are not sufficient,” the EC said.

Meanwhile, ESMA (the European Securities and Markets Authority) has issued a statement clarifying its plans for recognising UK CCPs under EMIR (the European Markets Infrastructure Regulation).

Among the conditions required for recognition is the establishment of cooperation agreements between ESMA and the BOE (Bank of England). Based on assurances from the BOE that it will provide information to ESMA in line with its current obligations and those set out in the equivalence decision, it is expected that an MoU will be agreed by end-January.

ESMA has already engaged with UK CCPs to solicit applications for recognition under EMIR, and plans to adopt the recognition decisions well ahead of the Brexit date. The decisions will take effect the day after Brexit (29 March 2019). A similar process will be followed for UK CSDs.

The BOE has already put in place a temporary recognition regime for EU CCPs and a transitional regime for EU CSDs, it confirmed in a statement welcome temporary equivalence decisions by the EC.

“The EC’s decision and ESMA’s announcement to complete the relevant recognition decisions represent concrete steps to protect global financial stability and mitigate market fragmentation by providing market participants with important legal and regulatory certainty to manage their operations after Brexit,” said CFTC (Commodity Futures Trading Commission) chairman Christopher Giancarlo. “These steps are commendable, and their implementation merits strong support.”

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