Urgent Action Needed on UK Trading Venue Equivalence

ISDA, FIA and eight other industry bodies warn of the disruptive impact that would result if urgent action is not taken by EU authorities to recognise UK derivatives trading venues.

ISDA (the International Swaps and Derivatives Association) and FIA (Futures Industry Association), together with eight other industry bodies have sent a letter to European Commission Vice-President Valdis Dombrovskis requesting urgent action by EU authorities to adopt equivalence decisions regarding UK trading venues in the event of a no-deal Brexit.

While welcoming the decisions to grant temporary equivalence to UK CCPs (central counterparties) and CSDs (central securities depositories), as well as the measures to facilitate novations of derivatives transactions from UK to EU counterparties, the Associations warn of the “disruptive impact” on market participants and derivatives markets if urgent action is not taken on derivatives trading venue recognition.

In the absence of an equivalence decision by the European Commission with respect to UK regulated markets, exchange-traded derivatives traded in the UK will be considered OTC derivatives under EMIR (European Market Infrastructure Regulation) in a no-deal Brexit scenario, the letter says.

This will significantly impact the collateral requirements on OTC derivatives transactions of EU non-financial counterparties, potentially forcing them to limit their positions in UK exchange-traded derivatives to avoid additional clearing, margin and other requirements under EMIR.

For EU financial counterparties, as well as any third-country financial counterparties trading with EU counterparties, UK exchange-traded derivatives will need to be included in aggregate group positions to determine clearing exemptions. This could restrict their ability to invest and risk manage, and result in a reduction or limiting of positions in such instruments.

Meanwhile, counterparties will no longer be able to execute OTC derivatives transactions under the MiFIR (Markets in Financial Instruments Regulation) trading obligation without an equivalence arrangement in place. As a result, “global liquidity would be fragmented across multiple venues,” the letter said.

EU clients will lose access to important sources of liquidity, EU banks and investment firms will not be able to access UK venues to manage risk or service their clients, and transactions between EU and UK counterparties may be subject to conflicting requirements.

“There should be no obstacle to the Commission making a determination as to the equivalence of the UK’s legal, supervisory and enforcement regime with respect to UK trading venues under EMIR and MiFIR,” the Associations said.

“It is important that the Commission indicates the approach that it intends to take as soon as possible in order to enable EU27 clients and counterparties to take appropriate action and to reduce uncertainty and to avoid disruption of financial markets.”

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