The U.S. Commodity Futures Trading Commission and the Bank of England—including the Prudential Regulation Authority and the U.K. Financial Conduct Authority—on Feb. 25 issued a joint statement finalizing a post-Brexit derivatives trading deal.
The joint statement says that, “U.K. and U.S. authorities are taking measures to ensure the U.K.’s withdrawal from the EU, in whatever form it takes, will not create regulatory uncertainty regarding derivatives market activity between the United Kingdom and the United States. These measures will help support financial stability and the sound functioning of financial markets. They also will give confidence to market participants about their ability to trade and manage risk through these markets.”
FCA Chief Executive Andrew Bailey said that the FCA has “worked closely with the CFTC and other U.K. authorities on these measures to ensure continuity and stability for consumers, investors, and other market participants, regardless of the outcome of the U.K.’s withdrawal from the EU. Cooperation with our international partners has always been an important part of our work, and it will remain so after Brexit. This partnership will support our day-to-day supervisory activities and rulemaking, as well as encouraging open markets and the development of rigorous global standards, by ensuring that wherever firms operate, they are regulated on a consistent basis.”
The Bank of England (BoE), FCA, and CFTC, as the regulators of U.K. and U.S. derivatives markets, reaffirm their commitment to close cooperation and, with support from HM Treasury, have agreed to coordinate on the following measures, where necessary to provide continuity, by the end of March 2019:
Continued supervisory cooperation. The BoE, FCA, and CFTC have in place information-sharing and cooperation arrangements to support the effective cross-border oversight of derivatives markets and participants and to promote market orderliness, confidence, and financial stability. As part of this, the BoE and CFTC are in the process of updating, in connection with the U.K.’s forthcoming recognition of CFTC-registered central counterparties (CCPs), their Memorandum of Understanding (MoU) covering clearing activity that was originally signed in 2009.
The FCA and CFTC are in the process of updating their MoUs covering certain firms in the derivatives and the alternative investment fund industry. These MoUs were originally signed in 2013 and 2016.
Extension of existing CFTC relief and comparability for the United Kingdom. The CFTC intends that existing regulatory relief granted by the CFTC to EU firms, including U.K. firms, will be extended to U.K. firms at the point of the U.K.’s withdrawal from the European Union by means of the following measures:
The CFTC staff will issue new no-action letters to U.K. market participants confirming the continued application of existing no-action letters directed at EU market participants. These no-action letters will permit U.K. market participants to rely on longstanding CFTC staff relief related to a series of issues including, but not limited to, introducing broker registration, swap data reporting, and the trading and clearing of inter-affiliate swaps.
The CFTC intends to grant new substituted compliance and exemption orders to confirm that existing orders directed at the European Union also will be accompanied by new orders directed at the United Kingdom. These orders will permit firms to satisfy certain CFTC entity-level and transaction level requirements and margin requirements for uncleared swaps by complying with relevant U.K. laws and to satisfy CFTC trade execution requirements by using eligible U.K. trading venues. To ensure there is no interruption in the applicability of such relief at the time of the U.K.’s withdrawal from the European Union, the CFTC staff will, if necessary, issue temporary no-action relief to cover a transition period until the relevant CFTC orders can be finalized. During this transition period, the CFTC will prioritize the completion of such orders.
The CFTC also has confirmed that U.K. CCPs currently registered with the CFTC will be able to continue providing services in the United States on the same basis they do now.
U.K. equivalence for the United States. U.K. authorities have confirmed that U.S. trading venues, firms and CCPs will be able to continue providing services in the United Kingdom. The basis on which these trading venues, firms, and CCPs currently provide services in the European Union and to EU firms is due to various decisions taken by the European Commission in declaring the CFTC regulatory framework equivalent. U.K. firms will continue to be able to access these entities on the same basis as EU firms do today by means of the following measures:
HM Treasury has confirmed that the European Commission’s decisions declaring the CFTC regulatory framework equivalent in relation to risk mitigation requirements, including margin requirements for uncleared derivatives, and in relation to trading venues, will continue to apply as a matter of U.K. law after the U.K.’s withdrawal from the European Union. These measures will provide critical continuity, including the ability for U.K. firms to apply CFTC margin rules for contracts with U.S. counter-parties regulated by the CFTC. U.K. firms will also be able to access and use CFTC-regulated trading venues to satisfy their regulatory obligations, including derivatives trading obligations.
HM Treasury, the BoE and the CFTC are cooperating closely on the process of making equivalence and recognition decisions in relation to CFTC-registered CCPs. U.K. authorities have already stated their presumption that clearing regimes, which have been found equivalent by the European Commission, will be found equivalent by HM Treasury. In light of the systemic importance of the clearing activity provided by CFTC-registered CCPs to UK firms, HM Treasury, and the BoE expect to announce these decisions regarding the CFTC regime and CFTC-registered CCPs as a matter of priority.
In the meantime, the BoE has confirmed that, if the United Kingdom withdraws from the European Union with no deal, U.S. CCPs will be able to continue providing services in the United Kingdom and to U.K. firms on the same basis as they do now using the U.K.’s “temporary recognition regime” for non-U.K. CCPs. To date, four CFTC-registered CCPs have notified the BoE of their intention to enter this regime, which lasts for up to three years and is extendable if required.