European firms should have 12 months to replace certain legacy derivative contracts without breaching clearing rules, in the event of no-deal Brexit, according to a proposal Thursday by the European Securities and Markets Authority.
Europe's superregulator called on the European Commission to introduce a limited exemption period for Europe-based firms to facilitate a replacement of certain non-centrally cleared over-the-counter derivative contracts.
In the event of a no-deal exit of the United Kingdom from the European Union, U.K. firms may no longer be able to provide certain services across the EU, the ESMA said. As a result, EU firms could be forced to renew their non-centrally cleared OTC derivative contracts and replace their U.K. counterparties with EU-based counterparties.
Under the European Market Infrastructure Regulation, however, a replacement of a legacy derivative contract triggers a clearing obligation and forces European firms to clear bilateral contracts via authorized central counterparty clearinghouses. The ESMA proposal asks that firms have a 12-month period to move their contracts.
"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. The proposed regulatory change supports counterparties' Brexit preparations and maintains a level playing field between EU counterparties, while addressing potential risks to orderly markets and financial stability .Counterparties should negotiate as soon as possible the novations of their transactions which are in the scope of this amending regulation, given the 12-month time frame to benefit from it," Steven Maijoor, chairman of the ESMA, said in a statement Thursday.
The proposal will have to be endorsed by the European Commission, before it can go before the European Parliament and the European Council for a vote and, if approved, implementation.