U.S. regulators seek to calm swaps dealers' Brexit fears

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WASHINGTON — U.S. regulators on Friday assured banks and other swap dealers that a “no-deal Brexit” will not lead to new margin requirements for their derivative contracts.

The prospect of the United Kingdom leaving the European Union without a deal later this month has prompted fears among some U.S. institutions that moving contracts out of facilities in the U.K. — and relocating them to the U.S. or the EU — could have regulatory repercussions.

But an interim final rule published by the Federal Reserve, Office of the Comptroller of the Currency, Federal Deposit Insurance Corp., Federal Housing Finance Agency and Farm Credit Administration said contracts held by U.S. entities, but not subject to U.S. margin requirements, would not face new margin requirements as the result of such a move.

U.S. rules require collateral, or margin, be posted for every over-the-counter swap. The U.S. stipulates that, where possible, swaps be “cleared” in central clearinghouses, a process that requires each side of the contract post margin against the possible failure of one of the counterparties.

But uncleared swaps have a phase-in period between 2016 and 2020. As part of that phase-in period, swaps contracts that had already been executed would be “grandfathered” and would not be subject to the margin rules until they expire.

Friday’s interim final rule clarified that contracts moved from the U.K to the U.S. or EU, according to certain stipulations, would retain their “grandfathered” status.

“The agencies seek to address industry concerns about the status of grandfathered swaps … so the industry can focus on making preparations for swap transfers,” the agencies said in a notice. “These transfers, if carried out in accordance with the conditions of the interim final rule, will not trigger the application of the Swap Margin Rule to grandfathered swaps that were entered into before the compliance dates of the Swap Margin Rule.”

Since the U.K. decided to leave the EU in a 2016 referendum, the country has been negotiating with the European bloc on the terms of their post-Brexit relationship. But negotiations that have thus far proven politically unpalatable for the British Parliament.

A so-called “hard” Brexit, with no deal in place, could have a detrimental impact on the financial markets — including U.S. banks — because a significant portion of the global swaps market is traded in London and includes counterparties in the U.S. as well as the EU.


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