The Impact of Brexit on the UK OTC Derivatives Market
Updated: Jan 27, 2020
The European Market Infrastructure Regulation (EMIR) and Markets in Financial Instruments Directive (MiFID) are European Union (EU) regulations. Once the United Kingdom (UK) leaves the EU, they are likely to implement elements of these directives into their own law, as these regulations are in line with guidelines set out by G20, of which the UK is a signatory.
Many UK financial institutions have already had to implement the EMIR and MiFID standards in order to comply, and therefore it seems likely that the UK will follow suit and implement these same requirements into English law – thus allowing the UK financial institutions to have already achieved compliance.
The more the English law requirements and standards diverge from the EMIR and MiFID standards, the less likely the UK will achieve third country equivalence under EMIR and MiFID – thus affecting their ability to transact with EU firms. This will act as a large incentive for English law to adopt the same principles as prescribed by EMIR and MiFID.
At one stage the European Central Bank (ECB) wanted euro-denominated products to be cleared only through a Eurozone Clearing House. The UK government took the ECB to court over this and argued that London-based clearing houses (like the London Clearing House, one of the largest clearers of euro-denominated products) should be able to continue to clear these products. The UK government won its case. However, after Brexit, the UK won’t be able to influence EU policy decisions, and we may see the ECB trying to impose certain requirements on clearing houses eligible to clear euro-denominated products.
Another consideration is whether the UK will implement the Bank Recovery and Resolution Directive (BRRD), the EMIR directive that establishes a common approach within the EU to the recovery and resolution of banks. If the UK stays in the European Economic Area (EEA) post Brexit, then it is almost certain that they will adopt a similar directive into English law. If not, then it remains to be seen how much of the BRRD (if any) the UK will adopt into its own regime.
Time will tell as to how the UK will deal with many of these regulatory elements after Brexit happens.
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