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The United Kingdom submitted on 29 March 2017 the notification of its intention to withdraw from the Union pursuant to Article 50 of the Treaty on European Union. This means that, if the Withdrawal Agreement1 is not ratified, the Unions’ primary and secondary law will cease to apply to the United Kingdom from 30 March 2019 (‘the withdrawal date’). The United Kingdom will then become a third country.
As of the withdrawal date, counterparties established in the United Kingdom will no longer be able to perform certain so-called “life-cycle events” (such as novations, unwinding by entering into an offsetting transaction, compression with new replacement contracts, etc.) in the EU under the current passport regime. The performance of those “life-cycle events” on certain cross-border (UK-EU27) contracts may require authorisation in Member States, in line with national third country regimes that still prevail today under Regulation (EU) No 600/2014. These counterparties established in the United Kingdom could then face up to 27 different national third-country regimes.
In order to address this situation, counterparties to these transactions might choose to novate their contracts to entities established and authorised in the EU27. However, the new contracts resulting from these novations might be subject to margin requirements that were not applicable at the time the original contracts were entered into and for which, in the absence of the UK’s withdrawal from the EU, they might have continued benefiting from the exemption. The triggering of those requirements may force certain counterparties to discontinue those transactions, leaving certain risks unhedged.
The proposed amendments address this disincentive to transfer contracts to firms established in the EU27 by extending the current exemptions envisaged in the existing Commission Delegated Regulation for a fixed period of time thus ensuring the smooth functioning of the market and a level playing field between counterparties established in the Union.
Clearing
As of the withdrawal date, counterparties established in the United Kingdom will no longer be able to perform certain so-called “life-cycle events” (such as novations, unwinding by entering into an offsetting transaction, compression with new replacement contracts, etc.) in the EU under the current passport regime. The performance of those “life-cycle events” on certain cross-border (UK-EU27) contracts may require authorisation in Member States, in line with national third country regimes that still prevail today under Regulation (EU) No 600/2014. These counterparties established in the United Kingdom could then face up to 27 different national third-country regimes.
In order to address this situation, counterparties to these transactions might choose to novate their contracts to entities established and authorised in the EU27. However, the new contracts resulting from these novations might be subject to a clearing obligation that was not applicable at the time the original contracts were entered into and for which, in the absence of the UK’s withdrawal from the EU, they might have continued benefiting from the exemption. Since centrally cleared contracts are subject to a different collateral regime than non-centrally cleared contracts, the triggering of the clearing obligation may force certain counterparties to discontinue those transactions, leaving certain risks unhedged.
The proposed amendments address this disincentive to transfer contracts to firms established in the EU27 by extending the current exemptions envisaged in the three existing Commission Delegated Regulations for a fixed period of time thus ensuring the smooth functioning of the market and a level playing field between counterparties established in the Union.
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