These FAQs address the possible UK position post-Brexit, i.e. after conclusion of the exit process under Article 50 of the Lisbon Treaty. There is still considerable uncertainty as to the format of the UK’s relationship with the European Union after conclusion of the exit negotiations, including as to a potential transitional period during which passporting rights of UK and EU firms, respectively, may be maintained following the UK’s exit from the EU. Consequently, the responses to these FAQs involve an assessment of the various outcomes of the exit negotiations and the consequences of those outcomes and it is not possible in all cases to give a definitive answer. Members can read a more in-depth analysis here.
On November 20, 2017, ISDA hosted an update Webinar on Brexit. To listen to the webinar, click here.
Market participants should take independent legal advice on the points addressed in these January 2018 FAQs.
Disclaimer: This page does not contain legal advice and merely is intended as an information resource to assist market participants in assessing the impact of the UK’s referendum on membership of the European Union (EU) held on June 23 2016 (Brexit referendum) and in planning for the exit of the UK from the EU following the Brexit referendum and the official notification on March 29, 2017 of the UK’s intention to withdraw from the EU, pursuant to Article 50 of the Lisbon Treaty.
Contractual points under ISDA Documentation
Could Brexit constitute a Force Majeure, Impossibility or an Illegality Termination Event under the ISDA Master Agreement?
A Force Majeure Termination Event requires a practical impediment to payment/delivery which seems unlikely to occur, even if the UK does not retain its passporting rights for investment services. An Illegality Termination Event is a theoretical possibility if Brexit results in a total loss of access for UK financial services firms to EU financial markets and the consequence of this is for performance of a Transaction to become illegal in the relevant EU member state. Such an outcome is unlikely in respect of the performance of pre-existing contractual obligations (not involving a dealing type activity that in effect involves entry into a new trade in a “financial instrument”), but will depend on local law in the jurisdiction of performance. See Question 16 (Access to the EU financial markets) for further detail on access to the EU financial markets.
Could Brexit constitute a Tax Event Termination Event under the ISDA Master Agreement?
The occurrence of a Tax Event depends on whether any withholding tax arises which would affect the underlying Transactions, either as a result of a change in domestic law in the UK or elsewhere, or because an existing exemption ceases to apply to UK entities. The occurrence of a Tax Event in these circumstances will depend on the change in law or application of the exemption in question (which in turn may depend on the outcome of the exit negotiations), and whether withholding tax would affect payments made on the underlying Transactions.
Could there be a breach of the representation under Section 3(a)(iii) (No violation or Conflict) or Section 3(a)(iv) (Consents) of the ISDA Master Agreement as a consequence of Brexit?
A breach of the ‘no conflict with applicable law’ representation is unlikely to arise as, assuming that this representation is true and accurate when given and repeated pre-Brexit (including on entering into each new Transaction), then existing Transactions will not cause a Misrepresentation Event of Default simply by virtue of such representations becoming untrue at a subsequent date as a result of Brexit (if, for example, in the absence of passporting rights for UK financial services firms, performance of a Transaction conflicts with local law due to a local authorisation requirement – as to which, please refer to the answer to Question 1 (Force majeure, Impossibility or Illegality Termination Event)). The same is true of the representation on consents in Section 3(a)(iv). Caution should be exercised in respect of any novation or modification of an existing Transaction, or any other dealing type activity with respect to an existing Transaction, to the extent this is actually the entry into of a new Transaction, at which point these representations will be deemed to be repeated. For more on this point, see Question 16 (Access to the EU financial markets).
Could there be a Breach of Agreement under Section 5(a)(ii) in respect of the obligations in Section 4(b) (Maintain authorisations) or Section 4(c) (Comply with Laws) of the ISDA Master Agreement as a consequence of Brexit?
It is unlikely that there would be a Breach of Agreement as a result of a failure to maintain authorisations pursuant to Section 4(b) or a failure to comply with law pursuant to Section 4(c) in the event of a loss of access for UK financial services firms to the EU financial markets. This is because the performance of pre-existing contractual obligations (not involving a dealing type activity that in effect involves entry into a new trade in a “financial instrument”) in relation to Transactions ought not to be subject to local authorisation requirements, although this will depend on local law in the jurisdiction of performance. However, even if, post-Brexit, there were an obligation on one party to seek authorisation locally in order to perform the Transaction, the Illegality Termination Event would probably be available to the party that had lost its passporting rights, which would, in accordance with the hierarchy provisions in Section 5(c), prevail over any possible Breach of Agreement Event of Default. For more on this point, see Question 16 (Access to the EU financial markets).
Could Brexit trigger an event of default or termination event under the ISDA/FIA Client Cleared OTC Derivatives Addendum?
In addition to the Events of Default/Termination Events under the ISDA Master Agreement (which apply only to the Client under the ISDA/FIA Client Cleared OTC Derivatives Addendum) covered in the preceding Questions, it is theoretically possible that a Cleared Transaction Illegality/Impossibility event (if specified as being applicable) could be triggered by loss of the ability for UK financial services firms to provide investment services cross-border into the EU. However, this eventuality seems improbable for the same reasons as outlined for an Illegality Termination Event under the ISDA Master Agreement.
A CM Trigger Event could occur if the loss of passporting rights causes the party which is the Clearing Member to be in default under the rules of an EU CCP and that EU CCP formally declares such Clearing Member to be in default of its rules, triggering its default management process (or such process is triggered automatically as a result of the loss of passporting rights by the Clearing Member).
A CCP Default could occur if a UK CCP loses its rights to offer clearing services pursuant to EMIR, is not granted recognition pursuant to the third country provisions of EMIR (as to which see Question 19 (Clearing pursuant to EMIR by a UK CCP)) and the rules of that CCP entitle Clearing Members to terminate their transactions with that CCP (or such termination takes place automatically) as a result.
Could Brexit trigger any other provisions in the ISDA Master Agreement/Credit Support Documents?
Market movements could trigger increased margin calls or trigger provisions linked to ratings.
Does Brexit impact any of the provisions of the ISDA Definitions booklets?
The eventual market impact may result in additional Credit Events pursuant to the 2014 Credit Derivatives Definitions. Adverse consequences for the financial markets may also result in the occurrence of one or more of the Additional Disruption Events pursuant to the 2002/2011 Equity Derivatives Definitions.
Should parties consider including any additional termination rights based on Brexit?
If, post-Brexit, parties are unable to perform cross-border Transactions, they will probably be able to rely on the Illegality Termination Event. To remove any uncertainty as to whether the law of the place of performance constitutes an “applicable law” for such purposes, parties to a 1992 ISDA Master Agreement may consider including an Additional Termination Event covering this eventuality.
Parties may also wish to consider additional termination rights to address the inability to clear derivative Transactions through EU CCPs (in the case of UK entities) or UK CCPs (in the case of EU entities) or the inability to report Transactions to UK/EU trade repositories (please see Question 19 (EMIR clearing/reporting by UK CCPs/trade repositories) and Question 20 (EMIR clearing/reporting by EU CCPs/trade repositories)).
What is the impact of Brexit on the parties’ choice of English law as the governing law of the ISDA Master Agreement?
9.1Will the Rome I and Rome II Regulations still apply post-Brexit?
If proceedings are brought before an EU court: The Rome I and Rome II Regulations continue to apply in the EU and so English law clauses specifying the governing law of the contractual and non-contractual obligations will continue to be recognised by EU courts, as is currently the case. This is irrespective of the domicile of the parties.
If proceedings are brought before a UK court: The Rome I and Rome II Regulations will no longer directly apply in the UK. However, the European Union (Withdrawal) Bill (the “Withdrawal Bill”), if passed into law in its current form, will generally speaking preserve existing UK domestic legislation that implements EU laws (e.g. UK legislation implementing an EU directive) and incorporate directly applicable EU legislation (such as an EU regulation), so far as operative immediately before exit day, into UK domestic law on the exit day. Whilst this is the case, the Withdrawal Bill also gives the UK government powers to amend “deficiencies” in existing UK law, and retained EU law, so that they work appropriately once the UK has left the EU. These powers go beyond fixing technicalities to encompass, for example, reciprocal arrangements tied to the UK’s EU membership which a minister considers to be no longer “appropriate”. However, as neither Rome I, nor Rome II, depends on reciprocity in their operation, the most likely outcome seems to be that, to preserve continuity, the same provisions as are currently set out in the Rome I and the Rome II Regulations will be retained as part of UK domestic law pursuant to the Withdrawal Bill. Following the publication of the Withdrawal Bill, the UK government’s position paper entitled “Providing a cross-border civil judicial cooperation framework” published on 22 August 2017 has confirmed that it is the intention of the UK to incorporate Rome I and Rome II into domestic law. If this happens, English law clauses specifying the governing law of contractual and non-contractual obligations will also continue to be recognised by the English courts pursuant to such rules. If, contrary to the UK’s stated intention, the provisions of the Rome I Regulation and Rome II Regulation are not retained as part of UK domestic law, then in respect of a choice of English law to govern contractual obligations, English common law will apply and there is unlikely to be any change in approach from the status quo. In respect of non-contractual obligations, the rules set out in Part III of the Private International Law (Miscellaneous Provisions) Act 1995 will be applied by the English courts in determining the proper governing law of non-contractual obligations. An express choice of English law to govern non-contractual obligations is likely to be influential, but not determinative, in this assessment.
9.2 Can the UK enact legislation replicating Rome I and Rome II entirely so as to maintain the status quo?
Yes, as discussed above the effective operation of Rome I and Rome II does not depend upon reciprocity. Accordingly, in order to preserve continuity, the UK government is to able retain the rules set out in Rome I and Rome II as part of UK domestic law within the framework of the Withdrawal Bill and has indicated an intention to do so.
9.3 Is it advisable for parties to continue to amend the governing law clause of the ISDA Master Agreement to include an express choice of law for non-contractual obligations?
There is no reason not to continue including a choice of law for non-contractual obligations. This choice will be recognised by the EU courts and will be recognised by the English courts if Rome I and Rome II are incorporated into English domestic law, which is the UK government’s stated intention. Even failing such incorporation into English domestic law or if such rules are subsequently repealed by the UK Parliament, such choice of law is likely to be taken into account in the UK post-Brexit.
9.4 Is it advisable to change the governing law of the ISDA Master Agreement to (i) New York law or (ii) the law of an EU member state?
Selecting New York law as the governing law (which would mean, unless agreed otherwise, a choice of court in favour of New York courts) is a possibility but there would be no real advantages in terms of the recognition of judgments of the US courts by either the EU or the English courts, particularly if Rome I and Rome II are incorporated into UK domestic law, which is the UK government’s stated intention. It is not advisable to change to any other governing law without legal advice as the ISDA Master Agreement has been drafted to operate under the legal regimes of New York and English law. Any such change from English law or New York law to a third country governing law would also necessitate further consideration of the jurisdiction clause, the application of ISDA commissioned netting and collateral opinions and the requirement of any contractual recognition provisions relating to bank resolution (see Question 26 (Additional provisions for inclusion in the ISDA Master Agreement)).
Article 37(13) of AIFMD (which is not currently in force) requires that disputes between Alternative Investment Fund Managers/Alternative Investment Funds (the latter, “AIFs”) and either (i) national competent authorities or (ii) EU investors in such AIF must be governed by the laws of (and jurisdiction given to) an EU member state. ISDA Master Agreements should in large part not be relevant to either of these relationships and so this provision of AIFMD is unlikely to be relevant.
Will the jurisdiction clause of the ISDA Master Agreement still confer jurisdiction on the English courts where the parties to the ISDA Master Agreement are established in the EU?
Currently, EU courts are bound to respect jurisdiction clauses in favour of another EU court on the basis of the Brussels I Recast Regulation. Post-Brexit, and if no other agreement is reached for its retention (or equivalent) in respect of the UK, this Regulation will no longer directly apply to the UK. The UK government’s position paper entitled “Providing a cross-border civil judicial cooperation framework” published on 22 August 2017 states that the UK will seek an agreement between the UK and the EU27 that allows for close and comprehensive cross-border civil judicial cooperation on a reciprocal basis, which reflects closely the substantive principles of cooperation under the current EU framework (the major component of which is the Brussels I Recast Regulation). The UK therefore proposes a bilateral, reciprocal agreement with the EU27 which replicates the existing rules on jurisdiction and the recognition and enforcement of judgments. If no agreement for retaining the current regime (or an equivalent) can now be reached (for example, if the EU27 does not agree to negotiate the terms of a replacement regime until the terms of the UK’s withdrawal are agreed) it is unlikely that the UK government would consider that unilateral retention of its rules as part of UK domestic law would be appropriate within the framework of the Withdrawal Bill since the Brussels I Recast Regulation depends upon reciprocity in order to function appropriately (for general observations on the UK government’s powers to correct “deficiencies” under the Withdrawal Bill, see paragraph 9 above). Also, even if the UK did act unilaterally it would not mean that the UK would continue to be treated as if it were an EU member state by the remaining nations. Consequently, any unilateral incorporation of the current rules into English law would, in any event, be of limited effect and would not mean that proceedings in, and judgments of, UK courts would continue to be treated in the same way as proceedings in, and judgments of, EU courts, when it comes to matters of jurisdiction and the recognition of judgments in civil and commercial matters within the EU.
If the rules in the Brussels I Recast Regulation are not retained as part of UK domestic law then, before the English courts, the English law ISDA jurisdiction clause is nevertheless likely to be respected on the basis of English common law rules. Whether or not those rules are adopted by the UK, in EU courts the UK will, and assuming again that contrary to the UK’s proposal no other agreement is concluded or implemented in respect of the UK, be a third country so recognition of an English exclusive jurisdiction clause will depend on the national position and it is not certain that an EU court would be obliged to decline jurisdiction in favour of the English courts or, in respect of a non-exclusive jurisdiction clause, to stay proceedings on the basis that the English courts are first seised.
What is the impact of Brexit on arbitration clauses in an ISDA Master Agreement which select England as the seat of arbitration?
Arbitration clauses, such as the ISDA model clauses in the 2013 ISDA Arbitration Guide, will be unaffected by the UK leaving the EU as arbitration is regulated by national law (the UK’s Arbitration Act 1996) and non-EU international instruments (the New York Convention on the Recognition of Foreign Arbitral Awards, to which the UK is already a signatory in its own right). An arbitral award made in the UK should be recognisable and enforceable in the EU member states, and vice versa, on this basis.
11.1 Where parties currently have an English governing law and jurisdiction clause in their ISDA Master Agreement, is there merit in retaining a choice of English law, but inserting an arbitration clause into the ISDA Master Agreement?
Possibly, for MiFID II equivalence.
What are the consequences of Brexit for the recognition and enforcement of judgments where:
12.1 enforcement of a judgment issued by an English court is sought in an EU court?
Post-Brexit (and assuming that no other agreement is concluded or implemented in respect of the UK and subject to any transitional arrangements agreed), this will depend on the rules of private international law of the jurisdiction in which enforcement is sought. There will likely be more procedural and substantive conditions to enforcement. For a number of EU jurisdictions, no significant hurdles are anticipated but for others the outcome will be uncertain. Local law advice will be needed on a jurisdiction-by-jurisdiction basis.
12.2 enforcement of a judgment issued by an EU court is sought in the English courts?
Again, on the assumption that no other agreement is concluded or implemented in respect of the UK and subject to any transitional arrangements agreed, EU judgments will continue to be enforceable by the English courts based on common law, especially where the judgment is from a court chosen by the parties.
Are there any other factors which will determine the choice of law/jurisdiction clause in an ISDA Master Agreement post-Brexit?
There may be circumstances in which the recognition of third country jurisdiction clauses by courts of a particular jurisdiction and/or enforcement of judgments in such jurisdiction may lead the parties to consider whether an alternative governing law/jurisdiction clause is suitable. In this case, a careful analysis of the enforcement of netting, and collateral, as well as how claims would be considered under a different system of law would need to be undertaken.
Post-Brexit, UK entities relying on the MiFID II equivalence regime to conduct MiFID II business in the EU may have to offer clients the ability to submit disputes to the jurisdiction or arbitral tribunal in an EU member state.
What amendments can parties make to Section 13 (Governing Law and Jurisdiction) to mitigate the uncertainty surrounding recognition of English choice of law/jurisdiction clauses?
Parties may consider removing uncertainty as to the treatment of Section 13(b) post-Brexit themselves by making any of the following changes:
inserting a fully exclusive jurisdiction clause without the current references to the European legislation to avoid any question of whether the clause elects for exclusive or non-exclusive jurisdiction in the EU;
inserting a fully non-exclusive jurisdiction clause which would also remove any uncertainty as to exclusivity/non-exclusivity in the EU and gives parties the maximum range of options to bring proceedings against their counterparty where it has assets;
inserting an asymmetrical clause which provides for exclusivity for proceedings commenced by one party but non-exclusivity for the other party; or
inserting an arbitration clause which would be unaffected by the UK’s withdrawal from the EU.
How will English insolvency proceedings in respect of a UK entity be recognised in the EU post-Brexit?
The EU Recast Regulation on Insolvency Proceedings, the Credit Institution Winding–up Directive and the Insurance Company Winding-up Directive will no longer cover the UK and the provisions in those instruments on the recognition of English insolvency proceedings by an EU court would no longer apply. Recognition of certain English insolvency proceedings in the EU would consequently become more complicated.
In respect of recognition of EU insolvency proceedings by the UK courts the position will depend upon whether the UK preserves the rules on recognition of EU insolvency proceedings currently set out in EU legislation pursuant to the Withdrawal Bill. If the UK chooses not to retain such rules, or post-Brexit the UK Parliament subsequently repeals the provisions of the above instruments, recognition of foreign insolvency proceedings would fall back to the common law position.
The Cross-Border Insolvency Regulations 2006 (which adopt the UNCITRAL Model Law on Cross-Border Insolvency) will continue to apply in the UK and provide for recognition of certain insolvency proceedings between signatory states. However, only four of these are EU member states and so it is of limited application within the EU.
Access to the EU financial markets
What is the impact of Brexit on the ability of financial services firms established in the UK to enter into OTC derivatives with counterparties established in the EU?
Passporting rights: When the UK leaves the EU, the EU financial services directives will no longer grant passporting rights to UK investment firms and credit institutions or UK branches. UK firms/branches wishing to enter into OTC derivatives with counterparties in the EU would then be subject to the regulations in such EU member state, many of which do not allow third country firms without a passport to enter into derivatives with locally resident counterparties except on a reverse-solicitation basis, or on the basis of narrowly defined local law exemptions.
MiFID II/MiFIR: The UK may request an equivalence decision pursuant to MiFID II/MiFIR, which would allow UK firms to register with the European Securities and Markets Authority (“ESMA”) to provide investment services to eligible counterparties and professional clients in the EU. The UK regime should, objectively, be equivalent for the purposes of such an equivalence decision but in practice there is no guarantee that one will be granted and there is still potential gap risk due to the lengthy time period involved in making an equivalence decision and in firms then becoming registered with ESMA. However, not all of MiFID II is covered by the equivalence regime, for example, dealings with retail clients and elective professional clients are not covered.
CRD IV: CRD IV contains no provisions for third country equivalence. In the absence of an agreement between the UK and the EU to extend the CRD IV passport for banking services to the UK, a UK credit institution would either have to provide banking services on a wholly unsolicited basis, or on the basis of narrowly defined local law exemptions, or would need to establish a subsidiary and obtain authorisation in an EU member state to provide those services.
Energy and commodities: Where the OTC derivative transaction is a physically-settled transaction relating to energy or a commodity, there may be certain additional regulatory considerations. These include, potentially, in the case of a transaction relating to emissions allowances, the need to open a trader account in a ‘part’ of the Union Registry administered by an alternative EU member state (or, in due course, a third country linked in accordance with the relevant legislation).
16.1 Will EU firms without a UK branch still be able to carry out derivatives business in the UK?
If agreement is reached between the EU and the UK for a transitional period during which passporting rights continue after the UK leaves the EU, EU firms would still be able to rely on their existing passporting rights during that period. Further, the UK Government announced on 20 December 2017 that it will, if necessary, bring forward legislation to enable EU firms operating in the UK to continue to do so after the UK leaves the EU under a “temporary permission”.
The UK has a wide overseas persons exemption and it is possible that OTC derivatives business could be conducted by EU firms with UK counterparties on that basis following expiry of any such transitional period or temporary permission (or, failing any transitional relief being negotiated or temporary permission being available, from when the UK leaves the EU).
16.2 Will EU firms still be able to carry out derivatives business through a UK branch post-Brexit?
EU firms that carry on investment business from their UK branches will likely need to re-apply for authorisation in the UK if the EU passport is withdrawn.
On 20 December 2017 HM Treasury, the Bank of England, the PRA and the FCA issued a series of announcements, including statements that:
the PRA is consulting on a revised approach to branch authorisation and supervision that, importantly, envisages allowing third country (including EU) banks to operate in the UK through branches, rather than having to establish a subsidiary, except where significant retail banking business is conducted in the UK;
if necessary, the UK Government will legislate to enable EU firms that operated in the UK before the UK leaves the EU to continue to undertake activities in the UK within the scope of their existing permissions for a limited period of time (“temporary permissions”).
Will UK OTC derivative counterparties still be required to comply with the clearing, reporting and risk-mitigation requirements under EMIR?
Not directly, although it seems likely that the UK will retain these requirements as part of the incorporation of directly application EU legislation into UK domestic law via the proposals under the Withdrawal Bill so that in practice, at least initially, UK entities will still need to comply with these requirements.
Even if that is not the case, a UK derivative counterparty entering into an OTC derivative contract with another non-EU entity (including another UK counterparty) may be subject to requirements under EMIR (including the mandatory clearing obligation, if applicable) in certain circumstances, where such contract has a direct, substantial and foreseeable effect within the EU or for anti-avoidance purposes.
What are the consequences of Brexit on the phase-in of the initial margin rules under EMIR?
The initial margin rules form part of directly applicable EU legislation and therefore are expected to be incorporated into UK domestic law pursuant to the Withdrawal Bill. However it should be noted that the Withdrawal Bill will only apply directly applicable EU legislation, such as the collateral regulatory technical standards under EMIR, if that legislation is “operative immediately before the exit day” which means that in the case of anything that comes into force at a particular time and is stated to apply from a later time, it is both in force, and applies, immediately before the exit day. Consequently the Withdrawal Bill, if enacted in its present form, would only incorporate into UK domestic law those initial margin requirements that had been phased in prior to the exit day. Initial margin requirements that had not been phased in before the exit day would not be incorporated into UK domestic law via the Withdrawal Bill but, given that the EU margin rules derive from BCBS-IOSCO, the UK is likely to adopt similar provisions.
Will EU entities be able to satisfy the EMIR clearing obligation by using a UK CCP or the EMIR reporting obligation using a UK trade repository?
This depends on the negotiated position and any equivalence decision granted to the UK under EMIR. Should an equivalence decision be made, a UK CCP or UK trade repository would be able to apply to ESMA for recognition under EMIR, which, if granted, would allow EU counterparties to continue clearing and reporting through UK CCPs and trade repositories. Under a European Commission proposal, a third-country CCP determined by ESMA to be systemically important (or likely to become so) would be required to meet additional requirements for that CCP to be recognised by ESMA. Under those proposals, a CCP determined to be of “substantial” systemic importance may be refused recognition and instead require to become established in the EU in order to provide clearing services there.
Will UK entities be able to satisfy any applicable UK clearing obligation by using an EU based CCP or the EMIR reporting obligation using an EU based trade repository?
Recognition of EU CCPs and trade repositories by the UK will depend on the rules on third country equivalence implemented by the UK, the outcome of the exit negotiations and, potentially, any reciprocal recognition of UK CCPs/trade repositories by the EU.
Are there any other issues in respect of the clearing obligation that members should consider?
Members of one or more CCPs should review the rules of each of those CCPs to determine whether Brexit is likely to result in them being in breach of those rules.
Will compliance with UK clearing rules similar to those in EMIR be sufficient as substituted compliance for Dodd-Frank clearing obligations?
It would depend on the location of the CCP through which a party clears its trade. If the CCP is located in the UK, there would need to be an application to the US to have it determined that trades cleared through a UK-based CCP would be deemed compliant with the Dodd-Frank clearing obligations. EU-based CCPs that are also registered in the U.S. as Derivatives Clearing Organizations currently benefit from that substituted compliance regime. If (as seems likely: see Question 17 (Compliance with EMIR)) the UK implements broadly similar CCP requirements and related clearing rules to those under EMIR, it ought to be capable of being granted a substituted compliance determination from the U.S., but this cannot be guaranteed and achieving such a determination from the U.S. may take time.
Are there any consequences of Brexit for parties which have entered into the English law ISDA Credit Support Documents for collateral arrangements which are currently financial collateral arrangements under the Financial Collateral Directive?
The Financial Collateral Directive has been implemented in the UK through the Financial Collateral Arrangements (No 2) Regulations (“FCAR”). Given the importance of the protections provided to collateral-takers by the FCAR, and the risk of invalidity of certain unregistered security interests in the absence of the FCAR, it is likely that these regulations will be retained under the provisions of the Withdrawal Bill that preserve existing UK laws that implement EU directives.
Are there any consequences of Brexit for participants of UK or EEA systems under the Settlement Finality Directive?
The Settlement Finality Directive has been implemented in the UK through The Financial Markets and Insolvency (Settlement Finality) Regulations 1999 (“SFR”). Systems established in the UK pursuant to the SFR will, post-Brexit (and absent any agreement between the EU27 and the UK), most likely fall outside the scope of the Settlement Finality Directive as implemented in EEA jurisdictions. Insolvency courts in those jurisdictions would therefore not be required to recognise the protections under the applicable implementing legislation afforded with respect to systems established in the UK when an insolvent participant is based in their jurisdiction, although the outcome will depend on the position under local insolvency law.
Bank Recovery and Resolution Directive
Post-Brexit, what additional provisions will counterparties need to include in their ISDA Master Agreements to address requirements under the BRRD when facing an EU counterparty?
EEA credit institutions and large investment firms will need to include contractual recognition of bail-in for the purposes of national rules implementing Article 55 of the EU Bank Recovery and Resolution Directive (“BRRD”) into English law governed ISDA Master Agreements.
Are there any additional provisions which UK entities will need to include in their ISDA Master Agreements when facing an EU counterparty to address requirements under the UK bank recovery and resolution regime (pursuant to the Banking Act 2009 or PRA rules)?
Whilst this question concerns the location of the counterparty, the determining factor will be the governing law of the contract and the same reasoning would apply regardless of whether the counterparty is located inside or outside the EU. The UK bank recovery and resolution rules currently include requirements for contractual recognition of stays in non-EEA law governed contracts. Post-Brexit, this rule may be extended to also include contracts governed by EEA law (i.e. any law other than English law). In the absence of legislation effecting these changes, however, amendment of this additional category of contracts will not be mandatory under English law (other than the existing requirement for contractual recognition of stays for non-EEA law governed contracts).
Is there any impact on the ISDA 2014 Resolution Stay Protocol, ISDA 2015 Universal Resolution Stay Protocol, the ISDA Resolution Stay Jurisdictional Modular Protocol (the “Stay Protocols”), the ISDA 2016 Bail-in Article 55 BRRD Protocol (Dutch, French, German, Irish, Italian, Luxembourg, Spanish, UK entity version) or the ISDA 2017 Bail-in Article 55 BRRD Protocol (Austrian, Belgian, Danish, Swedish entity version) (the “Bail-in Protocols”)?
No, there is no current impact on those protocols.
Amendments to the ISDA Master Agreement and transfers of existing contracts
What amendments, if any, should market participants consider making to their ISDA Master Agreement?
None immediately. However, there are amendments which parties may consider making depending on the likely outcome of the exit negotiations. Please see the answers to Question 8 (Inclusion of additional termination rights), Question 9.3 (Choice of law for non-contractual obligations), Question 9.4 (Merits of amending the governing law), Question 11.1 (Insertion of arbitration clauses), Question 13 (Consideration of the jurisdiction clause), Question 14 (Amendments to the jurisdiction clause), Question 16 (Access to the EU financial markets) Questions 25, 26 and 27 (BRRD amendments).
What is the process for transferring derivative transactions from an entity established in the UK to an entity established in the EU?
UK market participants may consider transferring their derivative relationships with EU counterparties from a UK established entity to an EU established entity by way of (i) individual novations of existing transactions, (ii) a court-sanctioned banking business transfer scheme pursuant to Part VII of the Financial Services and Markets Act 2000 (a “Part VII Scheme”), (iii) a cross-border merger of the two entities or (iv) relocation of a Societas Europaea.
A novation will require specific consent to the transfer from the transferor (i.e. the UK entity), the transferee (i.e. the EU entity) and the remaining counterparty. This can be achieved using the 2002 ISDA Novation Agreement or the 2004 ISDA Novation Definitions, both of which are available on the ISDA website.
A Part VII Scheme involves a lengthy procedure involving two court hearings but has the advantage of certainty of outcome and convenience versus the individual re-papering exercise required for novating existing transactions. However, a number of conditions need to be satisfied before a Part VII Scheme can be used, including that the business being transferred includes an authorised deposit-taking business.
Other transfer mechanisms, such as a court-sanctioned scheme of arrangement under Part 26 of the Companies Act 2006 may also be considered.
A cross-border merger of a UK company into a company incorporated in another EU member state would also involve a lengthy procedure. A cross-border merger would result in all the assets and liabilities of the transferor company being transferred to the transferee company with the transferor company ceasing to exist on completion of the merger. Shares in the transferee company must be issued in exchange to the shareholders of the transferor company (unless the transferor is already a wholly-owned subsidiary of the transferee). Cash can also be paid as part of the consideration. Like a Part VII Scheme, this process also has the advantage of certainty of outcome but there is no scope to select only some of the assets to be merged. In terms of process, pre-merger certificates are required to be issued by the ‘competent authority’ in the jurisdiction of the transferor and transferee (being, in the UK, a court). A joint application is then made to the competent authority of the transferee company for approval of the merger.
Another alternative would be the relocation of the business of a UK public limited company to another EU member state through (a) the conversion of the UK public limited company to a Societas Europaea (“SE”) under the EU Societas Europaea legislation and the associated UK regulations and (b) the transfer of that SE’s registered office to another EU member state. The SE regime contains a process to facilitate employee participation in management. To date, not many SEs have been set up in the UK or other EU member states (with Germany and the Czech Republic being the exceptions).
Will any new arrangements be required to clear derivative transactions in the future?
To the extent that (i) clearing of one or more classes of derivatives is no longer permitted in the UK (e.g. euro denominated derivatives (see Question 19 (Will EU entities be able to satisfy the EMIR clearing obligation by using a UK CCP or the EMIR reporting obligation using a UK trade repository?), which refers to recent European Commission proposals in relation to this)) and a clearing member clearing those classes of derivatives in the UK is not a clearing member of an alternative EU based CCP clearing those classes of derivatives, (ii) UK based clearing members are no longer permitted to satisfy their clearing obligations at EU CCPs, (iii) EU based clearing members are no longer permitted to satisfy their clearing obligations at UK CCPs, (iv) EU clients are no longer permitted to use UK clearing members to satisfy their clearing obligations, or (v) UK clients are no longer permitted to use EU clearing members to satisfy their clearing obligations, yes.
European Benchmark Regulation
What is the impact of Brexit on use of an index which is considered to be a benchmark for the purposes of the European Benchmark Regulation?
From 1 January 2018, pursuant to the European Benchmark Regulation, EU supervised entities (which includes certain credit institutions, MiFID II investment firms, UCITS, pension funds and alternative investment funds) will:
only be permitted to use a ‘benchmark’ if the administrator appears on the register maintained by ESMA (the “Register”). UK administrators will, post-Brexit, become third country administrators and will have to seek one of the three routes to entry on the register available to such third country administrators; and
be required to produce and maintain robust written plans on the action they would take in the event that either the benchmark materially changes or ceases to be provided or the administrator loses its authorisation or registration, including the provision of alternatives where feasible and appropriate. This will be particularly relevant for EU market participants referencing benchmarks administered by a UK administrator given the possibility that, as a third country administrator post-Brexit, such administrator may no longer be admitted to the Register.
Regulation 593/2008/EC of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations (“Rome I”)
 Regulation (EC) No 864/2007 of the European Parliament and of the Council of 11 July 2007 on the law applicable to non-contractual obligations (“Rome II”)
 The Alternative Investment Fund Managers Directive – Directive 2011/61/EU
 The Markets in Financial Instruments Directive II – Directive 2014/65/EU
 It is possible that the passporting rights of UK firms into the EU (and EU firms into the UK) will continue, after the UK leaves the EU, during a limited transitional period to be negotiated between the EU and the UK.
 The Markets in Financial Instruments Directive II – Directive 2014/65/EU
 The Markets in Financial Instruments Regulation – EU Regulation 600/2014
 The Capital Requirements Directive IV – Directive 2013/36/EU
 meaning taking deposits and granting credit for its own account