Contractual Continuity in OTC Derivatives

The issue of contractual continuity in the over-the-counter (OTC) derivatives market following the exit of the UK from the EU (referred to Brexit) is a subject of considerable concern to firms and their clients and counterparties and should, we believe, be of considerable concern to UK and EU-27 regulators and policy-makers alike.

In the context of Brexit, contractual continuity relates to existing transactions and refers to both:

  • The ability to perform contractual obligations agreed under existing transactions. In other words, is it still legally permissible to perform these contractual obligations? And if not, are the contracts still valid and enforceable?
  • The ability to perform other important lifecycle events (including risk management activities) for such transactions. Such lifecycle events are important both to regulators (regulatory technical standards under the European Market Infrastructure Regulation requiring market participants to seek to engage in portfolio compression exercises, for example) and market participants.

We do not believe Brexit will make it illegal for firms to perform contractual obligations under existing contracts in most (if not all) member states, and thus should not affect the legal validity of existing transactions.

However, if performance of lifecycle events on existing contracts between UK and EU-27 market participants is not legally permissible following Brexit, this is likely to impair the ability of UK and EU-27 counterparties to existing contracts to manage their exposures and risks.

Click on the attached PDF to read the full version of the paper.

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