Brexit FAQs – Version 7

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These FAQs address the possible UK position post-Brexit, i.e. after the conclusion of the exit process under Article 50 of the Lisbon Treaty. The exit negotiations, and the position in respect of cross-border financial services, are still evolving and will depend upon the final relationship negotiated between the UK and the European Union (the “EU”). These FAQs refer in a number of places to the draft Agreement on the withdrawal of the UK from the EU and European Atomic Energy Community (the draft endorsed by leaders at a special meeting of the European Council on 25 November 2018) (the “Draft Withdrawal Agreement”) and to the proposed transitional period that would expire on 31 December 2020 contained in the Draft Withdrawal Agreement (the “Implementation Period), during which passporting rights of UK and EU firms, respectively, would be maintained. As at the date of these FAQs, the Draft Agreement had not been approved by the UK Parliament[1] and any adoption of the Draft Withdrawal Agreement would be subject to approval by the UK Parliament and at EU level.

At the date of these FAQs, the UK and the EU have agreed an extension to the Article 50 withdrawal period until 31 October 2019. References in these FAQs to the ‘exit day’ in a no-deal Brexit scenario therefore refer to 31 October 2019. It remains possible that the UK and the EU could agree a further extension if the Draft Withdrawal Agreement is not ratified prior to this date.

While the Draft Withdrawal Agreement is the only negotiated deal that is in existence at the date of these FAQs, there remains considerable uncertainty as to whether the Draft Withdrawal Agreement and the Implementation Period will come into effect. Consequently, the responses to these FAQs involve an assessment of the various outcomes of the exit negotiations (including a no-deal outcome either on 31 October 2019 if the Draft Withdrawal Agreement is not approved and the Implementation Period does not come into effect by that date (and no alternative agreement is reached between the UK and EU to avoid a no-deal Brexit on that date), or at the end of the Implementation Period if the Draft Withdrawal Agreement is approved and comes into effect) and the consequences of those outcomes, and it is not possible in all cases to give a definitive answer.

Market participants should take independent legal advice on the points addressed in these July 2019 FAQs.

These FAQs are updated to the position as at 30 June 2019 and therefore do not reflect any developments after that date.

Disclaimer: This page does not contain legal advice and is merely intended as an information resource to assist market participants in planning for the exit of the UK from the EU following the official notification on 29 March 2017 of the UK’s intention to withdraw from the EU, publication of the Draft Withdrawal Agreement on 25 November 2018 and the decision to extend the Article 50 withdrawal period until 31 October 2019 on 10 April 2019.

Note that the Draft Withdrawal Agreement is a political document and not legally binding until ratified by both the EU and UK. Unless stated otherwise, reference to a position taken in the Draft Withdrawal Agreement is a reference to the Draft Withdrawal Agreement published on 25 November 2018.

Contractual points under ISDA Documentation

  1. Could Brexit constitute an Illegality Termination Event, a Force Majeure Termination Event or an Impossibility Termination Event under the ISDA Master Agreement?

The precise requirements of the Illegality Termination Event differ depending on whether a 1992 ISDA Master Agreement or ISDA 2002 Master Agreement is used.[2] The Illegality Termination Event under each version of the ISDA Master Agreement, the Force Majeure Termination Event and the Impossibility Termination Event are considered separately below.

(i) Illegality Termination Event- 1992 ISDA Master Agreement

An Illegality Termination Event under the 1992 ISDA Master Agreement is triggered by an adoption or change in applicable law, as a result of which it becomes unlawful for a party to make/receive any payment or delivery or to comply with any other material provision of the ISDA Master Agreement in relation to the Transaction in question.

The first question is whether a no-deal Brexit and resulting loss of passporting rights (as discussed further below in this FAQ) would constitute a change in applicable law. This can be considered both from the perspective of a UK party facing into the EU, and an EU party facing into the UK. In the former scenario, whilst it is not entirely clear that this event would constitute a change in applicable law (given that MiFID II[3] and its implementation throughout the EU27 is not being changed), it is arguable that this does apply as the UK’s withdrawal from the EU will change the scope of that implementing legislation (as it will cease to apply to UK-authorised entities). In the case of the latter scenario, it seems more likely that the on-shoring of EU legislation into UK domestic law and the adjustment of its scope to remove passporting rights of EU-authorised firms could be seen to be a change in law.

It should be noted that no guidance is given in the 1992 ISDA Master Agreement as to the scope of ‘applicable law’. There are good arguments, however, that this would extend to any jurisdiction in which the party is required to perform its obligations under the relevant Transaction (and so cover illegality in the jurisdiction of their counterparty).

Consideration must then be given to whether it is unlawful to make/receive any payment or delivery obligation or to comply with any other material provision of the ISDA Master Agreement relating to the Transaction. Currently, entering into derivative transactions with counterparties in the EU can be carried out pursuant to MiFID II and UK/EU parties exercise their “passporting rights” pursuant thereto to provide investment services which are covered by that Directive. The loss of EU passporting rights may impact a UK party’s ability to enter into derivative transactions with an EU based counterparty (or even a non-UK party being unable to enter into derivative transactions with a UK based counterparty if the overseas person exemption is withdrawn post-Brexit and such non-UK party does not enter the temporary permission regime; see Question 16.1 (EU firms’ ability to carry out derivatives business in the UK). Performing an existing transaction would not seem to fall within MiFID II as it does not involve the provision of an investment service or ancillary activity which is covered by MiFID II. However, certain events during the life of a transaction, such as the exercise of option rights, may involve more than the mere performance of existing contractual obligations. If any such event could be construed as entry into a new derivative transaction that is subject to either MiFID II passporting or authorisation in the relevant EU member state, then loss of the passport could render such activity illegal in the EU. This issue may be more relevant for certain product types, for example swaptions, where exercise of the swaption results in a new derivative transaction arising (although it is not clear that the exercise of a swaption would be an ‘obligation’ which has become unlawful (given it is a voluntary action), or that the settlement of such swaption would be a ‘contingent obligation’ that falls within the scope of this Termination Event). It will also be necessary to determine whether the Transaction could be performed (in accordance with its terms) by performing the obligation in a different jurisdiction. If this is possible, there will be no illegality.

Careful consideration will therefore need to be given to the event in question. In order for the Illegality Termination Event to apply both the following conditions must be met – (a) the activity must require the party to be authorised (or exempt from authorisation) in circumstances where it no longer is due to loss of passporting rights and (b) the activity must be an obligation within the scope of the Illegality Termination Event. In most circumstances it is expected that the performance of pre-existing obligations will not become illegal, although care should be taken with respect to dealing-type activities as discussed above, and this will ultimately depend on the position in the jurisdiction in question.

In respect of UK firms transacting cross-border with EU counterparties, this position is supported by the EU Commission’s Contingency Action Plan which provides that, while certain lifecycle events may imply the need for authorisation, existing uncleared OTC derivatives contracts between EU and UK counterparties will, in principle, remain valid and executable.[4] For further detail on the scope of activities subject to MiFID II passporting rights and possible exemptions/local contingency measures, see Question 16 (Access to the EU financial markets). It should also be noted that certain EU member states have implemented national contingency measures which may be relevant in this context.As far as EU firms conducting activities in the UK after exit is concerned, the UK Government has proposed draft legislation that, alongside the “temporary permissions” regime (see Question 16 (Access to the EU financial markets)), will introduce a financial services contracts regime providing for contractual run-off of existing transactions to ensure that contractual obligations which are not covered by the temporary permission regime can continue to be met. See Question 16.1 (EU firms’ ability to carry out derivatives business in the UK). This provides greater certainty that EU firms can continue to perform obligations under existing derivatives contracts with UK counterparties after the UK leaves the EU, and so the Illegality Termination Event is unlikely to be triggered.

It should be noted that there is a carve-out from the Illegality Termination Event where the illegality arises as a result of a breach of section 4(b) of the ISDA Master Agreement, which requires each party to “use all reasonable efforts to maintain in full force and effect all consents of any governmental or other authority that are required to be obtained by it with respect to this Agreement or any Credit Support Document to which it is a party and will use all reasonable efforts to obtain any that may become necessary in the future”. Whether this extends to an obligation to acquire an authorisation in the jurisdiction of its counterparty in anticipation of a loss of passporting rights in the context of a no-deal Brexit is discussed in Question 4 (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?) but to the extent this obligation does apply and the relevant party has not complied with it, the Illegality Termination Event cannot be triggered.

It is therefore possible in certain very specific circumstances that the Illegality Termination Event could apply.

(ii) Illegality Termination Event – ISDA 2002 Master Agreement

The analysis applicable to the Illegality Termination Event under the ISDA 2002 Master Agreement is very similar, except that:

(a) This Termination Event does not require a ‘change’ in applicable law – it is therefore clearer that a no-deal Brexit and the resulting loss of passporting rights would constitute a relevant event.

(b) This Termination Event provides greater clarity as to the scope of ‘applicable law’, which includes “the laws of any country in which payment, delivery or compliance is required by either party”. This would seem to clearly capture where the relevant action has become unlawful under the laws of the jurisdiction of the counterparty.

(c) Whilst the impact of the event must be that making/receiving a payment or delivery, or complying with any other material provision of the ISDA Master Agreement relating to the Transaction, becomes unlawful (in the same way as this is required under the 1992 ISDA Master Agreement), one difference is that the Termination Event is limited to the situation where it has become illegal for the office through which the relevant party makes and receives payments and deliveries to perform its obligations (notwithstanding that another office could perform such obligation).

The circumstances in which the 2002 Illegality Termination Event could apply are therefore potentially wider than is the case with the 1992 Illegality Termination Event, but its application is still uncertain in a number of areas, including in relation to the questions of whether the activity is illegal (which may well not be the case for the many pre-existing obligations for the reasons discussed above) and the effect of the carve-out relating to compliance with section 4(b) of the ISDA Master Agreement.

(iii) Force Majeure Termination Event

The Force Majeure Termination Event in the ISDA 2002 Master Agreement requires a force majeure or act of state which means that a party cannot make/receive payments or deliveries or comply with any other material provision of the ISDA Master Agreement in relation to the Transaction, or that it becomes impossible or impracticable to do so.

It seems likely that a no-deal Brexit would constitute an ‘act of state’ for these purposes.

The next question is whether the party is prevented from carrying out its obligations under the contract, or that this is ‘impossible’ or ‘impracticable’. This will depend on whether this concept extends to legal impossibility (as from a purely practical perspective there will not necessarily be an impediment to continued performance). It seems possible that a no-deal Brexit and subsequent loss of passporting rights, such that the performance of certain activities under the Transaction is no longer permitted (as discussed in more detail under (i) above), could constitute that party being ‘prevented’ from performing, or that it is otherwise ‘impossible’ or ‘impracticable’ to perform. As is the case with the Illegality Termination Event under the ISDA 2002 Master Agreement, the restriction need only apply to the office through which the party is acting.

There will be no Force Majeure Termination Event if the party has not used all reasonable efforts to overcome the prevention, impossibility or impracticability. It is made clear that all reasonable efforts does not require the relevant party to incur a loss, other than immaterial, incidental expenses. Obtaining a new authorisation to replace passporting rights may go beyond this, and so this carve-out should not be of much relevance.

However, as with the Illegality Termination Event, the expectation is that many pre-existing obligations will not be seen to require authorisation in the EU, although this will depend on the position in the specific jurisdiction (particularly in relation to dealing-type activities). See Question 16 (Access to the EU financial markets). As outlined in (i) above, due to measures implemented by the UK, it is unlikely that EU based counterparties will be required to obtain authorisations to perform derivative transactions with UK counterparties. In the cases where the performance of the pre-existing obligations does not require authorisation in the local jurisdiction (or where they would require authorisation but contingency measures provide relief) the necessary impediment to performance (i.e. a party being prevented from carrying out his obligations under the contract, or that this is ‘impossible’ or ‘impracticable’) may be missing and therefore the Force Majeure Termination Event may not apply.

(iv) Impossibility Termination Event

The Impossibility Termination Event is similar to the Force Majeure Termination Event under the ISDA 2002 Master Agreement. It requires a “circumstance beyond its control” which has made it “impossible” for a party to perform make/receive a payment or delivery or comply with any other material provision of the ISDA Master Agreement relating to the Transaction in question.

Whilst a no-deal Brexit and loss of passporting rights would seem to be a circumstance beyond the control of the party, similar questions will arise as discussed above around whether the activity in question requires a new authorisation, whether it is an obligation within the scope of this Termination Event and whether regulatory requirements constitute an ‘impossibility’.

There is no carve-out to this Termination Event for using reasonable efforts to remove the impossibility or maintain authorisations.

Separately, consideration should be given to the consequences if a Termination Event is found to have occurred. Assuming the consequence is close-out of the Affected Transactions, consideration should be given to whether the act of closing-out the transactions themselves is seen to constitute an activity requiring authorisation in the jurisdiction of the counterparty. ISDA has obtained high level, summary advice from counsel in France, Germany, Italy, the Netherlands and Spain, as well as the UK, as to the expected regulatory treatment (under current law and regulation) of certain lifecycle and other events, which is available here.[5] In that advice, counsel based in the five EU27 jurisdictions surveyed advised that terminating transactions (where not done by way of entering into an offsetting transaction) would not constitute an activity requiring authorisation. However local law advice should be obtained in the relevant jurisdictions.

2. Could Brexit constitute a Tax Event Termination Event under the ISDA Master Agreement?

Broadly speaking, a Tax Event occurs when one party is required to make an additional payment, or the other party is required to receive a payment subject to a deduction, in respect of tax deducted or withheld from a payment as a result of, inter alia, a change in tax law (as defined in the ISDA Master Agreement) after the parties have entered into the Transaction.

Certain EU directives govern the imposition of withholding tax on payments between entities in the EU, for example the Interest and Royalties Directive exempts from withholding tax interest payments between associated entities within the EU. These directives have already been implemented into UK law via primary legislation. Consequently, it is expected that (at least initially) there would be no change to the UK withholding tax consequences of transactions within the scope of these directives as a result of Brexit. However, depending on the relevant local law and the outcome of the exit negotiations, the withholding tax consequences of transactions within the scope of these directives in other EU member states may change, because Brexit may result in the UK becoming a third country from the perspective of that other EU member state. Note, however, that because they only apply to payments between associated entities (and will in any case only be relevant where there would be withholding under the applicable domestic law), these directives are only likely to be relevant to a limited category of Transactions.

Following Brexit, there may be domestic law change in the UK and elsewhere, or the way in which existing domestic law applies may change, which could result in additional withholding tax on payments made in cross-border transactions. For example, the UK could use the opportunity to impose new withholding taxes, or a domestic law exemption from withholding tax in another jurisdiction may cease to apply to UK entities (by virtue of the fact that the UK has ceased to be an EU member state). The occurrence of a Tax Event in these circumstances will depend on the change in law or application 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.

3. 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?

(i) Section 3(a)(iii), the ‘no conflict with applicable law’ representation, includes a representation that performance does not conflict with any law applicable to the relevant party. In respect of non-UK entities entering into Transactions on a cross-border basis with entities in the UK, this may depend on the continued availability of the overseas person exemption, the availability of the Implementation Period in the Draft Withdrawal Agreement, the temporary permissions regime for EU firms in the UK after exit or whether performance falls within the financial services contracts regime (see Question 16.1 (EU firms’ ability to carry out derivatives business in the UK)).

(ii) UK entities transacting with EU counterparties on a cross-border basis, are not expected to retain their passporting rights in respect of investment services on the UK exiting the single market (other than within the Implementation Period). If, as a result of the loss of passporting rights, the continued performance of obligations under Transactions requires authorisation in the EU member state where the counterparty is located, there is a risk that such performance could be considered to be in contravention of the laws of such EU member state. This outcome is unlikely in most cases as merely performing pre-existing contractual obligations under derivative Transactions entered into pre-Brexit generally ought not to be subject to local authorisation requirements. However, this will depend on local law and regulation in the place of performance (please refer to the answer to Question 1 (Force majeure, Impossibility or Illegality Termination Event) and Question 16 (Access to the EU financial markets)). As noted in the responses to Question 1 (Force Majeure, Impossibility or Illegality Termination Event) and Question 16 (Access to the EU financial markets), this position is further complicated by the implications of any modification or novation of, or other dealing type activity in relation to, such pre-Brexit Transaction which may be construed locally as the entry into of a new Transaction which is subject to authorisation in that member state. This issue may be more relevant for certain product types, for example swaptions (where exercise of the swaption results in a new derivative transaction arising). The outcome would need to be assessed on a jurisdiction by jurisdiction basis in light of the position of UK financial services firms when the UK completes the exit process, taking into account the contingency measures (if any) put in place by EU27 member states in respect of continuity of financial services contracts. ISDA has obtained high level, summary advice from counsel in France, Germany, Italy, the Netherlands and Spain, as well as the UK, as to the expected regulatory treatment (under current law and regulation) of certain lifecycle and other events, which is available here.[6] ISDA has also procured high level analysis of the proposed legislative measures in Finland, Germany, Italy, the Netherlands and Sweden, available in the documents wallet at the bottom of these FAQs. Please refer to the disclaimers in each such memorandum.

For more on this point, see Question 16 (Access to the EU financial markets).

Notwithstanding this, 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. In respect of new Transactions entered into post-Brexit, including the novation or modification of, or other dealing type activity in relation to, any existing Transaction which could be construed as entry into a new Transaction, in the absence of passporting rights, and if the Implementation Period has expired or does not come into effect, then in respect of UK firms transacting with an EU entity, there could be a breach of this representation, subject to any contingency measures put in place by the relevant EU jurisdiction which might cover novation and/or modification of Transactions. In respect of non-UK entities transacting with UK entities on a cross-border basis, the temporary permissions regime or, if such regime does not apply, the financial services contracts regime (to a limited extent) allow EU firms to carry out certain activities, such as novations (though new Transactions which are not by way of novation and are not ‘necessary for the purposes of reducing financial risk’ associated with the original Transaction are not covered by the financial services contracts regime. Consequently, in respect of a modification or novation, a breach of this representation is unlikely unless such regimes have expired, there is no negotiated position in place between the EU and UK and the overseas persons exemption is removed. For more on this point, the temporary permissions regime and the financial services contracts regime, see Question 16 (Access to the EU financial markets).

(iii) Section 3(a)(iv), the representation on consents, is subject to similar considerations if passporting rights are not retained. For more on this point, see Question 16 (Access to the EU financial markets).

4. 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?

(i) Pursuant to the first limb of Section 4(b) parties agree to use all reasonable efforts to maintain the consents required to be obtained with respect to the Agreement. This could present an issue following the expected loss of passporting rights on Brexit. In respect of EEA entities, this risk is alleviated by the temporary permissions regime, which preserves the existing permissions of an EEA firm exercising passport rights as at exit day for a limited period, and the financial services contracts regime, which achieves a similar result but in respect of pre-existing contractual obligations only. See Question 16.1 (EU firms’ ability to carry out derivatives business in the UK)). From a UK perspective, the parties will have the same authorisation as before, but no passporting rights. If passporting rights were required for a UK entity to continue performance of its obligations under the existing Transactions with an EU counterparty, then the UK entity would no longer have the consents required with respect to the Agreement. As set out in the answers to Question 1 (Force majeure, Impossibility or Illegality Termination Event) and Question 16 (Access to the EU financial markets), merely performing pre-existing contractual obligations under derivative Transactions entered into pre-Brexit generally ought not to be subject to local authorisation requirements, although there is a risk that certain EU regulators may determine otherwise. The position could be complicated by any modification of the terms of such Transactions post-Brexit, or any other dealing type activity or novation, that is construed locally as entering into a new derivative Transaction. ISDA has obtained high level, summary advice from counsel in France, Germany, Italy, the Netherlands and Spain, as well as the UK, as to the expected regulatory treatment (under current law and regulation) of certain lifecycle and other events, which is available here.[7]

For more on this point, see Question 16 (Access to the EU financial markets).

The second limb of Section 4(b) provides that parties will use all reasonable efforts to obtain any consents that may become necessary in the future. The question arises as to whether this imposes an obligation on a UK entity to seek authorisation in the relevant EU member state in order to perform the Transaction (if such is required), or on a non-UK entity to seek authorisation for cross-border Transactions in the UK, if this becomes necessary after expiry of the temporary permission regime or the financial services contracts regime. It is unclear to what extent this would be the case. What ‘all reasonable efforts’ requires depends on the particular circumstances and parties should obtain specific advice as to whether, in the circumstances of their case, Section 4(b) would require them to apply for authorisations.

(ii) For there to be a breach of Section 4(c), compliance with all applicable laws, the party would have to fail to comply with any applicable law to which it is subject and such failure must materially impair its ability to perform its obligations under the Agreement or any Credit Support Document. The loss of passporting rights would only be a breach of Section 4(c) if, in the absence of an immediate equivalence determination, this makes it illegal for the UK party to perform the Transaction. In respect of a non-UK entity which has entered into Transactions with a UK entity, there would only be a breach of Section 4(c) if the UK amended its laws to make it illegal for the non-UK party to perform the Transaction.

5. Could Brexit trigger an event of default or termination event under the ISDA/FIA Client Cleared OTC Derivatives Addendum?

(i) The Cleared Transaction Illegality/Impossibility event under the ISDA/FIA Client Cleared OTC Derivatives Addendum (the “Addendum”) (if applied by the parties) provides for termination if it becomes unlawful under any applicable law or impossible or impracticable for either party to make payment or delivery with respect to the Client Transaction or to comply with any other material provision of the Agreement. In the event of Brexit resulting in a loss of passporting rights with no negotiated access to the EU financial markets for UK banks/investment firms and no equivalence decision for the UK as a third country under MiFID II (as to which, see Question 16 (Access to the EU financial markets)), it is unlikely in most instances that the continued performance of Transactions would be subject to authorisation requirements in EU member states with payment or delivery thereunder consequently rendered ‘unlawful’ (see Question 1 (Force majeure, Impossibility or Illegality Termination Event)), although there is a risk that certain EU regulators may determine otherwise and this would depend upon local law and regulation. This would seem to be more relevant than performance being seen to be ‘impossible’ or ‘impracticable’ in these circumstances.

If, however, there is a novation or a modification of, or other dealing type activity in relation to, the Transaction that in effect involves entering into a new trade in a “financial instrument”, entry into such new trade may be subject to authorisation requirements in the relevant EU member state. This issue may be more relevant for certain product types, for example swaptions (where exercise of the swaption results in a new derivative transaction arising). In such circumstances, the loss of any related passport in the absence of an immediate equivalence determination could render the entry into of such new trade illegal in that EU member state, although this will depend on the relevant local law and regulation.

The occurrence of any illegality in respect of existing payment or delivery obligations or any other material provisions of the Agreement would need to be determined on the basis of the eventual position of UK financial institutions after conclusion of the UK exit negotiations (and after the expiry of the Implementation Period, to the extent ultimately applicable) and by reference to the relevant EU member state’s regulatory regime, included any contingency measures put in place in respect of continuity of financial services contracts post-Brexit, applicable to the continued performance of the terms of the Transaction.

(ii) An event that is an Event of Default or Termination Event under the ISDA Master Agreement in respect of the party which is the Client under the Addendum will apply in respect of the Client Transactions under the Addendum, but only for the benefit of the Clearing Member (since Section 8(b)(1) of the Addendum disapplies such events for the benefit of the Client). Please see Question 1 (Force Majeure, Impossibility or Illegality Termination Event), Question 2 (Tax Event), Question 3 (Breach of representation) and Question 4 (Breach of Agreement) for potential Events of Default/Termination Events under the ISDA Master Agreement.

(iii) A CM Trigger Event may also 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 such a loss of passporting rights by the Clearing Member). An analysis of the rules of each relevant CCP would be required to determine whether such an event might be triggered.

(iv) A CCP Default may also 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 in Article 25 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. An analysis of the rules of each such UK CCP would be required to establish whether such an event might be triggered.

6. Could Brexit trigger any other provisions in the ISDA Master Agreement/Credit Support Documents?

(i) Parties may have included a ratings downgrade provision as an Additional Termination Event/additional Event of Default which may be triggered if the market impact of Brexit is such as to result in ratings downgrades of counterparties.

(ii) Depending on the description of eligible collateral in any Credit Support Annex/Credit Support Deed, the downgrading of the UK government may result in UK debt becoming ineligible as credit support. Members may also want to consider the eligible collateral set out in their collateral documentation in light of the changes the UK government proposes[8] to make to the margin RTS[5] as part of the process which brings EU legislation into English law and amends it as necessary (note that such proposals are predicated and contingent on a ‘hard’ Brexit).

(iii) The market impact may also affect the mark-to-market value, particularly cross-currency swaps involving sterling, which may lead to increased margin calls.

(iv) Bespoke Additional Termination Events/Events of Default included in ISDA Schedules to address the ultimate agreement (if any) reached between the UK and EU27 may also be triggered.

7. 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.

8. Should parties consider including any additional termination rights based on Brexit?

 (i) One of the key risks for derivative markets is the expected loss of passporting rights pursuant to the various EU financial services directives and the absence of any immediate equivalence decision to replace such lost rights. This may not necessarily impact existing cross-border Transactions as their continued performance may still be permissible even post-Brexit. Were their continued performance to become subject to local authorisation, then, in the absence of local authorisation, performance will not be possible.

In these circumstances parties may be able to rely on the Illegality Termination Event (although there are a number of uncertainties associated with this and this will ultimately depend on the specific fact pattern). In order to remove any uncertainty, one possible option for parties to consider is including an Additional Termination Event addressing the circumstances of the inability of a UK entity to continue performance of an existing Transaction due to the loss of passporting rights and the existence of local law requirements preventing performance.  Non-UK entities might consider including this termination right as well in the circumstances of an amendment to UK law which renders continued performance of Transactions illegal. In addition, if it becomes illegal to exercise a right under a Transaction, this will not be an Illegality, but it may justify an early termination, in which case an Additional Termination Event will be required to address this.

(ii) Another risk would be 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 if there is no EMIR authorisation by the EU in respect of UK CCPs/trade repositories and vice versa (please see Question 19 (EMIR clearing/reporting by UK CCPs/trade repositories) and Question 20 (EMIR clearing/reporting by EU CCPs/trade repositories)). Even in the absence of reciprocal recognition, it is not certain that this would have an effect on existing trades. An option is to include additional termination rights to address these eventualities.

Choice of law, jurisdiction and recognition of judgments

9. What is the impact of Brexit on the parties’ choice of English law as the governing law of the ISDA Master Agreement?

 In the EU, the Rome I[9] and Rome II[10] Regulations deal with applicable law for contractual and non-contractual obligations respectively. Subject to limited exceptions, these Regulations give effect to the parties’ choice of applicable law.

9.1 Will the Rome I and Rome II Regulations still apply post-Brexit?

(i) When the UK leaves the EU, Rome I and Rome II will still apply in the EU and so any EU court dealing with a dispute under either of the ISDA Master Agreements will still have to apply these Regulations. In respect of the choice of English law, this means that EU courts will apply Rome I and (subject to the limited exceptions in the Regulation) give effect to the choice of English law as the governing law of the contract.

(ii) The ISDA Master Agreement (unless amended by the parties) is silent on the governing law of non-contractual obligations. However, since Rome II came into force in 2009, parties have commonly included an election in the Schedule to the ISDA Master Agreement to apply English law as the governing law of non-contractual obligations in connection with the contract. Post-Brexit, the position in respect of this choice of law to govern non-contractual obligations will be the same as in respect of the choice of law to govern contractual obligations; it will be respected by an EU court applying Rome II (again subject to the limited exceptions in the Regulation).

(iii) Once the UK has left the EU, and at the end of any Implementation Period, Rome I and Rome II, as directly applicable EU regulations, will cease to apply in the UK. However, if the Draft Withdrawal Agreement takes effect Rome I shall continue to apply in the UK post-Brexit in respect of contracts concluded before the end of the Implementation Period, and Rome II shall continue to apply in the UK post-Brexit in respect of events giving rise to damage which occurred before the end of the Implementation Period.

(iv) In a ‘no-deal’ scenario, the European Union (Withdrawal) Act 2018 (the “Withdrawal Act”) preserves existing UK domestic legislation that implements EU laws (e.g. UK legislation implementing an EU directive) and enables the incorporation of directly applicable EU legislation (e.g. an EU regulation), so far as operative immediately before exit day, into UK domestic law on the exit day. The Withdrawal Act 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.[11] 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, because neither Rome I, nor Rome II, depends on reciprocity in their operation, and in order to preserve continuity, on 29 March 2019 the UK government ‘made’[12] a statutory instrument (the “Applicable Law SI”)[13] which provides that, in a no-deal scenario (as the statutory instrument will only come into effect in the context of a ‘hard’ Brexit), the UK will retain the Rome I and Rome II rules on applicable law. Therefore, if the Applicable Law SI comes into force, English law clauses specifying the governing law of contractual and non-contractual obligations will continue to be recognised by the English courts pursuant to such rules.

If the Applicable Law SI is amended and/or repealed and so Rome I is not retained as part of UK domestic law, then in proceedings before the English court, the common law position on the law applicable to contractual obligations prior to Rome I and any prior relevant legislation (i.e. the Contracts (Applicable Law) Act 1980) may be found to apply.

In these circumstances, applying the common law, English courts would be likely to continue to recognise and accept commercial parties’ choice of English law to govern their ISDA Master Agreements.

In respect of non-contractual obligations, if the Applicable Law SI is amended and/or repealed and so Rome II is not incorporated into UK domestic law on the exit day, the rules set out in Part III of the Private International Law (Miscellaneous Provisions) Act 1995 (the “1995 Act”) would be applied. These look at a number of factors to work out which law applies to the non-contractual obligations, but the parties’ choice of law for contractual obligations is not expressly recognised as a factor. Therefore, if the parties have made an election of the governing law for non-contractual obligations, the express recognition of a choice pursuant to Rome II will no longer be determinative, but in practice such a choice is likely to be influential in an English court’s assessment of the law applicable to non-contractual obligations under the 1995 Act. If there is no election as to the governing law for non-contractual obligations, an English court will have regard to the test set out in the 1995 Act, and will likely take into account that the parties have chosen English law to govern their contractual obligations.

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. Indeed, the effect of the Applicable Law SI, if it comes into force since a no-deal scenario has arisen, will be to retain the rules set out in Rome I and Rome II as part of UK domestic law.

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, under the current terms of the Draft Withdrawal Agreement, will continue to be recognised by the English courts if the ISDA Master Agreement is entered into before the end of any Implementation Period in respect of events giving rise to damage which occurred before the end of the Implementation Period.

Further, and even in the event of a no-deal Brexit, a choice of law for non-contractual obligations will be recognised by the English courts if Rome II is incorporated into English domestic law, which will be the case unless the Applicable Law SI is amended and/or repealed. Even if the Applicable Law SI is amended and/or 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?[14]

Selecting New York law as the governing law (which would carry with it, 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 pursuant to the Applicable Law SI in a no-deal scenario.

Subject to the paragraph below, 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)).

ISDA has published new French law and Irish law ISDA Master Agreements and related collateral documentation. Those templates are (and will continue to be) governed by the laws of (and disputes under them may be submitted to the jurisdiction of courts of) an EU member state and will also form part of the ISDA framework – in particular, it is envisaged that the ISDA legal opinions will be updated in due course to contemplate these templates.[15] Members considering using these templates should consider the changes made to the English law ISDA Master Agreement in order to effect the transition to French or Irish law, as applicable, and of the underlying legal principles in those jurisdictions.

10. 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?

(i) Currently, EU courts are bound to respect jurisdiction clauses in favour of another EU court on the basis of the Brussels I Recast Regulation.[16] In addition, there are two further instruments currently in force which deal with recognition of contractual choice of jurisdiction: (i) the Convention on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (the “Lugano Convention 2007”), which deals with the position as between the EU member states and the other European Free Trade Association countries (Switzerland, Iceland and Norway) and (ii) the 2005 Hague Convention on Choice of Court Agreements (the “2005 Hague Convention”), presently in force between the EU, Mexico, Montenegro and Singapore. The Brussels I Recast Regulation is a directly applicable EU regulation and the other two are instruments concluded by the EU in areas where it has exclusive competence. Once the UK withdraws from the EU, and if no other agreement is concluded or implemented in respect of the UK, none of these instruments will apply to it. The UK has taken steps to become a participant in the 2005 Hague Convention in its own right in the event of a no-deal Brexit. However, and for the reasons explained at sections (v) and 10.2 below, there are potentially some questions as to when, if at all, the 2005 Hague Convention will enter into force in the UK based on the unilateral steps which the UK has taken to date.

(ii) The Draft Withdrawal Agreement provides that, post-Brexit, the UK and EU courts will be bound to respect jurisdiction clauses in favour of the EU and UK courts (respectively) in legal proceedings instituted prior to the end of the Implementation Period. This is a more restrictive approach than the position adopted in the earlier version of the Draft Withdrawal Agreement published on 19 March 2018 which provided that the UK and EU courts would be bound to respect jurisdiction clauses in favour of the EU and UK courts (respectively) if that jurisdiction agreement (i.e. the choice of court agreement itself) was concluded prior to the end of the Implementation Period. The Draft Withdrawal Agreement also states that the Brussels I Recast Regulation shall continue to apply to UK and EU courts in respect of the recognition and enforcement of judgments given in legal proceedings instituted before the end of the Implementation Period.

(iii) The position in a ‘no-deal’ scenario or following the Implementation Period is less clear. The UK government’s position paper entitled “Providing a cross-border civil judicial cooperation framework” published on 22 August 2017 stated 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).[17] The UK also stated in that paper that it will seek to continue to participate in the Lugano Convention 2007. The UK therefore proposes a bilateral, reciprocal agreement with the EU27 which replicates the existing rules of the Brussels I Recast Regulation on jurisdiction and the recognition and enforcement of judgments, and (it would appear) a multi-lateral agreement in respect of continued participation in the Lugano Convention 2007. If no agreement for retaining the current EU regime (or an equivalent) can now be reached (for example, if the EU27 does not agree to negotiate the terms of a replacement regime[18]) it would not be expected that the UK would retain the Brussels I Recast Regulation unilaterally, as it requires reciprocity between states to function properly. Consistent with this, on 4 March 2019 the UK government ‘made’[19] a statutory instrument (the “Brussels SI”)[20] confirming that, in a no-deal scenario, and subject to some limited transitional provisions, the Brussels I Recast Regulation and the Lugano Convention 2007 will be repealed for all parts of the UK on exit day, and domestic common law and statutory rules will prevail. Even if the Brussels SI is amended and/or repealed with the effect that the UK would unilaterally retain the rules in the Brussels I Recast Regulation in domestic law beyond the limited transitional scheme currently envisaged, it would not mean that the UK would continue to be treated as if it were an EU member state by the remaining EU 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.

(iv) If (a) the current Draft Withdrawal agreement does not take legal effect; (b) there is no agreement as to the applicability of the Brussels I Recast Regulation post-Brexit; and (c) if the rules on recognition of jurisdiction clauses set out in the Brussels I Recast Regulation are not retained in UK domestic law (by virtue of the effect of the Brussels SI or otherwise), before the English courts, the ISDA jurisdiction clause is likely to be respected on the basis of common law rules, whether construed as an exclusive or a non-exclusive jurisdiction clause.

(v) Irrespective of whether the Brussels I Recast Regulation is incorporated into UK domestic law (and absent of any other agreement between the UK and EU27), before the EU courts, the UK will be a third country and EU courts will no longer be obliged to decline jurisdiction in favour of the English courts pursuant to an exclusive jurisdiction clause. In this respect the UK would be in no different a position from the US. However, the UK has taken steps to become a contracting party to the 2005 Hague Convention in a no-deal scenario. Although there is potentially some uncertainty as to the effectiveness of the ratification steps taken to date (see section 10.2 below), if the UK does become a contracting party, that regime will apply in respect of wholly exclusive choice of court agreements concluded after the date on which it enters into force in the UK. From an English law perspective, the position will be governed by a new set of rules (the “Hague Convention SI”).[21] The Hague Convention SI provides that the UK will also treat exclusive choice of court agreements in line with the 2005 Hague Convention where they were entered into either: (a) prior to exit day; or (b) prior to the day on which the 2005 Hague Convention independently comes into force in the UK post-exit day, in each case as if the UK had remained a contracting state to the 2005 Hague Convention without interruption (i.e. English courts will accept and decline jurisdiction depending on whether the English courts have been specified, and in accordance with the 2005 Hague Convention). The only exception is where the question arises between the English courts and the courts of an EU27 member state, in which case this will be determined in accordance with the Brussels SI. The treatment of these transitional cases from an English law perspective does not mean that other contracting states (such as EU27 member states) will apply the 2005 Hague Convention to English exclusive choice of court agreements entered into prior to the date on which the 2005 Hague Convention enters into force in the UK (see section 10.2 below).

10.1 Will EU Regulation 1215/2012 (the Brussels I Recast) or its predecessors, Regulation 44/2001 (the Brussels Regulation) or the Brussels Convention, continue to apply?

Neither Regulation is likely to apply. The Brussels Convention will continue to apply only for the purposes of some EU overseas territories and otherwise will likely not apply.

10.2 What about the Lugano Convention 2007 and the 2005 Hague Convention on Choice of Court Agreements?

The Lugano Convention 2007 and the 2005 Hague Convention are conventions concluded by the EU which have direct effect in EU member states. They will only apply post-Brexit if the UK independently contracts to become a convention state.

In the event of a no-deal Brexit, under the terms of the Brussels SI, the Lugano Convention 2007 will be repealed for all parts of the UK so, subject to limited transitional provisions, will no longer have effect.

The UK has taken steps independently to ratify the 2005 Hague Convention. On 28 December 2018, the UK deposited its instrument of accession for the 2005 Hague Convention, with the effect that the convention would (unless the accession were to be withdrawn beforehand) enter into force in the UK on 1 April 2019, in accordance with Article 31 of the 2005 Hague Convention which provides that the convention will enter into force on the first day of the month following the expiration of three months after the deposit of the relevant instrument of accession. On 12 April 2019, the UK unilaterally declared that its accession should be suspended until 1 November 2019 (being the date after the expected exit-day), which takes the period between the deposit of the instrument of accession and entry into force beyond the three-month period specified in Article 31. The UK government considers that, unless the instrument of accession is withdrawn beforehand, the 2005 Hague Convention will enter into force in the UK on 1 November 2019. It remains to be seen whether the UK’s accession in this manner is regarded as effective in the EU or other Hague states such that the convention would be applied to an exclusive choice of court agreement in favour of the English courts.

On the basis that the 2005 Hague Convention does enter into force in the UK from 1 November 2019, there still remains some uncertainty as to whether exclusive choice of court agreements in favour of the English courts entered into on or after 1 October 2015 (the date of entry into force of the 2005 Hague Convention in the EU) but prior to 1 November 2019 will be treated by the other contracting states as falling within the scope of the 2005 Hague Convention. This will ultimately be a question for the relevant convention state court to decide and/or the Court of Justice of the European Union, although the European Commission has suggested that the 2005 Hague Convention will only apply to exclusive choice of court agreements concluded after its entry into force in the UK on 1 November 2019 (or otherwise).[22]

10.3 Can the UK unilaterally implement legislation replicating any of the existing EU legislation on recognition of jurisdiction so as to retain the status quo?

Not in a way that retains the status quo. As mentioned above, the Brussels I Recast Regulation depends upon reciprocity to work effectively. Once the UK ceases to be an EU member state, then, even if the Brussels SI is amended and/or repealed so the Brussel I Recast Regulation rules are retained in UK domestic law via the Withdrawal Act, the UK (assuming no agreement has been reached with the EU27 as to its retention (or equivalent) and subject to any transitional arrangements agreed) would become a third country from the perspective of the other EU Member States. Thus, although, in such circumstances, retaining the rules of the Brussels I Recast Regulation in UK domestic law would permit continuity of recognition by the English courts of jurisdiction clauses in favour of another EU member state, and the English courts would continue to recognise and enforce EU judgments on the terms of those rules, the other EU member states would no longer be obliged by those rules to do the same in respect of the English courts.

10.4 What would be the position in respect of the 1992 ISDA Master Agreement (if construed as having an exclusive jurisdiction clause in favour of English courts within the EU) where proceedings are brought before an EU court?

Pursuant to the Draft Withdrawal Agreement, if proceedings in relation to the ISDA Master Agreement are instituted before the end of the Implementation Period, the relevant EU court will be obliged to respect that jurisdiction clause and decline jurisdiction in favour of the English courts in accordance with the Brussels I Recast Regulation.

If either proceedings are not instituted before the end of the Implementation Period and/or there is no agreement between the UK and the EU27, and if the relevant choice of court clause is regarded as fully exclusive within the EU, there will be uncertainty as to whether an EU court will decline jurisdiction in favour of the English courts if England is not an EU or a Lugano Convention state. However, if proceedings are also brought in the English courts, the English courts would, post-Brexit (and provided that the Brussels SI is not amended and/or repealed), likely have the power to issue an antisuit injunction to restrain new proceedings brought elsewhere in the EU to protect their jurisdiction under an exclusive jurisdiction clause, which they are currently unable to do.

For completeness, we note that the choice of court provision in the ISDA 1992 Master Agreement, if construed as an exclusive jurisdiction clause in favour of English courts within the EU, is unlikely to fall within the scope of the 2005 Hague Convention.  This is because the 2005 Hague Convention only applies where the jurisdiction clause is of a very straightforward exclusive form, namely, situations concerning an “exclusive choice of court agreement”.  This is defined in Article 3(a) as an agreement which “…designates, for the purpose of deciding disputes which have arisen or may arise in connection with a particular legal relationship, the courts of one Contracting State or one or more specific courts of one Contracting State to the exclusion of the jurisdiction of any other courts”. A clause which in any way permits proceedings before any other courts is not, therefore, likely to be considered such an agreement within Article 3(a).

10.5 What would be the position in respect of the ISDA 2002 Master Agreement (if construed as having a non-exclusive jurisdiction clause in favour of English courts) where proceedings have been commenced in the English courts and subsequent proceedings are brought before an EU court?

Pursuant to the Draft Withdrawal Agreement, if proceedings in relation to the ISDA Master Agreement are instituted before the end of the Implementation Period, the EU court will be obliged to respect the jurisdiction clause and so, if the English courts are first seised, the EU court will be required to stay its proceedings until the jurisdiction of the English courts is established, at which point the EU court must decline jurisdiction in accordance with the Brussels I Recast Regulation.

If proceedings are not instituted before the end of the Implementation Period (if the Draft Withdrawal Agreement takes effect), and/or there is no agreement between the UK and the EU27, there will be uncertainty as to whether, when presented with a choice of court in favour of the English courts non-exclusively, the EU court would decline jurisdiction or stay proceedings on the basis that the English courts are first seised. However, provided that the rules in the Brussels I Recast Regulation are not replicated in UK domestic law (which will be the case if the Brussels SI is not amended and/or repealed) English courts will have greater freedom to accept jurisdiction and will not be constrained by any rules regarding litigation in other jurisdictions, subject to the transitional arrangements.

10.6 What would be the position in respect of either the ISDA 2002 Master Agreement or the 1992 ISDA Master Agreement where proceedings are brought before the English courts and neither party is domiciled in the UK?

 As the ISDA Master Agreement contains a clause conferring jurisdiction on the English courts, the English courts are likely to accept jurisdiction, irrespective of whether the Brussels I Recast Regulation has been converted into UK domestic law.

11. What is the impact of Brexit on arbitration clauses in an ISDA Master Agreement which select England as the seat of arbitration?

None. 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?

Arbitration is a potential work-around to avoid the uncertainty as to whether an English jurisdiction clause will be respected in the EU courts. Arbitration may also be a potential workaround to make jurisdiction clauses compliant for the purposes of MiFID II equivalence (see Question 13 (Factors which will determine the choice of law/jurisdiction clause)).

12. 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?

Pursuant to the Draft Withdrawal Agreement, if proceedings are instituted in the English court before the end of the Implementation Period, the EU courts will be required to recognise and enforce any judgment issued in those proceedings, in accordance with the Brussels I Recast Regulation.

If proceedings are not instituted before the end of the Implementation Period (assuming the Draft Withdrawal Agreement takes effect), and/or there is no agreement between the UK and the EU,[23] the enforcement and/or recognition of English court judgments 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?

Pursuant to the Draft Withdrawal Agreement, if proceedings are instituted in the EU court before the end of the Implementation Period, the English court will be required to recognise and enforce any judgment issued in those proceedings, in accordance with the Brussels I Recast Regulation.

If proceedings are not instituted before the end of the Implementation Period (assuming the Draft Withdrawal Agreement takes effect), and/or there is no agreement between the UK and the EU,[24]  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. Further, in a no-deal scenario, and based on the terms of the Brussels SI, if proceedings are issued in a EU or Lugano Convention member state court before exit day, the English courts will recognise and enforce any judgment issued in those proceedings in accordance with the Brussels I Recast Regulation or the Lugano Convention 2007 (as applicable).

13. Are there any other factors which will determine the choice of law/jurisdiction clause in an ISDA Master Agreement post-Brexit?

(i) The ISDA Master Agreements have been drafted with English and New York law in mind (although see Question 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?) in relation to the French and Irish law ISDA Master Agreements published by ISDA in 2018). There is benefit, therefore, in retaining English law (or New York law) as the governing law and having an English court (or New York court) resolve any disputes as to the terms of the agreement. There may be circumstances in which the parties’ identity and location of their assets, the recognition of third country jurisdiction clauses by the 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 those circumstances, a careful analysis of how claims would be considered under a different system of law and different procedural rules would need to be undertaken as well as due diligence on enforcement of netting and collateral.

(ii) If the UK loses its financial services passport under MiFID II,[25] which seems probable if the UK does leave the single market, it will be open to the UK to seek an equivalence decision from the European Commission (which in theory may be granted given that, at the point of exit, the UK’s regulatory regime will be equivalent with the EU’s). The Political Declaration regarding the future relationship between the EU and the UK published along with the Draft Withdrawal Agreement[26] includes an objective of both the EU and UK commencing equivalence assessments as soon as possible after the UK’s withdrawal from the EU, endeavouring to conclude those assessments before the end of June 2020. Third country firms (such as UK firms post-Brexit) relying on the MiFID II equivalence regime to provide MiFID II services to eligible counterparties or professional clients in the EU will have to comply with Article 46(6) of MiFIR[27] which would require such third country firms to offer to submit disputes relating to those services or activities to the jurisdiction of a court or arbitral tribunal in an EU member state. This requirement does not impact the parties’ choice of governing law. However, there is some uncertainty as to what is required by Article 46(6). Arguably, the only course of action which can be said certainly to comply with the provision is to make an entirely open offer to submit any such disputes to the jurisdiction of a court or arbitral tribunal in an EU member state. It would then open to the EU counterparty to refuse the offer in favour of, for example, the use of a third country’s courts.

Article 46(6) does not apply to the extent a third country firm establishes a branch in an EU member state pursuant to Article 39 of MiFID II (whether for the purpose of providing services/activities to retail clients in that EU member state or for the purpose of cross-border provision of services pursuant to Article 47(3) of MIFIR). If there is no need to satisfy the Article 46(6) requirement and the counterparty is not content to use the English courts, UK counterparties to an ISDA Master Agreement may select the jurisdiction of an EU court or include an arbitration clause which selects an EU place as the seat of arbitration. This would not necessarily require a change of the choice of English law as the governing law.

There are other provisions of EU legislation under which it may be beneficial for the governing law of an ISDA Master Agreement to be that of an EU member state. Each of the Credit Institutions (Reorganisation and Winding-up) Directive,[28] Solvency II Directive[29] and EU Recast Regulation on Insolvency Proceedings (“EIR”)[30] provide that the law of the home member state of the credit institution or insurance undertaking, as applicable, being wound-up (or, in the case of the EIR, the EU member state in which the insolvency proceedings are opened) shall determine certain points in relation to the winding-up or insolvency proceedings. This is, however, subject to a number of exceptions. One of these exceptions is in the context of ‘legal acts detrimental to all creditors’, where (i) such act is subject to the law of an EU member state other than the home member state or the EU member state in which the insolvency proceedings are opened, as applicable, and (ii) that law does not allow any means of challenging the act in the relevant case.[31] (i) and (ii) are required to be proven by a beneficiary of the relevant legal act. Where this is proven, the law of the home member state or EU member state in which the insolvency proceedings are opened, as applicable, cannot be used to invalidate such act or make such act unenforceable. Prior to the UK becoming a third country for the purposes of these pieces of EU legislation, if, for example, a delivery was made under an English law governed ISDA Master Agreement by an EU- (but non-UK) incorporated entity which at the time (or subsequently) became subject to winding-up or other insolvency proceedings which fall under one of these pieces of EU legislation, provided that such dispositions of property cannot be challenged under English law, insolvency officials of the insolvent entity (or entity being wound-up) would not be able to invalidate such disposition. This protection would fall away once the UK is no longer part of the EU as ‘legal acts’ carried out pursuant to an English law ISDA Master Agreement would no longer be subject to the law of an EU member state. In such circumstances, the outcome will depend on the position under the laws of the home member state or the EU member state in which the insolvency proceedings are opened, as applicable, and whether such laws allow the relevant disposition (or other act) to be invalidated in the relevant circumstances.

See also Question 25 (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?) in relation to BRRD.

See also Question 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?) for more detail on the French and Irish law ISDA Master Agreements recently published by ISDA.

 14. 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?

The Section 13(b) jurisdiction clauses may require re-visiting following the UK’s withdrawal to re-define the scope of exclusivity/non-exclusivity. In the meantime, parties may consider removing uncertainty as to the treatment of Section 13(b) post-Brexit themselves by making any of the following changes:

(i) fully exclusive jurisdiction clause: post-Brexit, if the European legislation on recognition of jurisdiction is no longer applicable in the UK (as would be the position under the terms of the Brussels SI), there may be further debate about whether or not the jurisdiction clause in the ISDA Master Agreements is an exclusive jurisdiction clause. Inserting a wholly exclusive jurisdiction clause may avoid this issue arising if the UK becomes a contracting party to the 2005 Hague Convention in its own right. Assuming that the 2005 Hague Convention does enter into force on 1 November 2019 (see section 10.2 above), any exclusive jurisdiction clause will, from that date, be recognised by convention signatories (which includes the EU). However, because of the operation of the 2005 Hague Convention’s provisions on its entry into force, there may be some doubt as to whether that Convention can apply to such a clause entered into before the Convention comes into force in relation to the UK pursuant to any such independent ratification by it (i.e. such clauses concluded whilst the UK was an EU Member State). This may restrict the Convention’s usefulness in relation to clauses entered into before that happens. On 30 October 2018, the UK government ‘made’[32] the Hague Convention SI (which will only necessarily come into effect in its current form in the context of a ‘hard’ Brexit). This statutory instrument attempts to deal with some of the uncertainty we have identified by specifying how exclusive jurisdiction clauses that are entered into prior to exit day should be treated. However, even if this becomes law in the UK, it will only have effect in the UK and so will not determine how the other 2005 Hague Convention courts (including in the EU) will treat any such clause. The treatment of the applicability of the 2005 Hague Convention to exclusive choices of English courts made whilst the UK was a member of the EU by non-English courts will be an important one if an English judgment given pursuant to such a clause is sought to be enforced overseas. It may be possible to amend a non-exclusive jurisdiction clause entered into prior to the UK’s independent ratification of the 2005 Hague Convention after such independent ratification so that it is an exclusive choice of court agreement, in order to definitively bring it within the scope of the 2005 Hague Convention (both from the perspective of the UK and the courts of other contracting states).

(ii) fully non-exclusive jurisdiction clause: this approach would also remove any uncertainty as to whether the jurisdiction clauses are exclusive or non-exclusive in the EU and gives parties the maximum range of options to bring proceedings against their counterparty where it has assets.

(iii) asymmetrical clauses: a combination of both exclusive and non-exclusive jurisdiction clauses can be inserted. This is increasingly common in commercial contracts where one party wishes to retain the option to bring proceedings against its counterparty where it has assets but impose the exclusive jurisdiction of the English courts on its counterparty in respect of proceedings against itself. The English courts will give effect to such asymmetrical clauses.

(iv) arbitration clauses: as discussed in the answer to Question 11 (Impact of Brexit on arbitration clauses), arbitration clauses are unaffected by the UK’s withdrawal from the EU and, because of the New York Convention, there is already a wide and certain regime for enforcing arbitral awards. Where parties are keen to continue using English law but are worried about the possibility of having to enforce against assets held in the EU, then switching to arbitration is an obvious choice to consider. Arbitration may also solve the issue of any future compliance with Article 46(6) of MiFIR for UK parties seeking to enter into derivative transactions with counterparties in the EU under the MiFID II equivalence regime (see Question 13 (Factors which will determine the choice of law/jurisdiction clause)).

 Insolvency

15. What impact would Brexit have on insolvency proceedings involving either a UK entity or an entity incorporated in an EU member state?

(i) Brexit may, depending on its final form, create uncertainty in relation to insolvencies involving UK companies that have businesses or significant assets located in EU member states or companies incorporated in EU member states with businesses or significant assets located in the UK. This is because insolvency proceedings commenced in EU member states (other than Denmark) are currently subject to the EU Recast Regulation on Insolvency Proceedings 2015 (“EIR”), which contains a framework of rules governing (i) where insolvency proceedings may be opened, (ii) the laws applicable to certain matters arising in such proceedings and (iii) the recognition of proceedings in other EU member states. Recognition under the EIR is currently reciprocal and automatic in nature.

(ii) Unless otherwise agreed, the EIR would cease to apply to the UK once it leaves the EU, with the result that UK insolvency officeholders would no longer automatically be recognised in the remaining EU member states as having the power to deal with assets located in those EU member states or as having the right to enforce insolvency-related judgments against entities located in those EU member states.

(iii) This would introduce an apparent element of asymmetry, as while insolvency officials in the remaining EU member states would no longer benefit from automatic recognition in the UK pursuant to the EIR, they could still benefit from the (more limited) recognition provisions contained in the UNCITRAL Model Law on Cross-Border Insolvency (the “Model Law”), which the UK has implemented in the form of the Cross-Border Insolvency Regulations 2006. Insolvency officials in such EU member states would therefore still be recognised as having the power to deal with assets located in the UK, although there would be issues surrounding the enforcement of foreign insolvency judgments in the UK, as such enforcement currently falls outside the scope of the Model Law. Such recognition would, however, not extend to EEA credit institutions and certain insurers, as such entities are carved out of the Cross-Border Insolvency Regulations 2006.

(iv) UK officeholders would not be in the same position, as, across the EU, only Greece, Poland, Romania and Slovenia have currently implemented the Model Law. In any other EU member state, a UK officeholder seeking recognition would, as was the case before the EIR came into force, have to seek recognition under the local domestic law of the relevant EU member state.

(v) The question of how easy it would be for a UK officeholder to obtain such recognition, typically using what is known as the “exequatur” procedure, would vary significantly from jurisdiction to jurisdiction, but in most cases the process would become considerably more difficult if the debtor’s centre of main interests (which broadly equates to its head office function) was not located in the UK.

(vi) UK members’ voluntary liquidations and receiverships would be unaffected, as they are currently outside the scope of the EIR.

(vii) The Credit Institutions (Reorganisation and Winding-up) Directive and the Solvency II Directive will no longer cover the UK. This means that provisions relating to the recognition of English insolvency proceedings involving UK credit institutions and insurers in the remaining EU member states would no longer apply, unless the EU member state in question chose to allow their continued application, in its domestic legislation.

(viii) The position in relation to recognition in the UK of insolvency (as opposed to resolution) proceedings under the Credit Institutions (Reorganisation and Winding-up) Directive and the Solvency II Directive will depend whether the UK choses to repeal the statutory instruments under which those EU directives became part of the UK’s domestic legislation pursuant to powers contained in the European Communities Act 1972 (the “1972 Act”).

(ix) When the 1972 Act is repealed, such secondary legislation will (subject to the UK government’s powers to correct “deficiencies” under the Withdrawal Act – see Question 9.1 (Will the Rome I and Rome II Regulations still apply post-Brexit?) above) be preserved pursuant to the Withdrawal Act, unless the relevant statutory instruments are specifically repealed by the UK Parliament.

(x) The Credit Institutions and Insurance Undertakings Reorganisation and Winding Up (Amendment) (EU Exit) Regulations 2018 have now been made, meaning that these statutory instruments would be repealed in the event of a “no-deal” Brexit, as the reciprocity underpinning this legislation would no longer apply between the UK and the remaining Member States. The effect of such repeal, in the event of a no-deal Brexit, would be that the same recognition provisions would apply to foreign insolvency proceedings involving EEA credit institutions and certain insurers as would apply to non-EEA credit institutions and insurers, recognition reverting back to the common law position, as such entities are carved out of the Cross-Border Insolvency Regulations 2006.

(xi) English courts will only take jurisdiction in relation to a scheme of arrangement proposed by a foreign company if they are satisfied that effect of the scheme would be recognised in the jurisdiction where the debtor company was domiciled.

(xii) This point is currently generally addressed, when a scheme is proposed by a debtor incorporated in an EU member state, by reference to the recognition provisions contained in the Brussels I Recast Regulation (see the answer to Question 12 (What are the consequences of Brexit for the recognition and enforcement of judgments where…) although there are additional complexities when dealing with insolvency-related judgments) which have resulted in this point also being addressed, in relation to contracts governed by English law, by reference to Article 12(1)(d) of the Rome I Regulation, which is discussed below.

(xiii) Assuming no agreement is reached as part of the UK’s withdrawal from the EU as to the continued application of the recognition provisions in the Brussels I Recast Regulation, the position would become more complex. If, however, courts in the remaining EU member states were to characterise the recognition of schemes as falling within conflicts rules relating to contracts, a scheme proposed by a company domiciled in their jurisdiction could, as long as it related only to contracts governed by English law, still be recognised on the basis of Article 12(1)(d) of the Rome I Regulation, which provides that, subject to certain exceptions, EU member states should, even post-Brexit, recognise that English law should govern the “various ways of extinguishing obligations” under English law contracts.

(xiv) The argument that Rome I would continue to apply to schemes involving liabilities governed by English law post Brexit is based on the facts that (a) Rome I is not limited to contracts governed by the laws of an EU member state and (b) its rules on applicable law in contractual matters generally do not rely on reciprocity to operate.

The negative impact of the Brussels I Recast Regulation ceasing to apply could be mitigated if the UK agreed to become a convention state under the Lugano Convention 2007 and/or the 2005 Hague Convention. On 28th December 2018, the UK submitted an instrument of accession to the Hague Convention, which would become effective in the event of a no-deal Brexit. The UK government’s proposals regarding re-joining the 2005 Hague Convention are set out in more detail in Question 10 (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?).

Access to the EU financial markets

16. 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?

(i) Passporting rights: Currently a UK bank/investment firm which is authorised to enter into wholesale OTC derivatives in the UK can apply to its home state regulator (i.e. the Prudential Regulation Authority or the Financial Conduct Authority) for a passport to provide those services in any other EU member state either via a branch or on a cross-border basis. These “passporting rights” are granted pursuant to the EU financial services directives (notably, MiFID II[33] for investment services and CRD IV[34] for credit institutions providing banking services). When the UK leaves the EU, these Directives will no longer grant this passporting right to UK entities, except during the Implementation Period set out in the Draft Withdrawal Agreement.

After the UK leaves the EU (or, if there is an Implementation Period, after the end of the Implementation Period) UK firms wishing to enter into OTC derivatives with counterparties in the EU will be subject to the national licensing regimes of EU member states. In many EU member states, firms which are not authorised locally, and do not have an EU financial services passport, are not permitted to enter into derivative transactions with locally resident counterparties except on a reverse-solicitation basis (that is, where the counterparty has solicited the business of the UK firm, rather than the UK firm soliciting business in the jurisdiction)[35], or on the basis of narrowly defined local law exemptions or licences which may be available in some cases.

The position with respect to OTC derivatives entered into by UK firms with counterparties in the EU prior to the date on which the UK leaves the EU will also be subject to the national licensing regimes of EU member states (after the UK leaves the EU or, if there is an Implementation Period, after the end of the Implementation Period in the Draft Withdrawal Agreement and in each case subject to anything that is agreed between the UK and the EU on point as part of the exit negotiations and subject to any contingency measures that may have been put in place by EU27 member states that provide for contract continuity). In relation to such transactions, the performance of existing obligations would not seem to fall within MiFID II as it does not involve the provision of an investment service or ancillary activity which is covered by MiFID II. Specifically, it does not involve the reception or transmission of orders, the execution of orders or dealing on own account. For performance of such existing obligations under a transaction that was entered into prior to the date on which the UK leaves the EU to be subject to authorisation, therefore, (a) the local jurisdiction would have to have implemented MiFID II in a way which goes beyond the requirements of MiFID II, (b) there would have to be a change in law at European or local law level, or (c) the local regulator would need to take a particularly restrictive view as to what activity non-authorised entities are permitted to carry out in their jurisdiction. Although it is expected that in most instances performance of pre-existing contractual obligations would not be subject to local authorisation requirements, there is a risk that such activity is treated otherwise by certain EU regulators, particularly where performance involves the transfer of MiFID II financial instruments (not including cash). There is also a risk that certain EU regulators take a restrictive view more generally with respect to non-authorised UK firms continuing to be counterparty to pre-existing transactions with local entities, and require that such transactions are novated to an appropriately authorised entity.

In addition, certain events or actions may occur during the life of an existing OTC derivative transaction, some of which could be viewed as more than the mere performance of a pre-existing contractual obligation. If such an event could be construed as entry into a new derivative transaction that is subject to either MiFID passporting or authorisation in the relevant EU member state, then loss of the passport could render such activity illegal in the EU. This will depend on whether the event involves the provision of an investment service (essentially a dealing type activity that in effect involves entering into a new trade in a “financial instrument”), although in at least some member states, engaging in these activities on a reverse-solicitation basis (that is, where the counterparty has solicited the business of the UK firm, rather than the UK firm soliciting business in the jurisdiction) may fall outside the scope of the regulatory regime while in other jurisdictions other exemptions may be available. This issue may be more relevant for certain product types, for example swaptions (where exercise of the swaption results in a new derivative transaction arising).

UK firms should also consider whether communication with their EU counterparty in connection with a legacy transaction could constitute the provision of investment advice, which is also regulated under MiFID II (and which will therefore also be impacted were a UK firm to lose its passporting rights). ISDA has obtained high level, summary advice from counsel in France, Germany, Italy, the Netherlands and Spain, as well as the UK, as to the expected regulatory treatment (under current law and regulation) of certain lifecycle and other events, which is available here.[36]

This advice indicates that the following events (of those considered) are likely to trigger authorisation requirements in the relevant EU member state (unless an exemption applies and subject to any contingency measures that may have been put in place by EU27 member states that provide for contract continuity):

              1. rolling an open position;
              2. ‘material’ amendments to the terms of the transaction;
              3. novations (the exact regulatory impact will depend on the precise capacity in which a party acts (remaining party, transferor or transferee), as well as the location of each such party);
              4. unwinds (where undertaken by way of entering into an offsetting transaction); and
              5. portfolio compression (where undertaken by way of termination of existing transactions and entering into one or more replacement transactions).

UK firms should consider which of their counterparties are ‘in the EU’ for regulatory purposes. There are a variety of factors which could bring a client within the regulatory scope of an EU member state, including the nature of the counterparty. In particular, consideration should be given to the position with respect to counterparties entering into derivative transactions as agent for underlying principals (e.g. investment managers). It is not necessarily the case that, where the agent is located outside the EU, such derivative transactions are not subject to the issues around loss of passporting rights as, in some instances, the UK firm may be required to ‘look through’ the agent to the underlying principal in order to identify their client for regulatory purposes.

In light of the potential regulatory requirements for lifecycle events, certain EU27 member states put in place legislation or other measures prior to 29 March 2019 (or following the initial extension of Article 50, 12 April 2019), to facilitate contract continuity for financial services contracts post-Brexit or provide other forms of regulatory relief.[37] The availability of such contingency measures will need to be reassessed in advance of the currently scheduled 31 October 2019 end of the Article 50 process (or the end of any Implementation Period). The outcome, then, for cross-border Transactions would need to be assessed on a jurisdiction by jurisdiction basis in light of (i) the total loss of passporting rights, assuming the absence of an equivalence decision or individually negotiated position retaining access for UK financial service firms to EU financial markets (although it is worth noting that the Political Declaration accompanying the Draft Withdrawal Agreement sets out the UK and EU’s intention to pursue equivalence assessments in advance of the end of June 2020), and (ii) the contingency measures (if any) put in place by EU 27 member states that facilitate contract continuity post-Brexit. ISDA has procured high level analysis of the proposed legislative measures in Finland, Germany, Italy, the Netherlands and Sweden, available in the documents wallet at the bottom of these FAQs.

See Question 16.1 (Will EU firms without a UK branch still be able to carry out derivatives business in the UK?) for more details regarding the lifecycle and other events which may require EU counterparties to be authorised in the UK once the UK has left the EU (unless an exemption applies and subject to any relevant contingency measures in the relevant EU member state).

(ii) MiFID II/MiFIR equivalence: In the absence of a specially negotiated position, the UK would be a third country for the purposes of the EU financial services directives. However, MiFID II/MiFIR[38] contains third country provisions. Article 46(1) of MiFIR grants third country firms the right to become registered with ESMA to provide investment services to eligible counterparties and professional clients in the EU if the European Commission makes a positive equivalence determination, that is, a determination that the legal and regulatory regime of the third country is equivalent to the prudential and conduct of business requirements of MiFID II/MiFIR. However, not all of MiFID II is covered by the equivalence regime, so it is not a blanket right for third country firms to offer financial services into the EU on the same terms as an EU firm might be able to do so. For example, dealings with retail clients and elective professional clients are not covered, equivalence is limited to MiFID II investment services / activities and third country firms will not be able to automatically provide their clients with direct electronic access to EU venues etc. The current equivalence regime under MiFIR is also proposed to be amended (and in some ways tightened) by the “Investment Firms Review” package of measures, which are expected to be formally adopted by the EU institutions and then published in the Official Journal of the EU in late 2019.

Given that MiFID II/MiFIR has been implemented in the UK, and having regard to the provisions of the Withdrawal Act that preserve existing UK legislation that implements EU laws and incorporate directly applicable EU legislation such as EU regulations into UK domestic law, the Withdrawal Act generally will operate to maintain the status quo, at least initially. Therefore, the UK regime should, objectively, be equivalent for the purposes of an equivalence decision under Article 47 of MiFIR. As noted above, the Political Declaration accompanying the Draft Withdrawal Agreement sets out the UK and EU’s intention to pursue equivalence assessments in advance of the end of June 2020. In practice, however, there is no guarantee that an equivalence decision would be forthcoming and in any event there is still gap risk (particularly in the context where the Draft Withdrawal Agreement does not come into effect) as ESMA has 180 working days in which to determine whether an application by a firm for registration should be granted.

As a consequence of the statutory instrument process in the UK, including the Markets in Financial Instruments (Amendment) (EU Exit) Regulations 2018[39] (the “MiFID Regulations”) which were made in December 2018, UK investment firms will become subject to the UK MiFID regime (as amended by Brexit statutory instruments) after Brexit, instead of the European MiFID regime (although it should be noted that the UK regulators currently plan to grant temporary transitional relief in the event of a no-deal Brexit which would allow UK investment firms to continue to comply with certain aspects of the pre-Brexit rather than the post-Brexit UK regime).[40]

(iii) CRD IV: UK credit institutions are currently authorised to conduct banking services pursuant to the UK implementation of CRD IV and have passporting rights pursuant thereto. 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 to the UK, a UK credit institution would either have to provide banking services[41] on a reverse-solicitation 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. That subsidiary would then be able to provide banking/investment services through the rest of the EU on the basis of the passport. However, in respect of MiFID II investment services, including dealing on own account or execution of orders in respect of derivatives which constitute MiFID II financial instruments, a UK credit institution would still have the option of relying on the MiFIR third country equivalence regime to provide these investment services in the EU if an equivalence determination were made – see sub-paragraph (ii) above.

(iv) Energy and commodities: Where the OTC derivative transaction is a physically-settled energy or commodity transaction, Brexit may have certain additional regulatory consequences.

(a) REMIT[42] requires persons who enter into wholesale energy products (including derivatives relating to electricity or natural gas produced, traded or delivered in the EU, and derivatives relating to the transportation of electricity or natural gas in the EU, but excluding any financial instruments regulated by the Market Abuse Directive) to be registered in the EU member state in which they are established or resident or, if not established or resident in an EU member state, the EU member state in which they are active. Any such market participants registered in the UK will need to re-register in an EU member state post-Brexit. This would need to be done prior to entering into any transaction with respect to such a product on any market within the EU. Regarding UK legislation, the UK has put in place arrangements so that, even in a ‘no-deal’ scenario, the existing REMIT regime will be maintained in the UK with minimal changes, with Ofgem assuming the role of regulator.[43]

(b) REACH[44] regulates the manufacture, placing on the market (including import) and use of substances on their own, in mixtures and to a limited extent in articles; and imposes registration requirements on, amongst others, EU manufacturers and importers of certain chemical substances. The settlement of many transactions is undertaken within customs-free zones where REACH requirements would not ordinarily be engaged. To the extent a physically-settled commodity derivative would require delivery of a substance or article into the EU where previously it would have been treated as taking place within the EU, the requirement to register may be triggered. This would typically result in the party importing the substance into the EU registering the substance and complying with any other requirements under REACH applicable to it. However, companies that hold REACH registrations through UK entities have been able to transfer those registrations to other EU domiciled entities within their group upon Brexit, and many registrations have already been transferred, avoiding a whole new registration process for the EU entity as either an importer or only representative of the UK entity. The UK has also, as a contingency, introduced a parallel REACH regime in the UK post-Brexit (including in a no-deal scenario).[45] Under this, existing REACH registrations will be automatically grandfathered into the new parallel UK regime and parties will be able to validate their existing EU registrations under the new regime through providing basic information only.

(c) The EU ETS[46] regulates the allowance system for greenhouse gas emissions in the EU. In 2012 the EU ETS operations were transferred to a centralised single EU registry, the Union Registry, covering all countries participating in the EU ETS, including the UK. The Union Registry (including its technical infrastructure) is operated and maintained by the central administrator[47], with each EU member state responsible for administering its ‘part’ within the Union Registry. Under the EU ETS, companies or individuals holding or trading emission allowances are required to hold such allowances in a Union Registry account administered on behalf of an EU member state or the EU.

The UK part of the Union Registry is administered by the Environment Agency in its capacity as the UK’s national administrator. A national administrator’s main responsibilities are to be the contact point for their respective account holders in the Union Registry and to perform all operations involving direct contact with them (such as opening, suspension and closure of accounts). The central administrator has the responsibility to provide, operate and maintain the Union Registry and the European Union Transaction Log and to perform operations which are carried out centrally. This includes processing transaction[48] instructions issued by any account holder[49]. The European Commission and UK have confirmed that trader account holders will not have access to their account in the UK part of the Union Registry and will not be able to trade from that account (for example, where an OTC derivative transaction requires a UK counterparty to transfer emission allowances to an EU counterparty) following the UK’s exit from the EU in a ‘no-deal’ scenario.[50]

The UK has therefore advised operators and traders to plan for a loss of registry access, including by opening a second account in another EU country.[51] The UK has also introduced legislation that, in a ‘no-deal’ scenario, would remove the requirement for UK operators to surrender emission allowances but would maintain the monitoring, reporting and verification requirements of the EU ETS to ensure transparency over greenhouse gas emissions.[52]

The Draft Withdrawal Agreement, by contrast, contemplates that the UK will remain in the EU ETS to the end of the Implementation Period (to 31 December 2020 – the end of the third phase of the EU ETS), have the obligation to surrender allowances for that period and that the United Kingdom and UK operators will have access to the Union Registry to the extent necessary to comply with that membership of the EU ETS.[53]

In addition, the UK is currently consulting on the future of UK carbon pricing in general, stating that a linking agreement with the EU for a linked UK-EU ETS is its preferred option.[54]

(v) Continued compliance with certain EU legislation: Even in a Brexit scenario, with no retention of passporting rights and no MiFID II equivalence decision, UK financial services firms providing services on a cross-border basis will still be required to comply with certain EU legislation in order to transact with EU counterparties due to their extra-territorial effect. This is the case for provisions of the Market Abuse Directive/Market Abuse Regulation (as well as certain market abuse provisions of REMIT), and some aspects of MiFID II/MiFIR and EMIR (e.g. the position limits for commodity derivatives under MiFID II, and the margin rules under EMIR which apply to certain third country entities).

16.1 Will EU firms without a UK branch still be able to carry out derivatives business in the UK?

If the Implementation Period set out in the Draft Withdrawal Agreement comes into force, EU firms would still be able to rely on their existing passporting rights during that period and PRA/FCA authorisation will only be needed by the end of the Implementation Period. In the event that the Implementation Period does not come into effect, the UK government has put in place certain contingency measures that would enable EEA firms operating pursuant to their existing financial services passport to continue derivatives business for a limited period after exit day, or to run-off existing derivatives contracts, as further described below.

The Temporary Permissions Regime

The EEA Passport Rights (Amendment, etc., and Transitional Provisions) (EU Exit) Regulations 2018[55] (the “EEA Passport Rights Regulations”), which would apply if the Implementation Period set out in the Draft Withdrawal Agreement does not come into effect, deal with the provision of certain financial services by EEA firms in the UK when the EEA financial services passport ceases to operate. This statutory instrument repeals the parts of domestic UK legislation which enable EEA firms to access the UK via an EEA financial services passport and EU-treaty derived access respectively and introduces a “temporary permissions regime” (the “TPR”) enabling EEA firms and funds operating in the UK via a financial services passport to continue their activities in the UK for a limited period after exit day. The TPR would run from three years from exit day with provision for this to be extended by HM Treasury by twelve-month increments. The FCA has set out further details of how the TPR will work and the rules that the FCA proposes to apply to participating firms in its policy statement, PS19/5, and related appendices.[56] Similarly the PRA has set out details on its approach to the TPR and the rules that it will apply to participating firms in its policy statement, PS5/19, and related appendices.[57]  For both PRA and FCA regulated firms, firms may enter the TPR by submitting an application for UK authorisation prior to exit day. There was also an alternative route for entering the TPR via notification, but for PRA regulated firms the notification window closed on 11 April 2019, and for solely FCA regulated firms it closes on 30 October 2019. It is conceivable that the PRA could reopen the window for notification at a later stage.  In the event that the Draft Withdrawal Agreement is not ratified by the UK, the TPR provides a back-stop to enable EEA authorised firms to continue doing business in the UK. Firms in the regime that want to continue to operate in the UK after their temporary permission expires will need to apply for UK authorisation. In line with the duration of the TPR, the PRA and the FCA have up to three years from exit day to make such an authorisation determination. Further details on the operation of the TPR can be found on the websites of the FCA and PRA.

The Financial Services Contracts Regime

The UK government has also put in place a statutory instrument, the Financial Services Contracts (Transitional and Saving Provision) (EU Exit) Regulations 2019[58] (the “Financial Services Contracts Regulations”), that will provide for the continuity of existing financial contracts for EEA firms that will not enter (or will depart early from) the TPR, either because such firm does not submit a notification to enter the TPR by the specified deadline or where such firm is unsuccessful in securing, or does not apply for, UK authorisation through the TPR and consequently leaves the TPR.

The financial services contracts regime (the “FSCR”) will apply automatically, for a time-limited period, allowing those firms not covered by the TPR to continue to service UK contracts entered into before exit day (for those firms which will not use the TPR) or before exiting the TPR (for those firms which exit the TPR). Unlike the TPR, the FSCR does not allow a firm to carry out regulated activities in relation to new contracts, except where necessary for the performance of pre-existing contracts and carried out for the purposes of performing the pre-existing contract. Firms falling within the scope of the regime will be expected to run-off, close out or transfer obligations under contracts that exceed the time limit of the regime prior to the end of the relevant period. For derivative contracts, the FSCR will apply for 5 years from the date on which the firm enters the FSCR, which, for any firms not entering the TPR, will be exit day (in respect of insurance contracts, the FSCR will run for 15 years). HM Treasury has the power to extend the length of the FSCR by up to 5 years at a time in certain circumstances. The FSCR is split into two regimes: Contractual Run-off (“CRO”) and Supervisory Run-off (“SRO”).

Contractual Run-Off: CRO will apply automatically to EEA firms without a UK branch operating under a freedom of services passport immediately before exit day, which did not hold a top-up permission from one of the UK regulators and which do not enter the TPR. A necessary condition of entry into the CRO is that the firm is authorised by its home state regulator. Firms in the CRO will benefit from a licensing exemption in the UK and will be principally permitted to carry out regulated activities that are necessary to perform pre-existing contracts, which includes the performance of an obligation under a pre-existing contract that is contingent or conditional. However, firms in the CRO may also be permitted to carry on regulated activities that are necessary to: (i) reduce the financial risk of parties to pre-existing contracts (i.e. hedging); (ii) transfer the property right or liabilities under a pre-existing contract; and (iii) comply with legal and regulatory requirements.

Supervised Run-off: SRO will apply automatically to all other EEA firms carrying on regulated activities in the UK pursuant to the EEA financial services passport to which the CRO does not apply, namely:

              • firms with a UK branch operating under a freedom of establishment passport immediately before exit day that do not enter the TPR;
              • firms that enter the TPR but exit that regime without a UK authorisation in respect of all regulated activities which they carry on pursuant to a freedom of services or freedom of establishment passport immediately before exit day; and
              • firms operating under either a freedom of establishment or freedom of services passport immediately before exit day and that hold a top-up permission before exit day.

SRO operates much the same as the TPR, in that firms will be deemed authorised in the UK. However, the scope of regulated activities for firms in SRO are as for CRO, i.e. those activities necessary for the performance of pre-existing contracts and to carry out certain limited ancillary activities (i.e. risk-reduction in respect of pre-exiting contracts; transfers of property or rights under pre-existing contracts and regulated activities necessary to comply with legal/regulatory requirements).

As firms in SRO will have a deemed authorisation under FSMA, they will be required to comply with certain parts of the UK regulatory regime (e.g. parts of the FCA Handbook and PRA Rulebook), the scope of which will depend on whether the firm has an establishment in the UK. Accordingly, and irrespective of whether a firm enters the SRO directly or via the TPR, the firm will need to, upon entry into the SRO, provide a run-off plan. Firms will also be asked to provide annual updates on progress and any unexpected divergence from the plan. As such firms may be complying with those rules for the first time, it is proposed that transitional relief will be available[59].

Substituted Compliance

The MiFID Regulations (which would only necessarily come into effect in its current form on exit day in the event of a ‘no-deal’ Brexit), propose changes to retained EU law where it relates to MiFID II. The MiFID Regulations apply the UK regulatory framework to TPR firms, but those firms may be deemed to comply with the UK rules under MiFIR and the MiFID II Delegated Regulation if they meet equivalent EU requirements. This “substituted compliance” will not be available for all MiFID obligations (e.g. the derivatives and shares trading obligation and in the case of the UK branches of EEA firms, UK transaction reporting and MiFID conduct of business obligations).

As a result of substituted compliance being unavailable for the derivatives trading obligation, there are circumstances in which firms may find themselves subject to conflicting mandatory trading obligations. In particular, by simply applying the UK derivatives trading obligation (which requires the transaction to be executed on a UK trading venue or third country trading venue provided that HM Treasury has made a positive equivalence decision with respect to such third country) under the MiFID Regulations to TPR firms, it is not clear from that legislation itself whether this is limited in any way (e.g. to TPR firms when acting through a UK branch, or where they are transacting with UK counterparties), or whether this applies to TPR firms in all circumstances. If the latter is the case, many TPR firms, particularly where they are also EU27 investment firms, could find themselves subject to both the UK and EU derivatives trading obligation with respect to the same transaction.

It is worth noting that, even if the a limited view of the application of the UK derivatives trading obligation to TPR firms is taken (i.e. that it applies only when such firm is acting through a UK branch or with UK counterparties), this still leaves circumstances in which a transaction or firm will be subject to both the UK and EU derivatives trading obligation in the absence of positive equivalence decisions with respect to EU and UK trading venues, as applicable. For example, UK investment firms entering into derivative transactions with EU27 investment firms would face this issue, as well as EU27 investment firms who are also TPR firms or who are authorised in the UK and which are entering into derivative transactions through UK branches (given the confirmation from the FCA regarding the application of the UK derivatives trading obligation to UK branches of TPR firms (and the general EU27 position that the EU derivatives trading obligation applies to non-EU branches of EU27 investment firms)).

In all such cases, this would require the transaction to be executed on a third country venue which is found to be equivalent for both the UK and EU regimes e.g. US trading venues, or for the parties to not enter into the relevant transaction given the lack of common execution venue.

The FCA has taken a similar “substituted compliance” approach in respect of most other aspects of the regulatory regime (e.g. with respect to most FCA Handbook obligations) as they apply to TPR firms immediately after exit day. The PRA generally has not allowed “substituted compliance”.

Overseas Persons Exemption

The UK has a wide overseas persons exemption for overseas persons without a place of business in the UK and it is possible that OTC derivatives business could be conducted by EU firms with UK counterparties on that basis following expiry of the Implementation Period, TPR and/or FSCR as applicable.

The requirements of the overseas person exemption vary depending on the regulated activity in question, but generally require dealing either exclusively with or through authorised UK firms, or otherwise in a manner consistent with the UK financial promotions regime. This is on the basis of the existing position in the UK and it is not inconceivable that this could be changed post-Brexit.

Lifecycle Events triggering authorisation requirements

ISDA has obtained high level, summary advice as to whether certain events or activities which may occur during the life of an existing OTC derivative transaction could trigger authorisation requirements for EU counterparties in the UK (to the extent the overseas persons exemption was not available and (if applicable) after expiry of the TPR and the FSCR). This advice as to the regulatory treatment (under current law and regulation) of certain lifecycle and other events, is available here.[60] As well as the events and activities which are likely to trigger authorisation requirements for UK counterparties in EU member states (see Question 16 (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?)), certain additional events may trigger authorisation requirements in the UK. These include exercising options, transfers of collateral and unwinds/portfolio compression carried out by any methodology.

16.2 Will EU firms still be able to carry out derivatives business through a UK branch post-Brexit?

If the Implementation Period set out in the Withdrawal Agreement comes into effect, EEA firms would still be able to carry out derivatives business in the UK through a branch during that period.

Temporary Permissions Regime

In the absence of an Implementation Period, EEA firms accessing the UK through a branch would be able to enter the temporary permissions regime (TPR) to the extent such firm is relying on passporting rights at exit day. See Question 16.1 (Will EU firms without a UK branch still be able to carry out derivatives business in the UK?) for further details on the TPR.

Financial Services Contracts Regime

EEA firms operating in the UK via a branch that do not apply to join the TPR would be automatically subject to Supervised Run-off (SRO) pursuant to the financial services contracts regime (“FSCR”) (in the event that the Implementation Period does not come into effect). See Question 16.1 (Will EU firms without a UK branch still be able to carry out derivatives business in the UK?) for further details on the FSCR.

Post-Implementation Period/TPR/FSCR

After the Implementation Period, or (in the absence of an Implementation Period), after expiry of the TPR and FSCR, EU firms that carry on investment business from their UK branches will need to obtain authorisation in the UK.

EMIR

17. Will UK OTC derivative counterparties still be required to comply with the clearing, reporting and risk-mitigation requirements under EMIR?

Post-Brexit, EMIR will no longer apply directly in the UK. However, on exit day (or, if the Implementation Period comes into effect, at the end of the Implementation Period), the UK will retain EMIR as part of the incorporation of directly applicable EU legislation pursuant to the provisions of the Withdrawal Act. Pursuant to the Withdrawal Act the current provisions of EMIR and the delegated regulations made thereunder will be incorporated into UK domestic law, as amended by the statutory instruments amending EMIR (namely, the OTC Derivatives, Central Counterparties and Trade Repositories (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2018 (the “EMIR Amending Regulations”)[61], the Central Counterparties (Amendment, etc., and Transitional Provision (EU Exit) Regulations 2018 (the “CCP Regulations”)[62] and the Trade Repositories (Amendment and Transitional Provision (EU Exit) Regulations 2018 (the “Trade Repositories Regulations”)[63]). These statutory instruments would only necessarily come into effect in their current form in the event of a ‘hard’ Brexit. Consequently, UK OTC derivative counterparties will continue to be subject to substantially similar rules on clearing, reporting and risk-mitigation techniques for OTC derivatives.

The Financial Services (Implementation of Legislation) Bill[64] was intended to be enacted in advance of the original ‘exit day’ in March 2019 to give the government power (but not the obligation) to incorporate into UK law provisions of EU financial services legislation that were then in the pipeline but not in effect as at exit date. The policy intention behind the bill does not appear to have changed, but the bill will need to be updated to reflect the extension of the Article 50 withdrawal period until 31 October 2019. The so-called “in flight” files that could be incorporated into UK law under the bill included legislation that was being negotiated and which may be adopted up to two years after exit, including (in the current draft of the bill) EMIR Refit and EMIR 2.2. The draft bill gives the government power to introduce legislation ‘corresponding’ or ‘similar’ to the EU legislation in question, with powers to make changes to reflect the UK’s position outside the EU (but without making changes that result in an effect which is different in a major way from that of the legislation being onshored). EMIR 2.2 could be onshored pursuant to the powers in this Bill although, depending on the ultimate timing of Brexit, it may be that EMIR 2.2 comes into force and applies in the EU prior to exit day, in which case it could be onshored pursuant to the Withdrawal Act. It is expected that EMIR Refit will be in large part onshored pursuant to the Withdrawal Act rather than pursuant to this Bill, as the vast majority of its provisions came into force on 17 June 2019. In both circumstances, adjustments will likely be made to this legislation as part of the onshoring process, whether under the powers given to HM Treasury under the Bill or the Withdrawal Act.

The onshored EMIR reporting obligation will require UK firms and CCPs to report new OTC transactions, and any modification or termination of transactions entered into pre-Brexit that were reported pursuant to EU EMIR, to a UK registered or recognised trade repository (see Question 20 (UK entities compliance with the UK clearing and reporting obligations) for further details on UK registration and recognition of trade repositories).

Post-Brexit, UK financial counterparties (“FCs”) and non-financial counterparties crossing the clearing threshold (“NFC+s”) will be obliged to continue to clear certain derivative contracts through CCPs authorised or recognised by the Bank of England (see Question 20 (UK entities compliance with the UK clearing and reposting obligations) for further details on UK authorisation and recognition of CCPs). The EMIR Amending Regulations amend the definition of financial counterparty and non-financial counterparty to refer to UK-established entities. As the EU will now be a third country for the purposes of onshored EMIR, UK firms dealing with EU entities (as well as any other third country entities) will need to determine whether those entities would be FCs, NFC+s or NFC-s (non-financial counterparties below the clearing threshold) if established in the UK. Because of this (as well as the impact of Brexit on the definition of “OTC derivative”, both from an EU EMIR and UK onshored EMIR perspective), it may be necessary to review existing counterparty classifications.

In addition, 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) where, if that entity were established in the EU, EMIR would apply, and the contract has a “direct, substantial and foreseeable effect” within the EU or to prevent the avoidance of the application of requirements under EMIR.[65]

18. 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 will therefore be incorporated into UK domestic law pursuant to the Withdrawal Act. However it should be noted that these preserving provisions of the Withdrawal Act will only apply to 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 Act will only incorporate into UK domestic law those initial margin requirements that had been phased in prior to the exit day. Initial margin requirements that have not been phased in before the exit day will not be incorporated into UK domestic law via the Withdrawal Act. PRA policy statement PS5/19 reflects this by, as part of onshoring the EMIR margin RTS[66], not onshoring the phase-in requirements which apply in 2019 and 2020.

However, it is expected that these obligations will nevertheless be phased-in as part of UK law as a result of: (i) the extension to the Article 50 withdrawal period, during which EU law continues to apply to the UK, (ii) the Implementation Period under the Draft Withdrawal Agreement coming into effect (during which the full body of EU law will apply to the UK) or (iii) the UK regulators bringing in such requirements at a later date separately to the onshoring process by amending the UK binding technical standards that onshores the EMIR margin RTS.

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?

During the Implementation Period provided for in the Draft Withdrawal Agreement, yes.

After the Implementation Period, or in the event that there is no Implementation Period, this depends on the negotiated position and any equivalence decision granted to the UK under EMIR.

Articles 25 and 75 of EMIR provide for the European Commission to grant an equivalence decision in respect of third country CCPs and trade repositories, respectively, where the third country’s regulatory regime contains equivalent legal and supervisory arrangements for CCPs/trade repositories to those provided for by EMIR.

The CCP and trade repository provisions of EMIR will be incorporated into UK domestic law pursuant to the provisions of the Withdrawal Act, as amended by (in the event of a ‘hard’ Brexit) the OTC Derivatives, Central Counterparties and Trade Repositories (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2018,[67] the Central Counterparties (Amendment, etc., and Transitional Provision (EU Exit) Regulations 2018[68] and the Trade Repositories (Amendment and Transitional Provision (EU Exit) Regulations 2018[69]. Consequently, as at exit day, the UK will have objectively equivalent CCP and trade repository rules for the purposes of EMIR. However, the UK will need an equivalence determination to be made by the European Commission and a UK CCP or UK trade repository would then need to make an application to ESMA for recognition under Article 25/Article 77 of EMIR to allow EU counterparties to continue clearing and reporting through UK CCPs and trade repositories.

Temporary equivalence for UK CCPs

Ordinarily, obtaining an equivalence decision from the European Commission and CCPs/trade repositories obtaining recognition from ESMA are processes that can take some time – for example, ESMA has 180 working days in which to consider an application for recognition of a third country CCP/trade repository. However, on 19 December 2018, the European Commission adopted a temporary equivalence decision[70] with respect to the UK’s regulatory framework for CCPs (but not trade repositories). The decision is valid until 30 March 2020 but does not apply if: (i) the Draft Withdrawal Agreement enters into force or (ii) a decision is taken to extend the Article 50 withdrawal period. This decision was amended[71] to reflect the agreed extension of the Article 50 withdrawal process. However, the decision still expires on 30 March 2020 (unless the Draft Withdrawal Agreement enters into force before that date).  The decision is conditional on the conclusion of cooperation arrangements between ESMA and the Bank of England regarding ongoing exchange of information and coordination of supervision, which were concluded on 4 February 2019.  ESMA has issued recognition decisions[72] (conditional on a no-deal Brexit) with respect to LCH Limited, ICE Clear Europe Limited and LME Clear Limited, which means that EU counterparties can continue to clear through these UK CCPs until 30 March 2020.

Equivalence post-expiry of the temporary decision

As the equivalence decision is temporary in nature, the UK will require a permanent equivalence decision from the European Commission in respect of the UK’s regulatory framework for CCPs in order for UK CCPs to continue clearing trades for EU counterparties after the expiry of the temporary equivalence decision. In this regard, the European Commission issued a proposal[73] (“EMIR 2.2”) (the trilogue agreements on this proposal were adopted by the European Parliament in April 2019) to amend EMIR in order to introduce, amongst other things, further conditions (which, broadly, relate to compliance with prudential requirements and access to information by ESMA) to the grant of recognition in the case of a third-country CCP determined by ESMA to be systemically important (or likely to become so) to the financial stability of the EU or one or more of its member states. Under those proposals, a CCP determined to be of “substantial” systemic importance may (as a last resort), upon the recommendation of ESMA, be refused recognition by the European Commission and instead be required to become established in the EU in order to provide clearing services there. See Question 31 (Will any new arrangements be required to clear derivative transactions in the future?) as to the arrangements that may be required or be desirable if a UK CCP is determined to be of “substantial” systemic importance and is required to become established in the EU in this way.

Trade Repositories

In respect of trade repositories, no temporary equivalence decision has been issued. In November 2018, ESMA issued a public statement on the readiness of trade repositories for a no-deal Brexit.[74] This public statement confirms that EU counterparties and CCPs must report details of derivative contracts to a registered EU-established trade repository (or a recognised third-country trade repository). There is no mention of a transitional period or any temporary relief being granted by the EU that would enable EU counterparties and CCPs to continue reporting to a UK based trade repository. Consequently, in the absence of an equivalence decision, EU counterparties and CCPs will need to ensure access post-Brexit to an EU-established trade repository and, to the extent that they have been reporting transactions to a UK trade repository, may need to port their data to such EU trade repository. This position was confirmed in a further statement from ESMA on 1 February 2019.[75]

20. 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?

During the Implementation Period provided for in the Draft Withdrawal Agreement, yes (as during such period UK entities would still be required to comply with EMIR, as opposed to UK onshored EMIR).

In the event that there is no Implementation Period, the provisions of the Withdrawal Act that preserve directly applicable EU legislation which is operative immediately before the exit day will incorporate the clearing and trade reporting provisions of EMIR into UK domestic law on exit day.

CCP Temporary Recognition

The UK Government has passed a statutory instrument, The Central Counterparties (Amendment, etc., and Transitional Provision (EU Exit) Regulations 2018[76] (the “CCP Regulations”), that amend the UK onshored version of EMIR to give the Bank of England functions equivalent to those carried out by ESMA with respect to the recognition of third country CCPs and transfers the European Commission’s functions of determining whether third countries have an equivalent regulatory regime to HM Treasury. The explanatory memorandum to the statutory instrument provides that the Treasury expects that jurisdictions that have already been assessed as equivalent by the EU will also be found to be equivalent by the UK (such equivalence decisions are expressly not onshored into UK domestic law pursuant to the CCP Regulations, so such decisions will need to be remade by the UK). In a joint statement[77] from the UK and US authorities, the UK authorities confirmed their intention that US CCPs will be able to continue to provide services in the UK post-Brexit. In addition, the CCP Regulations provide for a temporary recognition regime to enable third country CCPs (i.e. EU or non-EU CCPs) to continue operating in the UK for three years after the UK leaves the EU (assuming that the Implementation Period pursuant to the Draft Withdrawal Agreement does not come into effect). To enter the temporary recognition regime, the CCP will need to inform the Bank of England before exit day of their intention to provide clearing services in the UK. CCPs in the temporary regime will be deemed to be recognised to provide clearing services in the UK for a maximum of three years, extendable by HM Treasury for increments of twelve months. CCPs that have not already submitted an application for recognition must do so with six months of the start of the temporary recognition regime. An interim list of CCPs which have notified the Bank of England of their intention to provide clearing services in the UK under the temporary recognition regime can be found on the Bank of England website.[78]

The Bank of England has also confirmed[79] its previous position that non-UK CCPs may plan on the assumption that recognition by the Bank of England will only be required by the end of the Implementation Period provided for by the Draft Withdrawal Agreement. In the event that the Draft Withdrawal Agreement is not agreed or ratified, the temporary recognition regime provides a fall-back allowing EU CCPs to continue doing business in the UK for a limited time without the need for authorisation.

CCP Run-off pursuant to the Financial Services Contracts Regime

In addition to the temporary recognition regime set out under the CCP Regulations, the Financial Services Contracts (Transitional and Saving Provision) (EU Exit) Regulations 2019[80] establish a CCP run-off regime for non-UK CCPs that do not enter the temporary recognition regime or that do not gain permanent recognition under the UK onshored EMIR. Accordingly, (i) a non-UK CCP that was eligible for, but did not apply to enter, the temporary recognition regime, will be granted temporary recognition for a period of one year (non-extendable) beginning on exit day, and (ii) a non-UK CCP that entered the temporary recognition regime but exits that regime without the necessary permanent recognition to allow it to continue to provide services in the UK shall be granted temporary recognition for a period determined by the Bank of England that is no longer than one year (non-extendable) beginning on the day on which that CCP ceases to be subject to the temporary recognition regime. Non-UK CCPs in the run-off regime will be able to carry on the range of services they were permitted to carry on immediately before entering the FSCR.

Trade Repositories Temporary Registration Regime

In respect of trade repositories, the Withdrawal Act will retain the provisions of EMIR on trade reporting and trade repositories, as amended, in respect of trade repositories, by the Trade Repositories (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2018[81] (the “Trade Repositories Regulations”) and the OTC Derivatives, Central Counterparties and Trade Repositories (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2018 (the “EMIR Amending Regulations”).[82] The Trade Repositories Regulations provide for the transfer of ESMA’s functions relating to the registration of trade repositories to the FCA and create a conversion regime whereby UK trade repositories (but not EU trade repositories) who are currently registered by ESMA are automatically registered as authorised UK trade repositories by the FCA from exit day. In addition, the Trade Repositories Regulations set out provisions which allow trade repositories to submit applications for registration by the FCA in advance of exit day and to benefit from temporary registration whilst their application is being considered by the FCA. To enter the temporary registration regime, eligible trade repositories will be required to have a UK legal entity, which will be the applicant, and meet the requirement that they are an entity which forms part of a group which includes an ESMA-registered trade repository. This appears to assume that the UK entity will use the same infrastructure to receive and process reports as already used by the EU trade repository. The temporary registration will last for a maximum of three years from exit day.

The FCA has published on its website (i) an application form for trade repositories seeking registration under Regulation 5(2), and (ii) a conversion form, for trade repositories seeking to convert their ESMA registered-status into FCA registration. Forms must be submitted to the FCA by 30 October 2019.

Equivalence for EU TRs

The EMIR Amending Regulations give the FCA power to recognise third country (including EU) trade repositories to enable such trade repositories to receive reports from UK firms. Recognition would be dependent on an “equivalence” determination by the Treasury in respect of the third country, and co-operation arrangements being in place between the FCA and the third country supervisor of the trade repository. In case there is no registered UK trade repository for a class of OTC transactions, the EMIR Amending Regulation gives the FCA power to suspend the reporting obligation for a period of up to one year with the agreement of the Treasury.

Trade Repositories Financial Services Contracts Regime

In addition to the temporary registration regime established by the Trade Repositories Regulations, the Financial Services Contracts (Transitional and Saving Provision) (EU Exit) Regulations 2019 establish a trade repository run-off regime but only in respect of an EU trade repository that is part of the temporary registration regime (i.e. it has applied for registration in the UK in respect of a UK affiliate) and is subsequently removed from that regime; an EU trade repository that does not apply for UK registration (via a UK affiliate) and thereby gains temporary registration cannot enter the run-off under the FSCR. Under the run-off regime, the temporary registration will apply for one year from the date on the relevant trade repository ceases to be recognised under the temporary regime, non-extendable (unless the FCA sets a shorter period). This run-off regime would allow UK firms time to make alternative arrangements with another registered or recognised trade repository in order to comply with the UK EMIR reporting requirements.

Consequently, under the current Trade Repositories Regulations and Financial Services Contracts Regulations UK firms will be able to meet the UK onshored EMIR trade reporting requirements by reporting to one of the five UK trade repositories that are currently registered with ESMA. However, until such time as the Treasury makes an equivalence determination in respect of the EU and the FCA recognises EU trade repositories, UK firms will not be able to report to any of the three EU trade repositories, unless that EU trade repository establishes or has a UK legal entity and applies for registration as a trade repository in respect of such UK entity with the FCA. If the relevant non-UK trade repository does apply for UK registration (i.e. through a UK affiliate), reporting could continue be made to such trade repository (possibly using the same systems as the EU trade repository) pursuant to the temporary registration regime until such time as permanent registration is received, or, if permanent registration is not received, pursuant to the FSCR run-off regime. Consequently, UK firms that currently report some or all transactions to a trade repository outside the UK will need to verify that such trade repository intends to apply for UK registration and enter the temporary registration regime and, if such trade repository does not, will need to consider how to meet the reporting requirement from exit day.

21. 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. They may also wish to consult with their CCPs in relation to Brexit and its implications, and discuss whether any such potential default might be averted.

Members should also consider the impact of Brexit on the scope of their transactions which are subject to the clearing obligation – both in terms of their and their counterparty’s classification under EMIR and UK onshored EMIR (as applicable), as well as what would constitute an ‘OTC derivative contract’ under each regime post-Brexit.

To the extent members are relying on the exemption to the clearing obligation under EMIR for intragroup transactions, members should consider the impact of Brexit on their ability to use such intragroup transactions. Under EMIR, members will need to consider whether they need to reapply to their regulators for such intragroup transaction exemptions to reflect the UK’s status as a third country. Under UK onshored EMIR, the OTC Derivatives, Central Counterparties and Trade Repositories (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2018 introduce a transitional regime for intragroup transaction exemptions, which allows firms to ‘roll-over’ such exemptions where they rely on them pre-exit day for a certain time period. Members should consider the detail of these provisions of this statutory instrument to ensure that they can continue to rely on these intragroup transaction exemptions upon exit (although noting that it will be necessary to meet the requirements both from an EU and UK perspective in the case of cross-border UK-EU transactions). Similar considerations will apply to entities relying on the intragroup transactions exemptions to the uncleared margin requirements.

22. Will compliance with the UK onshored clearing rules 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, the UK would need to apply to the US and have the UK-based CCP regulations separately recognised as being comparable to rules in the U.S. in order for substituted compliance to be granted. Substituted compliance currently applies to EU-based CCPs that are also registered in the U.S. as a Derivatives Clearing Organization. As the UK will, on exit day, retain the CCP requirements and related clearing rules under EMIR via the provisions of the Withdrawal Act (as amended by the OTC Derivatives, Central Counterparties and Trade Repositories (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2018)[83], the Central Counterparties (Amendment, etc., and Transitional Provision (EU Exit) Regulations 2018[84] and the Trade Repositories (Amendment and Transitional Provision (EU Exit) Regulations 2018[85]) (see Question 17 (Compliance with EMIR)), the UK ought to be in a position in which it is able to be granted a substituted-compliance determination from the US. The UK and the US authorities have issued a joint statement[86] in which the US authorities confirmed their intention that existing substituted compliance determinations will be extended to the UK. The expectation is therefore that clearing through UK-based CCPs will be deemed compliant with the Dodd-Frank clearing obligations. Clearing through an EU-based CCP would continue to be deemed compliant with the Dodd-Frank clearing obligations.

Collateral

23. 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 (“FCARs”). This statutory instrument was enacted pursuant to powers in the European Communities Act 1972 (“1972 Act”). If not preserved, there would be an open question as to whether any security interests which would, in the absence of the FCARs, have required registration pursuant to the Companies Act 2006, be void as against a liquidator of a UK company for want of registration. At least initially, it seems that the FCARs will be covered under the provisions of the Withdrawal Act that preserve existing UK laws that implement EU directives. Although it would be open to UK Parliament thereafter to repeal or amend the FCARs, given the importance of the protections provided to collateral-takers by the FCARs, and the aforementioned risk of invalidity of security interests in the absence of the FCARs, it is likely that these regulations will be retained. In line with this expectation, the Financial Markets and Insolvency (Amendment and Transitional Provision) (EU Exit) Regulations 2019[87] (which would only necessarily come into effect in its current form in the event of a ‘hard’ Brexit) set out no substantive changes to the FCARs.

Settlement Finality Directive

24. Are there any consequences of Brexit for participants of UK or EEA systems under the Settlement Finality Directive?

The Settlement Finality Directive (“SFD”) has been implemented in the UK through The Financial Markets and Insolvency (Settlement Finality) Regulations 1999 (“SFR”). At least initially, the SFR will be covered under the provisions of the Withdrawal Act that preserve existing UK laws that implement EU directives.

The Financial Markets and Insolvency (Amendment and Transitional Provision) (EU Exit) Regulations 2019 (the “EU Exit Settlement Finality Regulations”)[88] enacted by the UK government, which would only necessary come into effect in their current from in the event of a ‘hard’ Brexit, provide for continuation, post-Brexit, of the settlement finality protections and set out the UK’s approach to amending ‘deficiencies’ in SFR as part of the onshoring process.

The Bank of England has also published two letters[89] to provide reassurance to system operators that the UK settlement finality protections will continue after Brexit. Pursuant to the EU Exit Settlement Finality Regulations, any UK system that has SFR protection as at exit day, will continue to receive these protections under UK law after exit day without further action. In addition, the Bank of England will be given new powers to grant permanent designation to non-UK (including EU) systems that are not governed by UK law and there will be a temporary SFR designation regime for EU systems currently designated under the SFD. In order to enter the temporary designation regime, the operator of the system must notify the Bank of England, prior to exit day, of its intention to enter the temporary designation regime. The effect of this would be to allow those EU systems that are currently designated by an EU member state (other than the UK) to benefit from continued settlement finality protection in respect of the insolvency of any of their UK participants until such time as they are granted permanent designation. Non-UK systems will not be required to apply for UK SFR designation as a matter of English law in order to have UK participants, but it is expected that an EU system may want to apply for designation in the UK if it has participants (including indirect participants that are considered as participants for the purposes of the SFR) established in the UK. An interim list of EU systems that have notified the Bank of England of their intention to receive settlement finality protection in the UK on the basis of this temporary regime can be found on the Bank of England’s website.[90]

In connection with this, it is worth noting that certain liabilities arising from participation in designated settlement systems are excluded from the scope of the liabilities that are subject to the bail-in powers of the UK resolution authority under the Banking Act 2009. Designated settlement systems for such purpose are designated systems under the SFD. The UK BRRD Regulations[91] (which will only necessarily come into effect in its current form in the event of a ‘hard’ Brexit) will limit designated settlement systems for the purposes of the excluded liabilities to systems designated under regulation 4 of the UK SFR.

In contrast, systems established in the UK pursuant to the SFR will, post-Brexit (and absent any agreement on this point as part of the withdrawal), may fall outside the scope of the SFD as implemented in EEA jurisdictions. This will depend on whether: (i) when implementing the Settlement Finality Directive, the particular EEA jurisdiction has looked to extend recognition to systems established in third countries (which may then capture systems established in the UK post-Brexit, assuming the necessary conditions have been met) or (ii) the jurisdiction has enacted specific Brexit-related legislation to extend protection to UK systems (which is the case in certain EU jurisdictions).

To the extent UK systems do fall outside the scope of the SFD as implemented in a particular EEA jurisdiction, insolvency courts in such jurisdiction would 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 (and could, for example, look to revoke a transfer order in such a system, or prevent the operation of a netting arrangement of a such a system). However, whether those courts could in fact take such action will then depend on the position under local insolvency law and whether it provides for those protections outside the implementation of the SFD. This has implications for EEA-based participants in systems established in the UK – from a practical perspective, those systems may ask for additional confirmations from those EEA-based participants regarding the position under the insolvency laws of their local jurisdiction.

 Bank Recovery and Resolution Directive

25. Post-Brexit, what additional provisions will counterparties need to include in their English law ISDA Master Agreements to address requirements under the BRRD when facing an EU counterparty?

If the UK does not join the EEA, then it will be a third country for the purposes of the EU Bank Recovery and Resolution Directive (“BRRD”). Pursuant to national rules implementing Article 55 of BRRD, EEA credit institutions and large investment firms must (subject to the exception discussed below) include contractual recognition of bail-in clauses into non-EEA law governed contracts, which, post-Brexit, will include English law governed ISDA Master Agreements.

The EBA has issued two opinions[92] in which it has emphasised the need for EEA resolution authorities and financial institutions to ensure that new non-MREL liabilities under UK law that might be subject to bail-in can be credibly written down or converted through the inclusion of contractual recognition of bail-in language.

Article 55(1) BRRD provides an exception to the contractual recognition of bail-in requirements where the resolution authority of the relevant member state determines that the liabilities can be subject to write down and conversion powers by the resolution authority of a member state pursuant to the law of the third country or to a binding agreement concluded with that third country.

Currently UK law provides two regimes for recognising resolution actions taken by foreign resolution authorities.

(1) Regulation 5 of the Credit Institutions (Reorganisation and Winding up) Regulations 2004 (the “UK CIR Regulations”) currently provides for the automatic recognition of resolution actions of EEA resolution authorities. However, the UK has enacted a statutory instrument, the Credit Institutions and Insurance Undertakings Reorganisation and Winding-up (EU Exit) Regulations 2019,[93] which removes this automatic recognition of EEA insolvency proceedings. Consequently, if these Regulations apply as currently drafted (which will only necessarily be the case in the event of a ‘hard’ Brexit), recognition under the UK CIR Regulations would not be available as a route to relying on the exception to Article 55(1) BRRD.

(2) Sections 89H and I of the Banking Act 2009 provides for the recognition of “third country resolution actions” unless one of the statutory grounds for refusal of recognition set out therein are met. “Third country resolution action”, as currently defined for the purposes of Sections 89H and I of the Banking Act, only captures actions under the law of a non-EEA jurisdiction. However, The Bank Recovery and Resolution and Miscellaneous Provisions (Amendment) (EU Exit) Regulations 2018 (the “BRRD Regulations”)[94] (which will only necessarily come into effect in the event of a ‘hard’ Brexit), amend the definition of “third country resolution actions” to capture resolution actions pursuant to the law of any country outside of the UK, thereby including EEA resolution actions.

It is unclear whether EEA resolution authorities would make a determination that Sections 89H and I of the Banking Act is sufficient for the purposes of the exception to Article 55(1) and it seems likely that any determination of the relevant EU resolution authority could only be formally made once the UK has left the EU (or if the Implementation Period applies, after the end of the Implementation Period) As a result, it is uncertain whether EEA credit institutions and large investment firms could rely on this exception to Article 55(1) BRRD in relation to English law contracts post-Brexit.[95]

Whilst not a requirement stemming from BRRD, certain EEA jurisdictions have also imposed similar requirements regarding contractual recognition of resolution stays for non-EEA law governed contracts. Where the EEA counterparty is located in a jurisdiction which has included such a requirement, that EEA counterparty will need to include language providing for contractual recognition of the relevant stays in English law governed ISDA Master Agreements post-Brexit. ISDA has obtained advice from counsel in France, Germany and Italy as to the impact of Brexit on the contractual recognition of resolution stays requirement implemented in those jurisdictions, including the relationship with the related ISDA published protocols and whether such obligation would apply during the Implementation Period (if this comes into effect).

 26. Are there any additional provisions which UK entities will need to include in their non-English law 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)?

Once the UK leaves the EU, the mutual recognition of resolution tools by other EEA member states pursuant to BRRD will no longer apply to a UK resolution of a UK bank. BRRD provides for cooperation agreements with resolution authorities in third countries and a process for recognition, either at an EU level or at member state level, of third country resolution measures, but neither is guaranteed. Consequently, after the UK’s withdrawal from the EU, EEA counterparties to non-English law governed agreements may not be bound by UK resolution measures such as contractual stays on enforcement of collateral or exercise of netting rights or application of bail-in to that contract.

The UK rules currently include requirements for contractual recognition of stays and bail-in to be included in third country law governed contracts (i.e. non-EEA law governed contracts).[96] As part of the onshoring of EU legislation, the PRA has published a policy statement, PS5/19[97] (and related appendices) setting out changes to the PRA Rulebook, including its approach to contractual recognition of bail-in and resolution stays language (in the event of a ‘hard’ Brexit). The amendments to the PRA Rulebook set out in PS5/19 include changing the definition of “third country” in the Glossary to the PRA Rulebook so that it means any country other than the United Kingdom. Consequently, the requirement to include contractual recognition of stays and bail-in will be extended, for all PRA regulated firms, to all EEA (non-UK) law governed contracts. However, UK institutions would only be required to comply with the contractual recognition of stay in resolution, and contractual recognition of bail-in, in all new EEA law governed financial contracts (or existing financial contracts that are materially amended) after exit day. For such purposes, EEA law governed ISDA Master Agreements under which new transactions are entered into post-exit day would be considered ‘materially amended’ and will therefore be brought into scope (i.e. only ‘dormant’ trading relationships will be out-of-scope, subject to the below). The FCA has published equivalent changes to its rulebook.[98]

The PRA has, nevertheless, noted in its consultation paper CP26/18 that, if a particular firm has existing EEA law governed liabilities at exit day which might constitute a substantive impediment to resolution, the Bank of England could use its power of direction to direct a firm to endeavour to re-negotiate such liabilities for the purposes of ensuring that the Bank of England’s powers to bail-in or exercise resolution stays would have effect under the relevant governing law.

The PRA, FCA and the Bank of England will, in the event of a no-deal Brexit, be provided with temporary transitional powers that can be used to grant transitional relief to firms in respect of onshoring changes.[99] The Bank of England and PRA policy statement PS5/19 (February version)[100] includes a transitional direction setting out how the Bank of England and PRA propose to exercise this power to grant temporary relief (this is in near-final form and the Bank of England and PRA have stated that they do not intend to publish the final version in light of the extension to the withdrawal period under Article 50 as they consider whether to make any changes to this transitional direction). PS5/19 provides that the PRA does not propose to grant transitional relief in respect of the contractual recognition of stays requirement, nor does it propose to grant transitional relief in respect of the contractual recognition of bail-in requirement in respect of any liabilities that are intended to count towards a firm’s minimum requirement for own funds and eligible liabilities (MREL). This means that any UK firm which has liabilities that are potentially subject to a stay or bail-in will need to include contractual recognition of stays and (in the case of MREL liabilities) bail-in wording in all new EEA law governed financial contracts (or existing financial contracts that are materially amended) after exit day. However, the PRA does propose to grant temporary transitional relief from the contractual recognition of bail-in rules for “phase two” liabilities, that is, any unsecured liabilities that are not debt instruments (which is expected to capture liabilities in respect of derivative master agreements that are not otherwise excluded from the contractual recognition of bail-in requirement by virtue of being “fully secured”). Accordingly, in the event that the Implementation Period does not come into effect, firms will not be required to include contractual recognition of bail-in terms in phase two liabilities from exit day until the expiry of the temporary relief (this is currently set as 30 June 2020). This creates some potential divergence between the time of application of the contractual recognition of bail-in requirement and contractual recognition of stays requirement post-Brexit. The FCA has similarly issued a transitional direction[101] (in final form, but contingent upon a ‘hard’ Brexit) setting out how it will apply the temporary transitional power to the contractual recognition of bail-in obligation. The FCA has similarly stated that in general they will not apply the temporary transitional power to the contractual recognition of bail-in obligation, except for any “debt instrument which is an unsecured liability” (where the temporary transitional power will be applied, again until 30 June 2020). This is similar in concept to “phase two” liabilities under the PRA rules, although the two terms are not identical. This should again largely capture liabilities in respect of derivative master agreements not otherwise excluded from the contractual recognition of bail-in requirement by virtue of being “fully secured”.

27. 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”)?

As set out in the response to Questions 25 (Additional provisions counterparties need to include in their English law ISDA Master Agreements to address requirements under the BRRD when facing an EU counterparty) and 26 (Additional provisions UK entities need to include in their non-English law 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), post Brexit,

EEA financial institutions will need to include,

(i) contractual recognition of bail-in in their English law governed ISDA Master Agreements pursuant to Article 55(1) of BRRD (unless the relevant EEA resolution authority determines that the liabilities of the EEA firm can be subject to write-down and conversion by it pursuant to English law or to a binding agreement concluded with the UK); and

(ii) where the EEA counterparty is located in a jurisdiction which imposes a requirement for contractual recognition of stays, a contractual recognition of such stays in their English law governed ISDA Master Agreements; and

UK financial Institutions will need to include,

(i) contractual recognition of bail-in in EEA law (i.e. non-UK law) governed agreements that are entered into or materially amended after exit day (i.e. any non-dormant trading relationships) (but subject to the temporary transitional relief to be provided by the PRA and FCA), and

(ii) (for firms subject to prudential regulation by the PRA) contractual recognition of stays in EEA law (i.e. non-UK law) governed agreements that are entered into or materially amended after exit day (i.e. any non-dormant trading relationships).

ISDA has assessed the impact of Brexit on the ISDA resolution stay and bail-in protocols. A summary of the current proposed approach for assisting ISDA members in complying with these requirements is set out in the table below:

Location of financial institution Governing law of contract Legacy Master Agreement New Master Agreement
Contractual recognition of bail-in requirement (the “Bail-in Requirement”)
EEA (i.e. entities potentially subject to BRRD resolution) EEA (non-English) Bail-in Requirement does not apply. Bail-in Requirement does not apply.
English Bail-in Requirement applies post-Brexit[102]. Parties can use Template EEA Bail-in Clause* to add applicable ISDA bail-in protocol wording OR adhere to protocol post exit day Bail-in Requirement applies post-Brexit[103]. Parties can use Template EEA Bail-in Clause to add applicable ISDA bail-in protocol wording OR adhere to the relevant bail-in protocol post exit day.
Non-EEA/English (e.g. NY) Bail-in Requirement applies pre-/post-Brexit. Applicable bail-in protocol adherence, or bail-in protocol wording, should already apply. Bail-in Requirement applies pre-/post-Brexit. Parties can use Template EEA Bail-in Clause to add applicable ISDA bail-in protocol wording OR adhere to the relevant bail-in protocol post exit day.
UK entities (i.e. entities potentially subject to UK resolution action) EEA (non-English) Bail-in Requirement does not apply in principle although the Bail-in Requirement will apply if the relevant agreement is materially amended post exit day e.g. by entering into a new transaction thereunder (subject to the temporary transitional relief).

Parties can use Template UK Bail-in Clause** to add 2016 bail-in protocol wording (including amendment in that agreement with respect to the definition of “UK Bail-in Power”).

Bail-in Requirement applies post-Brexit (subject to the temporary transitional relief).

Parties can use Template UK Bail-in Clause to add 2016 ISDA bail-in protocol wording (including amendment in that provision with respect to the definition of “UK Bail-in Power”).

English Bail-in Requirement does not apply. Bail-in Requirement does not apply.
Non-EEA/English (e.g. NY) Bail-in Requirement applies pre-/post-Brexit.

2016 ISDA bail-in protocol adherence, or bail-in protocol wording, should already apply.

Bail-in Requirement applies pre-/post-Brexit.

Parties can use Template UK Bail-in Clause to add 2016 ISDA bail-in protocol wording including amendment in that provision with respect to the definition of “UK Bail-in Power”).

Contractual recognition of stays requirement (the “Stay Requirement”)
EEA (i.e. entities subject to BRRD resolution) EEA (non-English) Stay Requirement does not apply Stay Requirement does not apply
English Stay Requirement applies post-Brexit. Parties can use relevant Template EEA Stay Clause*** to add applicable stay protocol wording OR adhere to protocol post exit day. Stay Requirement applies post-Brexit. Parties can use relevant Template EEA Stay Clause to add applicable stay protocol wording OR adhere to protocol post exit day.
Non-EEA/non-English (e.g. NY) Stay Requirement applies pre-/post-Brexit. Applicable stay protocol adherence, or stay language, should already apply. Stay Requirement applies pre-/post-Brexit. Parties can adhere to or bilaterally incorporate (using the relevant Template EEA Stay Clause) the applicable stay protocol.
UK entities (i.e. entities subject to UK resolution action) EU (non-English) Stay Requirement does not apply in principle although the Stay Requirement will apply if the relevant agreement is materially amended post exit day e.g. by entering into a new transaction thereunder.

Changes to ISDA stay resolution language required to reflect post-Brexit UK bank resolution regime. ISDA has prepared a revised version of the UK (PRA) Module to refer to the updated PRA Stay in Resolution Rules (this is in draft form, pending greater certainty as to the timing and final status of Brexit).

Stay Requirement applies

Changes to ISDA stay resolution language required to reflect post-Brexit UK bank resolution regime. ISDA has prepared a revised version of the UK (PRA) Module to refer to the updated PRA Stay in Resolution Rules (this is in draft form, pending greater certainty as to the timing and final status of Brexit).

 

English Stay Requirement does not apply Stay Requirement does not apply
Non-EEA/non-English (e.g. NY) Stay Requirement applies pre-/post-Brexit

Applicable ISDA resolution stay protocol adherence, or stay language, should already apply.

ISDA is considering whether any changes are required to the UK module already incorporated into legacy agreements

Stay Requirement applies pre-/post-Brexit

Changes to ISDA stay resolution language required to reflect post-Brexit UK bank resolution regime. ISDA has prepared a revised version of the UK (PRA) Module to refer to the updated PRA Stay in Resolution Rules (this is in draft form, pending greater certainty as to the timing and final status of Brexit).

 

  • *      Template EEA Bail-in Clause – This can be found in paragraph 5.3 of ‘Brexit – Template Clauses for ISDA Master Agreements’ as published by ISDA and available here. Members should read the FAQs related to this document (and also published by ISDA) before using the template clauses in their documentation.
  • **     Template UK Bail-in Clause – This can be found in paragraph 5.1 of ‘Brexit – Template Clauses for ISDA Master Agreements’ as published by ISDA and available here. Members should read the FAQs related to this document (and also published by ISDA) before using the template clauses in their documentation.
  • ***   Template EEA Stay Clause – This can be found in paragraph 5.4 to 5.6 of ‘Brexit – Template Clauses for ISDA Master Agreements’ as published by ISDA and available here. Members should read the FAQs related to this document (and also published by ISDA) before using the template clauses in their documentation.

Amendments to the ISDA Master Agreement and transfers of existing contracts

28. What amendments, if any, should market participants consider making to their ISDA Master Agreement?

(i) EEA credit institutions and investment firms should consider the need to include contractual recognition of bail-in and resolution stays in their English law governed agreements and UK credit institutions and investment firms should consider the need to include contractual recognition of bail-in and resolution stays in their EEA law governed agreements. See Question 27 (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”)?).

(ii) In addition, 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), and Question 16 (Access to the EU financial markets).

(iii) Market participants should also consider making certain changes to their documents in connection with the onshoring of EMIR into UK domestic law, in particular expanding confidentiality waivers to ensure that reporting to UK trade repositories under UK onshored EMIR post-Brexit is permitted. The ‘Brexit – Template Clauses for ISDA Master Agreements’ as published by ISDA and available here (and the related FAQs published by ISDA) describe the additional changes that could be made to ISDA Master Agreements and provide template wording for making such changes.

29. Should references in ISDA documentation to EU legislation be updated to contemplate equivalent UK legislation after the UK’s withdrawal from the EU?

It would be helpful and, at least in some instances, necessary, for references to EU legislation in ISDA documentation (including protocols) to be updated to contemplate the equivalent UK legislation after the UK’s withdrawal from the EU. See Question 28 (What amendments, if any, should market participants consider making to their ISDA Master Agreement?), which describes the documentation that ISDA has made available to facilitate such changes.

30. What is the process for transferring derivative transactions from an entity established in the UK to an entity established in the EU?

Given the loss of EU passporting rights when the UK leaves the EU (see Question 16.1 (EU firms’ ability to carry out derivatives business in the UK)), some UK market participants  are preparing to transfer some or all of their derivative relationships to EU affiliates or EU branches (although, once the UK is a ‘third country’ post-Brexit, this latter approach would only give access to counterparties in the relevant EU member state in which the branch is located).

A transfer of (English law governed) derivative transactions could potentially be effected 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.

(i) Novation: Transferring OTC derivative positions to a different legal entity, albeit in the same group, can be achieved by way of novation. Consistent with Section 7 of the ISDA Master Agreement, a novation will require specific consent to the transfer from the transferor (i.e. the UK entity), the transferee (i.e. the EU affiliate) and the remaining counterparty. A novation can be effected by using the 2002 ISDA Novation Agreement or the 2004 ISDA Novation Definitions, both of which are available on the ISDA website (http://www.isda.org/publications/pdf/NovationAgreement.doc). A payment between the transferee and the transferor will likely be required to reflect the mark-to-market value of the Transaction being transferred. To the extent there is any difference in collateral terms between, on the one hand, the transferor and the remaining party and, on the other hand, the transferee and the remaining party, an additional payment to or from the remaining party may arise. If there is no existing ISDA Master Agreement in place between the transferee and the remaining counterparty, typically a new ISDA Master Agreement will be required. If a Credit Support Annex or other collateral arrangement (e.g. an initial margin arrangement) is in place between the transferor and the remaining party, to the extent that continues to be required, the transferee and the remaining party will need to consider how to effect the transfer of that arrangement smoothly. If the EU affiliate will be entering into derivative transactions after Brexit, one advantage of novating existing transactions is that all transactions are able to form part of the same netting set.

A novation would ordinarily result in a loss of grandfathering for legacy transactions pursuant to the three EMIR clearing RTS and the margin RTS. However, the European Commission has adopted two regulatory technical standards (the “Clearing and Margin (Novations) RTS”)[104][105] that amend the three clearing RTS and the margin RTS to introduce a one year exemption period, in the event that the Implementation Period pursuant to the Draft Withdrawal Agreement does not come into effect, during which novations of non-cleared OTC derivatives that would (as a result of such novation) otherwise become subject to clearing or margining can be carried out without triggering the clearing or margining requirements. This exemption is limited to circumstances in which the novation is made from a UK entity to an EU entity. These regulatory technical standards have been amended[106] in light of the extension to the Article 50 withdrawal period – they will still come into effect provided that the Article 50 period is not extended beyond 31 December 2019. The US has introduced similar requirements providing an exemption from margin requirements for legacy swaps that were entered into prior to the applicable margin requirements taking effect and which are amended solely for the purpose of transferring the swap to a UK to an EU affiliate in the context of a no-deal Brexit.

(ii) Part VII Scheme: For UK authorised persons, an alternative would be to effect a court sanctioned banking business transfer scheme pursuant to Part VII of the Financial Services and Markets Act 2000 (a “Part VII Scheme”). Part VII Schemes are only available where the whole or part of the business to be transferred includes the accepting of deposits and so is not available for the transfer solely of derivative transactions. However, if the derivative trading business forms an integral part of a deposit-taking business and is being transferred along with the deposit-taking business, then a Part VII Scheme may be available. It provides an efficient way of transferring multiple transactions at once without the need for the consent of the counterparties to the transfer.

A Part VII Scheme is available for a transfer to an overseas entity, provided such entity meets the relevant authorisation and capital adequacy requirements for the business being transferred, although recognition of the transfer by the incoming EU member state will also depend on whether the transfer is a valid means of transferring the relevant assets and liabilities pursuant to the laws in the relevant EU member state.

The key conditions to a Part VII Scheme include (a) the UK transferor is authorised to accept deposits by the relevant UK regulator, (b) deposit-taking activities form an integral element of the business being transferred, (c) the transfer must involve the transfer of assets and liabilities, i.e. not a share transfer, (d) the transferee is authorised in the EU member state to carry on the business being transferred (including accepting deposits), and (e) the transferee has sufficient regulatory capital for the risks being transferred. As a practical matter, only agreements governed by English law will transfer automatically under a Part VII Scheme (as well as agreements governed by the laws of a limited number of other jurisdictions which recognise a transfer pursuant to a Part VII Scheme). The Part VII Scheme legislation will also operate to override any rights which become exercisable as a result of the Part VII Scheme (at least to the extent those rights are governed by English law).

The procedure itself involves various steps including regulatory scrutiny, two court hearings with the public having the right to object at the second hearing, and approval by the High Court. However, the length of the procedure should be balanced against the certainty and convenience of the outcome versus individual novations of multiple transactions and the requirement for individual counterparty consent.

(iii) Scheme of Arrangement: Other transfer mechanisms, such as a court-sanctioned scheme of arrangement under Part 26 of the Companies Act 2006 (a “Scheme of Arrangement”) may also be considered.

Schemes of Arrangement are used to effect a wide range of transactions, such as the transfer of the whole or part of a business. The key conditions include that (a) the scheme has to be approved at one (or more) meetings convened by the High Court for the purpose of considering the scheme, (b) the scheme has to be approved by a majority in number representing 75% in value of the relevant creditors or shareholders (as applicable) present at such meeting(s), (c) if the necessary voting thresholds are satisfied, the scheme has to be sanctioned by the court and (d) the court order has been delivered to the registrar. The sanction of a Scheme of Arrangement is subject to the exercise by the court of its discretion.

The procedure itself involves various steps. The relevant creditors or shareholders (as applicable) must be sent a notice summoning the creditors’ or shareholders’ meeting, along with an explanatory statement which sets out (amongst other things) the effects of the scheme. The procedure also involves two hearings, and approval by the High Court.

Consideration should be given as to whether the transfer of a derivative could amount to the novation, or entry into, of a new derivative Transaction triggering clearing and collateral requirements (as well as trade reporting requirements) under EMIR, unless subject to the exemption for clearing and margining pursuant to the Clearing and Margin (Novations) RTS.

(iv) Cross-border mergers: The Companies (Cross Border Mergers) Regulations 2007 implement in the UK the EU Directive on Cross-Border Mergers of limited liability companies (the “Cross-Border Mergers Directive”). The Cross-Border Mergers Directive has been implemented across the EU and so the regime is effective to merge any company (or companies) incorporated in the UK into a company incorporated in another EU member state.

The effect of the merger is that all the assets and liabilities of the transferor company (including employment contracts) are transferred to the transferee company without the need for counterparty or third-party consent. The transferor company ceases 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. It is not possible to select only certain assets and liabilities for the merger unless they are first transferred or hived-down to a new UK company which itself is then cross-border merged into the EU incorporated entity (however this initial step may require third party consents for the transfer into the new UK company which may remove one of the principal objectives of the cross-border merger).

The cross-border merger regime is not specific to financial services businesses and so, in contrast to a Part VII Scheme, there are no conditions on the regulatory status of the participating entities and there is no need for deposits to be included in the transferring business. This process also has the advantage of being effective in relation to all the assets and liabilities once approved by the ‘competent authority’ in the jurisdiction of the transferee and so does not carry the risk of a tail of business being left with the transferor. However, the effective transfer of assets and liabilities will not necessarily circumvent the contractual consequences of such transfer and, in contrast to a Part VII Scheme, there is no legislative override of contractual rights which become exercisable as a result of the merger.

Assuming a UK transferor entity, creditors of that entity may apply to the court for a meeting to be convened of the company’s creditors. If the court orders a creditors’ meeting, the merger terms must be approved by a certain majority of creditors. The court will need to be satisfied that creditors will not be adversely affected by the merger if a creditors’ meeting is to be avoided.

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. From finalisation of the cross-border documentation, the process can take several months to complete. An independent expert’s report is required in certain circumstances unless the shareholders of the merging companies agree otherwise.

The Cross-Border Mergers Directive contains extensive provisions regarding ‘employee participation’. Where the surviving entity is not a UK entity, the cross-border merger regime as implemented in the jurisdiction of the transferee will generally govern employee participation. Where the employee participation provisions apply, the process and length of time to implement them are often seen as a deterrent to using the cross-border merger regime.

(v) Societas Europaea: A Societas Europaea (“SE”) is a form of European public limited company established under the EU Societas Europaea Regulation (“EU SE Regulation”). One of the most useful aspects of the EU SE Regulation is that it specifically aims to facilitate the movement of companies across the EU. In principle, it would therefore be possible to relocate 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 SE under the EU SE Regulation and the associated UK regulations and then (b) the transfer of that SE’s registered office to another EU member state.

An SE can be formed in a number of different ways, including by merging two or more public companies into an SE where at least two of those companies are governed by the laws of different EU member states and also by converting a public limited company into an SE if, for at least two years, it has had a subsidiary company governed by the law of another EU member state.

An SE can only be registered once certain employee participation requirements have been satisfied (i.e. only once there has been a period of negotiation with an employee representative body to agree the basis on which employees will participate in the management/decision making of the SE). The level of employee participation required in the SE depends on the EU member state where the SE is to be registered.

The process of migrating the SE to another EU member state involves notification to shareholders and creditors as well as a directors’ solvency statement to the effect that (a) there are no grounds on which the SE could be found to be unable to pay its debts and (b) that the SE will be able to carry on business as a going concern for the 12 months following the proposed transfer.

It should be noted that it is not possible to complete the conversion process referred to above simultaneously or in parallel with the transfer process referred to above. This means that it would take several months for a UK public limited company to re-register as an SE and subsequently transfer to another EU member state.

To date, not many SEs have been established in the UK or other EU member states (with Germany and the Czech Republic being the exceptions).

31. Will any new arrangements be required to clear derivative transactions in the future?

Alternative arrangements for clearing, or repapering of existing clearing agreements, may be required in the following circumstances:

(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 EMIR 2.2 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.

For example, if euro denominated derivatives clearing is prohibited outside the EU, then a clearing member that is not currently a member of an EU clearing house clearing the relevant euro-denominated derivatives may choose to become a clearing member at such CCP, or transfer its business to an EU affiliate that is a member at such CCP. This might involve applications for membership of EU CCPs being made, changes to client clearing documentation (for example, to include clearing at EU CCPs not currently contemplated in the existing client clearing documentation) or entirely new suites of documentation being put in place with affiliated clearing members. See Questions 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?) and 20 (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) for further details on the current proposals and transitional relief suggested with respect to (ii) and (iii) – such proposals would not, however, seem to cover the client clearing part of the relationship (i.e. (iv) and (v)).  

European Benchmark Regulation

32. 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?

The European Benchmark Regulation[107] came into force on 30 June 2016 with the main obligations applying from 1 January 2018. The following two obligations will need to be considered in light of the impact of Brexit on the continued ability of EU market participants to reference a particular UK benchmark and of UK market participants to reference a particular EU benchmark:

(i) BMR Use Restriction: Pursuant to the Benchmark Regulation, EU supervised entities (which includes certain credit institutions, MiFID II investment firms, UCITS, pension funds and alternative investment funds) are only permitted to use an index (including an inter-bank offered rate such as LIBOR) that constitutes a ‘benchmark’ for the purposes of the European Benchmark Regulation, if such benchmark and its administrator appear on the register maintained by ESMA (such restriction, the “BMR Use Restriction”). The Benchmark Regulation, as directly applicable EU legislation, will be retained in the UK post-Brexit by the UK Withdrawal Act and, as part of the on-shoring process, the UK government has enacted a statutory instrument, the Benchmarks (Amendment and Transitional Provision) (EU Exit) Regulations 2019 (the “Benchmarks Amendment Regulations”), which will only necessarily come into effect in its current form in the event of a ‘hard’ Brexit.[108] Pursuant to the Benchmarks Amendment Regulation, the BMR Use Restriction will apply to UK supervised entities such that they may, subject to the transitional provisions of the Benchmarks Amendment Regulations, only use benchmarks which are on the UK register. The FCA will maintain the UK register of approved benchmarks and administrators for the purpose of the UK benchmarks regime.

On exit day, administrators that have already been authorised or registered in the UK by the FCA will be automatically included on the UK register. The same arrangement will apply to any third country benchmarks and/or administrators that have been recognised by the FCA or endorsed by UK administrators or supervised entities (with such endorsement authorised by the FCA) prior to exit day.

Benchmark administrators located outside of the UK (including, post Brexit, any EU located administrators) will be subject to the third country regime in the UK on-shored version of the Benchmark Regulation which will require the administrator or benchmark to become approved by equivalence, recognition or endorsement in the UK in order to be added to the UK register. This requirement will apply to any benchmarks/administrators that currently already appear on the ESMA register (unless they appear there as a result of an FCA decision). This requirement is likely to have the effect of causing a sudden loss of access by UK supervised entities to benchmarks (or their administrators) who appear on the ESMA register at exit day as a result of an approval by an EEA competent authority (other than the FCA). The Benchmarks Amendment Regulations therefore include a temporary registration regime under which any other benchmarks or administrators that appear on the ESMA register on the exit day will be temporarily included on the UK register for a 24 month period (subject to the administrator/ benchmark not being removed from the ESMA register or the FCA refusing an application for authorisation, registration, recognition or endorsement by the relevant administrator, in each case during that period). This will automatically enable continued use of these benchmarks by UK supervised entities for 24 months post-Brexit. During this twenty-four-month period, these third country administrators/benchmarks must become approved by the FCA through equivalence, recognition or endorsement to enable their continued use within the UK.

Where benchmarks/administrators do not appear on the ESMA register on exit day because the administrator is taking advantage of the transitional provisions under the European Benchmarks Regulation (which allows administrators until 1 January 2020 to apply for approval),[109] it could still be used by UK supervised entities pursuant to the transitional provisions under the European Benchmarks Regulation as onshored (except in the case where the relevant EU administrator applies for authorisation or registration under the European Benchmark Regulation and the application is refused).

In respect of EU supervised entities and the EU BMR Use Restriction, post-Brexit and in the absence of any transitional provisions implemented by the EU, UK administrators will become third country administrators and will have to seek one of the three routes to entry on the ESMA register available to such third country administrators: (a) an equivalence determination by the EU Commission, (b) endorsement by an EU authorised/registered administrator or EU supervised entity, or (c) recognition of the third country administrator by the competent authority of the member state of reference. The EU has so far not proposed any transitional provisions addressing Brexit for UK benchmark administrators. However, EU supervised entities should be able to take advantage of the existing transitional provisions under the EU Benchmarks Regulations for third country administrators enabling use of such benchmark until 1 January 2020, as confirmed in a statement from ESMA on 7 March 2019.[110]

(ii) Robust, written plans: EU/UK supervised entities are required to produce and maintain robust written plans on the action they would take in the event that either (a) the benchmark materially changes or ceases to be provided, or (b) the administrator is no longer authorised or admitted to the relevant register (i.e. the UK register for UK supervised entities and the EU register for EU supervised entities), 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 not be admitted to the Register. These fallback plans will need to be reflected in the contractual relationship between the supervised entity

[1]    In a vote held in the UK House of Commons on 15 January 2019 the UK Government’s motion to approve the Draft Withdrawal Agreement was heavily defeated, with 432 members of parliament voting against and 202 for. In a vote held on 12 March 2019, the UK House of Commons again voted to reject this motion. On 29 March 2019, the UK House of Commons again voted against approving the Draft Withdrawal Agreement by a margin of 58 votes (unlike the other two votes, this was not a ‘meaningful vote’ for the purposes of section 13 of the Withdrawal Act because it was a vote on the Draft Withdrawal Agreement without the associated Political Declaration).

[2]    For further analysis as to the doctrine of illegality, please refer to the Financial Markets Law Committee paper entitled U.K. Withdrawal from the E.U.: Issues of Legal Uncertainty Arising in the context of Robustness of Financial Contracts”.

[3]    The Markets in Financial Instruments Directive II – Directive 2014/65/EU

[4]    Communication from the European Commission on 13 November 2018 “Preparing for the withdrawal of the United Kingdom from the European Union on 30 March 2019: A Contingency Action Plan

[5]    This advice does not take into account any contingency measures proposed by EU27 member states, which are still evolving (see footnote 38).

[6]    This advice does not take into account any contingency measures proposed by EU27 member states, which are still evolving (see footnote 38).

[7]    This advice does not take into account any contingency measures proposed by EU27 member states, which are still evolving (see footnote38).

[8]    Appendix to PRA Policy Statement PS5/19 – EU Exit Instrument: The Technical Standards (European Market Infrastructure) (EU Exit) (No. 3) Instrument 2019

[9]    Commission Delegated Regulation (EU) 2016/2251

[10]   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”).

[11]   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”).

[12]   Section 8 (Dealing with deficiencies arising from withdrawal) Withdrawal Act

[13]   A Statutory Instrument is ‘made’ when signed by a minister (or person with authority) to signify that the Statutory Instrument is final, and not in draft. However, note that the provisions in the Statutory Instrument will only come into force on the effective day (exit day).

[14]   The Law Applicable to Contractual Obligations and Non-Contractual Obligations (Amendment etc.) (EU Exit) Regulations 2019, which was made on 29 March 2019.

[15]   Article 37(13) of AIFMD (The Alternative Investment Fund Managers Directive – Directive 2011/61/EU), 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.

[16]   Both the French and Irish law netting opinions have already been updated to cover the French and Irish law governed ISDA Master Agreements and a number of other jurisdictions for which the opinions have been updated since publication of the French and Irish law ISDA Master Agreements in July 2018 also include these templates.

[17]   The Brussels I Recast Regulation – Regulation 1215/2012

[18]   A negotiated solution in this area cannot, of course, be guaranteed. As of the date of this note, in the context of the Article 50 withdrawal negotiations between the EU27 and the UK, the issue of the ongoing application of, inter alia, the rules in the Brussels I Recast Regulation remains, however, on the agenda and has been addressed in the Draft Withdrawal Agreement, having previously been the subject of an EU27 documents published in July 2017 (click here) and a response from the UK Government in August 2017 (click here).

[19]   The Political Declaration regarding the future relationship between the EU and the UK published alongside the Draft Withdrawal Agreement does not make any reference to any aspirations in this regard.

[20]    See footnote 13

[21]   The Civil Jurisdiction and Judgments (Amendment) (EU Exit) Regulations 2019, which was made on 4 March 2019.

[22]    The Civil Jurisdiction and Judgments (Hague Convention on Choice of Court Agreements 2005) (EU Exit) Regulations 2018, which was made on 30 October 2018.

[23]    Communication from the European Commission on 11 April 2019 – “Questions and answers related to the United Kingdom’s withdrawal from the European Union in the field of civil justice and private international law

[24]   The Political Declaration regarding the future relationship between the EU and the UK published alongside the Draft Withdrawal Agreement does not make any reference to any aspirations in this regard.

[25]   The Political Declaration regarding the future relationship between the EU and the UK published alongside the Draft Withdrawal Agreement does not make any reference to any aspirations in this regard.

[26]   The Markets in Financial Instruments Directive II – Directive 2014/65/EU

[27]   The draft political declaration setting out the framework for the future relationship between the European Union and the United Kingdom of Great Britain and Norther Ireland, as agreed at negotiators’ level and agreed in principle at political level (the “Political Declaration”)

[28]   The Markets in Financial Instruments Regulation – EU Regulation 600/2014

[29]   Directive 2001/24/EC

[30]   Directive 2009/138/EC

[31]   Regulation (EU) 2015/848

[32]   Article 30 of the Credit Institutions (Reorganisation and Winding-up) Directive, Article 290 of the Solvency II Directive and Article 16 of the EIR.

[33]    See footnote 22

[34]    The Markets in Financial Instruments Directive II – Directive 2014/65/EU

[35]   The Capital Requirements Directive IV – Directive 2013/36/EU

[36]   This concept of reverse solicitation is reflected in art 46(5) of MiFIR

[37]   This advice does not take into account any contingency measures proposed by EU27 member states, which are still evolving (see footnote 38).

[38]   EU27 member states that put in place/proposed contingency measures as of April 2019 included major jurisdictions such as: Belgium; France; Germany; Italy; the Netherlands; Spain; and Sweden. Multiple other EU jurisdictions have also put in place contingency measures, whilst others have not put in place any contingency measures. The scope of contingency measures varies across jurisdictions. For example, contingency measures put in place in Belgium and the Netherlands were designed to provide licensing relief in relation to existing and new business by UK firms subject to specific conditions, whilst contingency measures in France did not provide general licensing relief.

[39]    The Markets in Financial Instruments Regulation – EU Regulation 600/2014

[40]    Markets in Financial Instruments (Amendment) (EU Exit) Regulations 2018

[41]    The UK regulators have been granted these powers under the Financial Services and Markets Act 2000 (Amendment) (EU Exit) Regulations 2019. Further details on the use of these transitional powers can be found on the FCA and PRA webpages on the topic.

[42]    Meaning taking deposits and granting credit for its own account.

[43]    Regulation on wholesale energy market integrity and transparency – Regulation (EU) No 1227/2011

[44]    The Electricity and Gas (Powers to Make Subordinate Legislation) (Amendment) (EU Exit) Regulations 2018, and the Electricity and Gas (Market Integrity and Transparency) (Amendment) (EU Exit) Regulations 2019

[45]    Regulation concerning the Registration, Evaluation, Authorisation and Restriction of Chemicals – Regulation (EC) No 1907/2006

[46]   REACH etc. (Amendment etc.) (EU Exit) Regulations 2019

[47]    Directive establishing a scheme for greenhouse gas emission allowance trading – Directive 2003/87/EC (as amended and/or supplemented)

[48]    Defined in Article 3 of Commission Regulation (EU) No 389/2013 (the “Registry Regulation”) as “the person designated by the Commission pursuant to Article 20 of Directive 2003/87/EC”.

[49]    Defined in Article 3 of the Registry Regulation as “a process in the Union registry that includes the transfer of an allowance, a Kyoto unit, an annual emission allocation unit or a portion of the credit entitlement from one account to another account”.

[50]    Article 66 (Transfers of allowances or Kyoto units initiated by a trading account) of the Registry Regulation: “Upon request of a holder of a trading account, the central administrator shall ensure that the Union Registry shall carry out a transfer of allowances or Kyoto units to a holding or trading account in the Union Registry unless such a transfer is prevented by the status of the initiating account”.

[51]    https://www.gov.uk/government/publications/meeting-climate-change-requirements-if-theres-no-brexit-deal

[52]    https://www.gov.uk/government/publications/meeting-climate-change-requirements-if-theres-no-brexit-deal

[53]  Greenhouse Gas Emissions Trading Scheme (Amendment) (EU Exit) Regulations 2019/107.

[54]    Draft Withdrawal Agreement, Article 94.

[55]  https://www.gov.uk/government/consultations/the-future-of-uk-carbon-pricing

[56]    The EEA Passport Rights (Amendment, etc., and Transitional Provisions) (EU Exit) Regulations 2018

[57]    FCA Policy Statement PS 19/5: Brexit Policy Statement

[58]    PRA Policy Statement: PS5/19 and supplement regarding finalisation of rules

[59]   Financial Services Contracts (Transitional and Saving Provision) (EU Exit) Regulations 2019

[60]    See footnote 41

[61]    This advice does not take into account any contingency measures proposed by EU27 member states, which are still evolving (see footnote 38).

[62]  The Over the Counter Derivatives, Central Counterparties and Trade Repositories (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2018

[63]    The Central Counterparties (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2018

[64]    The Trade Repositories (Amendment and Transitional Provision) (EU exit) Regulations 2018

[65]    Draft Financial Services (Implementation of Legislation) Bill (as amended in public bill committee)

[66]    In each case within the meaning of Commission Delegated Regulation (EU) No 285/2014.

[67]    Commission Delegated Regulation (EU) 2016/2251

[68]    The Over the Counter Derivatives, Central Counterparties and Trade Repositories (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2018

[69]    Central Counterparties (Amendment, etc., and Transitional Provision (EU Exit) Regulations 2018

[70]    Trade Repositories (Amendment and Transitional Provision (EU Exit) Regulations 2018

[71]    Commission Implementing Decision (EU) 2018/203

[72]    Commission Implementing Decision (EU) 2019/544

[73]    Press Release, 5 April 2019 – ESMA has adopted new recognition decisions for the three UK CCPs and the UK CSD in the event of a no-deal Brexit on 12 April

[74]    Proposal for a Regulation amending Regulation (EU) No 1095/2010 establishing a European Supervisory Authority (European Securities and Markets Authority) and amending Regulation (EU) No 648/2012

[75]    Public Statement, 9 November 2018 – Contingency plans of Credit Rating Agencies and Trade Repositories in the context of the United Kingdom withdrawing from the European Union

[76]    Public Statement, 1 February 2019 – “On issues affecting reporting, recordkeeping, reconciliation, data access, portability and aggregation of derivatives under Article 9 EMIR in the case of UK withdrawal from the EU without a transitional agreement

[77]    The Central Counterparties (Amendment, etc., and Transitional Provision (EU Exit) Regulations 2018

[78]    Joint Statement by UK and US authorities on continuity of derivatives trading and clearing post-Brexit, 25 February 2019

[79]    https://www.bankofengland.co.uk/financial-stability/financial-market-infrastructure-supervision

[80]    https://www.bankofengland.co.uk/news/2018/july/temporary-permissions-and-recognition-regimes

[81]    The Financial Services Contracts (Transitional and Saving Provision) (EU Exit) Regulations 2019

[82]    Trade Repositories (Amendment and Transitional Provision (EU Exit) Regulations 2018

[83]    The Over the Counter Derivatives, Central Counterparties and Trade Repositories (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2018

[84]    The Over the Counter Derivatives, Central Counterparties and Trade Repositories (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2018

[85]    The Central Counterparties (Amendment, etc., and Transitional Provision (EU Exit) Regulations 2018

[86]    Trade Repositories (Amendment and Transitional Provision (EU Exit) Regulations 2018

[87]    Joint Statement by UK and US authorities on continuity of derivatives trading and clearing post-Brexit, 25 February 2019

[88]    The Financial Markets and Insolvency (Amendment and Transitional Provision) (EU Exit) Regulations 2019

[89]    The Financial Markets and Insolvency (Amendment and Transitional Provision) (EU Exit) Regulations 2019f

[90]    24 July 2018 – https://www.bankofengland.co.uk/-/media/boe/files/letter/2018/letter-to-eu-systems-designated-under-the-settlement-finality-directive.pdf?la=en&hash=67C3509971A3381713439132785EA57AF9F0CA67 and 6 November 2018 – https://www.bankofengland.co.uk/-/media/boe/files/letter/2018/follow-up-letter-to-eu-systems-designed-under-the-settlement-finality-directive.pdf.

[91]    https://www.bankofengland.co.uk/financial-stability/financial-market-infrastructure-supervision

[92]    The Bank Recovery and Resolution and Miscellaneous Provisions (Amendment) (EU Exit) Regulations 2018

[93]    October 2017 – https://www.eba.europa.eu/documents/10180/1756362/EBA+Opinion+on+Brexit+Issues+%28EBA-Op-2017-12%29.pdf and June 2018 – https://www.eba.europa.eu/documents/10180/2137845/EBA+Opinion+on+Brexit+preparations+%28EBA-Op-2018-05%29.pdf.

[94]    Credit Institutions and Insurance Undertakings Reorganisation and Winding-up (EU Exit) Regulations 2019

[95]    The Bank Recovery and Resolution and Miscellaneous Provisions (Amendment) (EU Exit) Regulations 2018

[96]    Members considering including an Article 55(1) contractual recognition of bail-in provision in their English law governed ISDA Master Agreement should seek legal and tax advice as to the implications.

[97]    PRA Rulebook, Stay in Resolution rules and Contractual Recognition of Bail-in rules. FCA Handbook, IFPRU 11.6 Contractual Recognition of Bail-in

[98]    BoE/PRA Policy Statement PS5/19

[99]    https://www.handbook.fca.org.uk/instrument

[100]  https://www.gov.uk/government/publications/proposal-for-a-temporary-transitional-power-to-be-exercised-by-uk-regulators

[101]  BoE/PRA Policy Statement PS5/19

[102]  https://www.fca.org.uk/publication/handbook/prudential-transitional-direction.pdf

[103]  Unless the relevant EEA resolution authority determines that the liabilities of the EEA firm can be subject to write-down and conversion by it pursuant to English law or to a binding agreement concluded with the UK.

[104]  Unless the relevant EEA resolution authority determines that the liabilities of the EEA firm can be subject to write-down and conversion by it pursuant to English law or to a binding agreement concluded with the UK.

[105]  Commission Delegated Regulation (EU) 2019/396   

[106]  Commission Delegated Regulation (EU) 2019/397   

[107]  For clearing: https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32019R0565&from=EN and for margin: https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32019R0564&from=EN

[108]  The EU Regulation on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds (Regulation (EU) 2016/11).

Documents (19)