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Global Treasury

Brexit No-Deal Could Be Big Deal for Swaps

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October 17, 2018

A Brexit with no deal in place will mean a host of issues for MNCs

Brexit 209As concerns mount about a ‘no-deal’ Brexit, the International Swaps and Derivatives Association (ISDA) and several other financial-industry associations recently published a detailed report about its likely impact on the over-the-counter (OTC) derivatives market, leaving corporates with plenty to think about.

A no-deal Brexit, without a transition period and other mitigating steps, would leave swap market participants suddenly having to comply with different regulatory regimes when the UK leaves the European Union, scheduled for March 29, 2019. The UK would become a third-party country for the purposes of EU regulation.

“In that sense, the UK and US would be in the same boat,” said Eric Juzenas, director of global compliance and regulation at Chatham Financial, adding that UK financial institutions would have to analyze and comply with each EU country’s specific rules for non-EU institutions engaging in swap-related services.

An example, Mr. Juzenas said, is that some jurisdictions may allow UK bankers to provide some services to a local company so long as it is the local company that reaches out to the UK firm, and others may not. However, this is mostly for one-off situations.

The clear message that EU regulators have been providing, added Mr. Juzenas, is that if you want to provide investment services for derivatives in the EU as a regular business, you need to have an EU passport or meet the third-country requirements of each EU country you want to operate in. Countries tend to be more lenient regarding institutional business and services that don’t require holding customer funds, he added, but it would nevertheless require reviewing each country’s rules, which would be a very involved process.

Since corporates are exempt from clearing OTC swaps, typically relying on financial dealers to transact their hedges, most would not be directly impacted by a no-deal Brexit. However, the potentially indirect effects deserve consideration. The report, titled “The impact of Brexit on OTC derivatives: Other ‘cliff edge’ effects under EU law in a ‘no deal’ scenario,” points out that such a scenario would primarily impact UK and EU banks and their clients. Nonetheless, those clients could include US multinational corporations, especially big users of commodities, if they have swap-trading desks and operations in the UK or EU, Mr. Juzenas said.

“A treasury affiliate in London, depending on the nature of its operations in the UK, may have to look at what Brexit means for them because of Brexit’s impact on dealers,” Mr. Juzenas said.

He noted that US MNCs already must deal with multiple jurisdictions, and the biggest impact of a no-deal exit would likely be further bifurcation in the derivative markets. “Now a US MNC with a UK operation may also have to look at having an EU operation depending upon how easy and costly it is to transact across UK and EU borders. Or maybe they move their UK operation to the EU, he said, adding that financial institutions may similarly have to set up a second OTC-swap trading operation in the other jurisdiction, increasing their operational costs as well as capital requirements.

From a corporate perspective, he said, how their counterparties choose to adapt to a no-deal Brexit could impact where the corporate locates treasury executives to do deals, whether liquidity maybe split, and if there is less liquidity.

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