On 8 November 2018, the European Securities and Markets Authority (ESMA) published a final report with draft regulatory technical standards (RTS) proposing to amend the three Commission Delegated Regulations on the clearing obligation (Commission Delegated Regulations (EU) No 2015/2205, No 2016/592 and No 2016/1178) under the European Markets Infrastructure Regulation.
The draft RTS propose, in the context of the UK’s withdrawal from the EU, to introduce a limited exemption in order to facilitate the novation of certain non-centrally cleared OTC derivative contracts to EU counterparties during a specific time-window. The amendments would only apply if the UK leaves the EU without the conclusion of a withdrawal agreement – a no deal scenario.
The draft RTS allows UK counterparties to be replaced with EU ones without triggering the clearing obligation. This limited exemption would ensure a level playing field between EU counterparties and the preservation of the regulatory and economic conditions under which the contracts where originally entered into. The window for the novation of non-centrally cleared OTC derivative contracts which fall under the scope of this amending regulation would be open for twelve months following the withdrawal of the UK from the EU. Counterparties can, however, start repapering their contracts ahead of the application date, making the novation conditional upon a no-deal Brexit, given the conditional application date of this amending regulation.
The final report has been sent to the European Commission to submit the draft technical standards for endorsement in the form of Commission Delegated Regulations. Following the endorsement, they are then subject to review by the European Parliament and the Council of the EU.