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  3. EU/UK derivatives trading venues must have equivalency post Brexit, says ISDA
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EU/UK derivatives trading venues must have equivalency post Brexit, says ISDA


21 September 2020 London
Reporter: Natalie Turner

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Image: belya / Adobestock.com
It is “critical” that the EU and the UK recognise the equivalence of each other's derivatives trading venues after the Brexit transition period ends on 31 December, says the International Swaps and Derivatives Association (ISDA).

Failure to reach such an agreement would there “will be significant issues” for counterparties subject to the derivatives trading obligation and regulations, the trade body argues.

It would also be “likely to exacerbate the fragmentation of liquidity in over-the-counter derivatives markets between the EU and the UK resulting from Brexit”.

ISDA sets out its position in a new paper addressing the impact of the failure to make these equivalence decisions by the end of the transition period and the potential other mitigating actions available to the EU and the UK.

The EU and the UK should make equivalence decisions in relation to their respective derivatives trading venues to ensure EU and UK counterparties can continue to trade with each other.

Derivatives trading venues “will face conflicting requirements” where the derivatives fall within the scope of the EU and UK DTOs (in-scope derivatives), i.e. the most liquid EUR, USD and GBP interest rate swaps and index credit default swaps (CDS) says ISDA.

This conflict will arise where those EU and UK counterparties wish to trade with each other in
in-scope derivatives on a cross-border basis or where an EU counterparty trades in in-scope derivatives through a branch in the UK with a UK counterparty, or vice versa.

ISDA is recommending that the best way of mitigating the impact of this conflict is for the EU and the UK to recognise the equivalence of their respective legal and supervisory frameworks for their trading venues.

The association is urging both the EU and the UK to make appropriate equivalent decisions with respect to each other's regulated markets so that UK and EU exchange-traded derivatives are not re-characterised as OTC derivatives for the purposes of the European Markets Infrastructure Regulation as it applies in the EU and the UK.

The calls for derivatives equivalency follow news that there may be a delay on the decision to allow clearing houses in London to continue clearing euro transactions for EU-based clients after 31 December.

According to a report by Reuters, the delay is due to Britain’s plan to breach part of the Brexit divorce settlement.
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