Trade bodies representing the global futures market has urged the UK not to diverge from European regulation on derivatives, following Britain’s vote to leave the EU.
According to the Futures Industry Association (FIA) in a memorandum on the Brexit, it says the vote to leave could mean UK regulatory rules impacting derivatives counterparties could start to diverge from the equivalent EU rules.
“This would effectively leave those counterparties with cross-border operations with a dual compliance burden,” the FIA states.
In addition, without an EU membership, the FIA has warned the UK would “no longer be able to exert as much (if any) influence on the content of any relevant EU financial services regulation.”
The FIA has called for the UK to ensure that the Mifid II passporting system will not be affected by the Brexit, and that collateral and netting arrangements will not be impacted.
However, it stated Britain’s vote to leave the EU will not have any impact on the legal certainty of existing contracts.
Similarly, the International Swaps and Derivatives Association (ISDA) stated the vote will also not require contractual changes between counterparties.
“Now the UK has voted to leave, ISDA will convene applicable working groups and hold a series of industry calls to ensure derivatives market participants are prepared,” ISDA stated.
It may be possible that porting, defaults or credit-related termination events may arise, the FIA said in a memorandum of understanding (MOU), however “it seems unlikely that performance under existing contracts will become impossible or illegal so as to trigger related termination provisions under standard cleared derivatives agreements.”
Existing regulation on derivatives markets, such as EMIR, will continue to exist in the UK.
“Given the importance of the UK derivatives markets, the strong likelihood is that the UK government will be focused on ensuring that current protections for derivatives and collateral arrangements continue in effect and that cross-border trading is not adversely affected,” states the FIA.