AFME and ISDA paper on contractual continuity issues in OTC derivatives post-Brexit
On 30 July 2018, AFME and ISDA published a paper looking at the challenges faced by UK and EU firms and their clients seeking to avoid uncertainty by transferring their legacy cross-border OTC derivative contracts to an appropriately licensed EU27 affiliate in advance of Brexit.
The paper discusses both the availability and operation of statutory transfer mechanisms and novation. In terms of statutory transfer schemes the paper focuses on Part VII schemes, cross-border mergers, European Company Statute and schemes of arrangement. In relation to novation the paper argues that this is not a ‘silver bullet’ and that there are significant execution and timing challenges to a large scale novation of OTC derivative contracts in favour of an entity in a different Member State.
The final part of the paper discusses potential solutions that policymakers and regulators could consider. For example, the EU and the UK could seek to give firms and their clients and counterparties the highest level of legal certainty by including in the Withdrawal Agreement provisions allowing firms to continue to service these existing contracts after the end of the transition period and until their final maturity, disposal or completion. The paper adds that this solution would align with the treatment of the ECB and EIB under the current draft of the Withdrawal Agreement and that it would ensure that where clients and counterparties do not or cannot agree to a novation or the termination of a legacy contract, firms can continue to service their requirements until the contract runs off.