Increasingly looming ‘Brexit’ forces bank regulators, other agencies, to issue rule for transferring swaps

Qualifying swaps may be transferred from a United Kingdom entity to an affiliate in the European Union or the United States without triggering new margin requirements under an interim final rule issued Friday by the banking regulators and two other federal agencies in what they said was a response to the possibility of a non-negotiated “Brexit.”

The federal banking agencies, acting with the Federal Housing Finance Agency (FHFA) and the Farm Credit Administration (FCA), said the rule (issued for a 30-day comment period) applies to legacy swaps entered into before applicable margin requirements took effect. The rule, the agencies said, is generally consistent with similar relief under consideration by other international organizations.

The UK is now in the midst of figuring out how to withdraw from the European Union, as decided by voters in a plebiscite three years ago. Referred to commonly as “Brexit,” the UK’s parliament has failed to agree on a process for withdrawing from the trade bloc without causing major disruptions, particularly to its financial system. The deadline for doing that is March 29.

The rule amends the “Swap Margin Rule” of the banking regulators and other agencies that require swap dealers and security-based swap dealers under their jurisdictions to exchange margin with their counterparties for swaps that are not centrally cleared. The regulators noted that the Swap Margin Rule takes effect under a phased compliance schedule from 2016 through 2020; dealers covered by the rule continue to hold swaps in their portfolios that were entered into before the effective dates of the rule, the agencies noted. Those swaps are grandfathered from the Swap Margin Rule’s requirements until they expire according to their terms, the agencies said.

“There are currently financial services firms located within the United Kingdom (U.K.) that conduct swap dealing activities subject to the Swap Margin Rule,” the final rule states. “The U.K. has provided formal notice of its intention to withdraw from the European Union (E.U.) on March 29, 2019. If this transpires without a negotiated agreement between the U.K. and E.U., these entities located in the U.K. may not be authorized to provide full-scope financial services to swap counterparties located in the E.U.”

The interim final rule, the regulators said, is intended to address one aspect of the “scenario likely to ensue” — entities located in the U.K. transfer their existing swap portfolios that face counterparties located in the E.U. over to an affiliate or other related establishment located within the E.U. or the U.S.

“The Agencies seek to address industry concerns about the status of grandfathered swaps in this scenario, so the industry can focus on making preparations for swap transfers,” the rule states. “These transfers, if carried out in accordance with the conditions of the interim final rule, will not trigger the application of the Swap Margin Rule to grandfathered swaps that were entered into before the compliance dates of the Swap Margin Rule.”

Agencies adopt interim final rule to facilitate transfers of legacy swaps