Relief issued by the US Commodity Futures Trading Commission resolves any doubts that UK firms, as well as their swap counterparties and affiliates, may have had about whether no-action relief would continue to apply to UK firms after Brexit. The relief allows UK entities to rely on existing no-action relief issued in relation to the EU.
In the lead-up to Brexit, the US Commodity Futures Trading Commission (CFTC or the Commission) has been taking steps to ensure consistency and continuity of CFTC regulatory obligations to which United Kingdom (UK) firms are subject. The Commission has issued relief that permits UK entities to rely on existing no-action relief involving the European Union (EU), and although the relief is directed to UK entities, the entire market benefits from greater regulatory certainty.[1] For example, registration relief currently exists for a swap dealer’s affiliates that engage in activities (such as soliciting, negotiating, structuring, recommending, and/or accepting as agent swap transactions on behalf of the swap dealer) that would otherwise bring an affiliate within the introducing broker or commodity trading advisor definition, as long as the affiliate satisfies various conditions.[2] One of these conditions requires that the affiliate be registered or licensed with, or subject to regulation by, a financial services, prudential, or banking regulator in “a country that is a member of the European Union” (among other countries).[3] The Commission’s most recent relief allows UK firms to rely on this registration relief, notwithstanding the fact that the UK would not be a member of the EU upon the occurrence of Brexit. The relief resolves any doubts about CFTC registration that UK affiliates, and their US-based affiliates, may have had as a result of their planning in connection with Brexit.
In a recent statement, the CFTC, Bank of England (BoE), and UK Financial Conduct Authority (FCA) confirmed that firms operating in the UK and United States would continue to be able to rely on existing relief or provide services to US or UK firms, as applicable, on the same basis as they currently provide services, providing continuity and regulatory certainty to market participants who may feel the brunt of Brexit. Subsequent to the statement, the CFTC’s Divisions of Market Oversight (DMO), Clearing and Risk (DCR), and Swap Dealer and Intermediary Oversight (DSIO and, collectively with DMO and DCR, the Divisions) issued no-action relief confirming the extension of no-action relief to UK firms.[4]
In the statement, the CFTC also announced its intention to extend relief granted to EU firms to UK firms upon Brexit. On April 5, the Divisions issued no-action relief to permit UK entities to rely on existing relief applicable to EU member state firms. The relief will be effective “if and when the UK withdraws from the EU,” subject to the conditions and expiration dates of the existing no-action relief.[5] The Divisions provided UK firms confirmation that the following no-action letters would continue to apply to them after Brexit:
In addition, DMO and DSIO issued relief to confirm that, effective upon the UK’s withdrawal from the EU, existing relief would continue to apply to UK firms. The relevant relief includes substituted compliance for EU entity-level and transaction-level requirements (Dec. 27, 2013) and substituted compliance for EU margin requirements for uncleared swaps (Oct. 18, 2017) (EU Comparability Determinations), and an exemption of multilateral trading facilities and organized trading facilities authorized within the EU from the requirement to register as swap execution facilities (Dec. 8, 2017) (Exemptive Order and, collectively with the EU Comparability Determinations, the Existing Commission Actions).
In the event that the UK withdraws from the EU without a negotiated agreement (a no-deal Brexit), DSIO has provided no-action relief for registered swap dealers that are subject to UK regulation if, instead of complying with CFTC regulations as they relate to the EU Comparability Determinations, they comply with UK laws and regulations transposed pursuant to the European Union (Withdrawal) Act 2018.[11] The DSIO relief will expire on the earlier of (1) the effective date of any comparability determination issued by the CFTC for the UK to the extent that such determination encompasses the subject matter of EU Comparability Determinations; or (2) the date that is six months from the date of the UK’s withdrawal from the EU.[12] Alternatively, if the EU and UK ratify a withdrawal agreement with a “Transition Period” during which EU law and EU regulatory, budgetary, supervisory, judiciary, and enforcement instruments and structures continue to apply to the UK as if it were still an EU member state (a soft Brexit), DSIO staff will provide the same relief during the Transition Period while it determines whether to recommend that the CFTC make technical amendments to the EU Comparability Determinations to clarify the precise manner in which the determinations should apply after the UK is no longer an EU member state.[13] The DSIO’s soft Brexit relief will expire on the earlier of (1) the effective date of any technical amendments to the EU Comparability Determinations; or (2) the expiration of the Transition Period.[14]
In connection with the Exemptive Order, DMO provided relief that applies in the event of either a no-deal Brexit or a soft Brexit, providing certainty not only to UK swap trading facilities but to swap counterparties that trade on these facilities. In the Exemptive Order, the Commission granted EU multilateral trading facilities (MTFs) and organised trading facilities (OTFs) an exemption from swap execution facility (SEF) registration, allowing swap counterparties to satisfy the trade execution requirement in Section 2(h)(8) of the Commodity Exchange Act of 1936, as amended (the Act), if they engage in swaps on the MTFs and OTFs specified in the Exemptive Order.[15] The DMO relief confirms that UK MTFs and OTFs, and swap counterparties that trade on UK MTFs and OTFs, may avail themselves of the Exemptive Order’s relief by providing (1) no-action relief from SEF registration to an MTF or OTF that is authorized within the UK and listed in Appendix A to the Exemptive Order; and (2) clarification that a counterparty subject to the trade execution requirement of Section 2(h)(8) of the Act is in compliance with this requirement if the counterparty executes a swap subject to the trade execution requirement on such a UK MTF or OTF.[16] With respect to a no-deal Brexit, the relief expires on the earlier of (1) the effective date of any CFTC-issued exemptive order for MTFs and OTFs authorized within the UK; or (2) the date that is six months from the date of the UK’s withdrawal from the EU.[17] If there is a soft Brexit, DMO staff will determine whether technical amendments to the Exemptive Order are necessary to clarify the precise manner in which the Exemptive Order applies to UK-authorized MTFs and OTFs.[18] The relief will expire, in the event of a soft Brexit, on the earlier of (1) the effective date of any amendment to the Exemptive Order; or (2) the expiration of the Transition Period.[19]
The joint statement also addressed the status of central counterparties (CCPs). HM Treasury, BoE, and the CFTC announced that they have prioritized, and are cooperating on, the process of making equivalence and recognition decisions regarding CFTC-registered CCPs. In the event of a no-deal Brexit, BoE confirmed that US CCPs may continue to provide services in the UK and to UK firms on the same basis as they currently provide services under the UK’s “temporary recognition regime” for non-UK CCPs, which lasts for up to three years with a possibility of extension. According to the statement, four CFTC-registered CCPs have notified the BoE of their intention to rely on this regime. In addition, HM Treasury confirmed in the statement that the European Commission’s equivalency decisions related to risk mitigation (including margin requirements for uncleared derivatives) and trading venues will continue to apply after Brexit.
In addition, the CFTC, BoE, and FCA announced that they would continue their supervisory cooperation, including by updating the BoE and CFTC memorandum of understanding in connection with the UK’s forthcoming recognition of CFTC-registered CCPs, and two FCA and CFTC memoranda of understanding covering certain firms in the derivatives and alternative investment funds industries.[20] The CFTC also confirmed that UK CCPs registered with the CFTC will be able to continue providing services in the United States after Brexit in the same manner.
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[1] See, e.g., CFTC No-Action Letter No. 19-09 (Apr. 5, 2019).
[2] CFTC No-Action Letter No. 12-70 (Dec. 31, 2012).
[3] Id. at 5.
[4] CFTC No-Action Letter No. 19-08 (Apr. 5, 2019); CFTC No-Action Letter No. 19-09.
[5] CFTC No-Action Letter No. 19-09 at 1, 3.
[6] See supra notes 2-3 and related text.
[7] CFTC No-Action Letter No. 13-45 (July 11, 2013) (providing relief to registered swap dealers and major swap participants (MSPs) from CFTC Risk Mitigation Rules (as defined in the letter) for transactions where (1) one of the counterparties is established in the EU or otherwise subject to EMIR; (2) one of the counterparties is a US person; and (3) one of the counterparties is a swap dealer or MSP registered with the Commission, so long as the registered swap dealer or MSP complies with the EMIR Risk Mitigation Rules (as defined in the letter)).
[8] CFTC No-Action Letter No. 17-64 (Nov. 30, 2017) (providing relief to a non-US swap dealer or a non-US MSP established in Australia, Canada, the EU, Japan, or Switzerland that is not part of an affiliated group in which the ultimate parent entity is a US swap dealer, US MSP, US bank, US financial holding company, or US bank holding company, for failure to comply with the swap data reporting requirements of Part 45 and Part 46 of the CFTC’s regulations, with respect to its swaps with non-US counterparties that are not guaranteed affiliates, or conduit affiliates, of a US person, subject to conditions).
[9] CFTC No-Action Letter No. 17-66 (Dec. 14, 2017) (providing relief to certain swap counterparties from compliance with provisions of the Commission’s exemption from the swap clearing requirement for affiliated counterparties, provided that the counterparties satisfy an alternative compliance framework).
[10] CFTC No-Action Letter No. 17-67 (Dec. 14, 2017) (permitting an eligible affiliate counterparty that executes a swap transaction with another eligible affiliate counterparty to execute such a swap without complying with the trade execution requirement in Section 2(h)(8) of the Act).
[11] CFTC No-Action Letter No. 19-08 at 3. Upon a no-deal Brexit, the European Union (Withdrawal) Act 2018 “will transpose relevant EU law and regulations into UK law and regulations, and grant existing authority vested in certain EU institutions to the Financial Conduct Authority, the Bank of England including the Prudential Regulation Authority, and Her Majesty’s Treasury.” Id. at 2.
[12] Id.
[13] Id. at 3.
[14] Id.
[15] Id. at 4.
[16] Id.
[17] Id. at 5.
[18] Id.
[19] Id.
[20] Joint Statement by UK and US Authorities on Continuity of Derivatives Trading and Clearing Post-Brexit, CFTC Release No. 7876-19 (Feb. 25, 2019).