Like many people, I woke up on Friday June 24 expecting to hear the UK had voted to remain in the European Union (EU). The final polls had suggested the Remain campaign was ahead, and sterling had begun to rally the day before. A prominent member of the Leave campaign had all but conceded late on the Thursday night. As I went to bed, early results from Gibraltar and Newcastle were in favor of remaining. Like many people, regardless of how they voted, I was therefore caught by surprise when I switched on morning news.
The vote by the UK to leave the European Union (EU) is a momentous event, and will have significant ramifications on the political, economic and financial landscape in both the UK and the EU. In the immediate aftermath, financial markets have been volatile, and the political fallout severe. Two weeks after the vote, there is considerable uncertainty about the ultimate form of any negotiated exit.
But there are some things we already know for sure. For one thing, the UK continues to be part of the EU, and will remain a member for some time yet. Once the UK government serves formal notice of its intention to withdraw via Article 50 of the Treaty on the Functioning of the European Union, it will have at least two years to negotiate a settlement. During that time, existing European regulations and treaties will continue to apply – as this statement from the UK Financial Conduct Authority makes clear.
We also know that the referendum vote to leave the EU will not, by itself, have any immediate consequences on the legal certainty of derivatives contracts, nor will it require any contractual change. Nothing will fundamentally change in the immediate term. That’s not to say derivatives users shouldn’t begin to consider future implications. To help with this process, ISDA has published analysis that highlights potential issues that counterparties will need to consider, including the impact on the choice of English law as the governing law for an ISDA Master Agreement.
Now the UK has voted to leave, ISDA will convene applicable working groups and hold a series of industry calls to ensure market participants are prepared for future developments. The first of those calls took place last week, in partnership with law firm Linklaters. This webinar briefing set out issues touching on passporting rights, the impact on clearing, trade reporting and margining, and legal and documentation. Close to 4,000 people listened in.
The overriding message was that little will fundamentally change in the near term: those UK firms subject to the European Market Infrastructure Regulation (EMIR) and the forthcoming revised Markets in Financial Instruments Directive and regulation will continue to have to comply at the moment. However, the implications post-Brexit will depend on the exit model that is agreed between UK and EU authorities at the end of the two-year negotiation period. That will determine whether, for example, passporting arrangements will continue to apply, and whether EU entities subject to the clearing obligation under EMIR will be able to clear through UK central counterparties.
ISDA’s top priority is to work with UK and EU authorities – as well as other affected jurisdictions – to resolve any cross-border differences and harmonize rule sets. Our goal is to ensure that we have consistent regulation to support deep pools of liquidity and risk management for our membership.
It is clear there is a lot of work to do in the months and years ahead. There is a lot of uncertainty. It’s vitally important we have a deliberate and organized process to provide financial, legal and operational certainty going forward.
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