The International Swaps and Derivatives Association (ISDA), has released a paper outlining the impact that Brexit may have on the derivatives industry should the EU and UK not recognise the equivalence of each other’s derivatives trading venues after the transition period ends later this year.
To ensure minimal impact of the UK’s withdrawal from the EU, ISDA have stated that appropriate equivalence decisions need to be made. ISDA mentions: “In the absence of appropriate equivalence decisions, EU counterparties subject to the DTO applicable in the EU (the EU DTO) and UK counterparties subject to the DTO as it applies in the UK (the UK DTO) wishing to trade derivatives with each other after the end of the transition period will face conflicting requirements where the derivatives fall within the scope of the EU and UK DTOs (in-scope derivatives), i.e., the most liquid EUR, USD and GBP interest rate swaps and index credit default swaps (CDS).”
Furthermore, ISDA states that appropriate equivalence decisions will ensure that EU and UK exchange traded derivatives (ETDs) are not recharacterised as over-the-counter (OTC) derivatives for the purposes of the European Market Infrastructure Regulation (EMIR) as it applies in the EU and UK.
The report further examines how equivalence is the best solution for addressing the issues in relation to Britain’s exit from the EU and to avoid fragmentation of liquidity in the OTC derivatives markets between the EU and the UK.
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