In November 2020, the CFTC published two no-action letters extending previously granted no-action relief related to Brexit. The relief was intended to provide “greater certainty to the global marketplace” in connection with Brexit. The no-action letters, as discussed below, primarily address requirements applicable to swap dealers, but nevertheless may assuage concerns by end-users and other market participants over potential Brexit-related disruptions.
The UK left the EU on January 31, 2020 and entered into a transition period set to expire on December 31, 2020. (Notably, to prepare for the expiration of the transition period, the UK government passed the European Union (Withdrawal) Act 2018, which, upon the expiration of the transition period, will “transpose” certain EU law and regulations into UK law and regulations, and grant authority vested in certain EU institutions to the Financial Conduct Authority and certain other UK institutions.) These recent no-action letters seek to ensure that certain longstanding no-action relief, “comparability determinations,” and exemptive orders originally issued for EU entities will be available for UK entities following the expiration of the transition period.
In particular, the first of these no-action letters, Letter 20-39 (November 24, 2020), addresses various “comparability determinations” by which the CFTC has recognized that compliance by swap dealers with certain EU laws and regulations constitutes compliance with corresponding CFTC requirements. Letter 20-39 also addresses a CFTC exemptive order from 2017 exempting certain EU trading facilities from registration with the CFTC as swap execution facilities. Upon the expiration of the Brexit transition period, Letter 20-39 will allow a swap dealer to comply with relevant UK laws and regulations in the same manner and subject to the same conditions contained in the relevant EU comparability determinations, and UK-authorized trading facilities identified in the 2017 CFTC exemptive order will be allowed to remain exempt from CFTC registration as swap execution facilities.
The second no-action letter, Letter 20-40 (November 24, 2020) will, upon the expiration of the transition period, cause certain existing no-action relief originally from 2012 and 2013 to apply to or reference UK laws, regulations, and entities as it does with respect to EU laws, regulations, and entities. The 2012 and 2013 no-action relief in question provides, among other things, (i) relief from required registration as an introducing broker or commodity trading advisor for certain swap dealer affiliates in the EU and their employees, and (ii) that a swap dealer may, subject to certain conditions, comply with the European Market Infrastructure Regulation (EMIR) risk mitigation rules in lieu of the CFTC’s risk mitigation rules.
The CFTC has at various times indicated its desire to enhance certainty around the Brexit transition. These recent no-action letters note that CFTC staff “has been engaged with staff of the relevant UK authorities to learn about the regulatory and supervisory framework that will apply in the UK upon the expiration of the transition period.” Given the complexity of the Brexit transition, further CFTC relief and other pronouncements may be expected, including the no-action relief regarding margin and clearing requirements also discussed in this newsletter.