The agencies’ joint statement applies to certain legacy swaps affected by Brexit.
The Office of the Comptroller of the Currency and Federal Reserve Board have issued a joint statement on treatment of certain legacy swaps affected by Brexit and the Swap Margin Rule. The joint statement addresses the ability of a covered swap entity subject to the OCC’s or Fed’s jurisdiction, respectively, to service the covered swap entity’s cross-border clients.
The joint statement was issued in advance of the end of the transition period during which the laws of the European Union have continued to apply in the United Kingdom after the UK’s withdrawal (commonly referred to as Brexit) from the European Union. The joint statement explains that the staff of each of the Federal Reserve and OCC will exercise discretion to not recommend taking enforcement action if a covered swap entity is a party to a legacy swap that was amended under certain conditions, consistent with the intent of § 237.2(h)(2) of Regulation KK (Swap Margin Rule).
The joint statement includes specific conditions limiting the scope of this no-action relief. The no-action relief applies until Jan. 1, 2022, or one year after the expiration of EU passporting rights—whichever is later—unless amended, extended, or superseded in writing before that time.
The no-action statement would allow legacy swaps, which are determined to be those entered into prior to the firm’s compliance date with the Swap Margin Rule, to maintain grandfathered treatment if transferred out of the United Kingdom to the EU or the United States, subject to specific conditions and time limitations.
The OCC’s swap margin rule applies to certain national banks, federal savings associations, and federal branches and agencies of foreign banking organizations.
In July 2020, the Fed, OCC, Federal Deposit Insurance Corporation, Farm Credit Administration, and Federal Housing Finance Agency amended the Swap Margin Rule to assist covered swap entities as they prepared for "Brexit." The amendment was intended to address a covered swap entity’s ability to service its cross-border clients in the event that the UK withdrew from the EU without a Withdrawal Agreement pursuant to Article 50(2) of the Treaty on European Union. A Withdrawal Agreement between the UK and EU was ratified in January 2020 and includes a transition period that, absent an extension, expires on Dec. 31, 2020.
The agencies’ statement is intended to provide certainty to covered swap entities currently operating in the affected jurisdictions as to the legacy status of transferred swaps in light of the uncertainty regarding whether the EU will agree to a free trade agreement granting UK companies passporting rights related to financial services.
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