Italy: Hard Brexit: An Insight On Derivatives

Last Updated: 26 April 2019
Article by Davide Valli and Luca Alfonso Liberti

Last Monday night 8 April 2019, also the Commons approved the bill forcing the premier Theresa May to delay Brexit beyond the next 12 April, date when the hard Brexit should be triggered, i.e. the withdrawal of the United Kingdom from the European Union without an agreement.

Looking forward to the forthcoming political developments, although at the moment the hard Brexit seems unlikely, given the importance of derivatives with UK counterparties also in relation to financing agreements governed by Italian law, we deem appropriate to analyse the emergency instruments adopted by the EU and by the national authority concerning derivatives in a hard Brexit scenario.

In the event of a no deal Brexit, the English banks, as well as the UK central counterparties for derivatives, will lose their European passport and the consequent right to provide financial services in favour of entities resident in the other Member States.

This circumstance would jeopardise the operational continuity in various sectors of the financial markets, including derivatives. It is enough to recall that only the ICE Clear Europe, one of the three UK central counterparties, has positions in credit default swap for about 1,600 billion of dollars.

In order to avoid such risk, the European Union, on the one hand, and the Member States on the other hand, have introduced certain measures, based on the temporary principle of equivalence and aimed at allowing the European companies to continue trading with the English counterparties for a transition period, avoiding the issues related to the early termination of several derivative contracts. Such measures shall apply only if a withdrawal agreement is not reached pursuant to art. 50, paragraph 2, of the Treaty on European Union.

In order to identify the applicable interim regime, it is necessary to distinguish the standard derivatives entered into with central counterparties (i.e. the intervening guarantor institutions if one of the parties of the derivative is declared bankrupt) from the uncleared derivatives, those without a central counterparty and tailored with reference to each company. The interim regime for standard derivatives is issued directly by the European Union while the interim regime for uncleared derivatives is governed by domestic rules.

Starting from the EU rules, on 19 December 2018 the European Commission adopted certain emergency measures applicable in case of hard Brexit. Among these, we highlight the temporary and conditional equivalence decision for 12 months to ensure that there will be no disruption in central clearing of derivatives. In this respect, on 17 February 2019, the ESMA (European Securities and Markets Authority) announced that the three central counterparties currently established in the United Kingdom (ICE Clear Europe, LCH Limited and LME Clear Limited) will benefit of temporary licenses to continue to operate on derivatives with European Union banks.

Furthermore, pursuant to two delegated regulations, the Commission provided for a facilitating novation, for a fixed period, of over-the-counter derivatives contracts with a counterparty established in the United Kingdom to replace that counterparty with a counterparty established in the Union. The transfer of such contracts in favour of an EU counterparty will take place maintaining the exempted status, i.e. by way of derogation to the reporting requirements set out under article 9 of Regulation (EU) no. 648/2012 (EMIR), which would not be applicable to the British central counterparties following an eventual hard Brexit.

Coming now to the national legislation, the Italian Legislative Decree no. 22 of 25 March 2019 (Brexit Decree) governed, inter alia, the OTC derivatives existing on the withdrawal date and not eligible for central clearing. Specifically, subject to notification in favour of the competent authorities, UK banks and UK investment firms operating under the regime of the freedom to provide services provisions will be able to negotiate only with eligible counterparties and professional clients (as identified under art. art. 6, paragraph 2quinquies, let. a), and paragraph 2sexies, let. a) of the Italian Finance Act) and exclusively for the management of "life cycle events" (including the amendment and the perfection of new contracts) of the uncleared derivatives.

With regard to the UK banks and UK investment firms operating through Italian branches, the Brexit Decree allow them to continue to carry out the same activities (only for the transition period and subject to notification in favour of the competent authorities) without specifying additional restrictions.

All the British institutions (both those operating under the freedom to provide services regime or those acting through Italian branches) that, after the transition period, intend to conduct business in Italy, shall submit a specific authorization within 6 months starting from the transition period (art. 3, paragraph 7, of Brexit Decree).

Lastly, by way of derogation from the above deadline, pursuant to art. 4, paragraph 4, of Brexit Decree, the UK banks and UK investment firms will be able to carry on the management of the life cycle events of OTC derivatives existing on the withdrawal date and not eligible for central clearing, even in the event of failure to notify the competent authorities or failure to submit the authorization provided under art. 3, paragraph 7, of Brexit Decree, for a limited period of time, respectively, of 6 months from the withdrawal date or 6 months from the expiry of the term for submission of the authorization.

The abovementioned measures aim to safeguard the financial stability of the European Union, mitigating risks in a sector in which individual measures adopted by market operators would be insufficient.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions