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FMIA & BREXIT: Recognition of the UK derivatives regulations

Martin Liebi Director, Legal, PwC Switzerland 06 Mar 2019

FINMA provisionally recognises the UK provisions on clearing, reporting, and risk mitigation as equivalent to the Swiss ones. This is the first step towards enabling market participants to comply with the Swiss derivatives regulation by fulfilling the corresponding UK obligations.

FINMA has provisionally recognised the EU derivatives regulation (EMIR) provisions on the clearing-, reporting- and risk mitigation obligation as equivalent to the Swiss ones. These EU provisions will no longer apply in the UK in the near future. The UK will, however, transpose these obligations into domestic law (EMIR transposition act). On 21 February 2019, FINMA provisionally recognised the UK clearing, reporting, and risk mitigation provisions as equivalent to the Swiss ones by issuing Guidance 01/2019. FINMA’s provisional recognition of equivalence will enter into force when the British parliament passes the respective act.

The aforementioned recognition of foreign law as equivalent is one of two preconditions for enabling market participants to comply with the Swiss derivatives regulation (FMIA) by adhering to the corresponding foreign obligations (substituted compliance). The second precondition is the recognition of foreign financial market infrastructures, such as central counterparties or trade repositories by FINMA. This requires that financial market infrastructures, such central counterparties or trade repositories, are already recognised by FINMA.

Market participants within the scope of the Swiss derivatives regulation could benefit from the substituted compliance regime in the following scenarios:

  1. A Swiss bank trades on its own account in an interest rate swap subject to the clearing requirement with a UK broker. By clearing the transaction on LCH Ltd., both parties comply with their domestic derivatives regulation.
  2. A Swiss subsidiary forms part of an international banking group. The OTC derivatives agreements for all entities within the group are executed in the UK. The Swiss subsidiary intends to trade on its own account in OTC derivatives with a UK counterparty that is not part of the group. The Swiss subsidiary does not need to add a Swiss finish to the documentation governing the bilateral exchange of collateral to comply with the respective duty under the Swiss derivatives regulation.

These are only a few fictitious and simplified cases used to illustrate potential benefits of the substituted compliance regime. Please do not hesitate to contact us if you wish to discuss how your organisation could make use of this regulatory development.

Next steps

This provisional recognition of equivalence will enter into force as soon as the British parliament passed the EMIR transposition act. Market participants may already start to assess to what extent their derivatives trading activity will be impacted by this development and to identify opportunities to streamline their derivatives regulation related processes.

 

Contact us

Martin Liebi

Martin Liebi

Director, Legal, PwC Switzerland

Tel: +41 58 792 28 86

Silvan Thoma

Silvan Thoma

Manager, PwC Switzerland

Tel: +41 58 792 1817