The impact of Brexit on derivatives

The impact of Brexit on derivatives

Nigel Dickinson, partner, and Victoria Nevins, associate, at Norton Rose Fulbright LLP discuss the potential implications of Brexit on the derivatives market.

Has the UK’s vote in favour of Brexit had any immediate impact on derivatives transactions?

On 23 June 2016 the UK voted to leave the EU. As a result of this vote there are not any immediate legal changes that need to be made to the financial regulations which regulate derivatives transactions in the UK. This was confirmed in statements from the UK Financial Conduct Authority and the Governor of the Bank of England on 24 June 2016 and therefore market participants should continue to comply with their obligations under UK and EU law.

This vote has however had an immediate impact on derivatives transactions as a result of current market volatility. Some of the immediate consequences of the UK’s decision to leave on derivatives transactions include:

Decline in market value of certain collateral assets

The value of certain collateral assets has declined which in turn has triggered increased collateral posting obligations, increased haircuts and has resulted in certain assets becoming ineligible, in each case making derivatives trading more expensive.

Mark-to-market exposures increased

The mark-to-market exposures under existing derivatives transactions have increased which has subsequently triggered a greater number of margin calls.

Decline in credit ratings of certain counterparties

The credit ratings/creditworthiness of certain market participants have been negatively impacted by the vote. As a result, it may be more expensive for such market participants to enter into new derivatives transactions and to perform their obligations under their existing derivatives transactions. Market participants should also consider whether any credit deterioration of their counterparty has triggered any credit related termination events or events of default applicable to such counterparty under their derivatives documentation.

Trigger Events

As a result of the current market volatility, the financial pressures on certain market

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