On December 11, 2020, the Office of the Comptroller of the Currency (OCC) and the Board of Governors of the Federal Reserve (Federal Reserve) issued a statement extending until after the expiration of the Brexit transition period relief previously granted to legacy swaps of swap dealers (SDs) subject to their jurisdiction from the prudential margin rules for uncleared swaps (prudential margin rules) if amended in connection with a Brexit-related transfer. Legacy swaps are swaps entered into before the applicable compliance date of the prudential margin rules. A legacy swap can become subject to the prudential margin rules if it is later amended or novated on or after the applicable compliance date.

For details on the prudential margin rules, see Practice Note, US Derivatives Regulation: Margin Collection and Exchange Requirements for Uncleared Swaps: Prudential Margin Rules.

On March 29, 2019, the Federal Reserve, the OCC, the Federal Deposit Insurance Corporation (FDIC), the Farm Credit Administration (FCA), and the Federal Housing Finance Agency (FHFA) collectively issued an interim final rule (Brexit IFR) amending the prudential margin rules to assist covered swap entities (CSEs), which are certain national banks, federal savings associations, and federal branches and agencies of foreign banking organizations that are SDs subject to the prudential margin rules, in preparing for Brexit (see Legal Update, Federal Bank Regulators Exempt Brexit-Related Legacy Swap Transfers from Prudential Margin Rules).

The Brexit IFR was intended to address a CSE's ability to service its cross-border clients if the United Kingdom (UK) withdrew from the European Union (EU) without a withdrawal agreement pursuant to Article 50(2) of the Treaty on European Union. In the event that no withdrawal agreement was ratified between the UK and EU, the Brexit IFR provides that any legacy swap that is currently exempt from the prudential margin rules would not become subject to margin requirements by virtue of being amended solely for the purpose of transferring such swap from a UK entity to an affiliate located in the EU or the United States. A withdrawal agreement between the UK and EU was ratified in January 2020 and includes a transition period (the Brexit transition period) that, absent an extension, expires on December 31, 2020. The EU continues to recognize UK participation in the EU single market on an interim basis during the Brexit transition period.

However, the withdrawal agreement does not address the continuation of passporting rights for UK entities to provide financial services in the EU at the expiration of the Brexit transition period. The agencies understand that the UK and EU are negotiating a free trade agreement that may not include passporting rights for UK entities. The absence of a free trade agreement that addresses passporting rights would result in UK entities losing the ability to continue servicing their EU clients when the Brexit transition period expires. CSEs subject to the prudential margin rules currently operate in the affected jurisdictions.

The Federal Reserve and the OCC believe it is appropriate to provide certainty to CSEs regarding the status of their legacy swaps, consistent with the intent of the Brexit IFR, in light of the uncertainty regarding whether the UK and EU will agree to a free trade agreement granting UK companies passporting rights related to financial services. Therefore, Federal Reserve and OCC staff would not recommend that their respective agencies take action if a CSE is a party to a legacy swap that is amended under the following conditions:

The joint statement includes specific conditions limiting the scope of this no-action relief. The no-action relief applies until January 1, 2022, or one year after the expiration of European Union passporting rights – whichever is later – unless amended, extended, or superseded in writing before that time.