On March 15, 2019, five US prudential bank regulators (collectively, the agencies) adopted and requested public comment on an interim final rule (IFR) allowing qualified swaps to be transferred from UK entities to European Union (EU) or US affiliates in response to the possibility of the UK's non-negotiated withdrawal from the EU, known as a no-deal Brexit, without triggering prudential margin requirements for uncleared swaps (prudential margin rules).

The agencies are the Federal Reserve Board (FRB), Office of the Comptroller of the Currency (OCC), Federal Deposit Insurance Corporation (FDIC), Farm Credit Administration, and Federal Housing Finance Agency.

In the event of a no-deal Brexit, UK-based financial service firms that are swap dealers (SDs) and security-based swap dealers (SBSDs) subject to the prudential rules that engage in swap dealing activities that are subject to the prudential margin rules will not be authorized to provide full-scope financial services to swap counterparties in the EU. As a result, they may not be able to perform certain operations in relation to their legacy swaps with EU clients, and may therefore attempt to transfer their swaps to an appropriately authorized EU or US affiliate.

Similarly, financial entities may either face UK counterparties that request to transfer their swaps to an affiliate or other related establishment, or choose to engage in various reorganizations or consolidations of their swaps.

Though the prudential margin rules generally do not apply to legacy swaps, a legacy swap that is amended or novated on or after the applicable compliance date becomes subject to the prudential margin rules. Because such Brexit-related swap transfers would require an amendment of the transferred swaps, and absent the IFR, amended legacy swaps would lose their legacy status and could become a covered swap subject to initial margin (IM) and variation margin (VM) requirements under the prudential margin rules (see Practice Note, The Dodd-Frank Act: Margin Collection and Exchange Rules for Uncleared Swaps: Final Prudential Margin Rules).

The IFR allows qualified swap transfers to occur in this context without triggering the application of the prudential margin rules to legacy swaps entered into before the compliance dates for the prudential margin rules, which are being phased in under a compliance schedule that began in September 2016 and will be completed in September 2020 (see Practice Note, The New ISDA® Credit Support Annexes and Global Margin Compliance for Uncleared Swaps).

The IFR provides that in the event of a no-deal Brexit, a legacy swap may be transferred and amended without revising the swap date as long as the transfer:

The IFR is consistent with analogous Brexit relief provided by the CFTC from corollary CFTC margin rules for uncleared swaps (see Legal Update, CFTC Exempts Brexit-Related Legacy Swap Transfers from CFTC Margin Rules).

The IFR became effective on March 19, 2019 and permits transfers for a period of one year after a UK withdrawal. The one-year period commences at the point at which the law of the EU ceases to apply in the UK without a withdrawal agreement. Public comment will be accepted until April 19, 2019.