Board of Governors of the Federal Reserve System

The Board of Governors of the Federal Reserve System (“Federal Reserve”) and the Office of the Comptroller of the Currency (“OCC”) are issuing the attached joint statement to explain that the staff of each of the Federal Reserve and OCC will exercise discretion to not recommend taking enforcement action if a covered swap entity is a party to a legacy swap that was amended under certain conditions, consistent with the intent of § 237.2(h)(2) of Regulation KK (“Swap Margin Rule”). The no action statement would allow legacy swaps – those entered into prior to the firm’s compliance date with the Swap Margin Rule – to maintain grandfathered treatment if transferred out of the United Kingdom to the EU or the United States, subject to specific conditions and time limitations.

In July 2020, the Federal Reserve, OCC, Federal Deposit Insurance Corporation, Farm Credit Administration, and Federal Housing Finance Agency (together “agencies”), amended the Swap Margin Rule to assist covered swap entities as they prepared for the event commonly described as “Brexit” (“Brexit amendment”).¹ The Brexit amendment was intended to address a covered swap entity’s ability to service its cross-border clients in the event that 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 amendment provides that any legacy swap that is currently exempt from the Swap Margin Rule would not become subject to margin requirements by virtue of being modified solely for the purpose of transferring such swap from a UK entity to an affiliate located in the EU or the United States. The relief does not apply if the UK and EU entered into a Withdrawal Agreement because the agencies formulated the Brexit amendment on the premise that a Withdrawal Agreement would preserve “passporting rights” between the UK and EU.

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. 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. Interested parties have represented to the agencies 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.

The Federal Reserve and the OCC believe it is appropriate to provide certainty to covered swap entities currently operating in the affected jurisdictions as to the legacy status of transferred swaps in light of the uncertainty regarding whether the 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 covered swap entity is a party to a legacy swap that was amended under the conditions specified in the joint statement.

Reserve Banks are asked to distribute this letter to the supervised organizations in their districts that are subject to Regulation KK and to appropriate supervisory staff.  In addition, institutions may send questions via the Board’s public website.²

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