Agencies provide no-action relief to facilitate transfers of certain legacy swaps
On December 11, the Federal Reserve Board and the OCC issued a joint statement addressing the ability of a covered swap entity to service cross-border clients. (See also OCC Bulletin 2020-108.) As previously covered by InfoBytes, the Fed, OCC, FDIC, FHFA, and Farm Credit Administration adopted an interim final rule (IFR) in 2019 to amend the Swap Margin Rule to assist covered swap entities preparing for the United Kingdom’s withdrawal from the European Union. The IFR addresses the situation where the withdrawal occurs without a negotiated agreement and entities located in the UK transfer existing swap portfolios that face counterparties located in the EU over to affiliates located in the US or the EU. Specifically, the IFR provides that certain swaps under this situation will not lose their “legacy” status—will not trigger the application of the Swap Margin Rule—if carried out in accordance with the conditions of the rule. The OCC notes that the absence of an agreement between the UK and the EU that addresses passporting rights (defined in the joint statement as the “EU’s system of cross-border authorizations to engage in regulated financial entities) would result in UK entities losing the ability to continue servicing their EU clients when the transition period expires.
The joint statement explains that the Fed and OCC “will not recommend that their respective agencies take action if a covered swap entity is a party to a legacy swap that was amended under [certain] conditions.” The no-action relief is applicable to the transfer of legacy swaps completed by the later of January 1, 2022, or one year after the expiration of EU passporting rights, unless amended, extended, terminated, or superseded, and is intended “to provide certainty to covered swap entities currently operating in the affected jurisdictions as to the legacy status of transferred swaps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.”