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Brexit would cause major legal issues for derivatives market: ISDA
[LONDON] A British exit from the European Union (EU), or Brexit, would raise legal challenges for the world's US$550 trillion derivatives market and create potential barriers for regulators dealing with a failed cross-border bank, a top industry body said on Friday.
The International Swaps and Derivatives Association (ISDA) mapped out the legal issues the global sector would face if Britain voted in favour of leaving the EU on June 23.
Millions of interest rate, credit default and commodities swaps contracts are traded under ISDA's so-called "master agreement" or template.
Most come under British or American law, irrespective of which country the end users is based, a reflection of how London and New York are at the heart of the market.
ISDA, which takes no position on whether Britain should remain a member of the EU or leave, spelled out in its paper what derivatives users would face under Brexit to help the industry with its contingency planning.
"If a Brexit event were to happen, details of any industry calls or meetings would be sent to ISDA members separately," it said.
It questions whether the widespread choice of English law for derivatives contracts between two non-UK counterparts in the EU would still be accepted by local courts if there was a dispute over terms, or a bankruptcy.
A derivatives industry source said this affects hundreds of thousands of swaps contracts.
ISDA said much would hinge on Britain's trading terms with the EU, the legal detail of which may not be fixed for several years.
Brexit would also force British regulators to revisit how they deal with cross-border banks in trouble.
An EU law known as the bank recovery and resolution directive or BRRD is being rolled out to shield taxpayers from having to shore up lenders in trouble like in the 2007-09 financial crisis.
Banks must issue debt that can be bailed-in or written down to raise funds when core capital is burnt through.
A regulator in one EU state can trigger a write-down of financial contracts, which could affect operations in other member countries.
"Upon Brexit, the BRRD system of mutual recognition of cross-border resolution actions across the EU/EEA would fall away," the ISDA paper says. "While the UK could unilaterally legislate for the (British) recognition of foreign resolution actions, there would be no guarantee for reciprocal recognition of resolution measures taken by the UK," it added.