Since the shock Brexit vote on 23 June there have been big movements in a number of financial markets, as participants of all types reposition themselves for the period of uncertainty that the leave vote has ushered in. Regardless of the eventual terms of a UK exit from the EU, market movements that have already happened can be expected to cause defaults under derivative contracts linked to the affected markets, such as FX and equity index derivatives. For example we can expect:
- Margin calls made on out of the money counterparties not being met.
- Events of default or potential events of default arising, for example, from ratings downgrades on sovereigns, financial institutions or corporates.
- Repudiation of loss-making contracts by counterparties claiming not to be bound to honour their terms.
In a this alert, we have set out our guidance for handling these defaults, drawn from our experience of dealing with the wave of defaults that followed the 2008 financial crisis.