Grappling, defence and guard

If a character is grappled, do they lose the ability to defend? I suppose this boils down to whether reactions count as actions.

Additionally, do they lose guard? Would they automatically regain guard if they escape?

If both of the above are true, grappling is a seriously powerful option (especially as the grappling weapons have other valuable qualities).

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The way I handle Grappling and reactions is that I simply allow reactions as normal but I also allow anyone attacking either of two grappling characters to do so as if the opponent was prone ie; gaining two bonus momentum on a success. However I don’t use the prone option between grappling characters since they are both in the same position and neither one particularly has an advantage over the other.

I also allow grappled characters to forgo their breakout attempt in order to attack their grappler with a Diff equal to the Effects rolled on the attack that achieved the grapple. This represents being able to throw elbow, bite etc.