UK FCA Derivatives Trading Obligation


On Dec. 31, UK FCA issued direction on derivatives trading in Brexit.


  • FCA temporary transitional power TTP, modified UK derivatives trading obligation DTO.
  • Follows UK FCA Dec. 2020 final Brexit instruments and TTP directions, see #94317.
  • Follows UK FCA Dec. 2020 urged UK financial sector to prepare for Brexit, see #94080.
  • Follows UK GVT Dec. 2020 issued provisional agreement on UK-EU trade, see #94406.
  • Derivatives Trading Obligation
  • UK has implemented G20 commitment to improve OTC derivatives market safety, by onshoring the MiFIR derivatives trading obligation (DTO) under the EU Withdrawal Act.
  • The UK DTO applies to the same classes of derivatives as the EU DTO.
  • FCA welcomes announcement that UK and EU have agreed a Trade and Cooperation Agreement and associated joint declaration on financial services cooperation, #94134.
  • FCA continues to view agreement of mutual equivalence between UK and EU as best way to avoid disruption for market participants and avoid fragmentation of liquidity.
  • However, without mutual equivalence, some firms, in particular the branches of EU firms based in London, will be caught by conflict of law between the EU and UK DTOs.
  • In the absence of coordinated equivalence solution, the FCA are using the Temporary Transitional Power (TTP) to modify the application of UK derivatives trading obligation.
  • UK DTO Modification
  • Where firms that are subject to UK DTO trade with, or on behalf of, EU clients that are subject to EU DTO, they will be able to transact or execute those trades on EU venues.
  • Providing firms take steps to be satisfied the client doesn't have arrangements in place to execute the trade on a venue, to which both UK and EU have granted equivalence.
  • Also requires that EU venue has necessary regulatory status to do business in the UK.
  • Such venues include those that are a Recognized Overseas Investment Exchange, with temporary permission, or are certain they benefit from the Overseas Person Exclusion.
  • This modification of the application of the UK DTO applies to UK firms, EU firms using the UK’s temporary permissions regime (TPR), and branches of overseas firms in UK.
  • UCITS/AIFs Limits on Scope
  • Transactions concluded by EEA UCITS fund or EEA AIF, are outside scope of UK DTO.
  • This relief under TTP does not apply to trades with non-EU clients, proprietary trading conducted to hedge own risk exposure, and trades between UK branches of EU firms.
  • These trades remain subject to the UK DTO; FCA expect firms to demonstrate they are taking all reasonable steps during first quarter of 2021 to comply with the UK DTO.
  • The FCA approach aims to support the ability of firms based in the UK, to continue to conduct a range of international business and serve their global clients.
  • Effectiveness
  • Will consider by Mar. 31, 2021, whether developments warrant a review of approach.
  • FCA remains open to cooperation with EU on ways of avoiding conflicting obligations.
  • In Mar. 2021, UK FCA issued statement on review of the FCA approach, see #101542.
  • Aug. 29, 2023 Direction to Vary Transitional Direction
  • On Aug. 29, 2023, UK FCA issued a direction to vary its transitional direction for the derivatives trading obligation, accompanied by an explanatory note on the variation.
  • Paragraph 16 of Part 1 of Schedule 2 of the Financial services and markets act (FSMA) 2023 amends article 28 MiFIR (UK derivatives trading obligation) to bring it into line with the clearing obligation in EMIR, variation direction gives effect to FSMA 2023.
  • The FCA's direction to vary amends paragraph 4.1 of the guidance in Part 4 of the transitional direction for the derivatives trading obligation dated Dec. 30, 2022.
  • Regulator is satisfied that direction to vary does not adversely affect advancement of its key objectives, and has closely coordinated with UK BoE, UK Treasury, UK PRA.
  • Direction to vary comes in force on Aug. 29, 2023, as do relevant sections FSMA 2023.

Regulators UK FCA
Entity Types B/D; Bank; BS; Corp; Depo; Exch; HF; IA; Inv Co
Reference RF, PR, PR, Gd, 12/31/2020; MIFID/MIFIR Dir 2014/65, Reg 600/2014; FSMA 2023; EUWA; Brexit
Functions BCS; Compliance; C-Suite; Financial; Legal; Operations; Registration/Licensing; Reporting; Risk; Trade Reporting; Trading
Countries European Union; United Kingdom; Cross-Border
Category National Regulator
State
Products Banking; Corporate; Derivatives; Fund Mgt
Regions EMEA
Rule Type Final
Rule Date 12/31/2020
Effective Date 8/29/2023
Rule Id 94487
Linked to Rule :94317
Reg. Last Update 8/29/2023
Report Section UK

Last substantive update on 08/29/2023