The UK has implemented the G20 commitment to improve over-the-counter derivatives markets by onshoring the Markets in Financial Instruments Regulation (MiFIR) derivatives trading obligation (DTO) under the EU Withdrawal Act. The UK DTO applies to the same classes of derivatives as the EU DTO.The FCA welcomes the announcement that the UK and EU have agreed a Trade and Cooperation Agreement and the associated Joint Declaration on financial services regulatory cooperation. The FCA continues to view the agreement of mutual equivalence between the UK and EU as the best way to avoid disruption for market participants and avoid fragmentation of liquidity in DTO products, reducing costs for investors.
Without mutual equivalence, some firms, in particular the branches of EU firms in London, will be caught by a conflict of law between the EU and UK DTOs. In the absence of a co-ordinated solution, Temporary Transitional Power (TTP) is being used to modify the application of UK DTO as follows.
Where firms that are subject to the UK DTO trade with, or on behalf of, EU clients that are subject to the EU DTO, they will be able to transact or execute those trades on EU venues providing that:
• firms take reasonable steps to be satisfied the client does not have arrangements in place to execute the trade on a trading venue to which both the UK and EU have granted equivalence; and
• the EU venue has the necessary regulatory status to do business in the UK – such venues include those that are a Recognised Overseas Investment Exchange, have been granted the relevant temporary permission, or are certain that 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 the UK. Transactions concluded by an EEA Undertakings for the Collective Investment in Transferable Securities (UCITS) fund or an EEA alternative investment fund (AIF) are currently outside the scope of the UK DTO.
This relief under the TTP does not apply to trades with non-EU clients, proprietary trading conducted, for example, to hedge a firm’s own risk exposure, and trades between UK branches of EU firms. These trades remain subject to the UK DTO.
The FCA expects firms and other regulated persons to be able to demonstrate they are taking all reasonable steps during the first quarter of 2021 to ensure compliance with the UK DTO.
The FCA’s approach, driven by its objectives, aims to support the ability of firms based in the UK to continue to do a range of international business and serve their global clients, while upholding our G20 commitment in respect of the trading of OTC derivatives.
The FCA will keep our use of the TTP under review. In particular the regulator will consider by 31 March 2021 whether market or regulatory developments warrant a review of its approach. The FCA remains open to cooperation with EU authorities on ways of avoiding conflicting obligations.
