FCA averts Brexit derivatives disruption
05 January 2021 UK
Image: Markus Mainka/adobe.stock.com
The UK’s Financial Conduct Authority (FCA) has resorted to using a temporary transitional power (TTP) to make short-term changes to the derivatives trading obligation (DTO) on the final day before the Brexit transition period ended on 31 December 2020.
The UK has implemented the G20 commitment to improving over-the-counter (OTC) derivatives markets by onshoring the Markets in Financial Instruments Regulation (MiFIR) DTO under the EU Withdrawal Act. The UK DTO applies to the same classes of derivatives as the EU DTO.
In a statement, the FCA reaffirmed its positions that the agreement of mutual equivalence between the UK and EU was the best way to avoid disruption for market participants and avoid fragmentation of liquidity in DTO products, reducing costs for investors.
The FCA notes that it is still hoping for an equivalence decision to be reached between the European Commission and HM Treasury and that it planned to review the DTO rules by 31 March 2021.
In the absence of a co-ordinated solution, the FCA is using the TTP to modify the application of the UK DTO. 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. The relief under the TTP does not apply to trades with non-EU clients.
The FCA says: “We expect 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.
“Our approach, driven by our 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.”
Under the original DTO rules, derivatives had to be traded on venues within the EU or in third-country venues that had been granted equivalence.
The UK has implemented the G20 commitment to improving over-the-counter (OTC) derivatives markets by onshoring the Markets in Financial Instruments Regulation (MiFIR) DTO under the EU Withdrawal Act. The UK DTO applies to the same classes of derivatives as the EU DTO.
In a statement, the FCA reaffirmed its positions that the agreement of mutual equivalence between the UK and EU was the best way to avoid disruption for market participants and avoid fragmentation of liquidity in DTO products, reducing costs for investors.
The FCA notes that it is still hoping for an equivalence decision to be reached between the European Commission and HM Treasury and that it planned to review the DTO rules by 31 March 2021.
In the absence of a co-ordinated solution, the FCA is using the TTP to modify the application of the UK DTO. 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. The relief under the TTP does not apply to trades with non-EU clients.
The FCA says: “We expect 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.
“Our approach, driven by our 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.”
Under the original DTO rules, derivatives had to be traded on venues within the EU or in third-country venues that had been granted equivalence.
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