Written by Ciara Davies

The FCA has published a statement on the use of its temporary transitional power (TTP) to modify the UK’s derivative trading obligations (DTO).

Under the terms of the EU Withdrawal Act 2020 (EUWA), the UK on-shored the Markets in Financial Instruments Regulation (MIFIR). The UK DTO applies to the same classes of derivatives as the EU’s derivative trading obligations (EU DTO).

In the absence of a co-ordinated solution, the FCA has announced that it will use the TPP 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, 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 Persons Exclusion.

The modification 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 Collective Investment in Transferable Securities (UCITS) fund or an EEA alternative investment fund (AIF) are currently outside the scope of the UK DTO.

Trades with non-EU clients, proprietary trades and trades between UK branches of EU firms remain subject to the UK DTO.

 The FCA has published the transitional direction implementing the modification, which comes into force at the end of the transition period, together with an explanatory note.