UK Conduct Authority Consults on Changes to the Derivatives Trading Obligation

The Financial Conduct Authority has launched a consultation on three proposed amendments to different aspects of the U.K. derivatives trading obligation. The consultation is part of the Wholesale Markets Review. The Markets in Financial Instruments Regulation imposes a "trading obligation," requiring mandatory on-venue trading for financial counterparties and non-financial counterparties where they engage in transactions in derivatives that: (i) have been declared subject to the clearing obligation under the U.K.'s European Market Infrastructure Regulation; (ii) are admitted to trading or traded on at least one U.K. trading venue (a regulated market, multilateral trading facility or organised trading facility) or a third-country equivalent trading venue; and (iii) are sufficiently liquid. Responses to the FCA's consultation may be submitted until September 30, 2024. The FCA intends to publish its direction on the modification of the DTO in Q4.

The FCA is consulting on:

• Including certain overnight index swaps based on the U.S. Secured Overnight Financing Rate within the classes of derivatives subject to the DTO. SOFR OIS have been subject to the clearing obligation since August 24, 2022 and to the U.S. trading mandate since August 5, 2023. The FCA considers that there is sufficient evidence of the liquidity of certain SOFR OIS to warrant the application of the DTO.
• Expanding the list of post-trade risk reduction services exempted from the DTO and from other obligations. The Financial Services and Markets Act 2023 empowers the FCA to make rules exempting certain PTRR activities or services or providers from the DTO, the best execution requirements and the requirement in the Market Abuse Regulation that operators of a multilateral system must operate a MTF or OTF. The FCA sets out the characteristics that risk reduction services would need to satisfy for trades used to conduct them to be eligible for exemption. The FCA proposes to require providers of post-trade risk reduction services to comply with disclosure and notifications obligations.
• How it intends to suspend or modify the DTO once the transitional powers under Part 7 of the Financial Services and Markets Act 2000 (Amendment) (EU Exit) Regulations 2019 expire at the end of this year. The FCA aims to improve the UK's regulation of secondary markets, reduce systemic risk in derivatives markets and avoid fragmentation and disruption for firms trading OTC derivatives subject to the DTO.

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