UK FCA policy statement on the DTO and PTRR services

The UK Financial Conduct Authority (FCA) has published its policy statement (PS25/2) with final rules on the classes of derivatives subject to the derivatives trading obligation (DTO) and the new framework for the exemptions for post-trade risk reduction services (PTRR) in respect of the DTO, best execution and transparency. The original DTO and PTRR proposals were consulted on in July 2024, with an earlier consultation in December 2023 including proposals in relation to post-trade transparency for derivatives.

Regarding the DTO, which requires certain standardised and liquid over-the-counter (OTC) derivative trades to be concluded on certain trading venues, the FCA has decided to expand it to certain classes of secured overnight financing rate overnight index swaps (SOFR OIS) to increase the benefits of on-venue trading and align with the UK's G20 commitment. The policy statement notes that there were concerns with bringing the 12-year tenor in scope as it has a lower level of liquidity than other listed tenors, and has fewer trades than the 3-month and 6-month tenors (neither of which is subject to the DTO). However, the FCA will still be including the 12-year tenor, subject to the product only being in scope for spot starting swaps and IMM swaps with a par fixed (not a standard coupon fixed) rate, given its liquidity, industry's support for real-time transparency for all tenors of SOFR OIS and UK firm access to the U.S.'s pool of liquidity in the event of any periods of reduced liquidity on UK trading venues. The FCA also considered feedback that the implementation timeline should be extended from the proposed three-month period to six months after the publication of the policy statement; however, the FCA is not changing its position as it believes that the three-month timeframe is achievable. SOFR OIS will be subject to the DTO from 30 June.

Regarding PTRR services, the FCA had proposed to expand the current scope of PTRR services beyond portfolio compression, and extend the exemptions so that eligible PTRR services are also not subject to best execution and trading venue authorisation obligations (as well as the current DTO exemption). The policy statement confirmed that feedback was mostly positive and supportive of the FCA proposals. The FCA has, in addition, confirmed that the transactions resulting from PTRR services will not be included in scope of post-trade transparency rules as they are non-price forming in nature (although disclosure requirements for essential information about transactions resulting from a risk reduction exercise will apply, as is currently the case for portfolio compression). The proposed changes will come into force on 3 July, three months after the publication of the policy statement. Firms wishing to rely on the PTRR exemptions are required to notify the FCA, which is accepting notifications from 4 April. Information on how to submit notifications can be found on the FCA's UK MiFID framework notifications webpage.

The policy statement also notes that the FCA received strong support in respect of its proposal to make a new direction modifying the DTO to maintain the effect of its previous transitional direction, to avoid disruption for market participants potentially subject to conflicting UK and EU requirements. The direction is currently in force and remains so until 30 June, after which it may be extended.

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