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 welcomed 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, the FCA is using the Temporary Transitional Power (TTP) 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.
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