On December 31, 2020, the UK’s Financial Conduct Authority (FCA) published a statement on the use of temporary transitional power (TTP) to modify the UK’s derivatives trading obligation (DTO). The TTP will be implemented on December 31, 2020 at 11:00 p.m. UK time (the Statement).

Recently, the United Kingdom implemented the G20 commitment to improve over-the-counter 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.

The United Kingdom has agreed to a trade and cooperation agreement and the associated joint declaration on financial services regulatory cooperation, which will consider mutual equivalence between the United Kingdom and European Union. The aim is to prevent disruption for market participants and reduce costs for investors.

Without mutual equivalence, the FCA will use its TTP to modify applications of UK DTO that conflict with EU DTO. This is particularly relevant for EU firms with London branches.

Under this modification, firms that are subject to the UK DTO trading with or on behalf of EU clients (subject to EU DTO) will be able to transact those trades on EU venues providing that:

  • reasonable steps have been taken to satisfy that the client does not have arrangements to execute the trade on a trading venue to which both the United Kingdom and European Union have granted equivalence; and
  • the EU venue has the required regulatory status to conduct business in the European Union (for example, a Recognised Overseas Investment Exchange with the relevant temporary permission or someone who benefits from the Overseas Person Exclusion).

The use of TTP on UK DTO only applies to UK firms, EU firms using the United Kingdom’s temporary permissions regime, and branches of overseas firms in the United Kingdom. It does not apply to trades with non-EU clients, proprietary trading conducted, and trades between UK branches of EU firms. These trades remain subject to the UK DTO.

The FCA expect firms and other regulated persons to be capable of demonstrating that they are taking reasonable steps during the first quarter of 2021 to ensure compliance with the UK DTO.

The FCA will consider its use of TTP and decide whether market or regulatory developments warrant a review of its approach by March 31.

The Statement is available here.