We're updating the direction modifying the UK’s derivatives trading obligation (DTO) from 31 December 2024.
This will replace the transitional direction which is expiring.
The DTO is a G20 commitment to improve over-the-counter derivatives markets.
The UK has implemented this commitment through Article 28 of the UK Markets in Financial Instruments Regulation (MiFIR). Under Article 28 MiFIR, transactions in certain classes of derivatives must be concluded on regulated trading venues.
We are modifying the UK’s DTO using our new power of direction under Article 28a of the UK MiFIR[1], granted by the Financial Services and Markets Act (FSMA) 2023.
The new direction will apply from 11.01pm on 31 December 2024.
It will only apply to transactions in classes of derivatives subject to the DTO in both the UK and EU. This is to reflect changes to the scope of the UK and EU DTO following the transition from LIBOR[2] to risk-free rates.
The Treasury consented to our direction on 28 November 2024.
We have also published a statement (PDF)[4] explaining the purpose of our direction, including how it prevents or mitigates disruption to financial markets and advances our operational objectives.
What firms need to know
The new direction will continue to allow firms subject to the UK DTO, trading with, or on behalf of, EU clients subject to the EU DTO, to transact or execute those trades on EU venues, providing they meet certain conditions.
The same conditions set out in the transitional direction apply. This includes that firms must 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.
The direction does not affect the requirement that 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 permission, or
- whose activities meet all the conditions required to benefit from the Overseas Person Exclusion
Our direction will not apply to transactions:
- where the client is not established in the EU
- concluded on a proprietary basis or
- concluded by 2 EU entities trading through their UK branches
Our new direction, in comparison to the transitional direction, includes the technical change that it automatically adjusts to only apply to transactions in classes of derivatives subject to the DTO in both the UK and in the EU.
Background
In December 2020, we published a statement[5] noting our intention to use our powers under the Temporary Transitional Power (TTP) to modify the application of the UK DTO.
The purpose of the direction was (in absence of mutual equivalence between the UK and EU) to avoid disruption for market participants caught by a conflict of law between the EU and UK DTOs – in particular branches of EU firms in UK.
The TTP direction therefore allowed firms subject to the UK DTO, trading with, or on behalf of, EU clients subject to the EU DTO, to transact or execute those trades on EU venues, providing that certain conditions were met.
We did not observe any market or regulatory developments in the first quarter of 2021 that justified a change in our approach. Therefore, we continued to use the TTP to modify the application of the DTO as set out in December 2020.
The new direction is necessary because our current transitional power to modify the DTO expires on 31 December 2024.
In CP24/14[7] we proposed to use our UK MiFIR Article 28a power of direction to modify the DTO in such a way as to achieve an outcome equivalent to that achieved by the TTP direction, subject to the technical change relating to the scope of the UK DTO.
We received unanimous support to our proposals as laid out in Chapter 5 of CP24/14.