On 14 July 2021, the FCA published Consultation Paper 21/22: LIBOR transition and the derivatives trading obligation (CP21/22).
The proposals in CP21/22 will be of interest to financial counterparties, like investment firms and banks, and non-financial counterparties that are or could become subject to the derivatives trading obligation (DTO). It will also be of interest to regulated trading venues, including third country trading venues that are considered equivalent for the purposes of the DTO and to central counterparties.
In CP21/22 the FCA is proposing to modify the list of derivatives subject to the DTO in line with Articles 28 and 32 of the onshored Markets in Financial Instruments Directive (UK MiFID) as further specified under the UK regulatory technical standard (RTS) 4 (onshored Delegated Regulation 2016/2020).
The FCA explains that it needs to review the DTO in light of the interest rate benchmark reform and the consequential changes that the Bank of England has proposed to the derivatives clearing obligation in line with Article 5 of the onshored European Markets Infrastructure Regulation (UK EMIR) in its consultation. Over-the-counter derivatives based on benchmark rates that are being discontinued or may continue on an unrepresentative basis and become subject to use restrictions under the onshored Benchmarks Regulation (UK BMR) need to be excluded from the DTO to ensure its scope remains relevant. The DTO should extend to derivatives based on relevant risk-free rates that will replace them, provided they are sufficiently liquid or are likely to become sufficiently liquid as transition plans approach or reach completion.
The deadline for comments on CP21/22 is 25 August 2021.
On the basis of the responses to CP21/22 the FCA intends to finalise the draft RTS and will publish a Policy Statement late Q3/early Q4 2021.