On 3 April 2025, the Financial Conduct Authority (FCA) published a policy statement, PS25/2, on the derivatives trading obligation (DTO) and post-trade risk reduction (PTRR) services.
Background
In July 2024, the FCA consulted (in CP24/14) on proposed changes to the scope of the DTO and the framework for exemptions from the DTO for PTRR services. In particular, it proposed to:
- Bring swaps on the US risk-free rate SOFR (Secured Overnight Financing Rate) OIS (overnight index swap) into the scope of the DTO.
- Define the types of PTRR services that can be exempted from the DTO.
- Use its power of direction to modify the DTO.
Response and final rules
PS25/2 summarises the feedback received to CP24/14 and sets out the FCA’s response, as well as final rules on the classes of SOFR OIS subject to the DTO and the framework for PTRR services which allows investment firms to benefit from various exclusions.
Use of power of direction to modify the DTO
The FCA notes that it received unanimous support for its proposal to exercise its power of direction to modify the DTO to replace the direction made under the temporary transitional powers (TTP). As a result, it published its final direction in November 2024, which entered into force when the TTP direction expired on 31 December 2024.
Bringing SOFR OIS swaps into scope of DTO
The SOFR OIS classes of derivatives will be brought into the scope of the DTO as proposed in CP24/14, subject to some restrictions around the inclusion of the 12-year SOFR product.
PTRR services exempt from DTO
There are currently three types of PTRR services – portfolio compression, portfolio rebalancing and basis risk optimisation – but only transactions arising out of portfolio compression benefit from exemptions from the DTO at present. The FCA plans to proceed with its proposal to expand the exemptions to other PTRR services, subject to certain conditions.
Next steps
The changes will come into force on 30 June 2025.