On 30 March 2023, the FCA published a statement on the application of the derivatives trading obligation (DTO) to certain credit default swaps (CDS). The statement relates to the cessation of clearing for all classes of CDS contracts from 27 October 2023, announced by ICE Clear Europe in September 2022. The FCA flags that counterparties will need to close out their CDS positions on ICE Clear Europe and establish equivalent ones on other central counterparties (CCPs) before 27 October 2023.
The statement notes that some index CDS are subject to the DTO under Article 28 of the UK Markets in Financial Instruments Regulation (UK MiFIR), which requires certain financial and non-financial counterparties to conclude transactions in specified derivatives on trading venues.
In order to achieve an orderly migration of positions from ICE Clear Europe to other CCPs, market participants intend to execute trades outside a trading venue. To facilitate this migration, the FCA confirms that it will not require counterparties subject to trading obligations to apply that obligation to transactions in the relevant CDS which are concluded for the purpose of transferring existing positions to a new CCP. The FCA does not expect counterparties to publicly report these trades in accordance with Article 21 of UK MiFIR.
The FCA expects all trades to have been completed 27 October 2023 and may contact firms to validate that off venue trades in relevant instruments were executed for the purpose specified above.