As noted in our blog of 31 December 2020, the FCA has given directions in relation to the application of the derivatives trading obligation under the post-Brexit UK regulatory regime. In one key respect, the approach carries on the asymmetry between the UK and EU regimes by granting UK firms the ability to trade with or on behalf of EU clients on EU markets in relation to mandatory traded derivatives. This will apply to UK branches of EU firms which are within the transitional permission regime. It is presented as both a way of avoiding the conflict of obligations for EU firms and clients which would have led them to need to trade on US DCMs and SEFs or other third country markets which both the EU and UK recognise as equivalent and also as enhancing market stability and liquidity. In common with other areas, there has as yet been no reciprocation at EU level and the FCA’s implicit message is that there is a contrast between the UK which is talking account of proper regulatory consideration and the Commission which may be influenced by other considerations.
So far, so predictable. However, one needs to read the detail carefully. First, the carve out from the UK DTO only applies if the UK firm has taken reasonable steps to check that the client does not have arrangements for accessing a market recognised by both the EU and UK. It appears that there is no duty to put such arrangements in place but query how far a passive approach on this can be taken. Secondly, the EU market needs to be accessing UK participants directly or indirectly in conformity with the territoriality of the UK regime (which means that it is either an ROIE, has a temporary permission or is relying on the overseas persons exclusion). Our view is that, broadly, this is likely to mean that post transitional regime, the market will either only be able to grant membership or tier 1 DEA access to UK authorised entities.
Setting aside the position in relation to business with or for EU clients, the important point to note is that the direction permitting trading on EU markets will not apply to either prop trading or trading with or for non-EU clients. This is important as it makes accessing an EU market rather than a mutually acceptable market in, for example, the US much less attractive.
The interesting question which flows from this carefully calibrated balance of generosity and a less accommodative approach is whether this is indicative of the future direction of UK regulatory policy. In the background, there is HMT’s overseas regime consultation which has particular relevance to the overseas persons exclusion and its broad current scope in relation to wholesale and professional business.
We have become used to the significant discrepancy in approach between the UK with its broad transitional regime and overseas persons exclusion and the almost complete lack of reciprocation from the EU (with the exception of the short term recognition of UK CCPs) and businesses have been planning on this basis. Whether this asymmetry is sustainable from either side remains to be seen and we advise that a close eye is kept on these developments in relation to the wholesale market.