UK Regulator Amends Derivatives Trading Obligation for LIBOR Transition Purposes

Following its July 2021 consultation, the U.K. Financial Conduct Authority has published a Policy Statement amending the list of derivatives subject to the U.K. trading obligation for the purposes of the LIBOR transition.

The derivatives trading obligation under the U.K. version of the Markets in Financial Instruments Regulation requires U.K. investment firms to conclude transactions in certain derivatives on U.K. regulated markets, multilateral trading facilities, organised trading facilities or third-country venues in jurisdictions benefiting from U.K. equivalence decisions. In the absence of any equivalence decision, the FCA used its Temporary Transitional Power to provide transitional relief from December 31, 2020 (the end of the transition period) until March 31, 2022 for U.K. firms, EU firms using the U.K.'s temporary permissions regime and U.K. branches of overseas firms. The trading obligation currently applies to certain fixed-to-float interest rate swaps denominated in EUR, USD and GBP, and to certain index credit default swaps (iTraxx Europe Main and iTraxx Europe Crossover).

Derivatives can only be made subject to the DTO if they are subject to the U.K. derivatives clearing obligation. On September 29, 2021, the Bank of England confirmed certain amendments to the clearing obligation under the U.K. version of the European Market Infrastructure Regulation for the purposes of the LIBOR transition and launched a consultation on further changes. Details on those changes can be found in our post, here. In line with the BoE's approach, under the DTO Policy Statement the FCA is amending the U.K. onshored version of Commission Delegated Regulation (EU) 2017/2417 by removing derivatives referencing GBP LIBOR from the current DTO and replacing them with overnight indexed swaps referencing SONIA. The changes will coincide with the changes to the clearing obligation and will take effect on December 20, 2021.

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