The European Securities and Markets Authority has confirmed its position, originally proposed in March 2019, that the derivatives trading obligation under the EU Markets in Financial Instruments Regulation will continue to apply without changes, and as things stand without any U.K. equivalency, after the end of the Brexit transition period on December 31, 2020.
The derivatives trading obligation requires EU investment firms to conclude transactions in certain derivatives on EU regulated markets, multilateral trading facilities, organized trading facilities or third-country venues in jurisdictions benefiting from an EU equivalence decision. The trading obligation 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).
ESMA has questionably asserted that most U.K. trading venues that offer trading in these derivatives have established EU trading venues. Although trading in those platforms which do exist is recognised by ESMA to be low, EU investment firms will be able to comply with the EU DTO by trading on those venues from January 1, 2021. However, in the absence of an EU equivalence decision for U.K. trading venues, U.K. branches of EU investment firms are likely to have to comply with conflicting derivatives trading obligations in both the U.K. and the EU. In addition, EU and U.K. counterparties will not be able to trade derivatives with each other on an EU or U.K. trading venue, which has been highlighted by industry associations as likely to lead to market fragmentation. ESMA's view is that this is the result of the manner in which the U.K. has implemented the DTO, but in reality this is a consequence of the lack of an equivalency determination in either the U.K. or EU. ESMA intends to continue monitoring the situation to assess market liquidity in derivatives transactions for EU market participants after the end of the transition period.
The U.K. has not granted EU trading venues equivalence for the purposes of the derivatives trading obligation, either. U.K. investment firms will need to trade derivatives subject to the U.K. DTO on U.K. trading venues from January 1, 2021. The U.K. has, however, granted partial EEA equivalence for the U.K. clearing obligation and margin requirements for intragroup transactions. U.K. firms that wish to take advantage of the equivalence decision where their intragroup counterparty is located in the EEA should apply to (margin exemption) or notify (clearing obligation) the FCA by February 1, 2021. This includes firms that currently benefit from existing intragroup exemptions, which expire on March 1, 2021. This intra-group exemption under the equivalence direction is not time-limited. The existing transitional regime for intragroup exemptions from clearing and margin between U.K. firms and their third-country group entities will continue where there are no equivalence directions.