The FCA’s latest announcement on the UK derivatives trading obligation (DTO) landed quietly on July 17, but its impact is more than a short web statement. By invoking its brand-new power of direction under Article 28a of onshored MiFIR, the regulator has replaced the post Brexit Temporary Transitional Power (TTP) transitional regime with a standing solution that is meant to keep cross border trading flowing while the UK and EU continue to circle each other on equivalence.
The DTO stems from the G20 mandate to push standardised OTC derivatives onto organised trading venues. In the UK that mandate is covered by Article 28 MiFIR, which obliges certain financial and nonfinancial counterparties to execute in scope swaps and credit derivatives on UK trading venues or on third country venues deemed equivalent.The UK rulebook was taken wholesale from the EU at the point of Brexit, but European and UK policymaking have since started to diverge, most visibly around the post LIBOR product mix, creating the risk of overlapping, even contradictory, trading mandates.
Article 28a: a New Safety Valve
Schedule 2 of the Financial Services and Markets Act 2023 inserted Article 28a into MiFIR, empowering the FCA to “suspend or modify” the DTO if that is necessary to prevent market disruption and advances at least one of its operational objectives. The power is exercisable with Treasury consent and is time limited, so every direction must be justified and kept under review.
The Direction, which took effect one minute after the TTP expired at 11:01 p.m. on 31 December 2024, tells market participants that a DTO breach will not occur where five cumulative conditions are met – chiefly that the trade is executed on an EU trading venue, involves an EU client, and cannot, for practical connectivity reasons, be concluded on an equivalent third country venue.
The carveout also removes EEA UCITS (Undertakings for Collective Investment in Transferable Securities) and AIFs (Alternative Investment Funds) from UKDTO scope and clarifies that proprietary trades with non EU clients still need to be executed on a UK trading venue or an equivalent third country venue under the UK DTO. Accompanying guidance stresses that best execution duties in the Conduct of Business Sourcebook (COBS) still apply.The Regulator’s Rationale
In its two page explanatory statement the FCA is explicit: without the new Direction, UK branches of EU banks and UK asset managers trading on behalf of EU funds would be trapped between the UK DTO and the unchanged EU DTO. Restoring the limited flexibility previously provided by the TTP therefore “prevents or mitigates disruption” and upholds the FCA’s market integrity and competitiveness objectives. The Treasury gave its blessing on 28 November 2024 and retains the right to demand revisions.
The Direction only covers product classes that remain subject to the trading obligation in both the UK and the EU. That alignment narrows the scope, reflecting the retirement of LIBOR and the shift to SONIA, SOFR and other compounded risk-free rates. The policy aim is clear: avoid reviving the very cross border fragmentation that LIBOR reform sought to eliminate.
Observations for governance, risk and compliance teams
For GRC functions this is less a compliance overhaul than a reminder that venue related rules can now change at regulator speed. The FCA has demonstrated it will use Article 28a proactively whenever equivalence politics threaten market stability. Firms’ controls architecture therefore needs to be nimble enough to ingest, codify and sunset such directions without lengthy build cycles or board level angst.
Two softer points stand out. First, best execution procedures – and the Management Information that evidences them – must incorporate the new venue hierarchy set out in the Direction. Second, cross border client onboarding and booking model policies now face a new uncertainty: today’s accommodation of EU clients could be narrowed or broadened with 90days’ notice, depending on Treasury consent and market conditions.
Looking ahead
The FCA’s move effectively institutionalises what had been a temporary patch, giving firms and their risk managers clarity on how jurisdictional conflicts will be handled until formal equivalence is either granted or definitively taken off the table.
For now, the message is subtle but clear: operational resilience in derivatives trading is no longer just about margin models and Central Counterparty (CCP) access; it is equally about anticipating when the regime you trade under might be switched, overnight, by a new ‘two page Direction.’
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