FCA consults on LIBOR transition and derivatives trading obligation

The UK Financial Conduct Authority (FCA) today opened a consultation on the derivatives trading obligation (DTO), as the regulator seeks input on its proposal to modify it and the liquidity analysis supporting it.

As specified in Article 28 of UK MiFIR (onshored Regulation (EU) No 600/2014 on Markets in Financial Instruments), the DTO requires that financial and certain non-financial counterparties conclude transactions in standardised and liquid over-the-counter (OTC) derivatives only on regulated trading venues. These trading venues include regulated markets (RMs), Multilateral Trading Facilities (MTFs) and Organised Trading Facilities (OTFs).

Currently, the classes of derivatives that are subject to DTO are swaps referencing to USD LIBOR, GBP LIBOR and the Euro Interbank Offer Rate (EURIBOR) and index Credit Default Swaps (CDS) for contracts with standardised terms, such as payment frequency, trade start type, and notional amount type.

The FCA is proposing to modify the list of derivatives subject to the DTO in line with Articles 28 and 32 of UK MiFIR as further specified under the UK regulatory technical standard (RTS).

The regulator needs to review the DTO in light of the interest rate benchmark reform and the consequential changes that the Bank of England has proposed to the derivatives clearing obligation (DCO) in line with Article 5 of UK EMIR in its consultation. OTC derivatives based on benchmark rates that are being discontinued or may continue on an unrepresentative basis and become subject to use restrictions under UK Benchmarks Regulation need to be excluded from the DTO to ensure its scope remains relevant.

The DTO should extend to derivatives based on relevant risk-free rates (RFRs) that will replace them, provided they are sufficiently liquid or are likely to become sufficiently liquid as transition plans approach or reach completion.

The liquidity analysis indicates that Overnight Indexed Swaps (OIS) referencing the Sterling Overnight Index Average (SONIA) as a class of OTC derivatives is sufficiently liquid to impose a DTO. Hence, the FCA proposes to remove derivatives referencing GBP LIBOR under the current DTO and replace them with OIS referencing SONIA.

The FCA analysis shows that OIS referencing the Euro short-term rate (€STR) do not yet display the same level of liquidity of EURIBOR or other products currently subject to the DTO. The regulator intends to monitor market developments and liquidity in €STR OIS markets over the coming months. It would consider including them in the DTO once it is satisfied that the class of derivatives is sufficiently liquid.

As relevant EURIBOR-based swaps continue to be sufficiently liquid at the current time the FCA proposes to maintain them as part of the DTO.

Liquidity in OIS referencing the Secured Overnight Financing Rate (SOFR) as a class of OTC derivatives is developing. It may well increase rapidly over coming months. But, at the time of this analysis may not yet meet relevant criteria to be sufficiently liquid for the purposes of the DTO. The Bank has not proposed any changes to the DCO for USD products and contract types referencing USD LIBOR continue to be subject to the DCO. In absence of a change to clearing mandates, the FCA intends to monitor market developments and liquidity in USD LIBOR and SOFR products over the coming months as relevant deadlines and milestones are likely to impact liquidity.

The FCA is seeking views on the proposals by 25 August 2021.

Posted on

40 Replies to “FCA consults on LIBOR transition and derivatives trading obligation”

  2. Reimage to deal with every one of the problems, nevertheless that is solely50 performed.Free License Key – Get a Free Activation Code – Serial Keylicense key

  5. Howdy! Do you use Twitter? I’d like to follow you ifthat would be ok. I’m definitely enjoying your blog and look forward to newupdates.Also visit my blog post: Leaf Max CBD Reviews

  15. Very nice post. I just stumbled upon your blog and wanted to say that I have truly enjoyed surfing around your blog posts. In any case I will be subscribing to your feed and I hope you write again soon!

  19. Good day! This is my first visit to your blog!We are a group of volunteers and starting a new project in a community in the sameniche. Your blog provided us valuable information to workon. You have done a outstanding job!

  20. Heya i’m for the first time here. I found this board and I to find Ittruly helpful & it helped me out a lot. I am hoping to provide onething again and help others such as you aided me.

  23. This piece of writing is really a fastidious one it helps new net viewers, who are wishing in favor of blogging.

  25. Hi there! I simply wish to give you a big thumbs up for your excellent information you’ve got here on this post. I’ll be returning to your blog for more soon.

  29. Thanks for all of your endeavours which you have devote this specific. very exciting information.? An exile? s life’s no living.? through Leonidas with regards to Tarentum.

  31. Roblox Hack Your free roblox robux generator device is about upso that you can take the beguilement to the operating with level.

  33. Aw, this was a very good post. Taking a few minutes and actual effort to create a very good articleÖ but what can I sayÖ I hesitate a whole lot and don’t seem to get anything done.

  34. I need to to thank you for this fantastic read!! I absolutely loved every bit of it. I have you saved as a favorite to check out new stuff you postÖ

  39. An interesting discussion is worth comment. I believe that you ought to write more about this subject matter, it might not be a taboo matter but generally people do not talk about these issues. To the next! Cheers!!

Leave a Reply

Your email address will not be published. Required fields are marked *