UK Law and Practice Contributed by: Carolyn Jackson, Nathaniel Lalone, Christopher Collins and Ciara McBrien, Katten Muchin Rosenman UK LLP (Katten)
ferable Securities (UCITS) Directive, Alternative Invest - ment Fund Managers Directive, and capital rules. 1.2 Historical Trends and Looking Forwards Following the global financial crisis of 2007–08 and the 2009 G20 Pittsburgh Summit agreement to, among other things, clear all standardised OTC derivative contracts through a central counterparty (CCP), the EU adopted EU EMIR in 2012. EU EMIR was intended to increase transparency in the OTC derivatives mar - kets, mitigate credit risk and reduce operational risk, and it had a significant impact on the EU derivatives landscape. The UK’s departure from the EU in January 2020 also hugely influenced the development of the derivatives markets in the UK. EU financial markets legislation, including EU EMIR, was largely onshored in the UK following Brexit under the European Union (Withdraw - al) Act 2018. However, the UK government intended to repeal and replace the majority of EU law with the UK’s own domestic rules over time. The Financial Services and Markets Act 2023, pub - lished in July 2023, established the legislative frame - work for the revocation of all EU retained law (now referred to as “assimilated” law) relating to financial services and the transition to new requirements under the UK’s FSMA regime. The UK’s HM Treasury (HMT) has begun the process of revoking assimilated EU leg - islation in a piece-by-piece manner. Such revocation relies upon the relevant UK regulators having drafted and consulted on replacement rules in the required areas. It is expected that it will take several years to complete the process of revoking assimilated EU law. Much of the next 12 months (and beyond) will likely be spent on the further repeal and replacement of assimi - lated EU law. Any such replacement legislation and rules are not initially expected to be significantly dif - ferent to the EU law versions, but divergence is antici - pated. Over time, as the EU amends its rules and reg - ulations, further divergence between the UK and EU regimes can be expected. Ultimately, this could lead to increased compliance costs for those international firms that might have to comply with both regimes. We have already seen the implications of this for firms that are subject to both the UK and EU EMIR Refit.
As with other jurisdictions, ESG (ie, environmental, social and governance practices), operational resil - ience, and the use of new technologies such as artifi - cial intelligence and distributed ledger technology are also expected to have an impact on the development of the derivatives markets in the UK.
2. Types of Derivatives 2.1 Futures and Options
The UK does not use the term “futures” contract solely to refer to a derivative that must be traded on a UK- regulated market or an equivalent third-country market (ie, exchange). A futures contract, which is a regulated financial instrument under the RAO, can be traded both OTC as well as on a regulated market (ie, one that is registered with the Financial Conduct Authority (FCA)). Futures are defined in the RAO as “rights under a contract for the sale of a commodity or property of any other description under which delivery is to be made at a future date”. However, such a contract will not fall within the definition of a futures contract, and therefore not be a financial instrument when the con - tract is made for commercial rather than investment purposes. If such a contract is traded on a regulated market or third-country market, however, the contract will be deemed to be for investment purposes and will be a futures contract. The term “exchange-traded derivative” (ETD) is more frequently used in UK regula - tion to refer to derivatives traded on a UK-regulated market; however, the regulated markets themselves use the terms “futures” and “options on futures” to describe their products. The UK currently only has five regulated markets, three of which are stock exchanges. The two non- stock exchanges, ICE Futures Europe (IFEU) and the London Metal Exchange (LME), both list various futures and options on futures across an array of asset classes. IFEU lists such products for energy, soft com - modities, emissions, interest rates and securities. The LME lists such products for various metals, including non-ferrous, ferrous and EV metals, and platinum. In March 2024, the FCA announced that it would not oppose requests from regulated markets to list exchange-traded notes backed by crypto assets. As
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