UK Law and Practice Contributed by: Carolyn Jackson, Nathaniel Lalone, Christopher Collins and Ciara McBrien, Katten Muchin Rosenman UK LLP (Katten)
a result, institutional investors can now participate in this type of trading. Additionally, a select group of mul - tilateral trading facilities (MTFs) have been approved by the FCA to facilitate trading in crypto derivatives. In January 2021, the FCA implemented a ban on UK firms offering or selling crypto derivatives and exchange-traded notes that reference certain types of crypto-assets (cETNs) to UK retail consumers. In June 2025, the FCA issued proposals to lift such a ban in relation to cETNs, which it subsequently confirmed would be effective from 8 October 2025. 2.2 Swaps and Security-Based Swaps In the UK, OTC derivatives (the financial instruments that are most similar to swaps and security-based swaps as defined under the US federal commodities and securities laws) that have underlying securities, as opposed to those on non-securities, do not have a distinct regulatory regime. Under UK EMIR, deriva - tives are linked to one of five applicable asset classes: • interest rates; • foreign exchange (FX); • commodities; • equity; and • credit. The regulation of derivatives under UK EMIR does not differ based on the derivative’s underlying asset class. Cleared OTC derivatives are not regulated separately from uncleared OTC derivatives under UK EMIR. Most of the UK regulation applicable to cleared OTC deriva - tives under UK EMIR applies to the CCP and the clear - ing member. 2.3 Forwards Under UK regulation, a “forward” is considered to be a form of derivative (and therefore a regulated financial instrument) and is generally regulated in the same way as any other form of derivative. However, in the UK, FX forwards and physically settled commodity forwards are regulated differently from forwards on interest rate, cash-settled commodities, equities and credit. OTC derivatives on a commodity that must be physi - cally settled and cannot be cash-settled, and are not traded on a regulated market, an MTF or an organised
trading facility (OTF) – together, a trading venue – gen - erally fall outside of the definition of a financial instru - ment and are therefore not subject to UK regulation. Physically settled FX forward contracts and physically settled FX swaps contracts, although still regarded as financial instruments, are not subject to the obligation to exchange variation margin (VM) if one of the coun - terparties to the OTC derivative is not a credit institu - tion or would not be such an institution if it were to be established in the UK. The posting of initial margin (IM) is not required for physically settled FX forward contracts and FX swaps. 2.4 Listed v Over-the-Counter The regulation of derivatives under UK EMIR dif - fers not by asset class but according to whether the derivative is an ETD or an OTC derivative. Derivatives can trade either bilaterally or on one of three types of regulated trading venues. If a derivative is traded on a regulated market, it is classified as an ETD (ie, listed). If a derivative trades on either an MTF or OTF, it is classified as an OTC derivative, as is any deriva - tive agreed bilaterally between the two counterparties. Under UK EMIR, both ETDs and OTC derivatives must be reported to an FCA-registered or FCA-recognised trade repository. The other UK EMIR obligations are only applicable to OTC derivatives and include: • risk mitigation (including the uncleared margin rules (UMRs)); and • mandatory clearing. The G20 obligation of requiring mandatory trading of any OTC derivative subject to a mandatory clearing obligation is provided for in UK MiFID II. 2.5 Asset Classes In the UK OTC derivatives market, interest rates are the largest traded asset class by a significant margin, with FX following as a distant second. Derivatives in the credit, equity and commodity asset classes rep - resent a very modest share of the overall UK OTC derivatives market. An emission allowance is a financial instrument under paragraph 11 of Schedule 2 of the RAO, but not a
104 CHAMBERS.COM
Powered by FlippingBook