UK Law and Practice Contributed by: Carolyn Jackson, Nathaniel Lalone, Christopher Collins and Ciara McBrien, Katten Muchin Rosenman UK LLP (Katten)
Other UK regulators also play an important role and have significant responsibilities. The Bank of England supervises certain key market infrastructures that are vital to the derivatives markets, including CCPs and payment and settlement systems. Additionally, the UK’s energy regulator, the Office of Gas and Electric - ity Markets (Ofgem), is responsible for the registration of market participants in the wholesale energy mar - ket, which encompasses wholesale energy derivatives under UK REMIT. 3.1.2 Clearing There are two independent derivatives-clearing obli - gations under UK law. Under the first obligation, all derivatives concluded on a UK-regulated market must be cleared at a CCP without exception. Separately, the Bank of England is responsible for determining which standardised OTC derivatives must be cleared at a CCP; this list currently includes a number of interest rate and index credit default prod - ucts. Whether the clearing obligation applies to an in-scope product depends on the nature of the coun - terparties to the transaction. Generally, transactions between some combination of financial counterpar - ties (FCs) and/or non-financial counterparties (NFCs) that exceed the clearing threshold applicable to the relevant asset class (NFC+s) must be cleared unless an exemption applies. Relevant exemptions include qualifying intra-group transactions, which are subject to an application process with the FCA, as well as transactions by certain qualifying UK and EEA pension schemes, which the FCA has recently made perma - nent. In addition, certain “small” FCs are not required to clear OTC derivatives transactions that are other - wise subject to mandatory clearing, provided they do not exceed the relevant clearing threshold. FCs and NFCs must therefore determine on an annual basis whether, for a given asset class, their cleared and uncleared derivatives not executed on a UK-reg - ulated market or a third-country exchange deemed to be equivalent by the FCA, exceed the threshold appli - cable to a given asset class (currently EUR3 billion for interest rate, FX and commodities products, and EUR1 billion for credit and equity products). If a threshold is exceeded, the FC or NFC must begin clearing the relevant in-scope OTC derivatives within four months
of crossing the relevant threshold(s). NFCs are per - mitted to exclude hedging transactions from the UK EMIR clearing threshold calculation. NFC+s are only required to clear OTC derivatives in the asset classes where they exceed the relevant threshold, whereas a “small” FC that exceeds the relevant threshold in any asset class must then clear OTC derivatives subject to a clearing obligation in all asset classes. The Bank of England has the authority to suspend the clearing obligation in respect of one or more OTC derivatives, initially for a period not exceeding three months, where certain conditions are met. The sus - pension period may be renewed for successive three- month periods, up to a maximum of 12 months. 3.1.3 Mandatory Trading ETDs must, by definition, be concluded on a UK-reg - ulated market or an equivalent third-country market. Additionally, the FCA may decide that an OTC deriva - tive, which is subject to a UK clearing obligation, is also subject to a UK trading obligation. This applies if the OTC derivative is traded or admitted to trading on at least one UK trading venue, or on a third-country trading venue deemed equivalent for the trading obli - gation. Furthermore, there must be adequate third- party buying and selling interest to facilitate trading in the product. Where the UK trading obligation applies to an OTC derivative, in-scope FCs and NFC+s must conclude all transactions in such an OTC derivative on a UK or equivalent third-country trading venue. Cur - rently, only venues in Singapore and the United States regulated by the Commodity Futures Trading Com - mission benefit from such equivalence, although the FCA has used its powers in relation to the UK trading obligation to permit firms to transact on EU trading venues in certain circumstances. The UK’s rules require that derivatives’ clearing and trading obligations operate together. This means that if the clearing obligation is suspended, the related trading obligation is also suspended. 3.1.4 Position Limits The FCA has recently published its final rules over - hauling the UK’s position limits regime for commod - ity derivatives. The FCA’s reforms are intended to
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