UK Law and Practice Contributed by: Carolyn Jackson, Nathaniel Lalone, Christopher Collins and Ciara McBrien, Katten Muchin Rosenman UK LLP (Katten)
or an NFC+ established in the UK enters into non-centrally cleared OTC derivative contracts with either another FC or NFC+, or a third-country counterparty that would be an FC or NFC+ if it were established in the UK. • Risk mitigation techniques: FCs and NFCs must implement risk mitigation techniques for OTC derivative contracts not cleared by a CCP. These techniques include timely confirmation, portfolio reconciliation, portfolio compression, and dispute resolution processes. • Mark-to-market and mark-to-model valuations: FCs and NFCs must perform daily mark-to-market valuations of their derivative positions. If market conditions prevent this, they must use reliable and prudent mark-to-model valuations. • Reporting obligations: as discussed in 3.1.5 Reporting . • Clearing obligations: as discussed in 3.1.2 Clear- ing . • UK FCs, as authorised entities, can also be sub - ject to the full range of requirements under, among other things, UK MiFID II and the FCA’s Hand - book. This includes the FCA’s high-level principles, as well as specific requirements relating to, for instance: (a) financial promotions and client communica - tions; (b) client classification and suitability; (c) conflicts of interest; (d) business continuity and outsourcing; (e) the FCA’s Senior Managers and Certification Regime; (f) market conduct; (g) anti-money laundering, bribery and fraud; and (h) record-keeping. 3.1.7 Commercial End Users It would be prohibitively expensive for many end-users to have the middle- and back-office infrastructure to support compliance with the UK EMIR reporting, clearing and risk management obligations and the UK MiFID II trading obligations. Therefore, UK EMIR, as amended by UK EMIR Refit, provides substantial relief for those end users who are NFC-s. UK FCs must now report, on behalf of the NFC-, any OTC deriva - tive transaction they enter into with an NFC-, unless the NFC- determines to do its own reporting. Further,
NFC-s are no longer required to report the OTC deriv - atives transactions they enter into with third-country entities that would be FCs were they established in the UK, provided a reporting equivalence decision has been made for that jurisdiction. NFC-s are exempt from both UK EMIR clearing and UMRs. NFC-s are, however, subject to the UK EMIR risk mitigation obli - gation, which requires portfolio reconciliation, dispute resolution and portfolio compression (if certain thresh - olds are met). However, such compliance obligations in general are more burdensome to the FC than to an NFC-; for instance, an NFC- can elect to be a receiv - ing entity and not a sending entity for the purposes of the portfolio reconciliation obligation. In contrast, NFC+s are equally subject to all UK EMIR obligations as an FC above one or more clearing thresholds (FC+). However, certain UK EMIR exemp - tions apply for NFC groups, regardless of whether the NFC is an NFC-. As discussed in 3.1.5 Reporting , an exemption from UK EMIR reporting exists when, among other conditions, one party to the OTC deriva - tive transaction is an NFC and the parent undertaking of the group is not an FC. An intra-group exemption from both the UK EMIR clearing obligation and mar - gin obligation for uncleared OTC derivatives exists for NFCs (and FCs) provided an application is filed with and granted by the FCA. 3.2 Local UK regulation of the derivatives markets and market participants occurs solely at the national level. 3.3 Self-Regulatory Organisations, Independent Authorities, and Exchanges The UK derivatives regulatory regime does not have any “self-regulatory organisations” with quasi-stat - utory rulemaking authority akin to the US National Futures Association, nor do UK trading venues have the authority to establish or enforce any industry-wide standards or regulations.
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