As part of its quarterly consultation paper No 38 (CP22/26), the FCA consulted on changes to the derivatives trading obligation (DTO) – removal of USD LIBOR derivative products from the scope of the DTO to reflect USD interest rate benchmark reform (Chapter 3 of the CP).

ISDA responded to this consultation, welcoming the FCA’s approach with regards to removing all derivatives products referencing USD LIBOR from the scope of the DTO from 24 April 2023. These proposed changes appear necessary and logical – now that the scope of the derivatives clearing obligation has been amended to exclude all USD LIBOR products from that same date.

ISDA also welcomes the FCA’s approach with regards to SOFR products – i.e. not proposing to include SOFR OIS in the scope of the DTO, continuing to monitor market data, and coordinating with the CFTC if it becomes appropriate to consider introducing a trading mandate.

ISDA appreciates the FCA’s consideration for industry’s comments regarding which and when SOFR products should be brought within the scope of the DTO. ISDA members emphasise that the current data series are not long enough to develop an informed view – based on the venue and liquidity test, as required under Article 32(2) of UK MiFIR – on which SOFR products should be brought within the scope of the DTO. In addition, ISDA members consider that before incorporating a new class of products under the scope of the DTO, the FCA should (i) at least wait until its new power to suspend or modify the DTO, as set out under Article 28a of the Financial Services and Markets Bill, is available; (ii) build in a sufficient period of time after the final transition date away from USD LIBOR to SOFR (30 June 2023), as the industry will be focused on managing the actual transition at that time and considering introducing a new DTO too soon after that date would pose a challenge to firms’ systems and operations; (iii) provide for an implementation period of at least 6 months before introducing any potential future adjustment to the scope of the DTO, to allow for a smooth preparation within firms’ systems and operations.

Please find below the response form that ISDA submitted to the FCA.