TITLE II

CLEARING, REPORTING AND RISK MITIGATION OF OTC DERIVATIVES

Clearing obligation
Article 4
1
Counterparties shall clear all OTC derivative contracts pertaining to a class of OTC derivatives that has been declared subject to the clearing obligation in accordance with Article 5(2), if those contracts fulfil both of the following conditions:
a
they have been concluded in one of the following ways:
1. between two financial counterparties that
are subject to the conditions
set out in the second subparagraph of Article 4a(1);
2. between a financial counterparty that
is subject to the conditions
set out in the second subparagraph of Article 4a(1) and a non-financial counterparty that
is subject to the conditions
set out in the second subparagraph of Article 10(1);
3. between two non-financial counterparties that
are subject to the conditions
set out in the second subparagraph of Article 10(1);
4. between, on the one side, a financial counterparty that
is subject to the conditions
set out in the second subparagraph of Article 4a(1) or a non-financial counterparty that
is subject to the conditions
set out in the second subparagraph of Article 10(1), and, on the other side, an entity established in a third country that would be subject to the clearing obligation if it were established in the
United Kingdom
;
5. between two entities established in one or more third countries that would be subject to the clearing obligation if they were established in the United Kingdom, provided that the contract has a direct, substantial and foreseeable effect within the United Kingdom or where such an obligation is necessary or appropriate to prevent the evasion of any provisions of this Regulation; and
b
they are entered into or novated on or after the date on which the clearing obligation takes effect, provided that, on the date they are entered into or novated, both counterparties meet the conditions set out in point (a).
2
Without prejudice to risk-mitigation techniques under Article 11, OTC derivative contracts that are intragroup transactions as described in Article 3 shall not be subject to the clearing obligation.
The exemption set out in the first subparagraph shall apply only:
a
where two counterparties established in the United Kingdom belonging to the same group have first notified the FCA in writing that they intend to make use of the exemption for the OTC derivative contracts concluded between each other. The notification shall be made not less than 30 calendar days before the use of the exemption. Within 30 calendar days after receipt of that notification, the FCA may object to the use of this exemption if the transactions between the counterparties do not meet the conditions laid down in Article 3, without prejudice to the right of the FCA to object after that period of 30 calendar days has expired where those conditions are no longer met. ... ;
b
to OTC derivative contracts between two counterparties belonging to the same group which are established in the United Kingdom and in a third country, where the counterparty established in the United Kingdom has been authorised to apply the exemption by the FCA within 30 calendar days after it has been notified by the counterparty established in the United Kingdom, provided that the conditions laid down in Article 3 are met. ...
3
The OTC derivative contracts that are subject to the clearing obligation pursuant to paragraph 1 shall be cleared in a CCP authorised under Article 14 or recognised under Article 25 to clear that class of OTC derivatives and listed in the register in accordance with Article 6(2)(b).
For that purpose a counterparty shall become a clearing member, a client, or shall establish indirect clearing arrangements with a clearing member, provided that those arrangements do not increase counterparty risk and ensure that the assets and positions of the counterparty benefit from protection with equivalent effect to that referred to in Articles 39 and 48.
3A
Clearing members and clients which provide clearing services, whether directly or indirectly, must—
a
provide those services under fair, reasonable, non-discriminatory and transparent commercial terms, and
b
take all reasonable measures to identify, prevent, manage and monitor conflicts of interest, in particular between the trading unit and the clearing unit, that may adversely affect the fair, reasonable, non-discriminatory and transparent provision of clearing services.
3B
The duty under paragraph 3A(a)—
a
does not oblige clearing members or clients to contract, and
b
does not prevent clearing members or clients from taking steps to control the risks related to the clearing services offered.
3C
The duty to take the measures described in paragraph 3A(b) includes a duty to do so where trading and clearing services are provided by different legal entities belonging to the same group.
3D
The duties under paragraph 3A (read with paragraphs 3B and 3C) apply in relation to an undertaking with an indirect contractual arrangement with a clearing member of a CCP which enables that undertaking to clear its transactions with a CCP as they apply in relation to a client.
4
The FCA may make technical standards specifying the contracts that are considered to have a direct, substantial and foreseeable effect within the United Kingdom or the cases where it is necessary or appropriate to prevent the evasion of any provision of this Regulation as referred to in paragraph 1(a)(v).
The Bank of England may make technical standards in relation to CCPs specifying the types of indirect contractual arrangements that meet the conditions referred to in the second sub-paragraph of paragraph 3.
The FCA may make technical standards for cases other than CCPs specifying the types of indirect contractual arrangements that meet—
a
the conditions referred to in the second sub-paragraph of paragraph 3; and
b
conditions for reasonable and transparent commercial terms.
4A
The FCA may make rules specifying the conditions under which the commercial terms referred to in paragraph 3A(a) are to be considered fair, reasonable, non-discriminatory and transparent.
5
Paragraph 1 of this Article shall not apply with respect to OTC derivative contracts that are concluded by covered bond entities in connection with a covered bond, or by a securitisation special purpose entity in connection with a securitisation,
as defined in regulation 3(1) of the Securitisation Regulations 2024
provided that:
a
in the case of securitisation special purpose entities, the securitisation special purpose entity shall solely issue securitisations
of one or more of the following kinds—
i
an STS securitisation as defined in regulation 9 of the Securitisation Regulations 2024,
ii
an overseas STS securitisation as defined in regulation 12(2) of those Regulations;
iii
a qualifying EU securitisation as defined in regulation 12(3) of those Regulations.
b
the OTC derivative contract is used only to hedge interest rate or currency mismatches under the covered bond or securitisation; and
c
the arrangements under the covered bond or securitisation adequately mitigate counterparty credit risk with respect to the OTC derivative contracts concluded by the covered bond entity or securitisation special purpose entity in connection with the covered bond or securitisation.
5A. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6
In order to ensure consistent application of this Article, and taking into account the need to prevent regulatory arbitrage, the
FCA may make
technical standards specifying criteria for establishing which arrangements under covered bonds or securitisations adequately mitigate counterparty credit risk, within the meaning of paragraph 5.
...
Substituted by Regulation (EU) 2019/834 of the European Parliament and of the Council of 20 May 2019 amending Regulation (EU) No 648/2012 as regards the clearing obligation, the suspension of the clearing obligation, the reporting requirements, the risk-mitigation techniques for OTC derivative contracts not cleared by a central counterparty, the registration and supervision of trade repositories and the requirements for trade repositories (Text with EEA relevance).
Inserted by Regulation (EU) 2017/2402 of the European Parliament and of the Council of 12 December 2017 laying down a general framework for securitisation and creating a specific framework for simple, transparent and standardised securitisation, and amending Directives 2009/65/EC, 2009/138/EC and 2011/61/EU and Regulations (EC) No 1060/2009 and (EU) No 648/2012.
Words in Art. 4(1)(a)(i) substituted (31.12.2020) by The Over the Counter Derivatives, Central Counterparties and Trade Repositories (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2019 (S.I. 2019/335), regs. 1(1), 14(2)(a)(i) (as amended by S.I. 2019/1416, regs. 1(2), 14(a)) (with savings in S.I. 2019/680, reg. 11); 2020 c. 1, Sch. 5 para. 1(1)
Words in Art. 4(1)(a)(iii) substituted (31.12.2020) by The Over the Counter Derivatives, Central Counterparties and Trade Repositories (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2019 (S.I. 2019/335), regs. 1(1), 14(2)(a)(i) (as amended by S.I. 2019/1416, regs. 1(2), 14(a)) (with savings in S.I. 2019/680, reg. 11); 2020 c. 1, Sch. 5 para. 1(1)
Words in Art. 4(1)(a)(ii) substituted (31.12.2020) by The Over the Counter Derivatives, Central Counterparties and Trade Repositories (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2019 (S.I. 2019/335), regs. 1(1), 14(2)(a)(ii) (as amended by S.I. 2019/1416, regs. 1(2), 14(a)) (with savings in S.I. 2019/680, reg. 11); 2020 c. 1, Sch. 5 para. 1(1)
Words in Art. 4(1)(a)(iv) substituted (31.12.2020) by The Over the Counter Derivatives, Central Counterparties and Trade Repositories (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2019 (S.I. 2019/335), regs. 1(1), 14(2)(a)(ii) (as amended by S.I. 2019/1416, regs. 1(2), 14(a)) (with savings in S.I. 2019/680, reg. 11); 2020 c. 1, Sch. 5 para. 1(1)
Words in Art. 4(1)(a)(iv) substituted (31.12.2020) by The Over the Counter Derivatives, Central Counterparties and Trade Repositories (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2019 (S.I. 2019/335), regs. 1(1), 14(2)(a)(iii) (as amended by S.I. 2019/1416, regs. 1(2), 14(a)) (with savings in S.I. 2019/680, reg. 11); 2020 c. 1, Sch. 5 para. 1(1)
Words in Art. 4(1)(a)(v) substituted (31.12.2020) by The Over the Counter Derivatives, Central Counterparties and Trade Repositories (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2019 (S.I. 2019/335), regs. 1(1), 14(2)(a)(iii) (as amended by S.I. 2019/1416, regs. 1(2), 14(a)) (with savings in S.I. 2019/680, reg. 11); 2020 c. 1, Sch. 5 para. 1(1)
Words in Art. 4(2)(a) substituted (31.12.2020) by The Over the Counter Derivatives, Central Counterparties and Trade Repositories (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2019 (S.I. 2019/335), regs. 1(1), 14(3)(a)(i) (with savings in S.I. 2019/680, reg. 11); 2020 c. 1, Sch. 5 para. 1(1)
Words in Art. 4(2)(a) substituted (31.12.2020) by The Over the Counter Derivatives, Central Counterparties and Trade Repositories (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2019 (S.I. 2019/335), regs. 1(1), 14(3)(a)(ii) (with savings in S.I. 2019/680, reg. 11); 2020 c. 1, Sch. 5 para. 1(1)
Words in Art. 4(2)(a) substituted (31.12.2020) by The Over the Counter Derivatives, Central Counterparties and Trade Repositories (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2019 (S.I. 2019/335), regs. 1(1), 14(3)(a)(iii) (with savings in S.I. 2019/680, reg. 11); 2020 c. 1, Sch. 5 para. 1(1)
Words in Art. 4(2)(a) omitted (31.12.2020) by virtue of The Over the Counter Derivatives, Central Counterparties and Trade Repositories (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2019 (S.I. 2019/335), regs. 1(1), 14(3)(a)(iv) (with savings in S.I. 2019/680, reg. 11); 2020 c. 1, Sch. 5 para. 1(1)
Words in Art. 4(2)(b) substituted (31.12.2020) by The Over the Counter Derivatives, Central Counterparties and Trade Repositories (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2019 (S.I. 2019/335), regs. 1(1), 14(3)(b)(i) (with savings in S.I. 2019/680, reg. 11); 2020 c. 1, Sch. 5 para. 1(1)
Words in Art. 4(2)(b) substituted (31.12.2020) by The Over the Counter Derivatives, Central Counterparties and Trade Repositories (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2019 (S.I. 2019/335), regs. 1(1), 14(3)(b)(ii) (with savings in S.I. 2019/680, reg. 11); 2020 c. 1, Sch. 5 para. 1(1)
Words in Art. 4(2)(b) substituted (31.12.2020) by The Over the Counter Derivatives, Central Counterparties and Trade Repositories (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2019 (S.I. 2019/335), regs. 1(1), 14(3)(b)(iii) (with savings in S.I. 2019/680, reg. 11 ); 2020 c. 1, Sch. 5 para. 1(1)
Words in Art. 4(2)(b) omitted (31.12.2020) by virtue of The Over the Counter Derivatives, Central Counterparties and Trade Repositories (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2019 (S.I. 2019/335), regs. 1(1), 14(3)(b)(iv) (with savings in S.I. 2019/680, reg. 11); 2020 c. 1, Sch. 5 para. 1(1)
Art. 4(4) substituted (31.12.2020) by The Over the Counter Derivatives, Central Counterparties and Trade Repositories (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2019 (S.I. 2019/335), regs. 1(1), 14(4) (as amended by S.I. 2020/1385, regs. 1(4), 52(3)) (with savings in S.I. 2019/680, reg. 11); 2020 c. 1, Sch. 5 para. 1(1)
Words in Art. 4(6) substituted (31.12.2020) by The Securitisation (Amendment) (EU Exit) Regulations 2019 (S.I. 2019/660), regs. 1(2), 37(b)(i) (with savings in S.I. 2019/680, reg. 11); 2020 c. 1, Sch. 5 para. 1(1)
Words in Art. 4(6) omitted (31.12.2020) by virtue of The Securitisation (Amendment) (EU Exit) Regulations 2019 (S.I. 2019/660), regs. 1(2), 37(b)(ii) (with savings in S.I. 2019/680, reg. 11); 2020 c. 1, Sch. 5 para. 1(1)
Art. 4(3A)-(3D) inserted (1.7.2021) by Financial Services Act 2021 (c. 22), ss. 40(2)(a), 49(5); S.I. 2021/739, reg. 3(v)
Art. 4(4A) inserted (1.7.2021) by Financial Services Act 2021 (c. 22), ss. 40(2)(b), 49(5) (with s. 40(5)); S.I. 2021/739, reg. 3(v)
Art. 4(5A) omitted (1.11.2024) by virtue of The Securitisation (Amendment) Regulations 2024 (S.I. 2024/705), reg. 1(3), Sch. 2 para. 12(3)
Words in Art. 4(5) substituted (1.11.2024) by The Securitisation (Amendment) Regulations 2024 (S.I. 2024/705), reg. 1(3), Sch. 2 para. 12(2)(a)
Words in Art. 4(5)(a) substituted (1.11.2024) by The Securitisation (Amendment) Regulations 2024 (S.I. 2024/705), reg. 1(3), Sch. 2 para. 12(2)(b)