CP13/23 – Margin requirements for non-centrally cleared derivatives: Amendments to BTS 2016/2251

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Responses are requested by Wednesday 18 October 2023.

Although the FCA and PRA have considered the proposals independently of one another and in accordance with their statutory objectives, we have decided to consult jointly to avoid unnecessary duplication. The FCA makes all responses to formal consultation available for public inspection unless the respondent requests otherwise. The FCA will not regard a standard confidentiality statement in an email message as a request for non-disclosure. Despite this, the FCA may be asked to disclose a confidential response under the Freedom of Information Act 2000. The FCA may consult respondents if it receives such a request. Any decision the FCA makes not to disclose the responses is reviewable by the Information Commissioner and the Information Rights Tribunal.

Please address any comments or enquiries by email to:
[email protected] for PRA-regulated firms, or [email protected] for FCA firms. Other respondents should submit responses to both authorities.

Alternatively, please address any comments or enquiries to the below.

For PRA-regulated firms:

Muhammad Anuar / Market and Counterparty Risk Policy
Prudential Regulation Authority
20 Moorgate
London
EC2R 6DA

For FCA firms:

Phillip Bronk and Oliver McCausland / Market Conduct and Post-Trade Policy
Financial Conduct Authority
12 Endeavour Square
London
E20 1JN

1. Overview

1.1 This consultation paper (CP) sets out the Prudential Regulation Authority's (PRA) and Financial Conduct Authority's (FCA) proposal to extend the temporary exemptions for single-stock equity options and index options from the UK bilateral margining requirements from 4 January 2024 until 4 January 2026. This CP also sets out the PRA's and the FCA's proposed approach to model pre-approval in relation to bilateral initial margin models.

1.2 The proposal to extend the temporary exemptions for single-stock equity options and index options from the UK bilateral margining requirements in this CP would result in changes to the UK version of Commission Delegated Regulation (EU) 2016/2251 of 4 October 2016 and the regulatory technical standards for risk-mitigation techniques for over-the-counter (OTC) derivative contracts not cleared by a central counterparty (hereafter Binding Technical Standards (BTS) 2016/2251). This BTS supplements Article 11(15) of Regulation (EU) 648/2012 on OTC derivatives, central counterparties, and trade repositories (UK European Market Infrastructure Regulation (EMIR)) (Appendix 1).^{footnote [1]}

1.3 The proposals in this CP aim to:

• maintain the status quo under the temporary exemptions for single-stock equity options and index options from the UK bilateral margining requirements until 4 January 2026, allowing the PRA and the FCA to gather the evidence necessary to create a permanent regime; and
• set out the PRA's and the FCA's approach to model pre-approval in relation to bilateral initial margin models.

1.4 The PRA and the FCA consider that the proposed extension of the temporary exemption for single-stock equity options and index options from UK bilateral margining requirements strikes a proportionate balance in meeting the objectives of prudential safety and soundness, maintaining consistency of approaches and a level playing field across jurisdictions. The FCA considers that the proposal meets its strategic objective of ensuring that the relevant markets function well and its operational objective of protecting and enhancing the integrity of the UK financial system. Extending the temporary exemption would also provide the PRA and the FCA with the opportunity to gather evidence on current market practices and risks so they can assess the best permanent framework for the UK. The PRA and the FCA will then reconsider if, in light of information and evidence gathered, an exemption, whether partial or full, remains appropriate for these products as part of the permanent framework.

1.5 In relation to the proposed approach to model pre-approval for bilateral initial margin models, the PRA considers it remains prudent and proportionate to focus on reviewing and assessing existing practices and known areas of improvements for existing initial margin models and risk management. This is undertaken in accordance with the existing supervisory framework.^{footnote [2]} The FCA considers that the existing supervisory powers in relation to initial margin models are appropriate at this stage and that the existing supervisory framework is proportionate. Given the current implementation status, and substantial review work already undertaken by the PRA, the PRA and the FCA are not proposing to develop and introduce a formal pre-approval requirement in the BTS at this stage. Instead, the PRA will continue to use the existing framework to ensure models and practices meet requirements. The FCA will engage with firms on their models where necessary using existing supervisory powers.

1.6 The PRA and the FCA have considered whether the proposals set out in this CP would support the international competitiveness of the UK economy and its growth in the medium to long term. The PRA and the FCA consider that the proposal to temporarily extend the exemption for single-stock equity options and index options from the UK bilateral margining requirements is compatible with supporting the medium to long-term growth and international competitiveness of the UK economy. This is because the proposed temporary extension to the exemption would maintain a level playing field with other major jurisdictions, and promote market stability while the PRA and the FCA collect more information to determine the optimal end-state framework. The PRA and the FCA consider that the impact of the proposed approach to model pre-approval in relation to bilateral initial margin models is not material to the international competitiveness of the UK and the medium to long-term growth of the economy.

1.7 This CP is relevant to banks, building societies, and PRA-designated investment firms in scope of the margin requirements under UK EMIR. In addition, this CP is relevant to all FCA solo-regulated entities and non-financial counterparties in scope of the margin requirements under UK EMIR (FCA firms).

1.8 The proposal to extend the temporary exemption for single-stock equity options and index options from the UK bilateral margining requirements does not result in any change to firms' current requirements in this area. For this reason, the PRA and the FCA do not expect firms to incur material costs as a direct result of this proposal. Similarly, the proposed approach to model pre-approval in relation to bilateral margin models does not make any changes to firms' requirements. Thus, firms are not expected to incur material costs as a direct result of this proposal.

1.9 The PRA has a statutory duty to consult the FCA when making technical standards instruments (FSMA s138P(4)). The PRA also has a statutory duty to publish draft technical standards instruments through which the PRA considers to be the best way to bring them to the attention of the public (FSMA s138S(2)(g)). When not making rules, the PRA has a public law duty to consult widely where it would be fair to do so.

1.10 In carrying out its policy making functions, the PRA is required to comply with several legal obligations. Appendix 3 lists the statutory obligations applicable to the PRA's policy development process. The analysis in this CP explains how the proposals have had regard to the most significant matters, including an explanation of the ways in which having regard to these matters has affected the proposals.

1.11 The FCA has a statutory duty to consult when amending a technical standard such as BTS 2016/2251 under s138S FSMA. Please refer to the 'FCA compatibility statement' section in the Chapter 'FCA Cost benefit analysis' for an explanation of how the FCA is complying with relevant statutory requirements applicable to the proposal in this consultation. When not making rules, as a public authority, the FCA may have a public law duty to publicly consult where it would be fair to do so or may choose to consult for other reasons.

Background

1.12 In 2011, to mitigate the risks associated with non-centrally cleared OTC derivatives, the Group of Twenty (G20) agreed to add uncleared margin requirements to its reform programme, and tasked the Basel Committee on Banking Supervision (BCBS) and the International Organisation of Securities Commissions (IOSCO) to jointly develop consistent global standards. In 2013, BCBS and IOSCO published a standard on Margin requirements for non-centrally cleared derivatives. The introduction of the bilateral margining requirements is a key aspect of the post-financial crisis reforms aimed at mitigating systemic risk and incentivising central clearing. These requirements are implemented in the UK by the onshored EMIR and BTS 2016/2251.^{footnote [3]}

1.13 The standard requires counterparties to exchange initial margin and variation margin on uncleared derivatives. Initial margin protects the transacting parties from the potential future exposure that could arise, in the event that one counterparty defaults. Variation margin protects the transacting parties from changes in the mark-to-market value of the contract after the transaction has been executed.

1.14 The EU version of BTS 2016/2251, which implements the substantive aspects of the BCBS and IOSCO framework in the EU, was published in the EU Official Journal on Thursday 15 December 2016. The Bank of England (Bank) and the PRA policy statement (PS) 27/20 - The Bank of England's amendments under the European Union (Withdrawal) Act 2018: Changes before the end of the transition period noted an intention to consider whether pending amendments, including proposed extension to the temporary exemption for single-stock equity options and index options from the UK bilateral margining requirements, should be adopted into the UK framework.

1.15 PS14/21 - Margin requirements for non-centrally cleared derivatives: Amendments to BTS 2016/2251 made amendments to the BTS to extend the temporary exemption for single-stock equity options and index options from the UK bilateral margining requirements until 4 January 2024. PS11/22 made further amendments to the BTS on issues not related to the proposals in this CP.

1.16 Separately, the industry has asked the PRA to clarify whether it intends to introduce a supervisory pre-approval requirement for using initial margin models. The PRA and the FCA have considered the approach for model pre-approval, and are consulting on an approach in this CP.

Implementation

1.17 To extend the temporary exemption for single-stock equity options and index options from the UK bilateral margining requirements, the PRA and the FCA propose to amend BTS 2016/2251 using powers under Article 11(15) of EMIR, and s138P of FSMA. The PRA and the FCA propose that the implementation date for the changes resulting from this CP would start when the final technical standards are published. Consistent with the respective mandates under EMIR, the PRA's proposed amendments will apply to PRA-regulated firms, while the FCA's proposed amendments will apply to all other firms covered by the requirements. For the purpose of this consultation, the proposals are identical.

1.18 This is a joint consultation by the PRA and the FCA. The PRA and the FCA have also consulted with the Bank and HM Treasury (HMT).

Responses and next steps

1.19 This consultation closes on Wednesday 18 October 2023.The PRA and the FCA invite feedback on the proposals set out in this consultation. PRA-regulated firms should address any comments or enquiries to [email protected]. FCA firms should address any comments or enquiries to [email protected]. Please indicate in your response if you believe any of the proposals in this consultation paper are likely to impact persons who share protected characteristics under the Equality Act 2010, and if so, please explain which groups and what the impact on such groups might be.

1.20 Following consideration of any responses, the PRA and the FCA will submit the updated BTS 2016/2251 to HMT for approval, in accordance with s138R of FSMA. Assuming HMT provides approval, the PRA and the FCA will make and publish the amendments to the technical standards for the firms they regulate. The PRA and the FCA will, at the same time, confirm the approach for model pre-approval in relation to bilateral initial margin models.

2. The regulators' proposals

Bilateral margin requirements for single-stock equity options and index options contracts

2.1 The PRA and the FCA propose to extend the temporary exemption from the UK bilateral margining requirement in BTS 2016/2251 for single-stock equity and index options from 4 January 2024 until 4 January 2026.

2.2 The PRA and the FCA note that firms are exposed to counterparty credit risk when entering into certain derivatives contracts, including single-stock equity and index options contracts. As such, the BCBS-IOSCO margining standards envisage the requirements applying to these contracts. However, the previous temporary exemptions for single-stock equity and index options were introduced in the UK to avoid market fragmentation, to ensure a level playing field across jurisdictions, and to avoid scope for regulatory arbitrage given many jurisdictions provided a similar exemption. At the time, the PRA and the FCA also noted their desire to implement the BCBS-IOSCO margining standards faithfully, by applying margining requirements on these contracts to protect firms from counterparty credit risk. As such, the PRA and the FCA have considered the risk of retaining the exemption against the benefit of removing the exemption, either for specific counterparties or all firms.

2.3 The PRA and the FCA recognise there has yet to be a material change to the international positions of authorities across other jurisdictions since the most recent extension to the temporary exemption. The PRA and the FCA also recognise that in some cases there are already collateralisation arrangements in place between some counterparties, for instance between large firms or where they form part of a wider portfolio. Those arrangements help to mitigate some of the risk that the bilateral margining requirements would otherwise capture.

2.4 The PRA and the FCA accordingly consider that, on balance, extending the temporary exemption at this stage is warranted, and would provide time for the PRA and the FCA to undertake deeper analysis to develop the final UK framework. The PRA and the FCA consider this approach strikes a proportionate balance between maintaining the safety and soundness of firms and ensuring consistency of approaches and a level playing field across jurisdictions while the PRA and the FCA develop the end-state framework. The PRA and the FCA will, in the meanwhile, gather information on current market practices and risks posed by these types of products in order to inform their permanent approach.

Model pre-approval in relation to bilateral initial margin models

2.5 The PRA and the FCA propose not to implement a supervisory pre-approval requirement at this stage for using initial margin models.

2.6 BCBS-IOSCO margining standards require firms to obtain pre-approval from supervisors before using initial margin models. The UK regime did not implement this requirement when the rules were finalised. That is because EU EMIR did not provide the mandate to competent authorities to specify the supervisory procedures for ensuring the initial and ongoing validation of the relevant risk-management procedures. This includes the supervisory procedures for validating firms' use of models to calculate initial margin.^{footnote [4]} Since the introduction of the BCBS-IOSCO margining standards, industry has coalesced around an industry-wide model, and its use was subsequently adopted by major market participants. This may not have been foreseen when the BCBS-IOSCO margining standards were developed.

2.7 Model pre-approval is only one element of model supervision. The UK regime sets out detailed and prescriptive modelling requirements compared to the BCBS-IOSCO margining standards. The UK framework already allows supervisors to review ongoing model compliance with its requirements and the PRA has actively engaged with firms and model developers to gain comfort that models satisfy the requirements. Notwithstanding the absence of a formal pre-approval process, the PRA has continued to use its existing supervisory framework to further its statutory objectives. FCA firms mostly rely on the initial margin models of their PRA-supervised counterparties, which are subject to the aforementioned PRA supervisory framework to ensure modelling requirements are met. Furthermore, the FCA may also use existing supervisory powers to engage with firms on models where necessary to ensure compliance with bilateral margining requirements, including modelling requirements.

2.8 Reflecting on the considerable work and reviews undertaken to date, the PRA considers it prudent and proportionate to focus on reviewing and assessing existing practices and known areas where improvements in initial margin models risk management are needed, rather than a wholesale review that a pre-approval process would entail. The FCA considers that the existing supervisory powers in relation to initial margin models under the UK regime are appropriate at this stage and that the existing supervisory framework is proportionate. Hence, the PRA and the FCA do not propose to introduce a formal supervisory pre-approval requirement at this time. Instead, the PRA proposes to use the existing framework to ensure that the current requirements are met at all times. That framework will also be used to assess whether proposed changes are adequately implemented. When determining this, supervisors may require some pre-engagement from firms. At this time, the PRA considers this can be achieved within the current supervisory framework. The FCA will continue to use its existing supervisory powers to engage with firms on models where necessary to ensure modelling requirements are met.

3. PRA statutory obligations

PRA objectives analysis

3.1 The PRA has a primary objective to promote the safety and soundness of firms that it regulates. The PRA also has a secondary objective to facilitate effective competition in the markets for services provided by PRA-authorised persons in carrying out regulated activities.

3.2 The Financial Services and Markets (FSM) Act 2023 includes measures to amend the PRA's objectives by introducing a new secondary competitiveness and growth objective. At the point that those measures come into force, this new secondary objective requires the PRA (in discharging its general functions in a way that advances its primary objective and so far as reasonably possible) to act in a way that facilitates, subject to aligning with relevant international standards: (a) the international competitiveness of the economy of the UK (including in particular the financial services sector through the contribution of PRA-authorised persons); and (b) its growth in the medium to long term. Bearing this in mind and the proposed implementation date for the changes proposed in this, the PRA has considered whether the proposals set out in this CP would facilitate the international competitiveness of the UK economy and its growth in the medium to long term.

3.3 The PRA notes that firms are exposed to counterparty credit risk when entering into certain derivatives contracts, including single-stock equity and index options contracts. The BCBS-IOSCO margining standards also envisage that the requirements apply to these contracts. However, the PRA also recognises that:

• in some cases, firms may already exchange collateral to mitigate some risks on these contracts
• where firms do not exchange collateral on such contracts, firms may be required to maintain capital to cover potential losses
• the exposures arising from these contracts are relatively small versus large firms' total risks from other types of contracts and counterparties
• the international position, where many jurisdictions provide a similar exemption from the application of margin requirements on such contracts, is unchanged

3.4 The PRA has assessed its proposal to extend the temporary exemption from the UK bilateral margining requirement for single-stock equity and index options against its objectives. On balance, the PRA considers the proposed temporary exemption at this stage is warranted. The PRA will gather information on current market practices and risks posed by these types of products to develop its approach in the final framework.

3.5 The PRA has considered the impact of the proposal in facilitating the international competitiveness of the UK economy and its growth in the medium to long term. The PRA considers the proposal to temporarily extend the exemption for single-stock equity options and index options from the UK bilateral margining requirements is compatible with supporting the medium to long-term growth and international competitiveness of the UK. This is because the proposed temporary extension to the exemption will maintain a level playing field with other major jurisdictions and ensure market stability to preserve the UK's competitiveness as a global financial centre while the PRA determines the optimal end-state framework. The PRA considers that the impact of the proposed approach to model pre-approval in relation to bilateral IM models to the medium to long-term growth and international competitiveness of the UK economy is immaterial.

3.6 On the proposed approach not to implement a supervisory pre-approval requirement at this stage for using IM models, firms are already using IM models and the PRA already regularly uses existing supervisory powers to engage with firms on models. The PRA considers the current approach to be sufficiently prudent and proportionate at this stage.

Cost benefit analysis (CBA)

3.7 The PRA considers that the proposals do not make any changes to the requirements that apply to firms, and does not expect firms to incur material additional costs as a direct result of these proposals.

'Have regards' analysis

3.8 In developing these proposals, the PRA has had regard to the FSMA regulatory principles and the aspects of the Government's economic policy set out in the HMT recommendation letter from 2022. The following factors, to which the PRA is required to have regard, were significant in the PRA's analysis of the proposal:

1. The principle that a burden or restriction which is imposed on a person should be proportionate to the benefits which are expected to result from the imposition of that burden (FSMA regulatory principles): The PRA considered whether it would be more proportionate to remove the exemption for some or all firms. The PRA notes some firms already exchange collateral on the single-stock equity and index options contracts. As such, the PRA considers the marginal difference from removing or retaining the exemption to not be significant. However, the PRA notes that it needs additional information and evidence to assess the optimal end-state framework, including either to remove some or all of the exemptions. The PRA also considered whether it would be more proportionate to introduce a supervisory pre-approval regime for IM models. The PRA considers that, while there could be benefits for such an approach, implementing a supervisory pre-approval requirement at this time provides limited benefit against additional burden imposed to firms. Hence, the PRA considers that the proposal in this CP is the most proportionate option.

2. The need to use the PRA's resources in the most efficient and economic way: The PRA considered whether it would be more proportionate to introduce a supervisory pre-approval regime for using IM models. The PRA considers that implementing a supervisory pre-approval requirement at this stage introduces additional burden on the PRA's resources that is not proportionate to the risk. While there are clear benefits to reviewing models prior to implementation, the burden of approving models already in use, for which considerable supervisory work has already been undertaken, is not warranted at this stage. Hence, the PRA considers that the approach in the proposals uses the PRA's resources in the most efficient and economic way at this time.

3. Growth (HMT recommendation letter), and sustainable growth (FSMA regulatory principles): The PRA has considered whether the proposals have an impact on the sustainable growth in the economy of the UK. The PRA considers the proposal to temporarily extend the exemption for single-stock equity options and index options from the UK bilateral margining requirements is compatible with supporting the medium to long-term growth of the UK economy. The PRA also considers that the impact of the proposed approach to model pre-approval in relation to bilateral IM models to be immaterial to affect the competitiveness and growth of the UK economy and therefore has not identified any impact on the growth in the UK economy.

4. Competitiveness (HMT recommendation letter): The PRA notes that some firms already exchange collateral on the single-stock equity and index options contracts. As such, the PRA considers the marginal difference from removing or retaining the exemption to not be significant. Therefore, the PRA has not at this stage identified any significant impact on competitiveness as a result of the proposals.

3.9 The PRA has had regard to other factors as it is required to do. Where analysis has not been provided against a 'have regard' for this set of proposals, it is because the PRA considers that 'have regard' to not be a significant factor for this set of proposals.

Impact on mutuals

3.10 The PRA considers that the proposals do not make any changes to the requirements that apply to all firms, and therefore considers the impact of the proposed rule changes on mutuals is expected to be no different from the impact on other firms.

Equality and diversity

3.11 The PRA considers that the proposals do not give rise to equality and diversity implications.

4. FCA cost benefit analysis

FCA cost benefit analysis

4.1 FSMA, as amended by the Financial Service Act 2012, generally requires the FCA to publish a cost benefit analysis (CBA) of our proposed technical standards. Specifically, section 138I requires the FCA to publish a CBA of proposed technical standards, defined as 'an analysis of the costs, together with an analysis of the benefits that will arise if the proposed rules are made'.

4.2 Given the proposals reflect current market practice and maintain the current requirements for in-scope firms, the FCA does not expect firms to incur material additional costs as a direct result of this proposal. Accordingly, the FCA has not performed a cost benefit analysis in relation to this proposal under the exemption in FSMA section 138L (3).

4.3 The FCA and PRA are providing separate CBAs given the different supervisory remits. The FCA are consulting in relation to all FCA solo-regulated entities and non-financial counterparties in the scope of the margin requirements. As such, this chapter only considers the costs and benefits related to those entities.

FCA compatibility statement

Compliance with legal requirements

4.4 This Chapter records the FCA's compliance with a number of legal requirements applicable to the proposal in this consultation, including an explanation of the FCA's reasons for concluding that the proposals are compatible with certain requirements under the Financial Services and Markets Act 2000 (FSMA).

4.5 When consulting on technical standards, the FCA is required by section 138S(2)(f) and 138I(2)(d) FSMA to include an explanation of why it believes making the proposed rules is (a) compatible with its general duty, under s. 1B(1) FSMA, so far as reasonably possible, to act in a way which is compatible with its strategic objective and advances one or more of its operational objectives, and (b) its general duty under s. 1B(5)(a) FSMA to have regard to the regulatory principles in s. 3B FSMA. The FCA is also required by sections 138S(2)(h) and 138K(2) FSMA to state its opinion on whether the proposed technical standards will have a significantly different impact on mutual societies as opposed to other authorised persons.

4.6 This Chapter also sets out the FCA's view of how the proposed amendment to the technical standards and the proposal not to implement a supervisory pre-approval requirement for using IM models at this stage are compatible with the duty on the FCA, in so far as is compatible with acting in a way which advances the market integrity objective, to discharge its general functions (which include technical standards) in a way which promotes effective competition in the interests of consumers (s. 1B(4) FSMA). In addition, this Annex explains how the FCA has considered:

• the 9 December 2022 recommendations made by HM Treasury under s. 1JA FSMA about aspects of the economic policy of His Majesty's Government to which the FCA should have regard in connection with its general duties.
• the new secondary statutory objective to facilitate the international competitiveness of the UK economy and its growth in the medium to long term as outlined below.

4.7 This section includes the FCA's assessment of the equality and diversity implications of these proposals.

4.8 Under the Legislative and Regulatory Reform Act 2006 (LRRA) the FCA is subject to requirements to have regard to a number of high-level 'Principles' in the exercise of some of the FCA's regulatory functions and to have regard to a 'Regulators' Code' when determining general policies. The FCA is not subject to these requirements when exercising legislative functions like making technical standards, but the FCA has had regard to the Principles for the proposals which consist of a supervisory policy as set out below.

The FCA's objectives and regulatory principles: Compatibility statement

4.9 The proposals in this consultation are intended to advance the FCA's operational objective of market integrity.

4.10 The FCA considers that the proposal to extend the temporary exemption from the UK bilateral margining requirement for single-stock equity and index options is justified at this stage to maintain the current treatment of these products while the PRA and FCA undertake deeper analysis to develop a long-term approach. This short-term approach will meet the objective of protecting and enhancing the integrity of UK financial markets by striking a proportionate balance between ensuring the safety and soundness of firms and maintaining alignment with other jurisdictions while the regulators assess the optimal end-state framework for the treatment of these products in the UK.

4.11 The FCA notes that FCA firms often rely on PRA firms' models, which are already subject to PRA supervision under the existing regulatory framework, and that the FCA may engage with firms on IM model using existing supervisory powers. Accordingly, the FCA considers that, at this stage, the existing supervisory approach is proportionate and meets the objective of protecting and enhancing the integrity of UK financial markets by providing the supervisory tools for regulators to mitigate market integrity risks associated with models.

4.12 As such, the FCA is of the view that the two proposals are compatible with the FCA's strategic objective of ensuring that the relevant markets function well and secondary objective to facilitate the medium to long-term growth and international competitiveness of the UK economy at the point those measures come into force as set out below. For the purposes of the FCA's strategic objective, 'relevant markets' are defined by s1F FSMA.

4.13 In preparing the proposals set out in this consultation, the FCA has had regard to the regulatory principles set out in s3B FSMA.

The need to use resources in the most efficient and effective way

4.14 The proposals are consistent with this principle because they maintain the current treatment of single-stock equity and index options while the FCA determines a long-term approach and a proportionate approach to the supervision of IM models.

The principle that a burden or restriction should be proportionate to the benefits

4.15 The proposals are consistent with this principle because they maintain the current treatment of single-stock equity and index options while the FCA determines a long-term approach and a proportionate approach to the supervision of IM models.

The desirability of sustainable growth in the economy of the United Kingdom in the medium or long term

4.16 The FCA considers the proposals consistent with this principle as they maintain an appropriate supervisory approach for IM models and a level playing-field with other jurisdictions while the FCA assesses the optimal end-state framework for the treatment of single stock equity options and index options in the UK.

The principle that consumers should take responsibility for their decisions

4.17 The FCA considers that the proposals do not undermine this principle.

The responsibilities of senior management

4.18 The FCA considers that the proposals do not undermine this principle.

The desirability of recognising differences in the nature of, and objectives of, businesses carried on by different persons including mutual societies and other kinds of business organisation

4.19 The FCA considers that the proposals do not undermine this principle.

The desirability of publishing information relating to persons subject to requirements imposed under FSMA, or requiring them to publish information

4.20 This principle is not relevant to these proposals.

The principle that the FCA should exercise its functions as transparently as possible

4.21 The proposals are consistent with this principle.

4.22 In formulating the proposals, the FCA has had regard to the importance of taking action intended to minimise the extent to which it is possible for a business carried on (i) by an authorised person or a recognised investment exchange; or (ii) in contravention of the general prohibition, to be used for a purpose connected with financial crime (as required by s. 1B(5)(b) FSMA). The FCA considers that this is not relevant in relation to these proposals.

Expected effect on mutual societies

4.23 The FCA does not expect the proposals in this paper to have a significantly different impact on mutual societies.

HM Treasury recommendations on economic policy and the future secondary growth and international competitiveness objective

4.24 The FCA considers that these proposals are consistent with the recommendations in HM Treasury's remit letter dated 9 December 2022 and issued to the FCA under s. 1JA FSMA. In particular, FCA also considers that the proposal to extend the temporary exemptions for specific products subject to bilateral margin requirement is compatible with the FCA's new secondary objective on the international competitiveness of the UK economy and its growth in the medium to long term. By providing a level playing-field with other jurisdictions in way which is consistent with the FCA's operational objective of ensuring market integrity, while the FCA considers the optimal end-state framework for the treatment of these products in the UK, and ensuring the FCA continues to have a proportionate supervisory approach for IM models, the proposals maintain the UK's competitiveness as a global financial centre relative to other major jurisdictions compared to if the FCA permitted the temporary exemption to expire. The proposals will also support growth in the UK economy by preserving the status quo to ensuring ongoing market stability and confidence in UK financial markets and institutions.

Compatibility with the duty to promote effective competition in the interests of consumers

4.25 In preparing the proposals as set out in this consultation, the FCA has had regard to the FCA's duty to promote effective competition in the interests of consumers. The FCA considers that the proposals will support competition in the interests of consumers by striking a proportionate balance between ensuring the safety and soundness of firms and maintaining alignment with other jurisdictions so there is a level-playing field to enable competition in the interests of consumers.

Equality and diversity

4.26 The FCA is required under the Equality Act 2010 in exercising our functions to 'have due regard' to the need to eliminate discrimination, harassment, victimisation and any other conduct prohibited by or under the Act, advance equality of opportunity between persons who share a relevant protected characteristic and those who do not, and to foster good relations between people who share a protected characteristic and those who do not.

4.27 As part of this, the FCA ensures the equality and diversity implications of any new policy proposals are considered. The FCA has considered the equality and diversity issues that may arise from the proposals in this CP. Overall, the FCA does not consider that the proposals materially impact any of the group with protected characteristics under the Equality Act 2010. The FCA will continue to consider the equality and diversity implications of the proposals during the consultation period and will revisit them when making the final technical standards.

Legislative and Regulatory Reform Act 2006 (LRRA)

4.28 The FCA has had regard to the principles in the LRRA in relation to the proposed policy relating to IM model approval. The FCA considers that this proposal is:

• transparent; the FCA is consulting on its approach to IM model approval to provide transparency
• accountable; the FCA is consulting and will publish a finalised policy after considering all feedback received
• proportionate; the proposed policy will not impose any new costs on firms
• consistent; the FCA's proposal will apply in a consistent manner to all in scope firms; and
• and targeted only at cases in which action is needed; the proposals are only targeted at firms within the scope of the UK EMIR margin requirements

4.29 The FCA has had regard to the Regulators' Code and considers that the proposal will help clarify the regulatory approach to IM model approval which will provide certainty and clarity to help in scope firms understand regulatory requirements better.

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