Schedule 2: Transitional amendments Part 1 – Amendments to the Markets in Financial Instruments Regulation Paragraph 18: DTO exemptions for risk reduction services
Paragraph 18 of the Schedule substitutes Article 31 MiFIR. Paragraph 1 of the new Article 31 gives the FCA a rule-making power to disapply certain obligations in relation to either the transactions carried out as part of a risk reduction service, or persons meeting certain criteria who participate in the risk reduction services.
	Paragraph 2 limits the FCA’s use of this rule-making power to circumstances where the FCA considers its use is necessary or expedient for advancing at least one of the FCA’s operational objectives, as outlined in section 1B(3) FSMA 2000.
	Paragraph 3 establishes the criteria which risk reduction services must satisfy in order to be eligible for the exemption. Namely, to be capable of benefiting from the exemption, services must be post-trade services and must only produce trades which are non-price forming (i.e. that do not contribute to the price discovery process).
	Paragraph 4 specifies that when exercising this power, the FCA has the discretion to:
Specify which risk reduction services are to be eligible for the exemptions with reference to any factors or criteria which it deems to be suitable (within the parameters of paragraph 3); and
Impose any conditions on, or exceptions to, the use of the exemption that the FCA deems appropriate. It is through this provision that the FCA will be able to apply the conditions which were previously applied to the narrower exemption for portfolio compression, should it wish to.
	Paragraph 5 requires the FCA to consult with the Bank of England before using this power to make rules.
	Paragraph 6 specifies which requirements the FCA can exempt risk reduction services from under this rule-making power. These are:
The best execution obligation, which obliges firms carrying out investment business to obtain the best possible deal for clients;
A requirement in the FCA’s Market Conduct sourcebook relating to the operation of a multilateral system from an establishment in the United Kingdom.
The DTO.