The U.K. Financial Conduct Authority has launched a consultation on proposals for reforming the commodity derivatives regulatory framework, which covers position limits, the exemptions from those limits, position management controls, the reporting regime and the ancillary activities test. Responses to the consultation may be submitted until February 16, 2024.
The Financial Services and Markets Act 2023 has already made several reforms to the U.K.'s commodity derivatives regulatory regime. The MiFID II requirement for commodities position limits to be applied to all exchange-traded contracts and over-the-counter, or non-venue traded ("OTC"), contracts that are economically equivalent to exchange-traded commodity derivatives was revoked. Instead, the FCA will decide the scope of the commodity derivates to which position limits will apply. In addition, the powers for setting position controls were transferred from the FCA to the operators of trading venues. This contrasts with the EU approach, where position limits are not just set by the regulators, but actually in formulae in legislation, which have proven ill-thought-through and problematic for numerous markets. The FCA has retained the power to set position limits if certain conditions are satisfied, and has new rulemaking powers to establish how trading venues should set and apply position limits and what position management controls they should operate. Generally, the reversion of position limit controls to exchanges as self-regulatory organisations reflects the U.K.'s status quo ante, i.e., prior to MiFID II.
The FCA's consultation paper sets out its proposed approach and rules to further develop a U.K. regime that will enhance the ability to identify risks, ensure changes can be made swiftly in response to changes in the markets, and remove unnecessary requirements to relieve the burden on firms. In summary, the FCA is proposing:
In addition, new guidance is being issued on the so-called "ancillary activities" test. This provides an exemption from the regulated activity of dealing as principal, when a company deals in financial instruments only in a way ancillary to its main business. The intention of this exemption is primarily such that general corporates who hedge their business risks do not require regulation. The FCA is proposing to provide guidance to the effect that "ancillary" is something "related" or "subordinate" to the main business of the group, and that firms may consider the trading and capital employed thresholds used in the EU delegated regulation in order to take a view on whether an activity is ancillary. The legislative changes made in the Financial Services and Markets Act 2000 (Commodity Derivatives and Emission Allowances) Order 2023 enter into force on January 1, 2025.
[View source.]