On Feb. 5, 2025, UK FCA issued policy statement PS25/1Reforming the commodity derivatives regulatory framework, summarizing feedback to FCA proposals in CP23/27.
Also set out FCA response and final position on rules, guidance for the FCA Handbook.
Final rules, guidance focused on strengthening resilience of UK commodity derivatives markets' under various market conditions, by enhancing trading venue surveillance requirements, providing framework that gives trading venues clearer view of market risks from relevant over-the-counter (OTC) positions depending on market features.
PS is of interest to trading venues in UK which admit to trading commodity derivatives.
Persons, commercial users, financial firms, who trade commodity derivatives in the UK.
In line with commitments made in Wholesale Markets Review, delivered by Financial Services and Markets Act 2023 (FSMA 2023 (UK)), FCA carried out comprehensive assessment of existing regulatory framework for commodity derivatives markets.
Final rules require trading venues to have power to collect data on OTC positions, but also set out how that power can be exercised differently, per specific market risks.
The rules in the instrument made as part of this PS come into force on Jul. 6, 2026.
UK FCA will commence rules that enable trading venues to receive and process applications for exemptions from position limits from Mar. 3, 2025.
Exemptions granted under current regime will continue to apply until Jul. 5, 2026.
Transitional provisions relating to trading venues will also commence on Mar. 3, 2025, to allow notification to FCA, prior to implementation, of various arrangements, e.g. methodology for/setting position limits, accountability thresholds and policies.
FCA will allow substantial implementation period before rules come into effect, during which it will assess arrangements proposed by relevant trading venue operators.
Responses to UK Treasury Wholesale Market Review consultation showed that most respondents supported reforms to revoke certain commodity derivatives requirements.
Financial Services and Markets Act 2023 gives FCA general rule-making powers over recognized investment exchanges (RIEs), and new rulemaking powers to establish how trading venues should set and apply positions limits, controls they must have.
Consultation is part of Wholesale Market Review, FCA proposes changes to its rules to ensure they are proportionate to the benefits they deliver to market integrity.
Proposals
Relevant to trading venues in UK which admit to trading commodity derivatives, and persons, including commercial users/financial firms, who trade these in the UK.
Principal responsibility for setting position limits is being transferred from the FCA to trading venues, FCA proposes rules to set out its expectations on factors to be considered, and it will retain power, in some circumstances, to set the limits itself.
Applying position limits onto to certain commodity derivatives contracts, FCA proposes to identify set of critical contracts for which disorderly trading has largest impact.
Aims to create a regulatory framework under which trading venues will set position limits for this narrow set of critical contracts, extend to closely related contracts.
To enhance position management controls and reporting, FCA proposes rules to require trading venues to establish accountability thresholds, have access to additional details.
Including information on positions held over-the-counter by members and their clients.
Proposes new exemptions for liquidity providers and for financial firms dealing with non-financial firms that are hedging risks arising from their commercial activities.
Will also strengthen rules on arrangements that trading venues shall operate to satisfy themselves that use of exemptions remains consistent with orderly market operation.
FCA also proposes new guidance on what constitutes ancillary activity under test.
Effectiveness
The closing date for the submission of feedback on the proposals is Feb. 16, 2024.
Following consideration of responses, FCA will amend Handbook rules and guidance.
Expects to provide transitional period to allow firms time to make changes to comply, proposes period of 1 year from issue of instruments following the policy statement.
FCA also updated its Strengthening wholesale marketspage with link to consultation.
In Feb. 2024, FIA issued response to UK FCA commodities consultation, see #201626.
May 2024 FCA Update re UK Treasury Order
On May 30, 2024, UK FCA updated commodity derivatives consultation webpage noting that UK Treasury has laid the Financial Services and Markets Act 2000 (Commodity Derivatives and Emission Allowances) (Amendment) Order 2024, see #214038.
Includes provisions to delay commencement date of articles 2(2), (3), (4) of Financial Services and Markets Act 2000 (Commodity Derivatives and Emission Allowances) Order 2023, FCA will therefore delay revoking UK version of RTS 20 (Reg 2017/592).
It will also not be taking forward consultation proposals on ancillary activity exemption.
RTS 20 will remain in place while a permanent solution is considered, this will mean there continues to be a quantitative test for determining whether a firm can benefit from the exemption that will operate as it has done since the UK left the EU.
FCA confirms previous statements it has made about how regime operates in absence of data on overall size of the markets will remain operative until revision of regime is completed, UK Treasury will not delay abolition of annual notification requirement.
The regulator confirms that as a consequence, firms will no longer be required to systematically notify the FCA on an annual basis on their use of the exemption.
FCA will work with UK Treasury, market participants to develop approach that reflects conclusions of the Wholesale Markets Review, taking into account industry concerns.
Feb. 2025 Policy Statement
On Feb. 5, 2025, UK FCA issued policy statement PS25/1Reforming the commodity derivatives regulatory framework, summarizing feedback to FCA proposals in CP23/27.
Also set out FCA response and final position on rules, guidance for the FCA Handbook.
Final rules, guidance focused on strengthening resilience of UK commodity derivatives markets' under various market conditions, by enhancing trading venue surveillance requirements, providing framework that gives trading venues clearer view of market risks from relevant over-the-counter (OTC) positions depending on market features.
PS is of interest to trading venues in UK which admit to trading commodity derivatives.
Persons, commercial users, financial firms, who trade commodity derivatives in the UK.
In line with commitments made in Wholesale Markets Review, delivered by Financial Services and Markets Act 2023 (FSMA 2023 (UK)), FCA carried out comprehensive assessment of existing regulatory framework for commodity derivatives markets.
Final rules require trading venues to have power to collect data on OTC positions, but also set out how that power can be exercised differently, per specific market risks.
The rules in the instrument made as part of this PS come into force on Jul. 6, 2026.
UK FCA will commence rules that enable trading venues to receive and process applications for exemptions from position limits from Mar. 3, 2025.
Exemptions granted under current regime will continue to apply until Jul. 5, 2026.
Transitional provisions relating to trading venues will also commence on Mar. 3, 2025, to allow notification to FCA, prior to implementation, of various arrangements, e.g. methodology for/setting position limits, accountability thresholds and policies.
FCA will allow substantial implementation period before rules come into effect, during which it will assess arrangements proposed by relevant trading venue operators.
