CP23/27: Reforming the commodity derivatives regulatory framework

The FCA published the consultation paper CP23/27, titled „Reforming the commodity derivatives regulatory framework,“ presenting a set of proposals for overhauling the regulatory framework governing commodity derivatives in the UK. The primary focus areas include position limits, exemptions from those limits, position management controls, the reporting regime, and the ancillary activities test. The fundamental objective of these proposed reforms is to address the risk associated with large positions in commodity derivatives, which have the potential to disrupt pricing or settlement conditions, thereby adversely affecting financial markets, commodity market participants, and the broader real economy.
The proposed reforms seek to apply more stringent requirements to a specific subset of critical contracts, with the overarching goal of delivering fair and proportionate regulation. The intention is to remove unnecessary regulatory burdens on firms while honing in on market activities that pose the greatest risk to the real economy.
As part of the Wholesale Markets Review, a comprehensive assessment of the UK’s secondary markets framework, the proposed changes align with the commitment to ensure that regulatory rules are proportionate to the benefits they deliver to market integrity. Key changes involve shifting the responsibility for setting position limits from the FCA to trading venues, identifying a specific set of ‚critical‘ contracts for heightened regulation, and introducing enhanced position management controls and reporting requirements. The supervisory approach involves making trading venues responsible for setting and enforcing position limits, with the FCA supervising and monitoring their implementation.
To measure the success of these reforms, various metrics will be considered, including the frequency of breaches, the effectiveness of reporting requirements, the impact on market liquidity, and the reduction of unnecessary costs. Stakeholders are encouraged to provide feedback by February 16, 2024, with the FCA planning to make necessary amendments to the FCA Handbook based on the received feedback. The consultation recognizes the need for a transitional period to allow stakeholders to adjust to the proposed changes, and stakeholders are invited to share their perspectives on the implementation timeline.