The FCA has published a policy statement on reforms to the regulatory framework for commodity derivatives.
The 2023 consultation covered key pillars of the regime, including position limits and related exemptions, position management controls, the position reporting regime and the ancillary activities test.
On the position limits regime:
- Respondents agreed with the proposal to limit the regime to 14 ‘critical’ contracts and contracts closely related to those.
- On related contracts, the FCA’s approach is less prescriptive than the one consulted on, allowing trading venues greater discretion to calibrate the scope to ensure the position limit is no broader than that required to maintain market integrity.
On exemptions:
- Some concerns were raised regarding the proposed requirement for trading venues to only grant the hedging exemption where satisfied that the exempt position can reasonably be managed, including being able to unwind them in an orderly way during times of market stress.
- The FCA has therefore made its approach less prescriptive. Trading venues will be expected to deny an application for the hedging exemption where they assess that such positions could not be liquidated in an orderly way, based on indicators they develop (such as the size of the position relative to open interest or deliverable supply).
- Respondents welcomed the introduction of the new liquidity provide and pass-through hedging exemptions