UK Financial Services – Commodities
OK, how to make this interesting? I’m not sure I can promise that, but I will make it brief and snappy, and give you a quick overview of how the landscape of commodities regulation in the UK is changing.
The Financial Services & Markets Bill is currently winding its way through Parliament (it’s now at the Committee stage in the Lords) and is likely to be finalised during the course of this year. A lot of the current fuss regarding the Bill relates to the revocation of retained EU law, but we won’t focus on that (phew). More relevant for this post is that parts of the Bill are aimed at removing restrictions on trading in wholesale markets. It’s worth noting that the Bill delegates a large number of powers to the Treasury, the Bank, the PRA and the FCA, so a lot of the key details will follow in rules consulted on and published by those regulators in due course. However, many of the proposed changes were signalled in the Wholesale Markets Review which was published last year. Set out below is a very quick five-minute summary of the major changes we can expect from the Wholesale Markets Review, the Bill and the regulators’ rules which will follow.
- Recalibration of the pre-trade transparency waiver regime for derivatives markets. The FCA should impose rules only if the rules are necessary for advancing its operational objectives and it will have to take account of the impact the rules will have on market liquidity. This is likely to limit the scope of the regime to systems such as electronic order books and periodic auctions (hurrah!).
- Revisions to the definition of a systematic internaliser (moving from a quantitative definition, based on the number of trades or the size of the trading, to a qualitative definition).
- Allowing SIs to execute client orders at the midpoint within the best bid and offer for trades below Large in Scale (LIS).
- The alignment of the derivatives trading obligation (DTO) originally set out in MiFIR with the clearing obligation (CO) in EMIR, including in particular expanding the grounds for an exemption from the DTO beyond portfolio compression to all post-trade risk reduction (PTRR) services, and removing PTRR services from the CO.
- Simplifying and streamlining the ancillary activities test (AAT), which helps to determine whether firms participating in commodity derivatives markets need to be regulated, and also re-introducing the “commodity dealer exemption” and removing the annual notification requirements.
- Amending the position limits regime (revoking the requirement for position limits to be applied to all exchange-traded contracts, transferring the setting of position limits from the FCA to trading venues, and excluding economically equivalent over-the-counter (OTC) contracts).
- Giving HM Treasury the power to designate a person who provides services to regulated firms and FMIs (e.g. exchanges and CCPs) as "critical", where, in the Treasury’s opinion, a failure in / disruption of those services could threaten the stability in, or confidence of, the UK financial system. Also giving the BoE, the PRA and the FCA the power to give directions to critical service providers, gather information from them, and take limited enforcement action against them.
- Introducing a senior managers and certification regime (SM&CR) for FMIs.
- Revising the resolution regime for CCPs.
- Giving the Bank power to make rules in respect of CCPs, and the FCA the power to make rules in respect of RIEs, each in respect of their relevant activities and those of members of their group (note how broad these powers are).
Following the Wholesale Markets Review and the FCA consultation last year, we can also expect further guidance from the FCA on:
- Allowing matched principal trading by investment firms operating an MTF.
- Interpreting the requirement for trading venues to resume trading within two hours of an outage (including whether and how to amend this).
If you’d like more information on any of this, please reach out to me. I know its dry, but I hope it’s a helpful read.
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# Financial Services & Markets Bill
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