ANALYSIS: UK, EU commodity derivatives rules to diverge further in one year

The Financial Conduct Authority (FCA) plans to introduce in 12 months a rule that will effectively pass the responsibility for setting commodity derivative position limits to trading venues such as exchanges and away from the FCA itself which has done that job until now.

Carolyn Jackson, a partner at Katten, said this change, detailed in a policy statement issued in February, will put the UK further at odds with Europe: “The FCA’s position limit changes in the policy statement are also interesting. Commencing July 6 2026, position limits will be set by trading venues rather than by the FCA, the applicable national competent authority, as in the EU.”

Under European rules, commodity derivatives position limits are the responsibility of the national regulator with some coordination by the European Securities and Markets Authority.

The rule change in the UK requires regulated firms that currently have position limit exemptions to apply to the relevant UK trading venue before those exemptions expire in July next year.

“Existing position limit exemptions for non-financial firms will remain in place until July 5 2026 which allows time (which commenced on March 3 2025) for firms to re-apply to the trading venues for those exemptions.”

Reflecting on the FCA policy statement, Jackson said “most remarkable” was the UK watchdog’s decision not to move towards a more guidance-based approach to the ancillary activities exemption (AAE).

The regulator had earlier suggested a guidance rather than rules-based approach might be appropriate but the FCA did not take this step, opting instead to retain the quantitative tests under the EU’s RTS 20.

Jackson said: “I believe the FCA decided it wanted to postpone the elimination of RTS 20 from the UK AAE due to concerns regarding the certainty of guidance as opposed to a rules-based approach.”

She added: “In some ways, this leaves the UK behind the EU in terms of reforms to the AAE, as the EU introduced a de minimis €3bn (£2.6bn) threshold rather than RTS 20’s market share test.”

But Jackson feels this position is likely temporary as the British regulator seeks assurance from the market over a move to a less prescriptive model of AAE regulation.

“The length of the delay of future changes to the AAE really depends on when the FCA receives confidence from market participants that qualitative guidance rather than quantitative rules can provide the requisite legal certainty.”

That said, Jackson sees the UK the EU continuing to diverge over time as the two regimes adapt to the nuances of their specific markets. “Commodity derivatives regulatory reform is clearly a priority for both jurisdictions and my view is we will see further divergence over time, not because one jurisdiction is necessarily trying to generate a competitive advantage over the other but because the markets and their participants are subtly different.”

London-based ICE Futures Europe, the largest commodity derivatives market in Europe, traded 17.3 million lots of commodity futures and options in May, up 13% on the same month last year, according to FIA data.

The London Metal Exchange, the world’s main base metals venue, traded 16.2 million lots in May, down 12.8% on May 2024, according to FOW data.

Deutsche Boerse-owned European Energy Exchange, based in Germany, reported 6 million lots of power and gas contracts in May, up 13.2% on the same month last year, according to FIA data.

ICE Endex, based in the Netherlands, traded 5.6 million lots in May, up 1.3% on the same month last year, according to FIA data.

Euronext, the home of the main European wheat contract, traded 1.95 million lots in May, down 15.3% on May 2024, according to FOW data.