UK Financial Conduct Authority policy statement on reforming commodity derivatives regulatory framework

The Financial Conduct Authority (FCA) has published a policy statement (PS25/1) on reforming the commodity derivatives regulatory framework. The policy statement sets out the FCA's response to feedback on its consultation paper on the subject (CP23/27) and includes its final rules and guidance to be included in the FCA Handbook.

Key changes made in response to the consultation feedback include:

• Scope of the position limits regime: the regime will be limited to the 14 critical contacts consulted on, including LME Aluminium and LME Tin. However, the approach to contracts that are closely related to these critical contracts but outside the scope of position limits will be less prescriptive than consulted on, allowing trading venues more discretion to calibrate scope.
• Exemptions: the FCA's proposed requirement for trading venues to only grant the hedging exemption where they are satisfied that the exempt positions can reasonably be managed—the so-called risk management condition—is being amended to be less prescriptive. Non-financial entities will no longer be required to submit a detailed stress test.
• Position management controls: trading venues will still be required to operate accountability thresholds in the spot month, as consulted upon, but for other months the FCA will now offer some operator discretion, requiring the relevant trading venue to assess, for each critical contract, whether or not an accountability threshold was an appropriate additive measure to manage risks for the market in question.
• Position reporting: the FCA is removing the obligation for trading venues to collect additional information, including on OTC positions, under a specified set of circumstances; instead, trading venues will need to have the power to obtain OTC position data but the specific circumstances in which this can be done are not specified. Trading venues will need to satisfy the FCA that they are deploying their regulatory toolkit appropriately.
• Ancillary activities exemption: to take into consideration the concerns raised by industry, the FCA will delay the repeal for the time being of the technical standards on criteria to establish when an activity is considered to be ancillary to the main business.

The rules in PS25/1 will come into force on 6 July 2026. However, rules that enable trading venues to receive and process applications for exemptions from position limits will commence from 3 March 2025, as will transitional provisions relating to trading venues to permit notification to the FCA—prior to implementation—of arrangements such as the methodology for and setting of position limits. Exemptions granted under the current regime will continue to apply until 5 July 2026. The FCA expects proposed frameworks for position limits, accountability thresholds, exemptions, position management and monitoring in the first half of this year which will be subject to their review and non-objection.

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