On 4 December 2023, the FCA published Consultation Paper CP23/27 on reforming the commodity derivatives regulatory framework. CP23/27 sets out the FCA’s proposals concerning position limits, the exemptions from those limits, position management controls, the reporting regime, and the ancillary activities test.


The commodity derivatives regulatory regime aims to mitigate the risk that large positions can cause disorderly pricing or settlement conditions. The FCA is concerned that this can harm participants in financial markets, users of commodity markets and the real economy.

To address these concerns, the FCA is proposing to apply more stringent requirements to a narrower set of critical contracts. The proposed changes aim to deliver fair and proportionate regulation by removing requirements that impose unnecessary burdens on firms, while placing a sharper focus on the market activity that poses the greatest risk to the real economy.

CP23/27 is part of the Wholesale Markets Review. The FCA explains that its proposed reforms are an opportunity to ensure the UK’s commodity derivatives markets remain resilient under a variety of market conditions by introducing new requirements to strengthen the supervision of those markets.

The FCA’s proposals

In CP23/27, the FCA is consulting on the following changes:

  • Setting of position limits by trading venues: Consistent with provisions in the Financial Services and Markets Act 2023 (FSMA 2023), the principal responsibility for setting position limits is being transferred from the FCA to trading venues. Trading venues have the market proximity to set position limits effectively and to quickly change them if market conditions require. While trading venues will be responsible for setting the specific level of position limits, the FCA’s proposed rules set out its expectations as to the factors they should have regard to. The FCA also notes that it will retain the power, under certain circumstances, to set position limits ourselves.
  • Applying position limits only to certain commodity derivatives contracts: The FCA is proposing to identify a set of ‘critical’ contracts for which disorderly trading would have the greatest impact on commodity markets and their users. Under the proposed regulatory framework, trading venues will set position limits for this narrow set of critical contracts and also extend the application of the position limit regime to contracts that are sufficiently related to the critical contracts.
  • Enhanced position management controls and reporting: There are proposals to enhance the FCA’s expectations as to the oversight and surveillance arrangements trading venues must operate as part of their position management controls. The proposed rules require trading venues to establish accountability thresholds and to have access to additional information, including information on positions held over-the-counter by members and their clients.
  • Exemptions from position limits: The FCA proposes new exemptions for liquidity providers and for financial firms dealing with non-financial firms that are hedging risks arising from their commercial activities. It is also strengthening its rules as to the arrangements that trading venues must operate to satisfy themselves that the use of exemptions remains consistent with the operation of orderly markets.
  • Ancillary activities test (AAT): Following changes made by HM Treasury to the AAT, the FCA is proposing new guidance on what constitutes ancillary activity.

The FCA expects to provide a transitional period to allow time to make the necessary changes to comply with the regime, which it proposes should be one year after the relevant instruments are made following the publication of the policy statement. The relevant PERG guidance will, however, need to start earlier to take account of the fact that HM Treasury’s changes to the Regulated Activities Order enter into force on 1 January 2025.

Next steps

The consultation closes on 16 February 2024. The FCA is encouraging market participants to respond to CP23/27 noting how long they might need to adjust to the proposals outlined, including any specific considerations that the FCA should be aware of.

Once the FCA has considered responses to the consultation, it will make the necessary amendments to the Handbook rules and guidance.