The FCA has published a guide which explains the regulatory framework and the role of the FCA as it relates to commodities markets.
The guide contains information under the following headings:
- the regulatory framework. The FCA believes that commodity markets pose a set of specific regulatory challenges that need to be reflected in its policy and supervision. While regulated activities in commodity markets remain one of the smaller asset classes, commodity markets are unique in how their market activities straddle the regulatory boundary so that behaviour in the physical market can affect the financial markets and vice versa. The European regulatory perimeter is currently under review, through the work on the Markets in Financial Instruments Directive (MiFID) and the Market Abuse Regulation (MAR);
- scope of regulation. The UK chose not to align the regulatory perimeter under the Financial Services and Markets Act 2000 (FSMA) with that of MiFID as at the time of MiFID’s implementation, the European Commission’s review was already in prospect. The FCA states that FSMA is therefore more comprehensive in capturing firms under a domestic regime that are not within MiFID’s scope and the result has been to make the architecture of firm supervision more complex;
- recognised bodies. Although the FCA has a direct interest in, and powers over, multilateral trading facilities (MTFs) and the over-the-counter market, a principal focus of its interaction with the commodity markets remains with the three recognised investment exchanges (RIEs) that offer trading in commodity derivatives (ICE Futures Europe, LIFFE and London Metal Exchange). The FCA notes that the operation of warehouses licensed by RIEs is not a regulated activity. However, it does have a formal interest in warehousing in relation to commodity markets because of the role it plays in ensuring that those RIE derivatives contracts which incorporate warehouse arrangements are anchored to the price of the underlying product and have effective settlement arrangements;
- MTFs. These entities are now supervised within the FCA’s markets division using a common template;
- firm supervision. For all UK regulated commodities firms, the FCA adopts the same approach as for other regulated firms – making an assessment of impact to decide whether they should be relationship managed, thematically managed or event driven supervised from the FCA’s firm contact centre. In addition, the FCA continues to maintain various bespoke arrangements for supervising specialist firms active in commodity markets, particularly energy and oil market participants;
- market abuse. The FCA concluded its first enforcement action in commodities in relation to a finding of market abuse against an oil trader. Its predecessor organisation, the FSA, also took enforcement action on a number of occasions in relation to commodity market behaviour; and
- European legislation. There are four pieces of EU legislation that will have a particular impact on the regulatory framework for commodities. These are MiFID, MAR, the European Markets Infrastructure Regulation and the proposed Regulation on indices and benchmarks.
View Regulating the commodity markets: a guide to the role of the FCA, 27 February 2014