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Commodity trade in UK may have some position limit leeway after Brexit

[LONDON] Britain-based commodity exchanges may have some leeway in the way they manage large positions after the UK exits the European Union, but they will still have to comply with EU rules from 2018, experts say.

Position limits, a way of controlling how much of an individual commodity trading firms can hold, are being introduced for the first time in the Markets in Financial Instruments Directive II (MiFID II) from January 2018.

Britain voted to leave the EU last month, but its exit has to be negotiated with the remaining 27 members, a process that is meant to be completed within two years of triggering a formal legal process.

"It is too early to say what any new UK regime will look like particularly given pressure for equivalence," James Maycock, a director at KPMG, said, referring to companies having to prove that rules in their home countries are equivalent to those in the EU.

"But UK commodity trading venues may have more flexibility in setting position limits if they are not subject to MiFID II."

Contracts that are traded purely in the UK may not need to conform to an EU regime after Britain leaves, which would be particularly relevant for commodities traded on the London Metal Exchange (LME), ICE Futures Europe and CME Europe. Their UK-based commodity derivatives are subject to UK regulation only.

ICE and CME declined to comment. The LME declined to comment, but said after the vote that it intended to be fully compliant with MIFID by the January 2018 deadline.

A source at a commodity trading firm said if the UK had flexibility in the way it sets and implements position limits on local contracts then firms thinking of relocating business to Asia may look again at their plans.

Britain's Financial Conduct Authority (FCA) said in a statement after the Brexit vote that firms should continue to prepare for EU rules. But it has previously expressed doubts about position limits on all commodity contracts.

"We do not believe that it is necessary, as MiFID II requires, to have position limits for every single one of the hundreds of commodity derivatives contracts traded in Europe. Including the least significant," said Tracey McDermott, former acting chief executive at the FCA in February this year. "And I know there are concerns, frankly, that the practical details of position reporting were not adequately thought through in the negotiations on the framework legislation."

The LME's existing system of managing large positions obliges the holder of a dominant position to sell some short-term contracts at fixed prices to other participants if the latter need them.

ICE Futures Europe has maximum limits on the size of positions on soft commodity contracts which may be taken to delivery, but there are no overall position limits. There are no position limits on CME Europe's commodity contracts.

"The FCA may have some control following Brexit over which position limits would apply to regulated markets," said Mark Compton, a partner at Mayer Brown. "This may depend on the model for relations with the EU that we eventually negotiate and the views of other regulators."