BREXIT MEANS A BETTER ECONOMY
The UK’s move away from rigid EU one-size-fits-all position limits and allowing market participants to hold larger positions where appropriate, liquidity in UK markets improves, resulting in deeper, more resilient markets with better price discovery.
Explanation:
Under the EU’s MiFID II financial regulations, commodity position limits applied to market participants trading in commodity derivatives (futures, options, and swaps) on regulated markets. The position limits were set by both the European Securities and Markets Authority (ESMA) and national regulators, and were based on a rigid formula that considered the size of the market, trading volumes, the number of participants, and the nature of the commodity (whether it’s critical for the economy or has volatile prices). MiFID II’s position limits applied to all contracts traded on EU trading venues, as well as over-the-counter (OTC) contracts that were deemed economically equivalent to exchange-traded contracts.
Post-Brexit, the UK abolished most commodity position limits for contracts traded on UK venues. Instead of mandatory limits on all commodity contracts, the new rules allow trading venues to impose limits or position management controls where appropriate. The focus shifted away from strict position limits to a more flexible position management regime, where trading venues themselves are responsible for setting and enforcing position limits based on their own assessments of the market (self-regulation). Trading venues can also grant hedging exemptions, making the system less burdensome for market participants. Additionally, the UK’s post-Brexit framework eliminated the equivalent position limits that covered economically equivalent OTC contracts, reducing regulatory overheads and simplifying compliance.
The move away from rigid, one-size-fits-all position limits is beneficial to market operations. Trading venues can adapt position management rules according to market conditions and participant needs, which is expected to enhance efficiency. Additionally, by reducing the regulatory burden, UK markets are more attractive to commodity traders and commercial hedgers. This attracts volume from industries like energy, agriculture, and metals, which use derivatives to manage risk.
Finally, by allowing market participants to hold larger positions where appropriate, without the constraints of stringent limits, liquidity in UK markets improves. This results in deeper, more resilient markets with better price discovery.