Qi Qi Dong December 20, 2021
In December 2021, the Financial Conduct Authority (FCA) extended its supervisory approach concerning commodity derivatives position limits. This decision followed a review of the MiFID markets regime post-Brexit and aimed to address challenges faced by liquidity providers during the COVID-19 pandemic.
Background:
In December 2020, the FCA observed that position limits were constraining liquidity providers’ ability to manage positions effectively, especially during periods of market stress. To mitigate these constraints, the FCA announced that until January 1, 2022, it would not take supervisory or enforcement action against firms exceeding position limits, provided the positions were held by liquidity providers fulfilling their obligations on a trading venue.
Extension of Supervisory Approach:
Following a speech by the Economic Secretary to the Treasury, John Glen MP, on November 23, 2021, which supported the continued use of this supervisory approach, the FCA confirmed the extension of this policy. The extension remains in place while the scope of the position limits regime is under review as part of HM Treasury’s Wholesale Market Review.
Expectations for Firms:
Firms are expected to assess whether their positions are a result of genuine liquidity provision. While firms are not required to notify the FCA of these assessments, they should be prepared to explain their rationale if requested, particularly in cases of position limit breaches. The FCA emphasizes that positions should not exceed what is necessary for liquidity provision, and firms must reduce positions if they cannot demonstrate genuine liquidity provision.
Ongoing Responsibilities:
This supervisory approach does not alter the obligations of trading venue members or participants under the venue’s position management rules. Additionally, firms must continue to comply with market conduct obligations and maintain adequate systems and controls to adhere to position limits, unless a waiver has been granted or the firm can rely on this supervisory statement.
The FCA’s extension of this supervisory approach reflects its commitment to supporting market liquidity and stability while ensuring firms operate within a robust regulatory framework.
The full statement available from the FCA website: