Diverging paths: the UK and EU commodity derivatives rules reforms
July 2025 | SPECIAL REPORT: FINANCIAL SERVICES
Financier Worldwide Magazine
July 2025 Issue
Commodity derivatives are financial instruments, the values of which are derived from the price of underlying commodities, including metals, energy and agricultural products. Commodity derivatives are widely used by market participants to hedge against price fluctuations, speculate on market movements, access liquidity and diversify investment.
However, as with other financial instruments, they can pose potential risks to financial stability and market integrity, which prompted certain regulatory reforms for derivatives across all asset classes, including commodity derivatives, following the 2008 global financial crisis.
The UK and European Union (EU) have historically shared a common regulatory framework for commodity derivatives under the Markets in Financial Instruments Directive (MiFID I), and its successor (MiFID II), as well as under the European Market Infrastructure Regulation (EMIR).
The regulatory regimes in both jurisdictions, however, are undergoing reform with the aim of improving market transparency, reducing systemic risk and preventing market abuse, while also reflecting the UK and EU’s different market structures, policy objectives and global ambitions.
This article explores the key features and implications of the UK and EU commodity derivatives regulatory regimes and amendments thereto, noting the areas of divergence and convergence as well as the challenges and opportunities for firms operating in both jurisdictions.
Background: UK and EU commodity derivatives regulation
The regulation of commodity derivatives in the UK and EU has its origins in the post-financial crisis reforms and the G20 commitments to enhance the oversight and transparency of the derivatives markets, which began in the EU with the introduction of EMIR and rules thereunder relating to over the counter (OTC) derivatives.
MiFID II, implemented in 2018, introduced rules to, among other things, more tightly regulate commodity derivatives specifically, including position limits and reporting obligations.
The UK, as a member of the EU at the time, transposed EMIR and MiFID II into its national law, applying the same rules as the EU. Following the UK’s departure from the EU, the UK has been given the opportunity to diverge from EU regulations, tailoring its regime to suit domestic and international interests.
UK commodity derivatives reform
In July 2021, HM Treasury (HMT) published the ‘Wholesale Markets Review’ consultation setting out proposals to reform the UK’s secondary markets framework. In December 2023, the UK Financial Conduct Authority (FCA) published a consultation paper (CP23/27) addressing specific reforms to the commodity derivatives regulatory framework.
More recently, in February 2025, the FCA published a policy statement setting out its final rules and guidance on reforming the commodity derivatives regulatory framework. The new rules address position limits, exemptions from position limits, position management controls, position reporting and the ancillary activities exemption (AAE). The AAE provides that certain firms trading commodity derivatives or emission allowances, where such activities are ancillary to their commercial business, are exempt from the requirement to be authorised as an investment firm.
EU commodity derivatives reform
In February 2025, the European Commission (EC) published a targeted consultation on the functioning of the EU commodity derivatives markets and certain aspects of the spot energy markets.
The EU consultation, which closed on 23 April 2025, will inform the EC’s report to the European Parliament and the European Council, which will ultimately guide potential future policy initiatives regarding commodity derivatives. The EU consultation follows the EC’s ‘Action Plan on Affordable Energy’, which was adopted in response to the recent EU energy crisis and the extreme price volatility observed in energy markets. The EU consultation covers a wide range of topics, including data reporting, position management, position limits, circuit breakers and the AAE.
The European Securities and Markets Authority (ESMA) has published a response to the EU consultation. The response focuses on those areas of commodity derivatives regulation where ESMA believes its intervention will add the greatest value, covering data harmonisation, integrated reporting and data sharing, the AAE, position reporting, and circuit breakers.
For example, the response states that ESMA does not understand the benefit of revamping article 2(1)(d) of MiFID II, which provides an exemption from authorisation for market participants engaging in non-commodity derivatives activity, to a single provision being applicable to all asset classes in respect of the AAE, and supports retaining the existing differentiation of MiFID II authorisation exemptions per asset classes.
Growing divergence
Although the UK and EU share common principles and objectives in relation to their regulation of commodity derivatives, including improving market transparency, reducing systemic risk and preventing market abuse, the various consultative efforts discussed above demonstrate growing divergence. The UK and EU are now adopting different approaches to commodities derivatives regulation reflecting their different national priorities, policy objectives and global ambitions.
Ancillary activities exemption. The UK policy statement confirmed that the FCA’s earlier proposals relating to the AAE, including the issuance of guidance on its application, will not be issued. The FCA proposed to publish guidance to confirm that “ancillary” is something “related” and “subordinate” to the main business of the group, and that firms may consider the trading and capital employed thresholds used in the EU delegated regulation to decide whether an activity is ancillary.
Instead, the AAE quantitative test and regulatory technical standard 20 will continue to operate until at least 2027 while the FCA considers a permanent solution. Previous statements made about how the UK regime operates in the absence of data on the overall size of the market will remain operative until the revision of the regime is completed. The annual notification requirement to the FCA on the use of the AAE by firms was repealed on 1 January 2025 in line with changes HMT has made to legislation.
However, a firm using the AAE is required to report to the FCA on request the basis on which it considers it satisfies the relevant conditions. While the UK is diverging in some respects on the AAE, the earlier AAE proposals no longer being implemented means that the UK’s opportunity for more significant divergence has passed for now, until a permanent solution is brought forward.
The EU consultation sought views on the functioning of the AAE and, in particular, whether the AAE tests are fit for purpose or whether they should be adapted further, and on the impact of prudential requirements on the 2022 energy crisis.
The EU consultation therefore introduces some uncertainty regarding the AAE requirements that may apply, with a potentially significant impact on how non-financial companies (such as utilities or large energy-intensive corporations) operate. These companies rely on the commodity derivatives markets to mitigate the risks from their commercial activities and, in many cases, are exempted from strict regulatory requirements.
Should the AAE criteria become more stringent, then such non-financial companies engaging in commodity derivatives would be required to become MiFID-licensed entities and meet enhanced (albeit existing) regulatory requirements.
Scope and application of position limits. The UK has narrowed the scope of the application of position limits to only “critical contracts” and their “related contracts”, while the EU has maintained position limits only for agricultural commodity derivatives and to “significant or critical” commodity derivatives.
The UK has also transferred the responsibility for setting position limits from the FCA to UK trading venues, while the EU has currently kept the responsibility at the national competent authority level, with some coordination by ESMA (although the EU consultation does seek views on where the responsibility should lie).
The UK has also introduced two additional exemptions from position limits for financial firms that deal with non-financial entities that are hedging risks arising from their commercial activity, and for liquidity providers that fulfil obligations under the rules of the trading venue to provide liquidity.
Position management and reporting requirements. The UK has enhanced position management controls by requiring trading venues to apply accountability thresholds, in addition to position limits, to both critical contracts and their related contracts in the spot month, while the EU has not.
The UK has also introduced a new requirement for trading venues to have the power to obtain OTC position data from market participants, where such positions pose a risk to the fair and orderly trading of their markets.
Further legislation will provide the FCA with fuller powers to enable the FCA to direct a trading venue to collect a broader set of information on OTC positions from its market participants, and also to direct the market participants to provide that information to the trading venue. The EU has not consulted on any similar requirements.
Conclusion
The increasing divergence between the UK and EU regulation of commodity derivatives, while presenting challenges for firms operating in both markets, may also provide flexibility and innovation in both jurisdictions.
The UK and EU have embarked on different paths of reform for their commodity derivatives regimes, reflecting their different market structures, policy objectives and global ambitions. Although both jurisdictions share common principles and objectives, including improving market transparency, reducing systemic risk and preventing market abuse, they have adopted distinct approaches and priorities, resulting in growing divergence in certain areas.
Firms that operate in both markets will need to carefully navigate the differences and stay ahead of the curve, as both jurisdictions move forward with regulatory changes. Market participants should continue to monitor the regimes in both the UK and EU, especially for the EC’s response to feedback on the EU consultation.
Firms will need to ensure compliance and capitalise on opportunities, by taking a number of suggested actions, such as familiarising themselves with the new rules, reviewing their existing processes, gathering relevant information for exemption applications, reviewing their client documentation, and building a compliance framework and annual review process.
Carolyn Jackson is a partner, Christopher Collins is a senior associate and Ciara McBrien is an associate at Katten Muchin Rosenman UK LLP. Ms Jackson can be contacted on +44 (0)20 7776 7625 or by email: carolyn.jackson@katten.co.uk. Mr Collins can be contacted on +44 (0)20 7776 7662 or by email: christopher.collins@katten.co.uk. Ms McBrien can be contacted on +44 (0)20 7770 5231 or by email: ciara.mcbrien@katten.co.uk.
© Financier Worldwide
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Carolyn Jackson, Christopher Collins and Ciara McBrien
Katten Muchin Rosenman UK LLP