From the LME Regulation Team
In the coming year we will offer our view on the latest national and international regulatory developments affecting the metals market. The uniquely cross-jurisdictional reach of the metals value chain means that the consequences of regulatory and legislative initiatives in one jurisdiction can have far-reaching effects on parties throughout the value chain, irrespective of their own geographical location.
With proposals on increased transparency in China, a new mining charter in South Africa and the IOSCO (International Organisation of Securities Commission) report on storage and delivery infrastructure, the speed of the introduction of these new requirements appears to be matched only by their complexity and volume. Keeping up with this ever-changing landscape may feel like a Herculean endeavour. This month we have cherry picked three recent or forthcoming regulatory changes we feel are of most relevance to our members, clients and the broader metals community. Here’s a snap shot to get you started:
In the EU, the recent adoption of the Market Abuse Regulation has consolidated the regulatory oversight of the financial, physical and spot markets. A prime example is the newly forged concept of “inside information” for the purposes of commodity derivatives. The regulation has required written guidance to be provided to clarify what type of information falls within this definition. This guidance illustrates the clear regulatory link now established between the physical and financial markets. It lists a broad range of information and effectively puts the notification of warehouse stock lists, freight volumes and even crop diseases on a regulatory par with the latest profit forecasts of a large PLC. Those with access to, responsibility for the creation of, or maintenance of, such information may wish to consider how their obligations under this Regulation may affect their business practices.
The regulatory link between the physical and financial markets will be reinforced through the introduction of a pan-European “position limits” regime, via MiFID II (Markets in Financial Instruments Directive). This regime, introduced to honour the G20 commitment to manage commodity price squeezes, sets finite limits on the positions that firms are permitted to take in a particular commodity derivative. Whilst the regime does permit an exemption for pure commercial hedging firms, such entities must apply to a regulator to confirm their exemption and are nonetheless required to continue reporting their positions on a daily basis. All users of commodity derivative instruments will need to identify what action they must take to remain compliant with this regime when it comes into force on 3 January 2018.
The Trump effect – Dodd Frank
Looking west, the metals market may well be caught in the widespread changes promised by the Trump administration. The US President has vowed to “do a big number” on the Dodd-Frank Act as well as issuing an executive order to review financial market regulation with the goal of “[enabling] American companies to be competitive…[and]…[advancing] American interests in international financial regulatory negotiations”. The expected changes to the regulatory landscape will impact all participants of the financial markets. However, when these changes are viewed in light of the additional pledges to promote US manufacturing and the potential impact this could have on importers it would be prudent for producers, refiners, end users and traders to prepare for a bumpy ride.
The LME remains vigilant of all upcoming global regulatory developments relevant to our market and will continue to work with our members in managing the impact of such changes.
For more information please email Katy Hyams, LME’s Senior Regulatory Counsel.