UK exit from the EU: implications for accessing UK financial markets

LME Insight: April 2017

From the LME Regulation Team

On 29 March 2017 the UK gave notice to the President of the European Council to withdraw from the European Union, thereby triggering Article 50 and beginning the process of negotiations to determine the terms on which the UK will exit the world’s largest economy, trading bloc and political union. As negotiations proceed, the British landscape outside of the EU will begin to emerge. In this post we consider what the potential regulatory implications of Brexit could be for the global metals market and how the LME and LME Clear will look to navigate through the incoming tsunami of change.

Metal markets

The global metals market is formed of a nexus of interconnected, cross-jurisdictional systems and processes. It is already well-versed in managing conflicts of laws, complex trade arrangements and legislative arbitrage. Therefore, there is a cautious view that the influx of legal, regulatory and commercial change introduced with the Brexit process will have only minimal direct impact on each individual stage of the value chain.
Each separate stage of the process is principally governed by a distinct set of laws in force in the relevant jurisdiction. Therefore, harmonised pan-European regulation becomes most relevant towards the latter stages of the value chain and in particular the trade arrangements that the UK will be able to negotiate with the EU and with other countries. Outside of the single market, additional trade barriers and higher costs, combined with a weakened pound, could lead to a reduction in imports, which will, in turn, affect the volume of raw materials required. However, the criticality of reaching an agreement on a trade deal has been identified by both sides; the EU’s chief negotiator for Brexit recently commented that his priority is to prepare the way for a new partnership with the UK including a free-trade agreement at the centre of that partnership. Should such an agreement be achieved, then there is reason to remain tentatively optimistic about the supposed detriment that Brexit could have on the UK’s global trading position.

Post-Brexit LME and LME Clear

All of these political, economic and legislative uncertainties can be seen in price volatility. The LME sits alongside each stage of the metals value chain - offering the industry the opportunity to hedge risk and manage prices. Whilst mining, processing and producing often takes place far outside of the UK and EU, the LME, through the discovery of LME Official Prices, reflects the concentration of global interest from all stages of the value chain. Therefore, continued access to the LME and its prices for all participants remains of central importance. LME Clear supports this through its role as central counterparty, offering the opportunity to minimise credit risk and provide centralised clearing security.
The LME and LME Clear are well positioned to weather the regulatory and legislative developments and challenges that will be introduced during the exit negotiation process and beyond. The global nature of the metals market and the broad spectrum of jurisdictions represented by LME members and clients together with the LME’s experience, commitment to members and connections with the physical and underlying markets, will grant both the Exchange and the clearing house the chance to seize all opportunities that arise as the clarity of the post-EU landscape emerges. The LME remains confident in its ability to continue to offer a relevant and liquid market as well as centralised clearing facilities in London to its members and all participants in the metals value chain.

For more information please email Katy Hyams, LME’s Senior Regulatory Counsel.

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