Foreword
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A1
Acknowledgements
Figures and tables
Economic value of English law | Oxera

A1.2.3: Risks and opportunities

Published: October 5th 2021
Download the Report Executive Summary Funders
2.1: Introduction 2.2: Economic value is created by ‘gains from trade’—realised through transactions 2.3: The law underpins growth in the volume of transactions (and therefore the generation of economic value) 2.4: Considering the law as infrastructure on which transactions take place
3.1: Introduction 3.2: The economic value created through the UK legal services ecosystem 3.3: The economic value created for the UK as a whole -3.3.1: English law as a global market standard -3.3.2: Agglomeration effects -3.3.3: Reduced transaction costs for UK businesses trading internationally 3.4: The choice of law and legal services for internationally mobile transactions
4.1: Introduction 4.2: English law provides significant value to the UK economy -4.2.1: Maritime sector -4.2.2: Commodity trading -4.2.3: ISDA swaps and derivatives -4.2.4: International insurance contracts -4.2.5: The value of English law to the UK economy is significant 4.3: Risks and opportunities 4.4: Future opportunities for the use of English law represent significant potential value to the UK
5.1: Introduction 5.2: English law suffers from a type of ‘market failure’ 5.3: Solutions to the free-rider problem: coordination across private and public parties 5.4: How to manage the ‘provision’ of English law
Experts Funders
Chapter A1

A1.2.3: Risks and opportunities

The standard form contracts offered by GAFTA, FOSFA and RSA can be used for on-exchange commodity trading anywhere in the world. Given the current prevalence of GAFTA and FOSFA contracts in commodities trading globally, there is likely minimal risk to the use of these contracts globally. Therefore, English law is likely to continue to govern the majority of these transactions.

However, for UK-based commodity exchanges such as the LME, global competitive risks,[1]Competition from other metals exchanges worldwide could include COMEX, located in the USA, and the Shanghai Futures Exchange, located in China. Where commodities are traded on exchanges elsewhere, … Continue reading and trade tensions such as Brexit may pose a risk to trading volumes and the use of English law in these transactions.[2]Where commodities are traded on exchanges elsewhere, transactions are likely to be governed by a law other than English law. For example, contracts and arbitration services offered by the Shanghai … Continue reading Below, we discuss two reasons for this in the context of the LME and Brexit.

  • Prior to the end of the Brexit transition period, LME contracts were classified as exchange traded derivatives in the EU. However, as of 1 January 2021, the LME is no longer deemed to be an equivalent trading venue under EU law. As a result, any contract executed on the LME from 1 January 2021 onwards is considered to be over the counter (OTC) from an EU perspective. This has the potential to introduce additional regulatory obligations for EEA counterparties and UK counterparties trading with EEA counterparties[3]LME (2021), ‘LME Brexit Factsheet’, January, increasing transaction costs. This could reduce the volume of trading on the LME or hinder the expansion of trading on the LME in metals in which it is a non-dominant platform globally.[4]The LME is the dominant trading platform for non-ferrous metals—however, it has a non-dominant but growing market presence in ferrous metals. London Metal Exchange (2020), ‘Guide to the London … Continue reading This may reduce the use of English law for the trading of metals globally, as market participants may choose to trade on exchanges other than the LME, using contracts governed by a law other than English. This may also lead to a reduction in the use of UK arbitration services.
  • UK-incorporated members of the LME, such as brokers, may establish an EEA presence in order to service EEA clients because, as of 1 January 2021, UK-incorporated brokers can no longer advertise services in the EU.[5]LME (2021), ‘LME Brexit Factsheet’, January. Members of the LME outside of the UK can still trade on the LME,[6]The LME has received a licence or an exemption in EEA jurisdictions where members will require access to its trading systems: LME (2021), ‘LME Brexit Factsheet’, January. and there may or may not be a change in the volumes traded on LME platforms and the use of English law as a result. However, this represents a clear movement of activity associated with commodities trading out of the UK as a result of Brexit.

Box A1.2 Value at risk in commodity trading—stylised scenarios

The LME states that it is confident that London will continue to be an appropriate location for the trading of ferrous and non-ferrous metals.1 However, given issues relating to Brexit and competitive pressures from commodities exchanges globally,2 the position of the LME in commodities trading, and hence the use of English law to govern these transactions could be affected.

  • If 10% of transactions on the LME moved elsewhere, annual trading value governed by English law could fall by $1.2tn.
  • A more severe loss of 30% could entail an annual reduction in trading value governed by English law of $3.5tn.

A reduction in the use of English law to govern these transactions would reduce the value generated for the UK through the mechanisms discussed in section 3.The movement of these transactions would then reduce the additional value generated through the UK commodities trading ecosystem as associated activities are shifted to other global centres.

If trading moves to exchanges elsewhere in the world, it may be the case that these transactions are governed by a law other than English law. This will reduce the building of precedent under English law and may reduce the use of English legal services in, for example, arbitration. If English law is less likely to be chosen to govern commodity trading contracts, it may be more difficult to attract lost trading activity back to the UK.

On the other hand, if non-ferrous metals trading on the LME grew by 4% in line with estimates for the increase in steel demand,3 this could represent an additional $464bn in annual trading value governed by English law.

Note: 1 The LME has received a licence or an exemption in EEA jurisdictions where members will require access to its trading systems: LME (2021), ‘LME Brexit Factsheet’, January. 2 Other metal exchanges include: COMEX, located in the USA, offering futures and options products for trading metals such as gold, silver, copper, and aluminium; exchanges operated by the Deutsche Börse Group located in Germany, which offers contracts for energy, environmental products, freight, metal and agricultural commodities; and the Shanghai Futures Exchange, located in China, offering ferrous and non-ferrous metals contracts. 3 Estimates suggest that global steel demand is estimated to grow by 4.1% in 2021. See World Steel Association (2020), ‘worldsteel Short Range Outlook October 2020’, 15 October.

Source: Oxera analysis, based on data from London Metal Exchange (2020), ‘Guide to the London Metal Exchange’.

References

References
↑1Competition from other metals exchanges worldwide could include COMEX, located in the USA, and the Shanghai Futures Exchange, located in China. Where commodities are traded on exchanges elsewhere, transactions are likely to be governed by a law other than English law.
↑2Where commodities are traded on exchanges elsewhere, transactions are likely to be governed by a law other than English law. For example, contracts and arbitration services offered by the Shanghai Futures Exchange in China are written in accordance with the law, regulations and judicial interpretations of the People’s Republic of China. See Shanghai Futures Exchange (N.D.), ‘General Exchange Rules of the Shanghai Futures Exchange’.
↑3LME (2021), ‘LME Brexit Factsheet’, January
↑4The LME is the dominant trading platform for non-ferrous metals—however, it has a non-dominant but growing market presence in ferrous metals. London Metal Exchange (2020), ‘Guide to the London Metal Exchange’.
↑5LME (2021), ‘LME Brexit Factsheet’, January.
↑6The LME has received a licence or an exemption in EEA jurisdictions where members will require access to its trading systems: LME (2021), ‘LME Brexit Factsheet’, January.