Foreword
Summary
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2
3
4
5
6
A1
Acknowledgements
Figures and tables
Economic value of English law | Oxera

4.2.2: Commodity trading

Published: October 5th 2021
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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
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
A1.1: Maritime sector -A1.1.1: Size of the market -A1.1.2: Overview of governing laws -A1.1.3: Risks and opportunities A1.2: Commodity trading -A1.2.1: Size of the market -A1.2.2: Overview of governing laws -A1.2.3: Risks and opportunities A1.3: ISDA swaps and derivatives -A1.3.1: Size of the market -A1.3.2: Overview of governing laws -A1.3.3: Risks and opportunities A1.4: International insurance contracts -A1.4.1: Size of the market -A1.4.2: Overview of governing laws -A1.4.3: Risks and opportunities
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Chapter 4

4.2.2: Commodity trading

Commodities are undifferentiated goods often used as inputs in the production of other goods and services.[1]Examples of commodities include agricultural products, metals and crude and refined oil. The sale and purchase of commodities is regularly carried out on commodities exchanges worldwide, where trading is governed by standard form contracts issued by exchanges and trade associations. The UK is home to a number of trade associations, such as GAFTA, FOSFA and RSA,[2]Grain and Feed Trade Association (GAFTA). The Federation of Oils, Seeds and Fats Association (FOSFA). The Refined Sugar Association (RSA). and commodities exchanges including the London Metal Exchange (LME).

Trading on LME platforms totalled $11.6tn in 2020—making the UK the world centre for non-ferrous metals trading.[3]London Metal Exchange (2020), ‘Guide to the London Metal Exchange’. Similarly, estimates suggest that 85% of the global trade in oils and fats is traded under FOSFA contracts,[4]FOSFA International (N.D.), ‘FOSFA International: About us’. and 80% of the global trade in grains is traded under GAFTA contracts.[5]GAFTA (N.D.), ‘Membership’.

The standard form contracts offered by GAFTA, FOSFA, RSA, and the LME are governed by English law.[6]The rules and procedures for the arbitration services offered by GAFTA, FOSFA, RSA and the LME are also drawn up under the framework of English law. GAFTA (N.D.), ‘All Contracts’; LME (2021), … Continue reading Therefore, English law likely governed at least $11.6tn of global metals transactions, approximately $92.4bn of global oils and fats transactions,[7]Total global trade in oils and fats was $108.7bn in 2020. United Nations (N.D.), ‘UN Comtrade Database’. and $98.2bn of global grains transactions in 2020.[8]Total trade in cereals was $122.8bn in 2020. United Nations (N.D.), ‘UN Comtrade Database’.

Given the current prevalence of GAFTA and FOSFA contracts in commodities trading globally, there is likely minimal risk to the use of these contracts and thus the use of English law in these transactions. However, for UK-based commodity exchanges such as the LME, global competitive risks[9]This could include implications for the LME from Brexit as well as competition from other metals exchanges worldwide—for example, COMEX located in the USA, and the Shanghai Futures Exchange … Continue reading may pose a risk to trading volumes and the use of English law in these transactions. For example, as of 1 January 2021, the LME is no longer deemed to be an equivalent trading venue under EU law, which has the potential to introduce additional regulatory obligations for EEA counterparties and UK counterparties trading with EEA counterparties.[10]LME (2021), ‘LME Brexit Factsheet’, January. This could increase transaction costs and reduce the volume of trading on the LME and the use of English law to govern these transactions.[11]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 Stylised calculations suggest the following.

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

A reduction in the use of English law to govern these transactions will reduce the value generated for the UK through the mechanisms discussed in section 3.The movement of these transactions may also reduce the additional value generated through the UK commodities trading ecosystem as associated activities are shifted to other global centres, discussed further in section A1.2.

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,[12]Estimates suggest that global steel demand is estimated to grow by 4.1% in 2021. See worldsteel Association (2020), ‘worldsteel short range outlook October 2020’, 15 October. this could represent an additional $464bn in annual trading value governed by English law.

References

References
↑1Examples of commodities include agricultural products, metals and crude and refined oil.
↑2Grain and Feed Trade Association (GAFTA). The Federation of Oils, Seeds and Fats Association (FOSFA). The Refined Sugar Association (RSA).
↑3London Metal Exchange (2020), ‘Guide to the London Metal Exchange’.
↑4FOSFA International (N.D.), ‘FOSFA International: About us’.
↑5GAFTA (N.D.), ‘Membership’.
↑6The rules and procedures for the arbitration services offered by GAFTA, FOSFA, RSA and the LME are also drawn up under the framework of English law.
GAFTA (N.D.), ‘All Contracts’; LME (2021), ‘London Metal Exchange Rules and Regulations’, 18 March; RSA (2021), ‘Rules and Regulations’, 2 March; FOSFA (N.D.), ‘Contracts’.
↑7Total global trade in oils and fats was $108.7bn in 2020. United Nations (N.D.), ‘UN Comtrade Database’.
↑8Total trade in cereals was $122.8bn in 2020. United Nations (N.D.), ‘UN Comtrade Database’.
↑9This could include implications for the LME from Brexit as well as competition from other metals exchanges worldwide—for example, COMEX located in the USA, and the Shanghai Futures Exchange (located in China).
↑10LME (2021), ‘LME Brexit Factsheet’, January.
↑11Where 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. Shanghai Futures Exchange (N.D.), ‘General Exchange Rules of the Shanghai Futures Exchange’.
↑12Estimates suggest that global steel demand is estimated to grow by 4.1% in 2021. See worldsteel Association (2020), ‘worldsteel short range outlook October 2020’, 15 October.