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,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.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 counterpartiesLME (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.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.LME (2021), ‘LME Brexit Factsheet’, January. Members of the LME outside of the UK can still trade on the LME,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.