MiFID II and MIFIR impose a number of key changes aimed at reducing systemic risk, combating disorderly trading and reducing speculative activity in commodity derivatives markets through the imposition of new position limit and management powers by trading venues and national regulators and the grant of additional intervention powers to ESMA.
The competent authority of each Member State will impose limits on the size of the net position which a person can hold in commodity derivatives traded on an EU trading venue and economically equivalent OTC contracts. They will apply to all positions held both by a person and on its behalf at an aggregate group level. Where the same commodity derivative is traded in significant volumes on trading venues in more than one jurisdiction, a single position limit may be set by the competent authority of the jurisdiction where the largest volume of trading takes place.
Position limits will not apply to positions held by or on behalf of a non-financial entity and which are objectively measurable as reducing risks directly related to the commercial activity of that non-financial entity.
ESMA has produced two draft RTS in relation to position limits. These cover areas including the methodology which the Member State competent authorities should use to set position limits, the type of contracts which position limits will apply to and permissible aggregation and netting for the purposes of calculating a position. Position limits will be set for the spot month and all other months and will apply to both cash settled and physically settled commodity derivatives. ESMA’s proposal is for position limits to be based on the deliverable supply in the underlying commodity with adjustments for specified factors (maturity of the commodity derivative contract, deliverable supply in the underlying commodity, overall open interest, volatility of the relevant markets, number and size of market participants, characteristics of the underlying commodity market and development of new contracts).
The operator of a trading venue for commodity derivatives will also have to apply position management controls. These will include powers to monitor open interest positions; access information about the size and purpose of a position or exposure entered into, the beneficial or underlying owners, any concert arrangements and any related assets or liabilities in the underlying market; require a person to terminate or reduce a position on a temporary or permanent basis; and, where appropriate, require a person to provide liquidity back into the market.
The imposition of position limits and management controls will be a Member State responsibility and will be handled by the relevant competent authorities, although ESMA will be responsible for facilitating and coordinating national measures, including by publishing summaries of the position limits and management controls applied by competent authorities and trading venues on its website. The relevant Member State competent authority and ESMA will publish a list of commodity derivative contracts traded on an EU trading venue and OTC contracts that are economically equivalent to them for the purposes of position limits.
MiFID II introduces position reporting for commodity derivatives, EUAs and derivatives thereof such that each trading venue is required to make public a weekly report of the aggregated positions held by the different categories of position holders (investment firms or credit institutions, investment funds, other financial institutions, commercial undertakings or, in the case of EUAs or derivatives thereof, operators with compliance obligations under the Emissions Trading Directive) for the different contracts traded on that trading venue. These will specify the number of long and short positions held by such categories, changes since the previous report, the percentage of total open interest represented by each category and the number of position holders in each category, when both the number of position holders and their open positions exceed minimum thresholds. The format to be used in respect of each commodity derivative is set out in the draft ITS. There is also a separate obligation on the trading venue to provide its Member State competent authority on at least a daily basis with a breakdown of the positions of all position holders, including the members or participants and their clients on that trading venue.
Investment firms trading in commodity derivatives, EUAs and derivatives thereof outside a trading venue must, on a daily basis, provide the relevant Member State competent authority with a breakdown of their positions in commodity derivatives traded on a trading venue and economically equivalent OTC contracts, as well as those of their clients and the clients of those clients until the end client is reached. The format is set out in the draft ITS.
In order to monitor compliance with position limits, members or participants of RMs, MTFs and clients of OTFs will have to report to the operator of the trading venue details of their positions held through contracts traded on that trading venue, as well as those of their clients and the clients of those clients until the end client is reached.
Position management powers of ESMA
MiFIR provides ESMA with position management powers allowing it to request all relevant information from any person regarding the size and purpose of a position or exposure entered into via a derivative. Having analysed this information, ESMA may require such persons to reduce the size of or to eliminate their position or exposure or, as a last resort, to limit the ability of a person from entering into a commodity derivative. ESMA can only take these steps if two conditions are satisfied: (i) there is a threat to the orderly functioning and integrity of the financial markets, including commodity derivative markets and including in relation to delivery arrangements for physical commodities, or to the stability of the whole or part of the EU financial system; and (ii) a Member State competent authority has not taken measures, or the measures taken are inadequate, to address such threat.
ESMA must ensure that any measure it takes neither creates a risk of regulatory arbitrage nor has a disproportionate detrimental effect on the efficiency of financial markets. As part of this, ESMA must consult the Member State competent authorities and certain other bodies responsible for the physical markets. Any measures must be published on ESMA's website and be reviewed at least every three months.
In addition, ESMA will have powers of supervision and intervention in relation to the marketing, distribution and sale of financial instruments or types of financial activity or practice.