On 8 January 2020, FIA and ISDA responded jointly to ESMA’s consultation “MiFID II review report on position limits and position management and draft technical advice on weekly position reports”.
Under Article 90(1) of MiFID II, “…the Commission shall, after consulting ESMA, present a report to the European Parliament and the Council on […] (f) the impact of the application of position limits and position management on liquidity, market abuse and orderly pricing and settlement conditions in commodity derivatives markets; […].”
ESMA first issued a call for evidence on 24 May 2019 inviting stakeholders to share their experience with the application of the MiFID II position limit and position management provisions, explain how trading in commodity derivatives may have been impacted, either positively or negatively, by this new regime and provide thoughts for potential amendments. FIA had responded to this call for evidence jointly with ISDA and GFMA. Following considerations of the feedback received, ESMA published the above consultation paper.
FIA Key Messages
In our response, we point out that MiFID II position limits have been applicable for approximately two years, were unprecedented in the EU, and are without any equivalent regime in other jurisdictions. Our members are of the view that whilst the regime has not caused significant negative consequences with the exception for new and illiquid contracts, there are several areas that could be improved:
- re-focus the scope of the position limits regime to most important (‘benchmark’) contracts, and particularly to food commodity contracts. This would notably help solve the problems with the application of limits to new and illiquid contracts, where exchanges, dealers and end-users have raised concerns that the existing limits, even with the flexibility granted under ESMA RTS 21, are a hurdle to the development of markets for new contracts.
- limit the scope of contracts covered by position limits. The definition of financial instruments – and of commodity derivatives – has led to extensive discussions as to whether some securities or some derivatives with no underlying physical commodity should be subject to position limits just because the cross references between MiFID and MiFIR suggest that they are ‘commodity derivatives’. FIA and ISDA members support the objectives of the legislation and particularly the prevention of excessive speculation on underlying commodities such as food commodities. However, we support ESMA’s proposal of limiting the regime to a ‘set of important, critical derivatives contracts’. In addition, we support ESMA’s suggestion to dis-apply position limits to securitised commodity contracts.
- expand the scope of the hedging exemption. Whilst the position limits regime includes exemptions for market participants pursuing hedging activity, the MiFID II definition of hedging as set out in RTS 21 is clear that only non-financial entities can engage in such activity. As a result, the exemption is unavailable to investment banks or commodity trading houses that are MiFID II authorised, which both play a vital role in providing smaller commercial players with access to commodity derivatives markets.
FIA and ISDA generally support most of ESMA’s suggestions but members strongly recommend to retain the C(6) carve-out for physically settled power and gas contracts as they are sufficiently regulated under the Regulation on Wholesale Energy Market Integrity and Transparency (REMIT) and supervised by ACER. The interlinkage of wholesale gas and power markets in the European Union remains unique in commodity markets. REMIT was designed in 2011 by DG Energy, based on the advice from the Committee of European Securities Regulators (CESR) before the creation of ESMA, and from the European regulators Group for Electricity and Gas, to combat insider trading and market manipulation in this sector. Even though the Market Abuse Directive was reformed since REMIT’s adoption and the Market Abuse Regulation now addresses insider trading and market manipulation for commodity derivatives and spot commodity contracts generally, the basis for a specific regulation addressing European gas and power markets remains. It would not be appropriate to duplicate regulation and to apply MiFID to these markets.
ESMA will consider the feedback it receives to this consultation paper and is expected to deliver a final report to the European Commission by end of March 2020
- MIFID II
- Position Limits