On 28 September 2015 ESMA published final reports on technical standards it has been preparing under MiFID II along with final drafts of the technical standards themselves, which it has sent to the European Commission for adoption. The regulations are stricter in many respects than anticipated and leave numerous questions unanswered.

When it comes into effect in January 2017, MiFID II will wreak major regulatory changes for commodities firms. For such firms, the two most important regulations address:

  • The ancillary exemption: this will depend on passing a market share test and a main business test. Surprisingly, the latter now looks just at the proportion of derivatives trading activity that is deemed speculative, ignoring trading in physical commodities, non-trading business, and fixed assets.
  • Position limits: national regulators will set limits for commodity derivatives traded on exchanges and other venues they supervise, which will apply also to “economically equivalent OTC contracts”. ESMA has:
    • Reduced the range of possible limits to 5-35% of deliverable supply (for spot months) or open interest (for longer dated contracts).
    • Set definitions, for example for “economically equivalent OTC contracts”, that limit the range of positions that can be netted in applying a position limit.
    • Maintained an inflexible approach to the hedging exemption, which will not be available at all to financial entities, including firms that are authorised under MiFID.

MiFID II position limits apply to non-EU entities too, although it remains unclear how. The ancillary exemption, and certain other exemptions, from authorisation are available to both EU firms and non-EU firms, as indicated above. EU firms that are not exempt will require authorisation under MiFID II which will trigger a range of regulatory requirements, including:

  • Capital requirements.
  • Governance and remuneration requirements.
  • Pre- and post-trading transparency rules, execution standards and more trade reporting.
  • More obligations under the European Market Infrastructure Regulation.
  • Conduct of business rules.