Following its Call for Evidence issued in May this year, the European Securities and Markets Authority has launched a consultation on proposed revisions to the legal framework for position limits and position management in commodity derivatives. The position limits regime was introduced by the revised Markets in Financial Instruments Directive. MiFID II requires the European Commission to report to the European Parliament and the Council on 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 must provide the Commission with advice regarding this new regime to support the Commission's preparation of the report, including any recommendations for changing the legislative requirements. Responses to ESMA's consultation should be submitted by January 8, 2020.
MiFID II requires national regulators to establish and apply position limits on the size of a net position in commodity derivatives traded on trading venues and economically equivalent OTC contracts. The limits apply to the size of a position that a person can hold, including any other positions held on behalf of that person by group entities. Trading venues are required to apply position management controls, including monitoring of open interest and obtaining information about the size and purpose of a position entered into, beneficial or underlying owners, concert arrangements and any related assets or liabilities. Trading venues also have powers to require termination or reduction of positions and to require a person to provide liquidity back into the market at an agreed price and volume to mitigate the effect of a large or dominant position. The position reporting regime is intended to support the application and enforcement of position limits.
ESMA's consultation paper sets out its initial assessment of the impact of the commodity derivatives position limits regime on liquidity, market abuse and orderly pricing and settlement conditions in commodity derivatives markets. The consultation paper also puts forwards proposals for amending the MiFID II text or, where appropriate, the text of related technical standards. ESMA is seeking feedback on:
- Changing the methodology for calculating position limits for the "other months" because the existing methodology hampers fair competition across trading venues trading commodity derivatives based on the same underlying and sharing similar characteristics.
- Whether the exemption for the wholesale energy products traded on Organised Trading Facilities (OTFs) should be reconsidered as it creates an advantage for OTFs trading in physically-settled wholesale energy contracts (REMIT contracts).
- Excluding securitized derivatives from the scope of position limits regime because they are more akin to transferrable securities than derivatives.
- Amending the scope of other commodity derivatives under the position limit regime.
- Introducing limited exemptions for financial counterparties, including a limited position limit exemption where a financial counterparty is legally required to provide liquidity and a limited hedging exemption for financial counterparties that are part of a largely commercial group.
- Amending the MiFID II position management controls requirements to give a trading venue the power to obtain information from its participants on related positions entered by a person on other trading venues or OTC, where appropriate. This amendment could be made in conjunction with new technical standards, prepared by ESMA, on the content and scope of position management controls.
ESMA is also seeking feedback on its proposed amended technical advice on the threshold for weekly position reports. MiFID II requires trading venues to report weekly positions for commodity derivatives exceeding position holder and size of open position minimum thresholds. ESMA is proposing that the threshold be changed to ensure that there is more transparency of the markets because under the existing requirements only three trading venues have submitted reports, two of which are U.K. trading venues, which will be outside of the regime after Brexit. The third trading venue only started submitting reports in May this year for one commodity derivative. ESMA is proposing that a weekly position report should be required when two conditions are satisfied, namely (i) that 20 or more persons hold a position in that commodity derivative (as is currently required under technical standards) and (ii) the absolute amount of the gross long or short volume of total open interest in that commodity derivative is equal to, or exceeds, 10,000 lots.
ESMA intends to submit its final report and technical advice to the Commission by March 2020.