Last Monday saw the release of the final draft version of the MiFID II/MiFIR Regulatory Technical Standard (RTS), which has the potential to have a great impact on many market participants in the commodities and energy trading markets. The documents are many and lengthy, but two key elements that interest those in the sector are the rules around the Ancillary Exemption and Position Limits. (The RTS can be found here).
The original “leaked” proposal of June/July has by and large(with some changes) made its way into the RTS. In general there is a “market size” threshold test where you must be below one of the thresholds per asset class (commodity) in terms of market share of the EU market, in commodity derivatives. The thresholds range from 3% for gas and oil, 4% for metals and agriculture, 6% for power, 10% for coal, 15% for “other” and 20% for emissions. There is complexity around what counts in this number, especially around the definition of a “privileged transaction” (which in broad terms is a hedge, internal trade of fulfilment or obligation as a liquidity provider). There is also continuing complexity around what constitutes a derivative. There are many details around each aspect of the test including what to include in the “activity” part, what constitutes the EU market and how to include different group entities.
The second part of the test (“main business threshold”) is around the proportion of activity that is considered “speculative”, that is the non privileged trading vs all trading. If this proportion is below 10%, the above thresholds are used. If it is between 10 and 50% the threshold is halved and if over this amount it is divided by 5. In general the calculations are performed at a group level . This second test is very different to the initially proposed “capital test”.
The tests need to be initially carried out using data from mid 2015 to mid 2016 for a Jan 3 2017 start.
Commodity derivatives traded on a venue (volume above a certain threshold) will each have a “position limit” placed on them to prevent a build up of “dominant positions”. Theoretically each contract will have two limits, a “spot month” limits and an “other months” limit. The definition of the scope of each limit, is quite detailed. Also note that “equivalent contracts” traded on different venues are linked together and in addition, OTC contracts in “equivalent contracts” must be added in.
By default each limit is set at 25%, of deliverable supply for spot month and of open interest for other months. The regulator may vary this by 20% down or 10% up so it can be 5-35%. This is a change from the originally proposed 10-40%.It is possible to get an exemption for hedging positions (as usual the way this works is complex) so long as you remain a non financial counterparty (i.e. you pass the ancillary activity test).
The positions themselves must also be reported, using the “position reporting” regime. Position limits and reporting applies to all market participants, whether “in MiFID” or not.
There have already been some initial reactions to the proposal, for example from EFET, who have written a position paper (here) and a paper on possible unintended consequences (here). In addition there is an article on the ICIS website here highlighting initial reactions, some of which is negative, although the view from the emissions trading sector (which now has a base threshold of 20%) is not quite as gloomy. The Carbon Pulse website also has a more positive spin here.
This blog will next post on Wednesday 7th October by which point we may see more reactions and explanations.