13 January 2020

ESMA publishes responses to its consultation on MiFID II review report on position limits

Deutsche Boerse Group

Sceptical of the fact that the MiFID II position limits regime contributed to the prevention of market abuse or improved orderly pricing and settlement (as laid down in detail in our response to the Call for Evidence), we believe it might help avoiding excessive speculation adversely affecting prices. From this perspective, it is sufficient to consider only those contracts that are relevant for the price formation in the underlying commodity. This means mature products which serve as a benchmark for the respective market. Internal assessments show that to identify such “critical” contracts it would be appropriate to look at open interest only and that 300,000 lots would be an appropriate threshold to classify these contracts. Less liquid products are not prone to excessive speculation and hence unable to adversely affect prices in the underlying physical commodity markets, thereby negatively impacting consumers. In our response to Q5 and Q6, we explain in detail how such a selection could be achieved.

As stated in our response to the Call for Evidence as well as to Q4, the other (non-significant) contracts would remain subject to the position reporting regime under Art. 58 MiFID II as well as pre-existing market oversight practices of the exchanges’ market supervision and market surveillance departments that apply the principles laid down in the Regulation on Energy Markets Integrity and Transparency (REMIT) and the Market Abuse Regulation (MAR).

As these position monitoring, management and control activities are already subject to REMIT, MAR and MiFID II principles, we are convinced there is already sufficient consistency across trading venues and hence no need for a more convergent understanding and implementation of position management controls (please see our response to Q9.) Accountability levels for example have been implemented by DBG and function properly.

In sum, moving to a more limited scope of the position limits regime would address partly or entirely almost all of the issues addressed in this consultation paper, while not posing any risk to the transparency and functioning of the respective markets. To the contrary, it would even lead to more volumes traded on the regulated markets, contributing to a more transparent trading environment needed for a cost-efficient energy transition. Last but not least, a more proportionate and efficient regime would contribute to the European Commission’s objective to strengthen the competitiveness of European commodity derivatives markets in the context of the international role of the Euro.

Full DBG response

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London Stock Exchange Group

Based on our experience since the entry into force of MiFID II, LSEG would like to raise the following issues:

It agrees with ESMA analysis to exclude securitised derivatives (SDs) from the scope of position limits regime. These instruments are characterised by a number of different issuances registered within the central securities depository and the regime provides limited benefits also considering that the issuance size already constitutes a position limit.

LSEG believes that the position limits regime for new and illiquid contracts could be better calibrated. In order to limit the negative impact of position limits on new and illiquid contracts, it suggests reducing the scope to a limited set of significant, more critical contracts as reflected in the ESMA proposed option 1. This will result in various advantages i.e. indirectly limiting the impact of position limits on new and illiquid contracts and increase the consistency with the US market applicable discipline.

It believes that only the information needed for supervisory purposes should be reported, therefore in the absence of position limits, the position reporting should be waived accordingly.

Full LSEG response

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FIA and ISDA

The MiFID II commodity derivatives position limits regime is a new and unprecedented regime in the EU and has no equivalent in other jurisdictions.

Position limits have been applicable for approximately two years and ISDA and FIA consider that to date the regime has generally not caused significant negative consequences, with the exception of the constraints for new and illiquid contracts.

We are of the view that the regime could still be improved, particularly in three areas where we welcome ESMA’s proposals:

to 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.

to 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 would welcome the idea raised by ESMA 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.

to 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 of 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 after 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.

Full FIA and ISDA response

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AIMA and MFA

AIMA and MFA have in recent years highlighted our fundamental concern that position limits in commodities markets have the potential to distort price formation, dampen liquidity and undermine firms’ hedging activities, while being unlikely to deliver clear benefits in terms of limiting the potential for disorderly trading or market abuse. They therefore welcome ESMA’s work to consider whether the MiFID II position limits framework should be modified and believe that ESMA makes a number of helpful suggestions in the CP.

In their detailed response, AIMA and MFA make the following points:

They welcome the potential change to the “Same Contract” provision to introduce a new approach to calculating limits that references the most liquid market where contracts that share the same characteristics trade.

They support ESMA’s conclusion that the position limit framework should not apply to securitized derivatives on the basis that this would be consistent with the treatment of commodity contract for differences (“CFDs”) and Exchange Traded Commodities.

They strongly support implementing limits on a narrower range of contracts. They believe this will greatly reduce the compliance burden associated with the rules, while improving the position for new contracts.

In determining critical contracts for which limits will be set, AIMA and MFA believe the framework should consider whether those contracts have limits under other regimes.

Full AIMA and MFA response

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Consultation Paper on Position Limits

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