The European Securities and Markets Authority has launched a Consultation on Position Limits and Position Management Controls in Commodity Derivatives.
The Consultation Paper is divided into two parts, covering:
(1) MiFID II Review Report on the application of Position Limits and Position Management Controls
(2) Technical advice on Position Reporting Thresholds. ‘Consequently, ESMA’ seeks Stakeholder Views on the proposed changes to the Position Limits and Position Management Regime, including:
- Reviewing of the “same contract” provisions – ‘ESMA’ notes that to date no same commodity derivative contracts have been identified, which results in competitive disadvantage for less liquid markets, and proposes two options to address this issue – (1) to amend the definition of the “same contract” as currently set out in Article 5(1) of Commission Delegated Regulation 2017/591 or (2) to amend MiFID II provisions by deleting the reference to the “same contract” procedure and introduce a “more pragmatic approach”.
- Reconsidering the C(6) carve-out exemption – ‘ESMA’ notes that the carve-out “has proved a significant and successful incentive for Market Participants to move trading in REMIT contracts to OTFs and is the source of a major competitive disadvantage for regulated markets and MTFs, which ESMA can find no justification for”. Also, ESMA is of the view that “same rules should apply to the same instruments independently of the EU trading venues where those instruments are traded and that the logic for any such differentiation remains unclear”. Consequently, ESMA proposes to “reconsider” the current exemption.
- Reducing the scope of Commodity Derivatives under the Position Limits Regime – ESMA proposes to exclude Securitised Derivatives from the scope of the Positon Limits Regime. In addition, ‘ESMA’ is considering two options to reduce the scope of contracts subject to limits and in order to address the stakeholders
concerns about the impact of the regime on new and illiquid contracts – (1) reduce the scope of the regime to a limited set of significant or critical contracts, or (2) amend Article 57 MiFID II in a way that would allow ESMA to develop specific Level 2 measures with regard to new commodity derivatives and determine when position limits should start applying to those contracts.
- Introducing limited exemption for financial counter-parties – ‘ESMA’ notes that it “could see merits in introducing a Position Limit Exemption in Level 1 for “mandatory” liquidity provision”. It also considers an exemption for financial counter-parties “within a predominantly commercial group” where they act as the ‘Market Facing Entity’ for the group.
- Enhancing convergence in the implementation of position management regimes by trading venue – ‘ESMA’ is of the view that “there would be value in providing further clarity on the expected scope and content of position management controls to support a more convergent implementation across trading venues” and it proposes targeted amendments to Article 57(8) to this end.
In respect of new Technical Advice on ‘Weekly Position Reports’, ‘ESMA’ notes that in 2018 and in the first half of 2019, it received on average around 63 ‘Weekly Position Reports’ that met the minimum thresholds set out in Article 83(1) of Commission Delegated Regulation (EU) 2017/565. Those ‘Weekly Position Reports’ came almost exclusively from two UK trading venues, driving ‘ESMA’s’ concern that if the thresholds remain unchanged, it “appears likely that hardly any ‘Weekly Position Reports’ would be made public anymore” following Brexit. In ‘ESMA’s’ view it would defeat the purpose of Article 58(1)(a) MiFID II and to this end, ‘ESMA’ proposes to base the publication of ‘Weekly Position Reports’ no longer on the size of open interest in comparison with the size of deliverable supply, but simply on the size of open interest in a given Commodity Derivative.
Firms are advised to raise this consultation to the executive, or board level, if appropriate, and to submit their comments before the deadline on 8th January 2020.
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Please Note: This publication is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to. Readers should take legal advice before applying the information contained in this publication to specific issues or transactions.
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