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Markets and Securities Services | Issue 46
18
The main commodity-related developments
under MiFID II relate to:
• Instrument scope: MiFID II will bring more
commodity derivatives within the regulatory
perimeter than is currently the case.
• Exemption scope: although the perimeter of
these commodity dealer exemptions has been
a focus of continuing debate, they will be of
little relevance to asset managers.
• Position controls: the introduction of position
limits and position management controls for
commodity derivatives presents a significant
implementation challenge for asset managers,
their clients and their counterparties.
Instrument scope
Currently, under MiFID, contracts traded on a
regulated market or multilateral trading facility
(MTF) that can be physically settled are within
scope as “MiFID instruments”. Under MiFID II,
this will be expanded to cover physically settled
commodity derivatives traded on an organised
trading facility (OTF) as well. There will, however,
be an exemption for certain energy contracts.
Exemptions for commodities dealers
The existing MiFID exemptions have been
narrowed to increase regulatory oversight
and transparency. The current exemption
for dealers whose main business consists
of own-account dealing in commodities or
commodity derivatives has been deleted,
effectively bringing many commodities
dealers who currently rely on this exemption
within the regulatory perimeter for the first
time. Additionally, the current exemption
providing conditional relief for firms who do
not provide any investment services apart
from own-account dealing has been amended
so as not to apply to dealers in commodity
derivatives, emissions allowances and
derivatives in emissions allowances.
The remaining exemption is retained for
“ancillary activities”, albeit reduced in scope:
the exemption won’t be available if executing
client orders, market-making, or employing
high frequency trading or algorithmic trading
strategies for commodities. The latter
exemption has been a focus of debate in the
genesis of Level 2 rules, with divergent views
among EU rule-makers on what proportion of
a group’s activities could relate to commodities
before it ceases to be an “ancillary” activity
of the group.
Position controls
For asset managers, the position control
regime represents the most significant part
of the MiFID II commodities reforms. These
controls comprise both a position limits regime,
whereby national regulators will impose
position limits on the maximum net position
size that a person can hold in venue-traded
commodity derivatives (and “economically
equivalent” OTC contracts) and a position
reporting regime. Position limits will be set on
the basis of all positions held by a person and
those held on its behalf at group level.
Under MiFID II, the position limits regime is
expressed to apply to “any person.” This is
extremely broad and, unlike most provisions of the
legislation, is not limited in scope to authorised
EU investment firms. Indeed, the UK Treasury
has indicated that it thinks the scope of the EU
COMMODITIES UNDER MIFID II:
WHAT ARE THE ISSUES FOR
ASSET MANAGERS?
MiFID II marks a significant change in the regulation of commodity
derivatives in the EU. Following amending legislation made in June 2016,
the application of the new rules is being delayed until January 2018 and,
as of Q3 2016, debates among EU rule-makers are continuing on the exact
scope of the new rules for commodities, with several important details
necessary for implementation still to be finalised.