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Global Trustee and Fiduciary Services News and Views | MiFID II Special Edition 2016
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position limits regime is strongly extra-territorial,
affecting anyone inside and outside the EU.
A group-wide position limit will require complex
calculations, which may differ by delivery month.
This represents a major implementation challenge
for any firm that trades in these markets. Another
significant aspect to the legislation relates to the
obligation for trading venues to report aggregate
positions by class of persons, including daily
breakdowns of positions (e.g. by participants,
clients, clients of clients) to regulators. Firms
have to be able to provide that information to
the trading venue and a participant may have to
obtain that information from its clients to be able
to pass it on, presenting a substantial operational
burden and potential confidentiality issues as well.
How will commodity position limits be set?
The complex methodology by which position
limits will be set both for the spot month (the spot
month being the time period immediately before
delivery at expiry — which varies from commodity
to commodity and may not necessarily correspond
to exactly one month) and for other months
depends on the following factors:
• Maturity of the commodity derivative contract.
• Deliverable supply in the underlying commodity.
• Overall open interest in the contract and in
other financial instruments with the same
underlying commodity.
• Volatility in other relevant markets, including
substitute deliverables and underlying
commodity markets.
• Number and size of market participants.
• Characteristics of the underlying commodity
market including patterns of production,
competition and transportation to market.
• And development of new contracts.
The precise methodology by which these
different factors determine position limits will
be set out in regulatory technical standards
Position limits
Competent authorities shall impose position limits on:
• Net position that a person can hold at all times.
• In commodity derivatives traded on trading venues
and economically equivalent OTC contracts.
• And limits to be set on the basis of all positions held
by a person and those held on its behalf at an
aggregate group level.
Except that
Limits shall not apply to positions which are held by
or on behalf of a non-financial entity and which are
objectively measurable as reducing risks directly related
to the commercial activity of that non-financial entity.
Other powers for competent authorities
• Temporary additional position limits in exceptional
cases (valid for up to 6 months).
• Additional supervisory powers (including power to
require a person to provide information on commodity
derivatives, to reduce their position or to limit the
ability of a person or a class of persons to enter into
a commodity derivative).
Position management
Operators of trading venues’ trading commodity
derivatives must apply position management controls,
including powers to:
• Monitor open interest.
• Access information about size and purpose of a position.
• Require a person to terminate or reduce a position.
• And require a person to provide liquidity.
Position reporting
Operators of trading venues’ trading commodity
derivatives must:
• Make a public report of aggregate positions by class
of person weekly.
• Provide a complete breakdown of all positions
(participants, clients, clients of clients) to the
competent authority daily.
• Require participants to provide them with necessary
information to enable them to report.
ESMA powers
• Market monitoring and power to ban products or activities.
• Coordination of national measures.
• And additional position management powers.
Position controls for commodity derivatives