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Markets and Securities Services | Issue 46
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(RTS). RTS are also required to describe
which contracts will qualify as “economically
equivalent” OTC contracts and so factor into the
net position limit calculation. These RTS have
been the subject of extensive consultation since
December 2014.
Following the initial consultations, in
September 2015, the European Securities
and Markets Authority (ESMA) sent its final
draft of the RTS to the European Commission,
proposing a limit calculation methodology
whereby spot-month limits could vary
between 5% and 35% of the deliverable
supply underpinning the relevant commodity
derivative, with limits for the forward months
set in a similar range between 5% and 35% of
open interest in the commodity derivative.
These proposals met with some hostility in the
European Parliament, which was also critical
of ESMA’s proposal that contracts should only
qualify as “economically equivalent” contracts
if they had an identical contractual specification
to the venue-traded contract. Some MEPs
favoured a slightly more liberal definition of
economic equivalence so as to bring more
contracts into scope.
After the Commission had written to ESMA
indicating that it would only adopt the RTS
if certain amendments were made, ESMA
published revised RTS, taking into account the
Commission’s recommended changes in May
2016. The following discussion refers to that
version of the RTS, but it is important to note
that the RTS themselves are still not technically
in final form and have yet to be formally
adopted by the Commission or approved by the
Parliament or Council.
Under the RTS, the standard baseline position
limit will be set at 25% of deliverable supply and
open interest, but national regulators will have
scope to reduce that limit by 20% (or 22.5% for
some agricultural commodity derivatives) and
to increase it by a maximum of 10% (or 25% for
less liquid commodity derivatives). Compared
with ESMA’s proposals of September 2015, these
limits provide slightly more flexibility to national
regulators and are arguably better able to take
account of the specificities of the markets in
different underlying commodities.
Part of the reason for permitting greater
flexibility in changing limits along a sliding
scale is to avoid disorderly market conditions
as the spot month for a contract approaches.
As the RTS observe, in some markets there
may be substantial discrepancy between open
interest and deliverable supply, for example
where there is little derivative trading compared
with deliverable supply, or where a particular
commodity derivative is used to hedge a wider
range of exposure types such that open interest
in the contract might exceed deliverable supply.
Giving regulators greater control over moving
limits upwards or downwards from baseline
levels is intended to avoid market disruption
that these sorts of discrepancies might
otherwise cause.
In terms of the aggregation of positions at
group level, the RTS explain that positions
should not be aggregated at the level of the
parent undertaking if the positions in question
are held by collective investment undertakings
(i.e. funds) that hold those positions on behalf
of their investors rather than on behalf of their
parent undertaking in cases where the parent
cannot control the use of those positions for
its own benefit. This is important because it
means that fund managers should not have to
aggregate positions held by their funds.
In terms of economically equivalent OTC
contracts, the RTS confirm that while the scope
of what counts as “equivalent” ought not to
be too wide so as to prevent inappropriate
netting of potentially dominant positions, small
differences in the contractual specification
concerning lot size and delivery date should
not prevent an OTC contract from being
economically equivalent to a venue-traded
contract. This softening of the “economically
equivalent” definition compared with ESMA’s
September 2015 draft RTS does not completely
resolve the question of exactly which contracts
are affected by position limits because the
much broader scope question (of general
relevance under MiFID II and indeed under
other legislation such as the Market Abuse
Regulation) as to when a contract can properly
be considered to be “traded on a trading venue”
currently remains unresolved.
MiFID II establishes a hedging exemption
for non-financial entities, which allows them
to ignore positions that are objectively
measurable as reducing risk directly related
to the entity’s commercial activities. The RTS
explain in greater detail the terms on which this
exemption can be used, and confirm that