Derivatives Commodity derivatives: MiFID 2

Regulation of commodity derivatives markets

Published on October 26, 2017

Directive 2014/65/EU on markets in financial instruments (MiFID II) includes a number of changes to the regulation of commodity derivatives, notably by creating an EU-level regime for position limits and new reporting requirements. These changes are in line with the recommendations made by the G20 finance ministers and central bank governors in April 2011 and with the IOSCO “Principles for the Regulation and Supervision of Commodity Derivatives Markets” published in September 2011.

In France, a position limits and reporting regime has been in place since July 2015 for agricultural commodities, pursuant to the Banking Separation and Regulation Act. With the entry into force of MiFID II on 3 January 2018, the Banking Act regime will be replaced by a new regime with the following key characteristics:

  • Position limits: the scope of the new regime is not limited to agricultural commodity derivatives. The new position limits apply to the size of a net position that any participant can hold at all times in any commodity derivatives traded on trading venues and in economically equivalent OTC contracts;

  • New transparency and reporting requirements: in addition to the daily reports that trading venues must provide to the AMF, these venues will have to publish weekly reports with the aggregate positions held by the different categories of persons for the different commodity derivatives;

  • Exemption for non-financial entities: a process for the annual notification of exemption from investment firm authorisation is specified for persons whose trading activity is ancillary to their main business calculated on a group basis.

Position limits

MiFID II introduces a regime of limits applicable to net positions that a participant can hold at all times in commodity derivatives. This regime aims to prevent market abuse and to support orderly pricing and settlement conditions on the futures markets.
The AMF sets position limits for contracts traded on the venues that it supervises, such as Euronext and Powernext.

There are two types of limits:

  • Spot month limits, applicable to contracts whose maturity is the next to expire;

  • All other months limits, applicable to aggregate positions in contracts with other maturities.

To set these limits, the AMF follows the methodology that was established at the European level by the European Securities and Markets Authority (ESMA) and published in European Commission delegated regulation 2017/591. ESMA ensures that the competent national authorities apply this methodology uniformly and publishes its conclusions in non-binding opinions. These limits are set by the AMF in instructions, which can be accessed via the links below. Once a year, the AMF reviews the reference variables used to set the limits and changes them if necessary. It can also change them in the event of exceptional market situations or serious incidents.

Exemptions for non-financial firmsThese limits do not apply to positions held by non-financial firms when the position is taken for the purpose of managing the risks inherent to their commercial activities. These firms can apply for an exemption by filling out the form available online and sending it to the dedicated email address.

New transparency and reporting requirements

MiFID II establishes new requirements for reporting commodity derivatives positions.

These requirements seek to enhance market transparency and enable the AMF to enforce the position limits regime.

Trading venues must therefore:

  • make public a weekly report with the aggregate positions held by the different categories of persons for the different commodity derivatives; and

  • once a day, provide the AMF with a comprehensive breakdown of the positions held by each person, including members and their clients, on this trading venue.

Market participants subject to the position reporting requirement can contact the relevant venues directly for details on how to submit their reports.   

Investment firms trading in commodity derivatives outside a trading venue must also report their positions in economically equivalent OTC contracts to the AMF once a day. These investment firm reports may also be made through the corresponding venues (i.e. those that have admitted to trading derivatives whose OTC contracts are economically equivalent).   

Exemption from investment firm authorisation for firms whose commodity derivatives trading activity is considered ancillary

Under MiFID, non-financial entities that trade on the commodity derivatives markets were assumed to be exempt from investment firm authorisation. Under MiFID II, non-financial entities must give annual notification of their wish to benefit from the exemption. To do so, firms must now take this proactive step and then repeat the process every year as applicable.

The option of benefiting from an exemption from the investment firm authorisation is available to non-financial entities that deal on own account in commodity derivatives or that provide services in commodity derivatives to the customers or suppliers of their main business, where these activities are ancillary to their main business and where these persons do not apply a high-frequency algorithmic trading technique.

To determine whether their trading activity is ancillary to their main business, non-financial entities must apply the methodology established by ESMA and published in European Commission regulation 2017/592. This methodology involves two tests: the first (market share test) aims to compare the size of the entity's speculative commodity derivatives trading activity with the total size of the market in the European Union, by category of underlying. The second (ancillary activity at group level test) compares the size of the speculative trading activity, across all categories of underlying, with the entity’s total financial instrument trading activity. There is also an alternative to this second test which involves comparing the estimated amount of capital employed for the speculative trading activity with the capital employed at group level to carry out the main business.

Any entity that exceeds one of the thresholds set under the methodology established by ESMA must apply to the ACPR for investment firm authorisation. These authorisation requests will be processed jointly by the ACPR and the AMF. For more information about the authorisation procedure and the processing times, please follow the instructions on the ACPR’s website.

AMF notification formEntities that wish to benefit from the exemption from the investment firm authorisation must notify the AMF every year by filling out the form available online and sending it to the dedicated email address.

To help non-financial entities calculate the market share test, in June 2017 ESMA published estimates of the size of the European market by asset class. These estimates can be found here.

 

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