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MiFID II: Down to the Wire on Commodity Position Limits

Traders Magazine Online News, November 8, 2017

Ivy Schmerken

As MiFID II’s Jan. 3 go-live date draws closer, investment firms are rushing to implement systems that monitor position limits on commodity derivatives, though the majority of the limits are still unknown.

Commodity derivatives participants are waiting for precise position limit rules under MiFID II on more than 100 contracts ranging from agriculture to energy and metals. But the lack of information on those limits is making compliance difficult, according to a recent webinar held by Energy Risk.

While commodity dealers and hedge funds have had position limits applied by exchanges and prime brokers, respectively, MiFID II requires end-of-day reporting and continuous monitoring to avoid intraday breeches across all EU venues and jurisdictions.

Ivy Schmerkin

“At the close of each trading day, they must report their positions, which presents a new and daunting task for many commodity market participants and for their commodity monitoring compliance systems,” said the moderator on the Sept. 21 webinar, “MiFID II Position Limits: Preparing, Monitoring, Reporting in the New Regime.”

The rules apply to commodities derivatives contracts traded on EU venues as well as economically equivalent OTC derivative contracts (EOTC) traded off exchange. Limits are to be set by national competent regulators (NCAs) in whose jurisdiction the venue lies.

On Oct. 24, the European Securities Market Authority agreed to nine position limits proposed by the Financial Conduct Authority (FCA) for commodity derivatives. The position limits cover: London cocoa; Robusta coffee; white sugar, aluminum, copper, lead, nickel, tin, and zinc.

However, there is still a backlog of opinions that ESMA is scheduled to issue.

Despite the approval of position limits proposed by the FCA, in late September, ESMA suggested that it might not be able to issue opinions on all the position limits proposed by national regulators.

On Sept. 28, ESMA announced a pragmatic approach to ensuring that position limits on commodity derivatives set by national regulators under MiFID/MiFIR would be implemented by Jan. 3.

Citing the need to avoid processing bottlenecks, ESMA together with the NCAs, announced an updated work plan to deal with the 700 pre-trade transparency waivers for equity and fixed income securities and 110 commodity position limits.

“ESMA together with NCAs, given the complexity and the timing of position limit notifications, agreed that it will not be possible to finalize and publish all the position limit opinions for liquid commodity derivative contracts by the end of the year,” states the work plan.

The plan is for the NCAs to publish limits ahead of ESMA’s opinions and those limits will go into force and be monitored by NCAs on Jan. 3.

Following publication of opinions by ESMA, NCAs have agreed to modify the position limits in accordance with ESMA’s opinions or provide a reason for why a change is not necessary.

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