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MiFID II 

Commodities 

01 December 2011

Impact Red traffic light High impact – new position reporting requirement and narrowing of commodity derivative specific exemptions potentially bringing more institutions into the regime.

Other areas to consider

Activities, Services and Exemptions; Transaction Reporting; Regulators

Current MiFID rules

 

Exemptions for commodity firms

Broadly speaking, commodity firms may be exempt from MiFID when they deal on own account in financial instruments or provide investment services in commodity derivatives on an ancillary basis as part of their main business and when they are not subsidiaries of financial groups (Articles 2(1)(i) and (k) MiFID).

Definition of commodity derivatives

Currently under MiFID commodity derivatives are caught when they are:

  • cash settled contracts (or physically settled but with the option to cash settle);
  • physically settled contracts that are traded on a regulated market (“RM”) or multilateral trading facility (“MTF”); or
  • physically settled contracts and not traded on an RM or an MTF but which have the characteristics of other derivative contracts (e.g. standardised agreement terms, cleared by a central counterparty, etc) as defined in MiFID.

Physically settled forward contracts fall outside MiFID if delivery is to be made within two trading days (e.g. spot contracts) or the contract (not on a RM or MTF) is entered into with an administrator/operator of an energy transmission grid, energy balancing mechanism or pipeline network

Classification of emission allowances as financial instruments

Currently under MiFID derivative contracts on emission allowances are financial instruments (Section C(10) of Annex of Directive 2004/39/EC and 38 and 39 of Regulation 1287/2006), but the allowances themselves are not financial instruments.

MiFID Level 1 Directive Arts: 2(1)(i) and (k) Section C(10)

MiFID Regulation: 38 and 39

FSA rules

See RAO and PERG 13

Proposed changes
Draft Directive
Recitals (83) – (88)
Articles 2(1)(i), 59, 60 and 72
Draft Regulation
A
rticles 34 and 35

Exemptions for commodity firms

The draft Directive narrows the scope of exemptions for commodity firms as follows:

  • Article 2(1)(i) would be amended so that persons dealing on own account with clients of the main business would not fall within the exemption.
  • New measures to ensure that the notion of ancillary activity in Article 2(1)(i) is applied in a very narrow and precise way (e.g. the extent to which the activity is objectively measurable as reducing risks related to commercial or treasury financing activity and the capital employed to carry out the activity). ESMA will also provide technical measures clarifying whether an activity is ancillary on a group level and when an activity is provided in an incidental manner.
  • Article 2(1)(k) is deleted

Classification of emission allowances as financial instruments

The draft Directive classifies emission allowances as financial instruments so as to bring them within the scope of MiFID.

Position reporting and limits

Reporting

  • Currently, there is no general position reporting obligation towards regulators for commodity derivatives, as that tends to be dealt with by exchanges. Call for more systematic, standardised information on commodity derivative positions to be made available to regulators and the public. In addition, trading venues (i.e. regulated markets, MTFs and OTFs) shall apply limits on the number of contracts a participant may enter into.
  • The draft Directive imposes position reporting obligations by categories of traders for contracts traded on all EU organised trading venues which admit to trading or trade commodity derivatives or emissions allowances or derivatives thereof. This is addressed in a separate chapter in a new title on position limits and reporting in the draft Directive. Regulators (detailed information) and the public (aggregate information) would be the recipients of the information.
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