The European Commission has adopted the two outstanding regulatory technical standards (RTS) for Articles 2(4), 57(3) and (12) of MiFID II:
- RTS 20 on the Ancillary Activity exemption; and
- RTS 21 on position limits for commodity derivatives.
RTS 20 – Ancillary Activity exemption
Article 2(3) of the revised RTS clarifies that “trading activity undertaken in the Union” in relevant instruments includes the positions in commodity derivatives executed on third country markets of persons established in an EU member state.
The Commission proposes an alternative “main business” test in Article 3, for which persons eligible to use the exemption may measure their aggregate non-privileged positions in commodity derivatives, emission allowances and derivatives referencing emission allowances (calculated per Article 360 CRR) against “capital employed” (total assets minus current debt) at group level. Article 3(1)(b) fixes a 10% maximum threshold for this test.
Of note, the proposed numerator calculation set out in Article 3(8) does not exclude relevant contracts of group entities that are authorised as an investment firm per MiFID II or a credit institution per CRD IV.
The revised draft RTS provides for neither a phase-in for the two tests nor any period following 3 January 2018 during which eligible persons may be considered provisionally exempted from the Article 5 MiFID II authorisation requirement.
RTS 21 – Position limits for commodity derivatives
Article 2(1) confirms that third country persons would be treated as “non-financial entities” for the purposes of hedging exemptions only where those persons if established in an EU member state would not be subject to authorisation as any of the 10 regulated entities listed in that provision.
The Article 4 provisions on aggregation are unchanged and the requirement to aggregate to the ultimate parent undertaking remains – a provision that is likely to prove a significant compliance challenge.
No changes to permitted netting or the definition of “economically equivalent” OTC derivative contract from the revised ESMA proposal of 02 May.
The general ‘cap and collar’ for position limits is unchanged: baseline limits of 25% of deliverable supply (spot month limit) or open interest (all other months limit) with discretion for national regulators to set limits up to 35% and down to 5% from this baseline.
Responding to pressure from some European legislators, the Commission proposes a lower maximum spot month position limit (30%) for commodity derivative with an underlying that qualifies as “food intended for human consumption” and which have combined open interest (spot and all other expiries) of >50,000 lots over three consecutive months.
The Commission proposes more liberal position limits for new and illiquid commodity derivative contracts of up to 40% of open interest (combined open interest <20,000 lots).
It is expected both the Council of Ministers and European Parliament will endorse both RTS, with one or both institutions confirming so in writing to short circuit the three-month scrutiny process (due to expire on 1 March 2017). The provisions of RTS 20 will apply from 3 January 2018. The provisions of RTS 21 will apply from 3 January 2017.
View European Commission adopts rules to strengthen regulation of commodities markets, 1 December 2016
View Updated table on technical standards under MiFID I, MiFID II and MiFIR, 1 December 2016