On Tuesday, 05 November 2019, ESMA launched public consultation on position limits and position management controls in commodity derivatives. The consultation paper is divided into two parts and covers – (1) MiFID II review report on the application of position limits and position management controls and (2) technical advice on position reporting thresholds. Following on its call for evidence on position limits in commodity derivatives, ESMA analyses in the consultation paper the impact of position limits on market abuse and orderly pricing and settlement as well as the impact the position limit regime may have had on less liquid commodity derivative contracts. ESMA also seeks stakeholder views on the proposed changes to the positon limits and position management regime, including:
- Reviewing of the “same contract” provisions – ESMA notes that to date no same commodity derivative contracts have been identified, which results in competitive disadvantage for less liquid markets, and proposes two options to address this issue – (1) to amend the definition of the “same contract” as currently set out in Article 5(1) of Commission Delegated Regulation 2017/591 or (2) to amend MiFID II provisions by deleting the reference to the “same contract” procedure and introduce a “more pragmatic approach”.
- Reconsidering the C(6) carve-out exemption – ESMA notes that the carve-out “has proved a significant and successful incentive for market participants to move trading in REMIT contracts to OTFs and is the source of a major competitive disadvantage for regulated markets and MTFs, which ESMA can find no justification for”. Also, ESMA is of the view that “same rules should apply to the same instruments independently of the EU trading venues where those instruments are traded and that the logic for any such differentiation remains unclear”. Consequently, ESMA proposes to “reconsider” the current exemption.
- Reducing the scope of commodity derivatives under the position limits regime – ESMA proposes to exclude securitised derivatives from the scope of positon limits regime. In addition, ESMA is considering two options to reduce the scope of contracts subject to limits and in order to address the stakeholders concerns about the impact of the regime on new and illiquid contracts – (1) reduce the scope of the regime to a limited set of significant or critical contracts, or (2) amend Article 57 MiFID II in a way that would allow ESMA to develop specific Level 2 measures with regard to new commodity derivatives and determine when position limits should start applying to those contracts.
- Introducing limited exemption for financial counterparties – ESMA notes that it “could see merits in introducing a position limit exemption in Level 1 for “mandatory” liquidity provision”. It also considers an exemption for financial counterparties “within a predominantly commercial group” where they act as the market facing entity for the group.
- Enhancing convergence in the implementation of position management regimes by trading venue – ESMA is of the view that “there would be value in providing further clarity on the expected scope and content of position management controls to support a more convergent implementation across trading venues” and it proposes targeted amendments to Article 57(8) to this end.
In respect of new Technical Advice on weekly position reports, ESMA notes that in 2018 and in the first half of 2019, it received on average around 63 weekly position reports that met the minimum thresholds set out in Article 83(1) of Commission Delegated Regulation (EU) 2017/565. Those weekly position reports came almost exclusively from two UK trading venues, which causes ESMA’s concern that if the thresholds remain unchanged, it “appears likely that hardly any weekly position reports would be made public anymore” following Brexit. In ESMA’s view it would defeat the purpose of Article 58(1)(a) MiFID II and to this end, ESMA proposes to base the publication of weekly position reports no longer on the size of open interest in comparison with the size of deliverable supply, but simply on the size of open interest in a given commodity derivative.
Stakeholders have until 08 January 2020 to submit comments.