RegTech Intelligence 
The MiFID framework is venturing into unchartered territory as European legislators aim to place new restrictions on commodity markets. This element of MiFID II has been one of the most contentious parts of a highly controversial process. In light of the recent publication of the Regulatory Technical Standards (RTS) by ESMA, we look at five ways in which MiFID II is changing the rulebook for commodities.
The definition of a commodity derivative remains unknown
The application of the new MiFID II framework is highly dependent on what the regulators class as a ‘commodity derivative’ and, consequently, this has been a topic of much debate. The level one text passed by the EU Parliament does contain a definition, but the final decision is yet to be made. The keenly awaited European Commission Delegated Acts are expected clarify what falls within the level 1 definition, and the latest rumours suggest we will find this out in their November/December publication. What is already clear is that the definition will include securities based on an underlying commodity.
The scope of financial services is being extended
Another definitional question that is crucial to the scope of the rules is what will count as ancillary services. The authorities have been clear that the intention here is to extend the scope of financial services to entities currently undertaking speculative practices, but not considered as financial services firms. This will be done through a double test which firms must pass to be excluded from the MiFID II scope. The test focuses on the size of market share in a commodity and the ratio of the speculative versus hedging activity.
Central position limits are a whole new ball game
MiFID II will introduce centrally (at an NCA level) set position limits on all commodity derivatives traded on a trading venue – a historical first in European financial services regulation. This means even more uncertainty than for most other aspects of MiFID II, with regards to what the precise impact on the market will be.
How do you calculate a position?
There is a hedging exemption for position limits but it will only be available to non-financial entities meaning a wide range of firms will not actually be exempt. This fact is – crucially – not in line with recent proposals coming out of the CFTC. So-called ‘economically equivalent OTC contracts’ will need to be included in position limits, however, both ESMA and the FCA have been clear that they will not be providing a list of what is considered to be ‘economically equivalent’. Most importantly, limits will be set at both an individual entity level and the group level, further complicating the process.
Position reporting is a huge data challenge
Position reporting will be required to be done by trading venues to NCAs, so the obligation is on the venues to collect the data from their members, and little guidance seems to be forthcoming on how this should be done. Reports must identify the position holder as well as the ultimate parent.
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