Following on from last month’s Q&A on commodity derivatives within MiFID II/MiFIR, on 17 January ESMA published its guidelines for the disclosure of inside information on commodity derivatives and spot markets under the Market Abuse Regulation framework. This publication is a response in accordance with Article 7(5) of MAR, that expresses ESMA to be the source of a “non-exhaustive list of information which is reasonably expected or is required to be disclosed in accordance with legal or regulatory provisions”.
Within Regulation (EU) No 596/2014 on market abuse, inside information is defined to be that which has not been made public and relates to the associated derivative or spot commodity contract, such that, should it be made public, there would be a significant effect on the pricing of the instrument or contract.
The guidelines detail examples of information relating directly to commodity derivatives; indirectly to commodity derivatives without a related spot market and directly relating to a spot commodity contract. Whilst it is important to mention that this should not be taken as an absolute dictation of what applies within the regime, in this article we will outline the main points of discussion within the document.
(i) At the instrument level
ESMA details information disclosures that apply in direct relation to commodity derivatives, including the requirement of trading venues, in accordance with Article 58(1)(a) of MiFID II, to publish weekly reports on the aggregate positions held by the different categories of persons relating to commodity derivatives or emission allowances or derivatives thereof, traded on their venue.
The guidelines also require market participants to be updated with instances that could potentially affect the characteristics of the commodity derivatives or the contract on which they are based. This may relate to changes to the underlying specifications of the commodity or index linked to the derivative, or a change of the delivery point.
(ii) Given the current climate
Examples of information relating indirectly to commodity derivatives without a related spot market, refer to the expectation of information to be provided by public entities from and outside the EU, in relation to statistics that are intrinsically linked to the performance of the instrument and underlying commodity, due to the economic climate. This includes official economic statistics and forecasts such as GDP, inflation rates and the balance of payments.
(iii) Regarding the underlying commodity
The most thorough guidance relates to that of the spot commodity contract and, within this, there is a large significance placed on information regarding the physical nature of the commodity. Quantitative statistics are required to disclose levels of production, import, export and stocks of commodities on which an associated derivative is based, as well as transaction information about activity within the spot commodity market.
There is a rhetoric towards consulting the relevant bodies for official communications when citing production levels of commodity producing countries, and direction is given towards these sources of information. This includes public bodies in relation to statistical information on commodities and an expectation of platforms that promote food market transparency and the coordination of policy action, such as the Agricultural Market Information System (AMIS). Disclosure is also required for information from private entities regarding changes in the conditions governing storage and the capacity to process the delivery of the commodities. This also extends to the emergence of knowledge regarding any disease that is likely to affect agricultural goods, or changes relating to subsidy policy from public bodies.
These guidelines apply to market participants and competent authorities that operate within the commodity derivatives space; these include investors, financial intermediaries, trading venue operators and persons involved in the transaction process. It is important to mention the significance of this publication in the timeframe for implementation. These instructions follow approximately 30 months after Article 7(5) of MAR being published, demonstrating the longevity of the legislative process. The guides have now been translated into the official languages of the European Union, and should come into effect two months from now.
Whilst the paper does not propose any ground-breaking reform, there is a clear necessity for the industry to be informed on what falls in and out of scope in the interest of absolute transparency and market fairness.
As always, you can keep up with the discussion across all JWG platforms. To receive these articles and follow all regulatory developments, subscribe to our newsletter or join the conversation via our Twitter feed and LinkedIn page.