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MiFID II POsition Limits

A guide to our service

What is MiFID II and who will be impacted?

The European Securities and Markets Authority’s (ESMA) implementation of the amended Markets in Financial Instruments Directive (MiFID II), is causing an earthquake in the financial world with the requirements in effect since 3 January 2018. Position Limit requirements under MiFID II are set to be one of the most challenging areas of the new regulation, with the FCA estimating that as many as 1,900 commodities contracts will come under the new rules.

 

The motivation behind the implementation of MiFID II is to restrict speculation in the commodity markets. The harmonised approach will also prevent regulatory arbitrage and promote consistency within the European Union, and at the same time provide competent authorities with flexibility to take into account the variations among different commodity derivatives markets and the markets in the underlying commodities. Given the complexities around the MiFID II and its implementation, some essential aspects of it are still be subject to further amendments.

 

Commodity firms previously unaffected by MiFID I will be considered a financial services company and, from 3 January 2018, are required to comply with MiFID II regulations. According to the provisions of the new position limits framework in the EU, investment firms trading commodity derivatives on and off exchange will be subject to reporting obligations. It is expected that non-EU firms will also be subject to reporting requirements if they operate from a branch within the European Economic Area (EEA).

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Since 3rd January 2018, firms are required to report commodity OTC positions directly to National Competent Authorities (NCAs) on a daily basis. Other commodity positions are reported to the exchanges, which in turn reports to the relevant NCA on a weekly basis.

What is the scope of MiFID II?

1. Reportable under Mifid II:

  • Cash-settled commodity derivatives;
  • Physically settled commodity derivatives.
  • Derivative contracts relating to indices if the underlying index is materially based on commodities
  • Position limits apply to over-the-counter (OTC) commodity derivatives which are economically equivalent (EEOTC).
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2. Markets:

The following categories of trading venues are in scope:

  • Regulated Markets (RMs);
  • Multilateral Trading Facilities (MTFs);
  • Organised Trading Facilities (OTFs).

 

3. Third-party trading venues:

Whether a position held in a commodity derivative contract traded on a third-country venue can be considered as EEOTC, will primarily depend on the characteristics of the third-country trading venue. ESMA lists requirements that should be met by a third-country trading venue under MiFID II position limits.

Calculation Methodology

NCAs will establish and apply position limits on the size of a net position which can be held at all times. Long and short positions in a commodity derivative contract shall be netted off against each other.

 

There are two types of position limits per contract, spot month and other months’ limits. Competent authorities can set them in lots, units, or as a percentage value, depending on the type of a commodity derivative and its underlying commodity.

 

Generally, position limits shall be applied at both an entity and a group level.

Positions Reporting

Trading venues and investment firms should report their positions to the respective NCA by 22:00 CET on T+1.

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Data Requirements

Entity level data:

Legal Entity Identifier - Reporting Entity ID, Position Holder ID, Ultimate Parent Entity ID

 

Position level data:

ISINs, Hedging Indicator, Position Maturity, Position Type, Position Quantity, Delta Equivalent Quantity

 

What is FIRDS?

ESMA is currently working on a new data collection system called the Financial Instruments Reference Data System (FIRDS), where trading venues and systematic internalisers will be required to send financial instrument reference data to ESMA via competent authorities. It is expected that FIRDS will gather data feeds between ESMA, NCAs and approximately 300 trading venues within the EU.

ESMA will also publish a database with summaries of position limits and position management controls on its website. It may be expected that the data will be in a machine-readable format which will enable vendors to automatically source data relevant to their offering. The work to launch FIRDS is currently on track, and the system shall be operational as of January 2018.

About FundApps

FundApps monitors and reacts to regulatory change, to provide automated monitoring services that alert users to issues via an intuitive web interface. We provide services to automate some of the most complex tasks in financial compliance. Our dedicated team of compliance experts has years of experience in interpreting and coding regulation from around the world for dozens of our clients.

 

With MiFID II market participants are facing challenges related to correct calculations of their exposures in commodities, data sourcing, and extensive reporting requirements. FundApps can help navigate the world of position limits monitoring and reporting, providing a service that simplifies the process, from flagging a breach to generating pre-populated reporting forms ready to file with trading venues and regulators. 

Find out more!

Our dedicated team of compliance experts has years of experience in interpreting and coding regulation from around the world for dozens of our clients. We let our numbers do the talking, which is why we’re trusted to analyse over $3 trillion in client assets across all of our services every day.

A number of factors make maintaining compliance with MiFID II position limits a challenge for even the most data-driven and agile investors. Netting and aggregation, data sourcing and regulatory reporting present a three-pronged challenge to compliance teams, with non-compliant firms at risk of severe sanctions, including suspension of trading and the unwinding of trades.

 

If you'd like to learn more about how our Position Limits service makes MiFID II simple, leave your details in the form to the right and we'll get in touch.