Last year, on November 19th, 2021, ESMA had submitted its final report on the draft for Regulatory Technical Standards (RTS) for commodity derivatives under the MiFID II Recovery Package. This now lies in the hands of the European Commission, where they have three months from the submission date to decide whether or not to endorse the draft regulation and implement the technical standards. As the deadline quickly approaches, we wanted to share some of the potential changes in late February 2022.
What Is MiFID II?
MiFID II is a legislative framework implemented by the European Union to regulate financial markets and improve protection for investors. MiFID II applies to funds and fund managers, trading exchanges, banks and bank managers, pension funds, traders, brokers, and investors. Investors, in particular, will see a new methodology for calculating position limits and the size of a net position of a person. The main goal of this revision, to the original MiFID, is to keep financial markets strong, fair, effective, and transparent - but more importantly, to regulate financial institutions and their ever-growing technology. In order to do so, the impact of MiFID II can be seen through market infrastructure/technology, product governance, transaction reporting, rules of inducement, and investor protection/best execution.
What is the Capital Markets Recovery Package?
On July 24th, 2020, the European Commission adopted a Capital Markets Recovery Package, making it easier for capital markets to support European businesses to recover from the Coronavirus crisis. Notable amendments to the MiFID II commodity derivative’s framework were made, which include promoting the development of energy markets in the EU, allowing European companies to cover their risks, and at the same time safeguarding the integrity of commodity markets - specifically for agricultural products.
What is changing?
The main objective of RTS 21a is to determine procedures for financial entities undertaking hedging activities, allowing exemptions for liquidity providers in position limit reporting and revisiting the calculation methodology for position limits. Draft RTS 21a will repeal RTS 21 once the Commission adopts this draft. The draft also introduces changes to accountability levels, where trading venues will be required to set out accountability levels in the spot month and other months for physically settled commodity derivatives. In addition, ESMA explains the amendments necessary to ITS 4 - where securitized derivatives will no longer be part of the position reporting regime. Besides the above modifications, RTS 21a will retain the provisions set out in RTS 21. Regarding the new scope of agricultural commodity derivatives and critical/significant commodity derivatives, no draft RTS was required to be developed. Instead, a list of such contracts will be provided by ESMA in due course.
If you’re interested in discussing the upcoming MiFID II changes in more detail, please get in touch with us. If you would like to see how automation of Position Limits monitoring can help your firm save time and reduce operational risk, book a demo with us to see our service in action.