EU Authority Asks for Feedback on the MiFID II Position Limits Regime for Commodity Derivatives

The European Securities and Markets Authority has published a Call for Evidence on position limits and position management in commodity derivatives introduced by the revised Markets in Financial Instruments Directive. MiFID II requires the European Commission to report to the European Parliament and the Council on the impact of the application of position limits and position management on liquidity, market abuse and orderly pricing and settlement conditions in commodity derivatives markets. ESMA has been asked to provide the Commission with advice regarding this new regime to support the Commission's preparation of the report.

Under MiFID II, national regulators are required to establish and apply position limits on the size of a net position in commodity derivatives traded on trading venues and economically equivalent OTC contracts. The limits apply to the size of a position that a person can hold, including any other positions held on behalf of that person by group entities. Trading venues are required to apply position management controls, including monitoring of open interest and obtaining information about the size and purpose of a position entered into, beneficial or underlying owners, concert arrangements and any related assets or liabilities. Trading venues also have powers to require termination or reduction of positions and to require a person to provide liquidity back into the market at an agreed price and volume to mitigate the effect of a large or dominant position. The position reporting regime is intended to support the application and enforcement of position limits.

By issuing the Call for Evidence, ESMA is seeking to determine the issues that require further consideration for the provision of its advice. ESMA is requesting stakeholders to comment on their experience of the MiFID II position limit and position management provisions and to explain how commodity derivatives trading may have been impacted by the regime. It is widely known that the MiFID II regime has created particular problems for more illiquid contracts and may act as a barrier to their trading in Europe and to the development of new exchange-traded products in Europe. It is expected that these issues will be addressed as part of the review.

ESMA is also requesting input on whether the regime could be more effective if certain provisions of MiFID II or its secondary legislation were amended, including whether the U.K.'s exit from the EU is expected to result in a need for a revision of the scope of the position limit exemption.

Responses to the Call for Evidence should be submitted by July 5, 2019. ESMA intends to consult on a draft report in Q4 2019 and to finalize the report by the end of March 2020.

View the Call for Evidence.

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