Commodity derivatives: introduction of position limits and reporting regime

The position limits and reporting regime for commodity derivatives comes into force on 3 January 2018 (Articles 57 and 58 of MiFID II). The regime aims to prevent market abuse and support orderly pricing and settlement conditions by improving transparency and oversight of financial markets.

Pre-trade transparency waivers and commodity position limits

On 28 September 2017, ESMA issued a public statement regarding the joint work plan of ESMA and NCAs for opinions on MiFID II pre-trade transparency waiver and commodity position limits. Read our statement

 

Position limits

A position limit is the maximum size of a position held by a person in any commodity derivative traded on a European Economic Area (EEA) trading venue and economically equivalent over the counter (EEOTC) contracts.

The Markets in Financial Instruments Directive (Directive 2014/65/EU, MiFID II) requires competent authorities, in line with ESMA’s methodology, to establish and apply position limits on the size of a net position which a person can hold at all times in commodity derivatives traded on trading venues and EEOTC contracts.

Competent authorities are required to set position limits for a commodity derivative as per Commission Delegated Regulation (EU) 2017/591 ('RTS 21'). For certain new and illiquid contracts, a distinct approach will be taken, including the application of fixed position limits below certain liquidity thresholds.

Monitoring and Notifications

From 3 January 2018, trading venues are required to notify us by email when the total open interest of any commodity derivative reaches any of the amounts of lots or number of securities in issue as required by Article 15(1) RTS 21, over a consecutive three month period.

From the 1 August 2017, we expect the following notifications: 

  • multilateral trading facilities (MTFs) and applicants for organised trading facilities (OTFs) authorisation inform of any new commodity contracts prior to launch
  • regulated investment exchanges (RIEs) continuing notification of any new commodity contracts prior to their launch
  • all trading venues should share the contract specifications, specifically the commodity derivative name, market identifier code (MIC), venue product code (VPC) and the relevant unit of measurement

Notifications can be sent to: [email protected]

Position limit exemptions

Non-financial entities (NFEs), as defined in RTS 21 Article 2(1), can apply to us for a position limit exemption for one or more contracts. If you are such an entity and wish to have such an exemption you will need to show that your position in a particular commodity derivative is directly risk-reducing in relation to your commercial activity.

NFEs that have been granted exemptions will still have to report their positions to us but the exemption will be taken into account when the position limits are applied.

The position limit exemptions application is available for completion on Connect.

View the current format of the position limit exemption form (PDF)

Read our guide to completing the commodity position limit exemption application (PDF)

An approved position limit exemption will be uncapped for risk-reducing positions in the specific contract. However, we will still monitor the reported positions against the basis of the information provided in the application form. If there is a significant change in the nature or value of the NFE’s commercial or trading activities the NFE is required to submit a new application.

Please note that any position limit exemption will cover all risk-reducing positions held in the specific primary commodity derivative, and in any associated mini, Balmo (Balance of Month), mini-Balmo or other contracts such as those where the same commodity is traded in contracts denominated in different units where, on a case by case basis, we have determined that the contracts should be aggregated. The aggregation will be identifiable in the table with the publication of the position limits. An exemption application should list each Venue Product Code on a trading venue that is to be included in the exemption. 

In October 2017, we intend to start publishing position limits that will come into effect on 3 January 2018 on commodity derivatives contracts traded on UK trading venues.

Reporting positions

Position reporting obligations apply to all trading venues in the UK that facilitate the trading of commodity derivatives, emission allowances and their derivatives, and to all investment firms trading EEOTC contracts on these financial instruments.

Trading venues and investment firms will be able to submit position reports through our new market data processor (MDP) system.

To start the MDP on-boarding process, you will need to fill in a confidentiality agreement form, receive our market interface specification and complete an on-boarding application form. You can download these forms on the links below:

MIS confidentiality agreement (DOCX)

MDP on-boarding application form (DOCX)

Trading venues and investment firms submitting position reports can find reporting instructions on the following links: 

Commodity position reports - reporting instructions (PDF)

XSD for commodity derivative position reports (XSD)

Firms that have a reporting obligation but have not yet started the MDP onboarding process should complete the relevant documentation as soon as possible to be able to commence testing in the week commencing 11 September 2017.

Position management controls

Trading venues in the UK facilitating the trading of commodity derivatives are required to have appropriate position management controls that, for example, allow them to monitor and access information about commodity derivative positions.        

Our role in implementing Articles 57 and 58 MiFID II

Under the regime, we are responsible for:

  • calculating and setting spot month and other months’ position limits for commodity derivatives traded on trading venues in the UK based on ESMA methodology
  • daily receipt of position reports
  • applying position limits
  • reviewing position limits where there are significant changes
  • cooperating with other National Competent Authorities where a same commodity derivative is traded in more than one country to ensure a single position limit is set and applied
  • notifying ESMA of the proposed position limits as set in accordance with the methodology
  • monitoring compliance with the position limits, and taking supervisory or enforcement actions where appropriate
  • reviewing applications for position limit exemptions

Ancillary activity exemption

Under MiFID II, firms or individuals who trade in commodity derivatives, emission allowances and derivatives on emission allowances on a professional basis, may under article 2(1)(j) MiFID II be able to make use of an exemption from authorisation. This is through an assessment of their trading activities in accordance with tests in RTS 20.

Those firms or individuals, who rely on this exemption from authorisation, are required to notify us annually through Connect. You will find the notification form on the Connect landing page.

To assist you in completing the notification form, we have provided a user guide:

MIFID II Ancillary Activity Exemption – Notification Guide (PDF)

The notification lasts for twelve months from the date it was first made (or from 3 January 2018 for notifications made in advance of that date). 

The notification must be renewed before the end of that period using Connect.

Queries

For any questions or queries please email [email protected].