On 19th December 2016, the European Securities and Markets Authority (ESMA) published a new questions and answers document on commodity derivatives topics under the revised Markets in Financial Instruments Directive and Regulation (MiFID II/ MiFIR).

MiFID II applies from 3 January 2018 and the purpose of this Q&A is to promote common supervisory approaches and practices in the application of MiFID II and its implementing measures for commodity derivatives topics. In particular, the Q&A clarifies a number of points relating to the position limits and ancillary activities requirements.

Position limits

EU Member States must apply position limits on the net position a person can hold in commodity derivatives from 3 January 2018, in line with Article 57 of MiFID II and the underlying regulatory technical standards.

The Q&A clarifies a number of points, including what is a ‘lot’ for energy products and economically equivalent OTC contracts, when securitised derivatives are to be classed as commodity derivatives and the typical features which ESMA considers differentiates them from exchange traded commodities, and how position limits for futures and options should be applied.

Ancillary Activities

Article 2 of MiFID II introduces a new quantitative test for non-financial firms which trade in commodity derivatives to determine whether their speculative trading activities - their “ancillary activities” - are of a size that they should be authorised as a financial firm. Non-financial firms which are below the thresholds set out in the underlying regulatory technical standards are exempt from being authorised under MiFID II.

The Q&A clarifies that the exemption is not available for legal entities which deal in commodity derivatives within a financial group and that each person (legal or natural) is responsible for notifying the appropriate regulator they are using the ancillary activity exemption where they do so. The Q&A also explains how financial instruments which fall under the definition of C6 should be counted when firms calculate the size of their ancillary activities.  

Future work

ESMA will continue to develop this Q&A on commodity derivatives topics under MiFID II in the coming months, both adding questions and answers to the topics already covered and introducing new sections, in particular the position reporting regime, for other MiFID II commodity derivatives areas not yet addressed in this Q&A.