FIA, jointly with ISDA and GFMA, responded to ESMA’s call for evidence in May on position limits under MiFID II. ESMA sought stakeholders’ input as it launched this call for evidence in the context of the reviews it must perform under MiFID II together with the European Commission (EC). The response highlights challenges in the following three areas:
- the application of limits to new and illiquid contracts, where exchanges, dealers and end-users have raised concerns that the existing limits, even with the flexibility granted under ESMA RTS 21, are a hurdle to the development of markets for new contracts. The response includes specific examples to support the view that the regime applied to new and illiquid contracts should be amended;
- the scope of contracts covered by limits. The definition of financial instruments – and of commodity derivatives – has led to extensive discussions as to whether some securities or some derivatives with no underlying physical commodity should be subject to position limits just because the cross references between MiFID and MiFIR suggest that they are ‘commodity derivatives’. Market participants support the objectives of the legislation and particularly the prevention of excessive speculation on underlying commodities such as food commodities. However, they would welcome the idea raised by ESMA of limiting the regime to a ‘set of important, critical derivatives contracts’;
- the scope of the hedging exemption. Whilst the position limits regime includes exemptions for market participants pursuing hedging activity, the MiFID II definition of hedging as set out in RTS 21 is clear that only non-financial entities can engage in such activity, thereby rendering the exemption unavailable to investment banks or commodity trading houses that are MiFID II authorised, which play a vital role in providing smaller commercial players with access to commodity derivatives markets.