Alongside ISDA and EFET, FOA has released a paper on MiFID – Article 59 – Definition of appropriate position limits ‐ ESMA level 2 work.
The Associations and their members fully support transparency in both physical commodity markets and financial commodity derivatives markets and recognise the need for exchanges and regulators to have accurate information about commodity derivatives positions to enable them to carry out their supervisory and enforcement mandates.
They also underline that commodity and energy derivatives play a crucial role for the real economy as hedging tools tailored to meet the specific needs of an end‐user (e.g. an airline using jet fuel, an aluminium producer consuming power).
We wish to provide views as to how to make the supervisory framework for commodity derivatives markets most effective for market participants and in particular end‐users. With this in mind we have set out proposals on how position limits should be calibrated in future ESMA regulatory technical standards in order to achieve these objectives optimally.
We note that the article 59.7 of MiFID states that ESMA shall take account, in its RTS, of the following:
- "whether the financial instruments can be physically settled or are cash settled;
- the maturity of the commodity derivative contracts;
- the deliverable supply in the underlying commodity;
- the overall open interest in the respective commodity derivative contracts;
- the overall open interest in other financial instruments with the same underlying commodity;
- the level of volatility in the relevant markets, including substitutable derivatives and the underlying commodity markets;
- the number and size of the market participants;
- the characteristics of the underlying commodity market, including patterns of production, consumption and transportation to market;
- the experiences with the position limits that have been employed by investment firms or market operators operating a trading venue.”
Our view is that the future regime should be calibrated around the following principles:
- Limits should only apply to the delivery (spot) month, other more flexible methods should be used for longer dated contracts;
- Limits should apply to net long and short positions, across global trading venues and across ETD and economically equivalent OTC contracts;
- Limits should be ‘dynamic’ and flexible in that they should be regularly reviewed and adjusted according to underlying market conditions. They should be tailored to the specific characteristics
- of the contract, and the specific commodity market. This includes characteristics such as historical and current liquidity;
- Aggregation of positions applies for positions that are either held and/or directly or indirectly controlled;
- Position limits should be set by market operators (i.e. exchanges) who are experts in their given market in conjunction with competent authorities (i.e. national regulators). Position limit enforcement should form part of the local supervisory and enforcement regime in that given jurisdiction.
