The package completes the rulebook of secondary measures under the revised Markets in Financial Instruments Directive, known as MIFID II, and gives market participants time to prepare for its application, as of 3 January 2018.

In particular, the Commission is adopting regulatory standards that will define parameters for competent authorities to determine "position limits", i.e. the maximum amount of commodity derivatives that can be held by a single trader, and which represent a tool to help to limit commodity speculation, support orderly pricing and prevent market abuse. The new rules also ensure that large non-financial firms trading a large amount of commodity derivatives are regulated under MiFID II (through the so called “ancillary activity test”).

Valdis Dombrovskis, Vice-President for Financial Stability, Financial Services and Capital Markets Union, commented: “Today's rules will contribute to better functioning commodities markets that work for the real economy while helping to deal with some of the problems we saw in the financial crisis. We have listened to the concerns raised by the European Parliament and provided for stricter position limit standards whilst at the same time seeking to avoid unintended consequences."

Phil Hogan, EU Commissioner for Agriculture stated: "Today's move ensures the effective functioning of futures markets for agricultural products and offers the possibility to hedge risks."       

Today's package consists of two Delegated Regulations are part of the MiFID II rulebook and are based on the draft regulatory technical standards of the European Securities and Markets Authority (ESMA). With the today's adoption the Commission has put in place the two final pieces of the 28 regulatory standards that ensure the application of MiFID II as of 3 January 2018.

The Council and the European Parliament now have three months to approve or object to the two standards.

Background

The regulatory standard on position limits provide regulators with the full set of tools to ensure that food price speculation is curbed.The rules establish a "baseline" and maximum bands of deviation on either side of the baseline, to be set by the competent regulators in line with observed price volatility in the underlying commodity markets. The standard also contains several chapters to cater for the so-called "illiquid" derivative contracts, i.e. where open interest levels (number of pending contracts at any given moment in time) are low or where there a few market participants.  Moreover, the new standards contain an explicit reference to how volatility should be considered by NCAs. In particular, authorities should seek to minimise volatility or at least review their limits more often in cases of excessive volatility.

Responding to concerns raised in the European Parliament, the Commission modified key aspects of the original proposal by ESMA, in order to provide for stricter position limit standards whilst at the same time seeking to avoid the risk of unintended consequences for the real economy and end users. 

The technical standards on ancillary activities set the maximum amount of trading in commodity derivatives that non-financial firms (such as energy and agricultural firms) can engage in before they must seek a MIFID authorisation. The European Commission asked ESMA to revise its original proposal to take into account the capital used by non-financial firms in their physical activity. For this purpose, the Commission developed a test based on capital allocated by the Capital Requirements Regulation (CRR). This “ancillary test” represents a ratio between (i) the capital that would need to be allocated under CRR for the firm to engage in speculative derivatives trading versus (ii) the capital employed to conduct a firm's main business.

For More Information

• Updated rules for markets in financial instruments: MiFID 2
• Updated table of level II measures under MiFID

Source: europa.eu