The UK Financial Conduct Authority ("FCA") published position limits for commodity derivatives.
The FCA stated that the position limits were established to fulfill a Markets in Financial Instruments Directive II requirement, using the methodology of European Securities and Markets Authority ("ESMA") Regulatory Technical Standard 21. The limits will become applicable on January 3, 2018.
The announcement includes a table listing the applicable limits for covered contracts.
Commentary / Assia Damianova
Commodity firms may have been unaffected by MiFID I (because of some broad exemptions). However, by January 3, 2018, most firms will come within the scope of MiFID II – including the commodity position limits (unless a hedging exemption applies, in the case of non-financial entities).
Compliance will be very costly. Firstly, the limits relate to all positions held by a firm and those held on its behalf at an aggregate "group" level (in order to prevent market abuse). Firms will need to be able to aggregate position across such a "group," where that term cross-refers to the (complicated) Accounting Directive's definition of a "group." Secondly, "economically equivalent" over-the-counter (OTC) contracts will be brought into scope. That will require commodity firms to net these positions against future positions across the entire group, on an intraday basis. Those tasks can be accomplished only after investment and roll-out of new technologies and systems.
Now that the affected contracts have been announced by the FCA, firms may wish to prepare/test their systems by starting to gather transaction information at group level and designing appropriate alerts when positions start nearing thresholds.
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