Do hedging deserve any preferential treatment under MiFID II? Definitely!
Hedging has emerged from the legislative mess and uncountable MiFID II negotiation hours as a some sort of a safe harbor for any commodity trader wishing to stay away from regulatory complications and burdens.
Firstly, due to its preferential treatment, hedging activity will not expose commodity trader to the risk of loosing ancillary exemption (hedging positions are omitted in the calculations whether ancillary activities constitute a minority of activities at group level).
Secondly, hedging positions are "invisible" for MiFID II position limits.
Moreover, they are not subject to pre-trade transparency requirements in accordance with Article 8(1) MiFIR.
Let's recall, hedging positions are not counted towards clearing thresholds under EMIR Regulation.
Is there any need for further enumerations to advocate the view hedging has been placed as a central, pivotal element of the new infrastructure of the financial market...?
But what precisely do the word "hedging" mean in this context?
Significance of the issue is clearly underlined by the uniform legal definition of what is commonly described as "hedging" (often used descriptions accentuate elements like risk management strategy to limit or offset the probability of loss from fluctuations in prices or changes in forecasted demand for commodities) across the texts of new legislative pieces of the financial European law (particularly MiFID II, MiFIR, EMIR).
The golden formula of the legal wording captures "activities that are deemed to be objectively measurable as reducing risks directly related to the commercial activity or treasury financing activity" and the need for consistency in its application and interpretation between MiFID II, MiFIR, EMIR is explicitly stressed in the relevant recitals.
It does not surprise in this context that hedging positions are required to be clearly differentiated within reports made by investment firms or a market operators operating a trading venue which trades commodity derivatives or emission allowances or derivatives thereof.
Does it mean that "speculative" portfolios are entirely "bad" for European legislators?
They would probably be outraged at such an opinion. The politically correct answer reads: speculation is not "bad", it is simply subjected to the careful regulatory oversight.
However, there may appear the perception hedging represents the more legitimate type of activity...