The opinion of the ITRE Committee highlights the fact that physically settled forward products in MiFID II EC proposal are classified as financial instruments. The essence of the recent ITRE proposal is, however, to explicitly exclude products that can be physically settled and that are entered into for commercial purposes and do not display the characteristics of other derivative financial instruments.
If somebody hadn’t a sufficiently clear picture of legal situation of the commodity trading firms after proposal for MiFID II , the draft opinion of the rapporteur Holger Krahmer for the Committee on Industry, Research and Energy for the Committee on Economic and Monetary Affairs on the proposal for a directive of the European Parliament and of the Council on markets in financial instruments repealing Directive 2004/39/EC of the European Parliament and of the Council (recast) (COM(2011)0656 – C7-0382/2011 – 2011/0298(COD)) would shed some light on the issue.
Generally, the opinion of the ITRE Committee represents a substantial support for all, who believed that non-financial firms like commodities industries should, due to their nature, not be fully covered by the MiFID.
Furthermore, those, who, after having read the MiFID II proposals, regarded the manner, in which the exemptions are formulated, misleading or not clear enough, shouldn’t be confused, since the rapporteur for the ITRE Committee acknowledged exactly the same.
As ITRE underlined, if, under MiFID, non-financial firms are considered financial firms, they have to fulfil costly obligations of several financial regulations. For example they become subject to the clearing obligation of all their standardised 'over-the-counter' derivate transactions as defined under the European Market Infrastructure Regulation (EMIR) or might be required to hold a capital buffer under the Capital Requirements Directive (CRD) after 2014.
If non-financial firms are considered financial firms under MiFID, they become subject to the clearing obligation of all their standardised 'over-the-counter' derivate transactions as defined under EMIR.
Physically settled forward products in MiFID II proposal are classified as financial instruments. However, these forwards are crucial for risk management of commercial firms and are fundamentally different from speculative financial instruments - they do not involve any financial (cash) settlement and the underlying physical commodity will actually be delivered on schedule. Consequently physically settled forwards do not pose any risk to financial markets. The consequences of physical forward products being considered financial instruments include several implications under MiFID, EMIR and the Market Abuse Regulation (MAR).
According to the draft opinion the consequences for considering these products as financial instruments are not proportionate for non-financial firms and include negative implications regarding:
- reduced possibility to use the ancillary activity exemption mentioned in Article 2(1)(i) of MiFID;
- Market Abuse Regulation compliance;
- increased probability for non-financial firms to hold positions beyond the clearing threshold under EMIR and become subject to the clearing obligation;
- physical forward contracts would become subject to position limits.