The two facts that may occur important for many market participants as regards the MiFID II position limits are as follows:
1. if you do not expect to exceed position limit, there is no need to apply in advance for a position limits exemption;
2. you are not required to monitor the position limit compliance of your clients.
New regulatory Q&As has become a common, daily routine for commodity merchants in Europe.
Multiple EU agencies rush to issue more and more voluminous manuals intended, in theory, to help market participants to cope with abundant EU regulations.
Particularly, ACER and ESMA are active in this field, tirelessly and continuously explaining what is hidden behind strange-looking acronyms: EMIR, MiFID, REMIT, MAR etc.
Regulatory burden flowing from this endless charts is really impressive, and I truly admire, particularly, small investment firms that must to adhere thereto.
After this prolonged, bitter preface it's time to turn to very essence of this article.
ESMA and the UK FCA concentrated recently on position limits and among numerous issues being analysed a few have drawn my particular attention.
They seem to be of utmost practical significance.
1. No need to apply in advance for a position limits exemption
On 7 July 2017 ESMA explained that an application to the relevant national competent authority of a trading venue for a position limit exemption (available for hedging transactions) is necessary for a non-financial entity (NFE) only when it expects to be in excess of the position limit for a given commodity derivative.
ESMA, moreover, underlined, that there is no requirement under MIFID II to apply for a position limit exemption if an NFE does not expect to need one for its normal level of activities.
This interpretation means, practically, that the vast majority of non-financial counterparties with activity levels far below the established position limits don't need to care about bureaucratic burdens involved.
2. Position limit exemptions granted will not be listed publicly
Important consideration is that the approval of a position limit exemption is a matter between the national competent authority and the applicant.
This entails that firms are not required to monitor the position limit compliance of their clients, compliance with position limits is the sole responsibility of the position holder.
According to the stance of the UK Financial Conduct Authority (FCA), there is no expectation that a firm (such as a broker) should know, or need to know, the exemptions granted to any individual person.
FCA is silent on the fact, however, that the consequences of the violation by your trading partner of the position limit will have effect on your contract. It is quite probable that the contractual representations will have to be adequately adapted.
More far-reaching monitoring of the counterparty versus position limits - in the light of the above regulatory clarifications - may, however, be difficult.
The EU position limits rollercoaster is ready to ignite - the three EURONEXT contracts on agricultural products have been triggered firstly - on 10 August 2017.
There are, broadly, 1500 contracts left for the next 4 months (in the run-up to the MiFID II entry into force 3 January 2018).
Only the carbon and energy traders may feel comfortable - emission allowances are excluded from the MiFID II position limits regime, as well as physically delivered electricity and gas traded on an OTF (REMIT carve-out).
Reasons behind these exclusions seem unclear, but the present fact is these two products are treated extremely preferentially in the MiFID II position limits regime.
All other commodity derivatives traders are in the limbo....
So, the above brief guidance may help to orientate the pertinent strategies.