Assume, the non-financial counterparty, in effect of, for example, modifications of the ancillary activity exemption, finds itself above the respective activity thresholds and, consequently, is driven under the financial regulation. Among MiFID II unexpected impacts is the fact, the legitimate hedging needs of the above entity may, potentially, by constrained by position limits. Why? Hedging exemption - in general foreseen when calculating the group's position limit - is not available to financial counterparties.
It appears, such conglomerate, currently being beyond financial regulation, will face the risk of its hedging transactions being cut by the position limit after 3 January 2017.
Position limits in MiFID II will be set at the seemingly comfortable level - 40% of the deliverable supply.
But this impression occurs questionable when accounting for:
- positions for the purposes of position limits are to be agregated at a group level,
- position limit's calculations are based on an aggregation not only of commodity derivatives traded on trading venues but also "economically equivalent OTC contracts",
- position limits will apply not only to cash settled commodity derivatives, physically settled positions are equally covered,
- the EU Meber States national competent authorities will be able to decrease the baseline position by an additional 15% so that position limit may, potentially be set even at the level of 10% of deliverable supply.
Positions netting may, potentially, give some comfort, but is it able to extinguish all threats?