Non-financial companies are required to include in their internal policies "measures to ensure" that the risk-reducing transactions serve no other purpose than covering risks directly related to the commercial activities of the non-financial entity, and that any transaction serving a different purpose can be clearly identified.
If they still want to remain non-financials, obviously…
Overall, the tightening grip of financial regulators can easily be observed recently when it comes to delineation of hedging and speculative activity of market participants that are not subject to the financial sector supervision.
Pursuant to Article 5(2) of the ESMA's draft of 28 September 2015 of the Commission Delegated Regulation supplementing Directive 2014/65/EU of the European Parliament and of the Council with regard to regulatory technical standards for criteria to establish when an activity is considered to be ancillary to the main business "a qualifying risk-reducing transaction taken on its own or in combination with other derivatives is one for which the non-financial entity:
(a) describes the following in its internal policies:
(i) the types of commodity derivative contracts included in the portfolios used to reduce risks directly relating to commercial activity and their eligibility criteria;
(ii) the link between the portfolio and the risks that the portfolio is mitigating;
(iii) the measures adopted to ensure that the transactions concerning those contracts serve no other purpose than covering risks directly related to the commercial activities of the non-financial entity, and that any transaction serving a different purpose can be clearly identified;
(b) is able to provide a sufficiently disaggregate view of the portfolios in terms of class of commodity derivative, underlying commodity, time horizon and any other relevant factors."
The aforementioned provision is intended to be a component of the MiFID II ancillary exemption regime, but the analogous rule, in turn, for the purposes of the hedging exemption from the MiFID II position limits' framework, is stipulated in Article 7 of the draft of 28 September 2015 of the Commission Delegated Regulation supplementing Directive 2014/65/EU of the European Parliament and of the Council with regard to regulatory technical standards for the application of position limits to commodity derivatives.
Particularly interesting seems the requirement in point (a)(iii) above for the designation of concrete tools safeguarding the completness and soundness of the portfolio design. What these measures should looke like? Unfortunately, draft regulatory technical standards do not explain closer details what these measures could consist in.
What comes to mind is strict segregation and separation of hedging and speculative portfolios - implemented at accounting and IT mechanisms level.
The role of properly formulated documentation should also be accentuated - including mandates, agreements, procedures, policies, etc.
But these are the preliminary thoughts only, and, inevitably, the issue will require the much more thorough analysis.
There are multiple ambiguities involved. Among them is, for example, the issue at what moment in time the relevant hedge/speculation classification should take place: at the trade's inception or at some other, later, moment.
In other words, is it possible to re-classify the trades' character ex-post, even if the transaction has been reported as, say, hedging, in accordance with EMIR or REMIT reporting rules? If it would be possible, it is likely to entail the trade report modification.