Clearing arrangements as an indicator of whether a contract qualifies as a financial instrument? Manifest error in assumptions...



ESMA expressed the view that "the execution of orders in financial instruments between two non-financials directly and without any further intermediation by third parties as ancillary activity is not covered by the term 'dealing on own account when executing client orders' and would therefore not prevent the persons concerned from using the exemptions under paragraphs (d) and (j) of Article 2(1) MiFID II."


See more on MiFID II exemptions:


1. dealing on own account (Article 2(1)(d)),


2. ancillary activity (derivatives trader exemption - Article 2(1)(j)).



The EU ETS operators probable don't put to much weight whether they trade in the spot market or in emissions derivatives markets (particularly given the availability of financial products such as "daily futures" for instance), nevertheless, from regulatory point of view under MiFID II draft Directive each of these markets will be covered by distinct exemption. 


Each of these exemptions have its own strict perimeters, which must be observed, unless EU ETS operator intends to apply for a MiFID licence.



Is it really physically-settled gas and power forwards traded on multilateral trading facilities (MTFs) are 'financial instruments' for MiFID purposes?



Only physically-settled oil and coal commodity derivatives contracts as well as REMIT wholesale energy products deserved special treatment in the new financial market architecture created by MiFID II and MiFIR. All others traded on an OTFs will fall under financial instruments regulation.





A specific exemption for operators with compliance obligations under the EU ETS Directive has been inserted in MiFID II compromised text of February 2014.

To remain exempted the said operators, however, mustn't provide any investment services or apply a high frequency algorithmic trading technique.


There is also a separate exemption for dealing on own account or providing other investment services in emission allowances as an ancillary activity, but in this case an annual notification to the financial authority is required.



For the purposes of MiFID II reporting, operators with compliance obligations under Directive 2003/87/EC are categorised as a distinct group of traders within a broader spectrum of members, participants (and clients) of the regulated markets, MTFs or OTFs.



It is interesting that the architecture envisioned has, in its primary form, a decentralised character i.e. the respective decisions on the introduction of positions limits are to be taken at the level of the trading venue. It is to be borne in mind that pursuant to MiFID II legislative design the above developments will also be relevant for commodity derivatives as well as  emission allowances and derivatives thereof. Market strategies mustn’t neglect that fact.



MiFIR (Markets in Financial Instruments Regulation) will for the first time require certain derivatives contracts – those that are both cleared through a central counterparty (CCP) and deemed sufficiently liquid – to trade on a ‘trading venue’.



Specific MiFID exemption has been designed for persons which own or directly operate installations subject to Directive 2003/87/EC, but the issue whether it is properly formulated is open.



REMIT and MAR differ significantly in their market abuse prosecution regimes when it comes to the obligations of proprietary traders. Temporarily?



What was the essence of the dispute between the European Securities and Markets Authority (ESMA) and the European Commission as regards the inside information publications under REMIT and MAR?

Does it influence on the ongoing regulatory practice?