The procedure envisioned in MiFID II Directive for establishing position limits is founded on the following milestones:
1. Position limits are established by the EU Member States' competent financial authorities for each contract in commodity derivatives traded on trading venues.
2. Position limits must be in line with on the methodology for calculation determined by ESMA.
3. The legal base for imposing the position limits by competent authorities is Article 69(2)(p) MiFID II.
4. A competent authority is obliged to review position limits where there is "a significant change in deliverable supply or open interest or any other significant change on the market".
5. Competent authorities notify ESMA of the exact position limits they intend to set in accordance with the methodology for calculation established by ESMA.
Within two months following receipt of the notification, ESMA is required to issue an opinion to the competent authority concerned assessing the compatibility of position limits with the methodology and the objectives of:
- preventing market abuse,
- supporting "orderly pricing and settlement conditions, including preventing market distorting positions, and ensuring, in particular, convergence between prices of derivatives in the delivery month and spot prices for the underlying commodity, without prejudice to price discovery on the market for the underlying commodity".
ESMA publishes the opinion on its website.
6. The competent authority concerned is required to modify the position limits in accordance with ESMA's opinion, or provide ESMA with justification why the change is considered to be unnecessary.
Where a competent authority imposes limits contrary to an ESMA opinion, it must immediately publish on its website a notice fully explaining its reasons for doing so.
7. Where the same commodity derivative is traded in significant volumes on trading venues in more than one jurisdiction, the competent authority of the trading venue where the largest volume of trading takes place (the central competent authority) sets the single position limit to be applied on all trading in that contract.
The central competent authority consults the competent authorities of other trading venues on which that derivative is traded in significant volumes on the single position limit to be applied and any revisions to that single position limit.
Where competent authorities do not agree, they state in writing the full and detailed reasons why they consider that the requirements are not met.
ESMA is granted the authority to settle any dispute arising from a disagreement between competent authorities.
The competent authorities of the trading venues where the same commodity derivative is traded and the competent authorities of position holders in that commodity derivative put in place cooperation arrangements including exchange of relevant data with each other in order to enable the monitoring and enforcement of the single position limit.
8. ESMA is required to monitor at least once a year the way competent authorities have implemented the position limits set in accordance with the methodology for calculation.
In doing so, ESMA should ensure that a single position limit effectively applies to the same contract irrespective of where it is traded.
9. Competent authorities must not impose limits which are more restrictive than those adopted in accordance with the respective rules except in exceptional cases where "they are objectively justified and proportionate taking into account the liquidity of the specific market and the orderly functioning of that market."
10. Competent authorities publish on their websites the details of the more restrictive position limits they decide to impose, which should be valid for an initial period not exceeding six months from the date of their publication on the website.
The more restrictive position limits may be renewed for further periods not exceeding six months at a time if the grounds for the restriction continue to be applicable.
If not renewed after that six-month period, they automatically expire.
Where competent authorities decide to impose more restrictive position limits, they must notify ESMA.
The said notification must include a justification for the more restrictive position limits.
ESMA, in turn, must within 24 hours issue an opinion on whether it considers that the more restrictive position limits are necessary to address the exceptional case.
The opinion is to be published on ESMA's website. Where a competent authority imposes limits contrary to an ESMA opinion, it is obliged to immediately publish on its website a notice fully explaining its reasons for doing so.