Under MiFID II members and participants of trading venues must report to the trading venue on a daily basis a complete breakdown of their positions in commodity derivatives, emission allowances, and derivatives of emission allowances, as well as those of their clients and the clients of those clients and so on down to the end client (Article 58(3) MIFID II).

         
          
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26 July 2022

 

Commission Implementing Regulation (EU) 2022/1300 of 24 March 2022 amending Implementing Regulation (EU) 2017/1093 laying down implementing technical standards with regard to the format of position reports by investment firms and market operators published in the EU Official Journal


12 July 2022

 

ESMA Opinion on classification of counterparties in weekly position reports (ESMA70-156-6046) states that for the purpose of the weekly position reports on commodity derivatives and emission allowances derivatives under MiFID II, third-country financial entities should be classified as they would be classified if they were established in the EU.


28 March 2022


ESMA Final Report, Emission allowances and associated derivatives, ESMA70-445-38 - ESMA recommends removing the position reporting in emission allowances and weekly position reporting requirements from MiFID II.

 

 

The trading venue must then provide those reports to the national competent authority (NCA).

 

In addition, investment firms which undertake trading in commodity derivatives, emission allowances or derivatives of emission allowances outside a trading venue must report on a daily basis their positions in all commodity derivatives, emission allowances and derivatives of emission allowances, as well as those of their clients and the clients of those clients and so on down to the end client to the relevant NCA (Article 58(2) MIFID II).

 

 

“End client” classification

 

 

The wording of the above provisions raises some ambiguities with respect to the scope of the positions reporting requirement.

 

In particular, as there is no definition of “end client” in MiFID II/MiFIR, the document of GFMA, ISDA and FIA - Level 3 Q&A: Commodity Derivatives Position Reporting (MiFID II, Article 58) has proposed to resolve this problem in light of the Article 4(1)(9) MiFID II definition of “client” ("any natural or legal person to whom an investment firm provides investment or ancillary services").

 

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The obligation to report positions under Article 58 of MIFID rests with:

 

- members or participants of regulated markets, MTFs and clients of OTFs or

 

- investment firms when executing economically equivalent OTC (EEOTC) transactions on behalf of their clients. 

 

 

GFMA, ISDA and FIA infer the following implications from the said definition:

 

- for a person to be a “client” it must receive investment or ancillary services from an investment firm; 



- if that person (the “client”) is not itself an investment firm, then that client must also be the “end client” as it will not be providing investment or ancillary services, and therefore cannot have any clients of its own; and 



- if the client is an investment firm, but does not provide investment or ancillary services to another person, then the client will also be the “end client”. 



Accordingly, GFMA, ISDA and FIA argue that not every position taken in a commodity derivative, emission allowance or derivative thereof that is traded on a trading venue or in an economically equivalent OTC (EEOTC) contract will involve a client.

 

For example, an investment firm will not have a “client” where it is dealing on its own account.

 

Where an investment firm enters into an EEOTC with another investment firm, neither firm may be providing investment or ancillary services to the other.

 

Indeed, if both investment firms are dealing on their own account, neither investment firm has a “client”.

 

Consequently, according to the above organisations, an investment firm would not be required to report positions of a trading counterparty (where such counterparty is not that firm’s client), or those of any client that the trading counterparty may have.

 

Investment firms should only report their own positions, as well as those of their clients and the clients of those clients, until the end client is reached.

 

The UK FCA in the Q&As underlined that end-client is a different concept to that of any ultimate position holders who may not be an end-client according to the definitions within MiFID II.

 

 

Hedging flag

 

 

The practical ambiguity emerged whether non-financial entities (NFEs):

 

- having aggregated positions well below the limit set by the relevant NCA for the respective commodity derivative contract, and


- which do not apply for a hedging exemption from position limit under Article 8 of Commission Delegated Regulation (EU) 2017/591 of 1 December 2016 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 (RTS 21).

 

are required to flag positions as hedging or speculative based on the conditions established in Article 7 of RTS 21.

 

However, the ESMA’s stance in this regard is rigorous - irrespective of the above circumstances the positions reports must accurately describe whether the position is risk reducing in relation to the NFE’s commercial activities (Questions and Answers, on MiFID II and MiFIR commodity derivatives topics, ESMA70-872942901-28, Answer 11, updated on 13 November 2017).

 

In an answer to the Question 18 updated 15 December 2017 ESMA underlined that although the obligation to report positions under Article 58 of MIFID rests with members or participants of regulated markets, MTFs and clients of OTFs or with investment firms when executing EEOTC transactions on behalf of their clients, it is the client’s responsibility to ensure that the client’s position is accurately described in position report.

 

The client’s responsibility relates, in particular, to the information whether the positions are for hedging or speculative purposes.

 

It is, moreover, a matter for the individual client as to how they satisfy this obligation and they may provide an initial instruction that unless informed otherwise, the investment firm should report certain defined positions to be for hedging (or speculative) purposes providing that this is an accurate description at the time.

 

There may, however, be circumstances where a client is able more accurately to assign new transactions to hedging or speculative positions only after the initial trade. In this case the client should ensure that their position report is adjusted accordingly to the hedging or non-hedging nature of their position.

 

 

Positions reporting in case of matched principal trading

 

 

MiFID II positions reporting requirement covers also investment firms acting as brokers and using a matched principal model (Questions and Answers, on MiFID II and MiFIR commodity derivatives topics, ESMA70-872942901-28, Answer 12, updated on 13 November 2017).

 

According to the ESMA, investment firms should provide a complete breakdown of positions held on own account and on behalf of clients as the investment firm can end up holding a position even if trading on a matched principal basis.

 

This applies to any investment firm trading in commodity derivatives contracts traded on a trading venue or in economically equivalent OTC (EEOTC) contracts.

 

ESMA underlined that it is the investment firm’s responsibility to assess whether the transaction executed results in a change in the positions held on own account and/or on behalf of clients.

 

 

Reporting of end of day zero positions

 

 

In the answer to Question 13 (Questions and Answers on MiFID II and MiFIR commodity derivatives topics, Positions reporting, updated on 13 November 2017) ESMA invoked the fact that Article 58(2) of MiFID II provides for the reporting, at least on a daily basis, of a complete breakdown of the positions.

 

Nevertheless, ESMA said that end of day zero positions do not need to be reported to the NCA unless the firm showed a positive or negative position in the previous report.

 

In that case, the first time the open position is reduced to zero, a zero position should be reported to the NCA.

 

 

Reporting positions in "exotic derivatives"

 

 

In the answer to Question 15 (Questions and Answers on MiFID II and MiFIR commodity derivatives topics, Positions reporting, updated on 13 November 2017) ESMA referred to the issue of the positions reporting application to various instruments listed in Annex I, Section C(10) of MIFID II with an underlying which is not a commodity.

 

According to the ESMA these instruments must be treated consistently across all rules regarding commodity derivatives in the MiFID II/MiFIR framework.

 

ESMA invoked the purpose of daily reporting, which is to monitor for potential breaches of position limits as Article 58(3) of MiFID II stipulates that daily position reporting enables monitoring of compliance with Article 57(1) of MiFID II.

 

Therefore, all those commodity derivatives contracts with underlyings that are subject to the position limit regime are also subject to position reporting.

 

Considering the ESMA’s stance expressed in the said Q&As:

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See also:

 

MiFID II position limits for commodity derivatives 


- Positions reporting Question 15, and


- Position Limits Question 10;


it may be concluded that the ESMA’s approach to positions reporting of different types of commodity derivatives covered by Section C(10) of Annex I of MIFID II is as follows:

 

1. Freight rate derivatives (wet and dry freight)

 

According to the above ESMA's opinion, freight rate derivatives (wet and dry freight) are subject to the MiFID II positions reporting framework.

 

2. Derivative contracts relating to indices

 

ESMA also said that positions reporting should be applied to derivative contracts relating to indices if the underlying index is materially based on commodity underlyings as defined in Article 2(6) of Commission Delegated Regulation (EU) 2017/565 of 25 April 2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council as regards organisational requirements and operating conditions for investment firms and defined terms for the purposes of that Directive.

 

ESMA considers that the underlying index derivative is materially based on commodities if such commodities have a weighting of more than 50% in the composition of the underlying index.

 

3. Commodity derivative contract in the form of a “spread” or “diff” contract

 

A commodity derivative contract in the legal form of a “spread” or “diff” contract is a contract that is cash-settled and whose value is determined by the difference between two reference commodities which may vary in type, grade, location, time of delivery, or other features.

 

Whilst having multiple commodity values underlying it, the commodity derivative is available on a trading venue as a single tradable financial instrument.

 

As a spread contract has no single commodity at a specific place or time as the underlying, it is not possible to link it to a single physical deliverable supply against a contractual obligation to physically settle the trade.

 

It is for this reason all spread contracts are cash-settled and not physically settled.

 

Therefore, according to the ESMA, spread contracts should be treated for the application of positions reporting in the same manner as C10 commodity derivatives which do not have a physical underlying, such as weather derivatives.

 

4. Other derivatives listed in Section C10 of Annex I of MiFID

 

Other derivatives listed in Section C10 of Annex I of MiFID II and in Article 8 of Commission Delegated Regulation of 25 April 2016, according to the ESMA are not subject to positions reporting as the underlyings of such derivatives are not considered to be commodities as defined in Article 2(6) of Commission Delegated Regulation of 25 April 2016.

 

Another aspect is that Directive (EU) 2021/338 of the European Parliament and of the Council of 16 February 2021 amending Directive 2014/65/EU as regards information requirements, product governance and position limits, and Directives 2013/36/EU and (EU) 2019/878 as regards their application to investment firms, to help the recovery from the COVID-19 crisis in Article 1(11) laid down amendments to Article 58 of Directive 2014/65/EU as regards position reporting.

In accordance with those amendments position reporting is no longer applying to securities referred to in Article 4(1), point 44, point (c), of MiFID II, which relate to a commodity or an underlying as referred to in Section C.10 of Annex I to that Directive - therefore, references to those categories of derivatives in the implementing technical standards laid down in Commission Implementing Regulation (EU) 2017/1093 needed to be deleted.

These deletions were made by Commission Implementing Regulation (EU) 2022/1300 of 24 March 2022 amending Implementing Regulation (EU) 2017/1093 laying down implementing technical standards with regard to the format of position reports by investment firms and market operators which on 26 July 2022 was published in the EU Official Journal.



Quantity field reporting

 

 

In the Questions and Answers, on MiFID II and MiFIR commodity derivatives topics (ESMA70-872942901-28 (answer to the Question 19 updated on 15 December 2017) ESMA clarified its stance with respect to the population of the quantity field in case of reporting position in contracts that relate to delivery of the same underlying over different periods of time.

 

ESMA said that the Position Quantity held in a contract must be reported in the same unit as used by the Competent Authority to set the position limit for that contract.

 

The position limits for those contracts that refer to the same underlying commodity but have a variety of delivery periods, e.g. annual (calendar), quarterly, monthly, weekly (whole week, working day week and weekend) or daily are set in units of underlying since a lot does not represent a standard quantity of underlying across all maturities/delivery periods.

 

Thus, for these contracts, the figures reported in the field position quantity must be expressed in units of underlying.

 

 

Outsourcing 

 

 

According to the ESMA (Questions and Answers, on MiFID II and MiFIR commodity derivatives topics, ESMA70-872942901-28, Answer 14, updated on 13 November 2017) investment firms can delegate the reporting to third parties but remains responsible for the reports.

 

The investment firm has to comply with the relevant outsourcing requirements specified in MiFID II.

 

 

Reporting obligations in a chain of investment firms executing trades on behalf of their clients

 

 

Specific ESMA’s remarks (Questions and Answers, on MiFID II and MiFIR commodity derivatives topics, ESMA70-872942901-28, answer to the Question 17 updated on 15.12.2017) relate to reporting obligations where there is a chain of investment firms that are executing trades on behalf of their clients.

 

ESMA recalled that in such a case each one of investment firms has an obligation to report a complete breakdown of the positions held by all persons down the chain, down to the end client, as defined under Article 58(3) of MIFID II.

 

At the same time, duplicative reporting should be avoided.

 

Unless firms make arrangements to avoid it, this may arise, for example, where two or more of the investment firms in the chain are members of a trading venue, and therefore have an obligation (under Article 58(3)) to report to the trading venue.

 

To this aim, there is a possibility to outsource reporting, for example, an arrangement in which the first investment firm in a chain will agree with the second that it will report to the trading venue.

 

The firm which outsources the reporting should make sure that all the necessary and factual information is provided to the reporting agent, since, as was said above, the responsibility for reporting cannot be outsourced.

 

 

Jurisdictional issues

 

 

In practice an ambiguity emerged relating to the NCA’s competence in cases where an OTC contract is economically equivalent to more than one exchange-traded derivative (ETD) contract traded on an EU trading venue and where those ETD contracts are not the same derivative contract.

 

 

Commission Delegated Regulation (EU) 2017/591 of 1 December 2016 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 (RTS 21), Article 5(1)


Same commodity derivatives and significant volumes


A commodity derivative traded on a trading venue shall be considered the same commodity derivative as a commodity derivative traded on another trading venue where the following conditions are met:


(a) both commodity derivatives have identical contractual specifications, terms and conditions, excluding post trade risk management arrangements;


(b) both commodity derivatives form a single fungible pool of open interest or, in the case of commodity derivatives defined under point (c) of Article 4(1)(44) of Directive 2014/65/EU, of securities in issue by which the positions held in a commodity derivative traded on one trading venue may be closed out against the positions held in the commodity derivative traded on the other trading venue.

 

 

In the answer to the Question 21 in Questions and Answers on MiFID II and MiFIR market structures topics (ESMA70-872942901-38) updated on 28 March 2018 ESMA explained that in cases where an OTC contract is economically equivalent to more than one ETD contract traded on a trading venue in the EU and where those ETD contracts do not qualify as the same derivative contract in accordance with Article 5(1) of RTS 21, positions in the EEOTC contract can be reported to any of the NCAs of the trading venues where the ETD contract is traded.

 

ESMA, moreover, underlined that:

 

- position reporting of such EEOTC contract should not be split among different NCAs and should not be reported to more than one NCA;

 

- investment firms should ensure that non-reporting or double reporting is avoided and that EEOTC contracts are consistently reported to the same NCA, with a consistent reference to the contract;

 

- for aggregation purposes, in order to calculate “net positions” according to Article 57(1) of MIFID II and Article 3 of RTS 21, the EEOTC contract should be considered only once and be aggregated only once with the ETD contract that the investment firm has considered it is equivalent to.

 

 

UK FCA’s clarifications

 

 

The UK FCA Q&As made some important comments on the decomposition in MiFID II positions reports of:

 

- futures/options,

- indices, and 

- on-venue and economically equivalent OTC (EEOTC) contracts.

 

According to the UK FCA:

 

- futures and options should be reported separately which is reflected in the position report field ‘instrument name’,


- FCA is not expecting indices to be decomposed into separate positions,


- the on-venue contract and any economically equivalent contracts are to be reported separately.

 

The FCA made, moreover, an important remark that the spot/other month categorisation for position reporting is driven by the date of expiry of the position, not the execution date.

 

 

Standards for the Commitment of Trader (CoT) reports

 

 

On 3 November 2017 EFET and FIA announced they developed an industry standard to facilitate position reporting under MiFID II.  

 

According to the announcement, the EFET-FIA ITS4 schema allows for the provision of the missing static data for position reporting, as well as additional information required by trading venues to complete the Commitment of Trader report.

 

On 2 October 2018 (Questions and Answers on MiFID II and MiFIR commodity derivatives topics, ESMA70-872942901-36, Question 22) ESMA referred to the issue how to qualify firms into each of the ITS 4 categories for the purposes of the weekly Commitment of Trader (CoT) reports (ITS 4 -  Commission Implementing Regulation (EU) 2017/1093 of 20 June 2017 laying down implementing technical standards with regard to the format of position reports by investment firms and market operators).

 

Given that the ITS 4 implementing MiFID II provides the format of the weekly CoT report to be published by trading venues and provided to ESMA, members and participants of those venues must use their knowledge and judgment to categorise their activities and the activities of their clients accurately.

 

In order to achieve accuracy and consistency in the reporting of positions across different categories, ESMA provided the following guidance:

- Investment firms or credit institutions – includes banks and other firms regulated under MiFID II.
- Investment funds – entities holding investments directly in the commodity derivatives market as a form of collective investment scheme, including hedge, pension and exchange-traded funds.
- Other financial institutions – those financial firms not falling within any of the other categories.
- Commercial undertakings – non-financial entities using commodity derivatives, for example firms using those markets to hedge the risk they directly incur from dealing in physical commodities such as producers, end users, processors, manufacturers, shippers and merchants.
- Operators with compliance obligations under the Emissions Allowance Trading Directive – such as commercial airlines, entities in power and heat generation, energy-intensive industry sectors including oil refineries, steel works, production of iron, aluminium, metals, cement, lime, glass, ceramics, pulp, paper, cardboard, acids and bulk organic chemicals.

 

It should be noted that it is possible for a firm to be categorised as an operator with compliance obligations under the Emissions Allowance Trading Directive for a Weekly CoT report for an emissions allowance contract or derivatives thereof while, on the other hand, it must be categorised as a commercial undertaking for a Weekly CoT referring to another asset class of commodity derivatives contract (i.e. metals, oil, coal, gas, power, etc.).

 

ESMA Opinion of 12 July 2022 on classification of counterparties in weekly position reports (ESMA70-156-6046) states that for the purpose of the weekly position reports on commodity derivatives and emission allowances derivatives under MiFID II, third-country financial entities should be categorised according to the nature of their main business in the same way as they would be categorised if they were established in the EU and subject to EU law, i.e. under categories (a), (b) or (c) of Article 58(4) of MiFID II.

 

Reporting positions in emission allowances and derivatives thereof

 

 

Some important aspects of reporting positions in emission allowances and derivatives thereof have been underlined in the ESMA Final Report of 28 March 2022 (Emission allowances and associated derivatives, ESMA70-445-380).


In the said Report the ESMA observes that whilst the Level 1 text sets out that daily positions in emission allowances, and not only in derivatives on emission allowances, should be reported to the NCA, some other terms used in Article 58(1), such as open position, long and short positions, which typically apply to derivatives rather than spot instruments, appear to have created uncertainty on how positions on spot emission allowances should be reported.

 

ESMA notes that the daily position reports received from NCAs in the context of this report and the EU carbon market analysis performed did not include any position reports in emission allowances.

 

ESMA also notes that in accordance with the mandate received under Article 57(12) of MiFID II, Article 6 of RTS 21 (and RTS 21a) sets out criteria for determining whether a commodity derivative contract is an economically equivalent OTC contract to that traded on a trading venue for position limit purposes.

 

No such definition is however provided for EEOTC derivatives on emission allowances for position reporting purposes.

ESMA is of the view that the position reporting regime set out in MiFID II does not serve its intended purpose when it comes to position reporting in emission allowances.

 

Position reporting in derivative instruments allows the regulators to monitor the evolution and in particular the build-up of positions over time, and its possible effect on both the derivatives and the underlying spot market.

 

However, the same outcome cannot be reached as regards spot instruments, such as emission allowances, where positions in the contract remain open for a very short period.

 

A position that reaches maturity is reported by the trading venue to the NCA as “zero”, which means that for emission allowances, the NCA will receive a “zero” report every other day when the transaction is finally settled and the emission allowance is delivered. The same holds true for daily futures.

 

No meaningful information can therefore be drawn from those position reports by the NCA on the number of emission allowances held by market participants for market monitoring purposes.

 

Furthermore, no information is available to the NCA of the spot trading venue on the emission allowances that have been freely allocated, auctioned in the primary market or surrendered.

 

Considering the above, ESMA is of the view that the data already available in the Union Registry, which records the holdings of both financial and non-financial entities would be a more relevant and exhaustive source of information on emission allowance account holders.

 

In parallel, ESMA recommends removing the position reporting in emission allowances and weekly position reporting requirements from MiFID II.

 

As regards EEOTC derivatives on emission allowances, ESMA stands ready to provide technical assistance to the Commission should the Commission consider that further clarification in Level 2 is needed.



ESMA is of the view that, based on the above amendments, EUA position reports can be a source of useful additional information for NCAs in the exercise of their market monitoring responsibilities and can notably help identifying the potential existence, or building, of large positions in emission allowances by a market participant which may be a source of concern or raise question marks.

 

Additional information on the positions held by market participants in emission allowances over time will be of particular relevance considering the limited number of participants in the primary market, noting that the Union registry cannot be relied upon to that end due to the use of omnibus accounts.

 

More generally, ESMA considers that emission allowance position data will contribute to a better understanding of the EU carbon market dynamics and market participants’ trading strategies.

 

Moreover, further clarity on the definition of EEOTC derivatives on emission allowances may contribute to a more comprehensive position reporting of emission allowance derivatives, although ESMA notes that the EEOTC reporting obligation only applies when the position results from a transaction involving an investment firm.

 

ESMA also observes that weekly position reports on emission allowance derivatives published by trading venues include and combine open positions in futures on emission allowances and options on futures on emission allowances on a delta adjusted basis, even when the option and the future contracts have a different venue product code.

The combination of open positions held in futures on emission allowances and options on emission allowance futures on a delta adjusted basis provides a useful view of the total exposure a category of counterparties may have to emission allowances, however, ESMA notes that in the US, the CFTC requires trading venues trading commodity derivatives to publish two sets of Commitment of Traders (CoT) reports on:
1) combined open positions in futures and options on futures on a delta adjusted basis and
2) open positions in futures only.

ESMA recommends having a similar approach in the EU and requiring trading venues to also publish weekly position reports on open positions in futures on emission allowances only in addition to the current combined report.

This would require amending Article 58(1)(a) of MiFID II, Article 83 of Delegated Regulation (EU) 2017/565 and ITS 4.

ESMA would also see benefits in extending this increased transparency in weekly position reports to all commodity derivatives.

 

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