Getting Ready for MiFID II: Position Limit Monitoring
A
ENERGY AND COMMODITIES
GETTING READY FOR
MIFID II: POSITION
LIMIT MONITORING
Getting Ready for MiFID II: Position Limit Monitoring
GETTING READY FOR
MIFID II: POSITION
LIMIT MONITORING
The new Directive, MiFID II, becomes effective on January 3,
2018. With a multitude of touch points and areas of impact,
this recasting aims to ensure the ongoing integrity of the EU’s
financial markets. Regulator’s inclusion of intraday position
limit monitoring is designed to prevent market manipulation
and excess speculation. In preparation of this considerable
undertaking, regulating bodies have defined a harmonized
approach which has cascading responsibilities for many
market participants including previously unaffected
commodity trading firms. The European Securities and
Markets Authority (ESMA) has published Regulatory Technical
Standards (RTSs) detailing requirements under MiFID II.
Compliance with position monitoring
RTS 21 of MiFID II addresses the methodology for calculating
and aggregating positions. Firms are expected to aggregate
positions at the MiFID defined group level across trading
venues and including OTC contracts deemed economically
equivalent. Position limits are applicable at all times of the
day using regulator defined units and requirements. In the
following text, we distill the published Directive for the benefit
of commodity and derivative trading firms; most notably
compliance, operations and trading units.
Regulatory structure and responsibilities
Incorporated in the European Commission’s recasting of
the new Directive (MiFID II) are commodity derivative
position limits. This includes positions traded on a
regulated market, Multilateral Trading Facility (MTF),
Organized Trading Facility (OTF) and Economically
Equivalent OTC (EEOTC) contracts. With MiFID II, the scope
of commodity derivative was broadened to include
securitized contracts where the underlying is a commodity
as well as physically settled derivatives which are traded
on an OTF. Exempt from MiFID II requirements are those
products traded on an OTF which must be physically
settled since they are covered by Regulation on Wholesale
Energy Market Integrity and Transparency (REMIT),
otherwise known as REMIT carve-out.1
MiFID II requires a segregation of responsibilities. ESMA will
serve as the coordinating body for all competent authorities
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2
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HOW IS “LARGEST VOLUME” QUANTIFIED?
For securitized derivatives, it is the venue with the highest
daily average volume over a one-year period. With all other
commodity derivatives, it is the venue with the largest daily
average open interest over a one-year period.2
and publish public data to their website. In turn, each
competent authority will set position limits and apply
compliance measures. Those commodity derivatives traded
on a single venue or single member state will have a position
limit set by the competent authority of that member state.
When an economically equivalent commodity derivative
is traded on multiple member state venues, a competent
authority of the member state venue with the “largest
volume” of trading is deemed the competent authority and is
responsible for setting the position limit. Competent
authorities shall re-evaluate position limits regularly at a
frequency not greater than a year.
MiFID II – economically equivalent
With MiFID II, position limits apply to a commodity derivative
which can be traded on EU venues as either exchangetraded derivative (ETD) or EEOTC of ETD on an EU venue.
An OTC derivative is deemed economically equivalent to an
exchange traded contract provided all contractual
specifications are identical; save differences in lots size, post
trade risk management arrangements, and delivery dates
within one calendar day. For the purpose of determining
economic equivalence as well as position netting, it is critical
to note cash settled contracts are not the same as physically
settled contacts.
Position limit methodology
Position limits will be specified in lots where lot is equivalent to
the unit of quantity per contract as defined on the venue with
the “largest volume”. Those power and gas contracts without
a standardized lot as a unit of trading will have a limit specified
in terms of MWh. For the purpose of setting meaningful position
limits which facilitate orderly settlement, position monitoring is
subdivided into spot month and other months.
As contracts approach maturity, the supply of the underlying
commodity can heavily influence trading. Therefore,
competent authorities are to derive spot month position
limits as a percentage of the deliverable supply.
Other months position limits are calculated as percent of the
total open interest since this is a better measure of liquidity.
Two caveats apply:
CONSULTATION PAPER, MIFID II/MIFIR, 22 MAY 2014, ESMA/2014/549 (P. 278-281)
REGULATORY TECHNICAL AND IMPLEMENTING STANDARDS – ANNEX I, MIFID II/MIFIR, 28 SEPTEMBER 2015, ESMA/2015/1464 (P. 412-413)
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Position limits will apply separately
to securitized derivatives, economic
equivalence is deemed true where
securities on different venues
are fungible.
1. Spot month position limits are calculated as a percent
of open interest for those commodity derivatives without
underlying deliverable supply (as defined in Annex I,
Section C10 e.g., weather).
2. Securitized derivatives to have a single position limit since
they lack contract maturity dates. Limit calculated as a
percentage of total issuance.
RTS 21 provides additional clarity regarding spot month
contracts. The spot month is specific to each commodity
and identified as the next commodity derivative contract to
mature. Contracts which mature subsequently are
aggregated separately from spot month and evaluated
against the other months position limit. This logic applies
to both ETD and EEOTC contracts.
Baseline limit
For contracts of “significant volume”, the baseline benchmark
calculation for spot month and other months limits is 25
percent of deliverable supply or open interest respectively.
Based upon the factors specific to a commodity derivative,
competent authorities may adjust the limit to fall between 5
percent and 35 percent (or in the case of some agricultural
commodity derivatives as low as 2.5 percent and as high as 50
percent). Factors considered when adjusting from the
baseline 25 percent include market liquidity, number of
market participants, volatility, and storage capacity.
De minimis level
Threshold for “significant volume” is a commodity underlying
with open interest in excess of 10,000 lots or 10 million
securities in issuance. Contracts below the de minimis level will
have a fixed position limit of 2,500 lots or 2.5 million securities.
Contracts with open interest below 2,500 lots could be held
entirely by a single market participant without violation.
However, once the significant volume threshold is exceeded,
the standard methodology will be employed. This tiered
approach was adopted to accommodate new and illiquid
contracts which would be adversely impacted if position limits
were set using the standard baseline methodology.
Getting Ready for MiFID II: Position Limit Monitoring
long and short positions offset. Options are included in
position netting on a delta equivalent basis. However, spot
month positions are netted separately from positions in other
months. Firms are required to aggregate their own position
with subsidiary positions to determine a net position at the
group level. Excluded from group level aggregation are
those positions where the parent cannot control or influence
management of said positons.
Enterprise-wide impact
ESMA estimates approximately 1,500 limits required for
contracts traded across Europe. Under MiFID II, only those
positions held by non-financial entities which can be
evidenced as directly reducing risk of commercial activity
may be exempt from position aggregation. On a practical
level, the number of contracts included and ongoing
maintenance required will bring significant pressures and
additional costs to IT systems and department personnel.
Risk, compliance, and operation teams responsible for
monitoring positions in real-time require a robust solution
capable of aggregating enterprise-wide positions, including
subsidiary companies. Firms must monitor net positions
relative to the limit. This necessitates ongoing maintenance
of a position limit database, tracking new contract limits
across the EU and ensuring existing limits are in sync with
regulators. Integrity of referential contract data is also
critical to differentiate between spot month and other
months positions, especially at expiration of the spot month.
Depending upon trade activity, calculation of net positions
requires offsetting ETD, EEOTC, and option delta equivalent
positions. Position monitoring logic should be incorporated
in an accessible user interface which provides intraday
monitoring and alerting as thresholds are approached.
Are you ready?
As implementation of MiFID II nears, firms are starting to
evaluate solution options so they can ensure regulatory
compliance. Market participants are looking for solutions
to monitor position limits in accordance with MiFID II
requirements as well as the proposed CFTC cross exchange
level. An out-of-the-box solution for managing limits and
alerting users as positions approach thresholds, such as FIS’
Kiodex, can ensure trading compliance in real time.
Enterprise-wide management of intraday positions can
empower compliance managers to act prior to consequence.
Position netting and aggregation
To ensure compliance, firms must monitor positions intraday
relative to the published position limit. Positions are
calculated on a net basis where economically equivalent
OPINION, DRAFT REGULATORY TECHNICAL STANDARDS ON METHODOLOGY FOR CALCULATION AND THE APPLICATION OF POSITION LIMITS FOR COMMODITY DERIVATIVES TRADED ON TRADING VENUES AND ECONOMICALLY EQUIVALENT OTC CONTRACTS, 2MAY 2016, ESMA/2016/668 (P. 9)
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About FIS Solutions for Energy and Commodities
“The supply of the underlying commodity
actually available is what matters when the
contracts are nearing maturity whereas it is
much less relevant for maturities that can go
years into the future where open interest as a
reflection of liquidity is the much more readily
available and relevant metric”.3
FIS solutions for energy and commodities help utilities and
retailers, pipeline and storage operators, marketers and
traders as well as integrated energy companies compete
efficiently in global markets by streamlining and integrating
the trading, risk management and operations of physical
commodities and their associated financial instruments.
Through real-time data, connectivity and analysis, FIS
solutions help you achieve t ransparency and regulatory
compliance, optimize end-to-end transaction and
operational lifecycles and meet time-to-market needs with
flexible deployment options. As your technology partner,
we can help take advantage of the latest innovation and
explore new opportunities. For more information,
email us at [email protected].
About FIS
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with a focus on retail and institutional banking, payments,
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and breadth of our solutions portfolio, global capabilities
and domain expertise, FIS serves more than 20,000 clients
in over 130 countries. Headquartered in Jacksonville,
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