The Futures Industry Association (FIA), together with the International Swap Dealer Association (ISDA) responded jointly to the European Securities Markets Authority’s (ESMA) consultation referred to as the MiFID II review report on position limits and position management and draft technical advice on weekly position reports. ESMA issued its call for evidence in May 2019 inviting stakeholders to share their views with regard to the position limit regime. In their response, FIA and ISDA noted that MiFID II position limits had only been in place for approximately two years, were previously unprecedented in the European Union (EU), and were without any equivalent regime in other jurisdictions. The associations indicated that their memberships did not view the position limit regime as having caused significant negative consequences, with the exception of its impact on new and illiquid contracts. Notwithstanding, FIA and ISDA identified several areas for improvement in the position limit regime, and included the following key messages in its response letter to ESMA:
- Refocus the scope of position limits. The associations recommended refocusing the scope of the position limits regime to include only the most important benchmark contracts with a particular focus on food commodity contracts. FIA and ISDA asserted that this would help solve the problems associated with the application of limits to new and illiquid contracts, where exchanges, dealers, and end-users have raised concerns that the existing limits are a hurdle to the development of markets for new contracts.
- Limiting the scope of covered contracts. The associations also call for limiting the scope of contracts covered by position limits. FIA and ISDA noted that the definition of financial instruments—and of commodity derivatives—has led to extensive discussions as to whether some securities or some derivatives with no underlying physical commodity should be subject to position limits. They further noted their present inclusion in the regime is a result of their cross references between MiFID and MiFIR which suggest that they are commodity derivatives. Additionally, the associations asserted that their members support the objectives of the legislation, and particularly, the prevention of excessive speculation for underlying commodities such as food. However, they are in support of ESMA’s proposal limiting the position limit regime to a set of important, critical derivatives contracts. Further, FIA and ISDA support ESMA’s suggestion to disapply position limits applicable to securitized commodity contracts.
- Expanding the scope of the hedging exemption. While the associations recognize that the current position limits regime includes exemptions for market participants pursuing hedging activity, they also noted that the MiFID II definition of "hedging" is clear that only non-financial entities can engage in such activity. As a result, they note that the exemption is unavailable to investment banks or commodity trading houses that are MiFID II-authorized, which both play a vital role in providing smaller commercial players with access to commodity derivatives markets.
- Retaining carve-outs. FIA and ISDA strongly recommended retaining carve-outs from position limits for physically settled power and gas contracts asserting they are sufficiently regulated under the Regulation on Wholesale Energy Market Integrity and Transparency (REMIT) and otherwise supervised. The associations contend that the linkage between wholesale gas and power markets in the EU remains unique in commodity markets. They noted that REMIT was designed in 2011 based on the advice from the Committee of European Securities Regulators (CESR) before the creation of ESMA and from the European regulators Group for Electricity and Gas to combat insider trading and market manipulation in that sector.