ESMA Consultation Paper on the review of RTS 1 /RTS 2

Europex welcomes the opportunity to provide feedback to ESMA’s proposals for amending RTS 1 and –most relevant to us– RTS 2.

Given the long history of discussions on the pre-trade transparency regime and its implications for commodity markets, we truthfully welcome that ESMA acknowledges the need to review its current design and appreciate the effort behind the suggested proposals.

We believe it is crucial that the illiquid market and Large-In-Scale (LIS) transactions waiver methodologies will consider the unique characteristics of commodity trading, one of them being the important role of pre-arranged trading for the development of on-screen trading. 

ESMA’s proposals show that alternative proposals have been carefully assessed, and ESMA has paid significant attention to the differences between different commodity asset classes.

However, Europex members are concerned with some of the proposals that lead to an even more negative impact than the current regime. These proposals relate to the liquidity determination for commodity derivatives as well as the LIS threshold calculations, which should evidently be based on order book (or screen data) alone.

In our response, we provide detailed feedback on ESMA’s proposals to review RTS 2, with a particular emphasis on the following:

  • ESMA’s proposal on commodity derivatives 3 to increase the parameter of the “average daily notional amount” (ADNT) to 50 trades per day for all commodity derivatives: Europex remains of the view that 50 trades per day would be too low and suggest that 100 trades per day would be a more suitable threshold. 
  • ESMA’s proposal on commodity derivatives 4 to replace the criterion of ADNT with the criterion of “standard trade size” (STS) and set the parameter of the STS mode at 5 lots for futures: While Europex supports the introduction of the STS criterion, we believe it should complement the ADNA liquidity criterion and not replace it. Adding this criterion is particularly important for the appropriate calibration of options. Further, we highlight that instead of using ADNA, volume should be measured by looking at the Average Daily Amount traded in Lots (“ADAL”).  
  • ESMA’s proposal on commodity derivatives 6 to have LIS and SSTI thresholds equal to a set percentage of the average daily volumes (in lots), rounded to the nearest 5 lots and bounded by a floor and a cap: After having carefully investigated the ADVL proposal as well as other alternatives, we concluded that the 70 percentile approach is the least flawed methodology and could fit if the approach were slightly adapted. 
  • Proposal Commodity Derivatives 9 whereby ESMA proposes that transparency calculations continue to be performed with all data (on-venue, SI and OTC): Europex is strongly of the view that the liquidity assessment and LIS threshold calculation should be based on on-book data only.