Brussels, 5 July 2019 | Europex, the Association of European Energy Exchanges, welcomes the opportunity to contribute to the ESMA call for evidence on position limits and position management in commodity derivatives. Europex has actively participated in previous public consultations on the MiFID II/MiFIR package, including on the position limit regime as well as on its implementing legislation and the related regulatory guidance. The present call for evidence offers an important opportunity to review the regime 18 months after its entry into application.
Importantly, Europex supports the policy objectives of MiFID II/MiFIR to ensure transparency and prevent abuse in commodities markets. At the same time, certain key aspects of the position limit regime remain a challenge and need to be addressed urgently in order to prevent adverse negative consequences to the integrity and competitiveness of European commodity derivatives markets. The most important aspect concerns the position limits for new, illiquid and less liquid contracts. (For a number of well-developed benchmark contracts the MiFID II position limit regime has so far been able to function reasonably.) For the development of new products and further growth in existing illiquid commodity derivatives markets, the regime has proven to be a substantial barrier. Fast growing markets in particular have suffered from an increasingly restrictive limit as open interest increases, an inflexible treatment in terms of their categorisation under the position limit framework and an inaccurate reflection of the underlying physical markets.
Furthermore, Europex believes that the regime may contribute to pushing the liquidity to the exchange with the highest liquidity, if a materially different position limit applies to a similar contract listed by one or several different exchanges.
Against this background and based on the general need to make the position limit regime more proportionate and efficient, Europex sees merits in limiting the application of the MiFID II position limit regime to a more limited set of important critical (benchmark) commodity derivative contracts. Such a refocus of the position limit regime on benchmark contracts would make it more efficient, mitigate the unintended consequences and reduce the compliance burden for all concerned parties (market participants, trading venues and NCAs/ESMA). Most importantly, such a targeted approach would allow new and nascent products to develop in line with the policy objective of MiFID II as stipulated in RTS 21:
“Position limits should not create barriers to the development of new commodity derivativesand should not prevent less liquid sections of the commodity derivative markets from workingadequately“
In addition, Europex believes that an amended regime would better fulfil the overall policy objective of MiFID II to “improve the functioning and transparency of commodity markets and address excessive commodity price volatility”. A refocus of the regime is justified as the price formation mainly occurs in benchmark products. New and nascent products constitute a minor share of commodity markets. Such contracts are unlikely to influence price movements in the underlying physical commodity markets and thus do not negatively impact consumers. Moreover, in order to prevent market squeezes, it would be sufficient to set limits for the period right before expiry rather than covering the entire maturity curve. Finally, limiting the scope of the EU position limit regime would bring us closer to a regulatory level-playing field between the EU and the U.S. and enable liquid and competitive EU commodity markets.
The other (non-significant) contracts would remain subject to the position reporting regime under MiFID II Article 58, the pre-existing position monitoring and position managementmeasures by exchanges and the market oversight practices of the exchanges’ marketsupervision and market surveillance departments that apply the principles set out in the Regulation on Energy Markets Integrity and Transparency (REMIT) and the Market Abuse Regulation (MAR). Thus, removing position limits for such contracts would not pose any risk to the transparency and integrity of the respective markets. On the contrary, attracting more volume to regulated venues would contribute to a more transparent trading environment.
Europex further commits to making an assessment of the key criteria to be taken into account when determining that a contract should be classified as a benchmark contract to be in scope of the MiFID II position limit regime, in the second half of this year.
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