MiFID II and MiFIR

New rules revising the first Markets in Financial Instruments Directive and putting in place the Markets in Financial Instruments Regulation (MiFIR) entered into application in January 2018. The MiFID II framework includes energy commodity derivatives within its scope. The great majority of gas and electricity derivative contracts as well as all EU ETS emission allowances are now classified as financial instruments.

The European Securities and Markets Authority (ESMA) provides an overview of how some aspects of commodity derivatives are dealt with in MiFID II/MiFIR.

As is the case for legislation adopted under the Lamfalussy process, the legislation consists of several levels:

Level 1:

Markets in Financial Instruments Directive II (MiFID II):

Directive 2014/65/EU establishes a new regulatory framework for financial markets, and aims to improve transparency and investor protection. Trading venues defined under MiFID II include Regulated Markets (RM), Multilateral Trading Facilities (MTF) and a new category, Organised Trading Facilities (OTF). Notably for commodity derivatives, the Directive introduces position limits and position management controls. Market participants must also submit weekly reports on their aggregate positions.

This act has been changed. Current consolidated version: 26/03/2020

MiFID “Quick-Fix:

On 26 February 2021, the MIFID Quick Fix Directive was published in the Official Journal.

These amendments aim to support economic recovery from the COVID-19 pandemic, including via relief from certain administrative requirements on firms. EU Member States are required to transpose the quick-fix amendments into their national frameworks by 28 November 2021 and apply them by 28 February 2022.

The main changes of the quick-fix include:

  • A substantial reduction in the scope of the position limit regime, now limited to agricultural commodity derivatives and critical or significant commodity derivatives;
  • An extension of the hedging exemption for non-financial counterparties to positions held by, or on behalf of, a financial entity that is part of a predominantly commercial group and is acting on behalf of a non-financial entity of the predominantly commercial group, where those positions are objectively measurable as reducing risks directly relating to the commercial activity of that non-financial entity; and
  • Major changes to the application of the Ancillary Activity Exemption.

Markets in Financial Instruments Regulation (MiFIR):

Regulation (EU) No 600/2014 is closely linked to the Directive and focuses primarily on reporting requirements and transaction execution, such as pre- and post- trade transparency, transaction reporting, clearing obligations and further detail on the position limits regime.

This act has been changed. Current consolidated version: 26/06/2021

Level 2:

Implementing measures: A range of Commission delegated and implementing acts have been adopted, including technical standards (ITS) and (RTS).

The following technical standards are of particular relevance for commodity derivatives trading.

RTS 2 Transparency requirements for trading venues and investment firms in respect of bonds, structured finance products, emission allowances and derivatives.
RTS 20 Criteria for ancillary activity definition with reference to Art. 2 MiFID II.
RTS 21 Application of position limits to commodity derivatives.
ITS 4 Implementing technical standards with regard to the format of position reports by investment firms and market operators.
ITS 5 Technical standards with regard to reporting deadlines for position reports.

Commission Delegated Regulation (EU) 2017/565 as regards organisational requirements and operating conditions for investment firms also includes further provisions on classification of derivatives contracts.

Level 3:

With the aim of ensuring consistent and effective application of the legislation, ESMA publishes guidelines and Q&As, including Q&As on commodity derivatives.

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