EU Relaxes its MiFID II Position Limit Regime
ESMA has recently suggested to national regulators across the EU that they de-prioritize enforcement of MiFID II position limits on commodity derivatives, other than those related to agricultural products or “significant” products (defined as products with net open interest of at least 300,000 lots over a one-year period). So if you’re an investment manager, or other type of position holder in commodity derivatives listed on EU markets, be aware that you may not face any regulatory or exchange-based consequences when exceeding many of the established MiFID II position limits.
We can’t yet fully tell which national regulators or exchanges will indeed refrain from enforcing these position limits, because many of them haven’t published a response to ESMA’s call for relief. And it’s worth keeping in mind that because ESMA cannot change EU law (which it acknowledges in its statement), its suggestion to regulators is not a requirement they must follow. But one notable regulator recently weighing in is BaFin, the competent authority in Germany for position limit purposes. BaFin has stated that it will follow ESMA’s suggestion, and therefore relax its enforcement of “MiFID II” position limits on commodity derivatives listed on German exchanges, other than those related to agricultural products or products with open interest of at least 300,000 lots. The German exchange EEX reflects this approach, publishing an updated (and now reduced) list of products that remain subject to “MiFID II” position limit enforcement: just one electric power contract, and a handful of low-volume futures for milk, butter and whey powder.
ESMA’s statement stems from the EU’s “MiFID II Quick Fix” Directive published in February. Technically an amendment to MiFID II (and to other EU Directives to a lesser degree), the Quick Fix Directive aims to support struggling EU commodity derivative markets during a time of economic uncertainty arising from the COVID pandemic. While its provisions reduce the scope of products subject to “MiFID II” position limits (among other changes), they do not become effective until 28 February 2022. Acknowledging this delay in needed regulatory relief, ESMA essentially has decided to suggest to domestic regulators that they immediately supervise their markets as if the Quick Fix were in effect now (i.e., immediately reducing the scope of products for which “MiFID II” position limits should be enforced).