|The EU position limits framework - is this manageable issue?|
|Wednesday, 13 July 2016 06:00|
1,500 vs. 28 - this is the scale of discrepancy between the volumes of position limits frameworks in the EU and the US.
The former describes the number of liquid contracts for which position limits will have to be established by the EU national regulators before 2018 (with ESMA having to produce an opinion for every single contract), the latter the number of core, most liquid physical commodity contracts, and to contracts which are economically equivalent to them, in scope of the CFTC expansion of the US existing position limits framework (data from ECON MiFID II/MiFIR Scrutiny Session – 21 June 2016, Committee on Economic and Monetary Affairs European Parliament, Steven Maijoor, Chair, European Securities and Markets Authority, 21 June 2016 (ESMA/2016/940) and Verena Ross, Keynote speech at IDX 2015, London, 9 June 2015 ESMA/2015/921)).
If the European officials name their task to establish these limits as "Herculean" I dare to ask what is the vision for the application and observance of these new requirements by market participants (involving actors of such divergent size and sophistication).
What seems important, reporting lines that will have to be devised by firms will need:
- to monitor aggregated positions across the globe, and
- to net any economically equivalent positions in real time (in line with complex equivalency methodologies).
Needless to say, the observance of the European position limits regime is required of all persons, no matter in scope of MiFID II or exempt.
Does it mean that market participants will have to establish voluminous data bases to cope with and observe position limits?
Good question... There is something like Financial Instruments Reference Data System (FIRDS) intended to help financial authorities in managing the system, but the closer information on the extent of its availability for commercial uses is lacking.
Another problem are timelines as Recital 10 to the Regulation 2016/1033 of the European Parliament and of the Council of 23 June 2016 amending Regulation (EU) No 600/2014 on markets in financial instruments, Regulation (EU) No 596/2014 on market abuse and Regulation (EU) No 909/2014 on improving securities settlement in the European Union and on central securities depositories states:
"(10) The implementation process for the data collection infrastructures involves five steps: business requirements, specifications, development, testing and deployment. ESMA estimates that those steps will be completed by January 2018, provided that there is legal certainty on the final requirements under the relevant regulatory technical standards by June 2016."
Unfortunately, the deadline envisioned in the said Recital 10 for legal certainty on regulatory technical standards (June 2016) seems not to be met.
Does it mean that ESMA won't be ready with the FIRDS on January 2018? This would inevitably entail once more MiFID II delay beyond 3 January 2018.
Why? This is partly explained in the Recital 7 of the aforementioned Regulation 2016/1033, which reads:
"(7) In the absence of the necessary data collection infrastructures, trading venues and investment firms would not be able to report executed transactions to competent authorities. In the absence of reporting of positions in commodity derivatives, it would be difficult to enforce position limits on such commodity derivatives. With no position reporting, there would be limited ability to effectively detect breaches of the position limits. Many of the requirements in relation to algorithmic trading are also dependent on data."
So, it appears everything hinges on the FIRDS now...