For the purposes of MiFID II reporting, operators with compliance obligations under Directive 2003/87/EC are categorised as a distinct group of traders within a broader spectrum of members, participants (and clients) of the regulated markets, MTFs or OTFs.
The recent MiFID II European Parliament amendments contained in the Markus Ferber (Committee on Economic and Monetary Affairs) Report on the proposal for a directive of the European Parliament and of the Council on markets in financial instruments repealing Directive 2004/39/EC of the European Parliament and of the Council (recast) of 5 October 2012 (COM(2011)0656 – C7-0382/2011 – 2011/0298(COD)) bring also some interesting legislative developments with respect to position reporting by emission allowances traders (however the matter relates obviously not only to emission allowances (or derivatives thereof), but also, to the general category of commodity derivatives).
The criterion for the above differentiation of operators with compliance obligations under Directive 2003/87/EC was recognised “a nature of the main business” (see Article 60(3) of the MiFID II draft – box beside).
Classification of members, participants (and their clients) of the regulated markets, MTFs or OTFs as traders, according to the nature of their main business, pursuant to Article 60(3) of the MiFID II draft:
(a) investment firms as defined in Directive 2004/39/EC or credit institution as defined in Directive 2006/48/EC;
(b) investment funds, either an undertaking for collective investments in transferable securities (UCITS) as defined in Directive 2009/65/EC, or an alternative investment fund manager as defined in Directive 2011/61/EC;
(c) other financial institutions, including insurance undertakings and reinsurance undertakings as defined in Directive 2009/138/EC , and institutions for occupational retirement provision as defined in Directive 2003/41/EC;
(d) commercial undertakings;
(e) in the case of emission allowances or derivatives thereof, operators with compliance obligations under Directive 2003/87/EC.
It is not surprising that the main group in the above portfolio was destined for the financial sector participants, however, it is noteworthy that the above-mentioned category “operators with compliance obligations under Directive 2003/87/EC” has been separated from other “commercial undertakings”.
It appears that the specificity of the operators with compliance obligations under Directive 2003/87/EC has been perceived in MiFID II draft, but whether it has also been sufficiently caught it will occur after MiFID II implementing technical standards are issued.
Reporting on emission allowances trading on regulated markets, MTFs, and OTFs
The main burden of MiFID II reporting has been placed on regulated markets, MTFs, and OTFs which admit to trading or trade commodity derivatives or emission allowances or derivatives. Pursuant to Article 60 of MiFID II Directive Member States must ensure that the above entities:
(a) make public a weekly report with the aggregate positions held by the different categories of traders for the different financial instruments traded on their platforms and communicate this report to the competent authority and to ESMA;
(b) provide the competent authority with a complete breakdown of the positions of any or all market members or participants, including any positions held on behalf of their clients, upon request.
The obligation laid down in point (a) will only apply when both the number of traders and their open positions in a given financial instrument exceed minimum thresholds.
The reports referred to in point (a) above are envisioned to specify the number of long and short positions by category of trader, changes thereto since the previous report, percent of total open interest represented by each category, and the number of traders in each category.
MiFID II draft contains also the provision that in order to enable the publication referred to in point (a) above, Member States must require members and participants of regulated markets, MTFs and OTFs to report to the respective trading venue the details of their positions in real-time, including any positions held on behalf of their clients.
Reporting on emission allowances trading outside a trading venue
When it comes to reporting for trading in commodity derivatives or emission allowances or derivatives thereof outside a trading venue, MiFID II draft stipulates that Member States must ensure that investment firms engaged in such a trading provide the competent authority, upon request, with a complete breakdown of their positions, in accordance with Article 23 of MiFIR and, where applicable, of Article 8 of REMIT (MiFID II European Parliament amendment contained in the Markus Ferber (Committee on Economic and Monetary Affairs) Report).
The phrase that attracts attention in the above passage is that such information is provided “upon request” i.e. not on the initiative of traders.
Interactions with Directive 2003/87/EC reporting
In the case of emission allowances or derivatives thereof, MiFID II draft contains a rule that the MiFID II reporting does not prejudice the compliance obligations under Directive 2003/87/EC. The above-described administrative reporting requirements will in this way pose an additional burden for market participants.
Differentiation between hedging and trading portfolio reporting
It should be emphasised that MiFID II draft requires that the reports on trades made on the above trading venues as well as outside such places should differentiate between:
“(a) positions identified as positions which in an objectively measurable way reduce risks directly related to commercial activities; and
(b) other positions.”
This requirement has been added in MiFID II European Parliament amendments contained in the Markus Ferber (Committee on Economic and Monetary Affairs) Report.
Market participants which are at present not sufficiently separating the above categories of transactions, should improve their trading procedures immediately as the problem does not relate only to MiFID II but almost all incoming EU legal developments (for EMIR for instance see ‘Draft Regulatory Technical Standards on OTC Derivatives – which OTC derivative contracts are ‘objectively measurable as reducing risks directly relating to the commercial activity or treasury financing activity’).
Also Article 23(3) of MiFIR which relates to the obligation to report transactions for commodity derivatives mentions that the reports should also indicate “whether the transaction reduces risk in an objectively measurable way” in accordance with MiFID.
Furthermore, Article 59(1a) of MiFID provides for the introduction of a specific position check system for positions “which in an objectively measurable way reduce risks directly related to commercial activities”. This position check is intended to be carried out by the regulated markets and the operators of MTFs and OTFs (again MiFID II European Parliament amendment contained in the Markus Ferber Report).
ITS in action
As everyone is probably accustomed in the area of European Union legislation, it is envisioned that the above provisions will be enhanced by the entire set of the accompanying ESMA implementing technical standards.