Questions and Answers, on MiFID II and MiFIR commodity derivatives topics, ESMA70-872942901-28
Question 5 [Last update: 07/07/2017]
Does the requirement for trading venues to make public weekly aggregate position reports and to communicate that report to the competent authority and to ESMA apply to securitised derivatives?
The weekly aggregate position reports to be published by trading venues under Article 58(1)(a) of MiFID II aim at providing transparency to investors about the view of the market that certain categories of traders may be taking. As an example, if non-commercial traders are predominantly long in grain futures, this would be indicative of a view among professional investors that grain prices are going to go up.
Providing this type of transparency to investors appears useful and meaningful with regards to contracts for instance with large open interest that serve as a reference or benchmark for market participants.
In contrast, trading in European securitised derivatives is fragmented with well over 10,000 instruments in issue and liquidity per contract is often low. The potential publication of a multitude of weekly reports in securitised commodity derivatives on a per security level when position holder thresholds are exceeded would send out a confusing picture to investors rather than serve the envisaged purpose of market-wide transparency.
ESMA also notes that under Article 83 of [draft Commission Delegated Act of 25 April 2016], the obligation for a trading venue to make public weekly aggregate position reports applies “when both of the following two thresholds are met:
- 20 open position holders exist in a given contract on a given trading venue; and
- the absolute amount of the gross long or short volume of total open interest, ex-pressed in the number of lots of the relevant commodity derivative, exceeds a level of four times the deliverable supply in the same commodity derivative, expressed in number of lots.
Where the commodity derivative does not have a physically deliverable underlying asset and for emission allowances and derivatives thereof, point (b) shall not apply.”
While the condition of 20 position holders could be applied to securitised derivatives, the terminology of condition (b) referring to long or short volumes of open interest expressed in lots appears to be geared solely towards the contracts described in MiFID II, Annex I, Section C (5), (6), (7) and (10).
Based on the above, ESMA is of the view that Article 58(1)(a) of MiFID II and the Commission Delegated Regulation (EU) 2017/565 dealing with weekly position reports does not apply to securitised derivatives.
Question 7 [Last update: 19/12/2016]
Are securitised derivatives considered to be commodity derivatives under MiFID II? How does ESMA differentiate between ETCs and securitised derivatives?
Securitised derivatives” are transferable securities whose value is based upon underlying assets. However, neither MiFID I (incl. level 2 thereof), nor MiFID II/MiFIR contain a specific definition of these instruments.
Where the underlying asset of securitised derivatives is one or more commodities, these instruments are caught by the definition of “transferable securities” in Article 4(1)(44)(c) of MIFID II and are commodity derivatives under Article 2(1)(30) of MiFIR.
Exchange traded commodities (ETCs) are debt instruments which are within the scope of Article 4(1)(44)(b) of MiFID II and are classified as such in RTS 2. Therefore, they are outside the definition of commodity derivatives in Article 2(1)(30) of MiFIR and the position limits regime does not apply to them.
ESMA is aware that market practices in differentiating between ETCs and securitised derivatives are neither clear nor uniform and presents the following guidance to allow for a correct classification of instruments in practice.
In RTS 2 ETCs are described as debt instruments issued against a direct investment by the issuer in commodities or commodity derivative contracts. The price of an ETC is directly or indirectly linked to the performance of the underlying. An ETC passively tracks the performance of the commodity or the commodity indices to which it refers.
In addition, ESMA considers that ETCs typically have the following features:
- a primary market exists which is accessible only to authorised market participants per- mitting the creation and redemption of securities on a daily basis at the price set by the issuer;
- they are not UCITS and therefore unlike an ETF can have an exposure profile not in compliance with the UCITS diversification requirements;
- they are traded on- and off-venue in significant volumes;
- the price is aligned, or multiplied by a fixed leverage of the price of the underlying
- a management fee is charged by the issuer;
- they may be issued by non-banking institutions;
- they do not have an expiry date;
- they may have a strict regime of capital segregation, usually through the use of special purpose vehicles;
- they are often aimed at professional investors.
In comparison, the term ‘securitised derivatives’ describes a much wider set of financial instruments that can have a large variety of features among them the following typical features:
- they can have commodities as underlying but also many financial instruments or they can be linked to strategies, indices or baskets of instruments;
- they can passively track the performance of the underlying but they can typically also apply leverage, can have an option structure or also have a lower risk profile than the underlying by, for example, offering capital protection;
- they are traded on venue or OTC by the issuer directly or via intermediaries;
- the issuers’ costs and compensation are factored into their price;
- they have an expiration date;
- they provide an issuer credit risk exposure;
- they are often aimed at retail clients.
Question 9 [Last update: 07/07/2017]
Does the requirement under Article 58(1)(b) and (2) of MiFID II to submit daily position reports to the NCA apply to securitised derivatives with a total number of securities in issue not exceeding 2.5 million?
No. The NCAs do not need to require the submission of daily position reports of securitised derivatives with a total number of securities in issue not exceeding 2.5 million. The purpose of daily reporting is to monitor for potential breaches of position limits. To that end, Article 58(3) of MiFID II stipulates that daily position reporting shall enable monitoring of compliance with Article 57(1) of MiFID II. Accordingly, the reporting requirement has been set for situations in which reporting is necessary to enable monitoring. As a consequence, NCAs do not need to require daily reporting if the possibility of a breach of position limits can be ruled out from the outset.
These instruments would be illiquid contracts and benefit from the derogation pursuant to Article 15(1)(c) of RTS 21 with regard to regulatory technical standards for the application of position limits to commodity derivatives. For issues not exceeding 2.5 million securities it is per se not possible to breach position limits.
Trading venues that would otherwise be required to submit position reports of these securitised derivatives must confirm to the NCA that the total number of securities in issue does not exceed the 2.5 million threshold. The NCA assesses whether this condition is fulfilled. The reporting entity can rely on information provided by the CSD, the issuer, or another reliable source that ensures up-to-date knowledge on the current number of securities in issue. As soon as the threshold is exceeded, position reporting must be performed.