|MiFID II position limits - personal scope|
The strategic issue when it comes to the personal scope for position limits is that the limits will be set on the basis of all positions held by a person and those held on its behalf at an aggregate group level.
MiFID II position limits concept refers to the doctrine of single economic entity (for the purposes of the rules on competition laid down in the Treaty an undertaking is any entity engaged in an economic activity, regardless of its legal status and the way in which it is financed (Case C-222/04 Ministero dell'Economia e delle Finanze v Cassa di Risparmio di Firenze SpA et al.  ECR I-289).
The Court of Justice of the European Union has ruled that all entities which are controlled (on a legal or on a de facto basis) by the same entity should be considered as a single undertaking (Case C-382/99 Netherlands v Commission  ECR I-5163).
Based on the above precedents elaborated under EU competition law, further multiple legislative developments, MiFID II system for position limits including, treat groupings of undertakings as a single entity.
Obviously, applying position limits at the level of the group of undertakings and not on positions of the group's each component (which can, for example, be mutually compensated) makes more sense in the modern regulation of financial market.
However, MiFID II position limits framework exhibits some specificities in that regard.
ESMA's Discussion Paper on MiFID II/MiFIR of 22 May 2014, ESMA/2014/548 contains the following financial regulator's recommendations regarding the interpretation of the personal scope for the MiFID II position limits, and in particular the aggregation of positions within a group (in the context of the ESMA's mandate under Article 57(12)(b) MiFID II to develop the methods for the respective aggregation):
1. In the context of MiFID II, the term "group" is defined in Article 2(34) and provides a cross-reference to Article 2(11) of Directive 2013/34/EU ("Accounting Directive"). This provision states that a group is "a parent undertaking and all its subsidiary undertakings", and, pursuant to ESMA, the analysis relating to position limits is to be read using this definition as a context (see the detailed remarks on the MiFID II definition of the 'group').
2. Article 57(1) MiFID II states that the position limit requirement applies to positions which a 'person' can hold. ESMA interprets this as applying to the positions held by the end customer, which may be either a legal person or a natural person.
Applying limits at the level of the end customer would address the risk of a customer holding, through several intermediaries, positions which were individually of moderate size but in aggregate may be considered significant.
3. ESMA notes that there is inherently an interaction of the requirement to aggregate positions with the position reporting provisions in Article 58 MiFID II, as the position reporting must provide the means to identify and subsequently calculate the aggregate positions. This speaks for the position limits and position reporting regimes to be consistent.
4. Article 57(1) MiFID II requires that the limits apply on the basis of all positions held by a person and also those held on its behalf at an aggregate group level.
ESMA's view is that this will require the aggregation of positions of a person (whether held directly by itself or on its behalf by third parties such as investment firms, under a client relationship) together with those of any wholly or partly owned subsidiaries of that entity, but not aggregation with the positions of fellow subsidiaries of a mutual parent or ultimate holding company.
5. Where subsidiaries of a person are not wholly owned by that person, it is possible to construct rules for aggregation of positions based upon either a simple threshold of ownership, such as 50% which would generally be viewed as giving effective control, or upon a more subjective assessment of the degree of control of the entity exercised by the group.
There may also be circumstances where it is appropriate to aggregate positions even for unconnected persons where they are tied together in a common purpose.
6. Where a person has effective control of, but does not wholly own, a subsidiary (i.e. it has an ownership percentage of between 50% and 100%) ESMA proposes that the full amount of the relevant positions are aggregated, and not merely a percentage that reflects its proportion of ownership.
This proposal ESMA reasoned firstly that positions will be reported under Article 58 MiFID II on the basis of legal entities, and not on the basis of percentage legal ownership; and secondly that the person that has effective control may act to use the full amount of the position held and not merely the portion of it that represents its economic interest.
7. For the avoidance of doubt, ESMA wishes to make clear that positions that are held by an intermediary on behalf of an end consumer do not count towards that intermediary's own position limits regardless of whether, for reasons of market practice, operational structure or legal framework, the positions are held by the intermediary as principal.
ESMA's observations under points 4-7 above are particularly noteworthy, as the conceptions contained therein may diverge from the common and plain interpretation of the respective MiFId II provisions.
|Last Updated on Sunday, 17 January 2016 23:26|