Positions reporting under MiFID II
Sunday, 19 March 2017 23:22

 


 

 

Under MiFID II members and participants of trading venues must report to the trading venue on a daily basis a complete breakdown of their positions in commodity derivatives, emission allowances, and derivatives of emission allowances, as well as those of their clients and the clients of those clients and so on down to the end client (Article 58(3) MIFID II).

 

The trading venue must then provide those reports to the national competent authority (NCA).

 

In addition, investment firms which undertake trading in commodity derivatives, emission allowances or derivatives of emission allowances outside a trading venue must report on a daily basis their positions in all commodity derivatives, emission allowances and derivatives of emission allowances, as well as those of their clients and the clients of those clients and so on down to the end client to the relevant NCA (Article 58(2) MIFID II).

 

The wording of the above provisions raises some ambiguities.

 

In particular, as there is no definition of “end client” in MiFID II/MiFIR, the document of GFMA, ISDA and FIA - Level 3 Q&A: Commodity Derivatives Position Reporting (MiFID II, Article 58) has proposed to resolve this problem in light of the Article 4(1)(9) MiFID II definition of “client” ("any natural or legal person to whom an investment firm provides investment or ancillary services").

 

GFMA, ISDA and FIA infer the following implications from the said definition:

 

- for a person to be a “client” it must receive investment or ancillary services from an investment firm; 



- if that person (the “client”) is not itself an investment firm, then that client must also be the “end client” as it will not be providing investment or ancillary services, and therefore cannot have any clients of its own; and 



- if the client is an investment firm, but does not provide investment or ancillary services to another person, then the client will also be the “end client”. 



Accordingly, GFMA, ISDA and FIA argue that not every position taken in a commodity derivative, emission allowance or derivative thereof that is traded on a trading venue or in an economically equivalent OTC contract (EEOTC) contract will involve a client.

 

For example, an investment firm will not have a “client” where it is dealing on its own account.

 

Where an investment firm enters into an EEOTC with another investment firm, neither firm may be providing investment or ancillary services to the other.

 

Indeed, if both investment firms are dealing on their own account, neither investment firm has a “client”.

 

Consequently, according to the above organisations, an investment firm would not be required to report positions of a trading counterparty (where such counterparty is not that firm’s client), or those of any client that the trading counterparty may have.

 

Investment firms should only report their own positions, as well as those of their clients and the clients of those clients, until the end client is reached.

 

 

 

Article 58 MiFID II

 

Position reporting by categories of position holders

 

1. Member States shall ensure that an investment firm or a market operator operating a trading venue which trades commodity derivatives or emission allowances or derivatives thereof:

 

(a) make public a weekly report with the aggregate positions held by the different categories of persons for the different commodity derivatives or emission allowances or derivatives thereof traded on their trading venue, specifying the number of long and short positions by such categories, changes thereto since the previous report, the percentage of the total open interest represented by each category and the number of persons holding a position in each category in accordance with paragraph 4 and communicate that report to the competent authority and to ESMA; ESMA shall proceed to a centralised publication of the information included in those reports;

 

(b) provide the competent authority with a complete breakdown of the positions held by all persons, including the members or participants and the clients thereof, on that trading venue, at least on a daily basis.

 

The obligation laid down in point (a) shall only apply when both the number of persons and their open positions exceed minimum thresholds.

 

2. Member States shall ensure that investment firms trading in commodity derivatives or emission allowances or derivatives thereof outside a trading venue provide the competent authority of the trading venue where the commodity derivatives or emission allowances or derivatives thereof are traded or the central competent authority where the commodity derivatives or emission allowances or derivatives thereof are traded in significant volumes on trading venues in more than one jurisdiction at least on a daily basis with a complete breakdown of their positions taken in commodity derivatives or emission allowances or derivatives thereof traded on a trading venue and economically equivalent OTC contracts, as well as of those of their clients and the clients of those clients until the end client is reached, in accordance with Article 26 of Regulation (EU) No 600/2014 and, where applicable, of Article 8 of Regulation (EU) No 1227/2011.

 

3. In order to enable monitoring of compliance with Article 57(1), Member States shall require members or participants of regulated markets, MTFs and clients of OTFs to report to the investment firm or market operator operating that trading venue the details of their own positions held through contracts traded on that trading venue at least on a daily basis, as well as those of their clients and the clients of those clients until the end client is reached.

 

4. Persons holding positions in a commodity derivative or emission allowance or derivative thereof shall be classified by the investment firm or market operator operating that trading venue according to the nature of their main business, taking account of any applicable authorisation, as either:

 

(a) investment firms or credit institutions;

 

(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.

 

The reports referred to in point (a) of paragraph 1 shall specify the number of long and short positions by category of persons, any changes thereto since the previous report, percent of total open interest represented by each category, and the number of persons in each category.

 

The reports referred to in point (a) of paragraph 1 and the breakdowns referred to in paragraph 2 shall differentiate between:

 

(a) positions identified as positions which in an objectively measurable way reduce risks directly relating to commercial activities; and

 

(b) other positions.

 

5. ESMA shall develop draft implementing technical standards to determine the format of the reports referred to in point (a) of paragraph 1 and of the breakdowns referred to in paragraph 2.

 

ESMA shall submit those draft implementing technical standards to the Commission by 3 January 2016.

 

Power is conferred on the Commission to adopt the implementing technical standards referred to in the first subparagraph in accordance with Article 15 of Regulation (EU) No 1095/2010.

 

In the case of emission allowances or derivatives thereof, the reporting shall not prejudice the compliance obligations under Directive 2003/87/EC.

 

6. The Commission shall be empowered to adopt delegated acts in accordance with Article 89 to specify the thresholds referred to in the second subparagraph of paragraph 1 of this Article, having regard to the total number of open positions and their size and the total number of persons holding a position.

 

7. ESMA shall develop draft implementing technical standards to specify the measures to require all reports referred to in point (a) of paragraph 1 to be sent to ESMA at a specified weekly time, for their centralised publication by the latter.

 

ESMA shall submit those draft implementing technical standards to the Commission by 3 January 2016.

 

Power is conferred on the Commission to adopt the implementing technical standards referred to in the first subparagraph in accordance with Article 15 of Regulation (EU) No 1095/2010.

 

 

 

 

Questions and Answers, on MiFID II and MiFIR commodity derivatives topics, 7 July 2017, ESMA70-872942901-28

 

Position reporting [Last update: 07/07/2017]

 

Question 1 [Last update: 07/07/2017]


Do positions held by an investment firm on behalf of their clients add to the investment firm’s own positions?

Answer 1


Article 57(1) explicitly introduces the possibility that positions are held on behalf of another entity for legal or operational reasons. In order to avoid double counting, such positions are only to be reported as the positions of the person on whose behalf they are held. They are not to be added to or netted against other positions held by the investment firm.

 

Question 2 [Last update: 07/07/2017]


How should investment firms report the positions in commodity derivatives of persons who receive investment or ancillary services from a non-investment firm that is an “end client” of the investment firm?


Answer 2


As position limits apply to “persons”, all positions in commodity derivatives must be included in position reporting. Where an investment firm is reporting the positions of an end client that is not an investment firm and does not therefore have reporting obligations of its own under MIFID II, its report should cover both the end-client’s own account positions and any positions that the end-client holds on behalf of third parties.


Investment firms reporting such positions will reduce the risk of their reports erroneously identifying a breach of the position limit by the end-client by reporting the position of the end client separately from positions held by that end-client on behalf of third parties.


Further, by reporting the positions held by the end-client on behalf of third party entities on an entity-by-entity basis the investment firm will further reduce the risks of its reports erroneously identifying positions which appear to give rise to breaches because they aggregate across unaffiliated entities.


Entity-by-entity reporting is therefore encouraged, though ESMA recognises that the investment firm may not be able to disaggregate end-client’s positions, and there is no obligation on non-investment firms to provide disaggregated positions.
Every person holding a position in commodity derivative is subject to the position limits even if their positions are aggregated in the reporting process.


Question 3 [Last update: 07/07/2017]


 

Who should submit position reports under Article 58(2) of MiFID II?

 

Answer 3


Only investment firms trading in commodity derivatives or emission allowances or derivatives thereof outside a trading venue (economically equivalent OTC contracts) should submit position reports under Article 58(2) of MiFID II.


Question 4 [Last update: 07/07/2017]
Should investment firms include positions traded on a trading venue and economically
equivalent OTC contracts in position reports under Article 58(2) of MiFID II?


Answer 4


Investment firms should only include economically equivalent OTC contracts in position reports under Article 58(2) MiFID II, as positions traded on trading venues are already reported under Article 58(1)(b) MiFID II.


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?


Answer 5


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 6 [Last update: 07/07/2017]


 

At what level should Asset Managers aggregate positions? Is this to be done at group level or a lower level (e.g. fund/legal entity identifier etc.)?


Answer 6


Under Article 4 (2) of RTS 21, as an exception to the general rule on calculating positions for legal entities within a group, the parent undertaking of a collective investment undertaking (CIU), or of the management company of a collective investment scheme, should not aggregate the positions in commodity derivatives in any collective investment undertaking where it does not in any way influence the investment decisions in respect of opening, holding or closing those positions. In that case, positions are to be reported at CIU/LEI level. Alternatively, if the parent undertaking influences investment decisions by the collective investment undertaking or by the management company of a collective investment undertaking, it should aggregate the positions held in the relevant collective investment scheme(s).


The parent undertaking has to conduct a self-assessment exercise to determine whether it exercises any influence on investment decisions by the collective investment undertaking or by the management company of a collective investment undertaking, taking into account any relevant circumstances governing the relationship between the parent undertaking and the CIU or its management company.


Upon request, the parent undertaking should be in a position to explain to the relevant competent authority why it deems it does not exercise any influence on the decisions of the CIU or its management company.


Question 7 [Last update: 07/07/2017]


Which MIC should be used by trading venues for position reporting?


Answer 7


Venues should use the relevant ‘segment MIC’ under which a commodity derivative is traded. If a venue does not have a segment MIC, it should use its ‘operating MIC’.


Question 8 [Last update: 07/07/2017]


By when do positions have to be reported under Articles 58(1)(b) and 58(2) of MIFID II?


Answer 8


Trading venues and investment firms should report their positions to the respective NCA by 22:00 CET on T+1.


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?


Answer 9


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.


Question 10 [Last update: 07/07/2017]


How does ESMA propose to address the breaches of applicable non-EU laws and regulations regarding data protection and bank secrecy which may potentially arise from the reporting of client and end client positions?


Answer 10


Article 58(2) of MiFID II requires investment firms trading in commodity derivatives to provide to the relevant competent authority a complete breakdown of their positions as well as those of their clients and the clients of those clients until the end-client is reached. ITS 4 provides a template for such reporting. Position holders are to be identified in the same way as for trans- action reporting purposes. Legal persons are identified by their LEI. For non-EU position holders that are natural persons, the identifier with the highest priority is the passport number, the second priority being a unique CONCAT code combining nationality, first name and surname of the position holder.


The requirement to identify clients and clients of clients until the end client in position reports cannot be waived. Therefore, where an investment firm would be dealing with or on behalf of clients or clients of clients that cannot be identified in position reporting because of legal, regulatory or contractual impediments, that investment firm would not be deemed compliant with its obligations under Article 58(2) of MiFID II.

 

 

 

 

Questions and Answers, on MiFID II and MiFIR commodity derivatives topics, 31 May 2017, ESMA70-872942901-28

 

Third country issues [Last update: 31/05/2017]

 

Question 1 [Last update: 31/05/2017]


Should economically equivalent contracts traded on a third-country venue be considered EEOTC for position limit and position reporting purposes under MiFID II?

 

Answer 1


Whether or not positions held in commodity derivatives contracts traded on third-country venues that are economically equivalent (EE) to contracts traded on an EU trading venue, are to be considered as EETOC for position limit and position reporting purposes under Article 58(2) of MiFID II depends on the characteristics of that third-country trading venue, as set out in ESMA Opinion 70-154-165 of 31 May 2017.

 

Market participants holding positions on third country venue contracts, that may be considered EEOTC under Article 58(2) of MiFID II and Article 6 of Commission Delegated Regulation (EU) 2017/591 of 1 December 2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council with regard to regulatory technical standards for the application of position limits to commodity derivatives (RTS 21), or considering trading such contracts, should contact their CA and make them aware of those contracts. The CA will then get in touch with the third-country venue with a request for further information. Based on the information provided, ESMA will determine whether the third-country trading venue meets the criteria set out in the ESMA Opinion. If so, the respective third-country venue will be listed in an Annex to the Opinion.


Where a third-country trading venue appears in the annex to the Opinion, EE contracts traded on that venue will not be considered EEOTC for position limit and position reporting purposes. EE contracts traded on any other third-country trading venue that does not appear in the Annex to the Opinion will be considered EEOTC.


ESMA is aware that it is important for market participants to have legal certainty as soon as possible on the treatment of their transactions in EE contracts on third-country trading venues for position limit and reporting purposes. Whilst ESMA cannot commit to any set timeline for the assessment of the information received through NCAs, all notifications will be processed as expediently as possible.

 

 

 

 

 

 

IMG 0744

    Documentation    

 

 

 

 

Commission Implementing Regulation (EU) 2017/1093 of 20 June 2017 laying down implementing technical standards with regard to the format of position reports by investment firms and market operators (ITS 4) 

 

Commission Implementing Regulation (EU) 2017/953 of 6 June 2017 laying down implementing technical standards with regard to the format and the timing of position reports by investment firms and market operators of trading venues pursuant to Directive 2014/65/EU of the European Parliament and of the Council on markets in financial instruments

 

Questions and Answers, on MiFID II and MiFIR commodity derivatives topics, 7 July 2017, ESMA70-872942901-28

 

ITS 4: Draft implementing technical standards on position reporting

 

GFMA, ISDA, FIA, Level 3 Q&A: Commodity Derivatives Position Reporting (MiFID II, Article 58)

 

 

 

 

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    Links    

 

 

 

 

Derivative contracts on extra-EU trading venues at legal risk

 

FCA website on position reporting

 

 

 

 

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