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In our previous blog we saw how MiFID II intends to ensure transparency across all asset classes, including those that are not in scope today, and the impact it will have on market participants. In this second installment we look at the regulation of commodities through position limits.
To recap, most commodities trading firms are exempted from MIFID when trading on their own accounts. The result, as postulated by the regulators, was increasing food prices due to unencumbered speculation. The main concern is insufficiency of the intervention power of regulators with regard to commodity markets. More stringent rules in MiFID II attempt to remedy this area of concern.
The key reforms
Position limits on commodities trading have been added to MiFID II to limit speculation on energy and food prices. The key considerations in this area are as follows:
Organisations will be required to provide real time position reports detailing their own and client holdings to the venue they are a member of. These reports will then be scrutinised by a regulator. Reports of aggregate positions by trade and financial instrument category will be published weekly, and execution venues will also be required to supply content of such reports to national regulators when requested.
In the interests of providing uniform protection to investors across the EU, the proposition is to amend existing exemptions as follows:
The impact
MiFID II will have a significant impact across the whole securities value chain, from front-office sales and trading to back-office reporting. Specifically for commodities, the impact is likely to be shaped as follows:
It’s fair to say there will be a high impact on commodity derivatives. All constituents need to begin their impact analysis immediately to ensure they are ready to implement the necessary changes and not have to face the possibility of sanctions by regulators. Greater powers will be given to financial authorities to monitor firms and intervene in any trading activity, which should stop any potential mis-selling of derivative contracts; but what ESMA will do exactly is yet to be seen. As organisations begin the analysis on the effects of MiFID II, the predicted impacts will become reality and the financial industry will see what the future of commodity derivatives will hold.
This content is provided by an external author without editing by Finextra. It expresses the views and opinions of the author.
Scott Dawson CEO at DECTA
02 July
Frank Moreno CMO at Entersekt
01 July
Pete McIntyre Financial Services Director at Planixs
Alex Kreger Founder and CEO at UXDA Financial UX Design
30 June
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