“Commodity derivatives” are derivatives with a commodity as their underlying. “Commodities” are goods of a tangible nature that may be delivered. Commodities may for example take the form of agricultural products, metals, oil and oil-based products, coal, gas and electricity, or even “other commodities” such as freight. The regulation of commodity derivatives also applies to emission allowances or derivatives of emission allowances.
Certificates that use commodity prices as a reference (“commodities certificates”) that are traded in Austria at the Vienna Stock Exchange (Wiener Börse AG), are also to be classified as commodities derivatives.
How are commodities derivatives regulated?
With the transposition of MiFID II in the Stock Exchange Act 2018 (BörseG 2018; Börsegesetz 2018) and the Securities Supervision Act 2018 (WAG 2018; Wertpapieraufsichtsgesetz 2018) special regulations with be introduced for commodities derivatives markets. Not only are all commodities derivatives market participants subject to appropriate regulation and supervision under MiFID II (provided that the exemption for ancillary activities is not applied), but special position limits and comprehensive reporting obligations (position reporting) are also set for commodities derivatives market participants. The objective of such measures is to improving the regulation, functioning and transparency of the financial and commodities markets and to crack down on extreme fluctuations in commodity prices. The provisions regarding commodities derivatives in accordance with the BörseG 2018 and WAG 2018 enter into force on 3 January 2018.
Who is affected?
With regard to the scope of application of the provisions regarding commodities derivatives the following are addressed (to a varying extent)
- Participants in commodities derivatives trading,
- Trading venues where commodities derivatives are traded, as well as
- investment firms or credit institutions and their clients.
What are the key issues about the regulation of commodities derivatives?
An authorisation as an investment firm in accordance with MiFID II is required for commercially trading in commodities derivatives. Persons, who among other activities trade on their own account in commodities derivatives, may however may use of the exemption for ancillary activities subject to their fulfilling the conditions pursuant to Article 2 para. 1 no. 13 WAG 2018 in conjunction with Delegated Regulation (EU) 2017/592, provided that such persons notify the FMA on an annual basis about their making use of the exemption for ancillary activities.
The competent authority for the notification of the exemption of ancillary activities is the one at which the person would have had to have applied for an authorisation as an investment firm in accordance with MiFID II. I.e., in general persons having their registered office in Austria, are required to notify the FMA as the competent authority about their ancillary activities exemption, provided that there are making use of this exemption.
In order to simplify the submission of the notification for an ancillary activities exemption, as well as to guarantee as uniform a submission process as possible, the following Excel form is required to be completed fully and submitted to the FMA by e-mail to email@example.com.
It is advised, that at the request of the FMA the basis for the conclusion is to be submitted, based upon which the activity constitutes an ancillary activity to their principal activity.
In order to be able to make use of this exemption for an ancillary activity when MiFID II becomes applicable for the first time on 3 January 2018, this exemption must be notified to the FMA on 3 January 2018. In subsequent years the notification about the exemption for ancillary activities pursuant to Article 2 para. 1 no. 13 WAG 2018 in conjunction with Article 4 of Delegated Regulation (EU) 2017/592 the notification regarding the exemption of the ancillary activity shall be required to be made annually during the first quarter of the calendar year.
Delegated Regulation (EU) 2017/592 sets out detailed criteria, in accordance with which an activity is considered as ancillary activity to the principal activity. For this purpose all market trading activities in the European Union should be considered by commodity classes. To ensure a common approach throughout the European Union, ESMA published an opinion on 06.07.2017 (ESMA70-156-165) containing the figures collected for the years 2015 and 2016.
Position limits set clear quantitative thresholds for the maximum size of a net position, that a person is allowed to hold at any time in commodities derivatives that are traded on trading venues and in financially comparable OTC contracts. Position limits are to be determined by the competent authority of the trading venue in accordance with Delegated Regulation (EU) 2017/591.
Position limits for commodities certificates traded in Austria at the Wiener Börse AG are determined by the FMA by means of Article 2 of the Commodities Derivatives Regulation (WDV; Warenderivate-Verordnung) in conjunction with Article 15 of Delegated Regulation (EU) 2017/591 as 2.5 million units, provides that the volume of the issuance does not exceed 10 million units.
Trading venues, where commodities derivatives are trading, shall be required to conduct position management checks These checks must include checking the power of the trading venue to monitor the open positions of every person, to receive access to information from every person, as well as to demand from any person where applicable the releasing of or reduction of a position. Trading venues must inform the competent authority about the specificities relating to position management checks.
In Austria, Wiener Börse AG is required to conduct the relevant position management checks pursuant to Article 19 paras. 5 and 6 BörseG 2018 regarding the traded commodities certificates.
To check that position limits are observed (daily position reporting to the competent authority) as well as to improve market transparency (weekly position report, which must also be published), comprehensive reporting obligations have been established both to the competent authority for the trading venue at which commodities derivatives are traded, as well as to the ESMA. The daily position reports consist of a complete breakdown of the positions of all persons at a trading venue and in financially comparable OTC contracts. The weekly position reports include aggregated positions, that are held by different categories of persons in different commodities derivatives, which are also required to be published by the trading venue. ESMA subsequently collates a centralised publication of the information contained in these reports.
For commodities certificates traded in Austria at the Wiener Börse AG, where their issuance volume does not exceed 2.5 million units, they are excluded from the reporting obligations pursuant to Article 3 WDV. Any reporting obligations that exist, for which the FMA is not the competent authority, remain unaffected.