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Commodity Derivatives and Emissions Allowances – Regulation under MiFID II

Definitions

“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. Emission allowance certificates in accordance with Directive 2003/87/EC (the Emissions Trading Directive) allow a person the right to emit a certain amount of greenhouse gases.

How are commodities derivatives and emission allowance certificates 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) not only are all participants in markets for commodities derivatives and emission allowance certificates and derivatives thereof as financial instruments (cf. Article 1 no. 7 WAG 2018) subject to adequate regulation and supervision in the scope of application of MiFID II (provided that exemptions in accordance with Article 2 WAG 2018 do not apply), but special position limits and comprehensive reporting obligations (position reporting) for participants in commodities derivatives markets have also been defined. 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.

Who is affected?

With regard to the scope of application of the provisions regarding commodities derivatives and emission allowance certificates the following are affected (to a varying extent)

  • participants in commodities derivatives and emission allowance certificates and derivatives thereof,
  • trading venues where commodities derivatives and emission allowance certificates and derivatives thereof are traded, as well as
  • investment firms or credit institutions and their clients.

What are the key issues about the regulation of commodities derivatives and emission allowance certificates?

As a rule, an authorisation as an investment firm in accordance with MiFID II is required for commercially trading in commodities derivatives, emission allowance certificates or derivatives thereof. MiFID II (transposed in Article 2 WAG 2018) however prescribes certain provisions for exceptions. The exceptions for system operators (Article 2 para. 1 no. 12 WAG 2018) as well as the exception of ancillary activities (Article 2 para. 1 no. 13 WAG 2018) are particularly relevant for trading in commodities derivatives or emission allowance certificates or derivatives thereof.

Exception for Operators of Systems

The provisions set forth in MiFID II or WAG 2018 with regard to authorisation as an investment firm under MiFID II do not apply to operators with compliance obligations under Directive 2003/87/EC, thata, when dealing in emission allowances, do not execute client orders and who do not provide any investment services or perform any investment activities other than dealing on own account, provided that those persons do not apply a high-frequency algorithmic trading technique (Article 2 para. 1 no. 12 WAG 2018). Notification obligations to the FMA have not be stipulated.

Exemption of ancillary activities

Persons, who among other activities trade on their own account in commodities derivatives or emission allowance certificates or derivatives thereof, may make use of the exception 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) 2021/1833, so that the provisions in MiFID II or WAG 2018 regarding authorisation as an investment firm under MiFID II do not apply. Notification obligations to the FMA have not be stipulated.

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 for the trading venue.

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.

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.

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