Commodity Derivatives and Emissions Allowances – Regulation under MiFID II
“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. 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.
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. The provisions regarding commodities derivatives and emission allowance certificates in accordance with the BörseG 2018 and WAG 2018 entered into force on 3 January 2018.
Who is affected?
With regard to the scope of application of the provisions regarding commodities derivatives and emission allowance certificates the following are covered (to a varying extent)
- Participants in commodities derivatives and emission allowance certificates and derivatives thereof,
- Trading venue 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?
An authorisation as an investment firm in accordance with MiFID II is required for commercially trading in commodities derivatives, emission allowance certificates or derivatives. MiFID II (transposed in Article 2 WAG 2018) however prescribes certain provisions for exemptions. 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 do not apply to operators with compliance obligations under Directive 2003/87/EC who, 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 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.
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 for ancillary activities must be made annually during the first quarter of the calendar year or when commercial trading is taken up for the first time in commodities derivatives, emission allowance certificates or derivatives thereof.
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 collected and publishes figures annually about the European commodities derivatives markets broken down by classes of commodities.
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.