Newsflash: ESMA opinions - position limits and post trade transparency

On 3 June 2020, ESMA updated two opinions which could have important operational implications for European users of third country trading venues:

• Determining third-country trading venues for the purpose of position limits under MiFID2 (the Position Limit Opinion, available here); and
• Determining third-country trading venues for the purpose of transparency under MiFIR (the Transparency Opinion, available here).

Below is a summary of the main points of each opinion. In short, prior to the updates, firms could treat all third country venues as being out of scope of the relevant EU rules. From 3 October 2020, the venues need to be on the lists before firms can rely on their reporting rather than reporting the transactions themselves. Firms need to pay careful attention to the lists, the details within them and their updates. We have identified a few omissions. There are also potential huge implications for European users of UK venues should they not be on the list once the transition period ends.

To be clear the equivalence determination in these opinions are limited to the specific obligations they cover. They do not impact other equivalence determinations, such as those made for the mandatory trading obligations for equities and derivatives.

The Position Limit Opinion

Background

MiFID2 requires the national competent authorities (the CAs) to set limits on the maximum size of positions which a person can hold in commodity derivatives. These position limits apply to contracts traded on trading venues and their economically equivalent OTC (EEOTC) contracts. However, MiFID2 does not provide any indication as to whether a contract in commodity derivatives traded on a third-country venue should be considered as traded OTC, and thereby whether such a contract could qualify as an EEOTC.

The Opinion

ESMA believes that contracts in commodity derivatives traded on a third-country facility, which is considered as a trading venue, should not be regarded as OTC and, hence, that the positions resulting from trading those contracts should not count towards the EU position limit regime.

In particular, ESMA states that a third-country trading facility that meets the following criteria (the Trading Venue Criteria) will be considered as a trading venue for the purposes of the position limit regime:

• it operates a multilateral system;
• it is subject to authorisation under the legal and supervisory framework of the third-country; and
• its local regulator is a signatory to the IOSCO Multilateral Memorandum of Understanding concerning Consultation and Cooperation and the Exchange of Information.

Commodity derivatives traded on third-country trading venues that meet these criteria will not be considered as OTC trades.

Until this update, ESMA had not published any list of venues as it had made no determinations. Indeed, ESMA stated in its original Position Limits Opinion that until such list was published, firms could treat commodity derivatives concluded on third country venues as not being OTC.

The updated Position Limits Opinion now contains an Annex of third country trading venues which meet the criteria – ESMA will update this list on an ongoing basis and any commodity derivatives traded on venues not on the list will be considered as OTC trades from 3 October 2020. The following seven venues are currently on the list:

• Matba Rofex S.A.
• ASX 24
• EEX Asia Pte. Ltd.
• ICE Futures Singapore Pte. Ltd.
• Singapore Exchange Derivatives Trading Limited
• ICE Futures U.S., Inc.
• ICE Swap Trade, LLC

The list is surprisingly short, excluding some of the major commodity markets, in particular those operated by CME Group in Chicago and New York. Transactions on third country venues not on this list should be treated as OTC, therefore potentially EEOTC and counting toward the calculation of the EU position limits.

The Transparency Opinion

Background

MiFIR’s post-trade transparency requirements require EU investment firms to make information on transactions in financial instruments that are traded on a European trading venue (ToTV) public through approved publication arrangements (APA). However, MiFIR does not clarify whether this obligation applies to transactions concluded on a third-country trading venue.

The Opinion

ESMA believes that information on ToTV transactions concluded by EU investment firms that are OTC, or that are concluded on third country trading venues that would not be subject to post-trade transparency should be made public in the EU.

However, this should not result in EU investment firms republishing information in the EU about ToTV transactions concluded on third-country trading venues, which are subject to similar transparency provisions. Such duplicate reporting may mislead the EU public and would disproportionately increase EU firms’ compliance costs.

In this regard, any venue that meets the Trading Venue Criteria and which operates a post-trade transparency regime will be considered as a trading venue for the purposes of the MiFIR post-trade transparency regime. Therefore, EU firms will not be required to publish information about ToTV transactions that are concluded on such venues.

Until this update, the ESMA’s Transparency Opinion contained no list of venues as there had been no determinations made. Accordingly, ESMA stated in that opinion that until that list was published, firms were not required to make public details through an EU APA of ToTV transactions concluded on third country venues.

In common with the Position Limits Opinion, the updated Transparency Opinion now sets out a list of relevant third country venues. Importantly, these venues are divided into:

• those which meet the criteria for all the asset classes available for trading thereon. Investment firms concluding ToTV transactions on those venues are not required to make those transactions post-trade transparent in the EU; and
• those which meet the criteria for some only of the asset classes available for trading thereon. For these venues, firms will have to make ToTV transactions post-trade transparent via an APA by 3 October 2020 only with respect to instruments not covered by the positive assessment.

For venues not on either list, firms will to make have to make relevant details of all ToTV transactions public via an APA by 3 October 2020.

There are currently 120 venues on the “positive” list and 16 venues on the “partially positive” list. The “positive” list seems quite comprehensive, and covers the main markets in G7 countries, including those in Hong Kong, Singapore, Japan, Australia and Canada, as well as markets like Dubai, Johannesburg, Istanbul and Israel. Most of the large US markets are on the list, including Nasdaq, the New York Stock Exchange and ICE. But there are some omissions. CME Group is not on the list. Given its importance in global commodities markets, this seems surprising; no doubt market participants will look to push for it to be included before the 3 October cut-off date.

The “partially positive” list is dominated by US SEFs. They are generally considered equivalent for bonds and US Treasuries.

Implications for the UK

Given its close alignment to EU law, theoretically there should not be any regulatory obstacles in the inclusion of UK venues on the position limit or transparency equivalence lists. However, as the debate around the share and derivatives obligations have shown, this may not necessarily follow. It will be interesting to see whether the UK adopts a similar approach with regard to recognising non-UK venues.

Conclusion

In short, market participants should carefully monitor the evolution of the Annexes to both these Opinions and work out when they need a definitive dataset to amend procedures. Firms will need to build this data into their processes to ensure they do not miscount their commodity position limits or under or over report in-scope transactions. This is likely to involve discussions with service providers and firms should consider the length of time such providers would need to implement and test any changes.