On April 22, MFA submitted comments to the European Securities and Markets Authority (ESMA) regarding the comments and amendments requested by the European Commission relating to the MiFID II Regulatory Technical Standards (RTS) published by ESMA on September 28, 2015. In our letter, we submitted recommendations to ESMA on how it might effectively incorporate the Commission’s comments with respect to position limits and non-equities transparency.
A brief description of our final recommendations is below.
Commodity Derivative Position Limits
While we support and prefer ESMA’s draft RTS from September 28, 2015 for commodity derivative position limits, we provided the following suggestions to address the European Commission’s comments with respect to:
- The baseline for non-spot month limits – MFA suggested that to the extent ESMA incorporates the European Commission’s proposal (to base limits on deliverable supply) into RTS 21, we would urge that the interpretation of what constitutes a “significant discrepancy” between open interest and deliverable supply is left to national competent authorities (NCAs).
- The definition of “economically equivalent” commodity derivative contracts – MFA urged ESMA to ensure that as much certainty as possible is provided in determining what constitutes an “economically equivalent” contract. MFA suggested that the draft RTS refer to OTC commodity derivatives resulting in the “same economic exposure” as exchange-traded contracts.
- Volatility – While MFA acknowledges that the Level 1 text introduces a need for NCAs to take volatility into account in setting position limits, MFA does not consider that the RTS should mandate that greater volatility must necessarily result in lower position limits.
Non-Equities Transparency
In general, MFA strongly supports the application of proportionate and effective transparency requirements in the non-equities markets, particular in relation to derivatives. For bond transparency requirements, MFA supports the Commission’s proposal to require annual assessments of liquidity levels in all classes of bonds, as it will help to ensure that transparency has been set at the correct level and is not negatively affecting liquidity. However, in light of the more cautious approach to bond transparency suggested by the Commission, MFA cautions ESMA from applying the same standard in relation to the bond and derivatives markets. MFA believes that the maximum post-trade transparency deferral period set by RTS 2 should not be set at the same level across both types of instrument. Specifically, while a two-day deferral period applying to illiquid or large in scale bond transactions may be appropriate for bonds, MFA members do not consider that the same deferral period (which may in some cases be extended as long as four weeks) is necessary in the case of cleared derivatives. Deferring the publication of transparency data for cleared derivative transactions longer than necessary could be detrimental to CCP risk management and undermine the ability of market participants to accurately value their cleared portfolios and accurately calculate and/or validate initial and variation margin amounts. MFA’s letter encouraged ESMA to consider amending RTS 2 to provide that the maximum permitted post-trade transparency delay for cleared derivatives is 15 minutes, in line with the CFTC reporting regime for block trades.
