UK: MIFID II: Will Commodity Position Limits Affect Liquidity?


Some of the most fiercely contested provisions of MiFID II (EU Directive 2014/65/EU) are:

  • the obligations on Member States to impose position limits on commodity derivatives; and
  • the obligation on market participants and market operators to provide regular position reports on their positions in commodity derivatives and emissions allowances.

Position limits are intended to prevent market abuse and to ensure convergence between the price of a commodity derivative in the delivery month and spot prices for the underlying commodity. In December 2014 the European Securities and Markets Authority ("ESMA") published draft regulatory technical standards ("draft RTS") on how it proposes to implement these provisions which has reignited the debate.

In this update, we look more closely at what these obligations will mean for commodity firms.

Position limits

Member States are obliged to ensure that their national authorities establish and apply position limits on the size of a net position which a person can hold in commodity derivatives traded on trading venues and economically equivalent OTC contracts. The limits apply to all "persons" and will be set on all positions a trader holds or are held on its behalf at aggregate group level. There has been a lot of debate about when an OTC commodity derivative contract is to be considered "economically equivalent". Under the draft RTS ESMA has proposed that an OTC commodity derivative would be "economically equivalent" to a traded contract when it:

  • explicitly refers to or is otherwise based upon a commodity derivative traded on an EU trading venue; or
  • is valued on the basis of the same or an equivalent commodity of the same or equivalent grade that is deliverable at the same location, or another equivalent location so long as the other delivery location has similar economic characteristics and is deliverable on the same date as that of a commodity derivative that is traded on a trading venue.

Fortunately ESMA is required to publish a list of what these contracts are as it is difficult to apply these tests.

Limits will not apply to non-financial counterparties who use commodity derivatives for hedging purposes. The test for a hedge is the same as that under the European Markets Infrastructure Regulation ("EMIR"). In other words the trade must be objectively measureable as reducing risks directly relating to the commercial activity of the non-financial counterparty. If a non financial counterparty wants to use the hedging exemption it must apply for an exemption.

The methodology

ESMA is responsible for proposing the methodology to determine position limits for the spot month and other months position limits for physically settled and cash settled derivatives. ESMA acknowledges that there needs to be flexibility in setting the limits particularly for new products and for illiquid markets. It will, for example, be relevant to look at whether a commodity is perishable, how it is transported and delivered, whether there are capacity constraints at delivery points and whether the product is seasonal.

ESMA has proposed that the starting point should be a position limit that imposes a baseline limit of 25% of "deliverable supply". Under the draft RTS ESMA proposes how the baseline figure for "deliverable supply" in each commodity derivative should be calculated. It is unclear whether "deliverable supply" is to be interpreted narrowly as the supply used for settlement or as a pricing reference for the traded commodity derivative or more widely as the "deliverable supply" in the underlying physical commodity. If this baseline figure is incorrect, there is a real risk that position limits will be set too low.

ESMA has, therefore, proposed that the baseline could be adjusted by +/-15% up to 40% or down to 10% depending on a range of factors. The factors that are relevant to increasing or reducing the limits include:

  • the maturity of the commodity derivative contract: the more frequently the derivative expires, the higher the limit should be.
  • the deliverable supply in the underlying commodity: the greater the quantity of "deliverable supply", the higher the position limit.
  • the overall open interest in commodity derivatives and in other financial instruments with the same underlying commodity: the greater the volume of overall open interest, the higher the position limit.
  • the volatility of the market in the commodity derivatives: the greater the volatility, the lower the overall position limit.
  • the number and size of the market participants that hold a position: the greater the number of position holders,the lower the overall position limit. It is odd to set a lower limit where there are a greater number of participants.
  • the characteristics of the underlying commodity market: the greater the flexibility of the underlying market, the higher the position limit. There could be a difficulty with this test as it is easy to inadvertently build up a large position in an inflexible market where there are few delivery points.
  • whether a new contract is being developed: the position limit should be set at a higher level for new contracts which will be less liquid.

Position limits are set by the national authorities. Where the same commodity derivative is traded in several EU locations, the competent authority of the jurisdiction where the largest volume of trading takes place will set the position limit. National competent authorities are required to review and reset the position limits where there is a significant change in deliverable supply, open interest or any other significant market change.

Position management controls

Trading venues which trade commodity derivatives are required to apply position management controls. These need to include, as a minimum:

  • monitoring open interest positions.
  • accessing information about the size and purpose of positions as well as the ultimate beneficial owners of positions.
  • powers to require a person to terminate or reduce a position or put liquidity back into the market.

Member state regulators will also have similar powers.

Position reporting

Trading venues which trade commodity derivatives or emissions allowances have an obligation to:

  • Publish a weekly report of the aggregate positions held by the different categories of person for the different commodity derivatives when the number of persons and their open positions exceed minimum thresholds. These reports must specify the number of long and short positions as well as the percentage of the total open interest held by each category of participant.
  • Provide the competent authorities with a complete breakdown on a daily basis of the positions held by everyone on the trading venue, including their members, participants and clients.

Members or participants on regulated markets, multilateral trading facilities and organised trading facilities must report their positions on a daily basis to the trading venue. The report must give details of their own positions and the position of their direct and indirect clients.

Investment firms must provide on a daily basis a complete breakdown of their positions in commodity derivatives traded on EU trading venues and "economically equivalent" OTC derivatives contracts. The report must detail the firm's position and the position of their direct and indirect clients and distinguish between hedging transactions and other positions.


The trading community has raised serious concerns about the position limits regime and position reporting obligations. Their primary concern is that the position limits could have an adverse effect on liquidity. They will make life difficult for investment firms and banks who have traditionally been liquidity providers to producers and end users who want to hedge price risk which as recent volatility in the oil market has shown, is a real threat to business.

ESMA is required to submit its draft RTS to the EU Commission by 3 July 2015 and so this issue will continue to be hotly debated for some time.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions