Commission’s changes to MiFID position limits regime are not good enough
European Parliament should reject symbolic improvements to “RTS 21”
Brussels, 1 December 2016 – MEPs should request a better draft of the Commission's technical regime for position limits, which defines how supervisors should restrict commodity derivative speculation, said Finance Watch, the public interest advocacy group working to make finance serve society.
The draft regime for “RTS 21” as published today by the European Commission makes mostly symbolic changes to a previous version by slightly reducing the baseline limit for certain position limits for the spot (final) month of contracts only, and by asking supervisors to review limits in case of excessive volatility, without defining when such a situation applies and largely leaving the judgement to the national supervisor. The weak draft will still allow excessive speculation in agricultural commodity derivatives, defeating the aim of the position limits regime. Position limits are intended to reduce excessive volatility in food prices, which has pushed millions into poverty and hunger.
"We appreciate the European Commission's suggestion to reduce the baseline position limit from 25% to 20% in the spot month for a handful of derivative contracts related to foodstuffs for human consumption, but this is only the tip of the iceberg of derivative speculation", said Finance Watch Secretary General Christophe Nijdam.
Joost Mulder, Finance Watch Head of Public affairs, said: "The European Parliament should insist that the Commission respect the Level 1 mandate, which prescribes volatility as a mandatory factor when calculating the limits, and not leaving it up to supervisors to decide when speculation is excessive enough to start imposing a tighter limit. To significantly bring position limits down and ensure that the rules agreed by the co-legislators are implemented, the only option now left for the Parliament is to reject MiFID RTS 21 and request a new draft."
When the new Markets in Financial Instruments Directive (MiFID II) was adopted in 2014, MEPs welcomed the introduction of strict limits on speculating on agricultural commodities as one of the greatest successes of the reform. This followed a sustained public campaign against food speculation, led by civil society actors including Finance Watch.
Sadly, in Finance Watch’s view the changes in the text proposed today are mostly symbolic when compared to ESMA's previous draft of 28 September 2015, which the Commission rejected.
Most importantly, the "baseline" position limit (before the relevant factors are applied) will be reduced for a very restricted number of food-related contracts only, and only for the final (spot) month. According to our estimates, the European regime will cover even fewer contracts than the US CFTC rule which covers 19 agriculture-related "core referenced contracts" (out of a total of 28 commodities - the others are energy and metals-related). The reduction factor applied to these contracts is very minimal - the baseline limit will be 20% instead of 25% in the final month - reluctantly nudging national supervisors to set a slightly lower position limit. However, the national supervisor setting the limit (the Member State with the largest number of EU trades) can still at its own discretion modulate the baseline within the range of 2.5% to 35% and effectively ignore the baseline figure, and no provision is made for the “other months” phase of derivative contracts.
Our data as shared with MEPs on 14 October 2015 shows that a lower baselinelimit than 20% is defendable and workable. In the US, where a maximum limit of 25% was proposed by the CFTC, actual position limits as applied by trading venues are much lower, with grain commodities (corn, soybeans, wheat, rice and oats) typically clustered around the 5% - 15% range.
Some EU industry lobbyists argue that the EU regime covers up to 1,400 contracts whereas the US covers only 28, and that both regimes are not comparable in terms of hedging provisions. But the EU regime applies a separate set of rules to “food intended for human consumption”, and a further reduction to the position limits for these contracts will not affect the other position limits. Only this subset would be subject to a lower baseline limit.
Secondly, despite the Parliament's explicit request and drafting suggestions shared with the Commission, volatility has not been included as a factor to be taken into account when setting position limits at the same level as other relevant factors, as the Level 1 legislative agreement prescribes. Instead, the Commission suggests that if a situation of excessive volatility is established (without defining “excessive”), supervisors should consider a potential correction of the limit, if further adjustment (up or down) of the limit might reduce such excessive volatility.
We are therefore calling on MEPs to reject the Delegated Act as proposed by the European Commission, requesting the Commission to bring this base limit down further, include volatility as a factor for calculating position limits rather than a consideration, and apply limits throughout the length of derivative contracts.
What is the background to this?
The Commission decided in March 2016 to reject ESMA's draft Regulatory Technical Standard (RTS) and request a new one, following a November 2015 European Parliament letter which supported our concerns about an ineffective position limits regime (press coverage, press release).
Since the Parliament’s letter of November 2015, more than a year of reflection and behind-the-scenes negotiations with MEPs have followed. The Commission has now finally published the Regulatory Technical Standard (RTS) defining the "technical" elements of the position limits regime. Now that the text is on the table, only two formal options remain for the Parliament (and the Member States, who have similar scrutiny rights): adopt or reject the draft.
Under the Lisbon Treaty’s “Level 2 process”, the European Parliament can reject the Delegated Act as proposed by the European Commission and request a new draft. There is enough time left to do so, as the application date of MiFID II has already been delayed by one year to 3 January 2018, following financial industry pressure.
What happens next?
The Parliament now has three months to draft a Resolution rejecting the Delegated Act. This resolution must first be adopted in the relevant Parliament committee (ECON) and then be adopted by an absolute majority in plenary. Rejection of a Technical Standard is not a very common procedure but precedents in financial services exist, such as the PRIIPs rejection in September 2016.
Finance Watch and its member NGOs will continue to monitor this process to ensure the standards ultimately adopted meet the policy goal of MiFID II as agreed at the G20 Pittsburgh Summit: to bring down volatility in commodities markets.
Once all RTS have been adopted, the rules will start to apply as of 3 January 2018, one year later than previously planned.
What are position limits?
The Level 1 legislative text of MiFID II/MiFIR, which entered into force in 2014, introduced among other things a regime of position limits throughout Europe to reduce the potential for harm caused by excessive amounts of speculative capital in commodity derivative markets. The measure aims to reduce the scope for gambling on food prices - a matter of life or death for millions of the world’s poorest citizens - and on other commodities that are used daily by European citizens. The Level 1 agreement followed more than two years of campaigning and lobbying by civil society representatives, including Finance Watch, Oxfam, Foodwatch and others (read more). The legislation will be implemented via Level 2 regulatory technical standards (RTS) which, among other things, provide guidance for national supervisors to calibrate the position limits.
To see Finance Watch’s detailed comments about these and other devices and loopholes, see our 2 March 2015 response to ESMA’s consultation on its draft regulatory technical and implementing standards (RTS/ ITS) regarding the implementation of the Markets in Financial Instruments Directive (MiFID II) and Regulation (MiFIR) here.