(1)

Directive (EU) 2021/338 of the European Parliament and of the Council (2) provides for amendments to Article 57 of Directive 2014/65/EU as regards, among other things, position limits, which also include new related empowerments.

(2)

In order to improve the stability and integrity of financial markets in the Union, a methodology should be specified for calculating position limits to commodity derivatives in a harmonised manner. The methodology should prevent regulatory arbitrage and promote consistency whilst providing competent authorities with sufficient flexibility to take into account the variations among different commodity derivatives markets and the markets in the underlying commodities. The methodology for calculating the limits should allow competent authorities to balance the objectives of setting limits at a level sufficiently low to prevent persons holding positions in those commodity derivatives from abusing or distorting the market against the objectives of supporting orderly pricing and settlement arrangements, developing new commodity derivatives and enabling commodity derivatives to continue to support the functioning of commercial activities in the underlying commodity market.

(3)

A number of concepts stemming from Directive 2014/65/EU and technical terms used in this Regulation should be defined to ensure a uniform understanding.

(4)

Long and short positions of market participants in a given commodity derivative should be netted off against each other to determine the effective size of a position a market participant controls at any point in time. The size of a position held through an option contract or a commodity derivative traded on the same trading venue that is a sub-set of the principal contract should be calculated on a delta equivalent basis. To allow for a comprehensive, centralised and representative overview of a person’s activity, and to prevent circumventing the objective of the position limit set for the principal contract, the aggregate position held by a person in a commodity derivative traded on a trading venue should also include the position resulting from the disaggregation of the components of a spread contract admitted to trading as a single tradable instrument on the same trading venue and the positions in commodity derivatives traded on the same trading venue that are a sub-set of the principal contract with regards to their size (so-called minis), or pricing period maturity, such as balance-of-the-month (so-called balmos) contracts.

(5)

Directive 2014/65/EU requires that any positions held by third parties on behalf of a person is to be included in the calculation of that person’s position limit and for position limits to be applied at both an entity level and at a group level. It is therefore necessary to aggregate positions at a group level. It is appropriate to only provide for aggregation at the group level if a parent undertaking can control the use of positions. Accordingly, parent undertakings should aggregate positions held by their subsidiaries with any positions that the parent undertaking holds directly, in addition to the subsidiaries aggregating their own positions. Such aggregation can lead to positions calculated at the level of the parent undertaking which are larger or, due to a netting of long and short positions held by different subsidiaries, lower than at individual subsidiary level. Positions should not be aggregated at the level of the parent undertaking if the positions are held by collective investment undertakings which hold those positions on behalf of their investors rather than on behalf of their parent undertakings in cases where the parent undertaking cannot control the use of those positions for its own benefit.

(6)

The amendments set out in Directive (EU) 2021/338 require that position limits apply to critical or significant commodity derivatives that are traded on trading venues, and to their economically equivalent OTC (‘EEOTC’) contracts. Critical or significant derivatives are commodity derivatives with an open interest of at least 300 000 lots on average over a one-year period. Due to the critical importance of agricultural commodities for citizens, agricultural commodity derivatives and their EEOTC contracts remain under the position limit regime below 300 000 lots. The liquidity threshold from which position limits start to apply to agricultural commodity derivatives is to be specified in this Regulation and should only be considered as trading in significant volume on a trading venue if they exceed the liquidity threshold for a sufficient period of time.

(7)

Where an over-the-counter (‘OTC’) contract is valued on the same underlying commodity that is deliverable at the same location and with the same contractual conditions and if it is having a highly correlated economic outcome to a contract traded on a trading venue, it should be deemed economically equivalent regardless of small differences in the contractual specifications concerning the lot sizes and the date of delivery. Differences in post-trade risk management arrangements, such as clearing arrangements, should not be barriers to declaring such contracts as economically equivalent. In order to prevent inappropriate netting of potentially dominant positions traded on a trading venue by the use of bilateral arrangements in OTC contracts and to ensure an efficient operation of the position limits regime in practice, it is necessary for commodity derivatives traded OTC to be considered economically equivalent to trading venue contracts only in limited circumstances. To deter avoidance of position limits and to enhance the integrity of the position limit regime it is necessary that a definition of an economically equivalent OTC contract is narrowly framed so that it does not permit a person to net an OTC position against multiple other positions. Furthermore, discretion in the consistent choice of positions against which an OTC position is netted should be limited to the specific circumstances where such an OTC contract is economically equivalent to more than one commodity derivative traded on a trading venue in the Union.

(8)

In order to establish which positions in commodity derivatives are objectively measurable as reducing risks directly relating to commercial activity, certain criteria should be provided, including the use of the accounting definition of a hedging contract based on International Financial Reporting Standards (IFRS) rules. That accounting definition should be also available to non-financial entities even though they do not apply IFRS rules at an entity level.

(9)

Additionally, non-financial entities should be able to use risk management techniques to mitigate the overall risks arising from their commercial activity or that of their group including risks arising from several geographic markets, products, time horizons or entities (that is, macro or portfolio hedging). Likewise, financial entities within predominantly commercial groups should be able to use risk management techniques to mitigate the overall risks arising from the commercial activity of the non-financial entities of the group. When a non-financial entity or a financial entity uses macro or portfolio hedging, it may not be able to establish a one-to-one link between a specific position in a commodity derivative and a specific risk arising from the commercial activity that the commodity derivative is intended to hedge. A non-financial entity or a financial entity may also use a non-equivalent commodity derivative to hedge a specific risk arising from commercial activity of the non-financial entity where an identical commodity derivative is not available or where a more closely correlated commodity derivative does not have sufficient liquidity (that is, proxy hedging). In such cases, risk management policies and systems should be able to prevent non-hedging transactions from being categorised as hedging and should be able to provide for a sufficiently disaggregate view of the hedging portfolio so that speculative components are identified and counted towards the position limits. Positions should not qualify as reducing risks related to commercial activity solely on the grounds that they have been included as part of a risk-reducing portfolio on an overall basis.

(10)

A risk may evolve over time and, in order to adapt to the evolution of the risk, commodity derivatives initially executed for reducing risk related to commercial activity may have to be offset through the use of additional commodity derivative contracts that close out those commodity derivative contracts that have become unrelated to the commercial risk. Additionally, the evolution of a risk that has been addressed by the entering into of a position in a commodity derivative for the purpose of reducing risk should not subsequently give rise to the re-evaluation of that position as not being a privileged transaction from the beginning.

(11)

Financial and non-financial entities should be able to apply for the exemption in relation to hedging of commercial activities before entering into a position. The application should give the competent authority a clear and concise overview of the commercial activities of the non-financial entities in respect of an underlying commodity that are intended to be hedged, the associated risks and how commodity derivatives are utilised to mitigate those risks. Position limits apply at all times to agricultural commodity derivatives and to critical or significant commodity derivatives, and should the exemption ultimately not be granted by the competent authority, the financial or the non-financial entity, as the case may be, should reduce any position in excess of a limit accordingly and could face supervisory measures in respect of a breach of a limit. Financial and non-financial entities should re-assess their activities periodically to ensure that the continued application of the exemption is justified.

(12)

Financial and non-financial entities should be able to apply for the exemption in relation to positions resulting from the mandatory provision of liquidity on trading venues before those transactions are undertaken. The application should give the competent authority a clear and concise overview of the mandatory liquidity provision framework under which those persons operate, the person’s activities in the trading of commodity derivatives in accordance with the written agreement entered into with the trading venue and of the resulting open positions. Position limits apply at all times to agricultural commodity derivatives and to critical or significant commodity derivatives, and should the exemption ultimately not be granted by the competent authority, the non-financial or financial entity should reduce any position in excess of a limit accordingly and could face supervisory measures in respect of a breach of a limit. Non-financial and financial entities should re-assess their activities periodically to ensure that the continued application of the exemption is justified.

(13)

The spot month period, which is the time period immediately before delivery at expiry, is specific to each commodity derivative and may not correspond to exactly one month. Spot month contracts should therefore refer to the contract that is the next contract in that commodity derivative to mature. Restricting the positions a person may hold in the period during which delivery of the physical commodity is to be made limits the quantity of the underlying deliverable supply each person may make or take delivery of, thereby preventing the accumulation of dominant positions by individuals which may enable them to squeeze the market through restricting access to the commodity. The standard baseline for the spot month position limit for both physically and cash settled commodity derivatives should therefore be computed as a percentage of the deliverable supply estimate. Competent authorities should be able to implement a schedule of decreasing position limits ranging from the point in time when a contract becomes a spot month contract until maturity in order to more precisely ensure that position limits are adequately set throughout the spot month period and to ensure orderly settlement.

(14)

Where there is relatively little derivative trading compared with the deliverable supply of a commodity, open interest will be smaller in comparison with deliverable supply. In such circumstances, even using the lowest percentage of the deliverable supply in the methodology may not allow the competent authorities to set a spot month limit that is consistent with the objective of ensuring orderly pricing and settlement conditions and preventing market abuse. To ensure that those objectives are met in all circumstances, when the deliverable supply for a commodity derivative is substantially higher than the total open interest to such extend that the spot month limit based on deliverable supply would deprive the requirement for competent authorities to apply position limits of any effect, competent authorities should, as a fall back methodology, determine the baseline figure for the spot month limit in that commodity derivative as a percentage of the total open interest in that commodity derivative and then proceed with the relevant adjustment factors.

(15)

Crops in agricultural products can be subject to high volatility due to weather conditions. It is therefore appropriate that the reference period for the determination of deliverable supply in agricultural commodity derivatives extends beyond the reference period used for the determination of deliverable supply in other commodity derivatives.

(16)

The other months’ position limit is applied across all maturities other than the spot month. The standard baseline for the other months’ position limits for both physically and cash settled commodity derivatives should be computed as a percentage of the total open interest. The distribution of positions across the other months’ of a commodity contract is often concentrated in the months closest to maturity. Therefore, total open interest provides a more appropriate baseline for setting position limits than using a figure averaged across all maturities. As open interest may change significantly over a short period of time, the open interest should be calculated by the competent authorities over a period of time that adequately reflects the commodity derivative trading characteristics. That reference period should notably account for seasonality of trading of a contract.

(17)

To ensure that the position limits established by competent authorities are based on a comprehensive representation of the overall open positions held in a commodity derivative, the open interest calculated by the competent authority should include both the outstanding positions on the trading venue where the commodity derivative is traded and the outstanding positions in economically equivalent OTC contracts reported to the competent authority.

(18)

The standard baseline of 25 % of deliverable supply and of open interest has been set with reference to the experience of other markets and other jurisdictions. The baseline should be adjusted by competent authorities to enable it to be reduced to 5 % of deliverable supply and open interest, or 2,5 % in the case of some agricultural commodity derivatives, and to be increased up to 35 % of deliverable supply and open interest should the characteristics of the market require it in order to support the orderly settlement and functioning of the contract and its underlying market. Since any adjustment to the baseline figure applies only where, and for so long as, objective characteristics of the market require it, temporary adjustments to the baseline should be therefore possible. Competent authorities should ensure that an adjustment downwards of the baseline is effected whenever it is necessary to prevent dominant positions and to support orderly pricing in the commodity derivative and in the underlying commodity. For derivatives without a tangible underlying the deliverable supply cannot be used to establish a position limit. Therefore, competent authorities should be able to enhance or adjust the methodologies to determine position limits for these commodity derivatives based on different parameters like the use of open interest also for the spot month.

(19)

There may be circumstances where a commodity derivative newly admitted to trading on a trading venue was formerly traded on one or more trading venues in the Union or in third countries. In order to allow for the smooth transfer of the commodity derivative the open interest in the commodity derivative formerly traded on the other trading venue(s) should be taken into account by the competent authority when establishing the initial position limits for the newly admitted to trading commodity derivative. Other circumstances may arise, for example, where two commodity derivatives are traded on the same trading venue and due to a slight difference in their characteristics, such as a change in the underlying index or bidding zone, the open interest in the older contracts is expected to quickly move to the more recent contract. When establishing the position limits for the more recent contract, the competent authority should take into account the open interest in the older contract to allow for the smooth development of the more recent contract.

(20)

Certain commodity derivatives, in particular based on power and gas, provide that the underlying be delivered constantly over a specified period of time such as day, month, or year. Moreover, certain contracts with longer delivery periods such as year or quarter may be automatically substituted by related contracts of shorter delivery periods such as quarter or month (so-called cascading contracts). In those cases, a spot month position limit for the contract to be substituted prior to delivery would be inappropriate, as such limit would not cover the expiry and physical delivery or cash settlement of the contract. To the extent that delivery periods of contracts for the same underlying overlap, a single position limit should apply to all the related contracts in order to properly take into account the positions across those contracts which may potentially be delivered. To facilitate that, related contracts should be measured in units of the underlying and aggregated and netted accordingly.

(21)

For certain agricultural commodity derivatives, which have a material impact on consumer food prices, the methodology should enable a competent authority to set a baseline and position limit beneath the minimum of the general range, where it finds evidence of speculative activity impacting significantly on prices.

(22)

The competent authority should assess whether the factors listed under Article 57(3) of Directive 2014/65/EU necessitate adjustment of the baseline in order to set the final level of the position limit. The assessment should take into account those factors as relevant for the particular commodity derivative in question. The methodologies should provide a direction of how to set the limit without taking away the ultimate decision on an appropriate position limit for a commodity derivative from the competent authority in order to prevent market abuse. The factors should give important indications to the competent authorities and to the European Securities and Markets Authority, to facilitate forming their opinions and ensuring an adequate alignment of position limits across the Union.

(23)

Position limits should not create barriers to the development of new agricultural commodity derivatives and should not prevent less liquid sections of the agricultural commodity derivative markets from working adequately. The methodology should take into account the time required to develop and attract liquidity to both new and existing commodity derivatives and, in particular, for agricultural commodity derivatives that may support risk management in bespoke or immature markets or seek to develop new hedging arrangements in new commodities. Equally, there are agricultural commodity derivative contracts which may never attract sufficient participants or liquidity to enable the effective application of position limits without the risk of participants regularly and inadvertently breaching the limit and consequently disrupting the pricing and settlement of those commodity derivatives. In order to address those risks to the efficient functioning of markets, the position limit for the spot month and for other months should be set at a fixed level of 10 000 lots until the open interest in the agricultural commodity derivative exceeds a threshold of 20 000 lots.

(24)

The number, composition and role of market participants in a commodity derivative can influence the nature and the size of positions that certain market participants hold in the market. For some commodity derivatives, certain market participants might hold a large position which reflects their role in the buying and selling of, and the delivery of, the commodity when they are on the opposite side of the market to the majority of other market participants providing liquidity or risk management services for the underlying commodity market.

(25)

The supply, use, access to, and availability of the underlying commodity are characteristics of the underlying commodity market. Through the assessment of more granular components of those characteristics, such as perishability of the commodity and method of transportation, the competent authority should be able to determine the flexibility of the market and adjust position limits appropriately.

(26)

There may be a large discrepancy between open interest and deliverable supply for some commodity derivatives. That may occur where there is relatively little derivative trading compared with the deliverable supply, in which case open interest will be smaller in comparison with deliverable supply, or, for example, where a particular commodity derivative is widely used to hedge many different risk exposures and deliverable supply is therefore smaller in comparison with open interest. Such significant discrepancies between open interest and deliverable supply justify adjustments from the baseline applicable to the other months’ limit upwards or downwards, in order to avoid a disorderly market when the spot month approaches. More specifically, when open interest is significantly higher than deliverable supply, the other months’ limit should be adjusted downwards to avoid a cliff-edge effect with the spot month limit that is based on deliverable supply. It would not be appropriate to adjust the spot month limit upward in such circumstances considering the risk of market cornering. When deliverable supply is significantly higher than open interest, the other months’ limit should be adjusted upwards to avoid the risk of unduly constraining trading. As deliverable supply is significantly higher than open interest, the spot month limit based on deliverable supply that results from the baseline is expected to exceed the open positions held by market participants in the spot month. To ensure that the spot month limit does prevent market participant to build a dominant position and that the objectives of preventing market abuse and ensuring orderly pricing, as required by Article 57(1) of Directive 2014/65/EU, are effectively achieved, the spot month limit should, on the contrary, be adjusted downwards when based on deliverable supply.

(27)

With the same objective of limiting disorderly markets as the spot month approaches because of large discrepancies between calculations of deliverable supply and open interest, deliverable supply should be defined to include any substitute grades or types of a commodity that can be delivered in settlement of a commodity derivative contract under the terms of that contract.

(28)

Article 57(1), (3) and (12) of Directive 2014/65/EU empowers the Commission to adopt the methodology for the calculation and application of position limits in order to establish a harmonised position limits regime across commodity derivatives traded on trading venues and EEOTC contracts. Article 57(1) requires a methodology for calculation that competent authorities are to apply in establishing position limits for commodity derivatives. Article 57(1) also requires the determination of a procedure for applying for the liquidity provision exemption and for the risk reducing exemption for financial entities, that are part of a predominantly commercial group. Article 57(3) requires the specification of how competent authorities should take into account factors when establishing the spot month position limits and other months’ position limits for physically settled and cash settled commodity derivatives. Article 57(12) requires the determination of how the position limits methodology should be applied, for example, in the aggregation of positions within a group, when a position may be qualified as reducing risk or when a firm may use a hedging exemption. The content of the rules is substantively linked, since they are closely related to the methodology for establishing position limits. In the interests of simplicity and transparency, as well as to facilitate the application of the rules and avoid duplication, they should be laid down in a single act rather than in a number of cross-referenced separate acts.

(29)

This Regulation is based on the draft regulatory technical standards submitted to the Commission by the European Securities and Markets Authority.

(30)

The European Securities and Markets Authority has conducted open public consultations on the draft regulatory technical standards on which this Regulation is based, analysed the potential related costs and benefits and requested the advice of the Securities and Markets Stakeholder Group established in accordance with Article 37 of Regulation (EU) No 1095/2010 of the European Parliament and of the Council (3).

(31)

Commission Delegated Regulation (EU) 2017/591 (4) supplements Directive 2014/65/EU with regard to regulatory technical standards for the application of position limits to commodity derivatives. This Regulation replaces that Delegated Regulation, taking into account the amendments of Directive 2014/65/EU brought by Directive (EU) 2021/338, which set out new provisions regarding hedging exemptions for liquidity provisioning and for financial entities that are part of a predominantly non-financial group, empowering the Commission to adopt a delegated act specifying the criteria for liquidity provision exemption and for the risk-reducing exemption for financial entities. Furthermore, the notion of ‘same commodity contract’ was deleted and securities derivatives no longer in scope. Finally, the calculation of open interest was clarified and the methodology for new and less liquid agricultural commodity derivative contracts was simplified. Therefore, Delegated Regulation (EU) 2017/591 should be repealed and replaced by this Regulation,