There’s a real sense of exhaustion… REMIT is turning out to be like a second kid after EMIR reporting. The first one, you go around all paranoid, making your house all safe. The second? Well, the kid’s just got to learn the hard way not to stick their finger in the wall socket. That’s what REMIT feels like right now. But hey, it’s not our first Rodeo. We all know we are in for months of sleeplessness and dirty diapers…and there is just no sense complaining about it.
And, just as we see light at the end of the REMIT tunnel, our spouse just dropped the old, “Honey, there’s something we need to talk about tonight.” That something happens to be round 3 or MiFID II.
MiFID II/MiFIR | 14 Months of Gestation
For commodity oriented firms, there are some similarities to other regimes: There’s a “de-minimis” type threshold that if crossed gets you “Trading Frequent Flyer Status.” And by Frequent Flyer Status, I mean higher capital and reporting requirements that will be as comfortable as Row 34E on United Airlines. There’s a real risk non-speculative firms could get caught up in this.
But there is something firms can do now. And it’s really important.
Absolutely, Positively and Correctly categorize every trade. The current Regulatory Technical Standard (RTS) does not count hedges toward Frequent Flyer Status. If there was ever a time for trading operations to start or bolster an existing program to clearly identify the nature of every trade (such as spec or hedge), that time would be now. I’ll go as far to say that every hedge should be tied back to the underlying transaction(s) it (they) is (are) hedging. The RTS indicates that data for Frequent Flyer status is based on data from the Mid 2015 to Mid 2016 period. Let’s face it. If a trade is not clearly established as a hedge there is a risk it will be categorized as speculative. Hence the risk of being caught up as a Frequent Flyer are much, much higher.
Polish Up Your Limits Process
You might be calculating an exchange limit today. But, limits surface differently under MiFID II. The RTS really only contemplates a “Spot Period” (spot period defined by product). What’s interesting is that there is another limit that talks about “Other Months.” From the RTS it sounds more like, what we in the commodity world, call “Single Month” limits rather than “All Months” limits, but it’s not entirely clear. Like the proposed Dodd-Frank limits, OTC equivalents will need to be rolled into the limits calculation. So if one is trading a position on exchange and OTC those will both be counted in the limits calculation. Surprise, this means that firms will have to tie in an additional integration to their ETRM to also capture the OTC positions.The RTS indicates that the limits are to be calculated based on a percentage of deliverable supply or open interest (depending on the period or product). Here’s a quick video of limits using K3. If you are looking to validate your existing limits process, don’t hesitate to give us a call. (FYI the first minute of the video explains how limits work in general if you are not familiar.)