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Global rules on foreign direct investment (FDI)
Cross-border acquisitions and investments increasingly trigger foreign direct investment (FDI) screening requirements.
United Kingdom | Publication | maio 2021
In July 2020, the European Commission (“the Commission”) published targeted amendments to the Markets in Financial Instruments Directive (MiFID II), proposing – among other ideas – to restrict application of the commodity derivatives position limits regime to non-agricultural critical or significant contracts, and changing the ancillary activity exemption test for non-financial commodity derivative market participants. The so-called “MiFID Quick Fix” was recently approved by the European co-legislators and was published in the EU Official Journal on 26 February 2021.1 In this article, therefore, we seek to summarise the relevant amendments and the rationale behind them, as well as provide views about the timeframe for the application of the revised regime. Finally, we briefly discuss the upcoming review of UK MiFID, including the UK commodity derivatives regime, and we address Brexit-related implications for persons seeking to rely on the ancillary activity exemption.
This article is relevant to financial and non-financial participants in European commodity derivative markets, such as investment firms, banks, asset managers, commodity producers and commodity traders, as well as operators of European trading venues listing commodity derivatives. Financial and non-financial participants in European commodity derivative markets include both companies located or established in the European Union (EU), in the United Kingdom (UK) or in any other non-European Economic Area (EEA) jurisdiction.
Responding to international developments and the 2011 G20 commitments in respect of regulating commodity derivative markets, the Commission proposed in 2013 to introduce in European law a position limits regime. This turned out to be the most politicised piece of the MiFID II legislative review, with public discussion and activists’ engagement focussed mainly on alleged speculative activities of financial institutions in agricultural commodity derivative markets and their adverse effects on pricing of food products, but also pointing to “excessive speculation” in other asset classes, notably metals. The outcome was an extremely broad position limits regime, applicable to all commodity derivative contracts, in all asset classes, traded on European trading venues and economically equivalent OTC derivatives. In accordance with the public register available at the website of the European Securities and Markets Authority (ESMA), the bespoke position limits regime currently applies to nearly 50 liquid commodity derivative contracts listed on trading venues in the EU and Norway.2 Further hundreds are subject to the de minimis limit of 2,500 lots for contracts with a combined open interest in spot and other months’ interests not exceeding 10,000 lots over three months. In the UK, the Financial Conduct Authority lists 78 commodity derivative contracts subject to bespoke position limits and over 400 subject to the de minimis limit.3
The industry has long criticised the broad scope of the European position limits regime. It has often contrasted it with the much more targeted regime that exists at the federal level in the United States. Not surprising, therefore, that when in November 2019 ESMA launched its call for evidence on position limits and position management controls in commodity derivatives, it received over 40 responses. In a rare example of cross-industry alignment of views, all respondents supported the ESMA proposal to reduce the scope of positon limits to a more limited set of significant or critical contracts.4
With the commodity derivatives regime being highlighted by the Commission as one of the priority areas for the MiFID II review, there was therefore broad expectation that amendments would be proposed in the course of 2020. It happened sooner than anticipated as the COVID-19 outbreak forced re-prioritisation of the Commission’s legislative works. On 24 July 2020 the Commission proposed a set of targeted amendments to MiFID II (the “MiFID Quick Fix”) as part of a wider Capital Markets Recovery Package and which included – alongside a set of amendments to various investor protection-related provisions – substantive changes to the functioning of the commodity derivatives regime.
These amendments were approved by the European co-legislators – the European Parliament and the Council – in December 2020, following often contentious debate concerning in particular the scope of changes to the position limits regime and to the ancillary activity exemption test.5 Agreement has nonetheless has been reached and the main changes to the MiFID II commodity derivatives regime include the following:
In addition, the Commission is mandated to review – by 31 December 2021 – the impact of the ancillary activity exemption in relation to emission allowances and derivatives thereof, and to propose, if appropriate, a legislative proposal to amend that part of the exemption.
The amendments will therefore result in substantive – and arguably welcome – changes to the functioning of the European commodity derivatives regime. That said, adaptation to this new regime will require action by commodity derivatives markets participants - for example, in adjusting automated position limits monitoring systems and arrangements.
The MiFID Quick Fix entered into force on 27 February 2021, i.e. one day following its publication in the EU Official Journal. Member States have until 28 November 2021 to transpose its provisions to their national legal frameworks, in time for the entry into application of the new regime on 28 February 2022. Prior to the MiFID Quick Fix becoming applicable, ESMA has until 28 November 2021 to develop draft regulatory technical standards and submit them to the Commission for final review and adoption. With the intended application of the revised regime starting just three months later, it is fair to say that the timeline for the development and adoption of the required Level 2 measures is rather ambitious.
In anticipation of the upcoming positon limits regime change, on 19 March 2021 ESMA issued a public statement on its supervisory approach to position limits.6 Noting that the new regime will become applicable in early 2022 and reminding market participants that it cannot dissaply EU law, ESMA nonetheless called on national competent authorities “to not prioritise their supervisory actions towards entities holding positions in commodity derivatives, other than agricultural commodity derivatives, with a net open interest below 300,000 lots” and also “to not prioritise their supervisory actions towards positions that are objectively measurable as resulting from transactions entered into to fulfil obligations to provide liquidity on a trading venue”.
The MiFID Quick Fix review is the first piece of European securities market legislation that was amended – but did not become applicable – prior to the end of the Brexit transitional period on 31 December 2020. As such, it did not form part of the retained EU law in the UK. That said, the UK is expected to move swiftly with the adoption of changes to its legislative and regulatory framework for securities markets, including commodity derivatives. On 19 April 2021, the Chancellor announced a plan for UK capital markets reform, which will be undertaken by HM Treasury and the FCA in the course of 2021.7 This reform will include a comprehensive review of several priority areas, including rules governing market structure, pre- and post-trade transparency for shares, bonds and derivatives, the cost and distribution of market data and commodity derivative markets. On 28 April 2021, the FCA published its first consultation paper as part of the broader review. This is focused on UK MiFID conduct and organisational requirements. The FCA’s consultation is expected to be followed by a broader consultation document to be published by Treasury in June 2021, and which will address – among other issues – position limits for commodity derivatives.
Another Brexit-related issue that is important to mention is the application of the ancillary activity test by non-financial entities that – being located in either the UK or one of the EU Member States – trade commodity derivatives on trading venues located on the opposite side of the English channel or enter into bilateral OTC derivative contracts with counterparties on the other side. The following are two key points to note:
Our team has extensive experience in advising all types of European, UK and third-country participants in commodity derivative markets. We help clients to prepare for legislative change by advising on legal and regulatory requirements, as well as on practical aspects of their application from the perspective of operational systems and controls adaptation. We also assist clients with internal investigations and responses to potential enforcement action by the regulatory authorities. Unlike most other law firms, Norton Rose Fulbright offers a blend of advisory and contentious legal, compliance and government relations skills in one cohesive team.
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