How are position limits determined?

Pursuant to Article 57 (1) of Directive 2014/65/EU (MiFID II), position limits are to be established and applied with regard to commodity derivatives that are traded on trading venues. In addition, positions in OTC contracts that are economically equivalent to commodity derivatives traded on trading venues are to be taken into account when calculating a position limit.

Individual position limits are calculated and set for commodity derivatives that do not qualify as new or illiquid contracts within the meaning of Article 15 of Commission Delegated Regulation (EU) 2017/591. In accordance with Article 57 (4) of Directive 2014/65/EU (MiFID II) in conjunction with Articles 9 ff. of Commission Delegated Regulation (EU) 2017/591, the specific characteristics of the market, market participants and the relevant derivative are to be taken into account. Position limits are set on the basis of a baseline figure pursuant to Articles 9, 11 and 13 of Commission Delegated Regulation (EU) 2017/591. This generally amounts to 25% of the deliverable supply or open interest. Depending on the assessment of the specific characteristics of the market, market participants and the relevant derivative and the assessment of the factors specified in Articles 16 to 20 of Commission Delegated Regulation (EU) 2017/591, the competent authority may decide, in accordance with Article 14 of Commission Delegated Regulation (EU) 2017/591, not to use this baseline figure and set a position limit between 2.5% and 35% of the deliverable supply or open interest.

However, the competent authorities are to set a fixed position limit of 2,500 lots for new or illiquid commodity derivatives within the meaning of Article 15 of Commission Delegated Regulation (EU) 2017/591 or 2.5 million securities for securitised commodity derivatives.

How are the different maturities of a commodity derivative taken into account?

Under Articles 9 ff. of Commission Delegated Regulation (EU) 2017/591, the position limit regime concerning the different maturity structures of a commodity derivative makes a distinction between two different maturity categories. These are defined under Article 2 (2) and (3) of Commission Delegated Regulation (EU) 2017/591: “Spot month contract” means the commodity derivative contract in relation to a particular underlying commodity whose maturity is the next to expire in accordance with the rules set by the trading venue. “Other months' contract” means any commodity derivative contract that is not a spot month contract.

Given the distinction between "spot month contracts" and "other months' contracts" in commodity derivatives, two limits have to be determined for a single commodity derivative. These are calculated based on the current trading volume. Depending on the type of contract, the trading volume is determined on the basis of the deliverable supply in the case of spot month contracts and on the basis of the open interest on a trading venue in the case of other months' contracts.

Depending on the commodity derivative, trading predominantly takes place either in the contract whose maturity is the next to expire or in any contract that is not a spot month contract. As a result, there may be a significant difference between the spot month limit and the other months' limit for a commodity derivative.

Who determines the position limits?

Position limits are determined by the competent authority of the Member State in which the trading venue the commodity derivative is predominately traded on is established. Under sections 54 ff. of the new version of the German Securities Trading Act (Wertpapierhandelsgesetz – WpHG), BaFin is the competent authority for Germany.

Where the same commodity derivative within the meaning of Article 5 (1) of Commission Delegated Regulation (EU) 2017/591 is traded in significant volumes within the meaning of Article 5 (2) of Commission Delegated Regulation (EU) 2017/591 on trading venues in more than one jurisdiction, the competent authority of the trading venue where the largest volume of trading takes place (the central competent authority) sets the single position limit to be applied on all trading in that contract pursuant to Article 57 (6) of Directive 2014/65/EU (MiFID II).
If the largest volume of commodity derivatives trading takes place on a trading venue established in Germany, BaFin is the central competent authority for all trading in that contract pursuant to section 55 of the new version of the WpHG.