A meeting was held at the Baltic Exchange on 2 February to discuss the ESMA proposals under MiFIDII/MiFIR for significant expansion in financial regulation and how this will impact the commodity derivatives market, which includes FFAs.
ESMA (European Securities and Markets Authority) is empowered by MiFID II/MiFIR to propose and implement regulatory standards regarding how the legislation (which was passed last year) takes effect. These rules are now in draft and there is an opportunity to comment on the drafting.
The current draft has the effect that a company whose derivative activity exceeds 5% of total group company capital, or if the trading volume of that company represents more than 0.5% of the volume in a specific category of derivative (where freight is more or less a category on its own), then it will become a financial firm and subject to full regulation. There is therefore a real risk that as currently drafted the rules would have an impact on a large proportion of companies trading freight derivatives.
While there are carve-outs for hedging activity, it will be difficult for firms to ensure that they can use these exclusions.
We strongly encourage members to respond to the Consultation Paper, which can be found at this link www.esma.europa.eu/system/files/2014-1570_cp_mifid_ii.pdf .
Chapter 7 covers Commodity Derivatives and questions 168 (application of thresholds, page 509) and 178 (separate asset classes for commodities, page 520) in particular, need to be responded to.
The deadline, for feedback to ESMA, on this second and final round of consultation is 2 March 2015.
Broadly the meeting felt that we should argue for freight to be included with each commodity transported rather than being held as a category on its own. However, the thrust of any paper should also be that the proposals have an unwarranted and unintended effect on real companies in the physical shipping and commodity business whose derivative activity is entirely ancillary to that.
The Baltic will provide an industry response and produce a draft submission for comment within 10 days. Please direct your comments for inclusion to Jeremy Penn firstname.lastname@example.org. However, it is also vital that as many European firms as possible, especially those focused on the “real economy” as opposed to the “financial economy” respond in their own right.
Other industry bodies, such as FIA/FOA and FCA will also be contacted and encouraged to respond to the consultation.
There will be an open hearing hosted by ESMA in Paris on 19 February. Details can be found at www.esma.europa.eu/news/ESMA-announces-open-hearing-MiFID-IIMiFIR?t=326&o=home. Although the deadline for applications has passed, you may be able to apply and the Baltic will attempt to arrange some additional places.