Commodity traders gain relief on position limits under EU Mifid II

The UK financial regulator handed out more than a thousand exemptions to commodities traders in January after the introduction of wide-ranging markets reforms, underlining a scramble to comply with rules years in the making.

Europe’s new Markets in Financial Instruments Directive (Mifid II) legislation set tougher limits on the size of positions traders could hold in commodities and energy markets to prevent anyone from distorting prices.

The MiFID is specifically the framework of European Union (EU) legislation for: investment intermediaries that provide services to clients around shares, bonds, units in collective investment schemes and derivatives (collectively known as ‘financial instruments’)

The limits are set by national regulators, which gives the UK Financial Conduct Authority some latitude to make exemptions.

Intercontinental Exchange, the US company that owns London’s oil exchange, said the new strictures and reporting requirements created “challenges” for customers and even caused its share of the oil futures business to dip. The regulator has since addressed some of their concerns, said Jeff Sprecher, ICE chief executive.

“In fact, the UK’s FCA has processed over 1,000 hedge exemption applications, many of which were filed at the last minute,” he told analysts on Wednesday.

The reality is this move is primarily about responding to our customers that trade our North American energy contracts

Begun as a gas and power trading platform, ICE has diversified into new businesses but commodities remain important, with energy, agricultural and metals futures and options generating more than half its $2.1bn net revenue from trading and clearing in 2017.

Brokers said customers switched some of their oil futures positions from ICE to its rival, the Chicago-based CME Group, to escape Europe’s position limits.

“The direction of migration has been from ICE to CME,” said Campbell Faulkner, the chief data analyst at OTC Global Holdings, a Houston-based commodities broker. “Everything I’ve heard, it’s the position limits.”

To receive a so-called hedge exemption, companies trading on UK markets were able to apply by email after Mifid II came into force on January 3.

The exemptions could last in perpetuity. The FCA confirmed the number of applications revealed by ICE, but declined to comment further.

ICE in January announced it would remove hundreds of North American oil contracts from its London exchange and relist them in the US, which would put them under a less onerous position limit regime than Mifid.

Ben Jackson, ICE’s president, did not directly address Mifid as he discussed the switch. “The reality is this move is primarily about responding to our customers that trade our North American energy contracts. These customers are primarily based in North America, and they wanted our North America products to be based in North America,” he said.

In its annual report, ICE said divergent position limit regulations in the EU and US “may cause us to move products from one jurisdiction to another as a result of business risks and competitive challenges”.

The comments came as ICE reported record 2017 revenue less transaction-based expenses of $4.6bn, and record net income of $2.5bn. Results were buoyed by a $764m deferred tax benefit from the recent US tax reform law. ICE shares fell 0.4 per cent to $71.84 at midday on Wednesday.

ICE also confirmed it had spent a further €243m on purchasing a further 5.1 per cent stake in Euroclear, a Belgian central securities depository, subject to regulatory approval. The exchange, which also uses Euroclear, bought an initial 4.7 per cent stake for €275m in October.

Sprecher said ICE would work with its management to develop new products and that Hester Serafini, chief operating officer of ICE Clear US, would join the Euroclear board.