FCA publishes position limits for multiple commodities derivatives

The new MiFID II regime for commodities trading will introduce as of the 1st of January 2018 position limits for certain commodities contracts. A position limit is the maximum size of a position a person/group can hold in any commodity derivative traded on a European Economic Area (EEA) trading venue, in same commodity contracts on other trading venues and in economically equivalent over the counter (EEOTC) contracts. The position limits apply also to non-EU domiciled entities, such as Swiss based commodities traders. The position limit regime introduces two buckets: The spot month contract being the commodity contract with the closest maturity and the other months’ contracts combining all the remaining commodity contracts. The position limits apply generally to the aggregated position of a parent company and their subsidiaries. The position limits are being set by the competent national authorities upon prior consultation of ESMA. The FCA has published on the 24th of October the position limits for multiple commodities contracts traded on UK based trading venues. These are:

There is not much time left to prepare for the new MiFID II regime for commodities trading.

Please contact for further questions:

Martin Liebi

Silvan Thoma


The new Precious Metals Code

The Global Precious Metals Code (Metals Code) has been published in and is effective as of May 2017. It sets out the standards and best practices expected from participants in the global OTC-wholesale market for precious metals, meaning gold, silver, platinum and palladium (Precious Metals). It has been prepared and is backed by the London Bullion Market Association (LBMA).

Although the Metals Code is not binding law, all organisations actively involved in the global OTC-wholesale trading market for Precious Metals are expected to act according to the broad principles of the Metals Code and have procedures designed to uphold its general terms. The Global Code will need to be applied proportionally, because of the varying degrees of sophistication and the diverse nature of the participants. Non-compliance is likely to have negative consequences on business activities, because certain market participants might no longer be willing to enter into transactions with non-compliant market participants. It is also likely that courts will rely on the Metals Code when interpreting contracts entered into in the Precious Metals wholesale market.

The Metals Code applies to the following market participants (Market Participants):

  • LBMA members
  • Physical market participants (such as refiners and miners)
  • Financial institutions such as banks, asset/fund managers, high frequency trading firms, brokers, investment advisers
  • Trading houses
  • Central banks and sovereign wealth funds
  • Logistics firms and fabricators
  • Jewellery companies
  • Benchmark execution service providers and benchmark process platform operators
  • Affirmation and settlement platforms

The Metals Code does not apply to price-streaming platform providers, private banking clients and the general retail public.

The Metals Code is organised around the following four leading principles:

  • Ethics: Market Participants are expected to behave in an ethical and professional manner to promote the fairness and integrity of the Precious Metals market. This means in particular that Market Participants should:
    • Strive for the highest ethical and professional standards.
    • Identify and address conflicts of interests.
  • Governance, Compliance and Risk Management: Market Participants are expected to have a sound and effective governance framework that provides clear accountability and a compliance and risk framework that provides for robust control and a compliance environment that effectively identifies and manages the risks associated with their engagement with the market. This means that Market Participants have to:
    • Put an adequate business strategy and financial soundness in place as well as effective structures and mechanisms to provide for appropriate oversight, supervision and controls.
    • Have appropriate policies and procedures designed to handle and respond to potentially improper practices and behaviours effectively.
    • Have a framework for compliance and risk management.
    • Familiarize themselves with and abide by all applicable laws, regulatory obligations and relevant industry standards, and should have an appropriate compliance framework in place.
    • Maintain an appropriate risk management framework with systems and controls to identify and manage the Precious Metals market risks they face.
    • Have processes in place to independently review the effectiveness of and adherence to the risk management and compliance framework.
  • Information Sharing: Market Participants are expected to be clear and accurate in their communications. They are also expected to protect confidential information and to promote effective communication that supports a robust, fair, open, liquid and appropriately transparent Precious Metals market. Market Participants have thus to:
    • Clearly and effectively identify and appropriately limit access to confidential information.
    • Not disclose confidential information to external parties, except under specific circumstances.
    • Communicate in a manner that is clear, accurate, professional and not misleading.
    • Communicate market colour appropriately and without compromising confidential information.
    • Have clear guidance on approved modes and channels of communication.
  • Business Conduct: Market Participants are expected to effectively manage each stage of the transaction life cycle, i.e. pre-trade, execution, and post-trade, in order to promote a robust, fair, open and appropriately transparent Precious Metals market. Market Participants must, however:
    • Obtain sufficient information to know each client.
    • Ensure the adoption of proportionate and responsible business practices, appropriate to their business.
    • Be clear about the capacities in which they act.
    • Handle orders fairly and with transparency in line with the capacities in which they act.
    • Handle orders fairly, with transparency and in a manner consistent with the specific considerations relevant to the different order types.
    • Only pre-hedge client orders when acting as a principal and should do so fairly and with transparency.
    • Apply only a mark-up to client transactions if fair and reasonable.
    • Not request transactions, create orders or provide prices with the intent of disrupting market functioning or hinder the price discovery process.
    • Employ a last look which is transparent regarding its use and provide appropriate disclosure to clients.
    • When providing algorithmic trading or aggregation services to clients, provide adequate disclosure regarding their operation.
    • Not engage in practices that disrupt the integrity of benchmarks.
    • Confirm trades as soon as practicable, and in a secure and efficient manner.
    • Identify and resolve confirmation and settlement discrepancies as soon as practicable.
    • Perform timely account reconciliation processes.
    • Identify settlement discrepancies and submit compensation claims in a timely manner.
    • Measure and monitor their settlement risk and seek to mitigate that risk when possible.
    • Utilize standard settlement instructions.
    • Request direct payments.

Please contact our expert on this topic for a free consultation:

Martin Liebi
Tel: +41 58 792 2886

EU Benchmarks Regulation and Market Impact as of 1 January 2018

The new EU Benchmarks Regulation (BMR) was published in June 2016 and most rules will apply as of 1 January 2018. The BMR introduces new compliance requirements for benchmark administrators, contributors, and users, with regard to interest rate, foreign exchange, security, commodity, and other benchmarks used in financial transactions. The BMR was enacted in response to public pressure resulting from the aftermath of the LIBOR scandals and follows the recommendations of the IOSCO and ESMA EBA Principles.

Executive summary

Functioning benchmarks are key to ensuring the smooth functioning of financial markets. However, they lead to conflicts of interest and other integrity issues on the part of contributors of input data and administrators. The scope of the BMR covers all published benchmarks which are used in the European Union with regard to associating financial instruments, financial contracts and/or fund managers. The BMR defines obligations and conduct requirements for both administrators and contributors to ensure market integrity. The Regulation has an extraterritorial dimension in cases where third country administrators request market access. Market access can be granted on the basis of equivalence, recognition, and endorsement by an EU supervised entity. All the legal requirements of the BMR will phase-in on 1 January 2018 and take effect on 1 January 2020 – except for the EURIBOR, which is subject to the BMR today.

What is a benchmark?

A benchmark is defined as “a reference index, to which the amount payable under a financial instrument or a financial contract, or the value of a financial instrument, is determined, or an index that is used to measure the performance of an investment fund with the purpose of tracking the return of such index or of defining the asset allocation of a portfolio or of computing the performance fees” (Article 3(1)(3) BMR).  Such an index is a figure, fulfilling one of the following criteria:

  1. Published or made publicly available;
  2. Determined at a regular interval by either:
    • partially or entirely applying a formula or any other method of calculation, or another means to assess it by; and
    • on the basis of the value of one or more underlying assets or prices, including estimates of prices, actual or estimated interest rates, quotes and committed quotes, or other values or surveys.

Derivatives as defined in Section C, Annex I, Directive 2014/65/EU do not qualify as an index where there is only a single reference value. Such is the case where a single price or value is used as a reference for a financial instrument, e.g. the reference price for a future or option, without any calculation, input data or discretion. Equally, reference or settlement prices produced by central counterparties are not considered to be benchmarks.

Who will be affected?

While the IOSCO Principles are the basis of the BMR, the Principles included the concept of “comply or explain”; this exemption with respect to proportionality and the nature of the benchmark is only included to a limited extent in the BMR. In order to comply with the new Regulation, administrators of a benchmark will either have to apply for registration or for authorisation, depending on the type of benchmark they provide. The provision of critical and significant benchmarks, as well as commodity and interest rate benchmarks, requires an application, while in all other cases registration with the designated authority will suffice.

  • Administrators: An administrator can be either a natural person or a legal entity with control over the provision of a benchmark, in particular by administering the arrangements determining the benchmark, by collecting and analysing the input data, as well as by determining the rate of the benchmark, and by publishing it. While specific functions of the administrator can be outsourced to a third party, the sole act of publishing or referring to an existing benchmark is insufficient for an individual or an entity to be considered as the benchmark administrator. Control of provision of the benchmark is a necessary regulatory requirement for the provider to become subject to the BMR.
  • (Supervised) Contributors: The two types of contributors are differentiated in that any natural person or legal entity can contribute input data as a “contributor”, but only a “supervised contributor” can contribute input data to an administrator located in the EU as a supervised entity and the contributor has to comply with more stringent requirements, in accordance with Article 16 BMR. The quality and reliability of any benchmark is based on the integrity and accuracy of the input data, which is provided by the contributor. To prevent manipulation at data contribution level, contributors are subject to stringent rules under the BMR. The administrator has to ensure contributors adhere to the code of conduct and that input data is of the required integrity and can be validated, even if the contributor is located in a third country. Any omission by a contributor providing input data to a critical benchmark can undermine the credibility and representativeness of such a benchmark, with severe impact on the underlying market and economic reality. As such, national authorities are given the power to demand mandatory contributions from supervised contributors to critical benchmarks.
  • User of a benchmark: A supervised entity may use a benchmark or a combination of benchmarks in the EU if the benchmark is provided by an administrator located in the Union and included in the register or is a benchmark which is included in the register. Where the object of a prospectus is transferable securities or other investment products that reference a benchmark, the issuer, offeror, or person asking for admission to trade on a regulated market shall ensure that the prospectus also includes clear and prominent information stating whether the benchmark is provided by an administrator included in the register.

Which benchmarks will be affected?

The BMR subdivides the benchmarks into various subcategories, based on the type of market they reproduce. The Regulation contains specific additional requirements for both commodity and interest rate benchmarks. The following provides an overview of the various subcategories of benchmarks:

Type of Benchmark Description
Regulated Data Benchmark Data input for the benchmark is provided directly from regulated venues. Certain provisions of the BMR do not apply to regulated data benchmarks, and they cannot be classified as critical.
Interest Rate Benchmark An IR Benchmark is determined on the basis of the rate at which banks may lend or borrow from other banks or agents in the money markets. They are subject to the requirements set out in Annex I BMR. Provisions of the BMR relating to significant and non-significant benchmarks do not apply.
Commodities Benchmark The basis for the benchmark is a commodity as defined by MiFID II. Commodity Benchmarks are subject to the requirements of Annex II BMR, unless the benchmark also qualifies a regulated data benchmark, or is based on submissions from mainly supervised entities. Provisions of the BMR relating to significant and non-significant benchmarks do not apply.
Critical Benchmark To qualify as a critical benchmark, the value of the underlying contracts needs to be at least EUR 500 bn, or it has to have been recognised as critical in a member state. Critical benchmarks are subject to more stringent and specific requirements than other types of benchmarks.

A framework has been developed by ESMA to determine Interbank Offered Rates benchmarks (IBORs) and the Euro Over Night Index Average (EONIA) as critical benchmarks. To date, only EURIBOR has been qualified as such by the EC.

Significant Benchmark Requires the value of underlying contracts to be at least EUR 50 bn, or there to be none or very few market-led substitutes, leading to significant impact on financial stability, if the benchmark ceases to be produced.
Non-Significant Benchmark All other benchmarks where the benchmark is neither a commodity nor an interest rate benchmark and the value of underlying contracts of the benchmark is less than EUR 50 bn.

How will a Switzerland-based benchmark provider be affected?

Non-EU administrators are subject to BMR rules where they intend to obtain EU market access; non-compliance will likely lead to these non-EU benchmarks being denied EU market access. There are three ways for third country administrators to become compliant: equivalence, recognition, and endorsement. Firstly, an equivalence decision with regard to foreign jurisdictions can be made by the European Commission if the requirements of Article 30(1) BMR are met and this results in benchmarks from relevant third country jurisdictions being eligible for use by supervised entities in the EU. Secondly, where an administrator located in a third country provides proof of compliance with the IOSCO Principles and said compliance is equivalent to the BMR, the administrator should be recognised as an administrator within the EU. An administrator located in a third country, such as Switzerland, must have a legal representative in the reference member state, if the entity intends to obtain recognition. The legal representative must oversee the provision of benchmarks as performed by the administrator and is accountable to the competent EU member state authority. Finally, market access as a third country administrator can be gained through an endorsement by an administrator of a supervised entity located in the EU. Endorsement will permit market access where the third country administrator adheres to the IOSCO Principles and such adherence results in equivalent compliance with the BMR.

Obligations for administrators and contributors

The BMR directly imposes a variety of obligations on persons involved in the provision, contribution, and use of benchmarks throughout the EU to prevent conflicts of interest and manipulation of benchmarks as well as to ensure maximum harmonisation in cross-border applications. If tasks are outsourced to an external service provider the provider also has to adhere to the BMR. In particular, the administrator is required to provide a code of conduct specifying the requirements and responsibilities regarding input data and to supervise adherence to the code, even if the contributor is located in a third country.

The obligations include the following provisions for administrators:

  • Robust governance arrangements, including a clearly organisational structure with well-defined, transparent and consistent roles and responsibilities for all involved, preventing conflicts of interest (Article 4 BMR).
  • Develop and maintain robust procedures to ensure oversight of all aspects of the provision of a benchmark and communication with the relevant competent authorities (Article 5 BMR).
  • Ongoing control of benchmarks to ensure they are provided, published and/or made available in accordance with the Regulation, and maintained through an accountability framework, record-keeping, auditing, and review and complaints handling process (Article 6 to Article 9 BMR). These frameworks must include any third party to which a task has been outsourced (Article 10 BMR).
  • The administrator is also responsible for overseeing the quality of input data and reporting any infringements without delay to the competent authority (Article 11 to Article 15 BMR).

The obligations include the following provisions for contributors:

  • The contributor must adhere to the code of conduct provided by the administrator and the specific requirements prescribed with respect to the contribution of input data (Article 15 BMR).
  • Supervised contributors must also ensure input data is not affected by any existing or potential conflicts of interest and that all discretion is exercised in an independent and honest way (Article 16 BMR).

Typical products in scope

Entry into force

The BMR will enter into force on 1 January 2018. There is a transition period for certain new and existing benchmarks until 1 January 2020. In accordance with the transitional provisions of Article 51(3) BMR, ESMA considers existing benchmarks as including benchmarks “existing on or before 1 January 2018”, including those provided for the first time on or before 1 January 2018. Thus, an EU index provider may provide a benchmark created between 30 June 2016 and 1 January 2018, including updates and modifications, to supervised entities in the EU until 1 January 2020, even if authorisation or registration has not yet been granted, unless authorisation or registration has been refused.

The BMR has applied to the EURIBOR since 12 August 2016, following qualification as a critical benchmark.


The BMR is a highly complex regulation with implications for all market participants. It requires considerable time to plan, structure, and implement the requirements set forth in accordance with the IOSCO Principles and EU regulations. The requirements have a direct impact on the usage of benchmarks, provision of input data, and cross-border market access.

Please contact our experts on this topic for a free consultation:

Martin Liebi
Tel: +41 58 792 2886

Alexandra Balmer
Legal FS Regulatory & Compliance Services
Tel: +41 58 792 1424

Final standards of MiFID II exception for commodity traders

Does your firm trade in commodities derivatives? If so, the publication of the final standards regarding the exemption of ancillary activities and the position limits regime under MiFID II is of importance to you.

MiFID II/MiFIR will generally require that any company trading in commodities derivatives on its own account or on behalf of third parties will need a license as an investment firm as of 3 January 2018. This rule will also affect commodities trading firms domiciled in Switzerland to the extent that they trade in commodities derivatives listed on an exchange domiciled in the EU or conduct OTC trades with a counterparty domiciled in the EU.

There are, however, certain exemptions available to this general license requirement. The most prominent of these exemptions is the ancillary activity exemption. The final technical standards for the criteria to establish whether an activity is considered to be ancillary to the main business under MiFID II/MiFIR were published by the European Commission yesterday. Ancillary activity exemption is granted if the following three thresholds are not exceeded:

        • Overall market threshold: The group’s notional value in speculative positions in the asset classes metals, oil and oil products, coal, gas, power, agricultural products and other products, when compared to the overall market trading activity in each of these asset classes, does not exceed certain thresholds (4% for metals, 3% for oil and oil products, 10% for coal, 3% for gas, 6% for power, 4% for agricultural products, 15% for other products, and 20% for emission allowances).
        • Main business threshold: This test is now comprised of two subtests. The first is still the ratio between the company’s speculative and overall trading activity. A value below 10% means that the test has been passed, a value between 10% and 50% decreases the thresholds mentioned in the overall market threshold test by 50%, and a value above 50% decreases these thresholds by 80%.
        • New – capital employed test: the third test is passed when the estimated capital employed for carrying out the activities (15% of the net position in addition to 3% of the gross position, multiplied by the net price of the derivative) is not more than 10% of the capital employed (total assets of the company minus short-term debt) at company level for carrying out the main business activities.

The European Commission has also published the final technical standards on the position limits on the size of a net position which a person can hold in exchange-traded commodity derivatives and economically equivalent OTC contracts. In other words, there will be position limits for each commodity derivative in each commodity class.

What does this mean for firms trading in commodities derivatives?
If you have not done so already, we recommend starting your MiFID II/MiFIR project now. Compliance with MiFID II/MiFIR will result in (material) changes to your organisation. Synergies can be gained by combining the MiFID II/MiFIR project with projects related to other regulations that are already in force or will soon come into force (such as MAR, FMIA and EU benchmark regulations).

We have had the great fortune to assist many large and smaller commodities trading groups in becoming MiFID II/MiFIR compliant, and we would be delighted to share this wealth of experience with you.

For your free consultation, please contact:

Dr Günther Dobrauz MBA
+41 79 894 58 73

Dr Martin Liebi LL.M.
Senior Manager
+41 76 341 65 43