Talk:Dealing on own account: Difference between revisions

Jump to navigation Jump to search
No edit summary
No edit summary
Line 1: Line 1:
(1). The net outstanding notional exposure referred to in Article 2, paragraph 1, point (a), shall be calculated by averaging the aggregated month-end net outstanding notional values for the previous 12 months resulting from all contracts in commodity derivatives for cash settlement or emission allowances or derivatives thereof for cash settlement entered into in the Union by a person within a group.
We mention this only because there are some odd provisions of MiFID 2 which potentially put SPVs into scope should they look to securitise [[commodity derivative]]s or carbon emission allowances.
The net outstanding notional values referred to in the first subparagraph shall be calculated on the basis of all contracts in commodity derivatives for cash settlement or emission allowances or derivatives thereof for cash settlement that are not traded on a trading venue to which any person located in the Union is a party during the relevant annual accounting period referred to in Article 6(2).
 
The contracts in commodity derivatives or emission allowances derivatives for cash settlement referred to in the first and second subparagraph shall include all derivative contracts relating to commodities or emission allowances which must be settled in cash or may be settled in cash at the option of one of the parties other than by reason of default or other termination event.
So, an odd thing. In MiFID 1, commodity derivatives and carbon emissions products were (largely) excluded from scope. To ensure participants on commodity derivatives markets appropriately regulated and supervised, MiFID 2 narrowed exemptions, especially as regards “[[dealing on own account]]”.
3(2). The aggregation referred to in the first paragraph shall not include positions from contracts resulting from transactions referred to in Article 2(4), fourth subparagraph, points (a), (b) and (c), of Directive 2014/65/EU or from contracts where the person within the group that is a party to any of them is authorised in accordance with Directive 2014/65/EU or Directive 2013/36/EU.
 
3(3). The net outstanding notional values referred to in paragraph 1 shall be determined pursuant to the netting methodology of Article 5(2).
This activity is vaguely defined in MiFID — always has been, as “'trading against proprietary capital resulting in the conclusion of transactions in one or more financial instruments”<ref>Article {{mifid2prov|4(1)(6)}}.</ref> — but given MiFID’s purpose, generally has been understood as being restricted to brokerage and market-making activity; a continual activity in the market either to be able to fulfil third-party customer demand or provide market liquidity, only holding prop inventory. In other words, this is not about participants using their own capital to buy, and go on risk to, financial instruments.<ref>See this in the FCA’s [https://www.handbook.fca.org.uk/handbook/PERG/13/3.pdf Q&A to its perimiter guidance rules] which, indeed, no longer represent European law but are all the same heavily influenced by them, to the point of being presently identical:
3(4). The values resulting from the aggregation referred to in this Article shall be denominated in euro.
 
{{quote|“Dealing on own account involves position-taking which includes proprietary trading and positions arising from market-making. It can also include positions arising from client servicing, for example where a firm acts as a systematic internaliser or executes an order by taking a market or ‘unmatched principal’ position on its books.  
 
Dealing on own account may be relevant to firms with a dealing in investments as principal permission in relation to MiFID financial instruments, but only where they trade financial instruments on a regular basis for their own account, as part of their MiFID business. We do not think that this activity is likely to be relevant in cases where a person acquires a long term stake in a company for strategic purposes or for most venture capital or private equity activity. Where a person invests in a venture capital fund with a view to selling its interests in the medium to long term only, in our view he is not dealing on own account for the purposes of MiFID.”}}</ref> Indeed, MiFID is meant to ''protect'' people like that, not ''regulate'' them.
 
''Anyway''. When trying to bring commodity derivatives and EUAs into scope for MiFID, the regulations and technical standards do a curious job of them handling the usual exemptions, such as those under Art {{mifid2prov|(1)(d)}}, which says:
{{quote|Persons dealing on own account in [[financial instrument]]s ''other than [[commodity derivative]]s or [[emission allowance]]s or derivatives thereof'' and not providing any other [[Investment service - MiFID Directive Provision|investment services]] or performing any other investment activities in financial instruments ''other than commodity derivatives or emission allowances or derivatives thereof'' unless such persons:
:(i) are [[Market maker|market makers]];
:(ii) are members of or [[Regulated market|participants in a regulated market]] or an [[MTF]], on the one hand, or have direct electronic access to a trading venue, on the other hand, except for non-financial entities who execute transactions on a trading venue which are objectively measurable as reducing risks directly relating to the commercial activity or treasury financing activity of those non-financial entities or their groups;
:(iii) apply a high-frequency algorithmic trading technique; [[or]]
:(iv) [[deal on own account]] when executing client orders;
Persons exempt under points (a), (i) or (j) of MiFID II Article {{mifid2prov|2(1)}} are not required to meet the conditions laid down in this point in order to be exempt.}}
 
All very tedious, but what is going on here is exactly as presaged above: if you are just a regular joe, and you aren’t making markets, using algos, executing client orders, or directly accessing a regulated market, you aren’t required to be authorised under MiFID 2 ... ''unless your transacting in [[commodity derivatives]] or emission allowances''.
 
Like, ''what''? we have gone from commodities being ''out of scope'' from MiFID altogether, to being ''in scope'' for MiFID 2, even when normal MiFID instruments aren’t. That ''cannot'' have been what the regulators intended. Can it?
 
To see we have to continue down the laundry list of exemptions. The next one that might help is Article {{mifid2prov|2(1)(j)}} and it deals specifically with the purveyors of [[commodity derivatives]] and EUAs that Art {{mifid2prov|2(1)(d)}} misses out. This is promising, but still quite elaborate:
{{quote|(j) persons:
:(i) [[dealing on own account]], including [[market maker]]s, in [[commodity derivatives]] or [[emission allowances]] or derivatives thereof, excluding persons who deal on own account when executing client orders; [[or]]
:(ii) providing [[investment services]], other than dealing on own account, in commodity derivatives or emission allowances or derivatives thereof to the customers or suppliers of their main business; <br>
provided that:
:—for each of those cases individually and on an aggregate basis this is an ''ancillary activity to their main business'', when considered on a group basis, and that main business is not the provision of [[investment services]] within the meaning of this Directive or banking activities under Directive 2013/36/EU, or acting as a [[market-maker]] in relation to [[commodity derivatives]],
:—those persons do not apply a high-frequency algorithmic trading technique; and
:—those persons notify annually the relevant competent authority that they make use of this exemption and upon request report to the competent authority the basis on which they consider that their activity under points (i) and (ii) is ancillary to their main business;}}
 
And what is “ancillary to the main business”? Well, per Art {{mifid2prov|2(4)}} ESMA will draft regulatory technical standards about that.
Retrieved from "https://jollycontrarian.com/index.php?title=Talk:Dealing_on_own_account"