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Dealing on own account: Difference between revisions
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=== “Net notional outstanding exposure”=== | === “Net notional outstanding exposure”=== | ||
In any case this is all good stuff, if you can monitor, and keep a lid on, your commodity product exposure, or — if you are some kind of securitisation vehicle — you may wonder what “net outstanding notional” exposure means | In any case this is all good stuff, if you can monitor, and keep a lid on, your commodity product exposure, or — if you are some kind of securitisation vehicle — you may wonder what “net outstanding notional” exposure means. | ||
Art 3(1) of the RTS addresses this. The punctuation in “commodity derivatives for cash settlement or [[emission allowances]] or derivatives thereof for cash settlement” leaves something to be desired — namely, some punctuation — but the only way we can read this is (i) [[cash-settled]] [[commodity derivatives]]; (ii) [[emission allowances]]; (iii) cash-''settleable'' emission allowance derivatives — in that either party has an option to cash settle, that will be enough — but it leaves out purely ''physically-settled'' commodity derivatives and emission allowance derivatives. | |||
This, we think, as something to do with MiFID’s fractalised coastline when it comes to commodities: physical commodities are out of scope; “synthetic” commodities — i.e., [[commodity derivatives]] — are in — ''unless'' they are [[physically-settled]] commodity derivatives, which are out — ''unless'' they are physically settled derivatives, but traded on a [[regulated market]] in the EU (i.e., a [[trading venue]]), in which case they’re ''in'' scope again. This is the kind of flip-flopping, concatenated series of [[Double negative|multiple negatives]] that would get an [[Indemnifiable Tax - ISDA Provision|ISDA tax ninja excited]]. | |||
but | The odd one out is ''physical'' [[emission allowances]], which are sort of commodity-like — in that they’re inexorably tied to the commodities markets — but also [[financial instrument]]-like, in that they are abstract economic concepts represented and bounded by words, regulations, and legal title, and they can’t go off or be impounded in a warehouse in the Sudan, contaminated with sea-water or painted yellow and passed off as copper.<ref>https://www.mining.com/web/trader-buys-36m-of-copper-and-gets-painted-rocks-instead/</ref> Thus, these are ''not'' in fact commodities, and are in scope in their physical format. Which is why this is such a tortured definition. | ||
It shouldn’t have been this difficult, in any case: MiFID eligibility should trigger the need to look to the ''de minimis'' exemption, but should not put a limit on the sorts of contracts that contribute to your exposure calculation. But the pragmatic reactions are: ''make sure your derivatives have a cash settlement option''. That being economically neutral it ought to do the trick. If it can’t — well, EUR3bn is a decent bit of headroom to play with. | |||
If you are [[structured finance product]] and instead of hedging the asset risk you pass it on to the investor, what then? Would the debt certificates — undoubtedly cash-settled and with a return derived from the underlier — count as a [[cash-settled]] [[derivative]]? If you are genuinely interested in this question welcome to the [[MiFID/MIFIR/EMIR memeplex]]. Like the [[metaverse]], it is over-engineered, makes you tired, dizzy and eventually will gives you a splitting headache. | |||
In any case, we have a scenario where if you are trading on a regulated [[Venue|trading venue]], the ancillary business exemption is off the table, so it stands to reason that the only regulated activity you can conceivably be doing and still qualify is emissions trading, or transacting cash-settled OTC commodity (or, sigh, [[emission allowances]]) derivatives. | In any case, we have a scenario where if you are trading on a regulated [[Venue|trading venue]], the ancillary business exemption is off the table, so it stands to reason that the only regulated activity you can conceivably be doing and still qualify is emissions trading, or transacting cash-settled OTC commodity (or, sigh, [[emission allowances]]) derivatives. | ||