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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]]. | 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]]. | ||
====Cash-settled emissions derivatives?==== | |||
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. In limiting "nettability" of emissions derivatives to cash-settled contracts, we think, is a drafting error — a mistaken read-across from commodities. Remember: ''physical'' commodities are out of scope for MiFID; ''physical'' emission allowances are not. | |||
It shouldn’t have been this difficult, in any case: “MiFID eligibility” should trigger 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. | |||
====That disjunctive “or”==== | |||
Another puzzle is Article 3(3)’s reference to the netting methodology of Article 5(2). This comes from another test — the Capital Employed test — and this appears to bucket together different types of exposure, but then is not brilliantly clear what can be done ''between'' the buckets. The three buckets are: | |||
*(A) '''Commodity derivatives''' (noting that physical commodities are not in scope for MiFID at all); | |||
*(B) '''Emissions allowance ''contracts''''' — and one might pause to wonder whether an emissions allowance itself is, properly called, a “contract”; it is rather a creature of a European regulatory regime (unlike, say, private financial instruments such as bonds and equities, which fundamentally ''are'' contracts; and commodities, which fundamentally are not creatures of the law at all); | |||
*(C) '''Emission allowance ''derivatives'''''. | |||
Note at once that bucket A cannot net with buckets B or C, seeing as the underliers are mutually exclusive. Even if you wanted to and were allowed as a matter of law to net these exposures you could not as a matter of fact. But can you net physical emissions allowances against derivatives of the same underlying allowance? Common sense would shriek, surely ''yes'' — the net exposure to EUAs comprising a long EUA and a short forward sale, for example ought to be nil — but a cautious literal reading leans towards no. | |||
The final rider poses more questions than it answers: “net positions in different types of ''contracts'' with the same commodity as underlying or different types of ''derivative'' contracts with the same emission allowance as underlying can be netted against each other.” | |||
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. | 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. | ||