A number of large conglomerates with exposures in European commodity derivatives are still relying on manual processes such as Excel to collate data and comply with the second Markets in Financial Instruments Directive (Mifid II), according to lawyers.
“Some of our clients have had to do it manually, so they’ve had to allocate people to reach out to all of their operating subsidiaries, get information on all the trading venues that they trade on, work contracts and then gather, collate, and centralize that data. This is quite a novel thing for them to do,” says Azad Ali, partner at Field Fisher.
National competent authorities (NCAs) are responsible for setting limits using methodology established by the European Securities and Markets Authority (Esma).
The European regulator published opinions on seven limits at the end of March and said it “will continue assess the notifications received and issue opinions in order to ensure that the position limits are set in accordance with the Mifid II framework.”
Market participants must keep a close eye on the limits, which could fluctuate according to Robin Bhar, head of metals research at Society Generale.
“Obviously if there is a situation where a breach of those limits is sustained over weeks and months then there may need to be a new look at those limits, but you’ve got to start somewhere,” says Bhar. “What does the regulator do, what do exchanges do? Obviously, the regulators have talked with the exchanges, and they, by consensus have decided to come with these limits. Those limits could be reduced, they could be increased, it’s trial and error at the moment.
While many market participants believe they won’t breach the limits, there will be adjustments to them in the future, and firms need to make sure they are not caught out, says Ali.
“It is a practical risk-judged position that a lot of market participants are taking simply because they have made the assumption that the effort required in calculating is not going to really be that worth their while, because they know that they are going to come out on the right side of the limit,” says Ali.
“These kinds of things only become an issue, once someone exceeds the limit and gets caught out. And they will get caught out because obviously there are position reports that need to be made by the exchanges and by market participants, daily to regulators and weekly to the public,” he says.
The sheer volume of regulation in recent years has put a substantial burden on back office systems says Bhar.
“In general terms we have had a whole raft of legislation - Emir, Mifir, Mifid, and Dodd-Frank over the last few years, and it has gone from one extreme to another extreme that has put a lot of pressure on middle and back office operations in terms of getting systems up to date and compliant with the outstanding legislation,” he says.
There may be a need for a tech solution to assist in collating the data necessary to calculate a firm’s position, according to Ali.
“For the big conglomerates, I’m sure that if there is a way for a tech solution to streamline that then that would be obviously be beneficial to them, it may be once the procedure is up and running it may be that pure data gathering can be subject to more streamline through a tech solution,” says Ali.
“It will need to be a pretty sophisticated tech solution because imagine lots of operating subsidiaries located all over the world, and these are just European position limits, but they then trade in European markets. It is a headache at the moment.”