Esma to publish Mifid II commodity market data by July

Data vital to establish if firms are in Mifid II, but it will be incomplete, agency says

Esma has warned the data published in July will be incomplete

The European Securities and Markets Authority (Esma) is planning to publish much-awaited data on the total size of commodity derivatives markets by July this year, Risk.net has learned.

The data is required to determine whether commodity firms will be in or out of scope of the second Markets in Financial Instruments Directive (Mifid II) when it becomes law on January 3, 2018. Mifid II will embroil commodity firms in an onerous web of financial regulation unless they are able to claim the so-called ancillary exemption for which this data is necessary.

To qualify for the exemption, firms must take a test that involves running calculations using internal data on their trades as well as data on their market share. Firms that fail the test will need a Mifid II authorisation, falling into the scope of the law. As it takes regulators six months to process an application for authorisation, the test needs to be taken at least six months before a licence is required. The UK’s Financial Conduct Authority, for example, has set July 3, 2017 as the final deadline for completed applications for licences required in January 2018.

But the calculations require firms to use two – and a maximum of three – years’ worth of trading data, the last year of which runs up to December 31 of the year the test is being taken. For example, firms wanting to find out if they need authorisation in January 2018 need to take the exemption test in the first half of 2017, but the calculations require data that goes up to December 31, 2017.

In one part of the test, firms are allocated a market share in various markets; if they exceed a pre-defined share, they need to become authorised. In order to calculate their own activity as a percentage of the overall market, firms must know the total size of the exchange and over-the-counter commodity derivatives market. Currently, such aggregated data doesn’t exist. Fearing that every firm would measure the overall market size differently – which would render the test unfair – industry has been pressing Esma to gather and publish the data.

While Esma has now told trade associations that it plans to publish the data in July, it has warned that it will be incomplete – especially for 2015 – a source close to Esma told Risk.net.

“For 2015, it looks like the data will only include exchange-traded commodity derivatives, which means firms will need to make an assumption regarding the OTC data and add this to the figures,” says the source. “For 2016, data will include OTC and exchange data, but it will be for the second half of the year only.”

This means firms will have to extrapolate figures for the first half of 2016 based on the data for the second half. Meanwhile, 2017 data, which will cover only the first half of the year anyway, will not be published in July. This will only be available “several months into 2018”, the source says.

Market participants fear that having large chunks of data missing could introduce significant errors into their exemption calculations. “The big worry is if the Esma data is significantly different from a firm’s estimates,” says a regulatory affairs officer at a European energy firm. “It is possible that the difference could be enough to push a firm that thought it was exempt into regulatory scope.”

The big worry is if the Esma data is significantly different from a firm’s estimates. It is possible that the difference could be enough to push a firm that thought it was exempt into regulatory scope

Regulatory affairs officer, European energy firm

As firms will not receive 2017 data until several weeks into the 2018 regime, if the data does reveal a firm has tripped a market share threshold, the firm will by then be in breach of Mifid II, say lawyers.

Regulators stress that firms will not be under any obligation to use Esma data in their calculations. However, if they claimed an exemption based on their own data when Esma’s showed them to be in scope of Mifid II, they would need to prove that their own data is more robust and complete, say lawyers. This is something regulators could ask them to prove in court, they add.

In a written response to questions from Risk.net, Esma points out that it is under no legal obligation to publish this data. “Esma is providing an additional service here based on requests by market participants. [It] was not part of our Mifid II mandate,” the authority says. The regulator has pointed out in the past that gathering this data is an incredibly complex task for which it has been given no extra resources or budget.

Esma also says that it will issue further guidance in the form of questions and answers to provide more clarity on the matter “at the end of this month”.

According to the source close to Esma, the regulator has acknowledged that the timing problem is a recurring one due to Regulatory Technical Standard 20 stipulating that a full year’s data must be used in a calculation that must be taken half-way through the year. Esma says in the future it will publish data annually, but warns that it will not be available immediately at the beginning of each year. “Esma stressed that obtaining OTC data from trade repositories is a complex process that takes time,” says the source.