MiFID 2: how

position limits
affect metal
trading strategies
Global Mining & Metals
March 2016

Contents
Position limits: potential ramifications

What could it mean?

How could this affect the forward curve?

How could this impact trading?

What next?

10

MiFID 2: how position limits affect metal trading strategies Global Mining & Metals

Executive summary
The Markets in Financial Instruments Directive 2 regulation
(MiFID 2) will represent a series of potential challenges for
both financial and non-financial entities engaged in commodity
derivatives upon its proposed1 introduction on 3 January 2018.
A key aspect of the regulation is the introduction of an ambitious
position limits regime that will apply across energy, metals,
agriculture, freight and related derivatives. If implemented as
proposed, this regime will dwarf any other in force globally.
Although precise rules have yet to be finalized by European
lawmakers, there is little analysis on how MiFID 2 position limits
may affect underlying revenues and trading strategies, beyond the
internal controls needed to comply.
This paper provides a brief introduction on how this may affect
trading and future physical flows. Focusing on metals trading, it
sketches out what this may mean for both affected non-financial
firms (NFs) and existing MiFID-regulated entities that do not qualify
for exemptions under the regime.

Here are some salient points to consider:

Only trades by NFs will be exempt from position limits if clearly
demonstrable as hedges within the normal course of business.
A requirement to aggregate positions across entities, both
within and outside the European Economic Area (EEA), may
require significant spend on IT.
Less trading could subsequently reduce liquidity along the
forward curve and increase bid-ask spreads.
Limits may curtail speculative positioning and the ability to
capitalize on time, product or geographical arbitrages.
Limits may indirectly impact warehousing, with possible knockon effects on financing.
These points should not be considered complete or
certain to materialize, but they offer a starting point to
contemplate MiFID 2s potential commercial impact from
position limits.

This paper does not consider the potential ramifications from the United Kingdoms referendum on continued EU membership in June 2016,
which may affect how MiFID II is subsequently applied.

MiFID 2: how position limits affect metal trading strategies Global Mining & Metals

Position limits: potential

ramifications
There are several attributes in relation to MiFID 2 position limits
that are likely to impact trading behavior. As more complete
guidance in the form of Level 3 text is still to be released by the
relevant regulatory authorities, these remain subject to change.
Potential challenges may be found where:
Trading is restricted by position limits on cash
and physically settled contracts within the EEA.
This may impact:
Contracts with different tenors: These restrictions will
see limits divided between front contracts (i.e., when
the next immediate contract reaches maturity) and all
other tenors.
Use of financial derivatives: While some netting may
be allowed, MiFID 2 does not permit netting financial
derivative with non-MiFID instruments, potentially
disrupting trading strategies.
Hedging commercial activities: Certain trading activities
may qualify for exemption if demonstrable as hedging in
line with European Market Infrastructure Regulation (EMIR)
principles.2 Only non-MiFID regulated entities will be eligible
to apply for exemption from position limits, potentially
excluding financial entities with a legitimate interest in
hedging output, as an example.

Use of exchange and over-the-counter (OTC) contracts:

Exchange and selected OTC contracts will be within scope
if either cash settled or physically settled for non-hedging
purposes.3 From a position limits perspective, this will only
include OTCs deemed economically equivalent (i.e., EE
OTCs) to exchange traded contracts,4 for the purpose of
aggregating and netting position limits.
Position limits are aggregated among subsidiaries at the
group level (see below diagram): Besides representing added
compliance costs, without careful structuring, this may affect
positions held by non-EEA subsidiaries settled within the EEA.
The ultimate beneficiary of any transaction must be made
known: Although only MiFID-regulated entities will have an
obligation to report their positions to the regulator on a regular
basis, the details of the ultimate beneficiary will need to be
conveyed by the reporting party to the trade (e.g., bank).
In summary, position limits will apply to all in-scope instruments
traded in EEA markets, regardless of whether the entity is located
within the EEA or a so-called third country.
While firms with a legitimate and demonstrable interest in hedging
should qualify for exemptions (unless a MiFID-regulated entity),5
certain non-EEA NFs trading within the EEA may struggle to
demonstrate they would not be MiFID-regulated were they to be
based in the EEA from a hypothetical standpoint with this being a
requirement for third country firms trading in EEA markets.

Aggregation and position limits: example

Assumptions

Parent A
0 lots

Group wide net position limit = 50 lots

Each entity 100% owned by parent

Subsidiary B
+40 lots

Subsidiary D
10 lots

Results
No single entity in breach (<50 lot exposure)
Parent is in breach (0+40+3010 = 60)

Subsidiary C
+30 lots
Note: Based on example presented at the FCA MiFID II wholesale firms conference 2015.

This includes trades qualifying for hedge accounting under IFRS.

MiFID regulations, Annex 1, Section C defines the financial instruments within scope this is included in the appendix.
4
Where similar contract specifications exist, excluding post-trade settlement procedures, and whose economic outcome is highly correlated with a contract on a trading
venue. ESMA intend to narrowly define this to guard against circumvention of position limits.
5
Being MiFID-regulated brings a broad suite of onerous regulatory obligations for a firm and is distinct from the direct application of position limits, which apply to all firms
regardless of their MiFID status if they are trading in instruments subject to this regime.
2
3

MiFID 2: how position limits affect metal trading strategies Global Mining & Metals

What could this mean?

Operating costs

Metals and minerals

NFs may see costs rise to update IT infrastructure and wider

internal controls, for either companies registered within or
settling transactions through th6e EEA. This may concern:

MiFID 2 will impose position limits on any cash or physically settled

metal, coal or freight derivative traded through either a regulated
exchange, a Multilateral Trading Facility (MTF)9 or Organized
Trading Facility (OTF)10 within the EEA (Venues). This will also
apply to OTCs deemed economically equivalent.

Accurately aggregating cross-group exposures across

subsidiaries, so traders understand their overall position limit
headroom for in-scope instruments
Distinguishing and tracking trades designed to hedge
commercial risk exposure, which may prove exempt from
position limits
Guidance from the European Securities and Markets Authority
(ESMA) suggests risk-mitigating transactions among producers,
processors and end-users will be exempt from position limits.6 This
is subject to caveats while several issues remain unclear, including
the frequency such applications need to be made to the National
Competent Authority7 (NCA) should the underlying nature or
purpose of such transactions change or evolve.
However, it remains contingent on demonstrating a derivative
position is hedging such risk. This may prove difficult when applied
across multiple geographies, subsidiaries, maturities, variations in
physical underlying and so forth. This also applies should hedging
be at the macro/portfolio level or anticipatory in nature. It is
expected most firms can make such a distinction to support such
an exemption, consistent with EMIR regulations.
In any event, a firm will need to account for trades made by
entities within its control, both within the EEA and those outside
that trade through an EEA-based exchange.8 It will be through
such disclosures that an NCA can then determine if a firm is
compliant with position limits in aggregate, imposing further
limits under certain exceptional circumstance should it be deemed
appropriate.
Both of these scenarios entail significant complexity as operations
increase in scale. Quantifying these costs and the time needed
for implementation remain conditional on the idiosyncrasies of
each companys IT architecture and the scope and breadth of its
trading activities.

London Metal Exchange-based (LME) contracts will be included,

as well as potentially computer-based platforms where bid-ask
volumes are tendered (e.g., thermal coal; iron ore) should they be
EEA-based or settled. The latter depends to some extent on what
platforms are ultimately recognized as OTFs, something not yet
known. MiFID 2 position limits will not affect transactions by EEAbased entities on other exchanges (e.g., CME, SHFE).
Other less liquid commodities (e.g., ferroalloys) may be less likely
to be affected should no exchange or platform exist to facilitate
trades (i.e., those executed entirely bilaterally).
Contracts for metal products such as concentrates or mattes
may not be captured by MiFID 2. Though such transactions may
reference prices on a relevant Venue and thus be considered
to be replicating the underlying, MiFID 2 is mindful of such OTC
contracts not being used to circumvent net position limits on
designated instruments. How this anti-avoidance measure is
applied by NCAs remains to be seen.
This may introduce a mismatch insofar as hedging price exposure
throughout the supply chain, unless these positions can be
demonstrated to correspond with hedging the underlying, and
thus be classified as such following the relevant guidance drawn
from EMIR, which includes under IFRS accounting.11
Insofar as wider implications from these regulations are
concerned, these can be classified under the following categories:
Impact on the forward curve and price discovery
Potential effects on trading
Possible approaches within a post-MiFID 2 environment

 ased on the change in the value of assets, services, inputs, products, commodities or liabilities that the non-financial entity or its group owns, produces, manufactures,
B
processes, provides, purchases, merchandises, leases, sells, or incurs in the normal course of its business (Article 7, 1(a), Chapter 6: commodity derivatives RTS 20:
draft regulatory technical standards on criteria for establishing when an activity is to be considered to be ancillary to the main business, EC).
7
An example would be the Financial Conduct Authority for the United Kingdom.
8
Although only MiFID-regulated firms (e.g., banks) will be required to report their positions to the NCA (e.g., on behalf of an NF).
9
Operated by an investment firm or entity which brings a series of buyers/sellers of financial instrument(s) together, resulting in contract-based transactions.
10
Neither a regulated market or MTF but that which brings multiple buyers/sellers together with interests in bonds, structured finance products, emission allowances, or
derivatives, resulting in contract-based transactions. Specific venues remain to be defined but extended to exchange traded derivatives as well as OTCs.
11
But extended to exchange traded derivatives as well as OTCs.
6

MiFID 2: how position limits affect metal trading strategies Global Mining & Metals

How could this affect the

forward curve?
Base position limits for spot-month contracts are expected to be
around 25% of deliverable supply, which is assumed to reflect
monthly volumes of available supply averaged over the preceding
12 months.12 These limits can be varied to between 5%35% by the
relevant NCA to ensure orderly price settlement and liquidity while
guarding against any entity holding a dominant position.

Within commodities, MiFID 2 was ostensibly designed to limit

speculative activity, though both bid-ask spreads and overall
volatility may increase within forward curves to the potential
detriment of end users.
Implementing the required IT and business changes described
above and remaining compliant could prove costly, affecting
operating margins and profitability. This may impact, to varying
degrees, all but the smallest of particpants. At one extreme,
some may determine it remains unviable to continue trading
MiFID instruments on EEA markets.
Concurrently, position limits will be split between those deliverable
for a given front contract, with remaining maturities collectively
grouped into a separate category. This applies to each metal
contract rather than overall metal exposure.

For all other maturities, this is based on 25% of total open interest
across all maturities, subject to the same adjustment by the
relevant authority. In the event rolling these maturities into spotmonth positions engenders any issue with delivery, then spot limits
may be tapered down until eventual maturity.

The table below provides some initial context into current base
metal open interest volumes.

Open interest (OI) across main base metal exchanges

LME

Aluminium

SHFE*

CME Group

Total OI

Lot size
(tonnes)

Total metal
(tonnes)

Total OI

Lot size
(tonnes)

Total metal
(tonnes)

Total OI

Lot size
(tonnes)

Total metal
(tonnes)

Total global
metal
(tonnes)

1,093,282

25

27,332,050

783,358

3,916,790

142

25

3,550

31,252,390

Copper

441,963

25

11,049,075

751,602

3,758,010

182,597

11

2,063,346

16,870,431

Zinc

421,771

25

10,554,275

433,706

2,168,530

24

25

600

12,713,405

Lead

181,469

25

4,536,725

29,806

149,030

4,685,755

Nickel

310,410

1,862,460

470,808

470,808

2,333,268

20,990

104,950

4,036

4,036

108,986

Tin

Note: data between 2327 November 2015 and sourced from the respective exchanges.
*SHFE = Shanghai Futures Exchange

12

 Reference to the average monthly amount of the underlying commodity available for delivery over the one-year period immediately preceding the determination, Draft
RTS 21, Article 10; Regulatory technical and implementing standards, MiFID II/MiFIR, 28 September 2015.

MiFID 2: how position limits affect metal trading strategies Global Mining & Metals

This does not consider total daily volumes traded, which may serve
as a crude proxy for deliverable supply and can be significant
relative to annual production levels. This is illustrated by Q3 2015
flows reported on the LME below:

Should limits be set toward the bottom end of their range, it may
impact efforts to improve price formation and liquidity beyond
three months.

Q3 2015 daily LME volumes

YTDQ3 2015 daily LME volumes
Lots traded

Lot size
(tonnes)

Total metal
(tonnes)

Aluminium

249,315

25

6,232,875

Copper

168,446

25

4,211,150

Zinc

119,369

25

2,984,225

Lead

53,088

25

1,327,200

Nickel

82,071

492,426

9,261

N/A

N/A

Others

The impact on the forward curve will thus be contingent on

where these limits are set and how variable they prove over
time. Guidance has been provided for circumstances warranting
intervention,13 though an NCA will retain ultimate discretion.

Source: HK Exchange nine-month results as of 30 September 2015.

Examples on how position limits may impact liquidity include an

existing cash-and-carry trade prior to maturity. This is where a
counterparty may be unable to enter into new positions despite
having neutral pricing exposure, potentially inhibiting trading, as
illustrated below.
With such constraints, this could lead to higher prices toward
the back-end of the curve to sufficiently incentivize longer-dated
positions relative to foregoing any short-term optionality.
Equally within the front-month period, it does raise concerns
on whether liquidity may become lumpy, with responsiveness
curtailed to preserve flexibility. This may exacerbate any price
swings and result in bid-ask spreads widening accordingly. It could
also impact the cost of rolling over a position.

Hypothetical illustration on impact to cash-and-carry trades

At time = 0 months

At time = 3 months later

Buy 5
tonnes

Buy 5
tonnes
One-month copper price:
US$ 5,000/t
12-month copper price:
US$7,000/t
11-month storage, interest and
insurance cost: US$500/t
Position limit: 5 tonnes for
front delivery and all other
maturities, respectively
Trading strategy

Buy/sell 5 tonnes

Spot copper price: US$4,500/t

Profit = tonnesmargin

Nine-month copper price:

US$6,750/t

5(7,0005,000500) =
US$7,500
Position limit
Front contract: limit =
5 tonnes = met
Other maturities: limit =
5 tonnes = met

Buy front contract and sell

12 months

Buy 5
tonnes

Buy 5
tonnes

Nine-month storage, interest

and insurance cost: US$400/t
Position limits unchanged
Trading strategy
Repeat strategy in time = 0
Potential profit for 5 tonnes =
US$9,250

Position limit capacity

pre-trade
Front contract = 0 tonnes
Other maturities = 5 tonnes
Position limit
Front contract: limit =
5 tonnes = met
Other maturities: limit =
10 tonnes = fail

Note: numbers are purely for illustrative purposes.

13

Section 7.3, Final Report ESMAs Technical Advice to the Commission on MiFID II and MiFIR, December 2014.

MiFID 2: how position limits affect metal trading strategies Global Mining & Metals

How could this impact

trading?
We can broadly categorize potential impacts within three areas:
Trading strategies
Financing
Risk management

Trading strategies
By aiming to curtail speculation, these measures may constrain
the ability to act or anticipate market movements beyond given
position limits, if trading on an EEA-based Venue.
This may impact the earnings of marketing arms to varying
degrees, unless steps can be taken to avoid such limits (e.g.,
trading through Venues outside of the EEA). These earning losses
may be offset by trading upside from pricing volatility.
Further ramifications are subject to conjecture and depend on
the definition of economic equivalency, whereby EE OTCs
can be netted off with contracts traded on recognized Venues.
While MiFID 2 recognizes EE OTCs as contracts with similar
characteristics to those on exchanges, it is clear on the need for
applying this in limited circumstances14 to prevent questionable
trades from circumventing position limits.
What follows will also be contingent on such transactions not
being considered as a hedge,15 which could vary across entity and

transaction structure. This is likely to be an area where an NCA will

need to provide further guidance on how such distinction is made,
given some of the permutations below.
It should be noted where trading is confined to non-MiFID
instruments only (e.g., intermediate metal products or other
OTCs that are not MiFID-regulated), then position limits will not
apply. Should other risks be manageable, ranging from pricing to
counterparty risk, this may encourage an increase in positions
within other areas of the metal value chain.
Metal and mineral grades
Position limits could affect trades between grades of metals or
minerals, with mismatches between recognized MiFID instruments
and OTCs not deemed economically equivalent. An example
may concern the purchasing and blending of different coals to
capitalize on any price difference relative to a finished blend (see
diagram on page 7.) It should be noted this assumes API coal
contracts, including those physically settled, may be treated as
MiFID instruments,16 which may not apply to non-API coals.
It is uncertain whether these transactions can thus be netted
off within any position limit, representing a gray area where
further clarification is required. If not, it may create a potential
disadvantage unless these trades are undertaken and settled
outside the EEA.

Paragraph (6), p.405, RTS 21: draft regulatory technical standards on methodology for the calculation and the application of position limits for commodity derivatives
traded on trading Venues and economically equivalent OTC contracts; Chapter 6: commodity derivatives, ESMA.
15 
Note: hedging will only benefit NFs (and not existing MiFID-regulated entities) toward offsetting any position limit.
16 
As such transactions may not qualify as being for commercial purposes given the arbitrage being acted upon, they may have regard to derivative instruments which are
cash-settled and cleared through recognized clearing houses.
14 

MiFID 2: how position limits affect metal trading strategies Global Mining & Metals

Illustration on mismatch between OTCs and MiFID instruments coal blending

1. Customer

2. Spot coal prices

3. Blending

4. Economics

Order placed to buy 10 tonnes of

API 5 5,500kcal coal

5,900kcal* = USUS$100/t

Buys 5t of 5,900kcal

5,500kcal = USUS$80/t

Buys 5t of 5,100kcal

Buying coal costs: (5x100)+

(5x50) = US$750 (US$75/t)

5,100kcal* = US$50/t

Blending=5,500kcal
Sells 10t of API 5

Blending costs: US$10 (US$1/t)

Sales price: US$800 (US$80/t)
Profit = 800760 = US$40

Note: Ignores freight cost and assumes other specification characteristics are identical for simplicity.
* Non-API coal

Trading exposure vs. position limits

Trading exposure: (5t 5,900kcal coal+5t 5,100kcal coal)(10t 5,500kcal coal) = 0 net exposure
Under MiFID 2: non-API coal may not be deemed economically equivalent = short 10t API 5 until settled
May affect ability to enter into future trades between blends

This issue of asymmetric netting may also extend to OTCs based

on similar traded contracts, but with differences in product
specification17 or delivery arrangements relative to those on
Venues. This highlights where added guidance could help from
NCAs should subtle differences exist with an OTC otherwise
considered economically equivalent.
A hypothetical example would be non-LME-grade nickel cathode
contracts. Unless considered economically equivalent or a
hedge, should a sale be agreed with a customer, with price to be
determined 30 days after delivery, and with a short LME nickel
contract taken to correspond with time of delivery (to lock in a
spread), it is likely only the LME contract would be recognized for
the purpose of position limits.

17

Geography
Position limits will not apply to non-EEA exchange contracts, which
may encourage traders to store metal in warehouses approved by
such exchanges (e.g., Shanghai Futures Exchange (SHFE)) where
these warrants can then be traded. It may also see non-exchange
storage continue to develop in the EEA, with sales subsequently
arranged bilaterally rather than through the transfer of exchange
warrants, to the detriment of volumes on Venues like the LME.
This is significant, as it could diminish open interest on trading
Venues by which position limits are established, undermining
future liquidity. It may become self-fulfilling, with lower volumes
reducing the size of future position limits, pushing volumes away
from EEA Venues to preserve trading flows among NFs.

Insofar as supplier, form (e.g., cathode, briquette, ingot), specification, dimensions, etc.

MiFID 2: how position limits affect metal trading strategies Global Mining & Metals

It may also limit trades that capitalize on spread differences

between exchanges, among both EEA and non-EEA entities,
should this involve using instruments covered by MiFID 2. An
example would concern copper trades between the LME and SHFE
aimed at capitalizing on any prevailing spread. In this case, SHFE
positions would not be included in any net position calculations.
This should not affect producers who can divert output to an
exchange offering a premium relative to its competitors. Although
subject to other variables (e.g., freight prices), if liquidity on EEA
exchanges is insufficient to absorb physical metal, this may make
non-EEA alternatives more attractive.18 EEA end users may then
need to offer additional premiums to secure supply of desirable
metal specifications.
Volatility
An increase in price volatility is likely should the implementation
of MiFID 2 on commodity trading reduce overall trading liquidity.
Subject to bid/ask spreads remaining unchanged, this may benefit
NFs trading within their position limits, with wider fluctuations
within forward curves representing upside from trading
optionality.
While NCAs will have sight of position limits at the end of each
trading day, Venues are expected to continuously monitor intraday movements to ensure NFs remain compliant. This will help
prevent excessive intraday positions being undertaken, while
reinforcing the need for suitable IT systems to determine trading
headroom prior to transacting.

Financing
Access to trade finance is unlikely to be affected, regardless of
whether an entitys operations fall under MiFID 2. Existing MiFID
regulations already apply to EU financial institutions, which has
prompted a reduction in the availability of trade finance as banks
balance increased costs against return on equity requirements.
With Dodd-Frank affecting US lending capacity, both non-US and
non-EU banks are likely to have growing capacity (though varying
in appetite) to support such activities in future.

18

Financing warehousing warrants among trading firms should

also remain unaffected, unless these warrants are subsequently
used to settle futures contracts, which may count toward a
position limit. If so, depending on if such contracts are transacted
on- or off- exchange, and whether the latter are deemed
economically equivalent, they could affect physical flows and
financing arrangements within the EEA.
If non-exchange warranted metal sold forward are deemed to
be economically equivalent to selling an LME warrant, then
storage locations should remain a function of prevailing financing
terms available and other trading considerations (e.g., reducing
market visibility of stocks, proximity to customers). This is given
the parity of treatment with on-exchange contracts for position
limit purposes.
If not, then any outcome may be more mixed. On the one hand,
bypassing position limits may favor non-exchange based storage,
retaining trading flexibility through direct sales to customers.
However, it is unclear if banks are prepared to finance such
inventories in the future on the same terms as those supervised by
recognized exchanges. This may change with LME Shield (details
below) though could prove more expensive.
A separate, knock-on effect is whether such inventories could
continue to be treated as liquid assets for accounting purposes
among trading firms. On-exchange, all futures are cleared through
a clearing house, providing certainty over cash realization. Offexchange, it may prove difficult to justify inventories as readily
marketable, insofar as having a buyer of last resort available,
unless substantial market liquidity exists on Venues, while
volumes remain within position limits. This could affect future debt
covenant or credit rating treatment.
On the other hand, it could draw more volumes onto MiFIDregulated exchanges to combat these issues. Such warrants
should help secure inventory financing, though a downside would
be revealing such inventories to the market, which may affect the
forward curve and the value of other unhedged positions.
In practice, whether either materializes will still depend on
precisely where position limits are set and what instruments
are considered economically equivalent, but this highlights
how maintaining financing and liquidity could potentially alter
such strategies.

This will also depend on a series of other factors besides price (e.g., exchange rate, warehousing rules, legal enforcement).

MiFID 2: how position limits affect metal trading strategies Global Mining & Metals

Risk management
Should liquidity become constrained across the curve, and/or
bid-ask spreads increase, then value-at-risk models (or any other
stochastic at risk models) will need to be reassessed. With these
dependent on historical volatility to determine risk limits, the
implementation of MiFID 2 could represent a structural break with
past experience, potentially reducing the effectiveness of such
risk management tools without adjustment as the new normal
is established.
If non-exchange warehousing becomes increasingly prominent,
then structuring agreements where risk can clearly be apportioned
between warehouse owner, lender and borrower will be important.
This surrounds title over any metal, while incorporating safeguards
to prevent multiple pledging of warrants. Though unlikely to be
problematic within the EEA, this could affect non-LME storage
strategies in emerging markets, with less rigorous inspection or
enforcement systems.
The latter may be assisted by LME Shield, which launched in pilot
form during December 2015. This is intended to provide a tracking
system of non-LME stored metal. Though it is unclear how this will
be implemented in practice, it is unlikely to be any cheaper than if
stored within the LMEs network.

MiFID 2: how position limits affect metal trading strategies Global Mining & Metals

What next?
The options available with regard to responding to position limits
can be divided broadly along three lines:

Can price-neutral transactions still qualify as hedging should

OTCs not deemed to be economically equivalent be involved?

Remaining active within EEA markets but complying with

MiFID 2 requirements

Is sufficient trading liquidity present to divert transactions

outside of the EEA?

Avoiding MiFID 2 position limits by diverting transactions

outside of the EEA

Will this provide a basis for non-European exchanges

to continue expanding both their market share and
product offering?

Focusing trading strategies around non-MiFID instruments

For companies choosing to remain trading within EEA markets and
compliant with MiFID 2 position limits, solutions will depend on the
makeup of an entitys operations.
Other themes that may arise from MiFID 2 position limits being
implemented include:

Will European trading venues seek to establish a separate,

physical platform based in Asia?
These questions are beyond this papers scope but reinforce how
MiFID 2 may significantly alter the landscape around commodity
trading and flows of global physical metal in future.

How will this affect return on equity among trading houses, the
level of competition and underlying liquidity for commodities
among EEA-based trading Venues?

Contributors
Karim Awad
Senior strategic analyst Mining and
Metals, UKI
Tel: +44 20 7951 9474
Email: kawad@uk.ey.com

Shane Henley
Commodities Markets Director, UKI
Tel: +44 20 7951 9501
Email: shenley@uk.ey.com

For more information please contact:

10

Andrew Woosey
Commodities Markets Partner, UKI

Lee Downham
Metal and Mining Global Transaction Leader

Tel: +44 20 7951 8117

Email: awoosey@uk.ey.com

Tel: +44 20 7951 2178

Email: ldownham@uk.ey.com

MiFID 2: how position limits affect metal trading strategies Global Mining & Metals

Appendix: MiFID
financial instruments
The below highlights those instruments recognized under the
MiFID directive, with (5), (6), (7) and (10) applicable to those
trading commodities:
Transferable securities
Money-market instruments
Units in collective investment undertakings
Options, futures, swaps, forward rate agreements and any
other derivative contracts relating to securities, currencies,
interest rates or yields, or other derivatives instruments,
financial indices or financial measures which may be settled
physically or in cash
Options, futures, swaps, forward rate agreements and any
other derivative contracts relating to commodities that must
be settled in cash or may be settled in cash at the option of one
of the parties (otherwise than by reason of a default or other
termination event)
Options, futures, swaps, and any other derivative contract
relating to commodities that can be physically settled provided
that they are traded on a regulated market and/or an MTF

MiFID 2: how position limits affect metal trading strategies Global Mining & Metals

Options, futures, swaps, forwards and any other derivative

contracts relating to commodities, that can be physically
settled not otherwise mentioned in C.6 and not being for
commercial purposes, which have the characteristics of other
derivative financial instruments, having regard to whether,
inter alia, they are cleared and settled through recognized
clearing houses or are subject to regular margin calls
Derivative instruments for the transfer of credit risk
Financial contracts for differences
Options, futures, swaps, forward rate agreements and any
other derivative contracts relating to climatic variables, freight
rates, emission allowances or inflation rates or other official
economic statistics that must be settled in cash or may be
settled in cash at the option of one of the parties (otherwise
than by reason of a default or other termination event), as well
as any other derivative contracts relating to assets, rights,
obligations, indices and measures not otherwise mentioned in
this Section, which have the characteristics of other derivative
financial instruments, having regard to whether, inter alia, they
are traded on a regulated market or an MTF, are cleared and
settled through recognized clearing houses or are subject to
regular margin calls

11

How EYs Global Mining & Metals Network can

help your business
With a volatile outlook for mining and metals, the global mining and
metals sector is focused on margin and productivity improvements, while
poised for value-based growth opportunities as they arise. The sector also
faces the increased challenges of maintaining its social license to operate,
balancing its talent requirements, effectively managing its capital projects
and engaging with government around revenue expectations.
EYs Global Mining & Metals Network is where people and ideas come
together to help mining and metals companies meet the issues of today
and anticipate those of tomorrow by developing solutions to meet these
challenges. It brings together a worldwide team of professionals to
help you succeed a team with deep technical experience in providing
assurance, tax, transactions and advisory services to the mining and
metals sector. Ultimately it enables us to help you meet your goals and
compete more effectively.

Area contacts
Global Mining & Metals
Leader
Miguel Zweig
T: +55 11 2573 3363
E: miguel.zweig@br.ey.com

Oceania
Scott Grimley
T: +61 3 9655 2509
E: scott.grimley@au.ey.com

China and Mongolia

Peter Markey
T: +86 21 2228 2616
E: peter.markey@cn.ey.com

Japan
Andrew Cowell
T: + 81 3 3503 3435
E: cowell-ndrw@shinnihon.or.jp

Africa
Wickus Botha
T: +27 11 772 3386
E: wickus.botha@za.ey.com

Commonwealth of
Independent States
Evgeni Khrustalev
T: +7 495 648 9624
E: evgeni.khrustalev@ru.ey.com

France, Luxemburg,
Maghreb, MENA
Christian Mion
T: +33 1 46 93 65 47
E: christian.mion@fr.ey.com

India
Anjani Agrawal
T: +91 22 6192 0150
E: anjani.agrawal@in.ey.com

United Kingdom and

Ireland
Lee Downham
T: +44 20 7951 2178
E: ldownham@uk.ey.com

EY | Assurance | Tax | Transactions | Advisory

About EY
EY is a global leader in assurance, tax, transaction and advisory
services. The insights and quality services we deliver help build trust
and confidence in the capital markets and in economies the world
over. We develop outstanding leaders who team to deliver on our
promises to all of our stakeholders. In so doing, we play a critical role in
building a better working world for our people, for our clients and for
our communities.
EY refers to the global organization, and may refer to one or more, of
the member firmsof Ernst&Young Global Limited, each of which is
a separate legalentity. Ernst&Young Global Limited, a UK company
limited by guarantee, does not provide services to clients. For more
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All Rights Reserved.
EYG No. ER0297

United States
Andy Miller
T: +1 314 290 1205
E: andy.miller@ey.com

Canada
Bruce Sprague
T: +1 604 891 8415
E: bruce.f.sprague@ca.ey.com

Brazil
Afonso Sartorio
T: +55 11 2573 3074
E: afonso.sartorio@br.ey.com

Chile
Mara Javiera Contreras
T: +562 2676 1492
E: maria.javiera.contreras@cl.ey.com

Service line contacts

Global Advisory Leader
Paul Mitchell
T: +61 2 9248 5110
E: paul.mitchell@au.ey.com

Global Assurance Leader

Alexei Ivanov
T: +7 495 228 3661
E: alexei.ivanov@ru.ey.com

Global IFRS Leader

Tracey Waring
T: +61 3 9288 8638
E: tracey.waring@au.ey.com

Global Tax Leader

Andy Miller
T: +1 314 290 1205
E: andy.miller@ey.com

Global Transactions Leader

Lee Downham
T: +44 20 7951 2178
E: ldownham@uk.ey.com

90046.indd (UK) 03/16. Artwork by Creative Services Group Design.

ED 0317
This material has been prepared for general informational purposes only and is not intended to
be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for
specificadvice.

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