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Rules and Regulations

Commodities

Both MiFID II and MiFIR will profoundly impact commodities trading. Find out more about the effects on Nasdaq’s market model and its members, as well as the timeline for implementation of changes.

How Does MiFID II Impact Commodities Trading?

MiFID II introduces multiple changes for Exchange Traded Derivatives (ETDs) that affect trading in Commodity derivatives; among others pre-trade transparency requirements, extensive changes to MIFID I/EMIR transaction reporting, conditions for market making and microstructural issues. Specific impacts for Commodities markets are expected in the areas of Commodities position limits and reporting and changes to the ancillary services exemption.

Commodities position limits and position reporting
(MiFID II Article 57, 58, RTS 21) 


MiFID II establishes a position limits regime for commodity derivative markets to support orderly pricing and prevent market abuse. Article57(1) of Directive 2014/65/EU requires that Competent Authorities (National FSA, e.g. Finanstilsynet in Norway, Finansinspektionen in Sweden, FCA in the UK etc.) establish and apply position limits on the size of the net position which a person can hold at all times in commodity derivatives traded on trading venues and economically equivalent OTC contracts. Positions held for “hedging purposes” are exempt from the calculation of the member position limit. Members will need to report (directly or indirectly) all positions in commodity derivatives on exchange and OTC to the relevant Competent Authority. 

Nasdaq will implement a solution for this purpose which is aligned with current REMIT and EMIR reporting frameworks and with the overall needs for transaction reporting under MiFID II. 

Key member impact:

 Collection of End Client ID for all members trading on behalf of firms

Key member impact:

 Non-financial members need to apply for an exemption in relation to hedging of commercial activities with their local Competent Authority (i.e. FSA)


Investment Firms and the ancillary services exemption

By default all members trading ETDs are to be regarded as Investment Firms, and any deviation from this classification means the member has been granted an exemption. MiFID II narrows down the exemption from financial regulation that most commodity trading firms previously have relied on, namely the ancillary services exemption where trading in Commodity derivatives is regarded as ancillary to the actual Commercial activity of the member (e.g. production of a Commodity).

Key member impact:

Confirmation of Investment Firm status for all members

Key member impact:

Member are to verify if they are exempt from MiFID II via the ancillary business tests


MiFID II Reporting requirements
(RTS 21, 22, 24)


Current EMIR/REMIT reporting will be extended significantly to meet MiFID II reporting obligations. In practice this means that for each reported transaction a wide range of new details must be provided to Competent Authorities. Nasdaq will ensure that solutions are aligned with industry standards and that new features are integrated into existing solutions to minimize disruption for members.

Key member impact:

Registration of pre-trade customer data (RTS 24) for all exchange members

Key member impact:

Collection of LEI (Legal Entity Identifier) for all trading venue participants (RTS 22, 24)

Key member impact:
Testing and configuration of transaction reporting for all non-EEA members of all trading venues (RTS 22)

Other important MiFID II topics affecting Commodities members


Pre- and post-trade transparency (RTS 1, 2)
  • Deferred publication of details for certain transactions (LIS/SSTI thresholds)
  • Improved functionality for package transactions (e.g. option strategies)
  • Pre-trade transparency requirements for Block Brokers and the Exchange Marketplace (Voice broking desks)

Market Making (RTS 8)
  • Market Maker agreements to be made public and compliant with MiFID II requirements

Indirect Clearing
  • MiFID II introduces protection of indirect clients (clients of clients) in the event of a bankruptcy in the indirect clearing chain

Removal of pre-novation (RTS 26)
  • Seafood is the only commodity product currently subject to Pre-Novation. As a consequence of MIFID II, Pre-Novation for Seafood will be removed.

Micro-structural issues (RTS 6, 7) 
  • Mandatory conformance testing of all order entry protocols (FIX, OMnet) for all exchange members and ISVs
  • Due Diligence self-certification. Collection of information on (a) pre-trade controls, (b) staff information, (c) technical conformance, (d) kill policy, (e) DEA or Due Diligence and conformance testing of all Sponsored Access participants
  • Registration of algorithms for all exchange members that use algorithmic trading techniques (e.g.HFT traders)
  • Changes to reserve orders, relationships between hidden and shown volumes (iceberg orders) 
  • Setting of maximum ratio of unexecuted orders to transactions (O/T ratio)
  • Certify that deployed algorithms have been tested to avoid disorderly trading conditions


Nasdaq MiFID II implementation Project 


Nasdaq has launched a MiFID II implementation program, which aims at efficiently introducing changes to core functionalities for its members and stakeholders. Assuming there are no subsequent delays to the implementation of MiFID II, the expected timeline is as follows: 

Q2-Q3 2016

Bilateral meetings and discussions with Members

Q4 2016

First changes to Rulebooks and Systems to prepare for MiFID II
Bilateral meetings and discussions with Members

Q1-Q2 2017

Client seminars, Member Readiness activities, further changes to Rulebooks and Systems

Q3-Q4 2017

Member Readiness activities, finalization of changes to Rulebooks and Systems


During 2016, Nasdaq will use these web pages to inform members about the detailed implementation timeline and activities relevant for members (the Commodities product group, the Commodities Clearing Council and IT forums). 

Members are encouraged to reach out to their Key Account Managers directly with any questions or concerns regarding MiFID II. You may also contact the Nasdaq implementation project directly via commodities.mifid2@nasdaq.com

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For OTC Trade Publication - APA
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Clearing Members
Les Male, Head of Sales
Global Sales Freight & Metals
Hanne Johansson, Head of Sales Asia
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