MiFID 2: how position limits affect metal trading strategies · MiFID 2: how position limits affect metal trading strategies Global Mining & Metals 1 Executive summary The Markets

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

March 2016

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

ContentsPosition limits: potential ramifications 2

What could it mean? 3

How could this affect the forward curve? 4

How could this impact trading? 6

What next? 10

1MiFID 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 knock-on effects on financing.

These points should not be considered complete or certain to materialize, but they offer a starting point to contemplate MiFID 2’s potential commercial impact from position limits.

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


Position limits: potential ramificationsThere 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

2 This includes trades qualifying for hedge accounting under IFRS.3 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.

Parent A 0 lots

Subsidiary B +40 lots

Subsidiary C +30 lots

Subsidiary D –10 lots

Assumptions

► Group wide net position limit = 50 lots

► Each entity 100% owned by parent

Results

► No single entity in breach (<50 lot exposure)

► Parent is in breach (0+40+30–10 = 60)

Note: Based on example presented at the FCA “MiFID II wholesale firms conference 2015.”


What could this mean?

Operating costs

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:

► 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 company’s IT architecture and the scope and breadth of its trading activities.

Metals and minerals

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.

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 EEA-based 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

6 Based 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, 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.


How could this affect the forward curve?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.

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

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.

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 spot-month positions engenders any issue with delivery, then spot limits may be tapered down until eventual maturity.

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.”

Open interest (OI) across main base metal exchanges

LME SHFE* CME Group

Total OI Lot size (tonnes)

Total metal (tonnes)





Total global metal

(tonnes)

Aluminium 1,093,282 25 27,332,050 783,358 5 3,916,790 142 25 3,550 31,252,390

Copper 441,963 25 11,049,075 751,602 5 3,758,010 182,597 11 2,063,346 16,870,431

Zinc 421,771 25 10,554,275 433,706 5 2,168,530 24 25 600 12,713,405

Lead 181,469 25 4,536,725 29,806 5 149,030 – – – 4,685,755

Nickel 310,410 6 1,862,460 470,808 1 470,808 – – – 2,333,268

Tin 20,990 5 104,950 4,036 1 4,036 – – – 108,986

Note: data between 23–27 November 2015 and sourced from the respective exchanges. *SHFE = Shanghai Futures Exchange


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:

Hypothetical illustration on impact to cash-and-carry trades

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.

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

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.

13 Section 7.3, “Final Report — ESMA’s Technical Advice to the Commission on MiFID II and MiFIR,” December 2014.

Q3 2015 daily LME volumes

YTDQ3 2015 daily LME volumes

Lots traded Lot size (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 6 492,426

Others 9,261 N/A N/A

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 front contract and sell 12 months

► Buy/sell 5 tonnes

► Profit = tonnes×margin

► 5×(7,000–5,000–500) = US$7,500

Position limit

► Front contract: limit = 5 tonnes = met

► Other maturities: limit = 5 tonnes = met

► Spot copper price: US$4,500/t

► Nine-month copper price: US$6,750/t

► 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

Buy 5 tonnes

Buy 5 tonnes

Note: numbers are purely for illustrative purposes.

×

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

At time = 0 months At time = 3 months later


How could this impact trading?We can broadly categorize potential impacts within three areas:

► Trading strategies

► Financing

► Risk management

Trading strategiesBy 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.

14 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.


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

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.

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.

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

► 5,500kcal = USUS$80/t

► 5,100kcal* = US$50/t

► Buys 5t of 5,900kcal

► Buys 5t of 5,100kcal

► Blending=5,500kcal

► Sells 10t of API 5

► Buying coal costs: (5x100)+ (5x50) = US$750 (US$75/t)

► Blending costs: US$10 (US$1/t)

► Sales price: US$800 (US$80/t)

► Profit = 800–760 = 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


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 intra-day 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 entity’s 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.

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. Off-exchange, 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 MiFID-regulated 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.

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


Risk managementShould 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 LME’s network.


What next?

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

► Remaining active within EEA markets but complying with MiFID 2 requirements

► Avoiding MiFID 2 position limits by diverting transactions outside of the EEA

► 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 entity’s operations.

Other themes that may arise from MiFID 2 position limits being implemented include:

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

► Can price-neutral transactions still qualify as hedging should OTCs not deemed to be economically equivalent be involved?

► Is sufficient trading liquidity present to divert transactions outside of the EEA?

► Will this provide a basis for non-European exchanges to continue expanding both their market share and product offering?

► Will European trading venues seek to establish a separate, physical platform based in Asia?

These questions are beyond this paper’s scope but reinforce how MiFID 2 may significantly alter the landscape around commodity trading and flows of global physical metal in future.

ContributorsKarim Awad Senior strategic analyst — Mining and Metals, UKI

Tel: +44 20 7951 9474 Email: [email protected]

Shane Henley Commodities Markets — Director, UKI


For more information please contact:Andrew Woosey Commodities Markets — Partner, UKI


Lee Downham Metal and Mining Global Transaction Leader



Appendix: MiFID financial instrumentsThe 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

► 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

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MiFID 2: how position limits affect metal trading strategies · MiFID 2: how position limits affect metal trading strategies Global Mining & Metals 1 Executive summary The Markets