Position Limits in Commodity Derivatives: A Quantitative Regulatory Technique for the Efficiency of Financial Markets?

Position limits in commodity derivatives rank among the most distinctive and least explored innovations of MiFID II. In my recent article published in the Capital Markets Law Journal (available open access here), I offer a systematic and exegetical analysis of the EU position limits regime, reconstructing its genesis and rationale, its material and personal scope, along with the controversial, highly technical calculation methodology, and the complementary position reporting apparatus. The study ultimately raises a broader policy question: is a quantitative regulatory technique, one constraining market conduct through numerical thresholds, the optimal tool for curbing excessive speculation, or does it risk introducing undue rigidity into the system and hindering the development of commodity derivatives markets?

The regime originates in the far-reaching changes in commodity markets in the early years of this century. Once a niche instruments through which producers and merchants transferred price risk to counterparties willing to bear it (a mechanism reflecting the socially useful, liquidity-preserving function of speculation), commodity derivatives became a destination for return-seeking institutional investors, with a marked intensification of financial speculation and raw material price volatility. The G20 commitments of Pittsburgh (2009) and Cannes (2011) prompted the EU legislator to move away from the disclosure-centred paradigm of MiFID I. The genesis of Article 57 MiFID II, however, was anything but consensual: the financial industry lobbied first against position limits and then for their determination at national level, which would have encouraged regulatory arbitrage; a coalition of civil society organisations and agribusiness groups, driven respectively by food-security concerns and the hardship speculation inflicted on farmers, successfully advocated centralised limits set by ESMA. The resulting compromise, paralleled by the long-standing position limits set out in the US Commodity Exchange Act, caps speculative positions ex ante whilst sparing hedging activity, which remains the cornerstone of these markets. This holds notwithstanding persistent empirical uncertainty over the causal nexus between derivatives speculation and spot price volatility.

The scope of the regime was significantly reshaped by Directive 2021/338/EU within the Capital Markets Recovery Package. Position limits now apply only to agricultural commodity derivatives and to ‘critical or significant’ contracts (average open interest of at least 300,000 lots over one year), while securitised derivatives have been carved out altogether: a retrenchment designed to avoid stifling liquidity and growth in less developed markets, notably energy markets. The calculation methodology under Delegated Regulation 2022/1302/EU distinguishes spot-month limits, anchored to deliverable supply, from other months’ limits, anchored to open interest, both starting from a 25 per cent baseline adjustable between 5 and 35 per cent; a tailored, more lenient regime governs new and illiquid contracts.

The exemption architecture is, in my view, the very core of the regime: everything turns on its proper calibration. The hedging exemption, originally reserved for non-financial entities holding positions objectively measurable as reducing risks directly relating to their commercial activity, now extends to financial entities belonging to predominantly commercial groups and acting on behalf of a non-financial entity of the same group, and has been supplemented by an exemption for the provision of liquidity. Crucially, none of these operates automatically: prior authorisation by the national competent authority is required to forestall abuse.

In this context, a national peculiarity of systematic significance emerges. Whereas under Article 2(1)(j) MiFID II the ancillary activity exemption disapplies ‘this Directive’ in its entirety, position limits included, the Italian implementation (Article 4-terdecies of the Consolidated Text on Finance) confines it to Part II of that legislation, governing intermediaries, while the position limits regime sits in Part III, relating to markets. The textual consequence, supported by Article 65 of the Consob Markets Regulation, is that entities relying on the ancillary exemption remain subject to position limits in Italy: an instance of (perhaps unwitting) gold-plating that fragments the level playing field and, de lege ferenda, ought to be reconsidered.

The complementary weekly and daily reporting obligations complete the picture: their multi-level architecture generates significant compliance burdens and occasional national divergences that expose cross-border operators to heterogeneous disclosure demands. Enforcement, in turn, rests on the product intervention powers vested in national authorities and, on a subsidiary basis, in ESMA: the regime’s ultimate backstop.

All of this bears on the fundamental issue of regulatory design. Two techniques are conceivable: a quantitative approach, resting on arithmetic thresholds (position limits proper, possibly accompanied by simple reporting duties), and a qualitative approach, hinging on a substantive standard of abuse untethered from numerical benchmarks. The former is objective and promotes supranational harmonisation, but it is inherently rigid; the latter is flexible, but vague and difficult to enforce. My conclusion is that the quantitative approach is not merely preferable but, in some respects, essential in this field: the real challenge lies in devising clear and intelligible exemption regimes capable of tempering its rigidity without opening easy loopholes, striking the right balance between flexibility and rigour, so that oversight does not come at the expense of creating new commodity derivatives and developing existing ones.

The author's article is available here.

Luca Orciani is a Research Fellow in Business Law at the University of Bologna.