In recent years, both regulators and exchanges have placed a significant focus on position limits. Failure to adhere to these defined limits can not only put firms at risk of fines, sanctions and forced unwinding of positions, but can also be costly and inefficient. While traditionally viewed as a necessary obligation, firms can gain true business value when implementing systematic processes for monitoring positions.
There is a clear regulatory focus on position limits in both the U.S. and Europe, despite the difference in stages of implementation. While in the U.S., position limit requirements under Dodd Frank are more mature, the current regulatory and political climate has caused uncertainty amongst firms. In December 2016 a new proposal was submitted; however, no action is likely to occur before a new CFTC Chairperson is appointed and confirmed and the other Commissioners are similarly seated by the Trump Administration. In the interim, the CME and ICE are continuing to enforce the current position limits guidelines, including increased oversight on intraday trading activities. Interestingly, many firms have overlooked the fact that limit violations can occur at the order level, not just at the executed trade level. The CFTC can reprimand firms based on cancelled orders that would have breached position limits if executed. In this case firms could potentially either face a fine from the regulator for potential of breaching limits or a fine for spoofing (entering and cancelling a large number of orders that were not intended to be filled); however, position limits fines are more common, as they do not require proof of intent or causation.
In Europe, Regulatory Technical Standards (RTS) 21 under MiFID II is set to come into effect on January 3rd, 2018. Under RTS 21, every commodity derivative has a limit set against it, with exception to the REMIT carve-out, which states that forwards in power or natural gas traded on an OTF must be physically settled. Monitoring position limits in the EU presents several challenges, including tracking these exemptions in addition to monitoring economically equivalents contracts. Firms are still awaiting clarity on the Ancillary Activity calculation to determine if your firm’s activity put it in or out of scope.
While regionally, these position limits regimes are in different stages of implementation, global firms must be prepared to effectively comply with current and impending guidelines. In addition to helping to keep firms compliant, near real-time position limits monitoring allows firms to capitalize on efficiencies that they may not achieve otherwise. Without near real-time positions monitoring, firms typically resort to allocating specific amounts of capital to different counterparties. If these counterparties do not leverage the full amounts of capital allocated to them, the liable firm may lose out on optimizing capital, especially in physical markets. Furthermore, the majority of firms’ data structures are organized around risk, not compliance, meaning they face a high cost associated with internally monitoring position limits in near real-time.
Overall, the significant focus on position limits monitoring both regionally and globally is not to be ignored. While a necessary compliance obligation, monitoring positon limits in near real-time can allow firms to benefit from additional business insights and gain additional value through capital efficiencies.
To learn more, view our recent webcast: Position Limits: Getting Business Value from a Compliance Obligation
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
