ESMA Opinion on revised position limits for EEX Panamax TC Freight contracts

ESMA • 201-203 rue de Bercy • CS 80910 • 75589 Paris Cedex 12 • France • Tel. +33 (0) 1 58 36 43 21 • www.esma.europa.eu OPINION on position limits on EEX Panamax TC Freight contracts I.Introduction and legal basis

1. On 13 May 2020, the European Securities and Markets Authority (ESMA) received a new
   notification from the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) under Article 57(5) of Directive 2014/65/EU on markets in financial instruments1 (“MiFID II”) regarding the exact position limits BaFin has set for the EEX Panamax TC Freight Futures and Options commodity contract in accordance with the methodology for calculation established in Commission Delegated Regulation (EU) 2017/591 supplementing Directive 2014/65/EU of the European Parliament and of the Council with regard to regulatory technical standards for the application of position limits in commodity derivatives2 (“RTS 21”) and taking into account the factors referred to in Article 57(3) of MiFID II.
2. ESMA’s competence to deliver an opinion is based on Article 57(5) of MiFID II. In accordance
   with Article 44(1) of Regulation (EU) 1095/2010 of the European Parliament and of the Council of 24 November 2010 establishing a European Supervisory Authority (European Securities and Markets Authority) 3 (“ESMA Regulation"), the Board of Supervisors has adopted this opinion.
3. On 18 January 2018, ESMA issued a first Opinion regarding the exact position limits BaFin
   intended to set for the Panamax TC Freight Futures and Options commodity contracts. The position limits considered by BaFin was 4,049 lots for the spot month limit and 4,049 lots for the other months’ limit. In this opinion, ESMA concluded that the position limits considered by BaFin complied with the methodology established in RTS 21 and were consistent with the objectives of Article 57 of MiFID II.
4. According to Article 57(4) of MiFID II, a competent authority shall review position limits where
   there is a significant change in deliverable supply and open interest and reset the position limit. In the course of 2019, BaFin considered that there had been a significant increase in the open interest in 2019 to the extent that the position limit had to be reset for both the spot month limit and the other months’ limit. ESMA understands that the new position limits apply since 12 December 2019 and are replacing the previous position limits as determined by BaFin. In the opinion herewith, ESMA is assessing whether the new position limits BaFin has set for the EEX Panamax TC Freight futures and options commodity contracts comply with 1 Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU (OJ L 173, 12.6.2014, p. 349). 2 Commission Delegated Regulation (EU) 2017/591 of 1.12.2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council with regard to regulatory technical standards for the application of position limits commodity derivatives (OJ L 87, 31.3.2017, p. 479). 3 Regulation (EU) 1095/2010 of the European Parliament and of the Council of 24 November 2010 establishing a European Supervisory Authority (European Securities and Markets Authority), amending Decision No 716/2009/EC and repealing Commission Decision 2009/77/EC (OJ L 331, 15. 12.2010, p. 84). Date: 31 July 2020 ESMA70-155-10195

the methodology established in RTS 21 and are consistent with the objectives of Article 57 of MiFID II.
II. Contract classification
Commodity base product: freight (FRGT)
Commodity sub product: dry (DRYF)
Commodity further sub product: dry bulk carriers (DBCR) Name of trading venue: EUROPEAN ENERGY EXCHANGE MIC: XEEE Venue product codes: PTCM, OPTM III.Market description
5. The EEX Panamax TC Freight Futures and Options contracts are cash settled dry time￾charter freight contracts. Their underlying is the price representing the straight average of
rates for hiring on a time charter basis for four routes per vessel of the Panamax class. They do not include any specifications for physical delivery for this commodity derivative contract.
6. The underlying is the price for the hiring of a vessel for a specific period of time for a specific
route. In case of the Panamax Time Charter (PTC), the vessel is a dry bulk ship of the Panamax class. Panamax are terms for the size limits for ships travelling through the Panama Canal. These vessels have a capacity between 60,000 and 100,000 dwt (dead weight tons) and the cargos carried are mainly iron ore, coal and grains. PTC contracts of the EEX cover the average price of four routes for one day:
a. P1A (Transatlantic Route) b. P2A (Taiwan/Japan to Eastern Americas)
c. P3A (Japan to Australia)
d. P4A (Taiwan/Japan to Western Americas)
7. Trading takes place in lots. One lot is 1,000 metric tonnes (MT). Contracts series include
months, quarters and calendar years out to a maximum of 72 months.
8. The prices are based on the prices as published by the Baltic Exchange4
that also provides the Baltic Dry Index, which is a composite of all routes and vessel types and prices for the 4 The prices for the respective routes are published by the Baltic Exchange (https://www.balticexchange.com).

individual routes per vessel type. Panels of independent shipbrokers around the world give their judgement as to the prevailing level of the open market within the parameters of the route they have been asked to assess.
9. BaFin is not aware of any restriction on the supply of the underlying. It is estimated that there
were approximately 2 500 vessels in active operation in 2017. The control of these vessels is highly diversified with hundreds of different market participants responsible for their operation. Further, it is estimated that even the largest owners/operators in this segment control at a maximum less than 5% of total supply. It is not considered possible that supply can be restricted.
10. The supply side of the physical market are the ship owners and ship operators. The
demand is the charterers and cargo owners such as mining companies, grain houses, commodity trading companies and energy companies. Many of the market participants in the physical market are also active in the commodity derivative market. However, there are still many ship owners and demand side players worldwide who are not using freight rate derivatives to hedge their physical exposure to the freight rates. Generally, the market structure is very fluid, i.e. one entity may be at the same time owner, operator and charterer.
11. The physical supply does not fluctuate over the calendar year. The supply is mainly
influenced by the construction and delivery of new vessels into the fleet (newbuilding prices in relation to freight rates perspective) and the removal of vessels for scrapping or conversion to other ship types. Floating storage and slow steaming are also factors influencing the supply side.
12. The demand side in case of dry bulk is mainly driven by the world steel production and
the transportation need for iron ore and coal, i.e. growth of the world economy. Dry bulk prices are often used as indicator of economic trends. IV.Proposed limit and rationale Spot month position limit
13. The EEX Panamax TC Freight Futures and Options contracts are freight contracts under
Article C (10) of Annex I to Directive 2014/65/EU. According to Position Limit 10 of the ESMA
Q&A on position limits both in the spot month and in the other months should be based on open interest. Open interest
14. Open interest amounts to 52,395 lots.
15. EEX has acquired Nasdaq Futures Inc.' (NFX) set of dry freight contracts with effect from
12 December 2019. At this date all trading at NFX ceased and continued at EEX. During the preceding weeks most trading members had therefore migrated their positions to EEX.

Furthermore, trading members were required to announce the number of positions they were to migrate to EEX until 21 November 2020.
16. Open interest value was provided by the exchange. It was calculated as the sum of the
migrated positions as announced by former NFX’s trading members as of 21 November 2019 and the average size of daily open interest throughout three consecutive months (July, August, September 2019) at EXX. The open interest of the options has been calculated according to their delta equivalents. Spot month position limit
17. Spot month limit amounts to 13,099 lots, which represents 25% of open interest. The
spot month limit applies to the EEX Panamax TC Freight Futures and Options contracts. Spot month position limit rationale
18. As the underlying of the EEX Panamax TC Freight Futures/Options contract does not
qualify as food intended for human consumption, the baseline figure for the spot month is set at 25% of the reference amount, i.e. open interest, in accordance with Article 9 of RTS 21 (25% * 52,395 lots = 13,099 lots). There is no market maker active. Thus, the limit is to be set within a range of 5% - 50%. Spot month is the next calendar month which is available to trade. The spot month period only includes one monthly contract.
19. After considering all the characteristics of the contract, BaFin has decided not to make
any adjustments under any of the Articles of RTS 21. No factors that would justify an adjustment from the baseline, either up or down, have been identified.
20. In considering the volatility in the contract, as required by Article 21 of RTS 21, BaFin
noted that there has been some variation in the price of the commodity derivative but BaFin has not found evidence that this is excessive or that lower position limits would reduce volatility.
21. As no adjustment was made to the baseline, this results in a spot month limit of 13,099
lots, which equates to 25% of open interest.
Other months’ position limit
Other months’ position limit
22. The other months’ limit amounts to 13,099 lots, which represents 25% of open interest.
The other months’ limit applies to the EEX Panamax TC Freight Futures and Options contracts. Other months’ position limit rationale

23. As the underlying of the EEX Panamax TC Freight Futures/Options contract does not
    qualify as food intended for human consumption, the baseline figure for the spot month is set at 25% of the reference amount, i.e. open interest, in accordance with Article 9 of RTS 21 (25% *52,395 lots = 13,099 lots). There are less than three market makers active. Thus, the limit is to be set within a range of 5% - 50%.
24. All potential adjustment factors have been considered by BaFin and, based on the
    characteristics of the contract, are not regarded as material or relevant to require additional adjustments, either up or down, from the baseline.
25. In considering the volatility in the contract, as required by Article 21 of RTS 21, there has
    been some variation in the price of the commodity derivative but BaFin has not found evidence that this is excessive or that lower position limits would reduce volatility.
26. As no adjustment were made to the baseline, this results in a spot month limit of 13,099
    lots, which equates to 25% of open interest.
    V. ESMA’s Assessment
27. This Opinion concerns positions held in EEX Panamax TC Freight Futures/Options
    contracts.
28. ESMA has performed the assessment based on the information provided by BaFin.
29. Since the contract was traded before on NFX until the end of 2019, when the trading of
    Dry Bulk Freight was transferred from NFX to EEX, ESMA considers that this is a continuation of trading in the previously existing contract, rather than a new contract. Therefore, it seems appropriate to use the previously observed OI level on NFX, for the purpose of setting the relevant position limits.
30. ESMA notes that when BaFin notified ESMA, the position limits for the EEX Panamax TC
    Freight Futures/Options contracts had already been set and active.
31. For the purposes of this Opinion, ESMA has assessed the compatibility of the intended
    position limits with the objectives of Article 57(1) of MiFID II and with the methodology for calculation of position limits established in RTS 21, in accordance with Article 57(3) of MiFID II. Compatibility with the methodology for calculation of position limits established in RTS 21 in accordance with Article 57(3) of MiFID II
32. BaFin has set the same position limit for the spot month and for the other months’.

*Position limit as % of Open Interest
Spot month position limit
33. ESMA agrees that the EEX Panamax TC Freight Futures and Options contracts are
freight contracts under Article C(10) of Annex I of MiFID II and that, accordingly, the spot month limit is to be set as a percentage of the open interest in those contracts.
34. The open interest was calculated as the sum of the migrated positions as announced by
former NFX’s trading members as of 21 November 2019 and the average size of daily open interest throughout three consecutive months (July, August, September 2019). ESMA considers that such an approach is sensible in this case as it allows better taking into account the upward trend in open interest. ESMA also considers this approach to be consistent with
Article 12 of RTS 21.
35. ESMA considers in particular as a reasonable approach not to have adjusted the spot
month limit downwards based on the characteristics of the contract.
Other months’ position limit
29. ESMA agrees that most of the potential adjustment factors in RTS 21 are not relevant for
cash settled contracts where open interest serves as a baseline both for the spot month and for the other months’.
36. Consequently, these position limits have been set following the methodology established
by RTS 21.
Compatibility with the objectives of Article 57(1) of MiFID II

37. Under Article 57(1) of MiFID II, the objectives of the position limits are to prevent market
    abuse and support orderly pricing and settlement conditions including preventing market distorting positions.
38. In light of the assessment above, ESMA considers that the position limits set for the spot
    month and for the other months achieve a reasonable balance between the need to prevent market abuse and to ensure an orderly market and orderly settlement while ensuring that the development of commercial activities in the underlying power market and the liquidity of the EEX Panamax TC Freight contracts futures and options contracts are not hampered VI.Conclusion
39. Based on all the considerations and analysis presented above, it is ESMA’s opinion that
    this spot month position limit does comply with the methodology established in RTS 21 and is consistent with the objectives of Article 57 of MiFID II. This other months’ position limit does comply with the methodology established in RTS 21 and is consistent with the objectives of
    Article 57 of MiFID II.
    Done at Paris,
    Steven Maijoor
    Chair
    For the Board of Supervisors