Regulatory Matters
Mitsui Bussan Commodities (USA) Inc (MBCUS) acts as an agent for Mitsui Bussan Commodities Limited (MBCL) and therefore all agreements and transactions entered in to by our clients will be with MBCL as principal. MBCL’s head office is in the United Kingdom and it is authorised and supervised by the UK Financial Conduct Authority (FCA).
MBCL is subject to the UK version of the European Market Infrastructure Regulation (UK EMIR) and the Markets in Financial Instruments Directive 2 (MiFID 2). As part of the onboarding process MBCL is required to ask its clients to complete documentation which references these regulations and to obtain specific information which enables it to meet its obligations under these regulations. The purpose of this document is to explain such requirements.
UK EMIR
What is UK EMIR?
UK EMIR is a regulatory framework which was introduced in response to the 2008 financial crisis. It was formed as part of a global commitment, agreed by the G20 in September 2009, to tighten regulation of the OTC derivatives market by seeking to improve transparency and reduce overall systemic risk. The regime introduced requirements related to derivatives markets, clearing and exchanges. EU EMIR was onshored into UK legislation when the UK left the European Union and is known in the UK as UK EMIR.
More information about UK EMIR may be found on the FCA website, here.
When MBCL transacts with its clients it must comply with UK EMIR requirements wherever such clients are located.
UK EMIR requires MBCL to agree to certain regulatory specified arrangements with its clients.
These arrangements include:
UK EMIR rules divide market participants into two broad categories: Financial Counterparties (FCs) and Non-Financial Counterparties (NFCs). Both FCs and NFCs are further sub-divided depending on the aggregate size of the positions held and whether or not they exceed a pre-defined threshold (known as the “clearing threshold”), which is currently set at EUR 3 billion.
These categories are:
Where :
A client’s categorization will determine what requirements will need to be applied when dealing with MBCL. Requirements including timely confirmation, portfolio reconciliation, will always apply but are more stringent for NFC+ than for NFC- clients.
Commodity transactions that we enter into with you will need to be reported under UK EMIR. MBCL is able to report on your behalf as it does with many clients. In order to be able to do this, MBCL will need to obtain certain information from you related to our transactions, including a valid Legal Entity Identifier (LEI).
Under UK EMIR MBCL is required to agree with its counterparties a procedure that allows (i) reconciling our portfolio of transactions to identify discrepancies and errors; and (ii) solving potential disputes arising out of discrepancies in the portfolio reconciliation process.
ISDA has created a method which enables parties to incorporate the requirements of UK EMIR into their agreed Master Agreement documentation. This is done by means of the parties adhering to protocols via ISDA’s website. One such protocol is the ISDA 2020 UK EMIR Portfolio Reconciliation, Dispute Resolution and Disclosure Protocol (the “UK EMIR Protocol” that can be found at https://assets.isda.org/media/11dbf4df/7ebef173-pdf/ ). This is achieved by the UK EMIR Protocol being incorporated by reference into the ISDA Master Agreement or alternatively by including it as an Attachment to the ISDA Master Agreement itself.
The UK EMIR Protocol covers:
(i) Portfolio Reconciliation, a procedure where both parties may choose to exchange reconciliation statements or it can be agreed that MBCL will be the designated “sending party”.
(ii) Dispute Resolution, a mechanism allowing the parties to resolve discrepancies. This mechanism does not supersede any other dispute resolution process agreed in the ISDA Master Agreement.
Please note that the UK EMIR Protocol explicitly provides that failure to comply with any of its provisions will not result in an event of default under the ISDA Master Agreement.
MIFID2: Markets in financial instruments directive 2
What is MIFID2?
The Markets in Financial Instruments Directive (Directive 2014/65/EU) (MiFID2) is one of the key regulatory regimes governing financial markets in Europe and the UK. It applies to firms offering investment services or engaging in investment activity. The regime seeks to increase investor protection and transparency. MiFID2 came into effect January 2018 and has been transposed into UK law following the UK’s exit from the European Union.
More information about MiFID2 may be found on the FCA website, here.
MiFID2 applies to regulated investment firms which includes MBCL. MBCL must adhere to all applicable MiFID2 requirements in the course of its dealing relationships with all clients, wherever they are located in the world. Such requirements include making certain disclosures, explanations of the way we conduct business, our charges and commissions, where to find certain information and how we intend to communicate with clients, all of which must be done at the outset of the client relationship.
Consistent with many other financial regulatory regimes around the world, the UK (and EU) MiFID regimes have adopted a client classification framework which recognises that investors/market participants have different levels of experience, knowledge and expertise. Under MiFID2 there are three categories: Retail, Professional and Eligible Counterparty (ECP). The category will determine the level of investor protection offered. Clients must meet certain pre-defined criteria in order to qualify as either Professional or ECP (MBCL does not trade with Retail clients). MBCL is required to make an assessment as to which category a client falls into. Prior to entering into any transaction MBCL must notify the client of their client classification.
Eligible Counterparty (ECP) is a category which generally applies to regulated financial services firms such as banks, insurance companies, hedge funds etc. The ECP category is reserved for the most sophisticated market participants.
Professional Clients have a greater degree of investor protection than ECPs. When dealing with Professionals, a firm has an enhanced duty to act in the best interest of its Professional clients through various requirements including best execution, and disclosures about risks and costs and charges. It must also treat them fairly at all times.
Client Classification is determined by assessing certain financial criteria which can be done by reviewing financial statements. Since the financial criteria must relate to the client at legal entity level MBCL will usually request that such statements be provided on an unconsolidated basis rather than at a group level. However, it is appreciated that certain clients may only have consolidated group level statements available. Where this is the case, then MBCL will accept a written representation that the client meets the required threshold.
Professional clients – These are companies which are not regulated (see definition of ECP below) and which can be considered “Large Undertakings”. To be considered a Large Undertaking, a corporate client must meet two out of the three criteria set out below.
Where “Balance sheet” is the total figure under the assets column on a company’s balance sheet; “net turnover” is revenue from sales of products or services after deduction of sales rebates, discounts, value added tax and other taxes linked to the turnover; “own funds” is net worth i.e. total assets minus total liabilities.
A full definition of a Professional client can be found in the Appendix.
ECP – this category includes financial institutions, insurers, pension funds, and governments. This would be somewhat similar to Major Swap Participants as well as Swap Dealers under US regimes.
Under MiFID2 MBCL must obtain certain consents from clients prior to transacting in order to evidence the client is aware of certain aspects of the trading relationship. MBCL will obtain such consents at the time of client onboarding. The consent letter does not amend, change, supersede or in any way affect the contractual terms of the trading relationship between MBCL and its clients, including any rights and/or obligations under the terms of the ISDA Master Agreement.
Summary explanations of the common representations that are present within the Consent Letter are set out below:
Client Order Execution Policy
As set out in MiFID2 MBCL must:
(i) provide appropriate information on its Client Order Execution Policy,
(ii) obtain confirmation that its clients have read and understood its Client Order Execution Policy,
before commencing its trading relationship.
The Client Order Execution Policy describes the circumstances in which best execution applies. The relevance of the policy to an individual client will vary according to the nature of the particular dealing relationship.
Trading Outside a Trading Venue
In relation to executing orders off exchange (e.g. on an OTC basis), MBCL must obtain the prior express consent of their clients before proceeding to execute their orders.
Clients who give consent to trading off exchange may be able to access wider sources of liquidity for a given asset class but the consent is to alert the client to the fact that execution of OTC transactions between the client and MBCL has the consequence that the client will face the counterparty credit risk of MBCL. Our Consent Letter makes it clear that when we transact on an OTC basis we will be transacting off exchange under the regulations. By signing the Consent Letter a client is providing a continuous form of consent enabling an efficient and effective trading relationship where the client can trade on or off exchange with MBCL. Without such general consent, MBCL would be forced to obtain prior written consent each time it enters into an OTC transaction with a client.
Costs and Charges
Under UK MiFID2, MBCL must obtain their clients’ confirmation that they understand the mechanisms by which they will be informed of costs and charges related to transactions executed with MBCL. In accordance with the regulation, information will be provided on a generic, aggregated and anonymised basis to our clients via our website. Importantly, no individual client can be identified from this disclosure.
APPENDIX – USEFUL LINKS FOR MORE INFORMATION
UK EMIR
UK EMIR for NFC's, including reporting and clearing thresholds
GLEIF - Legal Entity Identifier
MiFiD 2
Regulation of markets in financial instruments | FCA
MiFID 2 Client Categorisation (fca.org.uk)
Professional Client Definition
(1) Entities which are required to be authorised or regulated to operate in the financial markets. The list below shall be understood as including all authorised entities carrying out the characteristic activities of the entities mentioned: entities authorised by a Member State under a Directive, entities authorised or regulated by a Member State without reference to a Directive, and entities authorised or regulated by a third country:
(a) Credit institutions;
(b) Investment firms;
(c) Other authorised or regulated financial institutions;
(d) Insurance companies;
(e) Collective investment schemes and management companies of such schemes;
(f) Pension funds and management companies of such funds;
(g) Commodity and commodity derivatives dealers;
(h) Locals;
(i) Other institutional investors;
(2) Large undertakings meeting two of the following size requirements on a company basis: — balance sheet total: EUR 20 000 000 — net turnover: EUR 40 000 000 — own funds: EUR 2 000 000
(3) National and regional governments, including public bodies that manage public debt at national or regional level, Central Banks, international and supranational institutions such as the World Bank, the IMF, the ECB, the EIB and other similar international organisations.
(4) Other institutional investors whose main activity is to invest in financial instruments, including entities dedicated to the securitisation of assets or other financing transactions.