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Surveillance of NZX Dairy

Derivatives Discussion Document

26 June 2015

SURVEILLANCE OF NZX DAIRY DERIVATIVES - June 2015 2 of 16

Contents Introduction ...................................................................................................................... 3

Request for comments ..................................................................................................... 4

Part I – Background ......................................................................................................... 5

A) The physical market for dairy products ........................................................................ 5

B) NZX’s dairy derivatives market ..................................................................................... 7

C) Relationship between GDT and NZX’s dairy derivatives ............................................... 7

Part II – The regulatory landscape ................................................................................... 8

A) NZX’s role .................................................................................................................... 8

B) Financial Markets Authority’s role ................................................................................. 8

C) NZX Derivatives Market Rules ...................................................................................... 8

D) Legislation .................................................................................................................... 9

Part III – Manipulation in commodity derivatives contracts...............................................11

Part IV – NZX’s proposal..................................................................................................12

A) New delivery month position limits .............................................................................. 12

B) New rules on reporting requirements and aggregation ............................................... 14

C) Reporting of underlying positions ................................................................................ 16

Submissions.....................................................................................................................16


Introduction NZX launched the NZX Derivatives Market with commencement of trading in Whole Milk Powder (WMP) Futures in October 2010. Since then, NZX has launched WMP Options, Skim Milk Powder (SMP) Futures, Anhydrous Milk Fat (AMF) Futures and Butter Futures. Equity Derivatives were launched in June 2014.

As market operator and regulator, NZX is responsible for surveillance of the NZX Derivatives Market to ensure that it operates in a fair, orderly and transparent manner so that market confidence is maintained. Effective surveillance tools for the regulation and surveillance of the market must be in place to prevent market manipulation and to provide confidence in the reliability of the settlement price and the effectiveness of derivatives contracts as a hedging tool.

NZX regularly reviews its arrangements for supervising trading behaviour in NZX Dairy Derivatives. This is to ensure that the market continues to operate in a fair, orderly and transparent manner and to ensure best practice in line with world markets.

The NZX Dairy Derivatives Market has grown considerably since launch in 2010, additional participants are joining the market and volume and open interest are growing exponentially. The market is entering a new phase of liquidity. As a result, NZX proposes to further enhance its surveillance and monitoring arrangements. Proposed enhancements include but a review of delivery month position limits and the aggregation of exposures as well as a requirement for participants to provide additional daily information on the beneficial ownership of contracts.

Part I of this document describes the characteristics of the physical market for dairy commodities and of NZX’s dairy derivatives.

Part II describes the regulatory landscape and explains NZX’s role as market operator and front line regulator.

Part III of this discussion document identifies forms of manipulation that are particularly relevant to commodity futures markets.

Part IV sets out the monitoring and surveillance tools that exchanges typically use to address market manipulation and NZX’s proposal to enhance its current monitoring and surveillance arrangements.

NZX seeks feedback from market participants on the risks of possible manipulative conduct relating to the dairy derivatives and the underlying physical market. NZX also seeks feedback on its proposal to implement enhanced surveillance and monitoring arrangements as set out in this discussion document.

Following feedback from the market, NZX intends to release a follow up consultation document responding to feedback and outlining the proposed final surveillance and monitoring arrangements for implementation. NZX is targeting release of this follow up document in Q4 2015.

A copy of this discussion document can be viewed at: www.nzx.com/regulation/consultation

http://www.nzx.com/regulation/consultation


Request for comments NZX seeks comment on its proposal as detailed in this discussion document.

Please provide comments in electronic format.

NZX may publish comments received. Please indicate in your submission if you have any objection to the release of information contained in your submission.

Please send your submission before 5.00pm on Friday, 7 August 2015 to: [email protected]

If you have any queries in relation to this discussion document or NZX’s proposal, please contact:

Kathryn Jaggard

NZX Head of Derivatives

Phone: +64 9 368 1242

Email: [email protected]

mailto:[email protected]


Part I – Background

A) The physical market for dairy products1

In 2014, the value of the global dairy export market was approximately US$37.1bn, up from US$34.8bn in 2013. Exported products include milk and creams, milk powders – whole milk, skim and whey – and fat products: including anhydrous milk fat, butter and cheese, as well as casein, lactose and other such by-products,

New Zealand accounted for approximately 33% of the value of annual global export trade in 2014.1 New Zealand is the leading exporter of WMP, exporting more than 1.4 million tonne, representing 61% of the global WMP export market. In 2014, 41% of New Zealand’s WMP exports were sent to China. New Zealand is also the leading exporter in Butter (52% of global exports), Casein (47%) and AMF (74%).1

Prior to 2008 the EU and US had large stocks of dairy products, acting as a buffer to supply. The elimination of stocks prior to 2008, coupled with the commodity boom, saw dairy prices increase. As such, an increase in volatility was observed. This price volatility has grown in response to increasing wealth in Asia and the Middle East. An increasing demand for western products, including dairy products, has been a key driver on the demand side, while several factors such as the 2012 droughts in the US and Russia and very good pasture conditions in Oceania and parts of South America have affected the supply side.

In 2008, an online auction platform facilitating the buying and selling of physical dairy commodities was established. GlobalDairyTrade (“GDT”), owned by Fonterra and operated by Charles River Associates, offers a platform for the sale of AMF, Butter, Butter Milk Powder, Cheddar, Lactose, Rennet Casein, SMP, Sweet Whey Powder and WMP. There are currently nine approved sellers who, together, sell over 1 million tonnes of product annually to over 600 approved bidders from around 90 countries2. Contracts in six different current and forward months are available. Fonterra, the world’s leading exporter of dairy commodities and a dominant

1 Unless otherwise stated, data in this section has been sourced from GTIS – Global Trade Atlas, http://www.gtis.com

2 GDT Chart Focus: http://www.globaldairytrade.info/assets/Uploads/resources/GDT-Chart-Focus-Interactive-March-2015.pdf

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GDT Price Index


seller on GDT, sells approximately 25% of its New Zealand product through the GDT platform3 . GDT has become a central price discovery mechanism for physical trade and is a pricing benchmark for globally traded dairy commodities

How does GDT work?

GDT auctions are held fortnightly and are conducted as ascending-price clock auctions run over several bidding rounds. In each auction, a quantity of each product is offered for sale in respect of different delivery time periods, known as contract periods, at a pre-announced starting price. Bidders bid the quantity of each product that they wish to purchase at the announced price. There is an automated bidding option for bidders who are unable to participate while the trading event is underway.

If in any bidding round the total demand exceeds the quantity on offer, then the price of that product increases the next round, and bidders must re-bid their desired quantity. The size of the price increase between rounds is determined by the trading manager at its sole discretion. The trading event runs over several rounds with the prices increasing round by round until the quantity of bids received for each product matches the quantity on offer for the product. Only bidders that place a bid at the final winning price win product. Typically, as the price of a product increases, the quantity of bids received for that product decreases.

Bidders cannot join a trading event part way through: they must participate in round one and can only maintain or decrease their total bid quantities from that point.

Each trading event typically lasts approximately 2-3 hours.

3 http://www.fonterra.com/nz/en/Financial/Fonterras+Place


Shortly after a trading event has concluded, GDT publishes the results on the results page of the GDT website. In the following two days, the seller will contact the buyer to complete the contracting process, and the product is shipped through the seller's standard logistics process.

B) NZX dairy derivatives

Volatility in markets drives demand for price risk management tools such as futures and options. Traders of physical product typically look for ways to lock in forward prices to create certainty and provide insulation from price movements.

Compared to other globally traded commodities, the absence of price risk management tools available for the physical dairy market has been conspicuous. While dairy derivatives have been traded at the Chicago Mercantile Exchange (CME) for some twenty years, this market has only

been relevant to managing risk in the US domestically traded milk market and not relevant to the export market.

In 2010, four exchanges launched futures contracts designed to manage price risk in globally or regionally traded dairy commodities. NYSE Liffe launched a physically delivered European Skim Milk Powder futures contract, and CME launched a physically delivered International Skim Milk Powder Futures contract. Eurex launched a cash settled Skim Milk Powder contract and has since launched separate butter and whey futures contracts. The Eurex contracts are cash settled to an index calculated from prices collected from industry participants in the Netherlands, Germany and France. NZX launched a cash settled WMP Futures contract in 2010 and launched SMP and AMF futures in early 2011. Options on WMP Futures were launched in late 2011. In December 2014 NZX expanded its product offering with Butter futures. NZX’s dairy futures lead in liquidity with over 215,000 tonnes traded to date.

C) GDT and NZX’s dairy derivatives

NZX’s dairy derivatives contracts cash settle to an average of winning prices for the relevant product in GDT auctions. NZX chose the GDT platform prices as the reference price for its Dairy Derivatives following analysis of the markets and industry consultation. NZX determined the prices generated from the GDT platform to be a transparent and credible benchmark for the development of a market in dairy derivatives.

The pricing information used to determine the settlement price is made publicly available on a timely basis: GDT publishes a winning price for every product sold in an auction on the

results page of its website shortly after a trading event has concluded.4 NZX also publishes this data on its dairy futures and options website. On dairy derivative trading days which coincide with a GDT auction, the dairy derivatives market is placed in a trading halt until the auction finishes and the winning prices have been published.

The pricing information used to determine the settlement price is commercially acceptable: GDT hosts 9 registered sellers and hundreds of bidders from over 90 countries. The

GDT auctions are operated by an independent trading manager, CRA International, and each auction is administered according to the GDT Market Rules. Participation has grown since the launch of GDT in 2008 and GDT has become a central price discovery mechanism for physical trade and a reliable pricing benchmark for globally traded dairy commodities.

A relatively large number of transactions are used to determine the settlement price: GDT auctions occur fortnightly and an average of 185 bidders participate in each auction.

4 From 4 November 2014, a winning price equal to its starting price will not be published on the publicly available section of the GDT website. This

change was implemented to ensure GDT compliance with global anti-trust law.


Part II –Regulatory landscape

A) NZX’s role

As a licensed market operator, NZX is required, to the extent that it is reasonably practicable, to do all things necessary to ensure that each of its licensed markets is a fair orderly and transparent market, and to have adequate arrangements for operating its licensed markets, including arrangements for monitoring the conduct of participants on or in relation to the markets and for enforcing compliance with the relevant market rules5.

To meet these obligations NZX has:

• Rules – the NZX Derivatives Market Rules (rules) contain provisions relating to market

manipulation, and requirements for disclosure of trade-related information. Further information about the rules is set out in Part V ‘NZX’s proposal’.

• Monitoring – as part of its programme of regular monitoring of participants, NZX Participant

Compliance will check whether participants’ procedures are adequate to prevent market manipulation and otherwise meet the requirements of the rules.

• Surveillance – NZX Surveillance undertakes in-depth analysis of abnormal market conduct

or trading, and investigates allegations of market misconduct in relation to contracts traded on the NZX Derivatives Market. NZX Surveillance will refer cases of suspected market manipulation to the Financial Markets Authority (FMA) or to NZX Enforcement for further investigation and prosecution.

• Enforcement – suspected breaches of the rules relating to market manipulation are investigated by the NZX Enforcement team, part of NZX Regulation. NZX Regulation may refer alleged breaches of the rules relevant to market manipulation to the NZ Markets Disciplinary Tribunal in accordance with NZX’s Enforcement Policy.

B) FMA’s role

FMA’s main objective is to promote and facilitate the development of fair, efficient and transparent financial markets. FMA oversees dealing in securities, registered exchanges and futures exchanges, including NZX’s securities and derivatives markets. FMA oversees and enforces the insider trading, market manipulation and other dealing misconduct provisions of the Financial Markets Conduct Act 2013 (FMCA). FMA investigates suspected breaches of the FMCA, and can take court action to seek civil penalties.

As a simple summary, NZX is responsible for surveillance and enforcement of market rules, and FMA is responsible for enforcement of legislation (including as a result of referrals from NZX Regulation).

C) NZX Derivatives Market Rules (rules)

The rules contain a general provision prohibiting a participant from placing an order for, or dealing in, any derivatives contract when dealing in that contract or placing that order might reasonably be expected to have an adverse effect on the operations of the market or result in unfairness to its clients or other participants.6

6 NZX Derivatives Market Rule 4.3.1.


The rules expressly state that market manipulation includes manipulating the market to create a condition in which prices do not or will not reflect fair market value – either by manipulation of the market or manipulation of a contract’s underlying market.7

In addition to a general prohibition against market manipulation, the rules require participants to consider certain matters before accepting an order for execution. For example, each participant must consider the impact of the order on the market, whether there is a legitimate commercial reason for the order and whether the client, or another related person, may have an interest in creating a false or misleading market.8

Lastly, the rules contain various other provisions which support the prevention, detection and prosecution of manipulative activity, for example:

• Participants are required to conduct and report trading and dealing in accordance with good broking practice, and must enter orders in accordance with the requirements of the NZX Trading System and the rules;

• Participants are required to maintain order records and provide information concerning orders to NZX on request – including information concerning the beneficial ownership of a position;

• Off-market transactions, including crossings and block trades must be reported through the NZX Trading System, and must be within parameters prescribed in the rules;

• Participants are required to “know their clients”;

• Participants who permit clients to use direct market access, are required to ensure those clients comply with all applicable rules, and are liable for orders directly entered into the NZX Trading System via the participant’s order entry system;

D) Legislation

In addition to the rules, the FMCA contains provisions prohibiting manipulative conduct. Section 265 of the FMCA provides that:

A person must not do, or omit to do, anything if –

(a) the act or omission will have, or is likely to have, the effect of creating, or causing the

creation of, a false or misleading appearance -

(i) with respect to the extent of active trading in quoted financial products; or

(ii) with respect to the supply of, demand for, price for trading in, or value of those financial products; and

(b) the person knows or ought reasonable to know that the person’s act or omission will,

or is likely to have, that effect.

7 NZX Derivatives Market Rule 4.3.1(c).



Section 267 of the FMCA provides that a person who is directly or indirectly party to a trade in quoted financial products of a listed issuer is considered as contravening section 265 if no change in beneficial ownership results from the trade.

It is a defence in a proceeding for contravention of section 265 if the trading occurred or the offer to trade was made in conformity with accepted market practices and for a proper purpose.

A person who contravenes section 265 commits an offence if the person knows that the act or omission will have, or is likely to have, the effect of creating, or causing the creation of, a false or misleading appearance with respect to the extent of active trading in quoted financial products, or with respect to the supply of, demand for, price for trading in, or value of those products. An individual who commits an offence may be liable on conviction to a term of imprisonment not exceeding 5 years, and a fine of up to $500,000. Any other person is liable on conviction to a fine up to $2.5 million.

Section 265 is a civil liability provision in respect of which the FMA can seek a pecuniary penalty for contravention or involvement in contravention up to a maximum of $200,000 in the case of an individual, or $600,000 in any other case.

The High Court may also make an order for compensation for contravention of section 265 on the application of FMA or any other person where a person has suffered, or is likely to suffer loss or damage because of the contravention whether or not that person is a party to the proceedings. The court may make any order it thinks just to compensate for the loss or damage or to prevent or reduce the loss or damage, and may direct persons involved in the contravention, including a director of a company in the case of a contravention by a company to pay the amount of loss or damage.


Part III – Manipulation in commodity derivatives

contracts Market manipulation is conduct that is likely to create a false or misleading appearance with respect to the extent of active trading in quoted financial products or with respect to the supply of, demand for, price for trading in, or value of those products. In commodity derivatives markets, market manipulation may be caused by manipulation of the underlying physical market.

Manipulation undermines market confidence by distorting price or disrupting trading and, in the case of commodity derivatives markets, the physical delivery or cash-settlement of contracts. NZX has considered what sorts of manipulation might be observed in relation to NZX’s markets. This part of the paper describes the main form of manipulation that may occur on commodity futures markets namely manipulation of the settlement price.

Manipulation of settlement price

The surveillance emphasis in cash-settled contracts is on the integrity of the cash price series used to settle the derivatives contract.9 Traders may be incentivised to manipulate the settlement price of a particular commodity in order to make a profit in the derivatives market in that commodity. Therefore, the settlement price must be reliable, in the sense that it must accurately reflect true supply and demand in the underlying physical market, otherwise price convergence will be lost and the derivatives contracts will not be effective hedging tools.

Each of NZX’s dairy derivatives contacts is cash-settled to the average GDT winning price (as described in Part I above, ‘The physical market for dairy products’). GDT registered bidders who use futures or options to fully and genuinely hedge GDT purchases may be immune to price movement on GDT and therefore there is a risk of GDT prices being artificially pushed to inflated levels. Equally there may be intentional manipulation of GDT to create a profitable position in the futures market where no genuine hedge exists. Because NZX’s dairy derivatives contracts settle to the winning GDT price, any changes to the GDT price will have a consequential effect on NZX’s dairy derivatives contracts.

While NZX has seen no evidence of this occurring in the market, and actively monitors all positions, NZX wishes to consult with the market on enhancements that may protect against any such behaviour in future.

Information about how the settlement price for NZX’s dairy derivatives contracts is determined is set out above in section (C) of Part I above.

9 IOSCO ‘Principles for the Regulation and Supervision of the Commodity Derivatives Markets’, September 2011, page 31.


Part IV – NZX’s proposal The objective of a surveillance program is to monitor the market in order to detect and deter manipulation or abusive trading that distorts prices, or disrupts trading or the delivery of contracts, and to provide information that supports a market authority’s enforcement actions.10

As explained in Part II ‘The regulatory landscape’, the rules contain provisions prohibiting manipulative conduct. For example, under rule 4.3.1, each participant is prohibited from placing an order for, or dealing in, any contract when dealing in that contract or placing that order might reasonably be expected to have an adverse effect on the operations of the market or result in unfairness to its clients or other participants. This specifically includes:

• where conduct creates a false or misleading appearance with respect to the market for, or the price of, any contract; and

• creating a condition in which prices do not or will not reflect fair market value either by manipulation of the market or manipulation of a contract’s underlying market.

This part sets out NZX’s proposals to enhance its existing surveillance and monitoring arrangements by implementing delivery month position limits, a new rule on aggregation and enhanced daily reporting requirements. The purpose of these proposals is to ensure there are effective measures in place to deter and prevent manipulative conduct and to effectively monitor the dairy derivatives market. The proposals reflect international practice in commodity futures markets.

A) New delivery month position limits

Market authorities should have, and use, effective powers to intervene in commodity derivatives markets – including the power to set ex-ante position limits, particularly in the delivery month.11 A restriction on the size of positions that can be held by market participants can deter market manipulation by inhibiting the development of extraordinarily large exposures.

While position limits can be an effective tool in preventing manipulative behaviour, NZX notes that position limits are less important where a particular market is exceptionally deep and/or liquid. Position limits at expiry may also be less relevant in cash-settled contracts because the size of a trader’s position at expiry should not affect the price of that contract because the trader cannot demand or make delivery of the underlying commodity.

Current arrangements

The rules prohibit a participant or group of participants who, pursuant to an agreement or understanding, act in collaboration to secure a dominant position in a contract or class of contracts which has the effect of creating unfair or misleading trading conditions.12

In addition, to ensure market integrity, NZX may determine the permitted number of open positions that any participant or client may hold or control in any contract by specifying the relevant position limits in the individual contract specifications.13

10 IOSCO, September 2011, page 27.

11 IOSCO ‘Principles for the Regulation and Supervision of Commodity Derivatives Markets’, September 2011, page 40.




The individual contract specifications for each NZX dairy derivatives contract prescribe a position limit of 20,000 open positions in any contract month. NZX’s Global WMP Options have a position limit of 20,000 futures-equivalent contracts in any contract month.

Proposal

As noted above, the rules permit NZX to determine the permitted maximum number of open positions that any participant or client may hold or control in any contract by specifying the relevant position limits in the individual contract specifications.

Under NZX Derivatives Market Procedure (“procedure”) 8.11, position limits must be set according to liquidity in the specified contract and liquidity in the physical underlying market.

NZX proposes to introduce reduced limits on net long open positions in each delivery month. This would impose a maximum limit on long positions which may be taken into the delivery month. Any proposed new position limits will be designed to prevent extraordinarily large exposures and at a limit that would not unduly impact price discovery or unnecessarily inhibit current commercial activity. In order to implement the proposed delivery month position limits, NZX will need to amend the individual contract specifications for each contract.

It is proposed that the existing non-delivery month position limits will continue to apply to all open positions in deferred contract months and all short open positions.

Position limits set by reference to supply of underlying product

As an alternative to fixed position limits set at a pre-determined level, it is possible for position limits to be fixed based on a percentage of overall open interest or based on available supply in the underlying commodity. Such position limits would change continuously to reflect current open interests and available supply.

During the course of developing this proposal, NZX considered implementing position limits in the delivery month set by reference to available supply on GDT. However, due to the difficulty in administering continuously changing position limits based on available supply, NZX proposes to introduce set delivery month position limits as described above.

Exemptions

Exchanges often provide a process for participants to seek exemptions from position limits where the participant is able to demonstrate that an exemption is appropriate.

The rules permit a participant to seek a waiver from the position limits where the participant can demonstrate that it has a material or significant exposure in the contract unit or underlying market which it is seeking to hedge through trading the relevant contract or class of contracts.14

Proposal If the proposed new position limits are implemented, NZX will consider granting market participants exemptions from the position limits where there is a real need to do so.

Questions

NZX seeks market participants’ answers to the following questions relevant to delivery month position limits:



Q1: What delivery month position limits do you think it would be appropriate for NZX to impose in order to reduce the risk of market manipulation?

Q2: Do you think that the proposed delivery month position limits should apply to both short and long positions, rather than only long positions?

Q3: Do you think that instead of being fixed, delivery month position limits should be variable and set by reference to deliverable volume on GDT?

Q4: At what level would delivery month position limits affect your current trading activity (and to what extent)?

Q5: In what circumstances would you consider exemptions should apply and to what participants?

B) New rules on reporting requirements and aggregation of positions

Market authorities should have the ability to collect information that permits them to identify positions under common ownership and control and to identify aggregate exposures.15

An explanation of NZX’s existing arrangements for collecting information and aggregating exposures, as well as NZX’s proposal to enhance its existing arrangements, is set out below.

1. Collecting information – reporting requirements


NZX currently receives daily reports from participants setting out the positions held by each participant and each participant’s clients. The daily reports are required under Procedure 8.9.1, which permits NZX to establish reporting levels on the open positions held by any client or participant – including daily (or other periodic) reports from trading participants on the amount of open positions held by any client or any participant.

Under the rules, “client” is defined as “a person who has executed a client agreement with a participant”. This means that the daily reports will only show the position of the direct client of the participant and may not always show the position held by an end client or the ultimate beneficial owner of a position because, in some cases, the “client” as defined in the rules will not be the ultimate beneficial owner of a position. Some participants’ clients act as intermediaries and have their own clients. In such cases, it is the end clients rather than the intermediary “client” who holds the beneficial interest in a position and therefore there is currently no transparency as to whether one of these end clients has a controlling interest.

Proposal

In order to collect information that enables NZX to identify positions under common ownership and control and to identify aggregate exposures, NZX must know the ultimate client/ beneficial owner of a position.

To achieve this, NZX proposes to amend the rules to require participants to report on the positions held by the end client or ultimate beneficial owner, as well as positions held by the participant and its immediate client. This information will enable NZX to identify the beneficial owner of a position and to effectively aggregate positions.

15 IOSCO ‘Principles for the Regulation and Supervision of Commodity Derivatives Markets’, September 2011, page 28.


Questions

NZX seeks market participants’ answers to the following questions relevant to reporting requirements:

Q6: Do trading participants have information about the beneficial owner of a position, such that they will be able to provide daily reports which identify the beneficial owners of positions?

Q7: Will trading participants need to get information from other parties, such as clearing participants, in order to comply with the proposed daily reporting requirement?

2. Aggregating exposures


As noted above, the rules16 prohibit a participant or group of participants from acting in collaboration to secure a dominant position in a contract or class of contracts, which has the effect of creating unfair or misleading trading conditions. However, there is no formal aggregation rule setting out NZX’s approach to aggregating positions.

Proposal

NZX proposes to introduce a requirement similar to CME17 whereby all positions in accounts for which a person, by power of attorney or otherwise, directly or indirectly holds positions or controls trading shall be included with the positions held by that person. Additionally, positions held by two or more persons acting pursuant to an expressed or implied agreement or understanding shall be treated the same as if the positions were held by a single person.

This new requirement, together with the enhanced reporting requirements explained above, will ensure that the overall net positions are considered for the purpose of meeting position limits. These new reporting requirements will also allow NZX to monitor the aggregation of positions where a position is held or controlled by the same person. For example, NZX will have visibility on whether a person has multiple accounts with different participants or multiple accounts with the same participant or where different entities with the same parent company hold accounts with various participants. Where the ultimate owner is the same, the positions held by the various entities must be aggregated to determine the total net position. The purpose of this proposal is to ensure that a person’s total position is taken into account when determining compliance with applicable position limits.

NZX notes that aggregation may not necessarily result in a parent company with different trading entities exceeding position limits. Different entities within a group may have different trading strategies (i.e. some may hold long positions and some may hold short positions) and the total net position will be considered when determining a person’s compliance with position limits.

Questions

NZX seeks market participants’ answers to the following questions relating to aggregation:


17 CME Rule 559D (http://www.cmegroup.com/rulebook/CME/I/5/5.pdf)


Q8: What difficulties do market participants anticipate they may face in meeting an aggregation

rule?

Q9: Do participants receive information about open positions their clients hold in accounts with

other participants, such that they are able to effectively monitor their clients’ total positions?

C) Reporting of underlying positions in physical market

Market authorities should have authority to access information on a routine and non-routine basis for commodity derivatives markets as well as the power to obtain information on a market participant’s positions in related over-the-counter commodity derivatives and the underlying physical commodity markets.18

NZX proposes to enter into an arrangement with GDT in order to obtain information about bidders’ positions in the physical market. This will enable NZX to compare the total volume sold on GDT with the total volume sold in the derivatives market. It will also allow NZX to compare market participants’ positions in the derivatives market to their position in the underlying physical product. NZX will only use this information for the purpose of carrying out surveillance (and enforcement of rules) of the NZX Dairy Derivatives Market. This information will otherwise be kept confidential by NZX.

Questions

NZX seeks market participants’ views on the following question:

Q10: Do you consider that obtaining information about underlying positions in the physical product will assist in effectively monitoring the market?

Submissions In addition to the specific questions set out at numbers 1 to 10 above, NZX invites general comment on the proposals set out in this discussion document and the impact of the proposals on market participants.

18 IOSCO ‘Principles for Regulation of Commodity Derivatives Markets’, September 2011, page 64.

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