At a Glance…

HM Treasury has published a statutory instrument revising the Regulated Activities Order to clarify what will happen in the event that a commodity derivatives trading firm cannot perform the necessary calculations to determine whether it falls within the Article 2(1)(j) MiFID II ancillary exemption, because the relevant data is not available from an official source. The instrument provides timely clarifications for both commodity traders and financial institutions who might deal with these counterparties once MiFID II comes into force on 3rd January 2018. The publication follows an extended period of engagement by commodity traders, financial institutions, trade associations and law firms, including Reed Smith.

Following an extended period of engagement by commodity traders, financial institutions, trade associations and law firms such as Reed Smith, HM Treasury has published a statutory instrument revising the Regulated Activities Order (the RAO)1 to clarify what will happen in the event that a commodity derivatives trading firm (a Commodity Trader) cannot perform the necessary calculations to determine whether it falls within the article 2(1)(j) MiFID II ancillary exemption (the Ancillary Exemption), because the relevant data is not available from an official source.

Regulation 4 of the Financial Services and Markets Act 2000 (Markets in Financial Instruments) (No. 2) Regulations 2017 (Regulation 4))2 provides timely clarifications for both Commodity Traders, and financial institutions that might deal with Commodity Traders once MiFID II comes into force on 3 January 2018. Regulation 4 comes into force on the same date.

Regulation 4 excludes certain activity3 from being a regulated activity under the RAO if in respect of a calendar year the person carrying on the activity:

i. cannot perform the threshold calculation to establish whether it can rely on the Ancillary Exemption because the relevant data is not publicly available from an official source;

ii. carries on an activity during a period of eight weeks beginning with the day after the relevant data is made publicly available; or

iii. has made an application to the FCA for permission to carry on regulated activities, and the application has not been determined or withdrawn.

A Commodity Trader can continue to trade during the period between submission of an application for authorisation and its determination by the FCA or withdrawal by the Commodity Trader (provided such an application is genuine).

What does this mean?

a) Relevant market data

  • To rely on an exemption for 2018, Commodity Traders must take into account trading figures for the three previous years. There is an argument that some of this data is not yet publicly available (ESMA has so far only published partial market-size data: OTC and exchange-traded data for the second half of 2016, and exchange-traded data for 2015).4
  • Commodity Traders that are genuinely unable to determine the availability of the Ancillary Exemption due to the unavailability of official data may therefore be able to rely on Regulation 4 to carry on trading in the UK. There is no guidance detailing the meaning of ‘relevant data’. Reliance on Regulation 4 is not therefore without risk.

b) Counterparty risk

  • Where the relevant market data is not publicly available, a Commodity Trader may seek to rely on Regulation 4 so as to not be deemed to be in contravention of the FSMA general prohibition5 in relation to its carrying on of certain regulated activities.
  • For financial counterparties dealing with Commodity Traders that rely on the Ancillary Exemption, Regulation 4 may provide an additional degree of assurance (as trades that may otherwise be contrary to the general prohibition may be unenforceable).

c) Caution required

  • Although Regulation 4 can be viewed as a positive development, a Commodity Trader that is taken above the relevant threshold by the publication of relevant data will only have eight weeks to prepare a MiFID II authorisation application.

d) Looking forward

  • Regulation 4 applies in the UK only. Commodity Traders seeking authorisation in other EU member states must check whether a similar statutory instrument dealing with the Ancillary Exemption has been put in place in that jurisdiction.