On May 30, 2016, ESMA published an Opinion specifying the criteria for establishing, under MiFID II, when the activity of a firm is to be considered “ancillary” to the main business of the firm at a group level. Under the current MiFID, eligible firms trading commodity derivatives can rely on exemptions for ancillary activities, avoiding the need to become regulated as an investment firm. MiFID II narrows the ancillary activity exemption considerably. ESMA is required to develop RTS to specify the criteria which must be taken into account for the revised exemption. They have specified at least the following two elements: (i) the need for ancillary activities to constitute a minority of activities at a group level; and (ii) the size of their ancillary trading activity compared to the overall market trading activity in that asset class. ESMA submitted draft RTS to the Commission on September 28, 2015. On March 14, 2016, the Commission indicated its intention to endorse the draft RTS, subject to a number of changes. In particular, the Commission requested that ESMA include, when proportionate and appropriate, a capital-based test for groups that have undertaken significant capital investments, relative to their size, in the creation of infrastructure, transportation or production facilities or groups that undertake activities or investments which cannot be hedged in financial instruments. The Opinion published is in response to the Commission’s request.
ESMA has responded by stating its view that the proposed business activity test in its final draft RTS is in line with the objectives pursued by the exemption for ancillary activities contained in MiFID II. ESMA’s view is that a capital-based test has drawbacks, because such a test could be inaccurate and could see a firm meeting requirements, or failing to meet requirements, depending on a given time period. Also, the different sizes and wide varieties of sectors and participants in commodity derivatives markets mean that such a test may fail to ensure a level playing field for market participants. Should the Commission decide to introduce a capital test, ESMA has identified some metrics that could be used by the Commission as an alternative to the main business test already designed by ESMA, such as the annual gross notional amount of transactions in commodity derivatives in the EU. ESMA has proposed that, if a capital test is introduced, entities should be able to choose between performing the original main business test based on trading activity or a capital test, on the basis that this would avoid putting small-and medium-sized entities at a disadvantage.
ESMA also published an amended version of the RTS with some minor changes not related to the Commission’s request; for example, altering the date in the RTS to take into account the co-legislator’s agreement to delay the implementation of MiFID II.
ESMA’s opinion and amended RTS are available at: