|MiFID II finally settled - EU ETS installations' operators exempted|
|Tuesday, 18 March 2014 19:51|
A specific exemption for operators with compliance obligations under the EU ETS Directive has been inserted in MiFID II compromised text of February 2014.
There is also a separate exemption for dealing on own account or providing other investment services in emission allowances as an ancillary activity, but in this case an annual notification to the financial authority is required.
Let's remind additions made by MiFID II in Section C of the said Annex I to the Directive 2004/39/EC in the legal catalogue of financial instruments:
- point 4 was modified so that emission allowances were added to the list of "options, futures, swaps, forward rate agreements and any other derivative contracts relating to securities, currencies, interest rates or yields, or other derivatives instruments, financial indices or financial measures which may be settled physically or in cash", and
- new point 11 was added ("emission allowances consisting of any units recognised for compliance with the requirements of Directive 2003/87/EC (Emissions Trading Scheme)".
February 2014 MiFID II compromised text formulates in Article 2 exemption at issue in the following wording:
"operators with compliance obligations under Directive 2003/87/EC who, when dealing in emission allowances, do not execute client orders and who do not provide any investment services or perform any investment activities other than dealing on own account, provided these persons do not apply a high frequency algorithmic trading technique."
In fact, if the said exemption was absent, it would mean subjecting the industrial installations emitting GHG gases to financial institutions' regime, which would amount to a complete nonsense.
Moreover, among those exempted are persons:
(i) who deal on own account, including market makers, in commodity derivatives, emission allowances or derivatives thereof, excluding persons who deal on own account by executing client orders; or
(ii) providing investment services, other than dealing on own account, in commodity derivatives or emission allowances or derivatives thereof to the customers or suppliers of their main business;
provided that for each of the above cases individually and on an aggregate basis this is an ancillary activity to their main business, when considered on a group basis, and that main business is not the provision of investment services within the meaning of MiFID II Directive or banking services under Directive 2006/48/EC, or acting as a market-maker in relation to commodity derivatives, and the persons do not apply a high frequency algorithmic trading technique.
In the case of ancillary activity exemption persons must notify annually the relevant competent authority that they make use of this exemption and upon request report to the competent authority the basis on which they consider that their activity under points (i) and (ii) is ancillary to their main business.
The requirement to notify annually the competent authority appears like quite a bureaucratic burden, especially its repetitive mode looks like a nuisance and a sign of lacking trust in market participant's compliance procedures. Why one-off notification is not considered suffcient? A reason known only to the trilogue negotiators.
On the other hand the mention in this provision that firms must report to the competent authority upon request the basis, on which they consider that their activity is ancillary to their main business, qualifies rather as a statement of an obvious fact, since, I suppose, the competences of relevant authorities always include measures to oversee the market effectively.
Given the indeterminate character of the term "ancillary", inevitably, ESMA should develop draft regulatory technical standards in respect of this exemption to specify the detailed criteria.
Among potential indicators MiFID II lists (non-mandatory and non-exhaustively) the mutual proportion of ancillary and main businesses relative their:
The above assessments are to be done on a group level and take account of different asset classes separately. However, the following elements are excluded:
(a) intra-group transactions as referred to in Article 3 of EMIR Regulation hat serve group-wide liquidity and/or risk management purposes;
(b) transactions in derivatives which are objectively measurable as reducing risks directly related to the commercial activity or treasury financing activity;
(c) transactions in commodity derivatives and emission allowances entered into to fulfil obligations to provide liquidity on a trading venue ("where such obligations are required by regulatory authorities in accordance with Union or national laws, regulations and administrative provisions or by trading venues").
Considering, as was said above, persons dealing on own account by executing client orders are not eligible to apply ancillary activity exemption, a question arises what is the precise delineation of the term: "dealing on own account by executing client orders".
Recitals to the MiFID II explain that the said notion should include firms executing orders from different clients by matching them on a matched principal basis (back to back trading), which should be regarded as acting as principals.
In any case, MiFID II recitals give an indication that the execution of orders in financial instruments as an ancillary activity between two persons whose main business, on a group basis, is neither the provision of investment services within the meaning of MiFID II Directive nor of banking services within the meaning of Directive 2006/48/EC should not be considered as dealing on own account by executing client orders.