|MiFID II exemptions|
MiFID II regulatory framework significantly narrows exemptions currently available to commodity derivatives traders. This effects in a need for such market participants to review their MiFID compliance status and - if necessary - to elaborate and implement an adequate and functional trading model.
The key assumption is that a person falling under any of the categories listed in Article 2(1) of MiFID II would not have to be authorised as an investment firm.
Under MiFID I companies specialising in commodity derivatives trading on own account were exempted from provisions of the said Directive (see in particular the exemption in Article 2(1)(k) of MiFID I).
However, under MiFID II the commodity derivatives trading exemption in Art. 2 (1)(k) was deleted. Moreover, the European Commission intention was explained in Recital 88 in the preamble to the Directive in the following way:
"Considering the communiqué of G20 finance ministers and central bank governors of 15 April 2011 on ensuring that participants on commodity derivatives markets should be subject to appropriate regulation and supervision, the exemptions from Directive 2004/39/EC for various participants active in commodity derivative markets should be modified to ensure that activities by firms, which are not part of a financial group, involving the hedging of production-related and other risks as well as the provision of investment services in commodity or exotic derivatives on an ancillary basis to clients of the main business remain exempt, but that firms specialising in trading commodities and commodity derivatives are brought within this Directive."
It follows European Commission doesn't aim to catch utility traders, only sole speculators.
Another potential exemption (Art. 2 (1)(j) relating to companies trading on own account in commodity derivatives if their trading activity is ancillary to their main business - so-called MiFID II ancillary activity (or "commodity derivatives trader") exemption) will be specified through the European Commission delegated acts to define "ancillary activity" to the main business (suggested criteria are: the extent to which the activity is objectively measurable as reducing risks directly related to the commercial activity or treasury financing activity and the amount of capital employed by the trading activity).
The effect of new regulation will be the notion of ancillary activity in Article 2(1)(i) is applied in a very narrow and precise manner. Article 2(1)(i) would be amended so that persons dealing on own account with clients of the main business would not fall within the exemption.
MiFID II also exempts from financial regulation regime EU ETS operators, however under certain restrictions (details see here).
In turn, the application of the dealing on own account exemption (Article 2(1)(d)) under MiFID II is excluded with respect to emission allowances.
In effect, MiFID II does not contain specific exemption for firms specialising in professional emissions trading on own account.
Recital 36 of MiFID II requires of persons covered with an exemption to comply on a continuous basis with the conditions thereof.
ESMA's Discussion Paper on MiFID II/MiFIR of 22 May 2014, ESMA/2014/548 elaborates on the issue the following way:
"In order to allow for market participants to plan and operate a business in a reasonable way, the calculation to determine whether a person still fulfils the requirements for the exemption may take place at specified intervals.
It would be unhelpful and impractical for the operation of the business if it were possible to 'fall in and out' of regulation due to seasonal patterns of activity.
Furthermore, requiring calculations in short time intervals could be prejudicial to smaller firms which are not required to mark-to-market their positions daily.
A daily calculation on a rolling basis (as EMIR provides for calculating clearing thresholds) may not be appropriate since falling in and out of the scope of MiFID II has broader implications than falling under the clearing obligation.
Falling within the scope of MiFID II, inter alia, results in authorisation requirements, being subject to the trading and clearing obligation and potentially being subject to prudential requirements under CRD IV.
One potential solution could be to have an annual test regarding whether the requirements of the exemption are still fulfilled based on an audit report. This approach would be in line with the requirement of annual notification.
However, it is noted that, even if calculated annually, the amount of capital employed and the size of the trading activity in financial instruments might fluctuate from year to year as, for example, events that occur periodically may require increased hedging activities in certain years.
Therefore, a firm may fall within the scope of MiFID II because it fulfils the relevant criteria one year; however, it may qualify for an exemption from MiFID II in another year. A practical approach to address this issue may be to determine the qualification for exemption on the basis of a rolling average of three years.
Nevertheless, notification to the competent authority will have to be made annually as set forth by Article 2(1)(j) MiFID II. In order to establish this process, at the beginning an interim approach would have to be applied.
A possible interim approach may be to define a starting date from which the data has to be collected that is necessary for the assessment of whether the person qualifies for the exemption and a second date at which the first calculation and notification to the competent authority has to be made.
The first period from collecting the data to the first calculation/notification may be shorter than three years.
The following calculations could then be made on an annual basis using a rolling approach until a period of three years can be taken into account on a rolling basis."
"Firms that qualify under the various exemptions of the MiFID's scope of application should not be regarded as MiFID investment firms. The MiFID requirements, in particular the basic usual prudential requirement of initial capital, do not apply to them" (European Banking Authority (EBA) Report on Investment Firms, Response to the Commission's Call for Advice of December 2014, EBA/Op/2015/20 (p. 12).
Article 3 of the MiFID also opens a national discretion for an optional exemption, whereby firms that only provide investment advice and/or receive and transmit orders may do so without being subject to the MiFID, provided that they comply with certain conditions, including only transmitting orders via a firm that is subject to the provisions of the MiFID.
Where such an exemption is used, such firms may not use the MiFID passport and are not subject to Article 31 of the CRD, which sets the basic minimum requirements for institutions not holding client money or securities (firms excluded from the full CRD/CRR, point (c) of Article 4(1)(2) of the CRR.
In general, MiFID II narrows certain exemptions contained in the provisions of the MiFID on scope.
In effect, the application of MiFID II will widen the scope of the MiFID and is likely to increase the number of firms captured by the Directive.
Since the CRR's definition of 'investment firm' makes use of the MiFID definition, changes in the scope of the MiFID definition are likely to also affect the scope of the CRR definition.
Therefore, unless changes are introduced in the CRD IV framework before the entry into force of MiFID II (see CRR exemption for commodity dealers), the number of investment firms subject to CRD IV will also likely increase when MiFID II comes into force in January 2018.
MiFID II Exemptions Summary
|Last Updated on Sunday, 16 July 2017 15:00|