Dealing on own account exemption under MiFID II - Article 2(1)(d)

 


 

 

Dealing on own account exemption under the MiFID II Directive (Article 2(1)(d)) mustn't be used with respect to commodity derivatives, emission allowances or derivatives thereof, thus in the case of the said products there appears a need to refer to other possibilities - see for instance MiFID II ancillary activity exemption or MiFID II exemption for EU ETS operators.

 

Dealing on own account exemption

under MiFID II Article 2(1)(d)

 

does not apply to:

 

persons dealing on own account in financial instruments other than commodity derivatives or emission allowances or derivatives thereof and not providing any other investment services or performing any other investment activities in financial instruments other than commodity derivatives or emission allowances or derivatives thereof unless such persons:

 

(i) are market makers;

 

(ii) are members of or participants in a regulated market or an MTF, on the one hand, or have direct electronic access to a trading venue, on the other hand, except for non-financial entities who execute transactions on a trading venue which are objectively measurable as reducing risks directly relating to the commercial activity or treasury financing activity of those non-financial entities or their groups;

 

(iii) apply a high-frequency algorithmic trading technique; or

 

(iv) deal on own account when executing client orders;

 

Persons exempt under points (a), (i) or (j) are not required to meet the conditions laid down in this point in order to be exempt.

 

 

Another restriction is that persons using it are not allowed to provide any other investment services and/or perform any other investment activities in financial instruments other than commodity derivatives, emission allowances or derivatives thereof.

 

Moreover, MiFID II stipulates this exemption does not apply to persons who:

 

(i) are market makers; 

 

(ii) are a member of or a participant in a regulated market or multilateral trading facility (MTF), on the one hand, or have direct electronic access to a trading venueon the other hand, except for non-financial entities who execute transactions on a trading venue which are objectively measurable as reducing risks directly relating to the commercial activity or treasury financing activity of those non-financial entities or their groups, or

 

(iii) apply a high frequency algorithmic trading technique; or

 

(iv) deal on own account when executing client orders. 

 

Article 2(1)(d)(ii) of MiFID II had initially the wording:

 

"(ii) are a member of or a participant in a regulated market or multilateral trading facility (MTF) or have direct electronic access to a trading venue",

 

but the Directive (EU) 2016/1034 of the European Parliament and of the Council of 23 June 2016 amending Directive 2014/65/EU on markets in financial instruments amended this provision as above.

 

The motives for this amendment have been explained, rather laconically, in Recital 12 of the said Directive 2016/1034, which reads:

"The exemption set out in point (d) of Article 2(1) of Directive 2014/65/EU should be extended to include non-financial entities who are members of or participants in a regulated market or a multilateral trading facility (MTF), or have direct electronic access to a trading venue when executing transactions on a trading venue which are objectively measurable as reducing risks directly relating to the commercial activity or treasury financing activity of those non-financial entities or their groups".

 
MiFID II makes also the reservation that persons who are exempt under the following points of paragraph 1 of Article 2 of MiFID II

- a - covering insurance, reinsurance and retrocession activities,

- i - collective investment undertakings and pension funds or 

- j - ancillary activity;

"are not required to meet the conditions laid down in this point in order to be exempt".

 

This provision requires more precise regulatory clearance. It remains ambiguous which concretely "conditions laid down in this point" need not to be observed by the above categories of participants, what it means, and what are the consequences. My hypothesis in that regard is shown in the diagram below.

MiFIDII-own-account-exemption 

Considering the above and the fact MiFID II recitals explicitly mention that dealing on own account and ancillary activity exemptions can be used in conjunction (this stance also accepted by ESMA - see: Discussion Paper on MiFID II/MiFIR of 22 May 2014, ESMA/2014/548), it requires to be determined whether, for eample, the firm exempt under Article 2(1)(j) (ancillary activity exemption) and willing to make simultaneous use of own account exemption is not prohibited from being market maker, a member of or a participant in a regulated market or multilateral trading facility (MTF) or from having direct electronic access to a trading venue, applying a high frequency algorithmic trading technique as well as from dealing on own account when executing client orders.

The proper answer to this question appears to require, however, the exact specification of the asset class at issue..

 

The EU financial sector's regulator has already adopted its stance in this regard (see ESMA's Consultation Paper, MiFID II/MiFIR of 19 December 2014 (ESMA/2014/1570) p. 505), quite restrictive, by the way.

As regards the last sentence of Article 2(1)(d) "ESMA is of the view that this sentence cannot be understood in a way that persons fulfilling the criteria of Article 2(1)(j) are not required to meet the conditions of Article 2(1)(d) in order to be exempt in relation to dealing on own account in financial instruments other than commodity derivatives, emission allowances and derivatives thereof. The differentiation between Article 2(1)(d) and (j) reflects different criteria being applicable to different asset classes. Consequently, ESMA understands the second sentence of Article 2(1)(d) to determine that persons seeking exemption under Article 2(1)(j) are not in addition required to meet the conditions laid down in Article 2(1)(d) in order to be exempt for the exemption under Article 2(1)(j)."

 

 

 

MiFID II recitals: 

 

"(22) Persons that deal in commodity derivatives, emission allowance and derivatives thereof may also deal in other financial instruments as part of their commercial treasury risk management activities to protect themselves against risks, such as exchange rate risks. Therefore, it is important to clarify that exemptions apply cumulatively. For example, the exemption in point (j) of Article 2(1) can be used in conjunction with the exemption in point (d) of Article 2(1).

 

(23) However, in order to avoid any potential misuse of exemptions, market makers in financial instruments, other than market makers in commodity derivatives, emission allowances or derivatives thereof provided that their market making activity is ancillary to their main business considered on a group basis and provided that they do not apply a high-frequency algorithmic trading technique, should be covered by the scope of this Directive and should not benefit from any exemption. Persons dealing on own account when executing client orders or applying a high-frequency algorithmic trading technique should also be covered by the scope of this Directive and should not benefit from any exemption."

 

What are the effects of this interpretation? I understand this in the following way: it is not possible for the person exempted under the MiFID II ancillary activity exemption to trade, for example, in IRS through the medium of direct, electronic access to a trading venue. Am I wrong?

 

The importance of the clear-cut regulatory guidance on this exemption is underlined by Recital 36 of MiFID II, which requires of persons covered with an exemption to comply on a continuous basis with the conditions thereof. So, firms need to be cautious on an ongoing basis.

 

One more thing when it comes to own account exemption is also noteworthy, in the said Discussion Paper ESMA has also expressed the view that "the execution of orders in financial instruments between two non-financials directly and without any further intermediation by third parties as ancillary activity is not covered by the term 'dealing on own account when executing client orders' and would therefore not prevent the persons concerned from using the exemptions under paragraphs (d) and (j) of Article 2(1) MiFID II."

 

This appears somewhat enigmatic, hence it will require more comments from the regulator's perspective.

  

 

 


 

 

 

 

Questions and Answers on MiFID II and MiFIR market structures topics, 31 January 2017, ESMA70-872942901-38

 

Question 4 [Last update: 31/01/2017]

 

Do the references to 'market makers' in MiFID II Article 2(1)(d)(i) and Article 2(1)(j) cover those market makers as defined under MiFID II Article 4(1)(7) or those firms engaged in a market making agreement according to Article 17(4) of MiFID II?

 

Answer 4

 

The reference to market makers' in MiFID II Article 2(1)(d)(i) and Article 2(1)(j) covers both firms engaged in a market making agreement according to Article 17(4) of MiFID II and other market makers covered by Article 4(1)(7) of MiFID II.

 

 

 

Requirements not covered by the exemption 

 

 

Even if traders are exempt under Articles 2(1)(d) of MiFID II, they will have to comply with the following MiFID II requirements:

 

1) position limits (only positions held by or on behalf of non-financials which are objectively measurable as reducing risks directly relating to commercial activity will not count towards the limits),

 

2) reporting obligations,

 

3) in accordance with Article 1(3) MiFIR, Title V of the MiFIR, (encompassing requirements for derivatives, in particular, the trading obligationclearing obligationindirect clearing arrangements as well as portfolio compression) apply to all financial counterparties and to all non-financial counterparties above the clearing threshold (EMIR Article 10(1)(b)).

 

 



Last Updated on Wednesday, 01 February 2017 22:35
 

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