Intragroup exemption represents potentially one of the most widely used MiFID II easements. It is on account of significant role intragroup transactions play in global trade.
The specifics of intragroup transactions in the EU derivatives market has been highlighted by ESMA Annual Statistical Report of 9 December 2019 on EU Derivatives Markets (ESMA 50-157-20, p. 4, data at the end of 2018), which refers to the following numbers:
- intragroup usage was higher in equity markets (27% of the total notional amount in equities), in commodities (24%) and in currency markets (19%);
- intragroup usage was lower in credit (10%) and in interest rate derivatives (7%);
- instruments particularly used in intragroup transactions were equity options, which made up 86% of the total intragroup notional amount in equities, currency CFDs, which made up 41% of the currency total, and commodity swaps which made up 56% of the total notional amount for intragroup commodity derivatives.
The legal base for intragroup transactions exemption under MiFID II is Article 2(1)(b), which has been transferred from MiFID I into MiFID II effectively in the same wording (the same applies to MiFID I Recital 11), however, its interactions with other MiFID II provisions evoke certain doubts (see, for example, remarks on the matched principal trading).
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MiFID II Directive does not apply to: persons providing investment services exclusively for their parent undertakings, for their subsidiaries or for other subsidiaries of their parent undertakings
(MiFID II Article 2(1)(b) - Intragroup exemption) |
Under the said provision persons providing investment services exclusively for their parent company, their subsidiaries and those of their parent company are not subject to MiFID II. This means that providing investment services for the benefit of group companies must be the only investment service that is undertaken.
However, companies buying and selling financial instruments for ourselves are still able to use the group exemption - because it applies to investment services and not investment activities.
So, as long as your own account dealing does not involve you providing an investment service (to which MiFID applies) to non-group entities, you can still rely on the group exemption in respect of the services you provide solely to other group companies (FCA, The Perimeter Guidance Manual, Chapter 13, Guidance on the scope of MiFID and CRD IV, p. 21).
The above-mentioned FCA Guidance Manual also refers to the issue of exemptions cumulation under MiFID I: "[s]o far as your own account dealing is concerned, you may be able to rely upon the exemption in article 2.1(i) if you meet the relevant conditions. The ability to combine reliance on article 2.1(b) and article 2.1(i) could be relevant to companies performing group treasury functions."
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Requirements not covered by the exemption
Even if intragroup traders are exempt under Articles 2(1)(b) 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 if the approval is granted by the competent authority),
3) Article 17(1) to (6) of MiFID II on algorithmic trading apply to members or participants of regulated markets and MTFs,
4) in accordance with Article 1(3) MiFIR, Title V of the MiFIR (encompassing requirements for derivatives, in particular, the trading obligation, clearing obligation, indirect 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)).