MiFID II ancillary activity exemption - capital employed test

 


 

 

The capital employed test is used for determination whether the entity qualifies for the MiFID II ancillary activity exemption and represents, one of the two - alternative - methods of the main business test.

 

The details of this test are stipulated in Article 3(1)(b) and Article 3(5) - (10) of the Commission Delegated Regulation (EU) 2017/592 of 1 December 2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council with regard to regulatory technical standards for the criteria to establish when an activity is considered to be ancillary to the main business (ESMA's RTS 20).

  

The said Commission Delegated Regulation (EU) 2017/592 has included capital employed test in the regulatory set-up as an alternative to the trading test.

 

Pursuant to the said Regulation the capital test "is provided as an alternative to the trading test in order to take into account of the economic reality of the very heterogeneous groups that need to undertake the assessment whether their trading is ancillary to their main business activities, including groups that undertake significant capital investments, relative to their size, in the creation of infrastructure transportation and production facilities, as well as investments which cannot be easily hedged in financial markets" (Recital 6 of the said Regulation).

 

 

Article 3(5) - (10) of the Commission Delegated Regulation (EU) 2017/592 of 1 December 2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council with regard to regulatory technical standards for the criteria to establish when an activity is considered to be ancillary to the main business

 

5. The estimated capital employed for carrying out the activities referred to in Article 1 shall be the sum of the following:


(a) 15 % of each net position, long or short, multiplied by the price for the commodity derivative, emission allowance or derivatives thereof;


(b) 3 % of the gross position, long plus short, multiplied by the price for the commodity derivative, emission allowance or derivatives thereof.

6. For the purposes of paragraph 5, point (a), the net position in a commodity derivative, an emission allowance or derivative thereof shall be determined by netting long and short positions:


(a) in each type of commodity derivative contract with a particular commodity as underlying in order to calculate the net position per type of contract with that commodity as underlying;


(b) in an emission allowance contract in order to calculate the net position in that emission allowances contract; or


(c) in each type of emission allowance derivative contract in order to calculate the net position per type of emission allowance derivative contract.

 

For the purposes of paragraph 5, point (a), net positions in different types of contracts with the same commodity as underlying or different types of derivative contracts with the same emission allowance as underlying can be netted against each other.

 

7. For the purposes of paragraph 5, point (b), the gross position in a commodity derivative, an emission allowance or a derivative contract thereof, shall be determined by computing the sum of the absolute values of the net positions per type of contract with a particular commodity as the underlying, per emission allowance contract or per type of contract with a particular emission allowance as the underlying. 
For the purposes of paragraph 5, point (b), net positions in different types of derivative contracts with the same commodity as underlying or different types of derivative contracts with the same emission allowance as underlying cannot be netted against each other.

 

8. The calculation of the estimated capital shall not include positions resulting from transactions referred to in points (a), (b) and (c) of subparagraph 5 of Article 2(4) of Directive 2014/65/EU.

 

9. The capital employed for carrying out the main business of a group shall be the sum of the total assets of the group minus its short-term debt as recorded in its consolidated financial statements of the group at the end of the relevant annual calculation period. For the purposes of the first sentence, short-term debt means debt with a maturity of less than 12 months.

 

10. The values resulting from the calculations referred to in this Article shall be denominated in EUR.

 

Furthermore, according to Recital 10 of the said Regulation, other methods developed "may not adequately measure the main activity of persons who have significant capital investments, relative to their size, in the creation of infrastructure, transportation and production facilities. Neither does it recognise investments which cannot be hedged in financial markets."

 

The said Recital 10, moreover, emphasises that it is therefore necessary for the main business test to contain a second method that uses a capital based metric to measure that that trading activity is ancillary to the main business of the group.

 

As both forms of the main business test cater for the different underlying economic realities of various groups both tests constitute equally suitable methods to determine whether the trading activity is ancillary to the main business of a particular group.

 

The scope of the calculation of the capital test is the global group, the test includes also any regulated entities.

 

The common ambiguity voiced is whether this transplant from CRR Regulation is self-contained or the whole of the CRR must be applied.

 

The answer to this question may influence on the interpretation of details of this test.

 

According to the document "Joint associations' Questions & Answers (Q&A) on Regulatory Technical Standard (RTS) 20 of the Markets in Financial Instruments Directive (MiFID II)" of 16 February 2017 the numerator of the capital employed test is to be applied on the person (entity) level, by each entity within the same group dealing in derivatives and not on an aggregated group level.

 

The above organisations argue that the capital employed test is to be construed in the context of the market-share test and the trading test where such interpretation is also proposed.

 

In addition, article 2(2), first subpara. RTS 20 clearly makes reference to “activities referred to in article 1 undertaken by a person”, which comprises activities “in accordance with Article 3” and, consequently, extends this understanding (indirectly) also to the entire capital employed test.

 

Hence, also the numerator to the capital employed test is limited to the activities undertaken by “a person” within a group.

 

According to the view presented in the aforementioned document Joint associations' Questions & Answers (Q&A) on Regulatory Technical Standard (RTS) 20 of the Markets in Financial Instruments Directive (MiFID II) of 16 February 2017, activities already authorised under MiFID I / II should be deducted equally from the numerator as well as denominator of the test where relevant.

 

In the Questions and Answers on MiFID II and MiFIR commodity derivatives topics, ESMA70-872942901-28 ESMA has explained on 31 May 2017 that the numerator of the capital test is calculated on the basis of the same positions as included in the market share test as only those asset classes referred to in Article 2(1) are required to be included.

 

In the reasons to the above stance ESMA indicated that:


- Article 3(1) b) RTS 20 refers to the estimated capital employed for those activities referred to in Article 1 of RTS 20, and


- according to Article 3(3) RTS 20 the size of the activities referred to in Article 1 must be calculated by aggregating the size of the activities with respect to all of the asset classes referred to in Article 2(1).

 

In the Q&As of 4 October 2017 SSMA added that:

 

- the capital test should be calculated using consolidated accounts,


- firms are required to use capital employed on a worldwide basis when calculating the capital test.

 

ESMA pointed to Article 3(9) of RTS 20 which stipulates that the capital employed for carrying out the main business of a group shall be the sum of the total assets of the group minus its short-term debt as recorded in the consolidated financial statements of the group at the end of the relevant annual calculation period.

 

 

 globe  

    Territorial scope   

 

 

The numerator of the capital employed test is to be construed in the context of the market share test and of the trading test.

 

Hence - analogously to the two above tests - also the numerator to the capital employed test is limited to the activities undertaken in the European Union.

 

In turn, the denominator of the capital employed test is to be calculated on a world-wide group basis as Article 3(9) of the Commission Delegated Regulation (EU) 2017/592 makes a reference to “the sum of the total assets of the group”.

 

In Recital (1) Commission Delegated Regulation (EU) 2017/592 it is stated that “In line with Article 2(11) of Directive 2013/34/EU of the European Parliament and of the Council', a group is considered to comprise the parent undertaking and all its subsidiary undertakings and includes entities domiciled in the Union and in third countries regardless of whether the group is headquartered inside or outside the Union.”

 

Such stance is shared by Bundesverband der Energie- und Wasserwirtschaft (BDEW), European Federation of Energy Traders (EFET), EURELECTRIC, Energy UK, EUROGAS, Futures Industry Association (FIA) and International Oil and Gas Producers association (IOGP) in the document of 16 February 2017 "Joint associations' Questions & Answers (Q&A) on Regulatory Technical Standard (RTS) 20 of the Markets in Financial Instruments Directive (MiFID II)".

 

 

Calculation frequency

 

 

With regard to the data basis for the annual calculation of the capital employed test, according to the view presented in the aforementioned document Joint associations' Questions & Answers (Q&A) on Regulatory Technical Standard (RTS) 20 of the Markets in Financial Instruments Directive (MiFID II) of 16 February 2017, firms should be allowed to consider a number of representative trading days during the calculation period as appropriate to the complexity of their business.

 

 

 

 



Last Updated on Friday, 06 October 2017 21:23
 

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