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MiFID II ancillary activity exemption - capital employed test - Page 2

 

 

ANNEX - ARCHIVED

 

 

 

Capital employed test - initial drafts

 

 

The first conception for calculation of the capital employed test was designed by ESMA in the Consultation Paper – Annex B Regulatory technical standards on MiFID II/MiFIR of 19 December 2014 ESMA/2014/1570 (p. 373-380).

 

Pursuant to the said ESMA's approach, an activity was considered to be ancillary to the main business in accordance with Article 2(1)(j) of the MiFID II Directive, if the capital employed by the group for carrying out eligible activity in the European Union accounted for less than 5% of the capital employed for carrying out the main business of the group in the European Union and in third countries (details see below).

 

The capital employed test has, however, been abandoned  in the ESMA's final draft RTS of 28 September 2015 since ESMA decided to develop the trading test instead (the reasons for this decision see here).

 

However, on 20 April 2016, the European Commission informed ESMA of its intention to endorse the relevant draft RTS (20) subject to a number of changes,

 

In particular, the European Commission requested ESMA to include, when proportionate and appropriate, a capital based test for groups that have undertaken significant capital investments, relative to their size, in the creation of infrastructure, transportation or production facilities or groups that undertake activities or investments which cannot be hedged in financial markets.

 

There was a disagreement in that regard between the said EU institutions, since ESMA in the Opinion of 30 May 2016 Draft Regulatory Technical Standard on criteria for establishing when an activity is to be considered ancillary to the main business, ESMA/2016/730 (p. 6 - 8) indicated significant practical flaws of the capital test, the most noticeable being:

 

- the potential for market participants to manipulate the test at a point in time by changing the composition of their balance sheets,

 

- the need for firms to make estimates to allocate capital to speculative trading in the absence of readily available and public data,

 

- the lack of uniformity of segment information across the EU that would make supervisory convergence challenging,

 

- difficulty in allocating accounting capital to trading activities,

 

- significant costs and operational implications for small and medium sized firms (such as the reorganisation of accounting systems and business structure, need for outside support, etc. - the Accounting Directive is not always applicable to these entities and even where is does, it does not mandate a disaggregation of MiFID II and non MiFID II financial instruments between risk-reducing (hedging) and non-risk reducing (speculative) activities;

 

- consolidated IFRS reporting would not identify intra-group transactions.

 

ESMA underlined moreover that:

 

- non-financial entities operating in the commodity derivatives market in the EU do not have, in general, readily available and verifiable data on capital used for or actually allocated to speculative commodity derivatives trading,

 

- the public financial statements, and their notes, do not generally differentiate speculative from non-speculative commodity derivatives positions, and do not segregate EU from non EU activity.

 

Commission Delegated Regulation (EU) of 1.12.2016 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 (C(2016) 7643 final) has eventually included capital test in the regulatory set-up, as an alternative to the trading test (Article 3(5) - (10) of the Regulation).

 

 

Capital employed test pursuant to the ESMA's Consultation Paper – Annex B Regulatory technical standards on MiFID II/MiFIR of 19 December 2014, ESMA/2014/1570

 

 

Given the detailed rules for applying MiFID II ancillary activity exemption (capital test including) have been stipulated in the Commission Delegated Regulation (EU) of 1.12.2016 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, the approach elaborated by ESMA in the ESMA's Consultation Paper – Annex B Regulatory technical standards on MiFID II/MiFIR of 19 December 2014 ESMA/2014/1570 (p. 373-380) with respect to capital employed test is of historical significance, nevertheless it is outlined below to show the evolution of legislation in that regard.

 

 

GLOSSARY 

for the capital employed test

(pursuant to ESMA's Consultation Paper of 19 December 2014)

 

eligible activity

 

(a) dealing on own account, including market makers, in commodity derivatives or emission allowances or derivatives thereof, excluding persons who deal on own account when executing client orders; or


(b) 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


"main business" - the overall activity of a group


"privileged transactions":

 

(a) intra-group transactions as referred to in Article 3 of EMIR Regulation, serving 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 (i.e. hedging);

 

(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")

 

"capital" - capital encompassing total equity, current debt and non-current debt as calculated from balance sheets and financial statements

 

Pursuant to the capital employed test as designed by the ESMA Consultation Paper – Annex B Regulatory technical standards on MiFID II/MiFIR of 19 December 2014 ESMA/2014/1570, p. 373-380, an activity was considered to be ancillary to the main business in accordance with Article 2(1)(j) of the MiFID II Directive, if the capital employed by the group for carrying out eligible activity in the European Union accounted for less than 5% of the capital employed for carrying out the main business of the group in the European Union and in third countries (see box for the definitions of "capital", "eligible activity" and "main business").

 

 

Calculation of the capital employed

 


Pursuant to the approach developed by ESMA in December 2014, the capital employed for carrying out the eligible activity was to be calculated by deducting from the sum of the capital employed for eligible activity by the group in the European Union the sum of the capital employed for privileged transactions (see box for the "priviledged transactions" definition) by the group in the European Union.

 

Capital employed for trading activity undertaken by an entity of the group that holds a MiFID license was not considered when calculating the capital employed for the eligible activity.


The capital employed for carrying out the eligible activity should be divided by the capital employed for the main business of the group in the European Union and in third countries.

 

 

Calculation period

 

 

Pursuant to ESMA's Consultation Paper of 19 December 2014, the calculation of the capital employed for the eligible activity was undertaken on the basis of a rolling average of three calendar years.

 

The relevant calculations untill 2020 were initially scheduled as follows (subject to modifications given the extended date of MiFID II entry into force (3 January 2018)):

 

(a) for 2017, the calculation took into account the simple average of 12 months over the 2016 calendar year;


(b) for 2018 the calculation took into account the simple average of 24 months for the calendar years 2016 and 2017;


(c) for 2019 the calculation took into account the simple average of 36 months for the calendar years 2016, 2017 and 2018.

 

 

 

Calculation for determining % capital employed for ancillary activity

 

(pursuant to ESMA's Consultation Paper of 19 December 2014)

 

Capital employed for MiFID II activity at group level in the EU (numerator)

 

divided by

 

Capital employed for business globally at group level (denominator)

______________

 

equals

 

% of capital used by a group for MiFID II activity

 

 

 

Calculation for capital employed for MiFID II activity at group level in the EU (numerator)

 

(pursuant to ESMA's Consultation Paper of 19 December 2014)

 

Capital employed by the person seeking the exemption for dealing on own account in commodity derivatives, EUAs and derivatives thereof in the EU at group level (excluding dealing on own account when executing client orders unless the execution of orders is done between two non-financials directly and without any further intermediation of a third party)

 

plus

 

Capital employed by the person seeking the exemption for providing other investment services in commodity derivatives, EUAs and derivatives thereof to customers or suppliers in the EU at group level

 

minus

 

Sum of capital employed by the person seeking the exemption for privileged transactions (i.e. for intra-group transactions, transactions in derivatives reducing commercial and treasury financing risks, and transactions entered into to fulfil obligations to provide liquidity) in the EU at group level

 

minus

 

Capital employed for licensed activity (i.e. trading activity that is undertaken by a MiFID authorised entity of the group)

 

______________

 

equals

 

Capital employed for MiFID II activity at group level in the EU

 

 

 

 

 

 

 

 

 

 



Last Updated on Sunday, 06 October 2019 17:05
 

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