|MiFID II ancillary activity exemption - backstop mechanism|
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Pursuant to Adjustment of ESMA's approach towards the ancillary activity exemption (13 July 2015) ESMA proposed a test combining the market size test with a trading activity test.
This methodology represented a significant modification if compared with the approach of December 2014 since:
- the trading activity test exclusively took into account the commodity derivatives transactions concluded in the EU;
- the test compared the sum of the non-privileged/speculative commodity derivatives transactions in the EU (numerator) with the overall sum of all commodity derivatives transactions (denominator) in the group at a European level;
- there were three threshold categories of the trading activity test (< 10%; 10% - 49.9%; ≥ 50%).
Depending on the outcome of this trading activity test, firms were allocated to three different categories of market size thresholds.
For example, a firm which stays below 10% of the trading activity test would be allowed to have a market share of 20% in emission allowances (the higher the percentage of the speculative activity within all trading activity, the lower thethreshold).
The purpose of this backstop mechanism was to ensure that only relevant and sizable participants in European commodity derivative markets should be determined as not conducting their activities as ancillary to their main business.
- if a firm's speculative trading activity is 10-50% of its total trading, it may be MiFID II exempt providing its market share is less than 50% of each threshold in the market share test e.g. 2% for metals, 1.5% for oil etc.
- if a firm's speculative trading activity is above 50% of its total trading, it may be MiFID II exempt providing its market share is less than 20% of each threshold in the market share test e.g. 0.8% for metals, 0.3% for oil etc.
Table: Market share thresholds by commodity group under ancillary exemption test pursuant to ESMA's Final Report of 28 September 2015
ESMA's Final Report of 28 September 2015 includeed also a graphical depiction of the backstop mechanism, as follows:
Diagram source: ESMA's Final Report of 28 September 2015 (ESMA/2015/1464), p. 330
The underlying measurement for all of the transactions was gross notional value (GNV).
The backstop mechanism as set out in the table above has been finally implemented in Article 3(2) of 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 - see box.
Recital 10 of the said Regulation explains that the backstop based on a group not exceeding a certain percentage of any of the thresholds set under the market share test for each relevant asset class is particularly relevant for very small groups with negligible overall footprint in the relevant commodity derivative trading.
On the one hand, those groups may be required to undertake a costly analysis of their trading activities to determine whether that trading reduces risk or not without the result being conclusive on the ancillary nature of the trading activity.
On the other hand, those groups are usually not equipped to engage in the capital test as an alternative to the test based on trading.
The said Recital 10 further argues that in order to avoid disproportionate burdens on those groups, it is appropriate that groups whose trading activity for each relevant asset class accounts for less than one-fifth of the threshold set under the market share test be considered as carrying out that trading as an ancillary activity to their main business.
|Last Updated on Thursday, 20 April 2017 12:43|