Along with the main business test, the market share test (sometimes called also OMT - Overall Market Threshold) is used for the determination whether the entity qualifies for the MiFID II ancillary activity exemption.

 

 

The purpose of the market share test is to determine whether the persons within the group are large participants relative to the size of the financial market in that asset class and as a consequence should be required to obtain authorisation as an investment firm.

 

 
The market share test compares the size of a person's trading activity (all contracts in commodity derivatives, emission allowances and derivatives thereof) against the overall trading activity in the European Union on an asset class basis.

 

The details of the test are stipulated in Article 2 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).

 

Article 2(1)(j) of MiFID II grants persons performing MiFID II activities in commodity derivatives, emission allowances and derivatives thereof an exemption if their activities are ancillary to their main business.

 

Article 2(4) of MiFID II requires such persons to compare the size of their trading activity in commodity derivatives, emission allowances and derivatives thereof to the overall market trading activity in a particular asset class over a certain period of time.

 

Hence, the OMT test compares the size of a person's trading activity against the overall trading activity in the European Union on an asset class basis to determine that person's market share (Recitals 2 and 3 of the said Commission Delegated Regulation (EU) 2017/592 of 1 December 2016).

 

 

Note, however that ESMA’s Opinion of 6 July 2017 (ESMA70-156-165) refers the on-venue data calculations in the denominator to the broader scope (the trading venues located in the EEA).

 

The eight distinct asset classes and the relevant thresholds per asset class are specified in the Commission Delegated Regulation (EU) 2017/592 of 1 December 2016.

 

Persons wanting to benefit from the MiFID II exemption in Article 2(1)(j) therefore have to execute a test and check whether they meet the prescribed proportions, where they compare their own trading (numerator) to the total trading in the EU market based on eight distinct asset classes (denominator). 

 

The aggregate values are to be denominated in EUR.

 

In the European Commission’s opinion 31 May 2018:

- Article 2(1)(j) MiFID II requires that the test of whether the MiFID activities are ancillary needs to be assessed for both MiFID activities (dealing on own account and providing investment services other than dealing on own account) individually, and on an aggregate basis,

- in practical terms this implies that if a person undertakes both activities, it must pass the ancillary activity test with respect to both MiFID activities and cannot be exempt from MiFID II merely by passing the test for one of the MiFID activities.

 

 

Numerator

 

 

The size of the trading activities undertaken in the European Union by a person within a group in each of the asset classes is to be calculated by aggregating the gross notional value of all contracts within the relevant asset class to which that person is a party (aggregation must cover all contracts in commodity derivatives, emission allowances and derivatives thereof on the basis of a rolling average of the preceding three annual periods).

 

The following items should be deducted from the volume of the overall trading activity undertaken by the person:

 

1. intra-group transactions as referred to in Article 3 of EMIR Regulation, serving group-wide liquidity and/or risk management purposes;

2. transactions in derivatives which are objectively measurable as reducing risks directly related to the commercial activity or treasury financing activity (i.e. hedging);

3. 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");

jointly: "privileged transactions" (Article 2(4) of MiFID II).

 

Trading activities conducted by a MiFID authorised firm within the group are also excluded from the said aggregation.

 

For the calculation of the numerator the notional amount of ETD option contracts should be determined with the use of the following formula (ESMA Opinion of 7 July 2017 on ancillary activity – market size calculation, ESMA70-156-165):

 

lot size/multiplier (number of underlying instruments to be delivered for one contract) * quantity (number of contracts traded) * strike price.

 

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 OMT 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 clear wording provides that under article 2(2), first subpara. RTS 20 the numerator is composed of the activities undertaken by “a person” within a group, i.e. the numerator is calculated on an individual person (entity) level".

 

Also the European Commission while answering on 31 May 2018 to the ESMA’s letter confirmed that the ancillary activities tests must be calculated as many times as necessary for each separate person who trades in commodity derivatives within a group.

 

 

Denominator

 

 

The overall market trading activity in each of the asset classes is to be calculated by aggregating, during the relevant annual accounting period, the gross notional value of:

1. all contracts that are not traded on a trading venue within the relevant asset class to which any person located in the European Union is a party, and

2. any other contract within that asset class that is traded on a trading venue located in the European Union.

 

There are multiple problems on account of lacking publicly available infrastructures to determine market size figures.

 

The absence of centralised place for recording on-venue and off-venue transactions for commodity derivatives and emission allowances was ignored in the MiFID II legislative process and some provisional measures become necessary.

 

Among those feeble and late try-outs are ESMA's documents:

 

- ESMA Opinion of 6 July 2017 on ancillary activity – market size calculation, ESMA70-156-165

 

- Final Report, Draft technical standards on data to be made publicly available by TRs under Article 81 of EMIR, 10 July 2017, ESMA70-151-370

 

The former of the above documents collected the data:

 

- from the trading venues located in the EEA only for the total year of 2015 and for the second half of the year 2016 (on-venue market size),

 

- from the OTC market size only for the second half of the year 2016 (based on reports submitted to the trade repositories (TRs) under the EMIR Regulation).

 

Given the partial availability of data (the years to be used in the calculations are 2015, 2016 and 2017), ESMA proposes that "the approximation of the total market size for 2016 could be achieved by annualising the half-year figures, and for the year 2015, assuming a similar proportion for OTC and on-venue activity during both years."

 

The total market size for both on-venue and OTC markets, i.e. gross notional value traded was calculated on a dual-sided basis, that is both buyer’s and seller’s notional value of each transaction was added to establish a gross notional value traded.

 

 

Overall market data

 

ESMA's Opinion of 6 July 2017 on ancillary activity – market size calculation, ESMA70-156-165

 

 

 

 

ESMA's Opinion of 22 December 2017 on ancillary activity – market size calculation, ESMA70-156-165

 

 

ESMA's Opinion of 2 October 2018 on ancillary activity – market size calculation, ESMA70-156-478

 

 

When it comes to the aforementioned ESMA's Final Report, Draft technical standards on data to be made publicly available by TRs under Article 81 of EMIR, 10 July 2017, ESMA70-151-370 - its attachment contains the draft for the Commission Delegated Regulation (EU) amending Commission Delegated Regulation (EU) No 151/2013 of 19 December 2012 supplementing Regulation (EU) No 648/2012 of the European Parliament and of the Council where the following rules for publication by the trade repository of the aggregate position data have been proposed:

 

- trade repository shall publish aggregate position data on its website on a weekly basis no later than Tuesday noon UTC on the derivatives reported by 23:59:59 UTC inclusive of the previous Friday;

- trade repository shall publish all aggregate data in euro and shall use the exchange rates published in the ECB website as of the previous Friday;

- trade repository shall publish aggregate position data in tabular form as detailed in Table A of the Annex to the RTS (see below) and shall keep in its website in an easily accessible form aggregate position data for the previous 104 weeks;

- when publishing the aggregations for the first time, a trade repository shall include all the relevant aggregations starting from 1 January 2018 or the relevant first date of the reference period determined pursuant to Regulation 2017/592.

 

 

 

 

 

 

 

ESMA argues that while it was not an original objective of EMIR to provide granular aggregate position data to the public, in the absence of TR data, market participants would need to run complex processes to compile the data across all the different venues and post-trade providers.

 

Clearly this process would not be error-free and it is highly possible that there will be different figures obtained by each entity and it will be impossible to compare the results.

ESMA therefore proposed the use of TRs, as they play a pivotal role in the EU derivatives reporting regime, hence, are naturally placed to perform aggregations.

 

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.

 

Importantly, on 16 October 2017 ESMA has enabled access to the Financial Instruments Reference Data System (FIRDS), which is intended to be used, among others, for market data calculations of the OMT test (see ESMA database: Financial Instruments Reference Data System (FIRDS)).

 

 

Market share thresholds

 

 

The relevant thresholds of the market share are differentiated on a per-asset-class basis and take into account the trading activity of the persons within the group - as in the table below (the table reflects the so-called "backstop mechanism").

 

 

Proportion of non-priviledged commodity derivatives trading versus total EU commodity derivatives trading at group level (gross notional value)	Oil	Gas	Power	Coal	Metals	Emissions	Derivatives on other commodities,  including freight and "exotic"  (Section C 10 of Annex I to MiFID II)
Under 10%	3%	3%	6%	10%	4%	20%	15%
10% - 49,9%	1.50%	1.50%	3%	5%	2%	10%	7.50%
50% or greater	0.60%	0.65%	1.20%	2%	0.80%	4%	3%

 

 

 

Territorial scope

 

 

The market share test is calculated based on activities in the European Union.

 

 

Such stance is supported by the wording of Article 2(2), first and second subpara. of the Commission Delegated Regulation (EU) 2017/592, it is also shared by important stakeholders (for example 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)".

 

Moreover, Recital 4 of the Regulation 2017/592 stipulates: "the overall market size should be determined on the basis of trading activity undertaken in the Union in relation to each asset class for which the exemption is sought, including contracts which are traded on and outside trading venues in the Union".

 

It is also noteworthy, the trade repositories under EMIR have only data available for activities in the European Union.

 

However, ESMA Opinion of 6 July 2017 on ancillary activity – market size calculation (ESMA70-156-165) with respect to on-venue data calculations in the denominator refers to the broader scope, i.e. the trading venues located in the EEA.

 

The ambiguities have been cleared by ESMA in Questions and Answers on MiFID II and MiFIR commodity derivatives topics updated on 14 November 2017, where in the answers to Questions 12 and 13 the EU financial regulator underlined that for the purposes of calculating the market size test under Article 2 of RTS 20:

 

1. transactions concluded on non-EU venues should not be included in either numerator or denominator, since those transactions do not constitute part of trading activity in the European Union;

 

2. OTC transactions done by non-EU entities of an EU group with EU counterparties are considered to take place in the EU and therefore should be included in the numerator of both the group that has an EU presence and the EU counterparty.

For the purpose of the denominator, these transactions would also be considered to take place in the EU.

 

However, on 2 October 2018 ESMA has deleted Q&A No 13.

 

 

 

REMIT carve-out

 

 

When defining the size of the trading activity it should be noted that derivatives on wholesale energy products defined under Article 2(4) REMIT are not financial instruments in accordance with Article 4(1)(15) and Annex I C 6 MiFID II provided that they:

 

- are traded on an OTF, and

 

- "must be physically settled".

 

Consequently, such instruments are excluded from the respective calculations.

 

 

Calculation frequency

 

 

With regard to the data basis for the annual calculation of the market share 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.

 

 

 

 

 

 

   Regulatory chronicle

 

 

  

 

 

24 July 2020

 

Proposal for a Directive of the European Parliament and of the Council amending Directive 2014/65/EU as regards information requirements, product governance and position limits to help the recovery from the COVID-19 pandemic ({SWD(2020) 120 final}, COM(2020) 280 final, 2020/0152 (COD)

  

10 July 2020

 

ESMA Opinion on ancillary activity – market size calculation – update for the year 2019, ESMA70-156-478

 

 

 

 

 

Documentation

 

 

 

 

 

27 May 2019 - ESMA Opinion on ancillary activity – market size calculation – update for the year 2018, ESMA70-156-478

 

2 October 2018 - ESMA Opinion on ancillary activity – market size calculation (ESMA70-156-478)

 

European Commission’s answer of 31 May 2018 to the ESMA’s letter on whether the ancillary activity tests should be performed at the group or single entity level

 

ESMA invites the European Commission to clarify whether the ancillary activity test should be performed at the group or single entity level, 9 April 2018, ESMA70-154-5851

 

ESMA opinion of 22 December 2017 on ancillary activity under MiFID II – market size calculation, ESMA70-156-165

 

Final Report, Draft technical standards on data to be made publicly available by TRs under Article 81 of EMIR, 10 July 2017, ESMA70-151-370 

 

ESMA Opinion of 6 July 2017 on ancillary activity – market size calculation, ESMA70-156-165

 

Questions and Answers on MiFID II and MiFIR commodity derivatives topics ESMA70-872942901-36

 

Joint associations' Questions & Answers (Q&A) on Regulatory Technical Standard (RTS) 20 of the Markets in Financial Instruments Directive (MiFID II), 16 February 2017

 

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, Article 2, Recitals 3 - 5

 

ESMA Consultation Paper – Annex B Regulatory technical standards on MiFID II/MiFIR of 19 December 2014 ESMA/2014/1570, p. 373-380

 

 

 

 

 

Links

 

 

 

 

 

ESMA database: Financial Instruments Reference Data System (FIRDS)

 

Financial Instruments Reference Files

 

Financial Instruments Reference Data System (FIRDS) Instructions on access and download of full and delta reference data files, 6 October 2017, ESMA65-8-5014