MiFID II ancillary activity exemption - market share test (OMT)

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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.

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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

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 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 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

Overall market threshold

1. The size of the activities referred to in Article 1 calculated in accordance with paragraph 2 divided by the overall market trading activity calculated in accordance with paragraph 3 shall, in each of the following asset classes, account for less than the following values:

(a) 4 % in relation to derivatives on metals;

(b) 3 % in relation to derivatives on oil and oil products;

(d) 3 % in relation to derivatives on gas;

(e) 6 % in relation to derivatives on power;

(f) 4 % in relation to derivatives on agricultural products;

(g) 15 % in relation to derivatives on other commodities, including freight and commodities referred to in Section C 10 of Annex I to Directive 2014/65/EU;

(h) 20 % in relation to emission allowances or derivatives thereof.

2. The size of the activities referred to in Article 1 undertaken in the Union by a person within a group in each of the asset classes referred to in paragraph 1 shall be calculated by aggregating the gross notional value of all contracts within the relevant asset class to which that person is a party.

The aggregation referred to in the first subparagraph shall not include contracts resulting from transactions referred to in points (a), (b) and (c) of the fifth subparagraph of Article 2(4) of Directive 2014/65/EU or contracts where the person within the group that is a party to any of them is authorised in accordance with Directive 2014/65/EU or Directive 2013/36/EU.

3. The overall market trading activity in each of the asset classes referred to in paragraph 1 shall be calculated by aggregating the gross notional value of all contracts that are not traded on a trading venue within the relevant asset class to which any person located in the Union is a party and of any other contract within that asset class that is traded on a trading venue located in the Union during the relevant annual accounting period referred to in Article 4(2).

4. The aggregate values referred to in paragraphs 2 and 3 shall be denominated in EUR.

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).

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).

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".

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

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

market share test overall market data

When it comes to the latter of the aforementioned documents - 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.

ancillary exemption tr publication table a

ancillary exemption tr publication table b

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.

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%

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Territorial scope

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

Recitals 3 - 5 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

(3) The first test compares the size of a person's trading activity against the overall trading activity in the Union on an asset class basis to determine that person's market share. The size of the trading activity should be determined by deducting the sum of the volume of the transactions for the purposes of intra-group liquidity or risk management purposes, objectively measurable reduction of risks directly relating to commercial or treasury financing activity or fulfilling obligations to provide liquidity on a trading venue ('privileged transactions') from the volume of the overall trading activity undertaken by the person.

(4) The volume of the trading activity should be determined by the gross notional value of contracts in commodity derivatives, emission allowances and derivatives thereof on the basis of a rolling average of the preceding three annual periods. 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.

(5) As commodity markets differ significantly in terms of size, number of market participants, level of liquidity and other characteristics, different thresholds shall apply for different asset classes in relation to the test on the size of the trading activity.

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.

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".

The aggregate values are to be denominated in EUR.

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.

Calculation Frequency and Data Basis for Ancillary Activity Tests

Question:

Should the outcomes of each of the Ancillary Activity Tests be calculated on a daily basis during the calculation period and be based on all trading days per se?

Answer:

No. The RTS 20 distinguishes between the frequency of the Ancillary Activity Tests and the underlying data basis for these tests.

With regard to the calculation frequency article 4 (1) RTS 20 states that these calculations “shall be carried out annually in the first quarter of the calendar year that follows an annual calculation period”.

Therefore, firms can calculate the Ancillary Activity Tests only once during the first quarter of a year and are not obliged to calculate these tests on a more frequent basis during the calculation periods.

With regard to the data basis for this annual calculation of the Ancillary Activity Tests, firms should be allowed to consider a number of representative trading days during the calculation period as appropriate to the complexity of their business.

Furthermore, firms should be allowed to use the clearing threshold calculations performed for the purpose of compliance with article 10 of EMIR also for the purpose of the calculations for the Ancillary Activity Tests.

Reasoning:

RTS 20 doesn’t establish a binding daily calculation frequency within a calculation period.

This is because it speaks in article 4 (1) of an annual calculation to be carried out in the first quarter of the year that follows an annual calculation period.

Therefore, persons may perform the calculation only once during the first quarter of year.

With regard to the underlying data basis for this annual calculation, article 4 (1) RTS 20 speaks of a calculation “based on a simple average of the daily trading activities or estimated capital”.

We believe that an annual calculation based on all trading days (250 days) would impose overly burdensome calculations on MiFID II exempted firms.

In particular an annual calculation of the Capital Employed Test based on positions held on all trading days would be overly burdensome as it requires complex calculations of net and gross positions.

Also for such firms, which entire portfolios of privileged and non-privileged trading activities are clearly below the defined test thresholds, a calculation based on all trading days would not be meaningful and impose unnecessary burdens.

Finally, a calculation based on all trading days would not be more meaningful than a calculation based on representative days, given the seasonality of certain commodity trading activity.

Therefore, we are of the opinion that it is more proportionate that firms may perform the calculations of the daily trading activities or estimated capital as appropriate to the scope and complexity of their business and sufficient to provide a representative yearly notification to the competent authorities about the usage of the exemption.

For these reasons we are of the opinion that the calculations can be done with an appropriate, representative granularity, i.e., based on representative trading days (e.g. for the purpose of the Capital Employed Test positions held on the last Friday of each month or each quarter).

Furthermore the re-usage of EMIR clearing threshold calculations seems justified, in particular as under EMIR and MiFID II the definitions of financial instruments, hedging and intra-group transactions are the same.

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