Questions and Answers on MiFID II and MiFIR commodity derivatives topics
Question 1 [Last update: 19/12/2016]
Do all legal entities that deal in commodity derivatives within a financial group need to be individually authorised as investment firms?
Yes. Under Article 2(1)(j), the exemption for trading in commodity derivatives only applies when the main business of the group is considered on an overall basis not to be the provision of investment services within the meaning of this Directive or banking activities under Directive 2013/36/EU.
Therefore, all entities within a group which cannot be considered as a non-financial group are required to obtain authorisation as an investment firm under MiFID II if they wish to trade commodity derivatives.
Question 2 [Last update: 19/12/2016]
Does trading activity in C6 contracts which takes place on OTFs after 3 January 2018 need to be counted towards the ancillary thresholds prior to that date?
We differentiate between wholesale energy products categorised as C6 within the REMIT scope (derivatives with electricity and natural gas as underlying traded on an OTF that must be physically settled), C6 energy derivatives contracts (those with coal or oil as underlying traded on an OTF that must be physically settled) and the rest of C6 instruments.
Financial instruments under MiFID I which will also be financial instruments within C6 under MiFID II should count towards the trading activity and assessed against the ancillary thresholds.
C6 with coal or oil as underlying and the rest of C6 instruments count throughout the calculation period to determine market size, as OTC instruments until January 3, 2018 and as OTF on-venue instruments after that. For C6 instruments with coal or oil as underlying traded on OTFs this assessment is based on them only being exempted from certain EMIR obligations for a transitional period while they are being classified as financial instruments throughout the period. The same applies to the computation of positions by non-financial corporates.
Question 3 [Last update: 02/10/2018]
Since elements of the ancillary activity tests are to be calculated on a group level, is only Can the parent undertaking obliged to notify its NCA for the whole group or do the subsidiary undertakings also have to notify their local NCA?
The ancillary exemption applies to persons. Notification to the relevant NCA for that person is a condition for using the exemption. Therefore, any person that is party to a commodity derivative will need to notify its relevant NCA. This also applies to persons who are part of a group. It is not possible for a group to apply for an exemption on behalf of all the entities that the group contains.
Question 4 [Last update: 31/05/2017]
Who has to notify annually the relevant competent authority that they make use of the ancillary activity exemption?
In general, any (natural or legal) person that deals on own account or provides investment services in commodity derivatives as a regular occupation or business on a professional basis pursuant to Article 5 of MiFID II has to be authorised as an investment firm under MiFID II. However, if the person meets the criteria for activities considered to be ancillary to the main business pursuant to Article 2(1)(j) and the provisions in RTS 20 and makes use of the ancillary activity exemption, then it has to notify annually the relevant competent authority that they make use of this exemption.
Question 5 [Last update: 31/05/2017]
To which competent authority should a person provide notification that it makes use of the ancillary activity exemption?
The relevant competent authority will be the national competent authority to which the person would need to apply for authorisation if it were unable to make use of the ancillary activity exemption.
Question 6 [Last update: 31/05/2017]
By when does a firm that wants to make use of the ancillary activity exemption need to notify its competent authority?
Article 2(1)(j) of MiFID II exempts persons who deal in commodity derivatives on an ancillary basis under a number of conditions. One of these conditions is that they notify annually the relevant competent authority that they make use of this exemption. The notification needs to have been made for a firm to be able to rely on it.
The first of such notifications must be made by January 3rd of 2018. For 2019 and subsequent years, the notification needs to be made by April 1st of each year. Any firm that has not applied for authorisation has to notify.
Question 7 [Last update: 31/05/2017]
When does a firm that can no longer make use of the ancillary activity exemption need to apply for a license?
When a person’s trading activity increases to such an extent that it can no longer be considered to be ancillary to its main business under Article 2(1)(j), the firm must apply to the competent authority for a license.
Firms may not be certain whether they will be able to benefit from the exemption until the data on market size becomes available. Those who have reasonable grounds for considering they will be able to benefit from the ancillary activity exemption should notify. Where subsequently the market data indicates that this is not the case, the firm would be expected to apply for authorisation as soon as reasonably practicable.
Question 8 [Last update: 31/05/2017]
What are the criteria that liquidity provision contracts need to meet in order to qualify for the privileged transactions exemption under Article 2(4) of MiFID II?
Article 2(4) fifth paragraph, letter (c) of MiFID II permits a number of transaction types to be classified as “privileged transactions” and thus to be set aside for the purposes of the ancillary activity calculations. Those transaction types include “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 law or with national laws, regulations and administrative provisions, or by trading venues”. Therefore, Article 2(4)(c) of MiFID II establishes two alternatives of liquidity provision programmes that can be exempt from the ancillary activity calculations, one being based on requirements by regulatory authorities and the other based on requirements imposed by trading venues. Under both alternatives it is only the transactions carried out under the liquidity programme that are exempt but not the liquidity provider as a person.
When elaborating the Level 2 rules, ESMA offered one example of the circumstances in which transactions undertaken in order to fulfil liquidity obligations would be privileged, i.e. the market making requirements established by the UK energy regulator, OFGEM, which oblige large electricity suppliers to post the prices at which they buy and sell wholesale electricity on power trading platforms up to two years in advance and to trade at those prices. This is an example of an obligation required by a regulatory authority in line with applicable national rules which satisfies the conditions imposed by the first alternative described in Article 2(4)(c) of MiFID II.
Article 2(4)(c) of MiFID II uses the term “obligations to provide liquidity” as opposed to the related term market maker which is used in Article 2(1)(j)(i) of MiFID II to determine the scope of the ancillary activity exemption and which is defined in Article 4(1)(7) of MiFID II.
As a consequence, a liquidity provider under Article 2(4)(c) of MiFID II in addition to providing liquidity on a continuous basis and being willing to deal on own account against its proprietary capital has to be under genuine obligations to carry out transactions. Such obligations have to be specified in advance by the trading venue and have to be the subject of an enforceable agreement between the trading venue and the liquidity provider. The obligations a trading venue requires liquidity providers to fulfil have to be transparent to other market participants and be applied in a non-discriminatory manner.
The obligations of any liquidity provider have to go clearly beyond the activities of any ordinary market participant providing liquidity in a more general sense by simply trading on the market. The obligations should contain elements such as or comparable to quoting requirements with a maximum spread, a minimum volume, a minimum quote duration and, depending on the trading model, a maximum response time to provide quotes and a minimum participation rate. Only transactions executed under these obligations should be considered as privileged transactions.
Question 9 [Last update: 31/05/2017]
Should the capital employed test be calculated only on the same positions as included in the market size test or for all commodity derivatives traded in the group?
Article 3(1) b) RTS 20 refers to the estimated capital employed for those activities referred to in Article 1 of RTS 20. According to Article 3(3) RTS 20 the size of the activities referred to in Article 1 shall be calculated by aggregating the size of the activities with respect to all of the asset classes referred to in Article 2(1). Accordingly, the numerator of the capital test is calculated on the basis of the same positions as included in the market size test as only those asset classes referred to in Article 2(1) shall be included.
Question 10 [Last update: 02/10/2018]
Should the denominator in the capital test under Article 3(9) of RTS 20 be calculated using consolidated accounts? Should firms use capital on a worldwide basis or just capital employed within the EU?
The RTS 20 capital test should be calculated using consolidated accounts. According to Article 3(9) of RTS 20, 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.
Firms shall use capital employed on a worldwide basis when calculating the capital test.
Question 11 [Last update: 04/10/2017]
How should various underlyings falling under the C(10) category be treated for the purpose of ancillary activity calculations?
The various commodity derivative underlyings within the scope of the C(10) category shall be treated consistently across all provisions concerning commodity derivatives in the MiFID II/MiFIR framework. Therefore, all those commodity derivative contracts with underlyings that are subject to the position limit regime as specified in Position Limits should also be counting towards the ancillary activity test calculations. Other contracts within the C(10) scope should not be counted.
Question 12 [Last update: 13/11/2017]
How shall transactions concluded on venues outside the EU be treated for the market size test computations under Article 2 of RTS 20?
Transactions concluded on non-EU venues should not be included in either numerator or denominator of the market size test, since those transactions do not constitute part of trading activity in the Union.
Question 13 [Last update: 02/10/2018]
How shall OTC transactions done by non-EU entities of an EU group with EU counterparties be counted for the market size test?
For the purpose of calculating the numerator, these transactions would be 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.
Question 14 [Last update: 13/11/2017]
RTS 20 refers only to Article 360 of the CRR, while the ‘simplified approach for calculating regulatory capital requirements’ is contained in CRR Articles 357, 358 and 360. Is the text in RTS 20 self-contained or should firms refer to the whole of CRR?
Article 3(5)(6)(7) of RTS 20 replicates the content of Articles 360(1) and 357(3) of Regulation (EU) No 575/2013 of 26 June 2013 (CRR). RTS 20 contains the stand-alone test that needs to be performed without firms having to refer to the rest of the articles that relate to commodity derivatives in the CRR. However, firms may find it useful to refer to the EBA Q&A on clarification of the treatment of positions in commodities for the purposes of calculating net and gross positions according to Article 360(1) of CRR.