European Commission Adopts Technical Standards on Criteria for the Ancillary Activity Exemption 

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The Commission adopted Regulatory Technical Standards supplementing the revised Markets in Financial Instruments Directive, setting out when an activity is “ancillary” to a firm’s main business. MiFID II provides an exemption from the requirement for authorization as an investment firm when dealing on own account, or providing investment services to clients in commodity derivatives, emission allowances or derivatives thereof, provided that the activity is an ancillary activity to their main business on a group basis and the main business is not the provision of investment services within the meaning of MiFID II or banking activities under the Capital Requirements Directive. Adoption of the RTS follows the consultation by the European Securities and Markets Authority on the draft RTS. The Commission proposed changes to ESMA's final draft RTS, which was submitted on September 28, 2015, including a capital test to distinguish a group’s main activates from its ancillary activities. The Commission requested a methodology to specify the allocation of capital between the main business activity and the ancillary activity to enable groups to demonstrate, based on the capital employed, where the group’s main business activity resides. On May 30, 2016, ESMA responded by way of formal opinion and revised draft RTS. Rather than a single capital based methodology, ESMA proposed five options for speculative trading and three for a group’s main activity. ESMA did not stipulate which of the options was to be preferred and did not specify a threshold for determining the percentage of speculative trading by a group‘s main activity that would trigger the requirement for authorization under MiFID II. 

The adopted RTS provides a “market share test” on correspondent trading activity thresholds. This compares the level of an entity’s trading activity with that of the overall activity in the EU based on a particular asset class. This test determines whether the activities conducted, such as dealing on own account, should be considered ancillary to the main business of the group. The adopted RTS outlines a “main business test”, with corresponding thresholds, to determine whether the non-hedging trading in commodity derivatives would constitute a minority of activities at a group level and specifies the details to be used when calculating the size of a group’s trading activities. The adopted RTS also contains criteria to determine the difference between non-hedging transactions in derivatives and those that can objectively be considered as reducing the risk directly relating to commercial activity or hedging and which would not count towards the trading activity as measured in the numerator in both tests. The adopted RTS will enter into force after they are published in the Official Journal of the European Union, and will apply from January 3, 2018.

View the adopted RTS on the criteria for the Ancillary Activity Exemption.

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