Article 2 of MiFID II provides for a narrower interpretation of exempt activities thereby capturing within its scope a range of firms previously excluded. The existing exemptions for commodity firms under articles 2(1)(i) and 2(1)(k) of MiFID are carried over in similar but not identical terms into article 2(1)(j) of MiFID II with the exemption in article 2(1)(k) of MiFID ceasing to exist.
Article 2(1)(j) provides that MiFID II will not apply to persons:
- dealing on own account, including market makers, in commodity derivatives, emission allowances or derivatives thereof, excluding persons who deal on own account when executing client orders; or
- providing investment services, other than dealing on own account, in commodity derivatives or emission allowances or derivatives thereof to the customers or suppliers of their main business.
In both cases the exemption is subject to the condition that the activity is an ancillary activity individually and on an aggregate basis to the person’s main business, when considered on a group basis, and that the main business is not the provision of investment services within the meaning of MiFID II or banking activities under the Capital Requirements Directive IV (CRD IV), or acting as a market maker in relation to commodity derivatives, and the persons do not apply a high frequency algorithmic trading technique.
Article 2(4) of MiFID II requires ESMA to develop draft RTS to specify the criteria for establishing when an activity is to be considered as ancillary to the main business on a group level.
In its consultation paper ESMA proposed two tests that need to be passed cumulatively in order for investment activities to be considered as ancillary. The first test covers trading activity thresholds, with the second test covering main business thresholds. The trading activity thresholds test compares the size of the firm’s trading activity to the size of the overall market trading activity in the EU (i.e. determining the market share of a given entity in a commodities derivatives class). In the final report ESMA considers that there is merit in applying the trading activity test at an asset class specific level. A higher threshold for the C10 asset class has been set at 15% with an even higher threshold of 20% set for emission allowances. The other thresholds are:
- 4% derivatives on metals
- 3% derivatives on oil and oil products
- 10% derivatives on coal
- 3% derivatives on gas
- 6% derivatives on power
- 4% derivatives on agricultural products
ESMA has also noted that for the trading activity threshold, only activity undertaken for non-hedging purposes has to be taken into account.
In relation to the main business threshold test ESMA consulted on a proposal that was based on considering the ratio of the capital employed for carrying out the ancillary activity to the capital employed for carrying on the main business. In the final report ESMA states that it has reviewed and “fundamentally changed” the approach in relation to the calculation, abandoning the capital employed test and taking into account the overall activity of a group’s main business without any further reductions (encompassing privileged transactions and transactions executed in an entity of the group authorised in accordance with MiFID II or the CRD IV).
ESMA also clarifies that the comparison of the ancillary activity against the main activity should be done by comparing all ancillary activities taken together against the main activity. Where a firm undertakes only one of the ancillary activities mentioned in article 2(1)(j) (dealing on own account or providing investment services) it would only have to undertake the ancillary test on the basis of this individual ancillary activity.