Details of key exemption tests for corporates released.
On 1 December 2016, the European Commission adopted the long-awaited final draft of RTS 20.
The RTS 20 governs the provisions under which persons dealing in commodity derivatives, emissions allowances and derivatives thereof (collectively “commodity derivatives” for the purposes of this summary), may be exempt from the provisions of MiFID II and MiFIR.
The so-called “Ancillary Activities Exemption” envisaged by MiFID II, is critical to many corporates and commodity traders who use commodity derivatives in their commercial activities, but who do not provide other investment services to clients and want to avoid becoming an authorised investment firm.
The mechanics of the exemption have been the subject of a long and public tussle between the European Securities and Markets Authority (ESMA) and the Commission, resulting in a complex compromise that offers plenty of scope for interpretation.
Certain transactions can be excluded from the size of a firm's speculative trading activity, including intra-group transactions serving group-wide liquidity or risk management purposes, hedging transactions and transactions undertaken in an authorised group entity.
In both cases the result is an average of three annual results, unless the trading activity or estimated capital allocated has declined in the current year, and in total over the three year period by more than 10%, in which case only the last year can be used. The calculations are also required to be undertaken in Euros.
Focus on the Overall Market Test
Focus on the Main Business Test
There are a number of potential issues with these tests. Among the obvious is the difficulty of applying the tests retrospectively for the first calculation period starting 1 January 2015 and, even at this stage, 2016 on a consolidated group level, especially if the group financial year-end is not 31 December. There will also be challenges associated with obtaining group-wide data where the ultimate parent is not an EU member firm. Our experience of the similar GNV approach to the European Market Infrastructure Regulation (EMIR) Clearing Threshold has revealed key sensitivities around hedging policy assumptions on the result. We anticipate similar challenges to be experienced with these tests.
Additionally, we note there are a number of important accounting standard changes to come in the next few years and their impact on the capital test will need to be considered carefully.
Firms should undertake structured and documented work to ensure they are, and remain eligible for, this exemption (which must be applied for annually), or apply for authorisation as a MiFID investment firm if they do not meet the exemption criteria. Some areas to focus on are: