The complicated character of the MiFID II ancillary exemption calculations (see the relevant equations for:
- capital-employed test and
becomes even more complex when considering items involved with intra-group transactions.
The intragroup transactions are "privileged" when assessing whether the firm satisfies the position thresholds set in the technical standard proposed by the financial regulator (the European Securities and Markets Authority - ESMA) in December 2014, which means, the "capital employed" for these trades is subtracted from the MiFID II expositions in the numerator of the relevant equation (similarly as, for example, transactions classified as hedging).
However, there may arise an ambiguity regarding the required breakdown of particular positions: whether is will be sufficient merely to say in the firm's annual notification directed to the regulator that intra-group transactions are not included (at all) in calculations (since intragroup positions are "privileged" and exempted from MiFID II under the separate heading in Article 2(1)(b)) or each intragroup financial service and activity must be identified, evidenced, evaluated and included as separate items in the equation.
There is further question whether the companies need to differentiate such positions at least for internal purposes (given non-financial counterparties will not only be required to submit annual notifications to the financial regulator evidencing they satisfy conditions for the anciliary activity exemption but will have to be capable further elaborate on and to substantiate the firm's stance on regulators' request).
Considering, moreover, dealing on own account when executing client orders, and in particular, matched principal trading, is not allowed under the ancillary activity exemption, it would be useful to know whether the regulator will require firms, for the purposes of the above notification, to identify business lines having the character of matched principal trading, which are intra-group only, and, consequently, to assess the capitals employed for such transactions.
Given the overall context, it seems reasonable that hedging transactions will have to be differentiated for the above purposes (as hedging also amounts to privileged transactions) - but what about intragroup ones?
Is it necessary to identify - within companies' groupings - business lines involving financial services with respect to financial instruments done on the professional and recurrent basis and to assess their value for the purposes of calculating thresholds of the anciliary activity exemption?
It is hard assess the scale of regulatory risk involved with the above ambiguities, however, the equations ESMA published in December 2014 indicate, such risk exists and it would be highly recommendable for the regulator to make some comments upon this issue.