Auction regulation business
There are two circumstances in which a UK firm must be authorised by FSA to bid for emissions allowances, and in so doing will not be conducting MiFID business:
a) where a firm qualifies for an exemption under Article 2(1)(i) of MiFID and bids in relation to either type of auction product (a two day spot or a five day future) on its own account or on behalf of clients of its main business; and
b) where an investment firm authorised by FSA under MiFID or a credit institution authorised by FSA under the Banking Consolidation Directive (2006/48/EC) bids in relation to a 2 day spot auction product on behalf of its clients.
FSA underlined in its document that Article 59 of CAR lays out authorisation and conduct of business requirements for bidders not undertaking MiFID business and that these requirements are directly effective and do not require implementation by the FSA to have effect in relation to bidders.
However, under CAR, competent national authorities may require as a condition of authorisation: 'any other measures deemed necessary having regard to the nature of the bidding services being offered and the level of sophistication of the clients in question in terms of their investor or trading profile as well as any risk-based assessment of the likelihood of money laundering, terrorist financing or criminal activity
CAR also requires competent national authorities to have at their disposal the 'necessary investigative powers and sanctions that are effective, proportionate and dissuasive.
In view of these circumstances FSA has taken into account the fact that the very smallest operators of facilities or airlines are exempt from the EU ETS under a 'de minimis' cut-off and that those who remain within the system just above that threshold are likely to bid via the firms FSA authorises but will require allowances as a fundamental part of their business.
FSA furthermore considers that the market's end-users will usually be relatively sophisticated clients. Also given the nature of the auctions, which will be conducted using sealed bids on a regulated market, there is limited risk to the clients' money outside of the limited time window in which each auction will occur.
The effect is that FSA finally has chosen to use the power in Article 59(5) and to implement 59(6) so that the same anti-money laundering measures be applied to bidders as apply to other firms. FSA has also chosen to approve key individuals of a bidder both to ensure the firm's overall suitability and to provide for effective, proportionate and dissuasive enforcement powers.
FSA observed that the amendments to CAR made by Commission Regulation 1210/2011 of 23 November 2011 removed the requirement for authorisation under CAR for a MiFID investment firm or a credit institution bidding in relation to two day spot products on its own account. Accordingly, this does not form part of the proposed new regulated activity.
Additionally, the persons listed in Article 18 CAR - other than investment firms, credit institutions and firms exempt under Article 2(1)i) of MiFID - don't undertake a regulated activity under proposed statutory framework and FSA do not need to authorise or supervise them.The FSA recalls that Article 18 CAR sets out an exhaustive list of persons eligible to apply for admission to bid directly in auctions which includes, for example, operators that are subject to the EU ETS.
What is noteworthy, the FSA document sets out auction participation requirements stemming from the CAR in a transparent and understandable way. The proposed structure seems to be rather clear. Among the three categories distinguished, the MiFID business and excluded business don’t raise ambiguities, auction regulation business will, however, as always, evoke diverging views regarding the scope for exemption under Article 2(1)(i) of MiFID (in particular the notion of “ancillary activity’).
FSA has invited comments on the consultation paper in question. Comments should reach the addressee by 19 April 2012.