MiFID II regulatory framework significantly narrows exemptions currently available to commodity derivatives traders. This effects in a need for such market participants to review their MiFID compliance status and - if necessary - to elaborate and implement an adequate and functional trading model.
The key assumption is that a person falling under any of the categories listed in Article 2(1) of MiFID II would not have to be authorised as an investment firm.
Under MiFID I companies specialising in commodity derivatives trading on own account were exempted from provisions of the said Directive (see in particular the exemption in Article 2(1)(k) of MiFID I). However, under MiFID II the commodity derivatives trading exemption in Art. 2 (1)(k) was deleted.
"Considering the communiqué of G20 finance ministers and central bank governors of 15 April 2011 on ensuring that participants on commodity derivatives markets should be subject to appropriate regulation and supervision, the exemptions from Directive 2004/39/EC for various participants active in commodity derivative markets should be modified to ensure that activities by firms, which are not part of a financial group, involving the hedging of production-related and other risks as well as the provision of investment services in commodity or exotic derivatives on an ancillary basis to clients of the main business remain exempt, but that firms specialising in trading commodities and commodity derivatives are brought within this Directive". It follows European Commission doesn't aim to catch utility traders, only sole speculators.
Another potential exemption (Art. 2 (1)(j) relating to companies trading on own account in commodity derivatives if their trading activity is ancillary to their main business - so-called MiFID II ancillary activity (or "commodity derivatives trader") exemption) is specified through the secondary legislation to define "ancillary activity" to the main business. The effect of new regulation is that the notion of ancillary activity is applied in a very narrow and precise manner.
MiFID II also exempts from the authorisation regime the EU ETS operators, however under certain restrictions.
"Firms that qualify under the various exemptions of the MiFID's scope of application should not be regarded as MiFID investment firms. The MiFID requirements, in particular the basic usual prudential requirement of initial capital, do not apply to them" (European Banking Authority (EBA) Report on Investment Firms, Response to the Commission's Call for Advice of December 2014, EBA/Op/2015/20, p. 12).
Article 3 of the MiFID also opens a national discretion for an optional exemption, whereby firms that only provide investment advice and/or receive and transmit orders may do so without being subject to the MiFID, provided that they comply with certain conditions, including only transmitting orders via a firm that is subject to the provisions of the MiFID. Where such an exemption is used, such firms may not use the MiFID passport and are not subject to Article 31 of the CRD, which sets the basic minimum requirements for institutions not holding client money or securities (firms excluded from the full CRD/CRR, point (c) of Article 4(1)(2) of the CRR.
In general, MiFID II narrows certain exemptions contained in the provisions of the MiFID on scope. In effect, the application of MiFID II will widen the scope of the MiFID and is likely to increase the number of firms captured by the Directive.
Since the CRR's definition of 'investment firm' makes use of the MiFID definition, changes in the scope of the MiFID definition are likely to also affect the scope of the CRR definition. Therefore, unless changes are introduced in the CRD IV framework before the entry into force of MiFID II (see CRR exemption for commodity dealers), the number of investment firms subject to CRD IV will also likely increase when MiFID II comes into force in January 2018.
MiFID II Exemptions Summary
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Description of exemption
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MiFID reference |
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Insurers
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article 2.1(a) |
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Intra-group services
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article 2.1(b) |
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Services complementary to other professional activities
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article 2.1(c) |
| Own account dealing (except in commodities)
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article 2.1(d) |
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An operator with compliance obligations under Directive 2003/87/EC (Emissions Trading Scheme) who, when dealing in emission allowances, does not: |
article 2.1(e) |
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Employee share schemes and pension schemes
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article 2.1(f) and (g) |
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The following public financial institutions: - members of the European System of Central Banks; - other national bodies performing similar functions in the EU; - other public bodies charged with or intervening in the management of the public debt in the EU; or - international financial institutions established by two or more Member States of the EU which have the purpose of mobilising funding and providing financial assistance to the benefit of their members that are experiencing or threatened by severe financing problems. |
article 2.1(h) |
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Collective investment undertakings |
article 2.1(i) |
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Own account dealing in commodity derivatives (ancillary activity exemption) |
article 2.1(j) |
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Persons providing investment advice in the course of providing another professional activity not covered by MiFID
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article 2.1(k) |
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Transmission system operators as defined in article 2(4) of Directive 2009/72/EC or article 2(4) of Directive 2009/73/EC (Directives about common rules for the internal markets in electricity and natural gas). This exemption is subject to various detailed conditions |
article 2.1(n) |
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Central securities depositories when providing services explicitly listed in Sections A and B of EU Regulation 909/2014 (Securities settlement and central securities depositories regulation) |
article 2.1(o) |
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Optional article 3 exemption |
article 3 |
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Exemptions relevant to Italy, Denmark and Finland |
articles 2.1(l) and (m) |
Even if not an authorised financial institution, firms - by virtue of Article 1 MiFID II and Article 1 of MiFIR - can be subject to a MiFID II and MiFIR requirements.
The respective requirements, to be complied with, are:
1) position limits (only positions held by or on behalf of non-financials which are objectively measurable as reducing risks directly relating to commercial activity will not be able to be counted towards the limits (upon notification),
3) Article 17(1) to (6) of MiFID II on algorithmic trading applies to members or participants of regulated markets and MTFs,
4) in accordance with Article 1(3) MiFIR, Title V of the MiFIR, (encompassing requirements for derivatives, in particular, on the trading obligation, clearing obligation, indirect clearing arrangements as well as portfolio compression) apply to all financial counterparties and to all non-financial counterparties above the clearing threshold (EMIR Article 10(1)(b)).
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Documentation |
EBA Report on Investment Firms, Response to the Commission's Call for Advice of December 2014, EBA/Op/2015/20, p. 12
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Links |
