Category: MiFID II/MiFIR

 

The purpose of main business test (MBT) under the MiFID II ancillary activity exemption is to determine whether the persons within the group trade on own account or provide investment services in commodity derivatives, emission allowances or derivatives thereof to such a large extent relative to the main business of the group that those activities cannot be considered to be ancillary at group level and that therefore the persons should be required to obtain authorisation as an investment firm.

         
          
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Important update
 

Directive (EU) 2021/338 of the European Parliament and of the Council of 16 February 2021 amending Directive 2014/65/EU as regards information requirements, product governance and position limits, and Directives 2013/36/EU and (EU) 2019/878 as regards their application to investment firms, to help the recovery from the COVID-19 pandemic substantially modifies legal framework regarding MiFID ancillary exemption.

The said Directive set out new provisions regarding the ancillary activity tests and empowers the European Commission to adopt a delegated act specifying the relevant criteria.

The delegation was exercised by adoption on 14 July 2021 of the Commission Delegated Regulation supplementing MiFID II by specifying the criteria for establishing when an activity is to be considered to be ancillary to the main business at group level.

This modification is not reflected in the remainder of this article, which is mainly based on previous provisions. However, some parts remain applicable and some updates are included.
 


The details of this test are stipulated in Article 3(1) - (4) and (10) of the Commission Delegated Regulation (EU) 2017/592 of 1 December 2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council with regard to regulatory technical standards for the criteria to establish when an activity is considered to be ancillary to the main business (ESMA's RTS 20).

 

The main business test takes two, alternative methods for determining the size of the trading activity in order to compare it to the size of the main activity undertaken by the group:

 

- the first method (trading test) takes into account volume of all trading activity in commodity derivatives, emission allowances or derivatives thereof measured in the gross notional value of the underlying,

 

- the capital test is the second method.

 

The reason behind shaping the main business test in two forms is "to better reflect the underlying activities of the persons intending to use the exemption whilst minimising the regulatory burden and complexity of implementing the test" (Recital 6 of the said Regulation (EU) 2017/592).

 

As both forms of the main business test cater for the different underlying economic realities of various groups both tests, however, "constitute equally suitable methods to determine whether the trading activity is ancillary to the main business of a particular group".

 

 

 

Article 3(1) - (4) and (10) of the Commission Delegated Regulation (EU) 2017/592 of 1 December 2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council with regard to regulatory technical standards for the criteria to establish when an activity is considered to be ancillary to the main business

 

Article 3 


Main business threshold

 

1. The activities referred to in Article 1 shall be considered to constitute a minority of activities at group level where they comply with any of the following conditions:

 

(a) the size of those activities calculated in accordance with the first subparagraph of paragraph 3 does not account for more than 10% of the total size of the trading activity of the group calculated in accordance with the second subparagraph of paragraph 3;

 

(b) the estimated capital employed for carrying out those activities calculated in accordance with paragraphs 5 to 7 does not account for more than 10% of the capital employed at group level for carrying out the main business calculated in accordance with paragraph 9.

 

2. The following derogations from paragraph 1(a) shall apply:

 

(a) where the size of the activities referred to in Article 1 calculated in accordance with the first subparagraph of paragraph 3 accounts for more than 10% but less than 50% of the total size of the trading activity of the group calculated in accordance with the second subparagraph of paragraph 3, ancillary activities shall be considered to constitute a minority of activities at group level only where the size of the trading activity for each of the asset classes referred to in Article 2(1) accounts for less than 50% of the threshold established by Article 2(1) for each relevant asset class;

 

(b) where the size of the trading activities calculated in accordance with the first subparagraph of paragraph 3 accounts for equal to or more than 50% of the total size of the trading activity of the group calculated in accordance with the second subparagraph of paragraph 3, ancillary activities shall be considered to constitute a minority of activities at group level only where the size of the trading activity for each of the asset classes referred to in Article 2(1) accounts for less than 20% of the threshold established by Article 2(1) for each relevant asset class.

 

3. The size of the activities referred to in Article 1 undertaken by a person within a group shall be calculated by aggregating the size of the activities undertaken by that person with respect to all of the asset classes referred to in Article 2(1) in accordance with the same calculation criteria as that referred to in Article 2(2). 
The total size of the trading activity of the group shall be calculated by aggregating the gross notional value of all contracts in commodity derivatives, emission allowances and derivatives thereof to which persons within that group are a party to.

 

4. The aggregation referred to in the first subparagraph of paragraph 3 shall not include contracts where the person within the group that is a party to any of those contracts is authorised in accordance with Directive 2014/65/EU or Directive 2013/36/EU.

 

 ...

 


10. The values resulting from the calculations referred to in this Article shall be denominated in EUR.

 

 

  

 

Recitals 6 - 9 of the Commission Delegated Regulation (EU) 2017/592 of 1 December 2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council with regard to regulatory technical standards for the criteria to establish when an activity is considered to be ancillary to the main business

 

(6) The second test provides two methods for determining the size of the trading activity in order to compare it to the size of the main activity undertaken by the group. That test takes two forms in order to better reflect the underlying activities of the persons intending to use the exemption whilst minimising the regulatory burden and complexity of implementing the test. The capital test is provided as an alternative to the trading test in order to take into account of the economic reality of the very heterogeneous groups that need to undertake the assessment whether their trading is ancillary to their main business activities, including groups that undertake significant capital investments, relative to their size, in the creation of infrastructure transportation and production facilities, as well as investments which cannot be easily hedged in financial markets. As both forms of the second test cater for the different underlying economic realities of various groups both tests constitute equally suitable methods to determine whether the trading activity is ancillary to the main business of a particular group.


(7) The size of the trading activity as used under the first method of the second test is taken as a proxy for the commercial activity that the person or group engages in as its main business. This proxy should be easy and cost efficient for persons to apply as it builds on data already required to be collected for the first test while at the same time establishing a meaningful test.


(8) This proxy is appropriate because a rational risk-averse entity, such as a producer, processor or consumer of commodities or emission allowances, is deemed to hedge the volume of the commercial activity of its main business with an equivalent volume of commodity derivatives, emission allowances or derivatives thereof. Therefore the volume of all its trading activity in commodity derivatives, emission allowances or derivatives thereof measured in the gross notional value of the underlying is an appropriate proxy for the size of the main business of the group. As groups whose main business activities are not related to commodities or emission allowances would not use commodity or emission allowances derivatives as a risk-reducing tool, their trading in commodity derivatives, emission allowances or derivatives thereof would not qualify as hedging.


(9) The use of commodity derivatives as a risk-reducing tool however cannot be considered a perfect proxy for all the commercial activity that the person or group conducts as its main business since it may not take into account other investments in fixed assets unrelated to derivative markets. In order to correct the potential mismatch between a group's trading in commodity derivatives and the actual size of its main business with regard, in particular, to small groups the first method of the second test should contain a backstop which recognises that the trading activity undertaken by the persons within the group should also not exceed a certain percentage of any of the thresholds set under the first test for each relevant asset class to be deemed ancillary. The higher the percentage of speculative activity within all trading activity of a group, the lower the threshold set under the first test. 

 

 

 

 

 


 chronicle   Regulatory chronicle

 

 

 

 

 

14 July 2021

 

Commission Delegated Regulation supplementing MiFID II by specifying the criteria for establishing when an activity is to be considered to be ancillary to the main business at group level

 

26 February 2021

 

Directive (EU) 2021/338 of the European Parliament and of the Council of 16 February 2021 amending Directive 2014/65/EU as regards information requirements, product governance and position limits, and Directives 2013/36/EU and (EU) 2019/878 as regards their application to investment firms, to help the recovery from the COVID-19 crisis - published in the Official Journal of the European Union


10 July 2020

 

ESMA Opinion on ancillary activity – market size calculation – update for the year 2019, ESMA70-156-478


27 May 2019

 

ESMA Opinion on ancillary activity – market size calculation – update for the year 2018, ESMA70-156-478

 

2 October 2018

 

ESMA Opinion on ancillary activity – market size calculation (ESMA70-156-478)


2 October 2018

 

Questions and Answers on MiFID II and MiFIR commodity derivatives topics ESMA70-872942901-36 updated

 

 

 

 

 

IMG 0744    Documentation

 

 

 

 

 

10 July 2020 - ESMA Opinion on ancillary activity – market size calculation – update for the year 2019, ESMA70-156-478

 

27 May 2019 - ESMA Opinion on ancillary activity – market size calculation – update for the year 2018, ESMA70-156-478

 

2 October 2018 - ESMA Opinion on ancillary activity – market size calculation (ESMA70-156-478)

 

Questions and Answers on MiFID II and MiFIR commodity derivatives topics ESMA70-872942901-36

 

Joint associations' Questions & Answers (Q&A) on Regulatory Technical Standard (RTS) 20 of the Markets in Financial Instruments Directive (MiFID II), 16 February 2017

 

Commission Delegated Regulation (EU) 2017/592 of 1 December 2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council with regard to regulatory technical standards for the criteria to establish when an activity is considered to be ancillary to the main business, Article 3(1) - (4) and (10), Recitals 6 - 9

 

 

 

 

 

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