As you will be aware, the MiFID II ancillary activity exemption is still very important in the UK in relation to commodity derivatives and emission allowances.
Since leaving the EU, there have been various developments. First, the FCA has provided some guidance on the interpretation of certain parts of the quantitative test which rely on information about the market which the FCA no longer publishes. Second, the EU quantitative test has been amended so it no longer matches the UK version. Third, the government made some amendments that were due to take effect on 1 January 2025, one of which effectively repealed the technical standard in which the quantitative test for the exemption is set out. Fourth, the FCA proposed new guidance to help firms determine in a more qualitative way whether their trading activity is ancillary to the main business of their group. The third and fourth steps reflected the outcome of the Wholesale Markets Review.
The FCA consulted on the guidance for the proposed new qualitative test to replace the quantitative test in December 2023 but feedback from industry has caused HM Treasury and the FCA to reconsider. Their joint work has led to:
- HM Treasury announcing that the commencement dates for most of the substantive provisions of the legislation are delayed from 1 January 2025. The exception is the provision which removes the obligation to notify the FCA of reliance on the exemption on an annual basis.
- FCA announcing that it will not take forward the proposed amended guidance on when trading activity might be considered to be ancillary.
This reflects concerns expressed by industry that the revised approach did not provide sufficient certainty for firms about whether they could rely on the ancillary exemption. HM Treasury and the FCA will continue to work together to determine how best to address these concerns.
So what does this mean for firms relying on the ancillary activity exemption?
- The bad news is: You will continue to have to undertake the quantitative test for the foreseeable future and the FCA has confirmed that its statement about how to do so in the absence of data about the overall size of the market (by using historic data for certain parts of the calculation) will remain operative.
- The good news is: You won’t have to notify the notify the FCA that you have done so, save as requested.
This doesn’t constitute much progress towards a simpler regulatory regime and leaves many unregulated entities struggling with a complex test located in different sources and having to maintain systems for identifying, recording and assessing their activity levels against thresholds. There may also be some disappointed market players who had seen some opportunity in the flexibility of the draft guidance on the proposed qualitative test, as compared to the prescriptive quantitative test which even the EU has improved.
However, there are significant potential benefits to working out when commodity derivatives and emission allowance activity should be regulated and when it doesn’t need to be and drafting the new legislation and rules as simply and holistically as possible to provide that clarity. We would encourage those concerned to consider in particular the emission allowance piece, which becomes increasingly significant and for which some of the concepts like hedging are not so relevant.
Whatever the ultimate outcome, we would urge government and regulators to keep industry both involved and updated on the direction of travel and likely timelines as this exemption remains critical to both those that trade in the UK but many overseas persons who access UK markets and trade with UK counterparties.
The Norton Rose Fulbright Financial Services team advise on the ability to rely on exclusions and the ancillary activity exemption on a regular basis. If you would like more information, please contact us.