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MiFID II - Licence obligation and exceptions

MiFID II changes the definition of financial instrument as far as commodity derivatives and emission rights are concerned, and expands the licence obligations for certain market participants, such as proprietary traders. An exception to this licence obligation is possible.

Which parties are required to have a licence?

Commodity derivatives traded on a trading venue are, in principle, financial instruments under MiFID II, provided that they do not fall under the REMIT carve-out. Emission rights and derivatives thereof also qualify as financial instruments under MiFID II.

Market participants that engage in dealing on own account in these financial instruments are, in principle, subject to a licence obligation under MiFID II. Market participants that have to apply for a licence as an investment firm will also have to apply provisions that are laid down in the EMIR and CRD IV as this legislation is applicable to investment firms.

Parties that wish to engage in proprietary trading in commodity derivatives or emission rights or derivatives thereof after 3 January 2018 must have a licence or have notified themselves to the AFM.

Which parties are not required to have a licence?

Parties that deal on own account in commodity derivatives, emission allowances and derivatives thereof are for now largely exempt under MiFID I. MiFID II drastically restricts the exemption from the obligation to obtain a licence. There is only no obligation to obtain a licence if the trading in commodity derivatives and emission allowances is ancillary to the main business, the traders do not execute client orders and do not use HFT. Use of the exemption must be reported to the AFM annually. There is an additional exemption for parties that trade in emission allowances as compliance buyers. All other professional traders in commodity derivatives must obtain a licence.

When does the ancillary activity exemption apply?

Parties that deal on own account in commodity derivatives, emission allowances and derivatives thereof which is considered to be ancillary to the main business are exempt from the licence obligation. This main business may not however consist of providing investment services, performing investment activities, operating the business of a bank or acting as a market maker in commodity derivatives. There are 2 tests for traders to establish when an activity is considered to be ancillary to the main business.

The first test should determine whether the persons within the group are large participants relative to the size of the financial market in that asset class and as a consequence should be required to obtain authorisation as an investment firm.

The second test should 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.

The threshold values (overall market threshold and main business threshold) for the calculations in these tests are established by ESMA in level 2 regulation.
See the Delegated Regulation 2017/592 for the criteria to establish when an activity is considered to be ancillary to the main business. See also the Q&A on ancillary activity.

Procedure for licence application and notification

Every person dealing on own account in commodity derivatives, emission allowances and derivatives thereof must either hold a licence on 3 January 2018 or have notified themselves to the AFM. If a person is not able to make use of the exemption, it is not permitted to be active without a licence after 3 January 2018.

Parties wishing to use the ancillary activity exemption must notify themselves to the AFM annually. We will provide information on how to submit this notification on this web page in Q4 of 2017.

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