Licence obligation and exceptions
MiFID II changes the definition of a financial instrument with regard to commodity derivatives and emission allowances, and extends the licensing requirement for certain market parties, such as proprietary traders. An exception to this permit requirement is possible. An exception to this permit requirement is possible. There are also rules for the use of the secondary activity exemption.
Which parties are required to have a licence?
Parties dealing on own account in commodity derivatives, emission allowances or derivatives thereof must in principle have a licence or comply with the conditions for the ancillary activity exemption. Under MiFID II, the principle is that commodity derivatives traded on a trading venue qualify as financial instruments, provided they are not within the scope of the REMIT carve-out.
Under MiFID II, emission allowances and derivatives thereof also qualify as financial instruments. Parties dealing on own account in these financial instruments are, in principle, subject to the licence requirement under MiFID II. Traders in these financial instruments that are required to apply for a licence to operate an investment firm will also be required to apply the legal provisions that apply to investment firms, including those under EMIR and CRD IV.
Which parties are not required to have a licence?
The licence requirement does not apply when: (i) trading in commodity derivatives and emission allowances is not the main business at group level but an ancillary activity; (ii) the relevant parties do not execute client orders; and (iii) they do not use high-frequency trading (HFT). An additional exception applies to parties trading in emission allowances as compliance buyers. All other professional parties trading in commodity derivatives must have a licence.
When does the ancillary activity exemption apply?
When parties trade on the basis of an ancillary activity, they may be exempt from the licence requirement. Only parties dealing on own account, including market makers, can qualify for the ancillary activity exemption. An activity qualifies as an ancillary activity when it concerns commodity derivatives, emission allowances or derivatives thereof, provided that the main activity to which the activity is ancillary does not concern parties that provide investment services, perform investment activities or banking activities or act as market makers in commodity derivatives. To determine when a trading activity is to be considered ancillary to the main business at group level, the parties at group level must perform an assessment by means of a test. To this end, they can select one the following three alternative tests.
De-Minimis Threshold Test: This test is used to establish whether the outstanding notional exposure in commodity derivatives, emission allowances or derivatives thereof, aggregated on an annual basis, is below the threshold of 3 billion euros. Commodity derivatives, emission allowances or derivatives thereof that are not traded on a trading venue must be excluded from the calculation of this exposure.
Trading Test: This test is used to compare the size of trading activities of an individual to the total trading activities of the group. The total size of the ‘ancillary activities’ may not account for more than 50% of the total size of the trading activities of the group.
Capital Employed Test: This test concerns the estimated capital employed for carrying out the ‘ancillary activities’, which may not account for more than 50% of the capital employed for carrying out the main business at group level.
For the exact criteria for establishing when an activity is to be considered ancillary to the main business at group level, see Commission Delegated Regulation (EU) 2021/1833. If you have any questions about the ancillary activity exemption, please send an email to commodities_mifid2@afm.nl.