Market participants subject to a licence obligation
With the introduction of MiFID II, fewer market participants are exempt from a licence obligation. In addition, the licence obligation has been expanded for certain market participants. A number of changes are explained below.
Proprietary trading
Proprietary traders were exempt from the application of MiFID I insofar as no other investment services or investment activities are provided or performed, unless they were market makers on the cash market or this concerned systematic internalisation. This exemption has been further limited under MiFID II. As a result, more market participants are subject to the licence obligation. This is explained in more detail below.Market makers
Certain market makers were not subject to the licence obligation under MiFID I because they were not active on the cash market. Under MiFID II, all market makers are subject to the licence obligation, including those who are active on the derivatives market.Members/participants regulated market, OTF orMTF, active via direct electronic access
Members or participants of a regulated market, OTF or MTF who engage in proprietary trading have become subject to a licence obligation under MiFID II. Proprietary trading by means of direct electronic access to a trading venue is also subject to a licence obligation under MiFID II. In the event of direct electronic access (DEA), a member or participant of a trading venue allows another person to make use of his trading code. This is also the case when a person makes use of the infrastructure of the member or participant to place orders. The licence obligation for these parties does not apply for parties whose main activity is not a financial enterprise (non-financials) and who only carry out transaction to hedge their main activity.Trading arcades
Various structures exist in Europe whereby several legal entities/natural persons trade under one licence for proprietary trading. These structures are referred to as trading arcades.For the qualification whether it concerns proprietary trading, the AFM assesses whether trading in financial instruments takes place with own funds, which results in the execution of transactions. To this end, the AFM considers it relevant in the name of which legal entity or natural person the funds and financial instruments are held and in whose name the trading decisions are taken. For the assessment of in whose name trading decisions are taken, the AFM looks at who is legally linked to the transactions.
Trading arcades are possible in principle, provided that all requirements of investment firms are satisfied. Within a trading arcade, all the rights, powers and obligations of each legal entity and natural person must be clearly allocated and documented. An investment firm must fulfil all the licence obligations at all times. For instance, it must ensure that its governance structure is transparent and that its business operations are ethical and controlled. The more layered the structure of a trading arcade, the smaller the likelihood that it will satisfy all of the requirements. If the trading arcade does not meet all the licence requirements, this will result in a rejection of the licence application.
A licence as investment firm is of course strictly personal and not transferable. Therefore, it is also not possible to 'contribute’ a licence to another entity.
Algorithmic trading
Proprietary trading whereby high frequency algorithmic trading technology is used is subject to a licence obligation under MiFID II. High frequency algorithmic trading is trading based on minimal price and time differences. This type of trading leads to a faster execution of orders, but also entails more operational risks. Therefore, MiFID II lays down requirements for the internal business operations of market participants that make use of a high frequency algorithmic trading technology. The aim is to avoid market disruptions. In addition, certain information and documentation obligations apply under MiFID II. Trading venues on which these traders are active also have to satisfy internal business operations requirements under MiFID II.Proprietary trading when executing orders
Proprietary trading whereby trading takes place by executing the orders of clients is also subject to a licence obligation under MiFID II.Trading in commodity derivatives, emission rights or related derivatives
Market participants that trade engage in proprietary trading in commodity derivatives or emissions rights or related derivatives, are in principle subject to a licence obligation under MiFID II. Emission rights and derivatives thereof also qualify as financial instruments under MiFID II. There is an additional exemption for parties who trade in emission rights as compliance buyers.Commodity traders are only exempt when they trade engage in proprietary trading in commodity derivatives in connection with their main activity, which is not a financial activity. The manner in which it is determined whether activities qualify as ancillary activities, is elaborated in European regulations.
Which contracts that provide trading venues with liquidity (LP schemes) can be excluded transactions for the calculation of an ancillary activity?
What contracts for providing venues with liquidity (LP schemes) comply with the criteria for not including transaction in the calculation of an ancillary activity?
Under the 5th paragraph of Article 2(4) of MiFID II, certain transactions are not taken into account for the calculation of what is known as the "ancillary activity exemption". It concerns among other things "transactions in commodity derivatives and emission allowances entered into to fulfil obligations to provide liquidity on a trading venue, where such obligations are required ... by trading venues."
Requirements imposed on market makers
It should be noted first and foremost that this obligation to provide liquidity on a trading venue is not the same as the activities of 'market makers' under MiFID (defined in Article 4(1)(7)). The definition of market makers is more limited and does not mention obligations. Market makers can only make use of this exemption if they are subject to additional requirements. The willingness to perform transactions is not sufficient; a liquidity provider must be subject to an actual obligation to perform transactions.This obligation must have been laid down in advance by the venue and must be subject to enforceable agreements between the venue and the liquidity provider. The programme must be transparent for other market participants and accessible in a non-discriminatory manner. For example, the obligations should be quote obligations with linked additional requirements that may concern a maximum bid-ask spread, minimum volumes, minimum duration, maximum response time or a minimum mandatory presence in the market.
The exemption for these types of transactions only applies to transactions performed under a liquidity programme, not the liquidity provider as a person. The AFM assumes that the programmes applied by the relevant Dutch venues comply with these conditions.