Final standards of MiFID II exception for commodity traders

Does your firm trade in commodities derivatives? If so, the publication of the final standards regarding the exemption of ancillary activities and the position limits regime under MiFID II is of importance to you.

MiFID II/MiFIR will generally require that any company trading in commodities derivatives on its own account or on behalf of third parties will need a license as an investment firm as of 3 January 2018. This rule will also affect commodities trading firms domiciled in Switzerland to the extent that they trade in commodities derivatives listed on an exchange domiciled in the EU or conduct OTC trades with a counterparty domiciled in the EU.

There are, however, certain exemptions available to this general license requirement. The most prominent of these exemptions is the ancillary activity exemption. The final technical standards for the criteria to establish whether an activity is considered to be ancillary to the main business under MiFID II/MiFIR were published by the European Commission yesterday. Ancillary activity exemption is granted if the following three thresholds are not exceeded:

        • Overall market threshold: The group’s notional value in speculative positions in the asset classes metals, oil and oil products, coal, gas, power, agricultural products and other products, when compared to the overall market trading activity in each of these asset classes, does not exceed certain thresholds (4% for metals, 3% for oil and oil products, 10% for coal, 3% for gas, 6% for power, 4% for agricultural products, 15% for other products, and 20% for emission allowances).
        • Main business threshold: This test is now comprised of two subtests. The first is still the ratio between the company’s speculative and overall trading activity. A value below 10% means that the test has been passed, a value between 10% and 50% decreases the thresholds mentioned in the overall market threshold test by 50%, and a value above 50% decreases these thresholds by 80%.
        • New – capital employed test: the third test is passed when the estimated capital employed for carrying out the activities (15% of the net position in addition to 3% of the gross position, multiplied by the net price of the derivative) is not more than 10% of the capital employed (total assets of the company minus short-term debt) at company level for carrying out the main business activities.

The European Commission has also published the final technical standards on the position limits on the size of a net position which a person can hold in exchange-traded commodity derivatives and economically equivalent OTC contracts. In other words, there will be position limits for each commodity derivative in each commodity class.

What does this mean for firms trading in commodities derivatives?
If you have not done so already, we recommend starting your MiFID II/MiFIR project now. Compliance with MiFID II/MiFIR will result in (material) changes to your organisation. Synergies can be gained by combining the MiFID II/MiFIR project with projects related to other regulations that are already in force or will soon come into force (such as MAR, FMIA and EU benchmark regulations).

We have had the great fortune to assist many large and smaller commodities trading groups in becoming MiFID II/MiFIR compliant, and we would be delighted to share this wealth of experience with you.

For your free consultation, please contact:

Dr Günther Dobrauz MBA
+41 79 894 58 73

Dr Martin Liebi LL.M.
Senior Manager
+41 76 341 65 43

Published by

Guenther Dobrauz

Guenther Dobrauz

Guenther Dobrauz
Birchstrasse 160
Postfach, 8050 Zurich
+41 58 792 14 97

Guenther leads the PwC Legal Services Practice in Switzerland and the Legal FS Regulatory & Compliance Services department. He is a PwC Partner since 2015 and a global expert on legal advisory, specializing in supporting the structuring, authorization and ongoing lifecycle management of financial intermediaries and their products. He in particular also focuses on leading large scale regulatory change and compliance alignment projects.

Guenther is the author of books on investment selection, FinTech Regulation and European, Swiss and Liechtenstein investment law. He also wrote 80+ publications in international expert magazines and has to date been speaking at more than 60 conferences worldwide.

Guenther Dobrauz received his Masters and PhD degrees in law from Johannes Kepler University (Linz, Austria). He holds an MBA from the University of Strathclyde Graduate School of Business (Glasgow, UK) and has participated in Harvard Business School’s Executive Education Program.

Guenther Dobrauz was Legal Counsel of an international hedge fund group and served as Managing Partner and Legal Counsel of a Swiss Venture Capital firm. He has practiced in court and with a leading business law firm.