The FCA, the UK financial market regulator, has published a policy statement setting out its approach to simplifying the ancillary activities test (AAT) under UK MiFID (click here). The policy statement follows this July consultation on the AAT which forms part of a wider set of reforms to the UK commodity derivatives regime.
The FCA’s 43-page policy statement may be found here. The AAT determines whether firms qualify for the ancillary activities exemption (AAE) which allows them to remain out of scope of needing a MiFID licence as originally conceived under the EU MiFID regime pre-Brexit. Under the current UK AAT, firms must meet the conditions for both the market share test and the main business test to rely on the AAE. Under the FCA’s final rules (as proposed in the consultation above), three separate and independent tests are introduced, namely a new annual threshold test (also referred to as the “de minimis test”), along with modified versions of the trading and capital employed tests. Firms will be able to rely on the AAE if they meet the conditions of any one of the tests. This represents a reasonably material departure from the EU’s AAT regime.
The new annual threshold test allows firms that trade over-the-counter (OTC) commodity derivatives on a relatively small-scale (i.e. below a fixed monetary threshold of GBP 3 billion) to rely on the AAE. The calculation includes only cash-settled commodity derivatives – that is, derivatives that either must or can be cash-settled. In response to feedback, this test does not include exchange-traded derivatives (ETDs). This test replaces the current market share test, which is based on annual averages of overall market activity in relevant commodity derivatives on an asset class basis.
The FCA will retain the existing methodology for calculating the trading and capital employed tests but the thresholds for both tests will be set at 50% (far more generous than the current 10% for both). Both tests calculate a firm’s relevant trading activities against the group’s activities. For the trading test, the group’s activities will include (for UK-based entities) their OTC trading and trading conducted on UK trading venues, and for non-UK-based entities, their trading conducted on UK trading venues. For the capital employed test, the group’s activities will include the capital employed worldwide, not just within the UK.
The policy statement notes that overall, firms supported their proposed approach to simplify the AAT but some raised significant concerns about the initial proposal to include ETDs in the annual threshold test as this could inadvertently expand the regulatory perimeter and discourage non-financial firms (NFCs) from trading on UK venues. Respondents believed that this could potentially drive activity offshore, fragment liquidity, reduce transparency, and harm the UK as a hub for commodity trading. Several firms also noted that separating physically settled on-venue contracts from cash-settled activity poses operational challenges given the limited automated access to data. As such there was wide support for limiting the annual threshold test to OTC cash-settled derivatives, and support for the exclusion of on-venue trades from the annual threshold test calculation as included in the final set of rules from the FCA.
The new AAT/AAE regime will take effect on 1 January 2027. From a transitional perspective however, HM Treasury will retain Article 72J of the Regulated Activities Order (RAO) for a further 12 months and revoke it from 1 January 2028. This is intended to provide transitional relief.
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