This week the FCA, the UK financial market regulator, announced (click here) a consultation on the changes to the ancillary activities test (AAT) for the ancillary activities exemption (AAE) under UK MiFID.
What is it about?
- This announcement represents the latest iteration in the long-running initiative to adapt the AAT rules for UK MiFID post-Brexit. In May 2024, the FCA announced its plans to delay major changes to the AAT that would move it from a quantitative test to a qualitative test after receiving pushback from stakeholders who objected to the lack of legal certainty this might induce. In February 2025, as part of this Policy Statement on Reforming the commodity derivatives regulatory framework, the FCA confirmed that the AAT quantitative test and related technical standards (RTS 20) will remain in place until at least 2027. The same Policy Statement noted that the FCA would work with HM Treasury and the market to develop an approach that takes into consideration the concerns raised by industry.
- In this week’s 48-page consultation (click here), the FCA proposes establishing three separate and independent tests to assess whether a firm is eligible to use the AAE. These will include a new annual threshold test (commonly known as a “de minimis” test), which will exempt firms that undertake trading in commodity derivatives on a relatively small scale. They will also include the existing trading and capital employed tests, that are currently part of the AAT’s main business test, but with some proposed modifications to these. Under its proposals, a firm can use the AAE if it meets the conditions set out in any of the three tests, which differ from the current regime where a firm needs to pass a market share test and a main business test to use the AAE.
- The proposed new annual threshold test will be based on a set monetary threshold and will replace the current market share test which is based on yearly averages of overall market activity in particular commodity derivatives. Compared to the market share test, the FCA proposes that the calculation against the annual threshold will not be done for each different type of commodity, but across allcommodity derivatives. The FCA’s proposal also notes that HM Treasury has decided to maintain Article 72J of the Regulated Activities Order (RAO) for 12 months and will commence its revocation on 1 January 2028, providing an additional year for firms to prepare. Article 72J formed part of the Brexit-related transitional regime that catered for firms that could not perform the market share test because of a lack of publicly available data on the overall size of the market.
The FCA proposes three separate and independent tests to assess whether a firm can use the AAE as follows:
- A newannual threshold test(“de minimis”), which will allow firms that undertake commodity derivatives trading on a small scale to be exempted from authorisation. It replaces the current market share test;
- The existingtrading test(currently part of the main business test) with some modifications;
- The existingcapital employed test(currently part of the main business test) with some modifications.
- Firms may benefit from the AAE where they meet any one of the three tests in a – c above;
- For all three tests, intra-group transactions, hedging transactions and transactions entered into as part of an agreement to provide liquidity on a trading venue are excluded from the calculations;
- The definition of hedging transactions will remain consistent with that set out in RTS 20, and the commodity derivatives regulatory framework outlined in PS25/1.
1] Annual threshold (de minimis test) *new*
- The FCA proposes to introduce an annual threshold test with the assessment based on whether a firm’s outstanding notional exposure in commodity derivatives is below a fixed monetary threshold - the assessment would include OTC derivatives;
- For derivatives traded on a UK trading venue, that are Recognised Investment Exchanges (RIE), Organised Trading Facilities (OTFs) and Multilateral Trading Facilities (MTFs), the FCA sees a case for including this activity but its decision on whether to include these derivatives will depend on the evidence-based feedback it receives from the consultation;
- In the context of our draft rules, the FCA has specified that activity conducted on trading venues shall be included in the assessment;
- The exposure should be calculated on a net basis, using the average of the aggregated month-end outstanding notional values over the previous 12 months;
- The calculation will only include cash-settled commodity derivatives - cash-settlement refers to contracts that are either required to be cash-settled or may be cash-settled;
- Contracts traded on Recognised Overseas Investment Exchanges and third country trading venues shall not be included in this calculation;
- Intra-group transactions, hedging transactions and transactions entered into as part of an agreement to provide liquidity on a trading venue are also to be excluded from the calculations;
- Its decision regarding what the appropriate threshold should be under this test will be partly dictated by whether commodity derivatives traded on UK trading venues will be included (decision subject to feedback from this consultation);
- With the above in mind, the FCA wants feedback on whether a threshold set at GBP 3 billion that excludes all transactions where the counterparty is a UK-authorised firm, or where the transaction is executed by a UK authorised broker on behalf of the firm seeking to rely on the AAE is preferable versus raising the threshold to GBP 5 billion which would include all cash-settled positions in derivatives traded on UK trading venues (the FCA is looking for evidence-based responses supported by data);
- The FCA proposes retaining the netting method prescribed in RTS 20 for the capital employed test and apply it to the annual threshold test aligning to the approach in the EU’s de minimis test;
- The FCA proposes that the calculation be determined by reference to the three relevant calculation periods preceding the date of calculation where the average of the resulting annual values should be compared with the threshold;
- The FCA recognises there may be a potential need to adjust the threshold in the future to cater for changes in market conditions. They are interested in feedback on whether its rules should include a mechanism to make threshold adjustments based on factors like inflation or if an annual review via consultation would suffice.
2] Trading test and capital-employed test
- The FCA proposes maintaining the methodology set out in RTS 20 for calculating the trading and capital employed test but to change the applicable thresholds by setting both at 50% to meet the aim of limiting the use of the exemption to firms whose business is predominantly commercial;
- They propose that for the purposes of determining whether a person should be authorised in the UK, calculations should look at activity traded in the UK;
- For both tests, the comparison is to group activity which can include the activity of entities located in the UK and outside of the UK;
- For the trading venue test, the group’s activities will include for UK based entities their OTC trading activity 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 be capital employed on a worldwide basis, not just within the UK;
- The FCA proposes that the calculation for both tests continues to be carried out annually using a 3-year rolling average.
Other points:
- Regarding test frequency, the FCA proposes that non-financial firms must meet the conditions set out in any one of the three tests on an annual basis to be able to use the AAE;
- Regarding Currency conversion e.g. when converting notional exposure in USD to GBP under the annual threshold test, the FCA proposes that firms should use the Bank of England (BOE) rate or another reputable source and when the average of the aggregated month-end outstanding notional value is calculated, the relevant month-end rate should be used for each of the previous 12 months.
Firms wishing to respond to the consultation must do so by Thursday, 28 August 2025.