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Mifid

Looking at MiFID II RTS 20 – and a training course

It is now just over a week since Regulatory Technical Standard 20, which specifies the Ancillary Activity test, was adopted by the European Commission (see here). The adoption came after several months of waiting for the new version, following ESMA “passing the baton” back to the Commission on May 30th.

This post takes a brief look at the changes in RTS 20. More illustrated explanations and training can be provided on request.

Overview
The main change expected in this version of the RTS had been the inclusion of a capital test. ESMA issued an opinion document alongside their latest version on 30th May, which suggested different options for such a test. A capital test has indeed been included. In addition there are several other changes primarily to the data sampling period and some of the wording around group application.

Overall, there are two tests:

  1. The market size test
  2. The main business test

The main business test has 2 options:

a) Non privileged  derivatives ratio OR
b) Capital based test

BOTH tests need to be passed to keep the exemption.

Market size test
The test remains largely unchanged, with the eight thresholds per counterparty as they were before. The scope of the test remains the total non privileged activity of the “person” in the EU (on EU venues and where one of the counterparties is in the EU if off venue). The number does not include activity in a “regulated” entity. There has however been a change of wording regarding the application of the group, the implications of which require clarification.

Main business test using derivatives ratio
This test (which can be used instead of the capital test) is largely unchanged: The ratio of non privileged derivatives trading in the group compared to the total derivatives trading of the group. However, the denominator no longer appears to be  limited EU activity.

As before, if this ratio is less than 10%, this test is passed. If it is between 10% and 50%, the market size test must be passed with the thresholds divided by 2. If over 50%, the thresholds are divided by 5. If the later two cases, the market size test is run on a group basis.

Capital test
The newly reintroduced capital test uses the “standard CRR” option as the numerator, and total assets minus short term debt as denominator. The scope of the calculation is the global group, and the ratio must be under 10% for the test to pass. There is no option to pass with a ratio of over 10%, but with lower market size thresholds.

The numerator is calculated as net position * price * 0.15 + gross position * price * 0.03, for non privileged positions. The RTS defines rules for the net position  as:
“in each type of commodity derivative contract with a particular commodity as underlying in order to calculate the net position per type of contract with that commodity as underlying”
“net positions in different types of contracts with the same commodity as underlying or different types of derivative contracts with the same emission allowance as underlying can be netted against each other.”

Gross position is defined as :
“the gross position in a commodity derivative, an emission allowance or a derivative contract thereof, shall be determined by computing the sum of the absolute values of the net positions per type of contract with a particular commodity as the underlying, per emission allowance contract or per type of contract with a particular emission allowance as the underlying. ”
“net positions in different types of derivative contracts with the same commodity as underlying or different types of derivative contracts with the same emission allowance as underlying cannot be netted against each other.”

The netting rules will require further elaboration. It is worth consulting the EBA’s question and answer on CRR Article 360 which can be found here.

The test is carried out at global group level and includes any regulated entities. This means that should a group  be required to set up a regulated entity, the remainder of the group will need to pass the test using the derivatives ratio test.

Sampling period
The other major change is in the sampling period. The test is to be calculated annually in Q1 using a three year average of the previous calendar years. For example, the 2018 calculation should use data from calendar years 2015, 2016 and 2017.

In the event that the last year is reduced by more than 10% of the first year, the last year only may be used. Similarly, if the last year figures are lower than both of the previous years, the last year only may be used.

There is no guidance as to the transitional arrangement, which will require clarification.

Conclusion and looking forward
The energy and commodities market now has more information than it did previously about whether regulated entities will need to set up. Asset heavy companies will benefit from the capital test, in particular the widely defined denominator and 10% threshold. Several points however, do require clarification, including:

  • How to apply group numbers for the market size test
  • Clarification on the netting rules for the capital test
  • The transitional arrangement.

The answer to some of these questions will bring several companies in and out of the regulation.

There are also several other outstanding points, for example finding out which trading venues will be classified as “OTF”, which will be important for energy traders.

Despite these unanswered questions, market participants will wish to ascertain likely  status as soon as possible, so that the process of applying for authorisation can be initiated if it appears that an investment firm is to be set up.

 

Further information and training
Please contact ETR Advisory on info@etr-advisory.com for a more graphical explanation  and discussion. ETR Advisory will also be running a training course together with Entrima looking into the details of the new RTS on 18th January 2017 in Amsterdam. Details can be found here.

This will also track third party online explanations over the coming days as they are published.

 

About avivhandler

Aviv is the Managing Director of ETR Advisory, a niche consultancy focused on energy and commodity regulation. He has more than 20 years of experience in energy and commodity trading, credit, risk and financial technology. He has delivered a series of trading, credit and risk solutions to a wide variety of oil majors, power and gas companies and investment banks. Prior to founding ETR, he was Partner at SunGard Global Services, where he built a Centre of Excellence in European Energy Regulation. Before that, he founded Coherence, a consulting firm specializing in credit risk in commodity and energy trading as well as software product management. The credit practice ultimately became part of Sirius Solutions, where he was the Managing Director of Europe. He has also held management roles at KWI and Iris Financial, among other organizations. Mr. Handler holds a degree in computer science from Imperial College, University of London.

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