Talk:Dealing on own account

We mention this only because there are some odd provisions of MiFID 2 which potentially put SPVs into scope should they look to securitise commodity derivatives or carbon emission allowances or EA derivatives (which for sanity’s sake we will call “commodity products” on this page, even though it isn’t a fantastically accurate description).

So, an odd thing. In MiFID 1, commodity derivatives and carbon emissions products were (largely) excluded from scope. To ensure participants on commodity derivatives markets appropriately regulated and supervised, MiFID 2 narrowed exemptions, especially as regards “dealing on own account”. The idea being, you would think, to make sure that commodity based financial products that in other ways resembled MiFID financial instruments — and commodity swaps to that, as do emissions allowances — should be regulated in the same way. You wouldn’t expect them to be regulated more heavily.

Anyway. When trying to bring commodity derivatives and EUAs into scope for MiFID, the regulations and technical standards do a curious job of them handling the usual exemptions, such as those under Art 2(1)(d) (see full text in panel on right), which, in a nutshell, exempts from MiFID:

2(1)(d) Persons dealing on own account other than in commodity products and who do not provide any other investment services or do any investment activities other than in commodity products unless they are market makers participate on or have direct electronic access to a regulated market or MTF (excluding corporates who trade to hedge their commercial or financing activity in an objectively measurable way), use high-frequency trading algorithms, or are executing client orders.

All very tedious, but what is going on here is exactly as presaged above: if you are just a regular joe, and you aren’t making markets, using algos, executing client orders, or directly accessing a regulated market beyond your normal funding and hedging activity, you don’t need to be authorised under MiFID 2 ... unless you’re transacting in commodity products.

Like, what? we have gone from commodities being out of scope from MiFID altogether, to being in scope for MiFID 2, even when normal MiFID instruments aren’t. That cannot have been what the regulators intended. Can it? To see, we have to continue down the laundry list of exemptions. The next one that might help is Article 1(j) — again, set out in full in the panel for completists, but what it means in layperson’s terms is the following persons are exempt:

2(1)(j) persons who “deal on own account” commodity products, as long as they are not executing client orders or providing other investment services in commodity products to their customers or suppliers, an further provided that:

• taken together this activity is an ancillary to their main business at a group level,
• that main business is not providing banking or investment services, or acting as a market-maker in commodity derivatives
• they are not using high-frequency trading algorithms; and
• when asked, explain to their competent authority how consider their activity to be “ancillary to their main business”;

Ok we are getting somewhere, but — ah: there is this gnomic question of what counts as “ancillary to one’s main business”. Fear not: Article 2 also addresses that, but punts it off to ESMA to come up with some regulatory technical standards governing it. This has been recently updated and you can find the latest — as of June 2022 — here.

There are three alternative ancillary activity tests. Under the “de minimis threshold test”, a person’s activity is ancillary to its main business if its net outstanding notional exposure in cash settled commodity products traded in the EU, excluding those traded on a venue, is less than EUR 3 billion annually (calculated against an average over three-years on a rolling basis). The other two tests are a bit more speculative and fiddly to calculate, but for a repackaging SPV, the first one gives plenty of room to work with.

“Excluding those traded on a venue?” We suppose this exclusion is predicated on there being someone else — a broker — involved in an on-venue trade who has the appropriate permissioning (if there isn’t, the entity must be accessing the venue directly itself, so is out of scope for the exemption anyway) so these naturally should not count towards your limit — though query whether they should count towards offsetting OTC exposures you might have in other markets.

This is all good stuff, if you can monitor, and keep a lid on, your commodity product exposure, or — if you are some kind of securitisation vehicle — you may wonder what “net” exposure means, and may be happy to see Article 3 of the RTS which goes on, in nutshell (full text in the panel) to say:

You calculate the “net outstanding notional exposure” by averaging the aggregated month-end net outstanding notional values for the previous 12 months resulting from all contracts in in-scope commodity products that may be cash settled and that are not traded on an EU trading venue between 1 January as 31 December in any year.