Dealing on own account
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MiFID 2 Anatomy™
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MiFID is implemented in Ireland through the European Union (Markets in Financial Instruments) Regulations 2017 of Ireland. 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.
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”.
This activity is vaguely defined in MiFID — always has been, as “'trading against proprietary capital resulting in the conclusion of transactions in one or more financial instruments”[1] — but given MiFID’s purpose, generally has been understood as being restricted to brokerage and market-making activity; a continual activity in the market either to be able to fulfil third-party customer demand or provide market liquidity, only holding prop inventory. In other words, this is not about participants using their own capital to buy, and go on risk to, financial instruments.[2] Indeed, MiFID is meant to protect people like that, not regulate them.
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), which says:
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(1)(d) Persons dealing on own account in financial instruments other than commodity derivatives or emission allowances or derivatives thereof and not providing any other investment services or performing any other investment activities in financial instruments other than commodity derivatives or emission allowances or derivatives thereof unless such persons:
Persons exempt under points (a), (i) or (j) of MiFID II Article 2(1) are not required to meet the conditions laid down in this point in order to be exempt. |
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, you aren’t required to be authorised under MiFID 2 ... unless you’re transacting in commodity derivatives or emission allowances.
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):
(j) persons:
- (i) dealing on own account, including market makers, in commodity derivatives or emission allowances or derivatives thereof, excluding persons who deal on own account when executing client orders; or
- (ii) providing investment services, other than dealing on own account, in commodity derivatives or emission allowances or derivatives thereof to the customers or suppliers of their main business;
provided that:
- —for each of those cases individually and on an aggregate basis this is an ancillary activity to their main business, when considered on a group basis, and that main business is not the provision of investment services within the meaning of this Directive or banking activities under Directive 2013/36/EU, or acting as a market-maker in relation to commodity derivatives,
- —those persons do not apply a high-frequency algorithmic trading technique; and
- —those persons notify annually the relevant competent authority that they make use of this exemption and upon request report to the competent authority the basis on which they consider that their activity under points (i) and (ii) is ancillary to their main business;
- ↑ Article 4(1)(6).
- ↑ See this in the FCA’s Q&A to its perimiter guidance rules which, indeed, no longer represent European law but are all the same heavily influenced by them, to the point of being presently identical:
“Dealing on own account involves position-taking which includes proprietary trading and positions arising from market-making. It can also include positions arising from client servicing, for example where a firm acts as a systematic internaliser or executes an order by taking a market or ‘unmatched principal’ position on its books.
Dealing on own account may be relevant to firms with a dealing in investments as principal permission in relation to MiFID financial instruments, but only where they trade financial instruments on a regular basis for their own account, as part of their MiFID business. We do not think that this activity is likely to be relevant in cases where a person acquires a long term stake in a company for strategic purposes or for most venture capital or private equity activity. Where a person invests in a venture capital fund with a view to selling its interests in the medium to long term only, in our view he is not dealing on own account for the purposes of MiFID.”