Dealing on own account: Difference between revisions

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{{a|mifid2|{{subtable|{{mifid2prov|4.1(6)}}
{{a|mifid2|{{subtable|{{mifid2prov|4(1)(6)}} “[[dealing on own account]]” means trading against proprietary capital resulting in the conclusion of transactions in one or more [[financial instruments]];<ref>https://www.esma.europa.eu/databases-library/interactive-single-rulebook/directive-201465eu-european/article-4-0</ref>
“[[dealing on own account]]” means trading against proprietary capital resulting in the conclusion of transactions in one or more [[financial instruments]];<ref>https://www.esma.europa.eu/databases-library/interactive-single-rulebook/directive-201465eu-european/article-4-0</ref>
}}
}}
{{subtable|{{mifid2prov|2(1)(d)}} Persons dealing on own account in [[financial instrument]]s ''other than [[commodity derivative]]s or [[emission allowance]]s or derivatives thereof'' and not providing any other [[Investment service - MiFID Directive Provision|investment services]] or performing any other investment activities in financial instruments ''other than commodity derivatives or emission allowances or derivatives thereof'' unless such persons:
{{subtable|{{mifid2prov|2(1)(d)}} Persons dealing on own account in [[financial instrument]]s ''other than [[commodity derivative]]s or [[emission allowance]]s or derivatives thereof'' and not providing any other [[Investment service - MiFID Directive Provision|investment services]] or performing any other investment activities in financial instruments ''other than commodity derivatives or emission allowances or derivatives thereof'' unless such persons:
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:—those persons do not apply a high-frequency algorithmic trading technique; and
:—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;}}
:—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;}}
}}'''Dealing on own account generally'''<br>
}}
The activity “dealing on own account” 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]]”<ref>Article {{mifid2prov|4(1)(6)}}.</ref> — 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.<ref>See this in the FCA’s [https://www.handbook.fca.org.uk/handbook/PERG/13/3.pdf 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 generally===
The activity “dealing on own account” 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]]” — but given MiFID’s purpose, generally has been understood as being restricted to brokerage and market-making activity; being continual prepared to fulfil third-party customer demand or provide market liquidity, but doing this as a principal not an agent, and therefore being permitted to hold “prop” inventory.  
 
In other words, this is not about participants using their own capital to buy, and go on risk to, financial instruments. See, for example, this in the FCA’s [https://www.handbook.fca.org.uk/handbook/PERG/13/3.pdf Q&A to its perimeter guidance rules] which, indeed, no longer represent European law but are all the same heavily influenced by it, to the point of being presently identical:  


{{quote|“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.  
{{quote|“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.”}}</ref> Indeed, MiFID is meant to ''protect'' people like that, not ''regulate'' them.
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.”}}</ref> Indeed, MiFID is meant to ''protect'' people like that, not ''regulate'' them.


MiFID is implemented in Ireland through the [https://www.irishstatutebook.ie/eli/2017/si/375/made/en/print 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 derivative]]s or carbon emission allowances.  
===The curious case of [[commodity derivatives]] and emissions===
We mention this only because there are some odd provisions of [[MiFID 2]] which potentially put [[SPV]]s into scope should they look to securitise [[commodity derivative]]s or [[carbon emission allowance]]s.  


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]]”.
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 {{mifid2prov|2(1)(d)}} (see full text in panel on right), which, in a nutshell, exempts from MiFID:


''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:
{{subtable|{{mifid2prov|2(1)(d)}} Persons dealing on own account ''other than in [[commodity derivative]]s, [[EUAs]]s or EUA derivatives'' (“'''commodity products'''”) and who do not provide any other [[Investment service - MiFID Directive Provision|investment services]] or do any [[investment activities]] ''other than in  commodity products'' unless they:
 
:(i) are [[Market maker|market makers]];
:(ii) participate on or have [[direct electronic access]] to [Regulated market|a regulated market]] or [[MTF]] (excluding corporates who trade across a venue directly to hedge their commercial or group treasury financing activity in an objectively measurable way;
:(iii) apply a high-frequency algorithmic trading technique; or
:(iv) are executing client orders;
This exemption is not dependent on those set out in Article {{mifid2prov|2(1)}}(a), (i) and (j).}}


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''.  
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''.  
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