Ancillary to the main business at a group level - MiFID 2 Provision: Difference between revisions

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Ancillary to the main business at a group level - MiFID 2 Provision (view source)

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For a start, “[[dealing on own account]]” when it comes to [[emissions allowances]] and [[commodity derivatives]] is a regulated [[Investment services and activities|investment service]], with, in Article {{mifid2prov|2(1)(j)}}, some exceptions, buried amongst which is that the activity is “ancillary to their main business, when considered on a group basis”. Something will be considered ancillary (assuming all no other other criteria are triggered: see [[dealing on own account]] about this as it will do your head in), if it passes the [[de minimis threshold test]], which looks at the “net outstanding notional exposure” in [[commodity derivatives]] for cash settlement or emission allowances or derivatives thereof for cash settlement.
For a start, “[[dealing on own account]]” when it comes to [[emissions allowances]] and [[commodity derivatives]] is a regulated [[Investment services and activities|investment service]], with, in Article {{mifid2prov|2(1)(j)}}, some exceptions, buried amongst which is that the activity is “ancillary to their main business, when considered on a group basis”. Something will be considered ancillary (assuming all no other other criteria are triggered: see [[dealing on own account]] about this as it will do your head in), if it passes the [[de minimis threshold test]], which looks at the “net outstanding notional exposure” in [[commodity derivatives]] for cash settlement or emission allowances or derivatives thereof for cash settlement.


What counts as “net outstanding notional exposure” is no cake walk, since the regulations teeter uneasily between scoping out physical commodities, and scoping in cash-settled ones, exchange-traded ones, and so on. It is a thorough mess. Cue this [[regulatory technical standard]]. It may not do what it sets out to do - by putting some contracts out of scope, one wonders whether one should be allowed to count them for risk-reducing purposes. For example: If I have a physical emissions contract (that is, I hold an emissions allowance) which I am hedging with a cash-settled emissions derivative, and when calculating my [[net outstanding notional exposure]] I must exclude the hedging transaction, because it is a hedging transaction, but cannot exclude the emission allowance it actually hedges, then this exemption puts me in a worse position than I would have been in had I not counted to the hedge.  
What counts as “[[net outstanding notional exposure]]” is no cake walk, since the regulations teeter uneasily between scoping out physical commodities, and scoping in cash-settled ones, exchange-traded ones, and so on. It is a thorough mess. Cue this [[regulatory technical standard]]. It may not do what it sets out to do - by putting some contracts out of scope, one wonders whether one should be allowed to count them for risk-reducing purposes. For example: If I have a physical emissions contract (that is, I hold an emissions allowance) which I am hedging with a cash-settled emissions derivative, and when calculating my [[net outstanding notional exposure]] I must exclude the hedging transaction, because it is a hedging transaction, but cannot exclude the emission allowance it actually hedges, then this exemption puts me in a worse position than I would have been in had I not counted to the hedge.  


This is madness of course, and is plainly not what is intended, but good luck getting a legal opinion confirming that without significant runniness around the edges.
This is madness of course, and is plainly not what is intended, but good luck getting a legal opinion confirming that without significant runniness around the edges.
Anyway, we are proceeding on the basis that what was intended was for hedging derivatives to reduce net outstanding notional exposure, that they therefore knock out any positions, however constituted that they hedge, and that therefore the hedging exemption is a good thing. In this case, any derivative that matches the exposure you face on an emissions allowance, to the return you must pay on a secured note repackaging the allowance and the derivative, on any account “reduces the risks arising from the potential change in the value of assets ... or liabilities that the person ... owns ... or incurs ... in the normal course of its business”.
Well, that’s my opinion anyway.


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