The Financial Services and Markets Act 2000 (Commodity Derivatives and Emission Allowances) Order 2023 was made on May 17, 2023. The Order, which enters into force on January 1, 2025, paves the way for the Financial Conduct Authority to develop a simpler test for determining which firms need to be authorized as investment firms as a result of their commodities and emission allowances trading business, known as the “ancillary activities test”. The final Order is substantively the same as the draft SI, which we discuss in our related blog: “UK Government Publishes Draft Legislation Revising Application of The Ancillary Activities Test for Commodity Derivatives and Emission Allowances”.
The ancillary activities test is an exemption from investment firm authorization requirements for firms that trade commodity derivatives or emission allowances as an ancillary activity to their main business, such as energy and other commodity trading firms which are active in both physical trading and financial instrument trading. Under the MiFID II regime, the ancillary activities exemption became based upon a hard-edged test with various financial thresholds. Some of these tests resulted in counterintuitive outcomes for firms, while other issues with the way in which the legislation had been drafted needed resolving via unusually narrow or arguably unnatural interpretations of the text, sometimes supported by regulatory or industry guidance. The Order simplifies the process for determining when a firm satisfies the “ancillary activities” test in the post-Brexit U.K. and removes the requirement for firms to notify their use of the exemption to the FCA, reducing the burden and costs on firms that apply the test.
This change is one of the numerous revisions to the U.K.’s Markets in Financial Instruments regime discussed under the Wholesale Markets Review and announced as part of the Edinburgh Reforms that are considered to have had unintended outcomes, are duplicative or excessive or have curbed innovation.
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