The European Securities and Markets Authority (“ESMA”) issued an Opinion on 30 May 2016 in response to a letter sent by the European Commission (“Commission”) asking to amend its draft RTS 20 under MiFID II and MiFIR. RTS 20 provides the necessary criteria to establish when a non-financial firm’s commodity derivatives trading activity is considered to be ancillary to its main business.

In the letter, the Commission requests that ESMA amends its draft RTS 20 to include a size-appropriate capital based test for groups that have undertaken significant capital investments in creating infrastructure, transportation or production facilities that undertake activities or investments which cannot be hedged in financial markets. The Commission will endorse the draft RTS 20 only when EMSA makes the changes it requests, however, in it’s Opinion ESMA raises concerns that the capital based test will not be a fair test for all participants in the sector, and believes it favours larger firms over smaller ones.

ESMA’s concerns with the capital based test

In it’s Opinion, ESMA states that it does not oppose the proposed capital based tests, if the Commission favours a more cautious approach, but warns that the concerns it raised initially about capital based test have not waned. ESMA is concerned that:

  • participants would have to rely on alternates that would vary over time by firm or sector, and therefore establishing if firms do or don’t meet the ancillary tests could be unreliable; and
  • a level playing field for all participants would be difficult to achieve, given the breadth of sectors and participants in commodity derivatives markets.

The Opinion goes on to say that if the Commission believes that capital tests are necessary, ESMA has identified some metrics for numerators and denominators, which it feels carry the least amount of drawbacks and which could be used to construct a capital test as an alternative to the test put forward in its draft RTS 20. An example numerator for the test could be having a more simplified approach to capital requirements regulations and for a denominator, using total equity from the liability side of the balance sheet.

Fairness for all sizes of firm

ESMA concludes that firms should have the option to choose between performing its original main business test based on trading activity and the Commission’s proposed capital test. It believes that larger firms would gain more benefit from the proposed capital gains test, and that small and medium sized firms would gain more benefit from ESMA’s main business test. ESMA went on to say that if the capital test was mandatory for small and medium sized firms, they would be at a cost disadvantage.

Other amendments to RTS 20

ESMA has made some amendments to the draft RTS 20 already, separate to the Commission’s requests, because they were notified by some stakeholders that elements of the calculation mechanics for the existing ancillary tests were not entirely clear.


Ultimately, it is now with the Commission as to whether it will choose to accept ESMA’s proposed changes to, and conditions of, its capital test and endorse the draft RTS 20, or not.

To view the full Opinion please click here.

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