The FCA has set out changes simplifying the ancillary activities exemption, which allows a firm to be exempt from authorisation as an investment firm where its trading in commodity derivatives, emission allowances, or derivatives of emission allowances qualifies under the relevant test.
Currently the test is costly and time-consuming, and firms must carry it out to assess whether they are eligible for the exemption. Under the new rules, the FCA is introducing 3 separate and independent tests:
- New annual threshold test – firms trading over-the-counter commodity derivatives will meet the test if their trading is below a £3bn. The calculation will include only cash-settled derivatives, and excludes exchanged-traded derivatives. This replaces the current market share test.
- Modified trading test – the test retains the existing methodology of calculating a firm’s trading activities against the group’s activities, but the applicable threshold will be increased to 50% and apply to UK activity only.
- Modified capital employed test – the test retains the existing methodology of calculating how much of a firm’s resources are used in trading commodity derivatives globally, but the applicable threshold will be increased to 50%.
Firms will need only meet the conditions of one of the above tests in order to rely on the ancillary activities exemption.
The new framework will come into force on 1 January 2027.