MAR 10A Ancillary activity exemption relating to trading of commodity derivatives

The purpose of this chapter is to set out the criteria for determining: 

1. (1) when an activity is considered to be ancillary to the main business of a firm at group level for the purposes of paragraph 1(k) of Schedule 3 to the Regulated Activities Order; and
2. (2) an annual threshold for establishing when a person is excluded from being an investment firm.

1. (1) P is a person whose main business, when considered on a group basis, is not:
   1. (a) the provision of  investment services (other than when the activity is one to which MAR 10A.2.1R applies);
   2. (b) banking activities requiring permission under Part 4A of the Act (or banking activities which would require such permission if they were carried on in the United Kingdom); or
   3. (c) acting as a market maker in relation to commodity derivatives.
2. (2) P does not apply a high-frequency algorithmic trading technique.
3. (3) P reports to the FCA under regulation 47 of the MiFI Regulations, upon request, the basis on which P considers that its activity under paragraph 1(k) of Schedule 3 to the Regulated Activities Order is ancillary to its main business:
   1. (a) when considered on a group basis, or
   2. (b) below an annual threshold as determined in accordance with FCArules.

P is not an investment firm where the net outstanding notional exposure in commodity derivatives or emission allowances, for cash settlement, traded in the United Kingdom:

1. (1) calculated in accordance with MAR 10A.3.1R; and
2. (2) excluding commodity derivatives or emission allowances traded on a trading venue,

is below an annual threshold of £3 billion.

P’s activities in the United Kingdom are ancillary to the main business at group level for the purposes of the ancillary activity exclusion where they comply with any of the following conditions:

1. (1) in accordance with MAR 10A.3.2R, the size of those activities accounts for 50% or less of the total size of the other trading activities of the group; or
2. (2) the estimated capital employed for carrying out those activities, calculated in accordance with MAR 10A.3.3R(1) to (5), accounts for not more than 50% of the capital employed at group level for carrying out the main business calculated in accordance with MAR 10A.3.3R(6).

1. (1) The net outstanding notional exposure must be calculated by averaging the aggregated month-end net outstanding notional values for the previous 12 months resulting from all contracts in commodity derivatives or emission allowances by a person within a group.
2. (2) The aggregation referred to in (1) must not include positions from contracts resulting from excluded positions.
3. (3) The net outstanding notional values in (1) must be calculated:
   1. (a) on the basis of all contracts in commodity derivatives or emission allowances for cash settlement to which any person is a party during the relevant calculation period; and
   2. (b) using the netting methodology of MAR 10A.3.3R(4).
4. (4) The contracts in commodity derivatives or emission allowances for cash settlement must include all such derivative contracts relating to commodities or emission allowances which must be settled in cash or may be settled in cash at the option of one of the parties other than by reason of default or other termination event.

1. (1) The size of the activities referred to in MAR 10.2.2R(1) undertaken by:
   1. (a) P; and
   2. (b) other persons in the group,
   3. must be calculated by aggregating the gross notional value of all contracts in commodity derivatives and emission allowances to which that person is a party.
2. (2) The aggregation referred to in (1) must not include excluded positions in the case of P.
3. (3) The aggregation referred to in (1) must include excluded positions in the case of other persons in the group.
4. (4) The overall market trading activities referred to in (1) and (2) must be calculated by aggregating the gross notional value of all contracts traded in the United Kingdom that are:
   1. (a) traded on a UK trading venue; or
   2. (b) in the case of any other contract, are:
      1. (i)  not traded on a trading venue; and
      2. (ii) entered into by a person in the group from an establishment in the United Kingdom.

1. (1) The estimated capital employed for carrying out the activities referred to in MAR 10A.2.2R(2), is the sum of:
   1. (a) 15% of each net position, long or short, multiplied by the price for the commodity derivative or emission allowance; and
   2. (b) 3% of the gross position, long plus short, multiplied by the price for the commodity derivative or emission allowance.
2. (2) The positions in (1) must be calculated on the basis of all contracts traded in the United Kingdom in commodity derivatives or emission allowances to which any person in the group is a party during the relevant calculation period and which:
   1. (a) are traded on a UK trading venue; or
   2. (b) in the case of any other contract are not traded on a trading venue.
3. (3) The calculation in (1) must not include excluded positions.
4. (4) For the purposes of (1)(a):
   1. (a) the net position in a commodity derivative or an emission allowance must be determined by netting long and short positions:
      1. (i) in each type of commodity derivative contract with a particular commodity as underlying in order to calculate the net position per type of contract with that commodity as underlying; or
      2. (ii) in each type of emission allowance contract in order to calculate the net position in that emission allowances contract; and
   2. (b) net positions in different types of contracts with the same commodity as underlying or different types of derivative contracts with the same emission allowance as underlying can be netted against each other.
5. (5) For the purposes of (1)(b):
   1. (a) the gross position in a commodity derivative or an emission allowance must be determined by computing the sum of the absolute values of the net positions per type of contract with a particular commodity as the underlying, per emission allowance contract or per type of derivative contract with a particular emission allowance as the underlying; and
   2. (b) net positions in different types of contracts with the same commodity as underlying or different types of derivative contracts with the same emission allowance as underlying cannot be netted against each other.
6. (6) The capital employed for carrying out the main business of a group is the sum of the total assets of the group minus its short-term debt as recorded in its consolidated financial statements of the group at the end of the relevant calculation period.

1. (1) The calculation for the purposes of the annual threshold test in MAR 10A.3.1R must:
   1. (a) be determined by reference to the 3 relevant calculation periods preceding the date of calculation;
   2. (b) compare the simple average of the resulting annual values with the threshold in MAR 10A.2.1R; and
   3. (c) be carried out annually in the first quarter of the calendar year that follows an annual calculation period.
2. (2) The calculation for the purposes of the trading test in MAR 10A.3.2R must:
   1. (a) be based on a simple average of the daily trading activities during the 3 relevant calculation periods preceding the date of calculation;
   2. (b) compare the simple average of the resulting annual values with the threshold in MAR 10A.2.2R(1); and
   3. (c) be carried out annually in the first quarter of the calendar year that follows an annual calculation period.
3. (3) The calculation for the purposes of the capital employed test in MAR 10A.3.3R must:
   1. (a) be based on a simple average of the estimated capital allocated to daily trading activities during the 3 relevant calculation periods preceding the date of calculation;
   2. (b) compare the simple average of the resulting annual values with the threshold in MAR 10A.2.2R(2); and
   3. (c) be carried out annually in the first quarter of the calendar year that follows an annual calculation period.

1. (1) Where currency conversion is necessary, for example, when converting notional exposure to GBP for the purposes of the annual threshold test, firms should use the Bank of England rate or other similar widely used rates.
2. (2) Where the average of the aggregated month-end outstanding notional value is required to be calculated, the relevant month-end rate should be used for each of the previous 12 months.