The Financial Conduct Authority (“FCA”) and HM Treasury have jointly published proposals to reform the “Ancillary Activities Exemption” (“AAE”) that permits non-financial firms to deal in commodity derivatives, emission allowances, and related instruments without becoming fully authorised investment firms.
These developments are a key aspect of the Wholesale Markets Review (“WMR”), and have been in development for some time. The reform package consists of two main components: (i) draft amendments to the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (“Regulated Activities Order”) and certain other legislation (through a draft statutory instrument with a policy note), and (ii) accompanying FCA consultation CP25/19 on a new AAE test.
Background to the Ancillary Activities Exemption
The AAE and its associated test have their origins in the EU’s MiFID II, which was implemented in the UK in 2018. The AAE was designed to allow commercial users and producers of commodities to participate in commodity derivatives markets without being subject to the full regulatory regime for investment firms, provided that their trading was ancillary to their main business. To determine eligibility, firms were required to perform a complex assessment, which consisted of two main quantitative components: the market share test and the main business test.
These tests are complex and burdensome for firms, particularly due to the need for detailed market data, which was not always available. The UK’s departure from the EU further complicated matters, as the publication of relevant market data by European authorities ceased. In response to industry feedback highlighting these challenges, the Treasury and FCA committed to simplifying the regime as part of the WMR. The current reform proposals aim to address these issues by removing the legacy market share test, streamlining the main business tests, and introducing a new, more straightforward annual threshold for smaller-scale activity.
Summary of Key Proposals
The consultation and the draft statutory instrument propose the following major changes:
- Three-Track Ancillary Activities Test: Instead of the current test (based on market share and main business calculations), the FCA proposes three separate criteria by which a non-financial firm may qualify under the AAE. Firms need only meet one of these tests each year:
- An annual threshold (a “de minimis” measure), which would exempt smaller-scale activity. The FCA seeks views on the exact thresholds, with the two options being GBP 3bn but excluding certain transactions with or through authorised firms, or GBP 5bn including all cash-settled positions in derivatives traded on UK trading venues.
- A trading test comparing a firm’s speculative trading with the overall trading of its group. The FCA proposes essentially maintaining the RTS 20 methodology but setting the applicable threshold at 50%. Certain transactions can also be excluded from the calculations.
- A capital employed test allowing large capital-intensive firms to show that speculation forms only a minor component of their overall group resources. The FCA proposal on the threshold is the same as for the trading test above.
- FCA Rule-Making Powers: A key legislative change is to grant the FCA a flexible rule-making power in this area. The FCA will be able to define the thresholds, detail calculation formulas, and adjust these measures as market conditions and policy objectives evolve.
- Implementation Timeline: The new rules are expected to take effect from 1 January 2027. However, Article 72J of the Regulated Activities Order (a transitional mechanism allowing firms to continue using the old test in the absence of market data) will remain in place until 1 January 2028. This prolongs transitional relief and aims to provide businesses ample time for compliance.
Practical Implications
The reforms are designed to simplify processes for commercial and public sector entities engaged in commodity derivatives trading. In particular:
- Reduced Administrative Burden: Firms that can demonstrate minimal speculative trading (under the annual threshold test) will face less complexity than under the old regime, which typically required tracking and comparing their trading to total UK or EU-wide markets.
- Monitoring: By placing ongoing calibration and guidance in the FCA’s hands, the system gains flexibility to adjust thresholds or methodologies as markets evolve. But impacted firms will need to ensure they continue to monitor these as they (potentially) change.
- Broader Market Access: Commercial entities that might have previously hesitated to use important UK commodity venues for fear of breaching the old tests may find it easier to remain below a threshold or demonstrate their trading is ancillary, thus maintaining access without full regulatory authorisation.
Next Steps
The consultations are open until 28 August 2025.
Formal rollout is scheduled for January 2027 and firms should monitor the publication of the final FCA rules in Q4 2025 or Q1 2026 to finalise compliance measures.
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