UK Ancillary Activities Exemption Proposals Published for Commodity Derivatives and Emission Allowances

The Financial Conduct Authority (FCA) recently published a consultation (Consultation) setting out its proposed approach to revising the ancillary activities test (AAT), which forms part of the ancillary activities exemption (AAE) from investment firm authorisation under Markets in Financial Instruments Directive. Separately, HM Treasury (HMT) has published a near-final statutory instrument (SI) that will amend the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (RAO) and confer rule-making powers on the FCA in respect of the AAE.

Background 

The AAE allows a firm to be exempt from authorisation as an investment firm when its trading in commodity derivatives, emission allowances or derivatives of emission allowances satisfies the requirements of the AAT and provided the firm does not execute client orders, use a high frequency algorithmic trading technique or act as a market maker. Non-financial firms (i.e., end-users) can use the AAE to deal in commodity derivatives, emission allowances and related instruments, where such activity is ancillary to their main business, without becoming fully authorised investment firms.

Historically, to determine AAE eligibility, firms were required to perform a complex assessment, consisting of two main quantitative components: (a) the market share test, and (b) the main business test. Following Brexit, the European Securities and Markets Authority abolished the market share test and ceased publishing the related underlying market-wide data for the European Economic Area (EEA). The UK market share test, however, requires the market data of both the UK and the EEA. The FCA, therefore, issued a series of temporary statements to clarify that firms could continue to benefit from the AAE in the United Kingdom pursuant to Article 72J of the RAO. 

Even when the EEA market share test data was available, however, the methodology required multiple asset-class calculations, sweeping in both cash- and physically-settled contracts and generating results that could swing materially with market volatility. Industry feedback requested a simpler, “de-minimis” style approach to the AAT in the UK similar to what has been adopted in the EU, US and Switzerland. As part of the UK’s Wholesale Markets Review, HMT committed to revoking the existing AAT and replacing it with a new, simplified version.

Key Proposals

The main proposals in the Consultation and amendments in the SI comprise: 

• amending the AAT by introducing three separate and independent tests to assess whether a firm can use the AAE. A non-financial firm may qualify for the AAE if it meets one of these tests each year:
  • the new annual threshold test (or “de-minimis” test), which will exempt a firm that undertakes trading in commodity derivatives on a relatively small scale. The FCA seeks views on the exact thresholds, with the two options being setting the threshold at (i) GBP 3 billion excluding certain transactions with or through UK-authorised firms, or (ii) GBP 5 billion including all cash-settled positions in derivatives traded on a UK trading venue. This would replace the current market share test; 
  • the existing trading test, which is currently part of the main business test, with some modifications; or
  • the existing capital employed test, which is also part of the main business test, for which the FCA is also proposing some modifications; and
• providing the FCA with a flexible rule-making power to define the necessary thresholds, detail calculation formulas, and adjust these measures as market conditions and policy objectives evolve. 

Next Steps

Responses to the Consultation and the SI are due by 28 August 2025. Subject to parliamentary time, HMT expects to lay the SI before Parliament in autumn 2025. The FCA intends to publish its final policy statement in the last quarter of 2025 or the first quarter of 2026. 

While the new regime will come into force on 1 January 2027, transitional relief under Article 72J of the RAO will continue to be available until 1 January 2028. This is intended to provide firms that are unable to rely on the new regime with time to obtain authorisation.

The Consultation, SI and HMT’s policy note are available here, here and here, respectively.