On 29 May 2024, a new statutory instrument (SI) – the Financial Services and Markets Act 2000 (Commodity Derivatives and Emission Allowances) (Amendment) Order 2024 – was published on legislation.gov.uk, along with an explanatory memorandum.
Background to the SI
HM Treasury (HMT) made changes in May 2023, through the Financial Services and Markets Act 2000 (Commodity Derivatives and Emissions Allowances) Order 2023, to legislation relating to the ancillary activities exemption (AAE), which gives firms trading commodity derivatives or emission allowances a possible exemption from needing to be authorised as an investment firm. HMT had consulted on this as part of the Wholesale Markets Review (WMR). Following on from those changes, the Financial Conduct Authority (FCA) published CP23/27 in December 2023, which set out its proposals concerning the commodity markets regime, including revoking Commission Delegated Regulation (EU) 2017/592 (known as RTS 20), and new guidance on the application of the AAE.
The FCA’s consultation closed in February 2024. Many responses to the consultation raised significant concerns with a principles-based approach to determining whether a firm requires authorisation for trading in commodity derivatives and emission allowances.
Changes made by the SI
To allow time to consider and address these concerns, HMT has decided to pause the implementation of legislative changes relating to the new ancillary activities regime. The SI provides that the planned changes will not come into force by omitting the relevant provisions from the 2023 Order, which were due to take effect on 1 January 2025. HMT plans to work with the FCA and engage further with the market to deliver a regime that reflects the conclusions of the WMR whilst also taking into consideration the concerns raised by industry, with the aim of implementing a new regime by 1 January 2027.
In the meantime, firms will be able to continue to rely on the existing Ancillary Activities Test to determine whether they are eligible to use the AAE. The SI does not omit provisions which remove the requirement for firms to notify the FCA annually of their ancillary activity status with regards to the trading of commodity derivatives or emission allowances. This requirement will still be removed from legislation by the 2023 Order on 1 January 2025.
Next steps
The SI comes into force on 31 December 2024.