I have been reviewing the recent MiFID2 consultation paper (here), in particular Chapter 7.1 Commodity Derivatives | Ancillary Activity. While ESMA has attempted and generally succeeded in taking a pragmatic approach to defining what constitutes ancillary activities there will still be some very significant challenges for many organisations in implementing this approach for a regular monthly calculation, and in some areas real costs which the regulator has explicitly (and, in my opinion wrongly) discounted as zero.

The devil is in the detail, which does not lend itself to a quick elaboration (give me a call to discuss?). However it is worth noting that in the cost/benefit analysis (Annexe B) ESMA estimates both the trading activity test, and the capital employed test to be trivial to implement. I would tend to agree with the former because it is based on the EMIR gross notional data which firms should already be producing and sending to Trade Repositories; on the other hand I doubt very much that today’s finance teams can produce the data for the capital employed threshold calculation without significant workload.   This is because balance sheet accounting is rarely as detailed as for profit and loss, and the balance sheet equity and debt specific to unhedged, non-intercompany MiFID2 Derivatives will not be separately booked in the chart of accounts.

When responding to the consultation NFCs should consider the implications of a change to their global chart of accounts, posting rules and monthly group consolidation, not to mention endless industry discussions on how to allocate equity and long term debt to derivative vs physical portions of their commercial business within the same legal entity.