Introduction
On 3 July 2025, the Financial Conduct Authority (FCA) published a consultation paper (CP 25/19) on the ancillary activities exemption (AAE). The AAE exempts commercial users or producers of commodities from the need to be authorised as an investment firm if their trading in commodity derivatives, emissions allowances or derivatives of emissions allowances (collectively commodity derivatives) meets certain conditions and the ancillary activities test (AAT).
Background
The AAE has been in place in the UK from 2018 when MiFID II entered into force. Since then, the AAT has been consistently acknowledged as complex to apply and costly, especially for smaller entities.
Consequently, HM Treasury made legislative changes to the AAE during May 2023 (the 2003 Order), which replaced the calculations with qualitative criteria, and which were due to apply from 1 January 2025. The FCA subsequently published CP23/27 in which it consulted on guidance that would assist entities in applying such criteria (the Relevant Guidance). However, concern was raised by market participants on the lack of certainty that arose from relying on guidance to determine whether the AAE could be used, instead of rules, and also on the proposed timeline for the changes to take effect.
Given such concerns, the Treasury announced, in May 2024, that it would delay the commencement of the legislative changes until 1 January 2027. In February 2025, the FCA published PS25/1 in which it stated that it would not proceed with the Relevant Guidance and it would work with Treasury to address the industry’s concerns. Such work has culminated in the Treasury publishing draft amending legislation on 3 July 2025, which has enabled the FCA to issue CP25/19, which sets out its proposals for the rules that it intends to make in relation to the AAE.
Current position
The AAE, as currently drafted, requires an entity to meet the following conditions, before it applies the AAT:
- it does not execute orders on behalf of clients by dealing on own account unless the client is a client or supplier of the group’s main business;
- it does not use a high-frequency algorithmic trading technique; and
- the main business of its group is not the provision of investment services, services requiring authorisation as a bank, or acting as a market maker in commodity derivatives.
Assuming these conditions are met, the entity can then carry out the AAT which comprises:
- the market share test; and
- the main business test (which can be performed either by using the capital employed methodology or the trading activity methodology).
Each of the market share and main business tests need to be met for the entity’s activities to be characterised as ancillary. Intra-group transactions, hedging transactions and transactions that are entered into as part of an agreement to provide liquidity on a trading venue (liquidity transactions) are excluded from the calculations that must be undertaken for each test.
The AAT must be carried out annually, in the first quarter of the year, based on data from the previous three years. Following the 2003 Order, there is no longer a requirement to make an annual notification to the FCA in respect of the use of the AAE.
Proposals
The FCA’s main objective of the consultation is to simplify the AAE and reduce costs for market participants. It has made clear, from a policy perspective, that its intention is not to amend the regulatory perimeter so that more entities are brought within its scope, compared to the position under the current regime. The FCA has also confirmed that CP25/19 will not lead to the removal of the MiFID override (which broadly speaking means that an entity must be able to rely on an exclusion in the UK RAO[1] as well as a MiFID exemption). It explains that assessing the long-term implications of such a significant change would have hindered the delivery of a simplified AAT by January 2027.
Consequently, the FCA proposes to establish three separate and independent tests to assess whether an entity is able to use the AAE, namely:
- a new annual threshold test (also known as a de minimis test) that would exempt entities that undertake trading in commodity derivatives on a relatively small scale, and which would replace the current market share test. The introduction of this test aligns with the EU and other international regimes. The FCA also notes that it provides a straightforward, cost-effective and workable approach for those entities that undertake limited trading activity in the commodity derivatives markets;
- the existing trading test, which is currently part of the main business test, which the FCA is proposing to modify; and
- the existing capital employed test, which is currently part of the main business test, which the FCA is proposing to modify.
Intra-group transactions, hedging transactions, and liquidity transactions would continue to be excluded from the calculations that must be undertaken for each of the above tests.
An entity would be able to rely on the AAE where it meets the conditions set out in any one of these three tests on an annual basis. There remains no requirement to notify the FCA in respect of the use of the AAE, but, as is currently the case, best practice would be to maintain an appropriate internal audit trail as the FCA may ask for justification for reliance on it.
Next steps
The FCA has raised a number of detailed questions on its proposals for the new annual threshold test. It has asked whether trading conducted on a trading venue should be included in this test and if so, which of the FCA’s suggested methodologies for doing so is preferable (in particular, given that one of the suggested methodologies is materially more complicated to operationalise than the other). The FCA has specifically highlighted that it is seeking evidence-based and well-informed responses, including supporting data, from market participants on these questions. Consequently, market participants that have a small overall footprint in commodity derivatives trading, would be well advised to submit such a response to the FCA with a view to influencing the future direction of the annual threshold test.
Other non-financial entities that rely, or are seeking to rely, on the AAE should also review CP 25/19 closely and assess the effect of the proposals on their business, and submit a response, where appropriate.
The FCA is seeking views on its proposals by 28 August 2025 and aims to publish a Policy Statement finalising its changes in Q4 2025 or Q1 2026.
[1] The Regulated Activities Order