August 19. 2025

Energy, Mining and Agriculture Regulatory Update: UK consults on licencing exemptions for commodity derivatives

Authors:

The significance of this topic for many clients arises because the UK is home to some of the largest and most significant commodity derivative markets in the world. They serve the risk management needs of a diverse group of market participants, facilitate the physical trading of commodities and the prices discovered on them are regularly used as global reference prices.

The existing ancillary activities exemption ("AAE") is an important feature of the UK MIFID II regulatory framework. It exempts UK and non-UK commercial users or producers of commodities from the need to seek authorisation/licencing from the UK Financial Conduct Authority ("FCA") if they trade in commodity derivatives, emission allowances or derivatives of emission allowances in the UK ("commodity derivatives").

The AAE is relied upon by, among others, UK and foreign companies operating in the energy, agriculture and mining sectors ("non-financial firms") who trade in UK commodity derivative markets. These non-financial firms include small and medium-sized companies as well as multinationals which use or produce physical commodities and use commodity derivative markets to hedge risk and/or speculate (e.g., a global energy company hedging crude oil prices in the UK or a domestic agricultural firm engaging in emission allowance trading in the UK). In short, no licence is needed from the FCA to trade commodity derivatives where a non-financial firm can rely on the AAE.

To qualify for reliance on the AAE, a non-financial firm is required to satisfy certain pre-conditions and complete an annual test (the "Ancillary Activities Test" or "AAT") which aims to determine if the non-financial firm's activity in commodity derivatives is ancillary to the main activities of the group to which it belongs.

In July 2025, the FCA issued a consultation paper with proposals to revise the existing Ancillary Activities Test. The aim is to simplify the complex and costly calculations and provide greater legal certainty on how non-financial firms qualify for the AAE. The government has also prepared a draft statutory instrument to give rulemaking powers to the FCA to create the AAE regime.

In summary, the proposals will make the following changes to the Ancillary Activities Test:

Remove the existing market share test.
Introduce a de minimum threshold of £3 billion or £5 billion (to be determined) based on annual averages of overall market activity. (The EU has already introduced a de minimis test).
Modifications to the existing capital employed test and trading test under the Ancillary Activities Test.

Non-financial firms must satisfy one of the above tests annually to qualify for the AAE.

This article summarises (i) the existing regime, (ii) changes proposed by the FCA and their impact on the market, and (iii) the next steps for market participants.

What is the existing Ancillary Activities Test?

Under the existing regime, a non-financial firm must satisfy certain pre-conditions to assess whether its activities are ancillary to the main business of its group before it completes the AAT. The pre-conditions are:

the non-financial firm does not execute orders in commodity derivatives on behalf of clients unless the clients are customers or suppliers of the non-financial firm group's main business; and
the non-financial firm does not use a high-frequency algorithmic trading technique; and
that the main business of the non-financial firm group is not the provision of investment services, banking or acting as a market maker in commodity derivatives.

If these are all met, the non-financial firm completes the AAT. There are two components to the annual AAT, both of which need to be met for the non-financial firm's activities to be deemed ancillary. These are: (i) the market share test and (ii) the main business test.

Market share test: The market share test determines the materiality of a non-financial firm's activity in commodity derivatives by comparing the size of that firm's trading against the overall market trading in the UK and European Economic Area, using applicable data ("EEA").

FCA rules set different threshold percentages per market (for example, 3% for gas and oil contracts, 20% for emission allowances derivatives). If the non-financial firm's share exceeds any threshold in a given asset class, it fails the test. To focus on true speculative activity, the calculation excludes intra-group trades, bona fide hedging transactions and liquidity transactions on trading venues.
This test focuses on limiting the ability of non-financial firms to take large speculative positions in a particular class of commodity derivatives, potentially distorting markets and creating an unlevel playing field with regulated investment firms.
The absence of EEA market data (formerly provided by the European regulator) has caused issues. These were rectified by the introduction of Article 72J of the Regulated Activities Order ("RAO") which provided a mechanism enabling the Ancillary Activities Test to be performed in the absence of publicly available data on the overall size of the market.

Main business test: This test is determined by one of two different methods (performed after passing the market share test). Non-financial firms can choose which method to apply. Both methods are calculated at group level.

The first method is the trading test. The trading test measures a non-financial firm's speculative trading in commodity derivatives as a percentage of the total trading in commodity derivatives undertaken by the group in which the firm operates. Under the trading test, generally a non-financial firm's trading activity in commodity derivatives is expected to be lower than 10% of the activities of its group.
The second method is the capital employed test. The capital employed method compares the estimated capital employed by the non-financial firm when dealing in commodity derivatives against the actual amount of capital employed at group level for carrying out its main business. The capital employed at group level is calculated from the total assets of the group minus its current debt. The threshold of 10% is the same as for the trading test. This test offers non-financial firms flexibility where they might conduct large trading volumes to support their commercial capital intensive activities (e.g., power grids or refineries), which could potentially result in them failing the trading test.

What changes are the FCA proposing to the existing regime?

The FCA is proposing three separate and independent tests to assess whether a non-financial firm can rely upon the AAE. Non-financial firms will need to meet the conditions in at least one of the three tests on an annual basis to rely on the AAE.

1. New annual threshold test

This test is based on whether a non-financial firm's outstanding notional exposure in commodity derivatives is below the fixed monetary threshold. The consultation proposes two options for the monetary threshold, depending on the scope of trading activity included in the calculation:

Option 1: Set the threshold at £5 billion if all cash-settled positions in commodity derivatives traded on UK trading venues are included in the calculation.
Option 2: Set the threshold at £3 billion if the calculation excludes all transactions where the counterparty is an FCA-authorised firm, or where the transaction is executed by an FCA-authorised broker on behalf of the non-financial firm seeking to rely on the AAE.

Key points to note:

The exposure of the non-financial firm is calculated on a net basis, using the average of the aggregated month end outstanding notional values of the previous 12 months.
The calculation only includes cash-settled commodity derivatives (i.e., it excludes derivatives that can only be physically settled). Commodity derivatives traded on recognised overseas investment exchanges and non-UK trading venues are excluded from the calculation. The FCA recognises that trading in cash-settled commodity derivatives is more likely to be associated with speculative trading than that in physically settled transactions (which are more likely linked to a non-financial firm's underlying business activities in energy, metals and other physical commodities).
Intra-group transactions, bona fide hedging transactions, and transactions entered into as part of an agreement to provide liquidity on a trading venue remain excluded.
The calculation will include OTC derivatives. The FCA invites views on the inclusion of commodity derivatives traded on UK trading venues (exchanges, MTFs, OTFs).

2. Removal of the market share test

The market share test will be eliminated entirely.

3. Modifications to the trading test and capital employed test

The FCA is proposing to retain the existing calculation methodology for the trading test and capital employed test but to make a significant change to the threshold applied. The key change is to raise the threshold from 10% to 50%.

The test will continue to be performed annually, using a three-year rolling average, and will focus on commodity derivative activity traded in the UK. For both tests, the comparison is to the non-financial firm's group activity which can include the activity of group entities located in and outside the UK.

For calculations under the trading tests, for UK-based non-financial firms, this includes both OTC trading activity and trading conducted on UK trading venues; for non-UK based non-financial firms, it includes their trading conducted on UK trading venues. For the capital employed test, the non-financial firm group's activities will be capital employed on a world-wide basis, not just within the UK.

What impact on the market does the FCA expect from the changes to the AAE?

In its consultation paper, the FCA evaluates the impact of the changes to the Ancillary Activities Test on UK trading volumes and market participation. Previous industry feedback implied heavily that if the annual threshold test includes trading activity conducted on UK trading venues, UK and foreign non-financial firms might be incentivized to shift their commodity derivative trading to foreign venues to remain below the threshold, potentially reducing market share for UK venues.
The FCA states that "….based on data reported to us and publicly available information, shows that only a small number of firms currently using the AAE have gross notional exposures, across both OTC markets and trading venues, exceeding GBP3 billion…". The FCA's analysis indicates that most non-financial firms currently benefitting from the exemption would still qualify under the new annual threshold test, so there should, in theory, be little incentive for them to divert their commodity derivatives trading away from UK venues.
However, the FCA remains open to adjusting its approach—such as excluding exchange-traded and other commodities derivatives traded on venues from the threshold calculation—if evidence emerges that including these positions negatively impacts the competitiveness of UK trading venues.

What are next steps?

The consultation closes on 28 August 2025. The FCA is expected to finalise its rules in Q4 2025/Q1 2026.
Note that under the new rules, once implemented, non-financial firms must be able to demonstrate to the FCA, upon request, the basis upon which they consider their activity to be ancillary or fall below the annual de minimis threshold (see draft MAR 10A.1.5R(3) in the consultation paper).