The UK’s financial regulator has finalised a redraft of the rules governing when a commodity trading firm may be exempt from authorisation as an investment firm, stepping back from a proposal that industry groups warned could have driven trading activity away from the UK.
The Financial Conduct Authority said its revised framework for the Ancillary Activities Exemption (AAE) will exclude exchange-traded derivatives from a new threshold test used to assess whether a firm’s commodity derivatives trading remains incidental to its core commercial business.
In practical terms, the decision means that commercial end-users such as utilities can use exchange-traded futures and options to hedge their risks without triggering regulatory requirements designed for financial institutions.
The rules, which take effect on 1 January 2027, apply to non-financial firms active in commodities and emissions markets and form part of the UK’s post-Brexit overhaul of wholesale markets regulation.
The decision follows feedback by market participants and trade bodies, including FIA, which argued that counting exchange-traded activity would create a more onerous and operationally complex regime than those in the EU and the US.
Simplifying the AAE for UK firms
The Ancillary Activities Exemption and its associated tests have their origins in the EU’s MiFID II, which was implemented in the UK in 2018. The AAE was designed to allow commercial users and producers of commodities to participate in derivatives markets without being subject to the full regulatory regime for investment firms, provided that such trading was ancillary to their main business.
Under powers granted by HM Treasury through the Wholesale Markets Review, the FCA was tasked last year with rewriting the rules to make them easier for firms to determine whether they can rely on the exemption.
In a consultation published in July 2025, the FCA proposed introducing three separate and independent tests, including an “annual threshold test” that would have captured transactions executed on trading venues alongside over-the-counter activity.
Industry respondents warned this would significantly broaden the scope of activity caught by the test, undermining the government’s stated objective of simplifying the regime without changing its outcomes. In its final policy statement, PS25/24, published in December, the FCA confirmed that exchange-traded derivatives will be excluded from the new threshold calculation.
Annual threshold test
A firm will satisfy the annual threshold test if its net outstanding notional exposure in cash-settled commodity derivatives or emissions contracts traded in the UK – excluding those executed on a trading venue – remains below £3 billion.
Trading venues are defined broadly to include UK recognised exchanges, EU regulated markets, multilateral and organised trading facilities, and equivalent third-country venues. In practice, this limits the threshold test to OTC derivatives. Group-wide positions must be included, certain transactions are excluded, and exposures must be calculated using a prescribed netting methodology.
Industry groups had warned that including exchange-traded derivatives would place UK firms at a competitive disadvantage. There is currently no comprehensive dataset enabling firms to automatically identify cash-settled exchange-traded transactions, which would have forced companies to manually review large volumes of trades, significantly increasing compliance costs and operational burden.
In practice, respondents argued, this could have incentivised firms – particularly those relying on the threshold test to access the exemption – to relocate trading activity to non-UK venues offering comparable products, thereby fragmenting liquidity and reducing the depth of UK commodity derivatives markets.
Market participants also emphasised the lower systemic risk associated with exchange-traded derivatives, which are standardised, centrally cleared and subject to margining and daily mark-to-market. OTC derivatives, by contrast, involve greater bilateral counterparty risk and rely more heavily on internal risk controls.
Other tests remain broader
While narrowing the scope of the annual threshold test, the FCA has retained a broader approach for the other two routes to the exemption: the trading test and the capital employed test.
The trading test measures a firm’s gross notional commodity derivatives activity against that of its wider group. The exemption applies if the firm’s activity accounts for no more than 50% of the group’s total commodity derivatives trading. For UK-based entities, this calculation includes both OTC trading and activity conducted on UK trading venues, although intra-group transactions, hedging activity, trades with authorised group members and liquidity provision are excluded.
The capital employed test assesses the proportion of group capital supporting a firm’s commodity derivatives trading. To qualify, the capital attributed to the firm’s relevant trading must not exceed 50% of the group’s worldwide capital employed.
A firm needs to meet only one of the three tests to qualify for the exemption, with all calculations based on a three-year rolling average. This represents a shift from a complex, dual-test framework to a more flexible, single-test approach.
The FCA said firms currently relying on the Ancillary Activities Exemption should familiarise themselves with the revised framework and ensure they are able to perform at least one of the three independent tests. The regulator added that it expects to engage with market participants before and after the rules take effect to support an orderly transition.
The new rules apply from 1 January 2027, although HM Treasury is retaining Article 72J of the Regulated Activities Order to provide relief until 1 January 2028, allowing firms time to adjust.
