EUROPE: ESMA letter to Commission on the classification of financial instruments as derivatives

Monday February 17 2014

The Chair of the European Securities and Markets Authority (ESMA) has written a letter to the Commissioner for Internal Market and Services of the European Commission on the classification of financial instruments as derivatives under the European Market Infrastructure Regulation (EMIR).

The letter concerns the definition of derivative or derivative contract in EMIR that refers to the list of financial instruments in Directive 2004/39/EC (MiFID). The different transpositions of MiFID across Member States mean that there is no single, commonly adopted definition of derivative or derivative contract in the European Union, thus preventing the convergent application of EMIR. This is particularly true in the case of foreign exchange (FX) forwards and physically settled commodity forwards. Differences in the definitions of what constitutes a derivative or derivative contract will result in the inconsistent application of EMIR, whose primary objective is regulating derivatives transactions.

ESMA has stated that it considers that for ensuring a consistent application of EMIR it is essential that the references to the MiFID definitions in the context of EMIR are clarified. ESMA has therefore invited the Commission to adopt as a matter of urgency an implementing act under Article 4(2) of MiFID, or any other measure that the Commission considers appropriate, to clarify the definitions.

In order to avoid the inconsistent application of EMIR across the EU, ESMA has stated that, until the Commission provides clarification, and to the extent permitted under national law, National Competent Authorities will not implement the relevant provisions of EMIR for contracts that are not clearly identified as derivatives contracts across the Union, in particular FX forwards with a settlement date up to 7 days, FX forwards concluded for commercial purposes, and physically settled commodity forwards.

Click on the above link for the letter.