Further to our briefings on 24 February 2014 and 9 April 2014, the European Commission has provided a further response to a request from the European Securities and Markets Authority (ESMA) to clarify the definition of “financial instruments” under Directive 2004/39/EC on markets in financial instruments (MiFID) which is used in defining “derivative” or “derivative contract” under Regulation (EU) No 648/2012 on OTC derivatives, central counterparties and trade repositories (EMIR).

The response stresses the need for a consistent interpretation, to ensure the effective application of the reporting regime under EMIR.  The European Commission also confirms that it is not now possible to address the issue by way of a MiFID implementing measure, as the European Commission’s powers in this regard ceased on the 1 December 2012.  It will therefore only be possible through an implementing measure under MiFID II, which will not take effect until January 2017.

The European Commission has urged ESMA to carefully consider whether the current approach by Member States achieves a sufficiently harmonised application of the EMIR reporting obligation in the period before the application of MiFID II in January 2017 or whether further measures by ESMA are necessary.

The European Commission’s response sets out the “broad consensus” which has been reached with respect to defining foreign exchange (FX) spot contracts as follows:

  • to use a T+2 settlement period to define FX spot contracts for European and other major currency pairs
  • to use the “standard delivery period” for all other currency pairs to define a FX spot contract
  • where contracts for the exchange of currencies are used for the sale of a transferable security, to use the accepted market settlement period of that transferable security to define a FX spot contract, subject to a cap of 5 days
  • a FX contract that is used as a means of payment to facilitate payment for goods and services should also be considered a FX spot contract.