On 31 July 2014, the European Securities and Markets Authority (“ESMA”) published a letter (dated 23 July 2014) from the European Commission regarding the definition  of derivatives for the purposes of reporting under the European Market Infrastructure Regulation (“EMIR”). Derivatives are defined by reference to the list set out in the Markets and Financial Instruments Directive (“MiFID I”) which, because it has been transposed into national laws by member states, has resulted in no common definition of a derivative or derivative contract in the EU, particularly for FX forwards and physically settled commodity forwards. ESMA had requested the Commission, in February of this year, to clarify the position using powers granted under MiFID I so as to provide certainty to market participants. The Commission’s letter to ESMA last week clarifies that the power referred to by ESMA ceased to apply in 2012. The definition will be able to be clarified in the Level 2 legislation required under the Markets in Financial Instruments Directive (“MiFID II”). However, that legislation is still pending and MiFID II only comes into effect on 1 January 2017. The Commission considers that the best way forward would be for ESMA to provide guidance in the interim period on the meaning of a FX contract. Such guidance may lead to a change  in the practice and laws in some member states which may, by 2017, need to be amended again. The letter also sets out the current ‘broad consensus’ on the definition of FX spot contracts. The Commission consulted earlier this year on the definition of FX financial instruments and FX spot contract, the results of which are available at: http://ec.europa.eu/internal_market/consultations/2014/foreign-exchange/index_en.htm

The Commission’s letter is available at: http://www.esma.europa.eu/content/EC-letter-ESMA-classification-financial-instruments.