The European Commission responds to ESMA

Further to our briefing on 24 February 2014, the European Commission has responded 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 lack of clarity in whether certain types of derivatives fall within the definition of “financial instruments” is preventing EMIR being applied consistently throughout the European Union

The European Commission has indicated that it agrees with ESMA that it is essential that EMIR is applied consistently throughout the European Union. In order to achieve this the Internal Market and Services Directorate General (“DG MARKT”) will urgently assess the options for ensuring consistent application of EMIR.

Preliminary views on the issues highlighted by ESMA

The European Commission has also set out some preliminary views on the issues highlighted by ESMA, which are as follows:

FX forwards

The European Commission confirmed that foreign exchange (“FX”) forwards are financial instruments for the purposes of MiFID and therefore derivatives within the scope of EMIR.

In respect of clarifying the distinction between FX forwards and FX spots, the European Commission has asked ESMA for guidance on (i) how the definition of FX forwards has been transposed by national competent authorities across the European Union; (ii) what the commonly accepted delivery periods for currencies in Member States are; and (iii) the developments in foreign exchange markets since the implementation of MiFID.

The European Commission stated that looking at whether an FX transaction was entered into for “commercial purposes” is not relevant as MiFID only applies this test to certain physically settled commodities transactions.

Physically settled commodity forwards

The issue of whether physically settled commodity forwards fall within MiFID is being dealt with pursuant to the work on MiFID II. As part of this work, the European Commission has invited ESMA to assess the status of physically settled commodity forwards and to consider issuing guidelines which ESMA has begun work on.