On 20 March 2014, ESMA published a letter (dated 26 February 2014) received from the EU Commission in response to a letter sent from ESMA on 14 February 2014 regarding the classification of financial instruments as derivatives for the purposes of reporting under EMIR (see this blog post for more detail).
The EU Commission shares ESMA’s view that a consistent transposition of the MiFID provisions which define derivatives contracts is required so as to avoid an inconsistent application of EMIR. It considers that FX forwards fall within the scope of MiFID, and therefore EMIR, but acknowledges a lack of clarity about where the line between FX forwards and spot currency contracts is to be drawn. As a result, the Commission will “urgently assess the options for action”. In the meantime, it asks for some additional detail from ESMA as to how the definition of “FX forward” has been transposed by national competent authorities as well as information about commonly accepted delivery periods for currencies within Member States.
The Commission also confirmed that work is underway in the context of MiFID II negotiations to draft a delegated act specifying the types of derivative contract that must be physically settled and asks, in the meantime, that ESMA assess the status of physically settled commodity forwards.
Whilst these issues are being sorted out, the FCA has confirmed that its position will not change. Accordingly, as far as the UK is concerned, the following are outside of scope for both MiFID and EMIR:
- forward foreign exchange instruments unless caught by scope of the Regulated Activities Order (RAO);
- a non-deliverable currency forward that is not a ‘future’ for the purposes of the RAO because it is made for commercial purposes; and
- spot transactions in both foreign exchange and commodities.