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EC to ESMA- spot FX, here’s a hint

The latest chapter[1] in the epic of indecision as to what actually constitutes an FX spot contract comes courtesy of EC Director General Jonathan Faull; ESMA have published his letter to its own Chairman- Steven Maijoor. The confusion stems from a legal hierarchical conflict- while the EMIR regulation defers to MiFID 1 definitions, as a directive MifiD I is open to dissonant national interpretation, and is therefore far from definitive.

The letter informs ESMA that a sunset clause in Article 64a MiFID 1 prevents the issue of an implementing measure as possible solution. The letter goes on to reiterate the need for an interpretation that can be consistently applied for EMIR reporting, but which is also aligned with forthcoming MiFiD 2 level 2 measures. Presumably written with some sense of irony given the complete lack of cohesion in this matter, the EC suggests “that ESMA carefully considers whether the current approach by Member States achieves a sufficiently harmonised application of the EMIR reporting obligation in the period before application of MIFID 2 or whether further measures by ESMA, e.g. guidelines, are necessary.” Drawing wisdom from both internal meeting and the recent public consultation, Mr Faull offers the EC suggestion:

  • To use a T+2 settlement period to define FX spot contracts for European and other major currency pairs (Euro, Croatian kuna, Bulgarian lev, Czech koruna, Danish krone, Hungarian forint, Polish zloty and Romanian leu (EU Member States currencies), US dollar, Japanese yen, Australian dollar, Swiss franc, Canadian dollar, Hong Kong dollar, New Zealand dollar, Singapore dollar, Norwegian krone and Mexican peso (BIS most traded currencies)).
  • 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 also considered a FX spot contract.

The EC’s point that MiFID 2’s application date of 3 January 2017 is too long to wait is well made, however it remains to be seen whether this latest shot across the bows will spur ESMA into action. If the definition of the very simplest product causes such angst, it hardly bodes well for the many more complex decisions ahead.

[1] Background in previous blogs – Spotting a Spot FX Contract, Spot the Difference, EMIR FX: ESMA pours murk into fog

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