Skip to content

Forward FX now definitely not decided

The FT has reported ESMA’s decision not to define FX derivatives for the purpose of EMIR trade reporting, deferring instead to the 2017 implementation of MiFID II. The advent of mandatory derivatives trade reporting in February exposed Europe-wide fault lines, as national authorities differed on the “derivative or not” status of forward FX contracts, a segment accounting for $680bn. of the $5trn. FX daily turnover. In the absence of a central ruling, national regulators looked to the settlement period to provide definition, highlighting difference rather than lending clarity. A number of States decided on a T+2 settlement boundary for the Spot-Forward distinction, the UK’s FCA chose the other end of the spectrum- trades settling T+7 or less, or trades conducted for commercial purposes, would not be counted as derivatives. The UK’s position as the location of the vast majority of Europe’s FX trades, lends extra weight to its position. The decision to defer the decision is material, exempting a large portion of the FX market from the onerous panoply of EMIR regulation for a further two years.   The FT quotes an unnamed source, “Other states therefore decided not to push further at this stage for guidelines as those would have been somewhat pointless if the UK was not going to comply with them”. The deferment will surprise few market participants, differences were always too intractable to allow for an easy solution; it will be a relief tothe  market to see at least a temporary respite from the saga of indecision. However, it is difficult to see how ESMA will solve this issue by the simple expedient of MiFID II fiat, or how they will deal with thornier problems such as liquidity definition when simpler questions have already proved so difficult.

Contact Us