On February 14th 2014 the European Securities and Markets Authority (ESMA) sent a letter to the European Commission (the “Commission”) where it asked for clarification on whether FX forwards should be classified as derivatives in the Markets in Financial Instruments Directive (MiFID) and consequently also in the European Market Infrastructure Regulation (EMIR) as the latter cross-refers to MiFID for its definitions.
The letter stressed the lack of a harmonised approach to what should be understood as a derivative across the different European countries.
ESMA further clarified that under the current MiFID there is not a common adopted definition for derivatives and this leads, particularly for foreign exchange (FX) forwards and physically settled commodity forwards, to an inconsistent application of EMIR.
The Commission responded to this letter on February 26th last by concluding that FX forwards are in the scope of MiFID and consequently also of EMIR.
However, the Commission did not provide an answer to ESMA’s concerns about how to distinguish between derivatives (FX forward contracts) and currency spot contracts.
The Commission said they would investigate this further and assess options to ensure a consistent application of the legislation and asked for more information and data from ESMA about how the definition of “FX forward” under MiFID has been transposed in Member States.
With regard to the definition of “commodity forwards that can be physically settled” the Commission indicated that this is already being discussed under the negotiations for MiFID II and invited ESMA to assess the status of such forwards in preparation for its advice to the Commission under MiFID II for which it will receive a mandate before the Summer.