There has been published a letter from Jonathan Faull (European Commission Director General for Internal Market and Services) to the chairman of the European Securities and Markets Authority (ESMA), Steven Maijoor. The letter is in response to Mr Maijoor’s earlier letter in which he pointed out the existence of inconsistent approaches to the application of the definition of ‘financial instruments’ under the Markets in Financial Instruments Directive (MiFID) with regard to certain derivatives and the resulting negative effects on the consistent application of the European Markets Infrastructure Regulation (EMIR).

In the letter, Mr Faull agrees that it is essential to have a fully consistent transposition throughout the EU of the relevant MiFID provisions defining derivatives contracts, in particular to avoid the negative effects caused by any inconsistent application of EMIR. Mr Faull further agrees that it is important that there is clarity about the precise delineation between FX forward contracts and currency spot contracts under MiFID. Mr Faull states that DG MARKT will urgently assess the options for action to ensure consistent application of the legislation.

In the letter Mr Faull also shares some preliminary views which should guide DG MARKET’s assessment of the issue. These views include:

• the delineation between derivative and spot contracts should be clarified. DG MARKET will need to consider carefully which delivery periods are appropriate in the FX forwards market. To assess the divergent application of the relevant provisions ESMA is asked to provide details of how point (4) of section C of Annex I to MiFID and the definition of an “FX forward” has been transposed by Member State competent authorities. ESMA is also asked to provide further details concerning the commonly accepted delivery period for currencies in Member States and the developments in the foreign exchange markets since MiFID’s implementation;
• the definition of commodity forwards that can be physically settled was discussed during the MiFID II negotiations and that the Commission has been empowered to further specify in a delegated act the derivative contracts referred to in point (6) of section C of Annex I to MiFID II that must be physically settled; and
• as part of its advice to the Commission under MiFID II, ESMA will be asked to assess the status of physically settled commodity forwards.

View Letter from European Commission to Steven Maijoor concerning definition of financial instruments with regard to certain derivatives, 26 February 2014