The European Securities and Markets Authority (ESMA) has published guidelines which concern the application of the definition of commodity derivatives and their classification under C6 and C7 of Annex I of the Markets in Financial Instruments Directive (MiFID).
ESMA notes that the application of MiFID in different Member States has given rise, for certain types of instruments or contracts, to different interpretations among competent authorities on what should constitute a financial instrument and what should be classified as a derivative contract. These different interpretations could lead to an inconsistent application of MiFID, the European Markets Infrastructure Regulation (EMIR) and potentially other Directives and Regulations that rely on MiFID definitions of financial instruments.
Against this background ESMA has issued the guidelines to try and ensure a common, uniform and consistent application of definitions of commodity derivatives under C6 and C7 of Annex I of MiFID.
ESMA has also set out at the back of the guidelines its response to the feedback that it received to its earlier consultation. In particular ESMA discusses:
- the view expressed by several respondents that the “secondary contractual rights” within the terms of a commodity derivative contract do not change the nature of what must be physically settled;
- whether or not physical forward contracts for commodities are derivatives under either C6 or C7;
- its approach on specifying that C6 includes commodity derivative contracts that “must” be physically settled and contracts that “can” be physically settled; and
- whether there is any conflict between definitions C5, C6 and C7.
The guidelines are issued under Article 16 of the ESMA Regulation. In accordance with Article 16(3) of this Regulation Member State competent authorities and financial market participants must make every effort to comply with the guidelines and recommendations. Member State competent authorities have two months in which to notify ESMA as to whether they comply or intend to comply with the guidelines.