The European Securities and Markets Authority (ESMA) has published a letter from Jonathan Faull, European Commission Director General for Internal Market and Services, to Steven Maijoor, the European Securities and Markets Authority (ESMA) Chair, on the need for clarity regarding the definition of a financial instrument relating to foreign currency (FX contract).

The letter outlines the need for a consistent interpretation, to ensure the effective application of the reporting regime under the European Markets Infrastructure Regulation (EMIR). Mr Faull indicates that it is not now possible to address the issue by way of a MiFID I implementing measure. However, he points out that the MiFID II Directive and related implementing measures (which he states will apply from 3 January 2017) will be able to provide legal certainty about what a FX contract is. He suggests that ESMA 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 II or whether further measures by ESMA (such as guidelines) are necessary.

Mr Faull sets out the “broad consensus” on a definition of FX spot contracts, which he explains has been reached following extensive public debate and meetings of the European Securities Committee, as follows:

• to use a T+2 settlement period to define FX spot contracts for European and other major currency pairs;
• 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; and
• 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.

View Letter from Jonathan Faull to Steven Maijoor on FX spot contracts, 23 July 2014