Monday, March 31, 2014

European Commission responds to ESMA Request for E.U.-wide Definition of Derivative

Responding to a request from the European Securities and Markets Authority  (ESMA) to provide a consistent definition of derivative and derivative contract across the E.U., the European Commission essentially said that the vehicle to do this would be standards under MiFID II and asked for ESMA’s assistance. In a letter to ESMA Chair Steven Maijoor, the Commission  said that it shared ESMA’s view that it is essential to have a fully consistent transposition throughout the Union of the relevant MiFID provisions defining derivative and derivatives contracts, in particular to avoid the negative effects caused by any inconsistent application of the European Market Infrastucture Regulation (EMIR). However, the Commission said that it would be inappropriate for it to prejudge the imminent work on the delegated acts for MiFID II by developing Level 2 proposals under the current MiFID, the preamble of which does not contain specific recitals to frame the definition.

Currently, EMIR refers to a list of financial instruments in MiFID to define derivative, which does not work because of different transpositions of MiFID across Member States. This in turn, said ESMA,  means that there is no single, commonly adopted definition of derivative or derivative contract in the European Union, thus preventing the convergent application of EMIR. In a letter to Michel Barnier, Commissioner for the Internal Market, ESMA said that this is particularly true in the case of foreign-exchange forwards and physically settled, commodity forwards. ESMA noted that differences in the definitions of derivative or derivative contract throughout the E.U. would result in the inconsistent application of EMIR, whose primary objective is regulating derivatives transactions.

Definition of derivative. The Commission acknowledges that ESMA has identified a lack of clarity about the precise delineation between FX forward contracts and currency spot contracts under MiFID. The Commission agrees with the important need for clarity and consistency in this regard and assured ESMA that it will urgently assess the options for action to ensure consistent application of the legislation. Article 4(2) of MiFID already empowers the Commission to clarify the definitions in Article 4 through the adoption of a delegated act, in order to take account of developments on financial markets, and to ensure the uniform application of the Directive.

But the Commission said that it would be inappropriate for it to prejudge the imminent work on the delegated acts for MiFID II by developing Level 2 proposals under the current MiFID, the preamble of which does not contain specific recitals to frame the definition. The Commission thus invited ESMA, as a part of its preparation for its advice to the Commission under MiFID II, for which it is going to receive a mandate before the summer, to also assess the status of physically settled commodity forwards. In addition, and in order to ensure the consistent application of MiFID, ESMA could also consider issuing guidelines.



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