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.