The European Securities and Markets Authority (ESMA) has sent a letter to the European Commission asking for clarification of the definition of a derivative or derivative contracts under the European Market Infrastructure Regulation (EMIR). The definition
of a derivative under EMIR refers to the list of financial instruments under the Markets in Financial Instruments Directive (MiFID). Member states have transposed MiFID into their local laws and this has led to some differences in approach resulting in there
being no single, commonly adopted definition of derivative or derivative contract in the European Union. This prevents the convergent application of EMIR.
This particularly impacts foreign exchange (FX) forwards with a settlement date up to 7 days, FX forwards concluded for commercial purposes, and physically settled commodity forwards. Differences in the definitions of what constitutes a derivative or derivative
contract may result in the inconsistent application of EMIR. This impacts:
· the reporting obligation which came into force on 12th February;
· the clearing obligation when in force;
· the calculation of the clearing threshold;
· risk mitigation techniques; and
· margin requirements.
ESMA is inviting the Commission to adopt as a matter of urgency an implementing act to clarify the definitions. In order to avoid the inconsistent application of EMIR across the EU, ESMA states that until the Commission provides clarification (and to the
extent permitted under national law) National Competent Authorities will not implement the relevant provisions of EMIR for contracts that are not clearly identified as derivatives contracts across the European Union.