Uncertainties On Definition Of FX Financial Instruments

On July 23rd 2014 the European Commission ("EC") wrote to ESMA regarding the definition of a financial instrument relating to foreign currency ("FX Contract"). Please refer our dedicated article for background information on this topic.

ESMA had suggested that the EC use the powers granted to it under MIFID I to provide clarity on this definition and in particular to determine the boundaries between FX contracts that can be considered as financial instruments and FX spot contracts that are not considered as financial instruments.

In its letter the EC explained that the powers of the EC to adopt implementing measures in relation to MIFID I had ceased to apply on December 1st 2012. As a consequence the only solution to clarify the definition would be to do so during the implementation process of MIFID II.

In the letter the EC suggests that ESMA issue, pending the entry into force of MIFID II, interim guidelines that could help Member States to reach a common approach on this definition.

The drawback of having such interim guidelines is that Member States could adopt changes in the market and legal practice that might then need to be amended after the entry into force of MIFID II.

Nonetheless, the EC noted that the question of how to define a FX contract has already been extensively discussed during the public consultation on MIFID II and that a...