February 17, 2014

ESMA letter to EC | When is it too late for such questions?

I was going through some articles these days to get the Market's heartbeat and find out more about the first day of Reporting when I came across ESMA's press release on Friday which, in short, reveals one of the many gaps of this Regulation. Should FX forwards and physically settled commodity forwards be considered as "Derivatives" under EMIR?

We are already 3 days after the Reporting go-live date where

  • Market participants continue to raise concerns amid technology problems and unsteady preparations and the general feeling is that the deadline was too soon for firms to be fully compliant. 
  • Huge amounts of work are spent to adapt the systems and processes to the simultaneous reporting of all asset classes without any phasing for both OTC and exchange-traded derivatives, where the latter was only confirmed to be mandatory in September.
  • Counterparties decided to follow idiosyncratic approaches in areas where there was little or no regulatory guidance, instead of taking no actions. 
  • Financial Counterparties really outdid themselves in their efforts to awaken their Non Financial counterparties in order for both to be able to comply 

YET out of the blue a question pops up, which should have been addressed long before Reporting started. 

"Should FX forwards and physically settled commodity forwards be considered as "Derivatives" under EMIR?"

As per ESMA's letter "this definition is not harmonised across the EU which could have a detrimental effect on the consistent application of EMIR. The EMIR definition of derivatives cross-refers to the list of financial instruments mentioned in the current Markets in Financial Instruments Directive (MiFID). The different transpositions of MiFID across Member States mean that there is no single, commonly adopted definition of derivative or derivative contract in the European Union, thus preventing the convergent application of EMIR".

As Risk puts it in its article today titled Esma calls for EC to overrule UK on forex reporting (subs).

"The loophole arises because EMIR defers to the Markets in Financial Instruments Directive (MiFID) when defining derivatives but, as a directive, Mifid is open to different national interpretations. In the UK, part 13.4 of the Financial Conduct Authority's (FCA) perimeter guidance manual says a forex derivative will not be counted as such under Mifid if it satisfies a commercial purpose test. This interpretation clashes with the EC's. In a question-and-answer document on EMIR, published on December 18th, the commission stated forex derivatives are subject to mandatory reporting."

What strikes me the most though is that ESMA's letter last paragraph reads 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 Union, in particular FX forwards with a settlement date up to 7 days, FX forwards concluded for commercial purposes, and physically settled commodity forwards, as identified in the annex". I would expect the contrary, no exemption until EC clarifies. 

I honestly can't tell if there is any other regulation with so many grey areas like EMIR and I can't help thinking that it's a miracle that we even managed to Report.

I would very much like to hear what you think, use the comments below and let me know.

Maria L.

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