Supra-national regulator the European Securities and Market Authority (ESMA) has written to the European Commission to ask for a single Europe-wide definition of a derivative or derivative contract.
ESMA said the lack of a common definition prevents the full application of the European market infrastructure regulation (EMIR). It highlighted foreign exchange (FX) forwards and physically settled commodity forwards as being particularly problematic when attempting to define derivatives across member states.
“In order to avoid the inconsistent application of EMIR across the EU, ESMA understands 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,” wrote Steven Maijoor, ESMA chair.
“In particular FX forwards with a settlement date up to seven days, FX forwards concluded for commercial purposes, and physically settled commodity forwards."
The European Commission can use an implementing act to clarify the existing definition of derivatives and derivative contracts contained within MiFID.
The original MiFID contains a list of financial instruments that are considered derivatives, but new market developments mean this is out of date and in need of a refresh, according to ESMA.