The European Securities and Markets Authority (ESMA) has sent a letter to the European Commission asking them to clarify the definition of a derivative or derivative contracts under the European Market Infrastructure Regulation (EMIR).

ESMA’s letter says that currently these 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.

ESMA stresses that this is particularly the case for foreign exchange (FX) forwards 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, whose primary objective is regulating derivatives transactions.

ESMA considers that for ensuring a consistent application of EMIR it is essential that the references to the MiFID definitions in the context of EMIR are clarified. ESMA, therefore, invites the Commission to adopt as a matter of urgency an implementing act under Article 4(2) of MiFID, or any other measure that the Commission considers appropriate, to clarify the above mentioned definitions.

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, 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.

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