Proposed New Rules on FX Financial Instruments under MiFID II

Regulatory Insurance

31 Jul 2015 Proposed New Rules on FX Financial Instruments under MiFID II

MiFID FX spot contracts relating currencies


Much discussion has arisen on whether  or not FX spot contracts relating to currencies are to be considered as financial instruments as defined under the Mark ets in Financial Instrument Directive1 (the MiFID”).  This lack of a clear and harmonized definition as to which instruments should be considered as FX financial instruments has led to mark et uncertainty with regard to regulatory requirements, particularly with respect to proper adherence with the reporting requirements imposed under the European Mark et Infrastructure Regulation  (the “EM IR”)2.



The foreign exchange (FX) market is one of the largest financial markets in the world. It is the market in which participants are able to buy, sell, exchange and speculate on currencies. Transactions in FX are performed to fulfil  a number of functions including for hedging forei gn currency risk for financial assets or commercial contracts or investment or speculation in forei gn currency. Different financial  instruments are used to execute  FX transactions including but not limited to swaps, options, forwards  and spots.


The regulation of FX financial instruments and markets has been flagged as raising regulatory uncertainties at an EU level. This article is to provide an update on the key issues that have come to light.




MiFID I establishes the general framework regulating financial markets in the  European Union. However, the financial crisis has exposed weaknesses in the functioning and in the transparency of financial markets, thus, the discovered  need to strengthen  the framework  for the regulation of markets in financial instruments, particularly the need to increase transparency , better protection to  investors,  reinforc e confidence, address unregulated  areas,  and ensure that supervisors are granted adequat e powers to fulfil their tasks 3.




The financial crisis also led the leaders of the Group of Twenty (G20) nations to highlight the necessity of introducing a series of measures to improve counterparty risk management and increase the transparency of the over-the-count er (“OTC”) derivatives market. This resulted in the adoption of EMIR in 2012, which was specifically designed to reduce the counterpart risk of OTCs and increase transparency within the markets, through  reporting  obligations.


Definition  Problem


Point (4) of Section C of Annex I to MiFID defines financial instruments as “Options, futures, swaps , forward rate agreements and any other derivati ve contracts relating to  securities,  currencies, interest rates or yields or other derivatives instruments,  financial  indices  or  financial measures which may be settled physically or in cash”4. In the Commission Q&A on MiFID5 it was stipulated that  spot FX contracts are not considered to be financial instruments for the purposes  of MiFID6

The lack of harmonization in respect of the financial instruments definition particularly  in respect of spot FX contracts has been raised by the European Securities and Markets Authority (“ESMA”) as potentially leading to an inconsistent application of MiFID, EMIR7 and potentially other EU legislation that rely on the MiFID definition of financial  instruments.


Discussion  Point


The issue that arose with the different  legislations in force is that of determining when an FX contract is a currency payment  or FX spot contract on the one hand, or an FX forward contract on the other. The main distinction being the fine line in settlement delivery date in respect  of an FX spot and an FX derivative.


ESMA argued  that “Differences  in the definitions of what constitutes a  derivative or derivati ve contract will result in the inconsistent application of EMIR, whose primary objective is regulati ng derivatives transactions8  and urged “that for ensuring a consistent application of EMIR it is essential that the references to the MiFID definitions in the context of EMIR are clarified9.


An analysis carried out by ESMA found that it is not controversial that contracts that  settle within two (2) trading days are considered spot contracts and that contracts that settle after seven (7) trading days are FX forwards. However, some member states consider that contracts that settle up to seven (7) days are not to be deemed to be derivative contracts. For contracts which have a settlement date between three (3) and seven (7) trading    days,   there   are    different    definitions adopted by the different Member States to determine whether or not such contracts are derivative contracts for the purposes of  the definition provided  by MiFID. 10



During the public consultation and also during certain European  Securities Committee meetings, a broad consensus appeared to have been reached in relation to the definition of an FX spot contract 11, which included  the following:


  • a T+2 settlement period should be used to define FX spot contracts for European and other major currency pairs and the standard delivery period for all other currency pairs;


  • to use the “standard delivery period” for all other currency pairs to define a FX spot contract;


  • where contracts for the exchange of currencies are used for the sale of a transferable security, the accepted market settlement period of that security should be used to define an FX spot contract, subject to a five (5) day cap; and


  • an FX contract that is used as a means of payment to facilitate payment for goods and services should also be considered to be an FX spot


Future Legislative Change – MiFID II


Omnibus I  (Directive 2010/78/EU) introduced a sunset clause in Article 64a of MIFID I which provides that “the powers conferred on the Commission in Article 64 to adopt implementing measures that remain after the entry into force of the Lisbon Treaty on 1 December 2009 shall cease to apply on 1 December 2012“.


The clarifications on FX financial instruments as broadly  agreed  to will therefore  be implemented through MiFID II.


MiFID II is to come into effect  as from  3 January 2017.


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lecocqassociate provides a full range of financial regulatory, corporate and commercial advice in relation to the structuring and incorporation of entities.

This newsletter is for information purposes only. It does not constitute professional advice or an opinion. Please contact Mr. Dominique Lecocq on for any questions.




1 Directive 2004/39/EC on markets in f inancial instruments and amending Council Directives 85/611/EEC and 93/6/EEC and Directive 2000/12/EC

2 Regulation (EU) No 648/2012 on OTC derivatives, central counterparties and trade repositories

3 Directive 2014/65/EU on markets in f inancial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU, provision 3

4 Section C of Annex 1 of Directive 2004/39/EC (MiFID).

6 “spot market f oreign exchange agreements are not considered to be f inancial instruments f or the purposes of MiFID”

http://w w w .es iles /2014-184_letter_to_c ommissioner_barnier_-_c las sif ication_of _f inanc al_ins truments.pdf

8 ibid

9 ibid


11 http://w w w iles/ec_letter_to_esma_on_classif ication_of _f inancial_instruments_23_07_2014.pdf

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