Uncertainties on definition of FX financial instruments – Luxembourg

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 “broad consensus” seems to have been reached along the following lines with respect to defining FX spot contracts:

• defining FX transactions in major currency pairs as spot trades provided their settlement is two days after the trade date;
• using the “standard delivery period” for all other currency pairs to define a FX spot contract;
• using the accepted market settlement period of that transferable security to define a FX spot contract, subject to a cap of 5 days, where contracts for the exchange of currencies are used for the sale of a transferable security;
• considering a FX contract that is used as a means of payment to facilitate payment for goods and services as  a FX spot contract.

At the moment it is still uncertain whether interim guidelines will be issued by ESMA before January 2017 the date for implementation of MIFID II.