ESMA to the Rescue - What’s a Derivative in Relation to EMIR?

Financial services firms in Europe were plagued with a new directive on the 12th of February under the new European Market Infrastructure Regulation (EMIR) that adds a new meaning to the way firms report derivatives transactions.

The European Securities Markets Authority (ESMA), an independent institution that supervises EU financial markets, has issued a notification to the EU Commission seeking clarification on the definition of contracts that are specified under new reporting rules for OTC derivatives.

In a letter sent out late Friday afternoon, as Europe draws to a close for the week, Chairman Steven Maijoor asked the EU Commission to take necessary actions, he commenced the letter with words of concern: “(A potential) issue that could have a significant detrimental effect on the consistent application of Regulation (EU) No. 648/2014 on OTC derivatives, central counterparties and trade repositories (EMIR).”

The notification sent to the EU Commission seeks clarity on specific FX and commodity contracts as Mr. Maijoor believes that without a single understanding of the nature of these derivatives contracts, participants will be facing hurdles, Mr. Maijoor explained: “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.”

The contracts that have come to light include; FX Forwards with a settlement date up to 7 days, FX forwards concluded for commercial purposes, and physically settled commodity forwards.

Bringing legal jargon to the foray, the letter quotes: "Article 4(2) of MiFID, whereby the Commission may clarify the definitions contained in MiFID through an implementing act, in order to take account of developments on financial markets, and to ensure the uniform application of the Directive."

ESMA's concerns lie in the lack of consistency in the way firms are comprehending the new rulings and they believe that action by the Commission is essential to prevent major issues arising.

EMIR comes on the back of new global measures that have been introduced post the G20 meeting which examined the 2008 global recession, during discussions certain OTC derivatives contracts were thought to be the culprits behind what was seen as the world’s largest economic meltdown since the Great Depression of the 1930's.

The ESMA notification comes as a temporary relief for firms, a practise commonly seen in the US where the CFTC issued no-action relief letters in response to the Dodd-Frank rulings.