If you live outside of the European Union, it is difficult to imagine the scale of the bureaucratic machine which is responsible for the implementation of any type of regulation. Let alone financial regulation… Putting things into perspective of the Forex industry, we will need to go back to the beginning of February to remind our readers about the introduction of the new directive under the European Market Infrastructure Regulation (EMIR), which added a new meaning to the way companies have been reporting derivatives transactions.
The definition is supposed to bring the necessary clarity to the reporting mechanisms under the EMIR. Since no consensus has been reached between European countries as to what constitutes an FX derivative, currently every member state classifies the products anyway it deems fit. This results in discrepancies as not every country supplies the same data to the trade repositories, which were specifically established to aggregate the reporting data after the implementation of the EMIR.
The letter addressing the issue sent by the European Commission to the ESMA has put a date stamp on the ongoing problem instead of solving it. If anyone hoped for clarity any time soon relating to the resulting uncertainty as to what qualifies as spot FX and what as an FX derivative, also concerning the definition of FX derivatives, it seems that the wait has just begun. The “matter of urgency” which was presented by the ESMA, has been treated by the European Commission (EC) as everything but. The legislative framework in place has been deemed insufficient to resolve the issue before the full implementation of MiFID II, which is scheduled for 2017.
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An Expert’s Opinion – Mark Kelly from Abide Financial
For a thorough analysis of the situation following the European Commission, Forex Magnates’ reporters reached out to our regular contributor, Mark Kelly from Abide Financial, to get a comment on the letter. He explained that while the document is written carefully in order not to trample over national legislation, by stating that it will be January 2017 before legal certainty can be attached to any Europe-wide definition of what constitutes spot FX, it leaves the door open for ESMA to produce further guidance (without any legal weight) to coax reporting firms into their preferred interpretation.
He went on to share saying, “The letter states fairly clearly what the Commission thinks should be the final destination of this legal and advisory voyage, which is of course broadly speaking that anything beyond T+2 settlement should be viewed as a reportable Forward rather than spot. There is a helpful clarification that currency trades which are tied to the settlement of an associated securities trade can follow the security’s settlement cycle without being considered a forward (subject to a cap of 5 days). But outside of this there is nothing new, and in particular nothing which would compel firms who are currently using the UK’s T+7 approach to get into line with the rest of Europe.”