There has been another very significant twist in the somewhat chaotic implementation of the European Market Infrastructure Regulation (EMIR) as the European Securities and Markets Authority (ESMA) has requested the European Commission to clarify the definition of a derivative or derivative contracts under EMIR.

The request for clarification arises, in particular, from differing interpretations as to whether certain types of foreign exchange (FX) hedging arrangements constitute reportable transactions within the scope of EMIR or should be treated as excluded. Most notably, the FCA in the UK did not consider FX transactions with a settlement period up to seven days, or entered into for commercial purposes, to be derivative contracts. This is similar, though not an exact match, for the corresponding exemption in the US under Dodd Frank for FX forwards.

Most, if not all, other Member States took a narrower view and assumed that FX transactions would need to be reported if the settlement period was more than two days. This did not address wider issues such as the fact that some FX transactions and, in some cases, the underlying security being hedged, have standard settlement periods of more than two days, or the very limited value of requiring a firm to treat a t+3 settlement as if it was a future.

ESMA has now asked the European Commission for clarity as a matter of urgency and “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 seven days, FX forwards concluded for commercial purposes, and physically settled commodity forwards.”

Comment courtesy of

Richard Frase, Partner at Dechert LLP in London

Declan O'Sullivan, Partner in Dublin and

Conor Durkin, Parnter in Dublin