On the 14th February 2014, the European Securities Market Authority (“ESMA”) sent a letter to the European Commission requesting clarification in relation to the definition of the terms “derivative” and “derivative contracts” under the European Market Infrastructure Regulation (“EMIR”). EMIR defines a derivative by making reference to the list of financial instruments found in the Markets in Financial Instruments Directive (“MiFID”). The concern is that there have been different transpositions of MiFID, and therefore there is no single, commonly adopted definition in the EU; this could have a significant detrimental effect on the consistent application of EMIR and may also prevent the convergent application of EMIR.

The main concern in this respect arises in relation to foreign exchange forwards and physically settled commodity forwards. ESMA has asked the Commission to exercise its powers in terms of MiFID and to clarify the definition 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 same directive. ESMA asked for particular clarification regarding: (1) the definition of currency derivatives in relation to both the frontier between spot and forward to their conclusion for commercial purposes; and (2) the definition of commodity forwards that can be physically settled.

It is anticipated that, until the Commission provides the above-mentioned clarifications, national competent authorities (provided they are permitted under national law) will not implement the relevant provisions of EMIR for these types of derivative contracts, and this in order to avoid the inconsistent application of EMIR across the EU.