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EU Searches for Meaning of Derivative as Rules Take Effect

ESMA’s Chairman Steven Maijoor
ESMA’s Chairman Steven Maijoor said in a Feb. 14 letter to Financial Services Commissioner Michel Barnier, “There is no single, commonly adopted definition of derivative or derivative contract in the European Union, thus preventing the convergent application” of the reporting rules within the European Market Infrastructure Regulation. Photographer: Brian Capon/British Bankers' Association via Bloomberg

Feb. 25 (Bloomberg) -- What is a derivative? Don’t ask the European Union -- you might get 28 different answers.

The EU’s top markets regulator, the European Securities and Markets Authority, asked the European Commission to clarify what a derivative is as it grapples with harmonizing trade reporting rules across the 28-nation bloc.

“There is no single, commonly adopted definition of derivative or derivative contract in the European Union, thus preventing the convergent application” of the reporting rules within the European Market Infrastructure Regulation, Steven Maijoor, ESMA’s chairman, said in a Feb. 14 letter to Michel Barnier, the commissioner for financial services.

The letter highlights divisions in how national regulators view reporting rules for the $693 trillion market for over-the-counter derivatives. A derivative transaction in one country might be considered a simple spot trade in another.

The U.K.’s Financial Conduct Authority views physically-settled commodities contracts and foreign exchange forward trades with settlement dates up to seven days as spot trades rather than derivatives, allowing them to go unreported.

“ESMA has a view about what a derivative should be,” Jonathan Master, a derivatives partner at Eversheds LLP, said in a telephone interview in London. The FCA “has a more permissive approach,” Master said. “Other regulators are much less sympathetic.”

Domestic regulators can use their own definitions until the commission makes its decision, he said. The commission should make its decision “as a matter of urgency,” Maijoor said in the letter.

Engage Closely

“We intend to engage closely with the commission and ESMA,” Chris Hamilton, spokesman at the London-based FCA, said in a telephone interview.

Rules came into effect this month requiring firms in the EU to report derivatives transactions to data banks known as trade repositories. The measure marks the EU’s implementation of part of a global agreement targeted at preventing any repeat of the financial crisis that followed the collapse of Lehman Brothers Holdings Inc.

The issue stems from the 2004 Markets in Financial Instruments Directive, or Mifid, which gave rise to slightly different interpretations as to what constitutes a derivative, ESMA said.

Mifid is a directive, which allows for national governments and regulators to interpret the EU rules themselves. Emir is a regulation, which must be implemented uniformly throughout the bloc.

Important Issues

The “consistent application of EU law is essential for the effective application of a single market in financial services and so this letter raises important issues,” Chantal Hughes, a spokeswoman at the commission, said in an e-mailed statement today.

The package of legislation governing derivatives regulation originated from an accord among the Group of 20 Nations aimed at bolstering the resilience of the for over-the-counter derivatives -- a term used to describe swaps traded away from exchanges.

Regulators say the step will enhance their ability to monitor risk taking, curb market abuse, and make it easier to understand who owns what when a financial institution fails.

To contact the reporter on this story: Ben Moshinsky in London at

To contact the editor responsible for this story: Anthony Aarons at

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