On Friday, ESMA issued this letter to the European Commission asking for clarification on the inclusion of Physical Commodity Forwards, as well and FX Forwards.(See also this press release). Definitions of what comprises a “derivative” under MiFID (and therefore EMIR) are found in Annex C.

This follows the ruling of the FCA in September, as amended later, stating that physical commodity forwards are only in EMIR (and MiFID) if traded via an MTF. While this has provided some clarity. the outstanding issues is what comprises “physical” in the first place, and in particular whether it must be settled physically, or whether it can be settled physically. As the letter alludes to, sections C6 and C7 state one, with C5 stating another. 

Furthermore, despite the ruling, there is still inconsistency between authorities, which will “un level” the playing field across member states. Since this potentially has a big impact on whether  non financial counterparty is over the threshold, inconsistency is not a good thing.

FX Forwards have also caused a great deal of confusion. These are also excluded from EMIR, when they are entered into “for commercial purposes”. This too has been the cause of great confusion.

Of course the uncertainty around all of this simply means that final EMIR resolution still has a way to go.