Following many discussions, a consultation and technical advice run by ESMA on MiFID Annex I Section C, ACER have just issued a recommendation, which can be found here.

As a brief background, Section C defines the trades that are defined as “financial instruments”. This is of particular interest to those who trade physical commodities, since some of section C defines when a physical forward is defined as a financial instrument. This is covered by paragraphs 6, 7 and 10.

The issue revolves around both where a trade is executed (i.e. the venue type, MTF, OTF etc.) and also whether it must be physically settled, or can be physically settled.

ACER’s recommendation revolves around the definition of “must be physically settled”. They are asking for a tighter definition of “must be physically settled” trades. In particular:

• A tightening of the definition of the capability to take physical delivery (to specifically include the ability to nominate, for example).
• That if a contract cannot be settled in cash, then it “must be physically settled”.
• That contracts which “must be physically settled” do not fall under Section C6.

The recommendation is now submitted to the European Commission.