The Malta Financial Services Authority (“MFSA”) has published a circular clarifying as to when derivative contracts should be considered as financial instruments, and that companies trading in such transactions will have to either provide a representation that all their transactions fall within the exclusion from being considered as financial instruments, or else comply with Regulation EU 648/2012 of 4th July 2012 (“EMIR”) and Regulation 2014/65/EU of 15th May 2014 (“MiFID II”) obligations, as the case may be.
In its circular, the MFSA cites the provisions in the Commission Delegated Regulation EU 2017/565 of 25th April 2016 supplementing MiFID II (“Delegated Regulation”) outlining the circumstances under which derivative contracts relating to currencies are considered as financial instruments. The circular also provides clarification as to the definition of spot contracts for currencies.
Exclusion from being considered as financial instruments
Derivative contracts relating to currencies are only excluded from being considered as financial instruments under MiFID II if all criteria provided in article 10(1) of the Delegated Regulation are satisfied.
The criteria for a derivative contract to be excluded from being considered as a financial instrument are that the contract must be a spot contract or a means of payment that:
Must be settled physically otherwise than by reason of a default or other termination event;
Is entered into by at least a person which is not a financial counterparty within the meaning contained in EMIR;
Is entered into in order to facilitate payment for identifiable goods, services or direct investment; and
Is not traded on a trading venue.
A spot contract is a contract for the exchange of one currency against another currency, under the terms of which delivery is scheduled to be made within the following periods:
Major currencies – 2 trading days in respect of any pair of the major currencies set out in Article 10(3) of the Delegated Regulation;
One currency is not a major currency – The longer of 2 trading days or the period generally accepted in the market for that currency pair as the standard delivery period, where the contract relates to any pair of currencies where at least one currency is not a major currency;
Main purpose is the sale of transferable securities or units in collective investment schemes – Whichever is shorter of 5 trading days or the period generally accepted in the market for the settlement of that transferable security or a unit in a collective investment undertaking as the standard delivery period, where the contract for the exchange of currencies is used for the main purpose of the sale or purchase of a transferable security or a unit in a collective investment undertaking.
A contract shall not be considered as a spot contract where, irrespective of its explicit terms, there is an understanding between the parties that delivery of the currency is to be postponed and not to be performed within the periods set out above.
Please feel free to contact us should you have any queries on derivative contracts relating to currencies and their classification as financial instruments.