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Markets Regulation
Europe delays FX derivatives reporting
From the Financial Times of Fri, 10 Oct 2014 09:01:22 GMT

Europe is to postpone standard reporting of all foreign exchange derivatives trades for more than two years after national regulators were unable to agree what types of deals counted under new rules.

The European Securities and Markets Authority (Esma) has decided not to issue guidelines defining a foreign exchange derivative in the face of UK opposition to a change in its interpretation.

A standard definition that will apply across the EU will be instead be included as part of Mifid II, the main capital markets legislation due to come into force in 2017, two people familiar with the talks confirmed.

Authorities have been struggling for months to determine if certain types offorex derivatives, such as forward contracts come under new rules introduced in February to bring more transparency to opaque off-exchange markets. Officials wanted more data on financial instruments, from swaps to fixed income, to give them a better view of market activity and systemic risk.

The new rules exposed loopholes with existing legislation, however, as they allowed national regulators to put differing interpretations on whether forward contracts – which account for $680bn of the daily market – should be classed as derivatives. Consequently some European countries were forced to report trades under the new rules while others, notably in the UK, were not.

The rulings matter as they can affect whether these instruments have to adhere to legislation, such as investor protections, algorithmic trading requirements, clearing and market abuse.Esma and the European Commission have been unable to come up with an answer to the impasse, however.

The UK, the world’s main hub for foreign exchange trading, stuck to a position it made for Mifid in 2007 that certain forex transactions, including forwards and non-deliverable currency transactions done for commercial purposes, be exempt from the rules. 

Other national regulators had a much tighter definition. While the UK was in an isolated position, it is also the world’s main hub for foreign exchange trading.

The decision was taken following a meeting of Esma board of supervisors on September 25, the people said.

“Other states therefore decided not to push further at this stage for guidelines as those would have been somewhat pointless if the UK was not going to comply with them,” said one person familiar with the talks.

Esma will instead work on harmonising its definition of a foreign exchange financial instrument definition for Mifid II. Esma declined to comment.

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