For the purposes of defining financial instruments under the MiFID II Directive (Section C(7) of Annex I thereto), a spot contract is understood as a contract for the sale of a commodity, asset or right, under the terms of which delivery is scheduled to be made within the longer of the following periods:

Spot-2-trading-days

(a) two trading days;
(b) the period generally accepted in the market for that commodity, asset or right as the standard delivery period.

  

The above definition is contained in Article 7(2) of the Commission Delegated Regulation (EU) 2017/565 of 25 April 2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council as regards organisational requirements and operating conditions for investment firms and defined terms for the purposes of that Directive.

MiFID II does not introduce any change in this regard - identical definition of the spot contract under MiFID I was stipulated in Article 38(2) of the Commission Regulation (EC) No 1287/2006 of 10 August 2006 implementing Directive 2004/39/EC of the European Parliament and of the Council as regards record-keeping obligations for investment firms, transaction reporting, market transparency, admission of financial instruments to trading, and defined terms for the purposes of that Directive. Pursuant to both said regulations, a contract is, however, not a spot contract if, irrespective of its explicit terms, there is an understanding between the parties to the contract that delivery of the underlying is to be postponed and not to be performed within the period mentioned above. The second limb of the definition set out in the said Article 7(2) of the Commission Delegated Regulation (EU) 2017/565 refers to the “period generally accepted in the market for that commodity, asset or right as the standard delivery period”.

MiFID II and the secondary legislation neither explain in greater detail what entails the formula in question nor give specific instructions therefor.

 

Commission Delegated Regulation (EU) 2017/565 of 25 April 2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council as regards organisational requirements and operating conditions for investment firms and defined terms for the purposes of that Directive, Recitals 8 - 12, Article 7(2)

 

(8) In order to ensure the uniform application of Directive 2014/65/EU, it is necessary to clarify the definitions laid down in Section C(4) of Annex I to Directive 2014/65/EU for other derivative contracts relating to currencies and to clarify that spot contracts relating to currencies are not other derivative instruments for the purposes of Section C(4) of Annex I to Directive 2014/65/EU.


(9) The settlement period for a spot contract is generally accepted in most main currencies as taking place within 2 days or less, but where this is not market practice it is necessary to make provision to allow settlement to take place in accordance with normal market practice. In such cases, physical settlement does not require the use of paper money and can include electronic settlement.


(10) Foreign exchange contracts may also be used for the purpose of effecting payment and those contracts should not be considered financial instruments provided they are not traded on a trading venue. Therefore it is appropriate to consider as spot contracts those foreign exchange contracts that are used to effect payment for financial instruments where the settlement period for those contracts is more than 2 trading days and less than 5 trading days. It is also appropriate to consider as means of payments those foreign exchange contracts that are entered into for the purpose of achieving certainty about the level of payments for goods, services and real investment. This will result in excluding from the definition of financial instruments foreign exchange contracts entered into by non-financial firms receiving payments in foreign currency for exports of identifiable goods and services and non-financial firms making payments in foreign currency to import specific goods and services.


(11) Payment netting is essential to the effective and efficient operation of currency settlement systems and therefore the classification of a foreign currency contract as a spot transaction should not require that each foreign currency spot contract is settled independently.


(12) Non deliverable forwards are contracts for the difference between an exchange rate agreed before and the actual spot rate at maturity and therefore should not be considered to be spot contracts, regardless of their settlement period.

 

Article 7(2)

 

A spot contract for the purposes of paragraph 1 shall be a contract for the sale of a commodity, asset or right, under the terms of which delivery is scheduled to be made within the longer of the following periods:
(a) 2 trading days;
(b) the period generally accepted in the market for that commodity, asset or right as the standard delivery period.


A contract shall not be considered a spot contract where, irrespective of its explicit terms, there is an understanding between the parties to the contract that delivery of the underlying is to be postponed and not to be performed within the period referred to in paragraph 2.

 

Some illustrative examples of spot contracts for oil are invoked by the Commodity Markets Council - Europe (MiFID II & MiFIR: Applying the Definition of “Spot” to Physical Commodities Contracts, p. 4) - periods in days:

I. Crude:

- West Africa Crude - 60,
- North Sea Crude - 30,
- Urals and Med Crude - 45,
- Persian Gulf Crude - 120,
- Asia Pacific Crude - 75,
- WTI - 60,
- Canada - 45,
- Latin America - 60,

II. Oil Products:

1. Cargos:

- Jet - 40,
- Diesel - 25,
- Gasoline - 30,
- Naphtha - 75,
- Heating Oil - 25,
- LPG - 45,
- Fuel Oil - 40,

2. Barges:

- Jet - 15,
- Diesel - 15,

- Gasoline - 15,

- Naphtha - 30,
- Fuel Oil - 15,
- Heating Oil - 15,
- LPG - 15,
- Biofuels - 60,
- Marine Fuels - 8,
- Eurobob - 10, 

3. Pumpover - 15,

4. Tank - 15,
5. Train - 15.

 

Other remarks


The transaction reporting regime in MiFID I and II only applies to financial instruments whereas spot commodity contracts remain outside the scope of the MiFID I and II transaction reporting framework.

"Non deliverable forwards are contracts for the difference between an exchange rate agreed before and the actual spot rate at maturity and therefore should not be considered to be spot contracts, regardless of their settlement period" (Recital 12 of the Commission Delegated Regulation (EU) 2017/565 of 25 April 2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council as regards organisational requirements and operating conditions for investment firms and defined terms for the purposes of that Directive).

Spot contract should be differentiated from forward and futures transactions.

 

This is in contrast with to The Market Abuse Regulation (MAR) where 'spot commodity contracts' and 'spot markets' are defined respectively as:

- 'spot commodity contract' a contract for the supply of a commodity traded on a spot market which is promptly delivered when the transaction is settled, and a contract for the supply of a commodity that is not a financial instrument, including a physically settled forward contract (MAR Article 3(1)(15));

- 'spot market' a commodity market in which commodities are sold for cash and promptly delivered when the transaction is settled, and other non-financial markets, such as forward markets for commodities (MAR Article (3)(1)(16)).

 

It means, for particular MAR purposes physically settled forward contracts are treated the same as spot ones. But this is only MAR-specific terminological convention. 

 

The way of the formulation of the definition for the 'spot commodity contract' under MAR entails, in particular, that wholesale energy productsas defined in Article 2(4) of the Regulation (EU) No 1227/2011 (REMIT) on wholesale energy market integrity and transparencyare included in the second limb of this definition (Consultation Paper, ESMA's guidelines on information expected or required to be disclosed on commodity derivatives markets or related spot markets under MAR, 30 March 2016, ESMA/2016/444, p. 9).

 

The new MAR predominantly applies to financial instruments; however, it also expressly extends the scope of the market manipulation and insider trading prohibitions to spot commodity contracts where any transaction or order in them or any behaviour in relation to them is likely to have an effect on the price or value of a financial instrument (Article 2(2a) MAR). This extension of the market manipulation and insider trading prohibitions in MAR will expressly exempt "wholesale energy products" as defined under REMIT. 

 

REMIT establishes a framework applying to wholesale energy products encompassing spot and derivative contracts in electricity and gas. While the REMIT obligation to publish inside information applies to both spot and derivative contracts in electricity and gas, the prohibitions of insider trading and market manipulation do not apply to financial instruments (i.e. derivatives in electricity and gas) where at the moment the Market Abuse Directive, in the future MAR, prevail and financial regulators are the competent authorities (see ESMA Consultation Paper on MiFID/MiFIR of 22 May 2014, ESMA/2014/549, p. 285).

 

An interesting and even surprising thing is that there is the lack of clarity concerning the definition of spot EUAs to be used for EMIR and MiFIR reporting, which effects in the application of transparency and reporting obligations being left to the discretion of the reporting entities.

 

The ESMA’s Report of 28 March 2022 (Emission allowances and associated derivatives, ESMA70-445-38, p. 126) reads:

„The issues identified by ESMA affect the consistency of the MiFIR regulatory reports and transparency publications by different market participants. Due to the lack of clarity concerning the definition of spot EUAs, the scope of ToTV as well as the ISINs to be used for reporting, the application of transparency and reporting obligations is left to the discretion of the reporting entities. The resulting data published and reported may be either missing elements or skewed. For example, the same EUA based instrument reported by different market participants might not be grouped in the same liquidity class for the purposes of the transparency calculation.  

In addition, the same EUAs and related derivatives are treated differently under MiFIR and other applicable sectoral acts (e.g. EMIR) and therefore subject to varying reporting and transparency requirements depending on how they are reported by market participants. For example, the EMIR reporting scope covers only derivative contracts, thus the inconsistent qualification of the same type of instruments either as a derivative or as spot, would result in some partial reporting to the Trade Repositories under EMIR. As for the MiFIR reporting scope, this covers ToTV instruments and derivatives thereof, so the issues identified by ESMA in this section equally result in partial/inconsistent reporting to the NCAs”.

 

Spot in the REMIT transactions' and orders' reporting framework

 

The specificity of "forward style contracts" in the REMIT reporting scheme needs also to be accounted for, as the REMIT Trade Reporting User Manual clarifies (for example Data Field No 13 of the non-standard reporting form): "[f]or bilateral contracts forward style contract refers to the forward style which also includes spot transactions. Market participants should not understand forward style as a sort of derivative contract but as the style of the contract itself." Thus, it follows under the specific REMIT reporting rules "forward style contract" includes also spot.

 


 

IMG 0744    Documentation

 

 

 

Commission Delegated Regulation (EU) 2017/565 of 25 April 2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council as regards organisational requirements and operating conditions for investment firms and defined terms for the purposes of that Directive, Recitals 8 - 12, Article 7(2)

 

Commission Delegated Regulation (EU) of 25.4.2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council as regards organisational requirements and operating conditions for investment firms and defined terms for the purposes of that Directive, 25.4.2016 C(2016) 2398 final

 

Consultation Paper ESMA's guidelines on information expected or required to be disclosed on commodity derivatives markets or related spot markets under MAR, 30 March 2016, ESMA/2016/444, p. 9


ESMA Consultation Paper on MiFID/MiFIR of 22 May 2014, ESMA/2014/549, p. 285

 
Commission Regulation (EC) No 1287/2006 of 10 August 2006 implementing Directive 2004/39/EC of the European Parliament and of the Council as regards record-keeping obligations for investment firms, transaction reporting, market transparency, admission of financial instruments to trading, and defined terms for the purposes of that Directive, Article 38(2)

 

MiFID II & MiFIR: Applying the Definition of “Spot” to Physical Commodities Contracts, CMC Europe, https://www.commoditymkts.org/wp-content/uploads/2017/08/CMCE-Statement-MiFID-II-Spot-definition-final.pdf

 

 

 

clip2   Links

 

 

 

Derivatives

Commodity derivatives 

OTC derivatives

Financial instruments

Contracts having the characteristics of other financial instruments

C6 energy derivatives contracts

Physically settled commodity derivatives in MiFID II

Contracts that must be physically settled

 

 

 

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