Głowacki Law Firm

Derivatives (MiFID definitions)
European Union Electricity Market Glossary




A derivative is a type of financial instrument whose value is based on the change in value of an underlying asset or a basket of assets.


Examples of assets on which a derivative contract can be written include equities, commodities or emission allowances.


The value of a derivative can also be derived from the value of a market variable (e.g. an interest rate, an exchange rate or a stock index).


Derivatives contracts are used by financial and non-financial economic actors to manage risks related to changes in interest rates, currency fluctuations, the default of a business counterpart etc.


Derivatives allow market participants to redistribute risk among each other, for example, exporters are able to fix their prices despite fluctuating exchange rates, and banks can offer fixed-rate mortgages even as interest rates move etc.


Derivatives can be used for insuring against risk (hedging) as well as for speculative purposes.


Hence, derivatives are a vital part of financial markets and account for hundreds of trillions of euros in volume - see table.





Table source: ESAs' Second Consultation on margin RTS for non-cleared derivatives of 10 June 2015 (JC/CP/2015/002), Impact Assessment



Different transpositions of MiFID I Directive across the European Union Member States cause there is no single, uniform legal definition of derivative or derivative contract in the EU (this is particularly true in the case of foreign exchange (FX) forwards and physically settled commodity forwards).


As a result, the same contract may be considered a derivative contract in one EU Member State and a spot contract in another Member State (EMIR Review Report no. 1 of 13 August 2015 - Review on the use of OTC derivatives by non- financial counterparties (2015/1251), p. 15), with the consequence that the latter would not be reported to trade repositories.


Article 2(1)(29) MiFIR


'derivatives' mean 'those financial instruments defined in point (44)(c) of Article 4(1) of Directive 2014/65/EU; and referred to in Annex I, Section C (4) to (10) thereto'.



This situation changes with the MiFID II entry into force (3 January 2017), where the 'derivatives' legal definition is stipulated in Article 2(1)(29) of MiFIR (see box).


The UK Financial Conduct Authority (FCA) in a document Markets in Financial Instruments Directive II Implementation – Consultation Paper I (CP15/43), December 2015 underlines (p. 266), the scope of financial derivatives under MiFID is wider than under the the former ISD and includes the following types: 


- derivative instruments relating to securities, currencies, interest rates or yields, or other derivative instruments, financial indices or measures, that may be settled physically or in cash (C4), emission allowances or certain other things;


- commodity derivatives;


- derivative instruments for the transfer of credit risk (C8); 


- financial contracts for differences (C9); and


- derivatives on miscellaneous underlyings. 


Pursuant to the FCA, the scope of MiFID I Section C4, C8 and C9 "does not extend to spot transactions, transactions which are not derivatives (such as forwards entered into for commercial purposes) and sports spread bets".


Derivatives' and spot markets are subjected to divergent legal frameworks.


See the 'commodity derivatives' for further comments on the interpretation of the narrower category in points (5), (6), (7) and (10) of Section C of Annex I to the MiFID Directive.


See also:


- the broader definition of the financial instrument,


- the interpretation of Section C7 of the Annex I to the MiFID Directive: Contracts having the characteristics of other financial instruments,


- detailed comments on the third limb of the trading criterion of the financial instrument's definition in Section C7 of Annex I to the MiFID Directive: 'contracts equivalent to a contract traded on a regulated market, an MTF, an OTF contract or such a third country trading venue'.












Last Updated on Wednesday, 21 June 2017 21:53


Copyright © 2009 - 2019 Michal Glowacki. All rights reserved.
The materials contained on this website are for general information purposes only and are subject to the disclaimer