Financial instrument (MiFID definitions)
European Union Electricity Market Glossary

 


 

 

A financial instrument is an asset or evidence of the ownership of an asset, or a contractual agreement between two parties to receive or deliver another financial instrument (Commission Staff Working Document Impact Assessment Accompanying the document Commission Delegated Regulation supplementing Regulation (EU) No 600/2014 of the European Parliament and of the Council with regard to definitions, transparency, portfolio compression and supervisory measures on product intervention and positions {C(2016) 2860 final} {SWD(2016) 156 final}, 18.5.2016, SWD(2016) 157 final, p. 61).

 

Financial instruments are legally enumerated in Section C of MiFID Directive supplemented by Articles 38 and 39 of the 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).

 

Articles 38 and 39 of the Regulation (EC) No 1287/2006

 

Article 38

 

(Article 4(1)(2) of Directive 2004/39/EC)

Characteristics of other derivative financial instruments 

 

1. For the purposes of Section C(7) of Annex I to Directive 2004/39/EC, a contract which is not a spot contract within the meaning of paragraph 2 of this Article and which is not covered by paragraph 4 shall be considered as having the characteristics of other derivative financial instruments and not being for commercial purposes if it satisfies the following conditions:

 

(a) it meets one of the following sets of criteria:

(i) it is traded on a third country trading facility that performs a similar function to a regulated market or an MTF;
(ii) it is expressly stated to be traded on, or is subject to the rules of, a regulated market, an MTF or such a third country trading facility;
(iii) it is expressly stated to be equivalent to a contract traded on a regulated market, MTF or such a third country trading facility;

 

(b) it is cleared by a clearing house or other entity carrying out the same functions as a central counterparty, or there are arrangements for the payment or provision of margin in relation to the contract;

 

(c) it is standardised so that, in particular, the price, the lot, the delivery date or other terms are determined principally by reference to regularly published prices, standard lots or standard delivery dates.

 

2. A spot contract for the purposes of paragraph 1 means 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) two trading days;

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

However, a contract is 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 in the first subparagraph.

 

3. For the purposes of Section C(10) of Annex I to Directive 2004/39/EC, a derivative contract relating to an underlying referred to in that Section or in Article 39 shall be considered to have the characteristics of other derivative financial instruments if one of the following conditions is satisfied:

(a) that contract is settled in cash or may be settled in cash at the option of one or more of the parties, otherwise than by reason of a default or other termination event;

(b) that contract is traded on a regulated market or an MTF;

(c) the conditions laid down in paragraph 1 are satisfied in relation to that contract.

 

4. A contract shall be considered to be for commercial purposes for the purposes of Section C(7) of AnnexI to Directive 2004/39/EC, and as not having the characteristics of other derivative financial instruments for the purposes of Sections C(7) and (10) of that Annex, if it is entered into with or by an operator or administrator of an energy transmission grid, energy balancing mechanism or pipeline network, and it is necessary to keep in balance the supplies and uses of energy at a given time.

 

Article 39

(Article 4(1)(2) of Directive 2004/39/EC)


Derivatives within Section C(10) of Annex I to Directive 2004/39/EC

In addition to derivative contracts of a kind referred to in Section C(10) of Annex I to Directive 2004/39/EC, a derivative contract relating to any of the following shall fall within that Section if it meets the criteria set out in that Section and in Article 38(3):

(a) telecommunications bandwidth;

(b) commodity storage capacity;

(c) transmission or transportation capacity relating to commodities, whether cable, pipeline or other means;

(d) an allowance, credit, permit, right or similar asset which is directly linked to the supply, distribution or consumption of energy derived from renewable resources;

(e) a geological, environmental or other physical variable;

(f) any other asset or right of a fungible nature, other than a right to receive a service, that is capable of being transferred;

(g) an index or measure related to the price or value of, or volume of transactions in any asset, right, service or obligation.

 

 

Pursuant to the Section C of MiFID I Directive financial instruments are:

 

(1) Transferable securities;

 

(2) Money-market instruments;

 

(3) Units in collective investment undertakings;

 

(4) Options, futures, swaps, forward rate agreements and any other derivative contracts relating to securities, currencies, interest rates or yields, or other derivatives instruments, financial indices or financial measures which may be settled physically or in cash;

 

(5) Options, futures, swaps, forward rate agreements and any other derivative contracts relating to commodities that must be settled in cash or may be settled in cash at the option of one of the parties (otherwise than by reason of a default or other termination event);

 

(6) Options, futures, swaps, and any other derivative contract relating to commodities that can be physically settled provided that they are traded on a regulated market and/or an MTF;

 

(7) Options, futures, swaps, forwards and any other derivative contracts relating to commodities, that can be physically settled not otherwise mentioned in C.6 and not being for commercial purposes, which have the characteristics of other derivative financial instruments, having regard to whether, inter alia, they are cleared and settled through recognised clearing houses or are subject to regular margin calls;

 

(8) Derivative instruments for the transfer of credit risk;

 

(9) Financial contracts for differences;

 

(10) Options, futures, swaps, forward rate agreements and any other derivative contracts relating to climatic variables, freight rates, emission allowances or inflation rates or other official economic statistics that must be settled in cash or may be settled in cash at the option of one of the parties (otherwise than by reason of a default or other termination event), as well as any other derivative contracts relating to assets, rights, obligations, indices and measures not otherwise mentioned in this Section, which have the char­acteristics of other derivative financial instruments, having regard to whether, inter alia, they are traded on a regulated market or an MTF, are cleared and settled through recognised clearing houses or are subject to regular margin calls.

 

 

Physically settled forwards traded on an MTF

 

 

There were divergent views with regard to whether forwards that can be physically settled and are traded on a regulated market or an MTF fall within MiFID's scope.

 

The said ambiguity was based on the fact the point C 7 explicitly applies to "futures" and "forwards" whereas in C 6 reference to forwards is omitted.

 

The European financial regulator's stance is that forwards are included within the definition of Section C 6 of Annex I to the MiFID Directive, this is upheld in the consecutive ESMA's papers:

 

Consultation paper Guidelines on the application of C6 and C7 of Annex I of MiFID of 29 September 2014 (ESMA/2014/1189)

 

ESMA's Guidelines on the application of the definitions in Sections C6 and C7 of Annex I of Directive 2004/39/EC (MiFID) of 6 May 2015 (ESMA/2015/675), p. 6, and

 

Guidelines on the application of C6 and C7 of Annex 1 of MiFID of 20 October 2015 (ESMA/2015/1341).

 

This means, in particular, forwards traded on the MTF are considered financial instruments.

 

 

Contracts having the characteristics of other financial instruments

 

 

The specification which contracts have the "characteristics of other derivative financial instruments" is laid down in Articles 38 and 39 of the above-mentioned Regulation (EC) No 1287/2006.

 

These provisions are quoted in the box.

 

See here for more extensive comments on:

 

contracts having the "characteristics of other derivative financial instruments",

 

-  the third limb of the trading criterion of the financial instrument's definition 'contracts equivalent to a contract traded on a regulated market, an MTF, an OTF contract or such a third country trading venue'.

 

 


Financial instruments pursuant to the Section C of the MiFID II Directive:

 

(1) Transferable securities;

 

(2) Money-market instruments;

 

(3) Units in collective investment undertakings;

 

(4) Optionsfuturesswaps, forward rate agreements and any other derivative contracts relating to securities, currencies, interest rates or yields, emission allowances or other derivatives instruments, financial indices or financial measures which may be settled physically or in cash;

 

(5) Options, futures, swaps, forwards and any other derivative contracts relating to commodities that must be settled in cash or may be settled in cash at the option of one of the parties other than by reason of default or other termination event;

 

(6) Options, futures, swaps, and any other derivative contract relating to commodities that can be physically settled provided that they are traded on a regulated market, a MTF, or an OTF, except for wholesale energy products traded on an OTF that must be physically settled;

 

(7) Options, futures, swaps, forwards and any other derivative contracts relating to commodities, that can be physically settled not otherwise mentioned in point 6 of this Section and not being for commercial purposes, which have the characteristics of other derivative financial instruments;

 

(8) Derivative instruments for the transfer of credit risk;

 

(9) Financial contracts for differences;

 

(10) Options, futures, swaps, forward rate agreements and any other derivative contracts relating to climatic variables, freight rates or inflation rates or other official economic statistics that must be settled in cash or may be settled in cash at the option of one of the parties other than by reason of default or other termination event, as well as any other derivative contracts relating to assets, rights, obligations, indices and measures not otherwise mentioned in this Section, which have the characteristics of other derivative financial instruments, having regard to whether, inter alia, they are traded on a regulated market, OTF, or an MTF;

 

(11) Emission allowances consisting of any units recognised for compliance with the requirements of Directive 2003/87/EC (Emissions Trading Scheme).

 

 

 

Financial instruments can be categorised according to various sets of criteria. Annex I to the Commission Delegated Regulation (EU) 2017/576 of 8 June 2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council with regard to regulatory technical standards for the annual publication by investment firms of information on the identity of execution venues and on the quality of execution enumerates, for example, the following classes of financial instruments:

 

(a) Equities — Shares & Depositary Receipts
(i) Tick size liquidity bands 5 and 6 (from 2 000 trades per day)
(ii) Tick size liquidity bands 3 and 4 (from 80 to 1 999 trades per day)
(iii) Tick size liquidity band 1 and 2 (from 0 to 79 trades per day)


(b) Debt instruments

(i) Bonds
(ii) Money markets instruments


(c) Interest rates derivatives
(i) Futures and options admitted to trading on a trading venue
(ii) Swaps, forwards, and other interest rates derivatives

 

(d) credit derivatives
(i) Futures and options admitted to trading on a trading venue
(ii) Other credit derivatives

 

(e) currency derivatives
(i) Futures and options admitted to trading on a trading venue
(ii) Swaps, forwards, and other currency derivatives


(f) Structured finance instruments


(g) Equity Derivatives

(i) Options and Futures admitted to trading on a trading venue
(ii) Swaps and other equity derivatives

 

(h) Securitized Derivatives
(i) Warrants and Certificate Derivatives
(ii) Other securitized derivatives


(i) Commodities derivatives and emission allowances Derivatives
(i) Options and Futures admitted to trading on a trading venue
(ii) Other commodities derivatives and emission allowances derivatives


(j) Contracts for difference


(k) Exchange traded products (Exchange traded funds, exchange traded notes and exchange traded commodities)


(l) Emission allowances


(m) Other instruments

 

 

 

 

IMG 0744   

  Documentation    

 

 

 

Commission Delegated Regulation (EU) 2017/576 of 8 June 2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council with regard to regulatory technical standards for the annual publication by investment firms of information on the identity of execution venues and on the quality of execution

 

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

 

 

 

 

  

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Commodity derivatives 

 

OTC derivatives

 

C6 energy derivatives contracts

 

Physically settled commodity derivatives in MiFID II

 

Contracts that must be physically settled

 

 

 

Last Updated on Thursday, 23 November 2017 00:28
 

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