Forex for a trader
Rolling spot forex contract

Rolling spot forex contractForex CFDs versus Forex Spot Trading. Q.: Are there any differences between forex spot trading and trading forex on a CFD account? A: Essentially there are two ways to trade forex: using CFDs or margin forex. Many CFD brokers are promoting themselves to be Forex brokers these days, which they have always offered but is there any edge in using them versus a normal Forex broker who specializes in that field? Trading Forex on a CFD account is similar to trading traditional Forex, ie. you would buy or sell a set value of currency, eg, $10,000 USD. Spot Forex : A spot forex trade involves either buying or selling a forex pair at a current rate. This involves a direct exchange between to currencies. Such transactions involve cash as opposed to a contracts and interest is not included upon the agreed transaction. Should you wish to keep the position open or rollover you must enter into a swap transaction involving your forex pair. Forex CFDs : A CFD replicates the movements of an asset like futures or shares. Thus, for instance if it is based on the EURUSD, then the spot EURUSD is the underlying of that specific CFD. CFDs are not traded on common exchanges, as opposed to their underlyings and are exclusively traded over-the-counter. Rolling Spot Forex is not a regulated investment in the United Kingdom, nor the USA. The USA only has a so-called NFA to charge fees if a market maker offer spot forex and in the United Kingdom, it is in line with BoE's Non-investment Products code. Thus, the only superficial technical difference is that when you are trading with a provider on a Forex CFD, you will not be buying the actual currency. You will be trading on the provider's prices. A problem with CFDs is that they almost never have exactly the same identical prices or the same spreads in their underlyings. Your CFD provider acts as the counter-party and sole market maker in all your trades, so in absence of inhouse hedging mechanisms you can end in a situation where when you win, the provider will lose, whilst when the provider wins, you will lose. CFD providers are sometimes criticised for setting arbitrary spreads or suspending trading in crucial moments.

Perhaps more significantly is that forex based CFDs will be based on the cash market but it will be more trusted if the provider tells you that they use CME's currency futures or Tier 1 Banks' prices and liquidity for hedging. Contracts for difference also have Rollover financing: Clients will either receive or pay financing. -> If a client is LONG and has a higher interest yielding currency it will be credited. -> If a client is LONG and has a lower interest yielding currency it will be debited. -> If a client is SHORT and has a higher interest yielding currency it will be debited. -> If a client is SHORT and has a lower interest yielding currency it will be credited. An advantage with CFDs is that the price at which a forex CFD is bought becomes the base price. The trader isn't concerned with the least or the maximum value of the currency pair, instead he is only affected by whether the price of a currency is above or below the contract price. For instance for a CFD holder located in the UK, positions will also be priced in sterling, which makes the CFD of a foreign share or asset more attractive when sterling depreciates. This is unlike what happens with conventional forex dealing where the gain or loss on a currency trade is denominated in the second currency; so for instance FXADUS measures the value of one Australian Dollar in terms of US Dollars. Thus, if the FXADUS is currently trading at 0.9200, this means 1 Australian Dollar buys 92 USA cents. You could, of course trade the FXUSAD in which case your profits or losses will be in Australian Dollars. Should you trade the FXEUBP, your profits and losses will be in British Pounds. Taking the case of a forex spot trader who trades the FXUSJY and who starts with an account size of $A30,000. The trader manages to make a profit of 1,500,000 Yen which translates to about $A18,519 if one Aus $ buys 81 Yen (1,500,00081 = 18,519). Thereby the trader's account will have two balances; they still retain the 30,000 Australian Dollars, but they also have 1,500,000 Yen. Now, in practice this amounts to a total account balance of $A48,519 (18,519 + 30,000) but currency pairs are in constant fluctuation. The FXADJY being the value of the Australian Dollar against the Japanese Yen; which means that when the FXADJY is trading at 81, then 1,500,000 Yen is worth $18,519 but if the FXADJY were to rise to say 91, then the same 1,500,000 Yen would be worth 'only' $16,483 (1,500,00091).

So even though the trader hasn't placed any trades he has still lost $2036 in the currency fluctuation. A way to mitigate this risk with forex spot trading would be to immediately convert all foreign currency values back to your primary currency as soon as you close a trade. It is also interesting to note that forex CFDs are also traded on margin (similar to forex spot trading) with leverage possible up to 500:1 in some cases. In any case, the real advantages with CFDs is mainly what you can do with share trades, and the ability to trade multiple global markets from a single brokerage account. Due to the carry costs on the long side of CFD trades which are computed based on the entire position as it rises and falls in value, not just the loaned portion as with a margin loan, a different strategy needs to be employed from other share trading instruments to offset this cost or there is no benefit, and probably a cost, in trading CFDs (although using the leverage to free up capital for other trading instruments has some benefit, but marginal in this case as there are other ways to do this). CFDs are a BRILLIANT instrument if you can get your hands on it as a professional trader, but you have to trade it aggressively and employ all the risk management tools it affords you. Rolling Spot Forex A Swap? Last month Commissioner Bart Chilton of the Commodity Futures Trading Commission (CFTC) confirmed that the CFTC intends to extend the definition of swap to include retail rolling spot forex (FX) transactions (hereinafter, Rolling FX). A Rolling FX transaction occurs when a net open position in the spot market is not physically delivered but is rather rolled forward until it is offset. The CFTC deems Rolling FX to be a swap due to the speculative nature of the product and the ability to exchange one asset or liability for a similar asset or liability to shift risk. In his announcement, Commissioner Bart Chilton stated that: “Rolling spot transactions are borne out of a desire to offer retail investors the ability to speculate on exchange rates, and what we’ve been telling people is that we interpret the rolling spot transactions with eligible contract participants (ECPs) as swaps, so they should be treated accordingly.” The CFTC believes it has the authority to categorize Rolling FX as a swap since the current definitions under the Dodd–Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) are still being formulated. For instance, the CFTC believes that Rolling FX can be seen as a contract for difference (CFD), which in turn can fit under the definition of a swap. Many FX firms disagree with the CFTC’s intended classification of Rolling FX as a swap, however, and counter that Rolling FX is fundamentally different than a CFD. These firms contend that a CFD grants no ownership rights with respect to the transacting party, whereas in Rolling FX the party to the contract maintains the right to receive physical delivery of the referenced currency on demand.

The CFTC apparently does not share this same opinion, however, regarding the fundamental distinction between a CFD and Rolling FX. The CFTC is expected to proceed with its plans to require all U. S. retail FX brokers to register as swap dealers pursuant to Dodd-Frank. Some retail FX brokers, such as Gain Capital and FXCM, have already registered in this capacity in March of this year. The CFTC’s intended treatment of institutional FX transactions, however, currently remains unclear. Some industry participants believe that the CFTC is likely to grant more leeway for institutional FX transactions and is likely to seek input from firms that offer these products when defining the parameters of a rolling spot in that situation. In this regard, institutional firms point to the distinction that in retail FX the positions are generally rolled over automatically whereas institutional FX requires manual rollover. Institutional FX firms in turn believe this distinction would render their transactions exempt from the swap definition. As a further consideration, the U. S. Treasury exemption for FX swaps and forwards, which was finalized in November 2012, exempts these products from mandatory clearing and exchange trading requirements. While this exemption is thought to cover FX transactions that are physically delivered, it is presently unclear as to whether it would also apply to Rolling FX. Based on this additional uncertainty, some firms are preparing themselves to be able to report on Rolling FX. Many of them are uncertain, however, as to when, how or whether to begin preparing for the possibility that such transactions may eventually require clearing as well. The CFTC’s latest position on spot forex trading may not come as a surprise to many registered firms within the U. S. As has been the case for most of the 2000s, forex regulations in the U. S. will likely remain a quagmire of uncertainty for the foreseeable future. During the last decade, both federal and self-regulatory organizations, on numerous occasions, have established rules only to subsequently second guess themselves.

With each new regulatory go-around the industry has suffered. This has forced more accounts and brokerages to seek regulatory shelter outside of the U. S. It has also driven the compliance cost of operating an FX brokerage in the U. S. to astronomical levels. We are hoping this time around the CFTC and Commissioner Chilton are able to land on a concrete set of rules that will stand over time. In this case, perhaps more than any other, regulatory uncertainty inadvertently eroded the very safeguards put in place to protect U. S. investors to begin with. Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these securities. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Forex involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. What is the difference between trading currency futures and spot FX? The forex market is a very large market with many different features, advantages and pitfalls. Forex investors may engage in trading currency futures, as well as trade in the spot forex market. The difference between these two investment options is subtle, but worth noting.

A currency futures contract is a legally binding contract that obligates the two parties involved to trade a particular amount of a currency pair at a predetermined price (the stated exchange rate) at some point in the future. Assuming the seller does not prematurely close out the position, he or she can either own the currency at the time the future is written, or may "gamble" that the currency will be cheaper in the spot market some time before the settlement date. With the spot FX, the underlying currencies are physically exchanged following the settlement date. In general, any spot market involves the actual exchange of the underlying asset. This is most common in commodities markets. For example, whenever someone goes to a bank to exchange currencies, that person is participating in the forex spot market. So, the main difference between currency futures and spot FX is when the trading price is determined and when the physical exchange of the currency pair takes place. With currency futures, the price is determined when the contract is signed and the currency pair is exchanged on the delivery date, which is usually some time in the distant future. In the spot FX, the price is also determined at the point of trade, but the physical exchange of the currency pair takes place right at the point of trade or within a short period of time thereafter.

However, it is important to note that most participants in the futures markets are speculators who usually close out their positions before the date of settlement and, therefore, most contracts do not tend to last until the date of delivery. What does rollover mean in the context of the forex market? In the forex (FX) market, rollover is the process of extending the settlement date of an open position. In most currency trades, a trader is required to take delivery of the currency two days after the transaction date. However, by rolling over the position – simultaneously closing the existing position at the daily close rate and re-entering at the new opening rate the next trading day – the trader artificially extends the settlement period by one day. Often referred to as tomorrow next, rollover is useful in FX because many traders have no intention of taking delivery of the currency they buy; rather, they want to profit from changes in the exchange rates. Since every forex trade involves borrowing one country's currency to buy another, receiving and paying interest is a regular occurrence. At the close of every trading day, a trader who took a long position in a high-yielding currency relative to the currency that they borrowed will receive an amount of interest in their account. Conversely, a trader will need to pay interest if the currency they borrowed has a higher interest rate relative to the currency that they purchased. Traders who do not want to collect or pay interest should close out of their positions by 5 P. M. Eastern. Note that interest received or paid by a currency trader in the course of these forex trades is regarded by the IRS as ordinary interest income or expense. For tax purposes, the currency trader should keep track of interest received or paid, separate from regular trading gains and losses.

Forex CFDs versus Forex Spot Trading. Q.: Are there any differences between forex spot trading and trading forex on a CFD account? A: Essentially there are two ways to trade forex: using CFDs or margin forex. Many CFD brokers are promoting themselves to be Forex brokers these days, which they have always offered but is there any edge in using them versus a normal Forex broker who specializes in that field? Trading Forex on a CFD account is similar to trading traditional Forex, ie. you would buy or sell a set value of currency, eg, $10,000 USD. Spot Forex : A spot forex trade involves either buying or selling a forex pair at a current rate. This involves a direct exchange between to currencies. Such transactions involve cash as opposed to a contracts and interest is not included upon the agreed transaction. Should you wish to keep the position open or rollover you must enter into a swap transaction involving your forex pair. Forex CFDs : A CFD replicates the movements of an asset like futures or shares. Thus, for instance if it is based on the EURUSD, then the spot EURUSD is the underlying of that specific CFD. CFDs are not traded on common exchanges, as opposed to their underlyings and are exclusively traded over-the-counter. Rolling Spot Forex is not a regulated investment in the United Kingdom, nor the USA. The USA only has a so-called NFA to charge fees if a market maker offer spot forex and in the United Kingdom, it is in line with BoE's Non-investment Products code. Thus, the only superficial technical difference is that when you are trading with a provider on a Forex CFD, you will not be buying the actual currency. You will be trading on the provider's prices. A problem with CFDs is that they almost never have exactly the same identical prices or the same spreads in their underlyings. Your CFD provider acts as the counter-party and sole market maker in all your trades, so in absence of inhouse hedging mechanisms you can end in a situation where when you win, the provider will lose, whilst when the provider wins, you will lose.

CFD providers are sometimes criticised for setting arbitrary spreads or suspending trading in crucial moments. Perhaps more significantly is that forex based CFDs will be based on the cash market but it will be more trusted if the provider tells you that they use CME's currency futures or Tier 1 Banks' prices and liquidity for hedging. Contracts for difference also have Rollover financing: Clients will either receive or pay financing. -> If a client is LONG and has a higher interest yielding currency it will be credited. -> If a client is LONG and has a lower interest yielding currency it will be debited. -> If a client is SHORT and has a higher interest yielding currency it will be debited. -> If a client is SHORT and has a lower interest yielding currency it will be credited. An advantage with CFDs is that the price at which a forex CFD is bought becomes the base price. The trader isn't concerned with the least or the maximum value of the currency pair, instead he is only affected by whether the price of a currency is above or below the contract price. For instance for a CFD holder located in the UK, positions will also be priced in sterling, which makes the CFD of a foreign share or asset more attractive when sterling depreciates. This is unlike what happens with conventional forex dealing where the gain or loss on a currency trade is denominated in the second currency; so for instance FXADUS measures the value of one Australian Dollar in terms of US Dollars.

Thus, if the FXADUS is currently trading at 0.9200, this means 1 Australian Dollar buys 92 USA cents. You could, of course trade the FXUSAD in which case your profits or losses will be in Australian Dollars. Should you trade the FXEUBP, your profits and losses will be in British Pounds. Taking the case of a forex spot trader who trades the FXUSJY and who starts with an account size of $A30,000. The trader manages to make a profit of 1,500,000 Yen which translates to about $A18,519 if one Aus $ buys 81 Yen (1,500,00081 = 18,519). Thereby the trader's account will have two balances; they still retain the 30,000 Australian Dollars, but they also have 1,500,000 Yen. Now, in practice this amounts to a total account balance of $A48,519 (18,519 + 30,000) but currency pairs are in constant fluctuation. The FXADJY being the value of the Australian Dollar against the Japanese Yen; which means that when the FXADJY is trading at 81, then 1,500,000 Yen is worth $18,519 but if the FXADJY were to rise to say 91, then the same 1,500,000 Yen would be worth 'only' $16,483 (1,500,00091). So even though the trader hasn't placed any trades he has still lost $2036 in the currency fluctuation. A way to mitigate this risk with forex spot trading would be to immediately convert all foreign currency values back to your primary currency as soon as you close a trade. It is also interesting to note that forex CFDs are also traded on margin (similar to forex spot trading) with leverage possible up to 500:1 in some cases. In any case, the real advantages with CFDs is mainly what you can do with share trades, and the ability to trade multiple global markets from a single brokerage account.

Due to the carry costs on the long side of CFD trades which are computed based on the entire position as it rises and falls in value, not just the loaned portion as with a margin loan, a different strategy needs to be employed from other share trading instruments to offset this cost or there is no benefit, and probably a cost, in trading CFDs (although using the leverage to free up capital for other trading instruments has some benefit, but marginal in this case as there are other ways to do this). CFDs are a BRILLIANT instrument if you can get your hands on it as a professional trader, but you have to trade it aggressively and employ all the risk management tools it affords you. When are FX Transactions subject to EMIR? FX forwards which settle in T+3 or longer are derivatives. Since the introduction of the European Market Infrastructure Regulation ( EMIR ) there has been uncertainty as to whether an FX forward is subject to EMIR. CENTRAL BANK GUIDANCE. EMIR defines FX derivatives by reference to MiFID I1. In its guidance (published in the context of the reporting obligations which apply under EMIR), the Central Bank of Ireland provides that, as a temporary measure, FX forwards which settle between T+3 and T+7 are generally not required to be reported for EMIR purposes. The Central Bank indicated that it would revise this guidance depending on the approach taken by the European Commission in any relevant delegated regulation under MiFID II2. COMMISSION DELEGATED REGULATION. The Commission has adopted a Delegated Regulation which provides that spot FX is generally limited to transactions which settle in T+2 or less. Once it is published in the Official Journal, the Delegated Regulation will apply from the same date as MiFID II (3 January 2018). EFFECT OF THE DELEGATED REGULATION. From 3 January 2018 and with only limited exceptions (applicable to minor currencies and to situations where settlement is in connection with a sale or purchase of securities), FX transactions which settle T+3 or over ( Relevant FX Transactions ) will constitute FX forwards for EMIR purposes. In addition to being reportable, Relevant FX Transactions will be subject to the other EMIR requirements (including the requirements in relation to mandatory margining). To date, the Central Bank has not updated its guidance to take account of the Delegated Regulation.

However, the possibility of the Central Bank requiring a change in approach prior to the application of MiFID II on 3 January 2018 cannot be excluded. ROLLING SPOT FX CONTRACTS ARE DERIVATIVES. Separately, the Commission has confirmed that " rolling spot FX " are MiFID I derivatives (and accordingly are derivatives for the purposes of EMIR). In its Q&A, the Commission states that: " As opposed to spot trading where there is immediate delivery, a rolling spot FX contract can be indefinitely renewed and no currency is actually delivered until a party affirmatively closes out its position. This exposes both parties to fluctuations in the underlying currencies. Hence rolling spot foreign exchange contracts are a type of derivative contract (i. e. either a forward or a financial contract for difference) relating to currencies and are considered financial instruments as defined under MiFID ". The Delegated Regulation goes on to say that a contract shall not be considered a spot FX contract (and so shall be an FX derivative) 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 T+2 (or the longer settlement cycles specified in the Delegated Regulation for minor currencies or in connection with hedging a sale or purchase of securities). "COMMERCIAL PURPOSES" EXEMPTION. The Delegated Regulation also provides that a physically-settled FX contract which meets all of the following criteria shall not be a MiFID II financial instrument (and accordingly will not be subject to EMIR when MiFID II comes into effect): Contracts for difference. Find out about our expectations of providers and brokers of retail contract for difference (CFD) products, which include spread betting and rolling spot foreign exchange (FX). We expect firms to comply with our rules to ensure their CFD products are marketed and sold to the right consumers. On this page find out about: Dear CEO letter - Providers and distributors of CFD products: resolving failings which may cause significant consumer harm. Following the conclusion of a project that assessed whether CFD providers and distributors deliver the CFD product to the intended target market, pay due regard to the interests of customers and treat them fairly, we have published a Dear CEO letter for the attention of all CFD firms (PDF) that provide or distribute these financial instruments to retail customers. Latest information on FCA and ESMA's work in relation to the sale of CFDs and binary options to retail clients.

Consultation Paper (CP1640) We published Consultation Paper CP1640 on 6 December 2016 that proposed changes to improve the conduct of firms and reduce the potential for consumer detriment. The proposals include: standardised risk warnings and mandatory profit-loss disclosure to illustrate the risks lower leverage limits for any new client that does not have 12 months experience or is not active in trading CFD products capping leverage at a maximum level of 50:1 for all retail clients preventing CFD providers from using any form of trading or account opening bonuses or benefits to promote products considering a range of policy measures for binary bets that would complement existing conduct of business rules, once these products are brought into the our regulatory scope. Contract for difference video. Dear CEO letter: Client take-on. We reviewed the procedures for taking on new clients in a sample of 10 firms that offer CFD products. We identified several areas of concern, which included: firms approach to completing the appropriateness assessment was not in line with COBS 10 most risk warnings issued to clients who failed the appropriateness assessments were not adequate anti-money laundering controls in place to manage the increased risks posed by higher risk clients were insufficient. We expect CFD providers to consider the points raised in the letter. If a firm identifies any areas of concern when reviewing their processes, we expect it to have regard to Principle 6 (Customers’ interests) and Principle 11 (Relations with regulators) and act accordingly. There are several areas we will be focusing on and we expect CFD providers to meet these requirements. They include: Retail CFD products have been a focus of intensive discussion at the European Securities and Markets Authority (ESMA).

ESMA has produced a range of materials to improve harmonised application of MIFID standards to the CFD sector and has also re-issued an ESMA warning about retail CFDs on 25 July 2016. You can also read Q&As published by ESMA on the application of the Markets in Financial Instruments Directive (MiFID) to the marketing and sale of financial contracts for difference (CFDs) and other speculative products to retail clients (such as binary options and rolling spot forex). Investor information. If you are considering an investment in CFDs, we would advise that you check our list of unauthorised firms and individuals to avoid. Furthermore, if you are also considering binary bets or options, you should read the following warnings: Rolling spot forex contract. Cash-settled Futures Transaction (Rolling Spot Futures) Gold of minimum 99.99% fineness. Computerized Individual Auction. Theoretical spot price. Theoretical spot price. Theoretical spot price is calculated as follows.

First, the Forward Rate is calculated using the settlement prices of the first contract month and the sixth contract month of the Gold Standard. Then, taking the number of days remaining until the expiry into consideration, the theoretical price is calculated from the settlement price of the first contract month, using the Forward Rate. However, on the last trading day of the first contract month, the settlement prices of the second and the sixth contract months will be used to calculate the Forward Rate. One Clearing Period (Rolling Spot Futures) Rolling Spot Futures Transaction. Rolling Spot Futures is a type of transaction which is established during the session in a given Clearing Period or as a result of the roll-over process executed at the close of the session for the Clearing Period immediately preceding said given Clearing Period, and closed through an offsetting resale or repurchase or as a result of the roll-over process executed at the close of session in the Clearing Period in which the position was established. Day Session Opening Call Auction (Ita-awase) : 8:45 a. m. (JST) Continuous Trading (Zaraba) : 8:45 a. m. to 3:10 p. m. (JST) Closing Call Auction (Ita-awase) : 3:15 p. m. (JST) Night Session Opening Call Auction (Ita-awase) : 4:30 p. m. (JST) Continuous Trading (Zaraba) : 4:30 p. m. to 5:25 a. m. of the following morning (JST) Closing Call Auction (Ita-awase) : 5:30 a. m. of the following morning (JST) Circuit Breaker Trigger Level (Static Circuit Breaker (SCB) Level) The SCB trigger level is to be set everyday at the start of a new clearing period (i. e.the start of a night session at 16:30) and is based on the settlement price of the previous clearing period (or the settlement price of the preceding contract month, in case of a new contract month) Immediately Executable Price Range (Dynamic Circuit Breaker (DCB) Level) The DCB trigger level is to be set based on DCB Reference Price (the last traded price, in principle) The SPAN Margining System applies. Position limits are not applicable; however, if it is deemed necessary by the Exchange for the prevention of excessive transactions, a limit on positions will be established. TOCOM Product Code: 18 Reuters Contract Detail: JAUCFD= Bloomberg Ticker: JGDDAILY. FX Rolling Spot Futures (xRolling™ ) MEFF will launch the FX Rolling Spot Futures, a Currency Future product, in the first quarter of 2019. Branded xRolling™, the new product will broaden the range of assets MEFF currently offers its Members and Clients. xRolling™ will be exchange traded for the following currency pairs (17): EURUSD, EURCHF, EURGBP, GBPUSD, GBPCHF, USDCHF, USDCAD, AUDUSD, AUDJPY, EURAUD, EURJPY, USDJPY , NZDUSD, USDMXN, EURMXN, USDBRL and EURBRL.

Rather than having a standard expiry date, the xRolling™ product is a “perpetual” future, with daily roll-over of positions. This ensures that the closing price of xRolling™ is the same as the spot price. There will be no physical delivery of the underlying and all settlements will be made in euros. The low nominal amount of the contract (roughly 10,000 euros depending on the currency) is well-suited to the needs of retail customers and the amount of leverage will be determined by the margin percentage prescribed by BME Clearing Central Counterparty, which is responsible for clearing and settling xRolling™ products. MEFF trading hours have been extended for this product, which can be traded from 00:00 through to 23:00 CET, following close of trading in New York, when a technical stop will be made to perform clearing and back-office processes. By having these trading hours from Monday to Friday (23x5), MEFF is offering Members and Clients a highly versatile product that can be traded as and when they need. With the launch of xRolling™, MEFF provides retail investors the opportunity to trade in currencies through a MEFF-listed instrument, with the added security and transparency of trading on a regulated market and with clearing handled by a Qualified CCP. Proposed new rules on FX contracts under MiFID II. Whether or not FX spot contracts relating to currencies are financial instruments for the purposes of the Markets in Financial Instruments Directive (“ MiFID ”) has been the subject of much discussion. The European Commission is now considering adopting a delegated regulation (“ Draft MiFID II FX Regulation ”), as a MiFID II1 Level 2 measure, which will clarify this issue under MiFID II. If adopted, the Draft MiFID II FX Regulation will also have implications for other legislation which relies on the MiFID definition of financial instrument. This includes the European Market Infrastructure Regulation (Regulation 6482012) (“ EMIR ”), the fourth Capital Requirements Directive (Directive 201336) and the Market Abuse Directive (Directive 201457). Background.

MiFID establishes the general framework for a regulatory regime for financial markets in the European Union. Financial instruments for the purposes of MiFID are defined. in Section C of Annex 1, which includes currency derivative contracts. MiFID will be replaced by MiFID II and the related MiFIR2 with effect from 3 January 2017. Given the implications of a currency contract being a MiFID financial instrument, it is hardly surprising that there has been considerable debate surrounding the issue of when an FX contract is a currency payment or FX spot contract on the one hand, or an FX forward contract on the other: the former does not comprise a MiFID financial instrument, while the latter does. It is broadly agreed that a currency contract which settles within two trading days is a spot contract while one which settles after seven trading days is an FX forward contract. However, Member States have taken different approaches to the classification of FX contracts the settlement date of which is between 3 and 7 trading days. Moreover, some Member States have transposed MiFID so as to exclude certain categories of FX forward contracts from the definition of financial instrument and those excluded categories themselves vary across the Member States. EMIR.

EMIR is the European implementation of the 2009 G20 Summit commitments to improve over-the-counter (“ OTC ”) derivatives markets through the clearing of standardised OTC derivative contracts through central counterparties, their reporting to trade repositories, the imposition of higher capital requirements on non-centrally cleared OTC derivative contracts and the implementation of certain other risk mitigants. EMIR defines the terms “derivative” and “derivatives contract” by reference to the MiFID definition of a financial instrument. In February 2014 the European Securities and Markets Authority (“ ESMA ”) wrote to the Commission explaining that the lack of a single EU-wide definition of derivative or derivative contract for EMIR purposes, and the different transpositions of MiFID across Member States, was preventing the convergent application of EMIR. It also called on the Commission to adopt an implementing act clarifying the ambit of FX transactions encompassed by MiFID. In March 2014 the Commission replied to ESMA indicating that it would urgently assess the options for action to ensure consistent application of the legislation. Subsequently, on 10 April 2014, the Commission published a consultation document on FX Financial Instruments. In July 2014 the Commission wrote to ESMA explaining that it no longer had the power to issue an implementing act to clarify the definition of a financial instrument relating to foreign currency contracts under MIFID and that any such act would need to be effected pursuant to MIFID 2 legislative measures. Notwithstanding this, the Commission noted that, during the public consultation and certain European Securities Committee meetings, a broad consensus appeared to have been reached regarding the concept of an FX spot contract. According to this consensus: a T+2 settlement period should be used to define FX spot contracts for European and other major currency pairs and the standard delivery period for all other currency pairs; where contracts for the exchange of currencies are used for the sale of a transferable security, the accepted market settlement period of that security should be used to define an FX spot contract, subject to a 5-day cap; and an FX contract that is used as a means of payment to facilitate payment for goods and services should also be considered to be an FX spot contract. The Draft MiFID II FX Regulation.

The Draft MiFID II FX Regulation largely reflects the terms of the consensus described by the Commission in its July 2014 letter, providing that a currency contract will not constitute a MiFID II financial instrument if it is either a spot contract or a means of payment that fulfils specified conditions. The Draft MiFID II FX Regulation provides that: a spot contract is a contract for the exchange of one currency against another currency, where delivery is scheduled to be made: within two trading days in respect of any pair of major currencies 3 ; for currencies that are not major currencies, the longer of two trading days and the period generally accepted in the market for that currency as the standard delivery period; where the contract is used for the sole or main purpose of the sale or purchase of a transferable security, within the shorter of: (a) the period generally accepted in the market for the settlement of that transferable security as the standard delivery period; and (b) 5 trading days, provided that, irrespective of the time for which delivery is scheduled, a contract will not be a spot contract if there is an understanding between the parties to the contract that delivery of the currency will not be performed within the period specified in the contract and will be postponed; and. a means of payment will not be a financial instrument under MiFID where it must be settled physically otherwise than by reason of a default or other termination event and is effected to facilitate payment for goods, services or direct investment. Implications under Irish Law. For the purposes of the Irish transposition of MiFID (“ Irish MiFID Regulations ”) a forward FX contract is not considered to be a financial instrument unless: its terms are determined principally by reference to standard or regularly published economic terms (such as price, lot and delivery date); it is traded, or is expressly stated to be equivalent to a contract that is traded, on a regulated market, a multilateral trading facility or a third country trading facility that performs a similar function; and it is cleared or settled through a recognised clearing house or is subject to regular margin calls. Not all of these will be excluded from scope under the Draft MiFID II FX Regulation and so, if that Regulation is adopted, the ambit of the FX contracts treated as in-scope in Ireland will expand once MiFID II takes effect on 3 January 2017. The position regarding FX contracts that are treated as in-scope for EMIR purposes in Ireland has diverged from the approach taken by the Irish MiFID Regulations, notwithstanding that the EMIR definition of “derivative” tracks the MiFID concept of a financial instrument. In August 2014, the Central Bank of Ireland (“ Centra l Bank ”) published guidance regarding the extent to which FX forwards are to be considered to be derivatives for EMIR reporting purposes. According to that guidance, FX transactions with settlement before or on the relevant spot date need not be reported while those with settlement beyond seven days must be reported. FX transactions with settlement between the spot date and seven days need only be reported if one counterparty to the trade is located in a jurisdiction which would deem the transaction reportable. The Central Bank stated that its guidance in this regard was likely to remain unchanged at least until the Commission indicates whether and how it might use powers due to be conferred on it under MiFID II. The FX contracts that will fall within the EMIR reporting obligations if the Draft MiFID II FX Regulation is adopted differ from those that must currently be reported under the Central Bank’s guidance. Comments and Next Steps. The Draft MiFID II FX Regulation will next be discussed by the Expert Group of the European Securities Committee on 19 May 2015, which will be the final discussion before it is adopted by the Commission. It is at this stage unclear whether or not the Commission will then proceed to a public consultation on its proposal. It is noteworthy that if the Commission does adopt the Draft MiFID II FX Regulation it will do so under powers conferred by MiFID II. The harmonised definition of an FX spot contract should, therefore, only apply once MiFID II and its associated implementing measures enter into effect from 3 January 2017, giving those affected some time to comply with any newly applicable legislative requirements. However, as mentioned above, the Central Bank has stated that its guidance regarding the FX contracts that are in-scope for EMIR reporting purposes is likely to remain unchanged at least until the Commission indicates whether and how it might use powers due to be conferred on it under MiFID II . The possibility of that guidance being updated to reflect the Draft MiFID II FX Regulation prior to that adopted Regulation taking effect cannot, therefore, be excluded.



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