EMIR ‘Creates Need for FX Clarity’

The prospect that a tax could be introduced on over-the-counter (OTC) derivatives raises the question of whether foreign exchange (forex) derivatives should also be included, according to broker Currencies Direct.

“The European Market Infrastructure Regulation [EMIR] aims to monitor the risks posed to the financial system by derivatives so asset class or instrument is all but irrelevant,” says Alistair Cotton, Currencies Direct’s head of corporate dealing.

“Forex derivatives are definitely within scope and the Markets in Financial Instruments Directive [MiFID] brought FX contracts into the definition of financial instruments. I think the question is less whether forex should be included or not, but rather if pure corporate hedging transactions should be within remit and whether forward contracts are in scope.

“Putting into context that one trade repository reported 50m transactions in the first week; you get a sense of quite how big the market is, the volume of data and what could be done with it. Even knowing what the risk may be, not a lot can be done given these are open positions.

“The end-game is clearly the MTM that comes into force in August. These six months are to get data flowing into the system, then the stated intentions of the directive will come into place once they can measure the systematic risk. There is a view within the European Union [EU] hierarchy that a lot on financial trading has no social benefit, so trying to firstly measure the size of the market with a view to a potential tax must be in the minds of politicians longer term.

“In the shorter term, the aim is to try and move away from a pure OTC market where risk and control is difficult to monitor and measure, eventually moving towards a more standardised and exchange traded market. Data in this period could be used to ensure capital buffers are sufficient, or to monitor fragility if certain parties are overly exposed to the market.

“From a currencies perspective, we need clarity on what is an FX financial instrument and what is an FX spot contract, bearing in mind there is no single definition of ‘derivative’ and different member states doing different things. If you are back-to-back hedging a client position, the risk of having to report the client transaction is ultimately counterparty, the systematic risk is bankside if anything, bearing in mind we are not taking speculative positions.

“Brokers like us, at Currencies Direct, will continue to struggle or be in the dark until more definitive rules and clarity are introduced.”


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