MiFID II - FX Forward Contracts Confirmed as Out of Scope (2024)

FAQs

Are FX forwards reportable under MiFID II? ›

The EC has determined that FX Forward contracts remain outside the scope of MiFID II if they satisfy all of the following conditions: The contract for deliverable FX is physically settled. At least one of the parties to the contract is a non-financial counterparty.

Broadly, the exemptions from MiFID are likely to be relevant to insurers, group treasurers, professional firms to which Part XX of the Act applies, many authorised professional firms, professional investors who invest only for themselves, pension schemes, depositaries and operators of collective investment schemes or ...

Foreign Exchange transactions and spot contracts under MiFID II. Foreign Exchange forwards are in scope for MiFID II. However, there is an exemption for spot contracts and for Foreign Exchange transactions that are used in order to facilitate payment for identifiable goods, services or direct investment.

MiFID II covers virtually all aspects of financial investment and trading and all financial professionals working in the EU. Bankers, traders, fund managers, exchange officials, and brokers and their firms all have to abide by its regulations, as do institutional and retail investors.

In general, all non-cash trades and trades with settlement/ value date after the spot date must be reported. In theory, this applies also to foreign exchange forward contracts (“FX Forwards”).

The key differences between a forward contract and an FX swap are: Maturity - An FX swap has two legs with different maturities, while a forward contract has a single maturity date. The near-date is called the spot leg, while the far-date is called the forward leg.

Out of scope refers to anything that goes beyond the original project plan. As detailed below, project management dictates that a scope statement should have been created at the project's inception. The scope statement includes everything that is to be included in a project.

Anything requirements that do not fall within the boundaries of the required functionalities and specifications documented in the scope statement is out of scope. Every project is based on three basic parameters – scope, schedule and cost. Changes to scope require amendments to the schedule and cost as well.

MiFID II also contains a new exemption for operators with compliance obligations under the Emissions Trading Directive⁵ where, when dealing in EUAs, such persons do not execute client orders or provide any investment services or perform any investment activities other than dealing on own account, provided they do not ...

An FX Forward is a financial instrument that represents the exchange of an equivalent amount in two different currencies between counterparties on a specific date in the future.

What are FX forward trades? ›

What is an FX forward? An FX forward is a contractual agreement between the client and the bank, or a non-bank provider, to exchange a pair of currencies at a set rate on a future date.

Another risk that arises from the non-standard nature of forward contracts is that they are only settled on the settlement date and are not marked-to-market like futures. What if the forward rate specified in the contract diverges widely from the spot rate at the time of settlement?

If you are a non-UK firm, for example the UK branch of a US firm, MiFID does not apply to you. However, if MiFID would have applied to you if you had been incorporated or formed in the United Kingdom, you will be a third country investment firm under the FCA's rules.

Execution costs are then separately regulated by “best execution” rules. The scope of MiFID II's territorial reach means that it will only apply directly to U.K. and EU-regulated investment firms.

What Is the Difference Between MiFID and MiFID II? MiFID II enhanced the transparency and reporting requirements of the older MiFID regulation. One key difference is the expansion of its scope: while MiFID applied largely to equities markets, MiFID II applies to all types of securities and derivatives.

Securities financial transactions (e.g., stock lending, repurchase agreements). Post-trade assignments and novations in derivatives. Portfolio compressions.

FX swaps and FX forwards are nonetheless subject to SDR reporting under CFTC Regulations, Part 45, and business conduct and anti-evasion requirements.

Key Takeaways. A forward contract is a customized derivative contract obligating counterparties to buy (receive) or sell (deliver) an asset at a specified price on a future date.