Financial instrument: Difference between revisions

Colloquially, a contract creating financial liabilities between two parties. It can, but need not, be [[negotiable]], but its main feature — its ''[[sine qua non]]'' — is that it cannot be [[Issuance|created]], [[paying agent|maintained]], [[investment manager|managed]], [[Custody|looked after]], [[Broker-dealer|transferred]], [[Securitisation|monetised]] or [[Redemption|redeemed]] — it cannot move or breathe, in other words — except through the [[Agency problem|agency]] of someone who will deduct a fee from the proceeds of your investment for the privilege.  

Step this way for a one-way trip down an open manhole. The definitions aren’t “disjunctive”: something that is a [[transferable security]] can also be a [[money market instrument]], a unit in [[collective investment scheme]]. Alas, a “[[derivative]]”, in MiFID speak, is restricted to those countenanced in sections 4-10, but that may not be the end of the matter:

Which means securities, such as certificates, do qualify as ''commodity'' derivatives ''if they relate to a commodity'', but emissions (and non-commodity underliers) do not. We know this because even the [[BaFin|BaFIN]] thinks this.<ref>See the [https://www.bafin.de/EN/Aufsicht/BoersenMaerkte/Derivate/PositionslimitsWarenderivate/positionslimits_warenderivate_artikel_en.html BaFIN on position limits.]</ref>  Fair enough: non-commodities aren't commodities, but there appears to be no equivalent widening of non-commodity derivatives to include funded, asset-backed or securitised instruments.

This curious exception to the physically-settled commodity derivatives class in point (6) is known elsewhere as the “[[REMIT carve-out]]”, and is dealt with in some depth [https://emissions-euets.com/internal-electricity-market-glossary/652-remit-carve-out here] by our friends at {{plainlink|https://emissions-euets.com|Emissions-EUETS.com}} — an excellent site you must explore if you haven’t already. REMIT is Regulation No 1227/2011. Why “REMIT”? '''R'''egulation on wholesale '''E'''nergy '''M'''arkets '''I'''ntegrity and '''T'''ransparency, of course.

In any case, but for that odd exception for wholesale gas and power traded on an OTF — which is a ''non''-non-discretionary venue not qualifying as a [[regulated market]] or an [[MTF]], so chapeau for the multi-dimensional negative there and note this is a very limited carve-out pertaining to wholesale participants in the gas and power industry — [[Exchange-traded products|exchange-traded]] commodity futures and options ''are'' in scope for MiFID, even where physically settled. Which we think makes sense: it would be arbitrary indeed to exclude a class of exchange-traded derivatives just because of their settlement method, when most of the “[[regulatey]]” things about them — the risk, the market infrastructure, the consumer protection requirements, the capital and solvency issues for clearers and settlers — are exactly the same.

Limb (7) throws a curve ball. A cautious fellow might squeak a bit and say, but any physically settled commodity derivative has some of the characteristics of other financial derivatives, so where does this leave me? Well, the implementing regulation (EC) No 1287/2006 — which was further restricted in 2017 — has something to say about what this means:

In practice this narrows things down a lot. Either it is (in a loose sense) [[exchange-traded]], or standardised by reference to lot size, delivery date and so on. It feels like this is targeting standardised, fungible contract types; OTC trades are not meant to be included.<ref>An earlier requirement for a margin requirement was removed by [https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32017R0565 Article 7 of Commission Delegated Regulation (EU) 2017/565]</ref>

A good place to look (if your interest level counts as “fiendish”) is the snappily titled ''Commission Delegated Regulation {{eureg|2017|565|EU}} of 25 April 2016 supplementing Directive {{eudirective|2014|65|EU}} of the European Parliament and of the Council as regards organisational requirements and operating conditions for investment firms and defined terms for the purposes of that Directive''.