Q27. Where do we find a list of MiFID financial instruments?
In Section C of Annex 1 to MiFID. There are ten categories of financial instruments in Section C (C1 to C10). Transferable securities (C1) and money market instruments (C2) are defined in article 4. Further provisions relating to certain derivatives under C7 and C10 are contained in articles 38 and 39 of the MiFID Regulation.
Q28. What are transferable securities? (C1 and article 4.1(18))
Transferable securities refer to classes of securities negotiable on the capital markets but excluding instruments of payment. We consider that instruments are negotiable on the capital markets when they are capable of being traded on the capital markets.
Transferable securities include (to the extent they meet this test):
- • shares in companies (whether listed or unlisted, admitted to trading or otherwise), comparable interests in partnerships and other entities and equivalent securities;
- • bonds and other forms of securitised debt;
- • depositary receipts in respect of the instruments above;
- • securities giving the right to acquire or sell transferable securities (for example, warrants, options, futures and convertible bonds); and
- • securitised cash-settled derivatives, including certain futures, options, swaps and other contracts for differences relating to transferable securities, currencies, interest rates or yields, commodities or other indices or measures.
Examples of instruments which, in our view, do not amount to transferable securities include securities that are only capable of being sold to the issuer (as is the case with some industrial and provident society interests) and OTC derivatives concluded by a confirmation under an ISDA master agreement.
Q29. What are units in collective investment undertakings (C3)?
This category of financial instrument includes units in regulated and unregulated collective investment schemes and units or shares in an AIF (whether or not the AIF is also a collective investment scheme).3 In our view, in accordance with article 1.2(a) and 2.1(o) of the Prospectus Directive, units or shares in an AIF include3 shares in closed-ended corporate schemes, such as shares in investment trust companies, and so3 are also units3 in collective investment undertakings for this purpose (as well as being. transferable securities).
Q30. Which types of financial derivative fall within MiFID scope (C4, C8 and C9)?
The scope of financial derivatives under MiFID is wider than under the ISD and includes the following:
- • derivative instruments relating to securities, currencies, interest rates or yields, or other derivative instruments, financial indices or measures, that may be settled physically or in cash (C4);
- • derivative instruments for the transfer of credit risk (C8); and
- • financial contracts for differences (C9).
The scope of C4, C8 and C9 does not extend to spot transactions, transactions which are not derivatives (such as forwards entered into for commercial purposes) and sports spread bets. In our view, neither C4 nor C9 comprise forward foreign exchange instruments unless they are caught by the scope of the Regulated Activities Order (see PERG 2.6.22B G). A non-deliverable currency forward which is not a "future" for the purposes of the Regulated Activities Order because it is made for commercial purposes will likewise fall outside the scope of MiFID.
Q31. What are derivative instruments for the transfer of credit risk (C8)?
Derivative instruments that are designed for the purposes of transferring credit risk from one person to another. They include, for example, credit default products, synthetic collateralised debt obligations, total rate of return swaps, downgrade options and credit spread products
Q32. Which types of commodity derivative fall within MiFID scope?
Broadly speaking, the following commodity derivatives fall within the scope of MiFID:
- • a derivative relating to a commodity derivative, for example, an option on a commodity future (C4);
- • cash-settled commodity derivatives (including physically settled derivatives that provide for settlement in cash at the option of one of the parties other than in the event of default or termination) (C5);
- • physically settled commodity derivatives traded on a regulated market or MTF (C6); and
- • other commodity derivatives capable of physical settlement and not for commercial purpose, that is standardised contracts subject to clearing house or margin arrangements so long as they fall into one of the following categories (C7):
- o instruments traded on a non-EEA trading facility that performs an analogous function to a regulated market or MTF;
- o instruments expressly stated to be traded on or subject to the rules of a regulated market, MTF or a non-EEA trading facility that performs an analogous function; or
- o back-to-back contracts with clients or counterparties equivalent to contracts traded on a regulated market, MTF or such a non-EEA trading facility.
Q33. What is a commodity for the purposes of MiFID?
“Commodity” means any goods of a fungible nature that is capable of being delivered, including metals and their ores and alloys, agricultural products and energy such as electricity (article 2.1 of the MiFID Regulation). The fact that energy products, such as gas or electricity, may be “delivered” by way of a notification to an energy network (such as notifications under the Network Code or the Balancing and Settlement Code) does not prevent them being “capable of being delivered” for these purposes. If a good is freely replaceable by another of a similar nature or kind for the purposes of the relevant contract (or is normally regarded as such in the market), the two goods will be fungible in nature for these purposes. Gold bars are a classic example of fungible goods. In our view, the concept of commodity does not include services or other items that are not goods, such as currencies or rights in real estate, or that are entirely intangible (recital 26 of the MiFID Regulation).
Q34. Are there any other derivatives subject to MiFID regulation?
There is a miscellaneous category of derivatives in C10, which is supplemented by articles 38 and 39 of the MiFID Regulation. These relate to:
- • climatic variables;
- • freight rates;
- • 2 emissions2 allowances;1
- • inflation rates or other official economic statistics;
- • telecommunications bandwidth;
- • commodity storage capacity;
- • transmission or transportation capacity relating to commodities, whether cable, pipeline or other means;
- • an allowance, credit, permit, right or similar asset which is directly linked to the supply, distribution or consumption of energy derived from renewable resources;
- • a geological, environment or other physical variable;
- • any other asset or right of a fungible nature, other than a right to receive a service, that is capable of being transferred; or
- • an index or measure related to the price or volume of transactions in any asset, right, service or obligation.
C10 derivatives must also meet at least one of the following criteria:
- • the 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 default or other termination event; or
- • the contract is traded in a regulated market or an MTF; or
- • the contract is standardised, subject to clearing house or margin arrangements and falls into one or more of the categories described under the fourth bullet point in Q32 above.
2In relation to emissions auction products, recital 14 together with the definitions of ‘two-day spot’ and ‘five-day future’ in article 3(3) and 3(4) of the auction regulation, indicate that a ‘five-day future’ (one of two forms of auction product permitted under the auction regulation) falls within this category of derivative.3 3