Europe aims to resolve FX dispute by late summer

European regulators aim to finalise their definition of foreign exchange derivative by late summer, in a dispute that will determine whether part of the $5tn-a-day forex market could face tougher legislation.

Authorities have been struggling for more than two months to determine if forex forward contracts come under new rules designed to bring more transparency to opaque off-exchange markets.

Highly detailed reporting of derivatives, fixed income and foreign exchange trades was intended to give regulators a better insight into investment flows and identify risk.

Its introduction in February exposed faultlines between national regulators and inconsistent regulation, however. National authorities have placed differing interpretations on whether forward contracts – which account for $680bn of the daily market – should be classed as derivatives and thus be subject to trade reporting rules.

The rulings matter as they can affect whether these instruments have to adhere to legislation, such as investor protections, algorithmic trading requirements, clearing and market abuse. Confused market participants such as banks and brokers have sought clarifications from the European Commission and Esma, the regulator.

The commission has accepted it will need to pass further legislation to resolve the issue and last week drew up a timetable in conjunction with a committee representing the European Parliament.

The commission is planning to hold further discussions with the parliament in June and publish draft legislation, known as an implementing act, in July. If adopted as planned in August, the act could come into force in November, according to briefing papers seen by FT Trading Room.

Unable to reach a conclusion on the issue, the commission has launched a public consultation, which ends on May 9.

National authorities have turned to settlement, the period by which a trade must be paid for, to help them make their rulings. Some states, such as Ireland, determined in February that trades settled two days after the trade would not need to be reported.

Contracts with a longer settlement period are being classed as forwards. Other regulators, such as the UK’s Financial Conduct Authority, have a broader interpretation and do not consider forex transactions that take up to seven days to settle, or are conducted for commercial purposes, to be derivatives. “The UK’s current position is looking rather isolated,” one observer at the meeting said.