EBA · 2014_1506 Final Q&A

Treatment of contracts for difference under Article 327(1) or Regulation (EU) No 575/2013 (CRR)

Regulation
Regulation (EU) No 575/2013 (CRR)
Article
327, para. 1
Topic
Market risk
Submitted by
Investment firm
Submitted
2014-10-01
Answered
2014-12-19
Answer provided by
ESAs (EBA, ESMA, EIOPA)
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Question

Shall financial contracts for difference be treated as exposure in an underlying instrument?

Background

Treatment of financial contracts for difference (MiFID, Annex I, Section C, Point 9) is not described in Article 327 of CRR, although treatment of the other derivative categories is described. As they are different MiFID category than futures, options, warrants etc., it is not clear how they shall be treated.

Answer

As per point 3 of Annex II to Regulation (EU) No 575/2013 (CRR), instruments specified in points 4 to 7, 9 and 10 of Section C of Annex I to Directive (EU) 2004/39/EC (MiFID) are a type of derivative. Point 9 in Section C of Annex 1 to MiFID is financial contracts for differences (CFDs). Hence, as per the CRR, financial CFDs are a type of derivative and should be treated as such for regulatory purposes. A CFD can be considered as a derivative which synthetically replicates the performance of the underlying which means that the market risk is identical with a position in the underlying itself. Therefore CFDs should be treated as exposure to the amount of the underlying instrument to which they refer.

Original source: European Banking Authority, Q&A ID 2014_1506

This Q&A is published by European Banking Authority and is non-binding. It does not constitute legal advice. Updated weekly from official ESA sources.

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