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By Bloomberg

European Union regulators face a basic quandary as they try to implement a welter of new financial- market rules: how to define a derivative.

The lack of a common standard for the 28-nation bloc is hindering the rollout of rules on trade clearing and reporting as well as measures to force more trading on to regulated platforms and boost pre- and post-trade disclosure of prices.

The EU needs “a harmonized regime in all member states to promote market integration and the cross-border provision of investment and ancillary services, and to facilitate the further consolidation of the single market,” according to European Commission documents prepared for an April 23 meeting with national finance ministries on the issue.

Without a common definition, regulators can’t consistently distinguish between derivatives and spot contracts, which aren’t covered by many of the new rules. In a spot trade, a foreign currency, commodity or security is bought or sold for immediate delivery. Futures contracts, a type of derivative, by contrast, link the trade to a pre-arranged date in the future.

Spot transactions fall outside the EU’s definition of a financial instrument, the key term for working out what transactions are covered by EU financial-market regulations.

Steven Maijoor, chair of the European Securities and Markets Authority, said last year that regulators needed a common EU definition of derivatives “as a matter of urgency.” Legal impediments prevented a quick fix, so the matter is now being addressed as part of the implementation of a financial- markets known as MiFID II, which takes effect in 2017.

Major Currencies

Working documents drafted by the commission, the EU’s executive arm, set out plans for foreign-exchange and commodities derivatives. The documents, dated April 15, were obtained by Bloomberg News.

For the foreign-exchange market, the EU would establish a list of 20 major currencies, including the dollar, euro and yen, for which the settlement period for a spot contract would be capped at two trading days. For other currencies, either the two-day rule or the “generally accepted” practice in that market would apply, the documents show.

An exception to these rules would apply for transactions conducted as an accompanying step to buying or selling a security, where a settlement period of five trading days would be allowed. Transactions with longer settlement times would be considered derivatives and covered by EU rules.

For commodity spot contracts, the limit would be the longer of two trading days or “the period generally accepted in the market for that commodity, asset or right as the standard delivery period,” according to the documents.

The U.K. Financial Conduct Authority regards physically settled commodities contracts and foreign-exchange forward trades with settlement dates of as much as seven days as spot trades rather than derivatives, allowing them to escape measures such as reporting to trade repositories.

Leaders of the Group of 20 nations called in 2009 for over- the-counter derivatives to “be traded on exchanges or electronic trading platforms, where appropriate, and cleared through central counterparties.”

Once the commission makes a proposal on the distinction between derivatives and spot contracts, it will be sent to national governments and the European Parliament for review.

The European Commission and the European Securities and Markets Authority didn’t have immediate comment.