Foreign Exchange Means of Payment Exclusion
New EU financial regulations that came into effect in January 2018 mean that corporates trading foreign exchange (FX) forward transactions with EU banks, including NatWest Markets (NWM), will either have to provide a representation that all their FX transactions are excluded from these regulations on the basis they are entered into for the purposes of payment facilitation, or comply with EMIR and MiFID2 obligations.
Previously there were differences across the EU in terms of how FX Forwards were treated for the purpose of MiFID and other financial regulations. The new rules (MiFID2) attempt to harmonise the treatment of FX forwards across the EU.
Those FX forwards used for the purposes of payment facilitation (eligibility criteria below) will not be classed as financial instruments. Rather they will be treated in the same way as spot FX, and will therefore not be subject to certain financial regulations (such as MiFID 2 and EMIR).
Payments Facilitation Eligibility Criteria
FX Forwards will qualify for the means of payment exclusion if they meet the following criteria:
1. The counterparty is a corporate entity (a non-financial counterparty (‘NFC’) as defined under EMIR);
2. The FX forwards are traded for the purpose of facilitating payment for identifiable goods or services (for example, entering into an FX forward in order to pay an upcoming invoice in a foreign currency, or in preparation of an upcoming purchase in a foreign currency, as opposed to trading FX forwards for speculative purposes); and
3. The FX forwards are traded bilaterally, as opposed to on a regulated trading venue (note that Agile Markets is not a regulated trading venue and does not affect eligibility);
The Financial Conduct Authority has provided some examples of scenarios that would fit within the exclusion. Please find the examples provided on the link here.
Steps to Confirm Foreign Exchange Means of Payment Exclusion
1. Read the material presented here which includes examples of trades that can make use of the exclusion to assess whether or not your FX transactions are excluded.
2. If you believe all of your FX forward trading activity falls within the exclusion, please complete the FX Means of Payment Representation letter online by clicking the button below:
(the link above uses Adobe eSign technology to submit the representation electronically. You and NWM will receive a copy of the completed form once you have filled in the details online and your email address has been verified. If you would prefer, please download the form here then email a completed version to firstname.lastname@example.org)
Consequences if trading falls outside of the FX Means of Payment Exclusion
If you are not eligible for the exclusion, or do not wish for the exclusion to be applied to your FX transactions, then you will be required to comply with the following under new EU regulations when trading with NWM:
- Obtain a Legal Entity Identifier (LEI) number. Under MiFID 2, all counterparties trading financial instruments must obtain an LEI pre-trade. The background to this requirement and instructions on how to obtain an LEI can be found here. LEIs can be obtained online at a cost of around $220 (see our LEI FAQs here).
- You will be subject to the European Markets Infrastructure Regulation (EMIR) which means you will be asked to read and agree to NWM’s EMIR terms of business prior to future trading in financial instruments.
- You will need to report your FX forward trades to a Trade Repository (EMIR trade reporting requirement). NWM may be able to report these trades on your behalf if you enter into a delegated reporting agreement with us (see details here).
If you trade markets products (other than excluded FX forwards) that are subject to the regulations (such as currency options, non-deliverable forwards, interest rate derivatives, other derivatives, securities or money markets products) then you are subject to the requirements in respect of those transactions regardless of the FX representation above. In such cases you should obtain an LEI and meet other obligations as applicable.
Please also note that regardless of whether or not your trading of FX Forwards with NatWest Markets falls within the FX payment facilitation exclusion, these trades are still covered by the standard NatWest Markets terms of business.
Please note that no part of this information constitutes advice from NatWest Markets to you. NatWest Markets does not owe any fiduciary duties to you in connection with this, and/or any related transaction and no reliance may be placed on NatWest Markets for any representation made by you. You should seek your own independent advice before making any representation.