Derivative Contracts in EU Law: Never Mind the Definition

Abstract

Trillions of euros change hands through derivative contracts every year. Although economically valuable for risk redistribution purposes, derivatives may also pose grave threats to financial stability, having led Wall Street magnate Warren Buffett to dub them “financial weapons of mass destruction”. In line with international policy initiatives after the 2008 financial crisis, the EU co-legislators have sought to mitigate the potential destructive effects of derivatives through a host of far-reaching legislative interventions (e.g. mandatory usage of central counterparties (CCPs)). To determine the scope of application of these legislative initiatives, the definition of derivatives is of pivotal importance. Although a strand in legal scholarship has aimed to map the conceptual properties of derivatives, the derivatives definitions that have been conceived by the EU colegislators to demarcate the scope of recent legislative interventions have received virtually no attention. This paper seeks to fill this gap. Through a combination of conceptual and regulatory analysis, the paper develops two new arguments. First, it argues that derivatives definitions in EU law do not identify any distinctive conceptual properties of derivatives and, instead, only provide a circular description of what derivatives may be. Secondly, it submits that this conceptually unsatisfactory approach is symptomatic for a more fundamental deficit in the conceptual underpinnings of derivatives. By exploring the relation between the derivatives definitions in EU law and the conceptual properties of derivatives, this paper seeks to uncover some of the conceptual impurities in the premises on which the major overhaul of EU derivatives legislation has been built.

Keywords: financial instruments, derivatives, derivative contracts, EMIR, MiFID II, MiFIR, EU law, insurance contracts, gambling agreements, circularity

JEL Classification: K22, G15, G23, G28