The Concept of Financial Instruments: Drawing the Borderline between MiFID and MiCAR

Abstract

The notion of a ‘financial instrument’ defines the frontier of traditional financial law, such as the Markets in Financial Instruments Directive (MiFID II), and the more recent crypto regulation, epitomized by the Markets in Crypto-Assets Regulation (MiCAR). The characteristics of a ‘financial instrument’ cannot be defined statically by way of a checklist. Instead, the definition must be open to future products and developments in the market, which at the moment cannot be foreseen. That is why we suggest a ‘flexible definition’. This definition is composed of typical elements that must not necessarily be present all the time. Rather, the lack of one element may be compensated by the abundance of another. Thanks to the flexible definition, it is possible to achieve both a necessary degree of legal certainty for market participants and sufficient space for supervisory authorities to respond to future developments. The typical elements of financial instruments can be found through a study of EU financial regulation and an analysis of the underlying economic reality. We also draw comparisons to US law that regulates similar problems. Three elements are typically present in financial instruments: (1) they create rights and obligations, (2) they are tradable on markets and (3) they have an investment function. (1) That financial instruments typically create rights and obligations is due to their contractual nature. These rights and obligations must be functionally similar to those arising from products detailed in Annex I Section C of MiFID II. (2) Tradability requires transferability, negotiability, and fungibility. It is best viewed as a spectrum rather than a definitive boundary. (3) The purpose of financial instruments is to generate future financial returns or protect against financial risks. They are not empty shells but serve as legal channels for investment. The investment function must be assessed by taking an ex ante view, based on the endogenous characteristics of a product, the issuer’s intentions and market communications, and the expectations of the public they are likely to generate. The concept of ‘financial instruments’ plays a quintessential role in European Union (EU) financial markets law. It defines the scope of key acts, such as the Markets in Financial Instruments Directive and Regulation (MiFID II/MiFIR),1 the Prospectus Regulation2 and the Market Abuse Directive and Regulation (MAD/MAR).3 Recently, its significance has further increased because it now also delineates the scope between the ‘traditional’ financial markets law—which is, among other things, composed of the acts just mentioned—and that of the newly adopted rules for the crypto-economy in the MiCAR.4 The latter contains very similar rules to those of traditional financial law, which nevertheless differ in many respects.5 This the between of rules The is as one have the of or other Instead, it is the concept of ‘financial This is because ‘financial instruments’ as defined in MiFID from its This from not be necessary at on not at the also ‘financial other all are by financial law and not by of they are on a or the is not a but rather a financial This is the that to the is a that to an the US or a or a ‘financial a that to the for other for for a to be as ‘financial the be of the to a and a of the It is that may also have the of the such of and financial which the of their more analysis of the concept ‘financial instrument’ EU law must from the rules in Annex I Section C of MiFID II. the definition is by problems. it contains a of instruments rather than a the is and to the is that the contains very and such as or and the are the likely to on a which is why we on in to draw the between MiFID and at the concept of ‘financial instruments’ have in the they have to recent to a and in of MiFID of such We are a which is in many that must we the economic purpose of financial regulation as a for we a at the regulation of US financial to the we that the US can on the concept because (1) it has as the for EU financial law and (2) it to the or at very similar as the The economic and analysis to the that cannot be a and definition of ‘financial Rather, we the of a which is more and to the of financial We it a ‘flexible definition’. 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