A currency forward may be a routine hedge for a business making an overseas payment. For the institution offering it, the same contract can raise an investment licensing question.
The Court of Justice of the European Union (CJEU) has addressed that question in Iulicris Recycling SRL v Ibanfirst SA (C-339/25). A currency forward can qualify as a closely related ancillary service under Article 18(1)(a) of PSD2, provided it is closely linked to payment services that the institution provides. Where the offering would otherwise fall within MiFID II as an investment service, the institution must meet the conditions for the incidental-service exemption to rely on its payments licence alone; otherwise MiFID II applies.
Iulicris Recycling, a Romanian recycling company, sold scrap priced in US dollars and settled many of its liabilities in Romanian lei. It entered into three flexible FX forwards with Ibanfirst, a Belgian-authorised payment institution that also provided its multi-currency payment account.
The contracts fixed future USD/RON exchange rates for amounts totalling up to USD 10 million. After margin calls and a disagreement over extending the hedges, Iulicris asked the Brussels Business Court to declare the contracts void and order repayment of the margin it had paid. Iulicris argued that Ibanfirst had offered financial instruments in breach of the rules implementing MiFID II. Ibanfirst maintained that its authorisation as a payment institution covered the forwards as ancillary FX.
Advocate General Campos Sánchez-Bordona read Article 18(1)(a) as a self-standing basis for offering forwards that hedge risks arising from an institution’s payment services.
On that reading, a payment institution could rely on its PSD2 authorisation for those forwards without meeting the MiFID II conditions raised by the referring court.
Although the Advocate General regarded the contracts as likely to be financial instruments, he considered MiFID II only in the alternative. He saw a close factual link to Ibanfirst’s payment services and expressed doubt that the offering satisfied the condition concerning a systematic source of income. He also raised the question of how Ibanfirst promoted the service, if at all, and whether it disclosed the service’s ancillary role.
The Court agreed that a foreign exchange service may cover a contract fixing the exchange rate that will apply at a future date. To qualify under Article 18(1)(a), the forward must be closely linked to the payment services that the institution principally provides on the customer’s behalf.
The Court departed from the Advocate General’s opinion on what follows from that classification. It held that MiFID II can apply to an investment service even where PSD2 permits it as ancillary FX. In doing so, the Court gave weight to MiFID II’s objectives of investor protection and market transparency alongside PSD2’s objective of facilitating payment services.
Under MiFID II, the starting point is the contract. The Iulicris contracts fixed a rate for later exchange, a typical feature of a currency derivative that may fall within the Directive’s scope.
Article 10(1)(b) of Delegated Regulation (EU) 2017/565 excludes currency derivatives from the definition of financial instrument if they meet all four conditions for treatment as a means of payment. The contract must require physical settlement in the ordinary course, independently of default or another termination event, and at least one party must fall outside EMIR’s definition of a financial counterparty. The parties must enter into the contract to facilitate payment for identifiable goods, services or direct investment, and the contract must not be traded on a trading venue.
If the contract qualifies for that exclusion, the institution assesses whether the service is closely related to its payment services under Article 18(1)(a) of PSD2 independently of MiFID II.
If the forward is a financial instrument, the next question is whether the institution offers it as part of a MiFID II investment service on a regular and professional basis. Article 2(1)(c) of MiFID II exempts incidental investment services where the legislation, regulation or professional code governing the institution’s main activity leaves room for them. Under Article 4 of the Delegated Regulation, the service must have a close and factual link to the main activity for the same client and must be offered without the aim of generating systematic income. Any promotion of the institution’s ability to provide the service must disclose its ancillary role to clients.
The Court considered that a payment institution’s forwards are to be regarded as offered incidentally where they are offered to reduce currency risk when payment transactions are executed, because payment services are themselves regulated by PSD2. It left it to the Belgian court to determine whether the contracts qualified for the means-of-payment exclusion and, if the offering would otherwise fall within MiFID II, to verify all the conditions of the incidental-service exemption. The claims for invalidity and repayment are for the Belgian court to decide.
The customer’s reason for hedging and the provider’s reason for offering the hedge can point in different directions. The Court requires a close link to the payment services the institution provides for the customer and leaves open how the institution can demonstrate that link. A forward sized and timed to a supplier payment that the institution will execute can arguably help to show the PSD2 link. Such a forward also points towards the “identifiable goods, services or direct investment” condition of the means-of-payment exclusion, although the two tests are distinct. The judgment records Iulicris’s stated aim of reducing its USD/RON exposure and does not tie them to identified payments.
If the forward is a financial instrument and the institution offers it as an investment service designed to generate systematic income, the institution would fail a condition of the incidental-service exemption, and MiFID II would apply. The Advocate General doubted that this condition was met on the facts, and the Court left that assessment to the Belgian court. Pricing and sales practices therefore arguably matter to the licensing analysis even where the customer has a genuine exposure to hedge although neither the opinion nor the judgment addresses pricing directly.
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Authors: Dr Cherise Abela Grech & Dr Malcolm Vella Bray