Today we want to take a closer look at the legal concept of a financial instrument and its meaning.
Why is the term financial instrument important?
The question whether a product is a financial instrument plays a major role in regulatory law. The reason is that services related to the financial instrument may constitute banking business or financial services requiring authorisation. For example, if you act as an intermediary for financial instruments, you provide investment brokerage services; if you make personal recommendations in relation to financial instruments, you provide investment advice. The management of assets invested in financial instruments for third parties is financial portfolio management. Anyone wishing to obtain an overview of the banking businesses and financial services subject to authorisation simply needs to read the German Banking Act, Section 1 (1) and (1a).
Is the term financial instrument defined in the law?
The term financial instrument is defined in more detail in the law, namely in § 1 (11) KWG. Due to its significance, BaFin has published a guidance notice (notes on financial instruments pursuant to Section1 (11) sentences 1 to 5 KWG, as of 26 February 2020) to give the term financial instrument even sharper contours.
Financial instruments include investment products. These include shares and debt instruments such as corporate bonds, covered bonds and certificates. They also include shares in investment funds and investments within the meaning of the German Investment Act.
Derivatives are also financial instruments. The exact meaning of a derivative is also described in more detail in Section 1 (11) KWG. These include forward transactions such as futures or options on certain underlying assets as well as financial contracts for differences. Explanations are provided in the BaFin information sheet on financial instruments (derivatives), as of 30 April 2018.
Financial instruments also include units of account. The BaFin considers units of accounts to include crypto currencies such as Bitcoin, for example. Recently, the legislator extended the concept of a financial instrument to include the catch-all term crypto asset. Crypto assets are digital representations of a value which has not been issued or guaranteed by any central bank or public authority and does not have the legal status of a currency or money, but which is accepted by natural or legal persons as a means of exchange or payment on the basis of an agreement or actual practice or which serves investment purposes and which can be transferred, stored and traded electronically.
Finally, the term financial instrument also covers foreign exchange, money market instruments and emission certificates.
Is a financial instrument always the same financial instrument?
Be careful! Financial instruments are not always the same. The legislator defines financial instruments differently depending on the law. For example, the term financial instrument under the German Banking Act – as described above – does not correspond to the term financial instrument under the German Securities Trading Act. It is therefore possible, that a licence is required for the sale of crypto-currencies or foreign exchange because both instruments qualify as financial instruments within the meaning of the German Banking Act. At the same time, however, other than for securities, distribution is not regulated in detail, because neither crypto currencies nor foreign exchange are financial instruments according to the German Securities Trading Act.
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