US Treasury Exempts Foreign Exchange Swaps & Forwards from Dodd-Frank Rules

“Foreign exchange (FX) swaps, the second largest derivatives trading market, [have] been exempted from Dodd-Frank regulation by the U.S. Treasury. Though some Democratic legislators criticized the move, the Treasury went forward with the exemption citing the high-levels of risk management inherent in FX trading. ‘Unlike other derivatives, FX swaps and forwards already trade in a highly-transparent, liquid and efficient market,’ the Treasury Department said. ‘This final determination is narrowly tailored.’” (Shipkevich PLLC)

On November 16, 2012, the U.S. Department of the Treasury issued a final determination exempting foreign exchange swaps and foreign exchange forward contracts from regulation as “swaps” under the Commodity Exchange Act as amended by Dodd-Frank.

For your reference, here’s a roundup of legal commentary and analysis on the exemption:

U.S. Treasury Secretary Exempts FX Swaps and FX Forwards From Key Dodd-Frank Requirements (Sutherland Asbill & Brennan LLP):

“As a result of the final determination, counterparties to FX swaps and FX forwards will not be required to comply with the myriad of requirements imposed on OTC derivatives by the Dodd-Frank Act including, among others, central clearing, electronic trade execution and margin requirements for uncleared trades. In addition, such transactions will not need to be included in swap dealer or major swap participant determinations.” Read on>>

“If It Ain’t Broke, Don’t Fix It”: Treasury Exempts Foreign Exchange Swaps and Forwards from Dodd-Frank Swaps Regulation Requirements (Morrison & Foerster LLP):

“… the Determination was based on the Secretary’s conclusion that the foreign exchange markets did not present the types of counterparty credit and market risks present in other swaps markets, and that the one type of risk associated with the foreign exchange markets, namely, settlement risk, was effectively mitigated through various measures, including the predominance of payment-versus-payment settlement arrangements, and the activities of the Continuous Linked Settlement system in the settlement of transactions in major currencies.” Read on>>

Regulatory Developments: Treasury Publishes Final Determination Exempting Foreign Exchange Swaps and Forwards from Regulation as “Swaps” Under the CEA (White & Case LLP):

“Under the CEA, a FX swap is narrowly defined as a transaction that solely involves — (A) an exchange of two different currencies on a specific date at a fixed rate that is agreed upon on the inception of the contract covering the exchange and (B) a reverse exchange of those two currencies at a later date and at a fixed rate that is agreed upon on the inception of the contract covering the exchange. A FX forward is likewise narrowly defined by the CEA as a transaction that solely involves the exchange of two different currencies on a specific future date ata fixed rate agreed upon on the inception of the contract covering the exchange.” Read on>>

Treasury Department Issues Final Determination Exempting Foreign Exchange Swaps and Certain Foreign Exchange Forwards from the Definition of “Swap” (Ropes & Gray LLP):

“The exemption established by the Final Determination only covers foreign exchange swaps and deliverable foreign exchange forwards, and does not extend to other foreign exchange derivatives, including foreign exchange options, currency swaps, and non-deliverable foreign exchange forwards.” Read on>>

Treasury Issues Final Determination on Foreign Exchange Swaps and Forwards (Morgan Lewis):

“Despite the Determination, transactions in FX Swaps and FX Forwards still must comply with the CEA’s general reporting requirements (but not real-time reporting requirements), and swap dealers and MSPs that are parties to a transaction involving FX Swaps or FX Forwards still must comply with external business conduct standards. FX Swaps and FX Forwards also are subject to the Commodity Futures Trading Commission’s (CFTC’s) anti-evasion authority.” Read on>>

FX Swaps Exempted from Dodd-Frank Regulation by U.S. Treasury (Shipkevich PLLC):

“The Commodity Markets Council claimed last year that such an exemption could undercut the Dodd-Frank mandate. ‘Exempting foreign exchange forwards and swaps at this time from the clearing and trading requirements of Dodd-Frank could increase systemic risk at a time when regulators around the globe are trying to reduce it,’ stated a letter from the CMC to the Treasury. The Treasury has exempted FX swaps from rules that will otherwise work to regulate the $640 trillion OTC derivatives market. Though, for now it appears that FX swaps will still contribute to the agencies reporting requirement.” Read on>>

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