In November 2012, the Secretary of Treasury issued a final determination that, in effect, exempted FX swaps and FX forwards ("Exempt FX Transactions") from many of the requirements added to the Commodity Exchange Act ("CEA") by Dodd-Frank.1 However, the determination expressly provided that Exempt FX Transactions remain subject, among other requirements, to the business conduct rules that are applicable to swap dealers ("SDs") and major swap participants ("MSPs").2 Spot FX transactions separately are excluded from the definition of "swap" under the CEA.3
As the Business Conduct Rules were taking effect on May 1, 2013, the CFTC issued two no-action letters that provide relief from compliance with certain of the rules in the case of Exempt FX Transactions and spot FX transactions.
Relief from Disclosing Pre-Trade Marks
Under the Business Conduct Rules, prior to entering into a swap, an SD or MSP is required to disclose material information concerning the swap, including the price of the swap and the midmarket mark of the swap ("PTM"). One of the purposes of such disclosure is to provide the counterparty with pricing information to facilitate negotiations. In the case of certain Exempt FX Transactions, the CFTC determined that the transactions benefitted from high liquidity, narrow bid and offer spreads and a significant amount of publicly available information. As a result, the CFTC determined that, in the case of such transactions, the benefit of PTM disclosure did not outweigh the operational and other costs imposed on the SD or MSP in connection therewith.4
Specifically, the CFTC ruled that an SD or MSP is not required to disclose PTM to a counterparty, provided that:
- the subject transaction is: (i) a physically-settled FX swap or FX forward where each currency is a BIS 31 Currency5 and the transaction has a stated maturity of one year or less; or (ii) a physically-settled vanilla FX option where each currency is a BIS 31 Currency and the option has a stated maturity of six months or less;
- real-time tradeable bid and offer prices are available electronically, in the marketplace, to the counterparty; and
- the counterparty agrees in advance and in writing that the PTM disclosure is not necessary.
This is an expansion of the relief that was granted by the CFTC in December 2012 in respect of FX transactions in BIS 13 Currencies.6 Please note that SDs and MSPs remain obligated to disclose other material information concerning the transactions covered by the no-action letter.
Relief from Pre-Trade Disclosure Requirements
In addition to the relief described above, the CFTC provided SDs and MSPs relief from all pretrade disclosure requirements in the case of Exempt FX Transactions that are executed on electronic trading platforms.
Specifically, the CFTC ruled that an SD or MSP is not required to make pre-trade disclosures in respect of Exempt FX Transactions, provided that:
- the transaction is executed on an electronic trading platform and the SD or MSP does not know the identity of the counterparty prior to execution;
- only eligible contract participants participate in the anonymous electronic trading platform; and
- real-time tradeable bid and offer prices for the transaction are available electronically, in the marketplace, to the
This no-action position represents an expansion of the exception provided in CFTC Rule 23.431(c), which provides that pre-trade disclosure requirements do not apply to transactions initiated on a designated contract market or swap execution facility and in respect of which the SD or MSP does not know the identity of the counterparty prior to execution.
Spot or No Spot? – Time Limited Relief
Spot FX transactions are not subject to the Business Conduct Rules, but FX forward transactions are. Traditionally, a spot transaction is one that settles via actual delivery of the relevant currencies within two business days. However, a spot transaction can include a transaction with a settlement cycle of longer than two business days when such longer settlement is customary in the relevant market. In addition, the CFTC considers certain securities conversion transactions to be spot transactions even though the settlement cycle is longer than two business days.
In practice, the operational systems of many SDs cannot distinguish between (i) spot transactions with a settlement cycle of longer than two business days and (ii) a forward transaction. By default, the systems of many SDs treat any FX transaction with a settlement cycle of more than two business days as an FX forward.
To address this practical reality, the CFTC has deferred until September 1, 2013, the start date for compliance by SDs and MSPs with the Business Conduct Rules for FX transactions with eligible contract participants with a settlement cycle of no more than seven local business days in the place of settlement. Moving the deadline to September will give SDs more time to put systems in place that will distinguish between FX spot transactions, FX forwards and other FX transactions, and will allow them to continue to work with their clients to obtain the needed information and representations to be in compliance with the Business Conduct Rules.