On Friday, November 16, under an authorization added to the Commodity Exchange Act (“CEA”) by the Dodd-Frank Act, the Department of the Treasury issued a final determination that foreign exchange swaps (“FX Swaps”) and foreign exchange forwards (“FX Forwards“): (i) should not be regulated as “swaps” under the CEA; and (ii) are exempt from the definition of the term “swap” under the CEA. The final determination will become effective on the date of its publication in the Federal Register.1
A “foreign exchange swap” is narrowly defined under the CEA as a transaction that solely involves an exchange of two currencies on a specified date at a fixed rate that is agreed upon at the inception of the contract and a reverse exchange of those two currencies at a later date at a fixed rate. A “foreign exchange forward” is narrowly defined as a transaction that solely involves the exchange of two currencies on a specified future date at a fixed rate agreed upon at the inception of the contract.
As a result of the final determination, FX Swaps and FX Forwards are not subject to the clearing and exchange-trading requirements of the Dodd-Frank Act and do not have to be counted for purposes of determining whether an entity comes within the definition of a swap dealer or a major swap participant. Furthermore, by virtue of this exemption, FX Swaps and FX Forwards will not constitute “commodity interests” under the CEA so that investment managers will not be required to register with the CFTC as commodity pool operators (“CPOs”) and commodity trading advisors (“CTAs”), or rely on an exemption from registration, solely as a result of engaging in FX Swaps and FX Forwards.
The exemption does not apply to the Dodd-Frank Act’s trade-reporting requirements; that is, FX Swaps and FX Forwards are required to be reported to swap data repositories and thus are still subject to regulatory oversight. In addition, swap dealers and major swap participants are required to comply with applicable business conduct standards when engaging in FX Swaps and FX Forwards transactions. Finally, the determination does not exempt FX Swaps and FX Forwards from the anti-fraud and anti-evasion provisions of the CEA.
The exemption is narrowly tailored and does not extend to other types of foreign exchange derivatives, such as foreign exchange options, currency swaps, non-deliverable forwards (“NDFs”) or retail foreign currency transactions. The CFTC separately has issued an interpretation that spot FX transactions (generally, foreign exchange transactions that are settled via an actual delivery of the relevant currency within two business days) are not within the definition of the term ‘‘swap’’ under the CEA.
The Treasury Department’s final determination may be accessed here.