Time Limited No-action Relief: Foreign Exchange Swaps and Foreign Exchange Forwards Not to be Considered in Calculating Aggregate Gross Notional Amount for Purposes of Swap Dealer De Minimis Exception or in Calculatin...

Summary: Time Limited No-action Relief: Foreign Exchange Swaps and Foreign Exchange Forwards Not to be Considered in Calculating Aggregate Gross Notional Amount for Purposes of Swap Dealer De Minimis Exception or in Calculating Substantial Position in Swaps or Substantial Counterparty Exposure for Purposes of the Major Swap Participant Definition. Time-Limited No-action Relief for persons that meet the definitions of Commodity Pool Operators and Commodity Trading Advisors Solely as a Result of their Foreign Exchange Swap and Foreign Exchange Forward Activities.

U.S. COMMODITY FUTURES TRADING COMMISSION

Three Lafayette Centre

1155 21st Street, NW, Washington, DC 20581

Telephone: (202) 418-5977

Facsimile: (202) 418-5407

www.cftc.gov

Division of

Swap Dealer and

Intermediary Oversight

CFTC Letter No. 12-21

No-Action

October 12, 2012

Division of Swap Dealer and Intermediary Oversight

Re: Time Limited No-action Relief: Foreign Exchange Swaps and Foreign Exchange

Forwards Not to be Considered in Calculating Aggregate Gross Notional Amount for

Purposes of Swap Dealer De Minimis Exception or in Calculating Substantial Position in

Swaps or Substantial Counterparty Exposure for Purposes of the Major Swap Participant

Definition;

Time-Limited No-action Relief for persons that meet the definitions of Commodity Pool

Operators and Commodity Trading Advisors Solely as a Result of their Foreign Exchange

Swap and Foreign Exchange Forward Activities

Ladies and Gentlemen:

This letter is in response to requests from multiple parties received by the Division of

Swap Dealer and Intermediary Oversight (“Division”) of the Commodity Futures Trading

Commission (“Commission”) requesting relief from the obligation to include foreign exchange

swaps and foreign exchange forwards in the calculation of a person’s substantial position in

swaps or substantial counterparty exposure for purposes of determining if a person is a major

swap participant under Commission Regulatio

and Intermediary Oversight (“Division”) of the Commodity Futures Trading

Commission (“Commission”) requesting relief from the obligation to include foreign exchange

swaps and foreign exchange forwards in the calculation of a person’s substantial position in

swaps or substantial counterparty exposure for purposes of determining if a person is a major

swap participant under Commission Regulation 1.3(hhh),1 or the calculation of the aggregate

gross notional amount of swaps connected with swap dealing activity for purposes of

determining when and if a person is no longer entitled to rely on the de minimis exception from

swap dealer registration set forth in Commission Regulation 1.3(ggg)(4)2 and must register with

the Commission as a swap dealer, pending a determination by the Secretary of the Treasury

(“Secretary”) to exempt foreign exchange swaps and foreign exchange forwards from the

Commodity Exchange Act (“CEA”). This letter also is in response to requests that, pending such

determination, persons who would meet the definitions of the terms commodity pool operator

(“CPO”) and commodity trading advisor (“CTA”) in the CEA solely as a result of their foreign

exchange swap and forward activity not be required to register in those capacities.

1 17 CFR 1.3(hhh), 77 FR 30596, 30746 (May 23, 2012).

2 17 CFR 1.3(ggg)(4), 77 FR at 30744.

2

The CEA, as amended by the Dodd-Frank Act, provides that “foreign exchange

forwards”3 and “foreign exchange swaps”4 shall be considered “swaps” under the swap

definition unless the Secretary issues a written determination that either foreign exchange swaps,

foreign exchange forwards, or both: (i) should not be regulated as swaps; and (ii) are not

structured to evade the Dodd-Frank Act in violation of any rule promulgated by the Commission

pursuant to section 721(c) of the Dodd-Frank Act.5 The Secretary published in the Federal

Register on October 28, 2010, a request for comment as to wheth

itten determination that either foreign exchange swaps,

foreign exchange forwards, or both: (i) should not be regulated as swaps; and (ii) are not

structured to evade the Dodd-Frank Act in violation of any rule promulgated by the Commission

pursuant to section 721(c) of the Dodd-Frank Act.5 The Secretary published in the Federal

Register on October 28, 2010, a request for comment as to whether an exemption from the swap

definition for foreign exchange swaps, foreign exchange forwards, or both, is warranted, and on

the application of the statutory factors that the Secretary must consider in making a

determination regarding whether to exempt these products.6 Subsequently, the Secretary

published in the Federal Register on May 5, 2011, a proposed determination to exempt both

foreign exchange swaps and foreign exchange forwards from the definition of the term “swap” in

the CEA.7 A final determination to exempt has not yet been issued by the Secretary.

Pursuant to their authority under the Dodd-Frank Wall Street Reform and Consumer

Protection Act (“Dodd-Frank Act”),8 the Commission and the Securities and Exchange

Commission (“SEC”) adopted joint rules to explicitly define the term “swap” to include foreign

3 A foreign exchange forward is defined in the CEA as “a transaction that solely involves the exchange of two

different currencies on a specific future date at a fixed rate agreed upon on the inception of the contract covering the

exchange.” CEA section 1a(24), 7 U.S.C. 1a(24).

4 A foreign exchange swap is defined as in the CEA as follows:

a transaction that solely involves—

(A) an exchange of 2 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 the 2 currencies described in subparagraph (A) at a later date and at a fixed rate

that is agreed upon on the inception of the contract covering the exchange

he CEA as follows:

a transaction that solely involves—

(A) an exchange of 2 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 the 2 currencies described in subparagraph (A) at a later date and at a fixed rate

that is agreed upon on the inception of the contract covering the exchange.

CEA section 1a(25), 7 U.S.C. 1a(25).

5 See section 1a(47)(E)(i) of the CEA, 7 U.S.C. 1a(47)(E)(i). Under the Dodd-Frank Act, if foreign exchange

forwards or foreign exchange swaps are no longer considered swaps due to a determination by the Secretary,

nevertheless, certain provisions of the CEA added by the Dodd-Frank Act would continue to apply to such

transactions. Specifically, those transactions still would be subject to certain requirements for reporting swaps, and

swap dealers and major swap participants engaging in such transactions still would be subject to certain business

conduct standards. See, e.g., sections 1a(47)(E)(iii) and (iv) of the CEA, 7 U.S.C. 1a(47)(E)(iii) and (iv) (reporting

and business conduct standards, respectively). In addition, a determination by the Secretary does not exempt any

foreign exchange forward or foreign exchange swap traded on a designated contract market or a swap execution

facility, or cleared by a derivatives clearing organization, from any applicable antifraud or anti-manipulation

provision under the CEA. See sections 1a(47)(F)(i) and 1b(c) of the CEA, 7 U.S.C. 1a(47)(F)(i) and 1b(c). Nor

does it affect the CFTC’s jurisdiction over retail foreign currency agreements, contracts, or transactions pursuant to

section 2(c)(2) of the CEA, 7 U.S.C. 2(c)(2). See section 1a(47)(F)(ii) of the CEA, 7 U.S.C. 1a(47)(F)(ii).

6 See Determinations of Foreign Exchange Swaps and Forwards, 75 FR 66829 (Oct. 28, 2010)

tions 1a(47)(F)(i) and 1b(c) of the CEA, 7 U.S.C. 1a(47)(F)(i) and 1b(c). Nor

does it affect the CFTC’s jurisdiction over retail foreign currency agreements, contracts, or transactions pursuant to

section 2(c)(2) of the CEA, 7 U.S.C. 2(c)(2). See section 1a(47)(F)(ii) of the CEA, 7 U.S.C. 1a(47)(F)(ii).

6 See Determinations of Foreign Exchange Swaps and Forwards, 75 FR 66829 (Oct. 28, 2010).

7 See Determination of Foreign Exchange Swaps and Foreign Exchange Forwards Under the Commodity Exchange

Act, Notice of Proposed Determination, 76 FR 25774 (May 5, 2011) (“Notice of Proposed Determination”). The

comment period on the Secretary’s proposed determination closed on June 6, 2011.

8 See section 712(d) of the Dodd-Frank Act.

3

exchange forwards and foreign exchange swaps (as those terms are defined in the CEA), in order

to include in one rule the definitions of those terms and the related regulatory authority with

respect to foreign exchange forwards and foreign exchange swaps.9 The final rules incorporate

the provision of the Dodd-Frank Act that foreign exchange forwards and foreign exchange swaps

will no longer be considered swaps if the Secretary issues the written determination described

above to exempt such products from the swap definition. They also reflect the continuing

applicability of certain reporting requirements and business conduct standards in the event that

the Secretary makes such a determination. These joint final rules become effective on October

12, 2012.

After the October 12, 2012 effective date, all swaps entered into by a person in

connection with the person’s swap dealing activities are relevant in determining whether the

person is within the swap dealer definition and therefore must register as a swap dealer. Also,

beginning on October 12, 2012 a person must begin to calculate whether it is within the

definition of major swap participant in Commission Regulation 1.3(hhh)

ive date, all swaps entered into by a person in

connection with the person’s swap dealing activities are relevant in determining whether the

person is within the swap dealer definition and therefore must register as a swap dealer. Also,

beginning on October 12, 2012 a person must begin to calculate whether it is within the

definition of major swap participant in Commission Regulation 1.3(hhh). This would include

foreign exchange swaps and foreign exchange forwards, unless the Secretary determines to issue

the written determination described above and such determination becomes effective before

October 12, 2012.10 Similarly, among the changes made by the Dodd-Frank Act to the CEA

were to include within the CPO definition the operator of a collective investment vehicle that

trades swaps, and to include within the CTA definition a person who provides advice concerning

swaps,11 which in both cases would include foreign exchange forwards and foreign exchange

swaps absent a determination by the Secretary described above, and may require registration in

those capacities absent an exemption or exclusion.

Several parties have commented that for a number of parties who are solely or primarily

engaged in foreign exchange swap and forward activity, whether they will be required to apply to

be registered as swap dealers or major swap participants will be dependent upon whether the

Secretary issues a final determination to exempt foreign exchange swaps and forwards. If the

Secretary does so before October 12, 2012, such parties would not be required to apply to be

registered

marily

engaged in foreign exchange swap and forward activity, whether they will be required to apply to

be registered as swap dealers or major swap participants will be dependent upon whether the

Secretary issues a final determination to exempt foreign exchange swaps and forwards. If the

Secretary does so before October 12, 2012, such parties would not be required to apply to be

registered. If the Secretary does so shortly after October 12, 2012, these parties state that it is

unclear whether or not such parties would still be required to apply to be registered due to their

activities prior to the Secretary’s determination to exempt such instruments by a deadline which

9 Further Definition of “Swap,” “Security-Based Swap,” and “Security-Based Swap Agreement”; Mixed Swaps;

Security-Based Swap Agreement Recordkeeping, issued July 18, 2012 (to be codified at 17 CFR pt. 1), 77 FR 48207

(August 13, 2012). The Commission also adopted anti-evasions rules, including an anti-evasion rule with respect to

foreign exchange swaps and forwards. Under that rule, an interest rate swap or currency swap (including certain

foreign exchange transactions that the Commissions have provided in their regulations are not foreign exchange

swaps or foreign exchange forwards) that is willfully structured as a foreign exchange forward or foreign exchange

swap to evade any provision of Subtitle A of Title VII of the Dodd-Frank Act shall be deemed a swap for purposes

of Subtitle A and the Commission’s regulations thereunder.

10 The exclusion of foreign exchange forwards and foreign exchange swaps would become effective upon the

Secretary’s submission of the determination to exempt to the appropriate Congressional Committees. See sections

1a(47)(E)(ii) and 1b of the CEA, 7 U.S.C. 1a(47)(E)(ii) and 1b.

11 See Section 721(a) of the Dodd-Frank Act. The CPO and CTA definitions, as amended, are codified at CEA

sections 1a(11) and 1a(12), 7 U.S.C

change forwards and foreign exchange swaps would become effective upon the

Secretary’s submission of the determination to exempt to the appropriate Congressional Committees. See sections

1a(47)(E)(ii) and 1b of the CEA, 7 U.S.C. 1a(47)(E)(ii) and 1b.

11 See Section 721(a) of the Dodd-Frank Act. The CPO and CTA definitions, as amended, are codified at CEA

sections 1a(11) and 1a(12), 7 U.S.C. 1a(11) and 1a(12), respectively.

4

could be December 31, 2012 for swap dealers in certain cases, or whether they would be allowed

to refrain from applying, withdraw their application to be registered or make a new application to

cancel their registration. These parties state that these questions about registration are subjecting

them and the foreign exchange markets generally to significant uncertainty. To avoid this

uncertainty, these parties also have suggested that such market participants may withdraw from

the foreign exchange swap and foreign exchange forward markets, or be forced to restructure

their activities. Similar concerns have been raised with respect to operators of collective

investment vehicles that trade foreign exchange swaps and forwards and persons who provide

advice concerning foreign exchange swaps and forwards, and would have to apply to be

registered with the Commission as commodity pool operators or commodity trading advisors

solely as a result of these respective activities.

Based on the information provided by these parties, the Division believes that time-

limited no-action relief is warranted in order to alleviate the uncertainty on market participants

who engage solely or primarily in foreign exchange swap and foreign exchange forward swap

dealing activity in the event that, shortly after October 12, 2012, the Secretary issues a

determination to exempt foreign exchange swaps and foreign exchange forwards from the

definition of the term “swap” in the CEA

-action relief is warranted in order to alleviate the uncertainty on market participants

who engage solely or primarily in foreign exchange swap and foreign exchange forward swap

dealing activity in the event that, shortly after October 12, 2012, the Secretary issues a

determination to exempt foreign exchange swaps and foreign exchange forwards from the

definition of the term “swap” in the CEA. However, the Division does not believe it is

appropriate that this limited no-action relief would delay the date by which an entity must

register as a swap dealer, if the entity enters into other types of swaps in connection with its swap

dealing activities in excess of the de minimis thresholds.

Accordingly, the Division will not recommend enforcement action to the Commission

against an entity for failure to include, in its calculation of the aggregate gross notional amount

of swaps connected with its swap dealing activity for purposes of Commission Regulation

§1.3(ggg)(4), any foreign exchange swap or foreign exchange forward that is covered by an

exemption by the Secretary under section 1a(47)(E)(i) of the CEA that is effective prior to

December 31, 2012. However, notwithstanding the foregoing, if by December 31, 2012, an

entity enters into other types of swaps in connection with its swap dealing activities in excess of

either of the gross notional amount thresholds in CFTC regulation § 1.3(ggg)(4)(i),12 then such

foreign exchange swaps and foreign exchange forwards must be considered for purposes of the

entity’s determination of the date by which it must apply to be registered as a swap dealer.

For example, consider an entity that, in the month of October 2012 (following October

12, 2012) enters into foreign exchange swaps in connection with its swap dealing activities with

an aggregate gross notional amount of $5 billion, and also enters into interest rate swaps in

connection with its swap dealing activities with an aggregate gross notional amount of $4 billion

d as a swap dealer.

For example, consider an entity that, in the month of October 2012 (following October

12, 2012) enters into foreign exchange swaps in connection with its swap dealing activities with

an aggregate gross notional amount of $5 billion, and also enters into interest rate swaps in

connection with its swap dealing activities with an aggregate gross notional amount of $4 billion.

Under Commission Regulation § 1.3(ggg)(4), this entity must apply to be registered as a swap

dealer by no later than December 31, 2012. 13 However, if the Secretary were to determine to

12 Such an entity would include, for example, an entity that following October 12, 2012 and prior to December 31,

2012 enters into, in connection with its swap dealing activities, swaps that are not foreign exchange swaps or foreign

exchange forwards and that, in the aggregate, exceed either of the gross notional amount thresholds in CFTC

regulation § 1.3(ggg)(4)(i).

13 December 31, 2012 is the latest date that swap dealers which exceed a de minimis threshold in October 2012

would be required to register with the Commission. See CFTC Staff Frequently Asked Questions on Timing of

Swap Dealer Registration Rules (Sept. 10, 2012).

5

exclude such foreign exchange swaps from the definition of the term “swap” with an effective

date of November 15, 2012, then the entity may disregard all such excluded foreign exchange

swaps for purposes of such aggregate gross notional amount calculation

with the Commission. See CFTC Staff Frequently Asked Questions on Timing of

Swap Dealer Registration Rules (Sept. 10, 2012).

5

exclude such foreign exchange swaps from the definition of the term “swap” with an effective

date of November 15, 2012, then the entity may disregard all such excluded foreign exchange

swaps for purposes of such aggregate gross notional amount calculation. However, if in the

month of November 2012 the entity enters into interest rate swaps in connection with its swap

dealing activities with an aggregate gross notional amount of $5 billion, then (because it has

entered into interest rate swaps in connection with its swap dealing activities with an aggregate

gross notional amount of more than the $8 billion de minimis threshold by December 31, 2012),

its foreign exchange swaps must be considered for purposes of determining the date by which it

must register as a swap dealer, and therefore the entity must apply to be registered as a swap

dealer by no later than December 31, 2012.

Also, the Division will not recommend enforcement action to the Commission against an

entity for failure to include, in its calculation of its substantial position in swaps or substantial

counterparty exposure for purposes of Commission Regulation §1.3(hhh), any foreign exchange

swap or foreign exchange forward that is covered by an exemption by the Secretary under

section 1a(47)(E)(i) of the CEA that is effective prior to December 31, 2012

t action to the Commission against an

entity for failure to include, in its calculation of its substantial position in swaps or substantial

counterparty exposure for purposes of Commission Regulation §1.3(hhh), any foreign exchange

swap or foreign exchange forward that is covered by an exemption by the Secretary under

section 1a(47)(E)(i) of the CEA that is effective prior to December 31, 2012.

In addition, the Division believes that time-limited no-action relief is warranted in order

to alleviate uncertainty with respect to operators of collective investment vehicles that trade

foreign exchange swaps and forwards and persons who provide advice concerning foreign

exchange swaps and forwards, and would have to register with the Commission as commodity

pool operators or commodity trading advisors solely as a result of these respective activities, in

the event that, shortly after October 12, 2012, the Secretary issues a determination to exempt

foreign exchange swaps and foreign exchange forwards from the definition of the term “swap.”

Accordingly, the Division will not recommend enforcement action to the Commission against a

person who operates a collective investment vehicle that trades foreign exchange swaps and

forwards or a person who provides advice concerning foreign exchange swaps and forwards, and

would have to apply to be registered with the Commission as a commodity pool operator or

commodity trading advisor solely as a result of these respective activities, for failure to apply to

be registered with the Commission, if the Secretary issues a final determination to exempt

foreign exchange swaps and forwards from the term “swap” that becomes effective before

December 31, 2012.

This letter, and the positions taken herein, represent the view of the Division only, and do

not necessarily represent the position or view of the Commission or of any other office or

division of the Commission

th the Commission, if the Secretary issues a final determination to exempt

foreign exchange swaps and forwards from the term “swap” that becomes effective before

December 31, 2012.

This letter, and the positions taken herein, represent the view of the Division only, and do

not necessarily represent the position or view of the Commission or of any other office or

division of the Commission. The relief issued by this letter does not excuse the affected persons

from compliance with any other applicable requirements contained in the CEA or in the

Commission’s regulations issued thereunder. Further, this letter, and the relief contained herein,

is based upon the information made available to the Division. Any different or changed material

facts or circumstances might render this letter void.

6

Should you have any questions, please do not hesitate to contact Frank Fisanich, Chief

Counsel, at 202-418-5949, or Ward Griffin, Associate Chief Counsel, at 202-418-5425.

Very truly yours,

Gary Barnett

Director

cc:

Regina Thoele, Compliance

National Futures Association, Chicago