CFTC Eases FX Requirements in New Interpretation

The US Commodity Futures Trading Commission (CFTC) has eased some of the regulatory conditions around window FX forwards and packaged spot transactions, laying out the new interpretation in a letter.

The staff interpretation has been worked up by the Division of Market Oversight and the Market Participants Division to provide greater clarity of the FX products’ treatment in the Commodity Exchange Act (CEA).

Window FX forwards, which are forward transactions with a flexible maturity date (they are particularly useful for firms making payments on delivery of goods), should, the letter notes, be considered “foreign exchange forwards” and thus exempt from the definition of “swap”. This means that these products will no longer be subject to the regulatory requirements of the CFTC around areas such as reference rates and trade reporting.

The letter notes that there has been some discrepancy amongst market participants regarding how these contracts have been treated, this has led to them reporting “confusion and frustration from business customers” because access to these products has been restricted due to regulatory uncertainty.

The CFTC divisions have also issued guidance on what they term “packaged spot transactions”, but in reality appear to be overnight and tom-next swaps, i.e. trades that mature inside the traditional T+2 spot window. Responding to demands for clarification, the letter observes that the “component transactions are priced or quoted together as one economic transaction with simultaneous or near-simultaneous execution of both components. However, (a) each spot transaction is evidenced by a separate confirmation, often two Swift messages, that contain no linkage between the two, and (b) if one party failed to perform on the first transaction, the other party would still be obligated to perform on the second transaction (i.e., each transaction is a separate legally enforceable obligation that is not contingent on performance of the other transaction).”

In these circumstances, the letter says, market participant have argued that the timeframe, within spot, means these transactions should not be characterised as a swap, something the CFTC divisions clearly agree with as they now state these transactions “should not be considered to be foreign exchange swaps” under the CEA.