CFTC Issues Time-Limited No-Action Relief from Certain Swap Documentation Standards with FX Counterparties (Letter 13-38) (with Lofchie Comment)

The CFTC's Division of Swap Dealer and Intermediary Oversight ("DSIO") issued a no-action letter relating to requirements imposed on Swap Dealers ("SDs") and Major Swap Participants ("MSPs") pursuant to CFTC Rule 23.504 ("Swap trading relationship documentation") in connection with:

(i) foreign exchange transactions that are swaps, and (ii) physically-settled foreign exchange forwards and swap agreements that have been exempted from the definition of "swap" by the Secretary of the U.S. Department of the Treasury.

The letter provides relief for SDs and MSPs from the requirements of swap trading relationship documentation under Rule 23.504 until (1) September 1, 2013 with respect to a counterparty that is an active fund; or (2) December 31, 2013 with respect to any other counterparty except a registered SD or MSP, subject to certain conditions detailed in the letter. Among these conditions are that the swap dealers have in place compliance procedures, with which the no-action letter excuses it from complying. In addition, the swap dealers must not enter into any swaps with the relevant counterparty other than those FX trades that are the subject of this letter.

Lofchie Comment: This is an example of the CFTC imposing conditions on no-action relief that serve no obvious policy function and that only make availing oneself of the relief complicated and difficult. In this letter, there appears to be no purpose in preventing firms from relying on the relief if they enter into swaps other than FX swaps or if they have previously entered into an ISDA that does not cover FX swaps.This is one of nine no-action letters, many of them extending prior no-action letters and most of them subject to complicated conditions and time-limitations. The issuance of these letters in order to delay the effectiveness of rules that otherwise would have gone into effect after June 30th seems evidence of a rulemaking process that is not working well. The reason for the issuance of many of the no-action letters is that it is simply impossible for either technological reasons or conflicts of laws to comply with the underlying requirements. There is no reasonable explanation that the letters should have been issued at the very last minute.

See: CFTC Letter 13-38.