SIFMA AMG Requests Interpretive Guidance on Foreign Exchange Transactions
Commentary by Bob Zwirb
SIFMA Asset Management Group ("SIFMA AMG") submitted comments to the CFTC requesting interpretive guidance with respect to the status of certain types of FX transactions as bona fide spot foreign exchange transactions. The CFTC further defined the term "swap," setting forth a distinction between FX spot transactions and FX forwards that included providing guidance as to "securities conversion transactions," which are entered into in connection with a related foreign securities transaction.
Additionally, SIFMA AMG submitted comments to the CFTC requesting relief for certain External Business Conduct Standards for certain FX Transactions. SIFMA AMG requested that the CFTC extend the date for compliance by SDs and MSPs with external business conduct requirements and other information collection rules when entering into deliverable FX transactions with a settlement cycle of no more than seven local business days after execution.
See: SIFMA AIMG Interpretive Guidance Letter; SIFMA AIMG Relief Request Letter.
See also: SIFMA AMG Submits Comments to CFTC on Cross-Border Phase-in Exemptive Order and Final Interpretive Guidance (with Lofchie Comment) (August 23, 2013).
Commentary
The SIFMA AIMG letters highlight two significant problems with efforts to comply with Dodd-Frank requirements relating to FX transactions. First, market participants continue to struggle with respect to "interpretive issues" in connection with Securities Conversion Transactions that involve delivery beyond the normal T + 2 day period of settlement for FX spots. Second, market participants can not readily distinguish between FX spots and forwards, a distinction that is necessary in order to determine whether Dodd-Frank business conduct standards apply to them or not (they do if the contracts are forwards or swaps, they do not if they are spots). Prior CFTC no-action relief, see CFTC No-Action Letter 13-13, expires on September 1st, and it appears that the industry is in no better shape in distinguishing between FX spots and FX forwards or swaps than it was a year or two ago.
Although the CFTC's external business conduct rules apply to SDs and MSPs engaged in FX swaps and FX forwards transactions, such requirements do not extend to "transactions that historically have been considered spot transactions." 77 Fed. Reg. 48207, 48257 (Aug. 13, 2012). However, because the customary settlement period for spot FX varies by jurisdiction and by type of transaction, e.g., an FX transaction executed contemporaneously with a foreign securities transaction takes longer than the normal T + 2, it is not always clear whether a transaction being entered into is truly a spot FX or not. In order to determine whether the product is a spot transaction that falls outside the swap regime, or an FX forward subject to the CFTC's external business conduct rules, SDs and MSPs presumably must have a reasonable basis for determining whether FX transactions they enter into are bona fide spots.
The problems are compounded by the fact that the CFTC has not itself provided guidance on the required level of due diligence to determine the classification of a product, or the extent to which firms may rely on written representations or notices for this purpose. Consequently, the market is still uncertain how to comply with Dodd-Frank business conduct requirements because there are no clear rules for distinguishing between various types of currency transactions.