Decision on FX Exemption Likely Not Until after November Even Though Swaps Requirements Become Effective October 12 (with Lofchie Comment)

Several sources have reported that the U.S. Treasury may not decide whether to exempt certain currency derivatives from new rules until late November, at best. The failure to specify which FX trades are "swaps" materially adds to the level of uncertainty for all parties attempting to determine whether they will be required to register as swap dealers or major swap participants and which regulations will apply to currency trades, bearing in mind that the definition of "swap" is due to become effective this October.

Lofchie Comment: There is a direct thematic relationship between the absence of a rulemaking on this issue and Commissioner O'Malia's criticisms intoday's news. That is, I simply don't see how the regulators expect the industry to develop rules of compliance in the face of open questions so basic as whether a trade in currencies constitutes a swap. Similarly, in determining, for example, the level of swaps trading that will make an entity a "major swap participant," doesn't it matter to the CFTC whether a currency trade is a swap (e.g., maybe it would be appropriate to define the MSP level higher or lower depending on what types of trades constitute a swap)? The uncertainty of the application of the swap definition to currency trading is particularly significant to non-U.S. banks determining whether they may be required to register as a swap dealer or a major swap participant, as a significant portion of their trades with U.S. banks are likely to involve currencies.