CFTC Time-Limited No-Action Letter Regarding FX Swaps for Purposes of SD, MSP and Pool Calculations (with Lofchie Comment)

The Division of Swap Dealer and Intermediary Oversight issued a no-action letter providing time-limited, and otherwise limited, no-action relief from the obligation to include any forex swap or forex forward for purposes of determining a person's registration requirement as an SD, MSP or CPO. Be aware that the relief is quite limited. It applies for purposes of the calculations relevant to determining if a person is a major swap participant or SD, but significant aspects of the relief are only available if the Treasury determines (which is uncertain at this point) to exempt such swaps or forwards from the definition of the term "swap" under the CEA.

The letter also provides similar temporary no-action relief, for the same time period, for persons who would meet the definitions of the terms "CPO" and "CTA" in the CEA solely as a result of their forex swap and foreign forward activity, from registration in those capacities.

Lofchie Comment: This no-action letter states that it is intended to alleviate the uncertainty that has arisen in the FX market because the Secretary of Treasury has not issued any determination as to which FX transactions will constitute "swaps" under Dodd-Frank. Frankly, I don't get it. This no-action letter seems to be drafted so as to provide as little certainty as possible; much of the relief in the letter becomes ineffective if Treasury fails to provide an exemption, thus seemingly rendering the letter moot. Beyond the extremely limited relief and less certainty provided by the letter, it is drafted in a remarkably confusing manner (see pages 4-5). I simply do not understand why the CFTC could not issue a one-page letter that says, "until Treasury determines which FX transactions are swaps, then, for purposes of calculations to determine whether one is an SD, MSP, or CPO, one may ignore FX transactions. Once the Treasury makes such a determination, market participants will be given a reasonable amount of time to include such transactions in their calculations going forward." Separately, I still question how the CFTC could set its levels for determining whether an entity would be an SD, MSP or CPO without knowing whether FX transactions would be counted in the relevant calculations. It is not logical to say that "x" dollars of swaps make an entity into an SD if the term "swap" is not yet defined.

See: CFTC Letter 12-21 Commission Regulation 1.3(ggg)(4); No-Action.