MFA Files Letter to EC on FX Spot Transactions
Commentary by Bob Zwirb
The Managed Funds Association ("MFA") submitted comments with the European Commission ("EC") in response to the EC's request for comments (in connection with a Consultation Document that the EC issued) on how to define a foreign exchange ("FX") spot contract and how to delineate between spot contracts and FX financial instruments, which are subject to other legal frameworks, such as Markets in Financial Instruments Directive II and the European Market Infrastructure Regulation. &
The MFA recommended that the EC, in interpreting an "FX spot transaction" consider an approach comparable to the U.S. regulatory approach. Specifically, the MFA recommended that the EC adopt a "FX spot transaction" definition which considers a settlement period (such as T+2) and includes transactions which have a longer settlement period because of market custom or because the FX transaction is part of a foreign currency asset conversion transaction.
See: MFA Response to EC Consultation Document.
Commentary
The CFTC approach, with which MFA urges the European Commission to harmonize, recognizes that settlement periods longer than T + 2 for FX transactions are sometimes necessary to allow for settlement in certain markets or to accommodate transactions involving foreign securities where the customary period is usually longer than T + 2. That said, those who transact in this space should be mindful of the fact that the CFTC requires "actual delivery" to take place within the specified period in order for an FX transaction to be regarded as a true spot and that so-called "rolling spots," which are common in the FX industry, do not qualify, notwithstanding case law to the contrary. See, e.g., CFTC v. Zelener, 373 F.3d 861, 867 (2004), reh'g and reh'g en banc denied, 387 F.3d 624 (7th Cir. 2004), CFTC v. Erskine, 512 F.3d 310 (6th Cir. 2008), reh'g and reh'g en banc denied (6th Cir. 2008) (rejecting CFTC's position that "rolling spot" forex contracts are illegal off-exchange futures); In re Grain Land Cooperative, CFTC Docket No. 97-01 (Nov. 25, 2003) ("[n]either the existence [n]or exercise of an option to roll delivery obligations [i]s incompatible with intent to deliver the underlying commodity").
Harmonizing these definitions is important. If an FX contract does not qualify as a spot either because it has a rolling clause or delivery does not occur within the required time frame, then it will be re-characterized as a "swap" in the U.S. or a "financial instrument" in Europe and subject to more comprehensive regulation for derivatives under the regulatory frameworks for such instruments that have been set up in those two jurisdictions in the aftermath of the financial crisis.