Rep. Frank and Industry Trade Associations Request Action on FX Swaps Exemption (with Lofchie Comment)
Representative Barney Frank (co-author of the Dodd-Frank Act) submitted a letter to CFTC Chairman Gary Gensler and Treasury Secretary Timothy F. Geithner regarding the implementation of rulemakings that impact entities engaged in foreign exchange (FX) transactions. In particular, Representative Frank stressed the need for the Treasury to clarify what FX trades are to be considered "swaps" under Dodd-Frank, so that, among other things, firms can determine whether they will be required to register as swap dealers and major swap participants.
Representative Frank expressly stated that he was not taking a view on what FX trades should be regulated as swaps.
The various trade associations likewise requested action by Secretary Geithner and, failing that, that the CFTC delay the application of its rules to FX swaps.
Lofchie Comment: At some point (in fact, a point long past) the failure to act to define the application of Dodd-Frank to FX trades becomes just plain weird. Dodd-Frank was signed into law on July 21, 2010. The relevant provision of the statute authorizing the Treasury to determine whether to regulate FX trading as a "swap" was in the bill for several months before the adoption of the statute. So the Treasury has had approximately 2 1/2 years to act on this question. The Treasury issued a proposed rule making on May 5, 2011, almost 1 1/2 years ago. I assume that there is more going on here than simple inaction. I will confess that when I saw (back in 2010) the provision of Dodd-Frank that would potentially treat all FX contracts as swaps, I assumed that the provision would be quickly deleted from the bill. (Wrong.) Then I assumed that the Treasury would quickly issue a broad exemption. (Wrong again.) Now, here we are: still no decision made. (I really don't understand this; is it remotely possible that all of these FX trades can be regulated as swaps without doing some serious damage to the U.S. economy and global trade?) If the Treasury determines that all FX trades are to be regulated as swaps (or fails to provide an exemption), doesn't that mean that the CFTC (i) needs to rethink the levels at which swap dealer and MSP registration are required (presumably those levels were set on the assumption that the May 2011 proposals would be adopted) and (ii) give a good deal more thought to some of the cross-border transaction issues (are we really going to require that non-U.S. banks trading currency forwards with U.S. banks and persons register as swap dealers)? I have to believe that any decision by the U.S. government to regulate FX forwards as swaps would draw a negative response from non-U.S. regulators, who have already strenuously complained as to CFTC regulation.
View Barney Frank letter in full here. Additional Materials: MFA, SIFMA, et al. - Comment Letter to Treasury Secretary Geithner (requesting determination of whether FX transactions are "swaps") Comment Letter to CFTC Chairman Gensler (requesting that the CFTC not treat FX trades as "swaps" pending determination of the issue by the Treasury) See also: Dodd Frank Section 721 (Definitions) (The relevant provision is Section 721(a)(47)(E)). For a general discussion of the definition of the term swap, see "What is a Swap and Other Jurisdictional Questions" (Section IX deals with FX trades).