CFTC Clarifies Treatment of Certain Foreign Exchange Products

In newly issued interpretative guidance, the CFTC Market Participants Division and the Division of Market Oversight clarified the definitions of (i) "foreign exchange forward" and (ii) "foreign exchange swap" under the Commodity Exchange Act.

The Divisions confirmed that two specific foreign exchange products—Window FX Forwards and certain package Spot FX transactions—are not considered foreign exchange swaps or swaps under the Act.

As set forth in CFTC Letter No. 25-10, Window FX Forwards—foreign exchange forwards permitting settlement on one or more pre-specified dates within a window—qualify as "foreign exchange forwards" under CEA Section 1a(24) ("Definitions"). The Divisions concluded that they are outside the definition of a "swap" in CEA Section 1a(47), consistent with the Treasury Determination issued in 2012. The Divisions noted that the exchange rate for the transactions may vary depending upon the actual settlement date, but the exchange rate for any particular settlement date is established at the initiation of the transaction.  

The Divisions also addressed deliverable package Spot FX transactions (e.g. "tom/next" structures), clarifying that such transactions, where the parties exchange two currencies on trade date, or on T+1, and then exchange back on the following trade, are viewed as two bona fide spot transactions settled within the customary T+2 timeframe, and thus are not considered to be within the definition of a "swap."