The Treasury Department has proposed to exempt foreign exchange swaps and forwards from certain provisions of the Dodd-Frank Act that regulate derivative transactions. Section 721 of the Dodd-Frank Act amends section 1a of the Commodity Exchange Act, or CEA, which defines the term “swap” under the CEA and includes foreign exchange swaps and foreign exchange forwards in the definition. Section 1a(47)(E) of the CEA authorizes the Secretary of the Treasury to make a written determination that foreign exchange swaps, or foreign exchange forwards, or both:
• should not be regulated as swaps under the CEA; and
• are not structured to evade the Dodd-Frank Act in violation of any rule promulgated by the CFTC pursuant to section 721(c) of the Dodd-Frank Act.
According to the Treasury Department, the FX swaps and forwards market is markedly different from other derivatives markets. Existing procedures in the FX swaps and forwards market mitigate risk and help ensure stability. Central clearing requirements will strengthen the rest of the derivatives market, but could actually jeopardize practices in the FX swaps and forwards market that help limit risk and ensure that it functions effectively. This market plays such an important role in helping businesses manage their everyday funding and investment needs throughout the world that disruptions to its operations could have serious negative economic consequences.
The Treasury Department warns that FX swaps and forwards will remain subject to Dodd-Frank’s rigorous new trade reporting requirements and business conduct standards. Additionally, the Dodd-Frank Act makes it illegal to use these instruments to evade other derivatives reforms. Importantly, the proposed determination does not extend to other FX derivatives, such as FX options, currency swaps, and non-deliverable forwards.
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