A no-action letter issued on May 2 provides swap dealers and
major swap participants with temporary relief from compliance with
External Business Conduct Standards rules in connection with
certain foreign exchange transactions that have a settlement cycle
of no more than seven local business days (T+7). The applicable
Commodity Futures Trading Commission (CFTC) External Business
Conduct Standards rules became effective on May 1, 2013. The
no-action relief applies only to transactions executed before
September 1, 2013.
In general, a foreign exchange transaction will be considered a
bona fide spot transaction if it settles via an actual delivery of
the relevant currencies within two business days after the trade
date (T+2). However, in some markets the settlement cycle for
certain securities conversion transactions can be significantly
longer than two business days. The CFTC has recognized such
transactions may be considered bona fide spot transactions
depending on the customary time line of the relevant
market.[1]
The CFTC received information from an industry group that, for
administrative ease, some swap dealers were treating all foreign
exchange transactions that settle on a greater than T+2 basis as
foreign exchange forwards. Although foreign exchange forwards are
not regulated as "swaps," the parties to such
transactions must conform to the External Business Conduct
Standards rules.
The CFTC's Division of Swap Dealer and Intermediary Oversight
issued the no-action letter. The stated purpose of the no-action
relief is to allow market participants time to develop systems to
distinguish between bona fide foreign exchange spot transactions
(which are beyond the regulatory jurisdiction of the CFTC) and
foreign exchange forwards (i.e., transactions that are not bona
fide foreign exchange spot transactions and are subject to the
External Business Conduct Standards rules).
The CFTC granted the no-action relief due to concern that parties
seeking to transact bona fide foreign exchange spot transactions
would find their activities disrupted because their counterparties
were treating these transactions as subject to the External
Business Conduct Standards rules. The temporary relief will allow
parties engaging in bona fide foreign exchange spot transactions to
continue their normal activities (so long as those transactions
have a settlement cycle no longer than seven local business days)
while spot dealers and major swap participants address operational
issues.
Please contact the Day Pitney attorneys listed above to discuss any
questions you may have about the timing and implementation of the
Dodd-Frank swap market reforms.
Footnote
[1] See Further Definition of "Swap,"
"Security-Based Swap," and "Security-Based Swap
Agreement"; Mixed Swaps; Security-Based Swap Agreement
Recordkeeping, 77 FR 48208, 48256-58 (Aug. 13, 2012).
www.daypitney.com
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
