On November 16, 2012, the Department of the Treasury (“Treasury”) issued a determination (“Determination”) that both foreign exchange (“FX”) swaps and FX forwards should not be regulated under the Commodity Exchange Act (“CEA”) and therefore should be exempted from the definition of “swap” under the CEA as amended by the Dodd Frank Wall Street Reform and Consumer Protection Act (“Dodd Frank”). The Determination is a wholesale adoption of the proposed determination issued by the Treasury last year.[2] The Determination is effective immediately.

Key takeaways for market participants are:

• FX swaps and FX forwards are exempt from the trade execution, mandatory clearing and margin requirements under Dodd-Frank;
• Many commonly used FX derivatives, including foreign currency options, currency swaps and non deliverable forwards are not exempt;
• Exempt FX swaps and FX forwards are still subject to Dodd-Frank’s reporting requirements and swap dealers must still comply with external business conduct rules in connection with such transactions, with compliance being required as soon as December 31, 2012.

The Determination was strongly supported by many market participants, who argued that applying clearing and trading requirements to FX swaps and FX forwards would increase costs and ultimately have an adverse effect on U.S. business and discourage hedging activity.

View full memo, "Dodd Frank: Treasury Exempts FX Swaps and FX Forwards"