July 31, 2012

CFTC Swap Product Definition

Something I meant to look up, but didn’t dare, was the CFTC definition of ‘what is a swap’ for Dodd Frank purposes. It’s surprising how many hits google will return for that question without providing a useful answer. Below are the official CFTC docs:

  • The rule making page they came from is here
  • The final rule PDF is here
  • Fact Sheet here
  • Q&A here

If you tried reading the final rule, and completed it, apply to me for a prize. If you made sense of it that’s even better. In the Q&A, there are some useful statements which cut through the fog of regulation:

The statutory definition of “swap” is detailed and comprehensive. It includes, for example, interest rate swaps, commodity swaps, currency swaps, equity swaps and credit default swaps. To avoid confusion in certain areas, the Commissions are proposing rules and guidance to clarify that a few types of transactions in particular are swaps. These include foreign exchange swaps and forwards (for further information, see questions about foreign exchange forwards and swaps below), foreign currency options (other than foreign currency options traded on a national securities exchange), commodity options, non-deliverable forwards in foreign exchange, cross-currency swaps, forward rate agreements, contracts for differences, options to enter into swaps and forward swaps.

And also:

If the Treasury Secretary determines to exempt Foreign Exchange Forwards and Swaps from the swap definition, are there any regulatory requirements applicable to them under the Commodity Exchange Act (CEA)? 

Yes. Under the Dodd-Frank Act, even if the Secretary of the Treasury determines that foreign exchange forwards or foreign exchange swaps should not be regulated as swaps, they still would be subject to swap reporting requirements (to a swap data repository, if available, or to the CFTC otherwise). Also, swap dealers and major swap participants engaging in such transactions still would be subject to certain business conduct standards with respect to the transactions.

And also:

Are there other foreign exchange products that remain subject to the CEA? 

Yes. All foreign exchange products that meet the swap definition, and are not foreign exchange forwards or foreign exchange swaps, remain subject to the CEA even if the Treasury Secretary exempts foreign exchange swaps and foreign exchange forwards. These include foreign currency options (other than foreign currency options traded on a national securities exchange) (including those on foreign exchange forwards or foreign exchange swaps), non- deliverable forward contracts involving foreign exchange, currency swaps and cross-currency swaps.

The rest you can read in the above PDFs… enjoy!

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