Last month Commissioner Bart Chilton of the Commodity Futures Trading Commission (CFTC) confirmed that the CFTC intends to extend the definition of swap to include retail rolling spot forex (FX) transactions (hereinafter, Rolling FX). A Rolling FX transaction occurs when a net open position in the spot market is not physically delivered but is rather rolled forward until it is offset. The CFTC deems Rolling FX to be a swap due to the speculative nature of the product and the ability to exchange one asset or liability for a similar asset or liability to shift risk. In his announcement, Commissioner Bart Chilton stated that: “Rolling spot transactions are borne out of a desire to offer retail investors the ability to speculate on exchange rates, and what we’ve been telling people is that we interpret the rolling spot transactions with eligible contract participants (ECPs) as swaps, so they should be treated accordingly.”

The CFTC believes it has the authority to categorize Rolling FX as a swap since the current definitions under the Dodd–Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) are still being formulated. For instance, the CFTC believes that Rolling FX can be seen as a contract for difference (CFD), which in turn can fit under the definition of a swap. Many FX firms disagree with the CFTC’s intended classification of Rolling FX as a swap, however, and counter that Rolling FX is fundamentally different than a CFD. These firms contend that a CFD grants no ownership rights with respect to the transacting party, whereas in Rolling FX the party to the contract maintains the right to receive physical delivery of the referenced currency on demand. The CFTC apparently does not share this same opinion, however, regarding the fundamental distinction between a CFD and Rolling FX. 
 
The CFTC is expected to proceed with its plans to require all U.S. retail FX brokers to register as swap dealers pursuant to Dodd-Frank. Some retail FX brokers, such as Gain Capital and FXCM, have already registered in this capacity in March of this year. The CFTC’s intended treatment of institutional FX transactions, however, currently remains unclear. Some industry participants believe that the CFTC is likely to grant more leeway for institutional FX transactions and is likely to seek input from firms that offer these products when defining the parameters of a rolling spot in that situation. In this regard, institutional firms point to the distinction that in retail FX the positions are generally rolled over automatically whereas institutional FX requires manual rollover. Institutional FX firms in turn believe this distinction would render their transactions exempt from the swap definition.

As a further consideration, the U.S. Treasury exemption for FX swaps and forwards, which was finalized in November 2012, exempts these products from mandatory clearing and exchange trading requirements. While this exemption is thought to cover FX transactions that are physically delivered, it is presently unclear as to whether it would also apply to Rolling FX. Based on this additional uncertainty, some firms are preparing themselves to be able to report on Rolling FX. Many of them are uncertain, however, as to when, how or whether to begin preparing for the possibility that such transactions may eventually require clearing as well.

The CFTC’s latest position on spot forex trading may not come as a surprise to many registered firms within the U.S. As has been the case for most of the 2000s, forex regulations in the U.S. will likely remain a quagmire of uncertainty for the foreseeable future. During the last decade, both federal and self-regulatory organizations, on numerous occasions, have established rules only to subsequently second guess themselves. With each new regulatory go-around the industry has suffered. This has forced more accounts and brokerages to seek regulatory shelter outside of the U.S. It has also driven the compliance cost of operating an FX brokerage in the U.S. to astronomical levels. We are hoping this time around the CFTC and Commissioner Chilton are able to land on a concrete set of rules that will stand over time. In this case, perhaps more than any other, regulatory uncertainty inadvertently eroded the very safeguards put in place to protect U.S. investors to begin with.  

Further Guidance

We encourage you to seek assistance if you have any questions regarding how the expected change in the registration requirements for retail FX firms might affect your firm. Please note that the information set forth in this summary is not intended to be all-inclusive and does not constitute legal advice. While the CFTC’s intention to include Rolling FX under the definition of a swap is not final, firms should be preparing themselves for this likely reality. For instance, retail FX firms should start becoming aware of the requirements for swap dealer registration, as well as the ongoing requirements once registered. If you have any questions concerning your potential registration and compliance obligations, we suggest you contact a regulatory professional like Turnkey Trading Partners (TTP) to assist you in understanding the CFTC’s new intentions concerning Rolling FX. TTP has the business acumen, as well as relationships with law firms, such as Henderson & Lyman, to provide you with the guidance you need to tackle these proposed new registration and compliance requirements.

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