Derivatives: Relief for documenting FX trading relationships? – It’s complicated

June 2013


On June 27, 2013, the Commodity Futures Trading Commission (CFTC) provided welcome, if partial, relief from its swap documentation requirements. The relief extends the July 1, 2013 deadline for swap dealers (SDs) and major swap participants (MSPs) for putting swap trading relationship documentation in place with counterparties. However, the relief comes with some caveats – it is temporary, only applies to trades with foreign exchange (FX) counterparties, and only applies to transactions with non-SD/MSP counterparties.

At issue are the CFTC’s “swap trading relationship documentation” rules that require SDs and MSPs to have in place not only documentation that meets minimum standards governing the terms of their trading relationships with counterparties, but also policies and procedures designed to ensure that such documentation is executed. After first providing for a phased-in implementation of the rule, the CFTC later set July 1st as the date by which SDs and MSPs had to have such documentation and policies in place with all counterparties with regard to all asset classes. The rule hit a snag, however, with FX transactions because FX has customarily traded without the type of trading relationship documentation the CFTC is now requiring. Whereas other products in a dealer’s portfolio likely traded under ISDA master agreements or other forms of documentation, many dealers had to start from scratch or update existing agreements in order to meet the more rigorous CFTC documentation standards.

The industry asked for relief from the July 1st deadline with regard to FX transactions, arguing primarily that most FX transactions affected by the rule had not traditionally been covered by ISDA master agreements or equivalent types of relationship documentation. The industry also argued that there had been an “initial lack of awareness” that swap trading relationship documentation rules applied to all FX derivatives.

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