The Dodd-Frank Wall Street Reform Act continues to include regulatory direction relating to defining the framework around which swaps should be overseen, and to provide clarity as to what constitutes a swap.
This has now been extended to rolling spot transactions, which according to the Commodity Futures Trading Commission (CFTC) are to be deemed swaps in the retail market due to the speculative nature of such products. Such a move could create a significant change in FX trading environments, as FX spot is expected to be exempt from US clearing and exchange trading rules, but rolling spot could be classified as a CFD.
As part of a research carried out by FXWeek on this matter, CFTC Commissioner Bart Chilton made a statement yesterday which covered the reasoning behind such a ruling, stating that the rationale behind rolling spot transactions is to offer retail investors a means of speculating on exchange rates, and as a result of this, they should be interpreted by the US regulator as swaps and should be treated accordingly.
The position relating to rolling spot transactions in the institutional sector has not yet been clarified.
Two major FX firms with a large proportion of their retail volume taking place in the United States are GAIN Capital and FXCM. Both of these firms registered as swap dealers in March this year, although did not stipulate the exact reasoning for doing so.
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Commenting on this ruling, Drew Niv, CEO of FXCM detailed the company’s stance on this matter to Forex Magnates: “FXCM has registered as a swap dealer for its business with ECPs and will meet all requirements. The majority of FXCM’s volumes are retail trading volumes. ECP business, while very important to us, is a much smaller percentage, particularly US-based ECP business.”
“FXCM has always been an advocate of regulation that brings about confidence in the markets and the market participants” said Mr Niv.
Forex Magnates extended the opportunity to provide viewpoints to several other industry participants in the United States, all of whom declined to comment due to it being, according to one major US broker, “a sensitive issue still pending final decision, on which a number of other players are currently in talks with the CFTC”.
On May 16 this year, the CFTC held a meeting during which items on the agenda included the swap transaction compliance and implementation schedule, trade execution requirement under Section 2(h) of the CEA (Made Available to Trade Rule). Points discussed during this part of the meeting were centered on the core principles and other requirements for swap execution facilities (SEFs), along with the interpretive guidance and policy statement from the Anti-disruptive Practices Authority.
Under the Dodd-Frank Act, the SEF was instigated as a means of reforming the OTC derivatives market without forcing participants onto an exchange. Forex Magnates intends to research this matter further and provide a full and detailed synopsis as developments within the regulatory structure emerge.