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collection of information is necessary CEA, as well as Federal securities laws, (1) Whether the required trading and for the proper performance of the to provide a comprehensive regulatory clearing of foreign exchange swaps and functions of the Bureau, including regime for swaps. Section 721 of the foreign exchange forwards would create whether the information will have Dodd-Frank Act amends section 1a of systemic risk, lower transparency, or practical uses; (b) the accuracy of the the CEA, which, in relevant part, threaten the financial stability of the above estimate of the burden of the defines the term ‘‘swap’’ and includes United States; proposed information collection; (c) foreign exchange swaps and foreign (2) Whether foreign exchange swaps ways to enhance the quality, usefulness, exchange forwards in the definition.2 and foreign exchange forwards are and clarity of the information to be Section 1a(47)(E) of the CEA authorizes already subject to a regulatory scheme collected; and (d) ways to minimize the the Secretary to make a written that is materially comparable to that reporting burdens on respondents, determination that ‘‘foreign exchange established by the CEA for other classes including the use of automated swaps’’ 3 or ‘‘foreign exchange of swaps; collection techniques or other forms of forwards,’’ 4 or both— (I) should not be (3) The extent to which bank information technology. regulated as swaps under the CEA; and regulators of participants in the foreign Treasury Department PRA Clearance (II) are not structured to evade the exchange market provide adequate Officer: Robert Dahl, Department of the Dodd-Frank Act in violation of any rule supervision, including capital and Treasury, Room 11000, 1750 promulgated by the Commodity Futures margin requirements; Pennsylvania Avenue NW., Washington, Trading Commission (‘‘CFTC’’) pursuant (4) The extent of adequate payment DC 20220. to section 721(c) of the Dodd-Frank and settlement systems; and BEP Contact: Sonya White, Deputy Act.5 (5) The use of a potential exemption Chief Counsel, United States On October 28, 2010, the Department of foreign exchange swaps and foreign Department of the Treasury, Bureau of of the Treasury (‘‘Treasury’’) published exchange forwards to evade otherwise Engraving and Printing, Room 419–A, in the Federal Register a Notice and applicable regulatory requirements.7 14th and C Streets SW., Washington, DC Request for Comments (‘‘October 2010 I. Summary of Final Determination 20228. Notice’’) to solicit public comment on a The CEA, as amended by the Dodd- Robert Dahl, wide range of issues relating to whether foreign exchange swaps and foreign Frank Act, provides a comprehensive Treasury Department PRA Clearance Officer. exchange forwards should be exempt regulatory regime for swaps and [FR Doc. 2012–28112 Filed 11–19–12; 8:45 am] from the definition of the term ‘‘swap’’ derivatives, including a wide range of BILLING CODE 4810–25–P under the CEA.6 foreign exchange derivatives, such as On May 5, 2011, Treasury published foreign exchange options, currency a notice of proposed determination swaps, or non-deliverable forwards DEPARTMENT OF THE TREASURY (‘‘NPD’’) seeking comment on a (‘‘NDFs’’). Among other measures, this proposed determination that would regulatory regime provides for clearing Determination of Foreign Exchange and exchange-trading requirements that Swaps and Foreign Exchange exempt both foreign exchange swaps and foreign exchange forwards from the are designed to mitigate risks, promote Forwards Under the Commodity price transparency, and facilitate more Exchange Act definition of ‘‘swap,’’ as well as on the factors that would support such a stable, liquid markets for derivative AGENCY: Department of the Treasury, determination. instruments. Departmental Offices. In addition, Treasury staff has In general, swaps, including foreign exchange derivatives, carry three types ACTION: Final determination. engaged in a broad outreach to representatives from multiple market of risks: (i) Counterparty credit risk SUMMARY: The Commodity Exchange segments, as well as market regulators prior to settlement; (ii) market risk; and Act (‘‘CEA’’), as amended by Title VII of and the Federal regulatory agencies. (iii) settlement risk. Counterparty credit the Dodd-Frank Wall Street Reform and After assessing the comments in risk prior to settlement is the risk that Consumer Protection Act (‘‘Dodd-Frank response to the October 2010 Notice and a party to the transaction potentially Act’’), authorizes the Secretary of the the NPD, consulting with Federal could default prior to the settlement Treasury (‘‘Secretary’’) to issue a written regulators, and considering the factors date, which could result in the non- determination that foreign exchange set forth in section 1b(a) of the CEA, as defaulting party suffering an economic swaps, foreign exchange forwards, or discussed below, the Secretary finds loss associated with having to replace both, should not be regulated as swaps that a determination pursuant to the defaulted contract with another under the CEA. The Secretary is issuing sections 1a(47)(E) and 1b that ‘‘foreign transaction at the then-current terms. a determination that exempts both exchange swaps’’ and ‘‘foreign exchange foreign exchange swaps and foreign forwards’’ should not be regulated as 7 7 U.S.C. 1b(a). In addition, section 1b(b) of the exchange forwards from the definition CEA provides that, ‘‘[i]f the Secretary makes a swaps under the CEA, and therefore determination to exempt foreign exchange swaps of ‘‘swap,’’ in accordance with the should be exempted from the definition and foreign exchange forwards from the definition applicable provisions of the CEA. of the term ‘‘swap’’ under the CEA, is of the term ‘swap’,’’ the Secretary must submit a DATES: Effective November 20, 2012. appropriate. separate ‘‘determination’’ to the appropriate In making a determination pursuant committees of Congress, which contains (1) an FOR FURTHER INFORMATION CONTACT: explanation as to why foreign exchange swaps and Office of Financial Markets, 1500 to sections 1a(47)(E) and 1b of the CEA, foreign exchange forwards are ‘‘qualitatively Pennsylvania Avenue NW., Washington, the Secretary must consider, and has different from other classes of swaps’’ such that DC 20220, (202) 622–2000; Thomas E. considered, the following factors: foreign exchange swaps and foreign exchange Scanlon, Office of the General Counsel, forwards are ‘‘ill-suited for regulation as swaps’’ 2 and (2) an ‘‘identification of the objective 1500 Pennsylvania Avenue NW., 7 U.S.C. 1a(47). differences of foreign exchange swaps and foreign 3 Washington, DC 20220, (202) 622–8170. 7 U.S.C. 1a(25). exchange forwards with respect to standard swaps 4 7 U.S.C. 1a(24). SUPPLEMENTARY INFORMATION: that warrant an exempted status.’’ The Secretary has Title VII 5 7 U.S.C. 1(a)(47)(E)(i). 1 submitted this determination to the appropriate of the Dodd-Frank Act amends the 6 75 FR 66,426 (Oct. 28, 2010). Thirty comments committees of Congress, and, therefore, this were submitted in response to the October 2010 determination is effective, pursuant to section 1 Public Law 111–203, title VII. Notice. 1a(47)(E)(ii) of the CEA.

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Market risk is the risk that the value of determines that foreign exchange swaps transaction generally is very short. For the contract changes over the term of the and forwards ‘‘(I) should not be the vast majority of foreign exchange transaction. In this context, market risk regulated as swaps under [the CEA]; and swap or forward contracts, the risk is intertwined with counterparty credit (II) are not structured to evade [the profile is centered on settlement risk. risk prior to settlement because the non- Dodd-Frank Act] in violation of any Settlement risk often is addressed in defaulting party (who thus bears the rules promulgated by the [CFTC] foreign exchange swaps and forwards credit risk) also bears the risk that the pursuant to section 721(c) of the [Dodd- through the use of payment-versus- value of the prior contract might have Frank Act].’’ 9 payment (‘‘PVP’’) settlement declined when that party seeks to Under the CEA, a ‘‘foreign exchange arrangements,12 particularly with large replace the defaulted contract with swap’’ is narrowly defined as ‘‘a financial institutions. another transaction. Settlement risk, transaction that solely involves— (A) an Treasury believes, as do several particularly in the context of a foreign exchange of 2 different currencies on a commenters,13 that requiring central exchange swap or forward transaction, specific date at a fixed rate that is agreed clearing and trading under the CEA on is the risk that the contract will not be upon on the inception of the contract foreign exchange swaps and forwards settled in accordance with the initial covering the exchange’’ and ‘‘(B) a would potentially introduce operational terms, including when one party to the reverse exchange of [those two risks and challenges to the current transaction delivers the currency it owes currencies] at a later date and at a fixed settlement process. If central clearing the counterparty, but does not receive rate that is agreed upon on the inception were to be required, the central clearing the other currency from that of the contract covering the facility would be effectively 10 counterparty. exchange.’’ Likewise, the CEA guaranteeing both settlement and The payment obligations on currency narrowly defines a ‘‘foreign exchange market exposure to replacement cost. As swaps, interest rate swaps, credit default forward’’ as ‘‘a transaction that solely a result, combining clearing and swaps, commodity swaps and other involves the exchange of 2 different settlement in a market that involves derivatives fluctuate in response to currencies on a specific future date at a settlement of the full principal amounts changes in the value of the underlying fixed rate agreed upon on the inception of the contracts would require capital variables on which those derivatives of the contract covering the backing, in a very large number of 11 contracts are based. As a result, for most exchange.’’ currencies, well in excess of what will types of swaps, the full extent of the The Secretary’s authority to issue a be required for swaps that are settled on determination is limited to foreign future payments to be exchanged is not a ‘‘net’’ basis. Treasury believes that exchange swaps and forwards and does known at the outset of the contract and requiring foreign exchange swaps and not extend to other foreign exchange is determined throughout the life of the forwards to be cleared and settled derivatives. Foreign exchange options, contract. Moreover, as the term of a through the use of new systems and currency swaps, and NDFs (as discussed swap or derivative contract increases, a technologies could introduce new, below) may not be exempted from the party generally is exposed to greater unforeseen risks in this market. counterparty credit risk and market risk CEA’s definition of ‘‘swap’’ because prior to settlement. Settlement of most they do not satisfy the statutory II. Overview of the Comments on the types of swaps and derivatives involves definitions of a foreign exchange swap NPD only payments of net amounts that are or forward. After considering the statutory factors In response to the NPD, Treasury based on the changes in the value of the received 26 comment letters. Of these, variables underlying the derivatives and the comments on the NPD, the Secretary is issuing this determination 15 expressed support for the proposed contracts. Given the features of most determination, while 11 were generally swaps and derivatives, including some to exempt foreign exchange swaps and forwards because of the distinctive opposed. Several commenters who types of foreign exchange derivatives, support the proposed determination the clearing and exchange-trading characteristics of these instruments. Unlike most other swaps, foreign filed letters that incorporated by requirements under the CEA, where reference—as well as reconfirmed— applicable, would mitigate the relevant exchange swaps and forwards have fixed payment obligations, are settled by statements and arguments they made in risks, notably counterparty credit risks response to the October 2010 Notice.14 prior to settlement. the exchange of actual currency, and are By contrast, foreign exchange swap predominantly short-term instruments. A. Comments Supporting Proposed and forward participants know their Counterparty credit risk prior to Determination own and their counterparties’ payment settlement is significantly reduced by the structure of a foreign exchange swap Commenters who support issuing an obligations and the full extent of their exemption generally argue that foreign exposures at settlement throughout the or forward transaction, particularly because the term for each type of exchange swaps and forwards are life of the contract. Thus, while the functionally different from other over- mark-to-market value of a position in a a person from engaging in a swap unless the person the-counter (‘‘OTC’’) derivatives because foreign exchange swap or forward may submits such swap for clearing to a derivatives foreign exchange swaps and forwards vary based on changes in the exchange clearing organization that is registered under the involve an actual exchange of principal, rate or interest rates, the actual CEA if the CFTC requires the swap, or a category are predominantly very short in settlement amounts do not. of swaps, to be cleared. 7 U.S.C. 2(h)(1). In addition, Under the regulatory regime enacted section 2(h)(8) of the CEA provides that any swap required to be cleared is subject to trade-execution 12 PVP settlement arrangements permit the final by the Dodd-Frank Act, foreign requirements. 7 U.S.C. 2(h)(8). Pursuant to section transfer of one currency to take place only if the exchange swaps and forwards generally 4s(e) of the CEA, uncleared swaps are subject to final transfer of the other currency also takes place, are subject to the requirements of the margin requirements under the CEA. 7 U.S.C. 6s(e). thereby virtually eliminating settlement risk. CEA and, in particular, would be subject Thus, as a result of this determination pursuant to 13 See, e.g., American Express Co., at 1; American sections 1a(47)(E) and 1b of the CEA, foreign Bankers Ass’n et al., at 3; FX Investor Group, at 1; to central clearing and exchange exchange swaps and forwards would not be subject Global FX Division of SIFMA, et al. (‘‘Global FX 8 trading, unless the Secretary to margin requirements under the CEA. Division’’), at 1–2. 9 7 U.S.C. 1a(47)(E)(i). 14 References made herein to the comment letters 8 7 U.S.C. 2(h)(1)–(2). In general, section 2(h)(1) of 10 7 U.S.C. 1a(25). are to those submitted in response to the NPD, the CEA, as added by the Dodd-Frank Act, prohibits 11 7 U.S.C. 1a(24). unless otherwise noted.

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duration and have high turnover rates.15 exercise strong regulatory oversight. A potential techniques, systems These commenters note that this market few of these commenters also observe ‘‘analogous to traditional central functions predominantly as a global that the Federal Reserve Board has counterparty clearing’’ 28 that, in their payments market and is used authority to craft appropriate view, could be developed in order to significantly by end-users for hedging regulations governing systemically conduct foreign exchange swap and purposes.16 Many corporate participants important financial market utilities and forward transactions that can be subject have expressed concern that the payment, clearing, and settlement to initial and variation margin payments additional costs and operational activities, as designated under Title VIII designed to minimize the credit risk difficulty associated with clearing of the Dodd-Frank Act.22 exposures to the parties.29 foreign exchange swaps and forwards B. Comments Opposing Proposed III. Analysis, Consideration of Statutory would adversely affect their business Determination Factors, and Implications of Final activities and discourage hedging Determination and Treatment of NDFs activity.17 Commenters also have By contrast, commenters who urge cautioned that imposing mandatory Treasury not to issue a determination to A. Analysis of Why Foreign Exchange clearing and exchange trading exempt foreign exchange swaps and Swaps and Forwards Should Not Be requirements on the foreign exchange forwards, as proposed, criticize several Regulated as Swaps Under the CEA market would increase systemic risk by aspects of Treasury’s proposal. Some (i) Foreign Exchange Swaps and concentrating risk in one or more commenters who oppose an exemption Forwards Differ in Significant Ways clearinghouses.18 for foreign exchange swaps and Commenters supporting the proposed forwards raise a general concern that the From Other Classes of Swaps determination argue that settlement risk exemption would create an ‘‘enormous’’ Foreign exchange swaps and forwards is the primary risk associated with loophole, citing the large size of this are particular types of transactions that foreign exchange swaps and forwards, market, as well as the lack of a are qualitatively different from other and they state that the settlement of fundamental economic difference, in classes of derivatives covered under the trades through CLS Bank International their view, between foreign exchange definition of ‘‘swap’’ in the CEA. The (‘‘CLS’’), has largely addressed these swaps and forwards and other distinctive structural characteristics of concerns.19, 20 derivative products.23 In light of the foreign exchange swaps and forwards, Given the particular characteristics of recent financial crisis, these particularly the certainty of payment foreign exchange swaps and forwards, commenters argue that such loopholes amounts and shorter maturities, as well most commenters emphasize that can play a significant role in as the market characteristics of these counterparty credit risk is not as undermining financial stability by instruments, merit different regulatory significant a risk for these transactions, preserving an opaque, unregulated and treatment pursuant to this relative to other derivative transactions, under-capitalized market. Opponents determination. Moreover, largely due to and that the widespread use of credit also express concerns that an exemption the required exchange of principal support annexes (‘‘CSAs’’) and standard could be used to mask complex amounts, foreign exchange swaps and ISDA documentation mitigates this risk. transactions in an effort to avoid forwards are not structured to evade the Moreover, commenters who favor an subjecting them to clearing and trading requirements of the Dodd-Frank Act or exemption maintain that foreign requirements.24 regulations prescribed by the CFTC. exchange swaps and forwards generally One commenter, for example, First, foreign exchange swaps and trade in a highly liquid, efficient, and contends that ‘‘foreign exchange swaps forwards involve the actual exchange of transparent inter-bank market that is and forwards have all of the relevant the principal amounts of the two characterized by a high degree of characteristics of other categories of currencies in the contract (i.e., they are electronic trading.21 The major derivatives that are subject to the settled on a physical basis). Unlike participants in the foreign exchange clearing and exchange trading many other derivative instruments swaps and forwards market requirements of the Dodd-Frank Act,’’ whose payment obligations fluctuate predominantly are either depository and states that the ‘‘case for the frequently in response to changes in the institutions or affiliates of depository exemption [presented in the NPD] is value of the underlying variables on institutions, over which banking especially weak since the [NPD] which those derivatives contracts are regulators have substantial visibility and concedes that many critical measures based, the payment obligations of that support such an exemption simply foreign exchange swaps and foreign 15 See, e.g., Alternative Investment Management do not exist.’’ 25 exchange forwards, as defined by the Ass’n (‘‘AIMA’’), at 2; BlackRock, Inc., at 2. 26 CEA, are fixed at the inception of the 16 See comment on October 2010 Notice by 3M, In addition, several commenters Cargill Inc. et al., at 2. contend that foreign exchange swap and agreement and involve the exchange of 17 See Coalition for Derivatives End-Users, at 2. forward contracts pose significant full principal for settlement. A currency 18 See, e.g., BlackRock, at 2; FX Alliance, Inc. counterparty credit risk which, as one swap, also known as a cross-currency (‘‘FXall’’), at 1. commenter states, arises precisely basis swap, differs significantly from a 19 See, e.g., comment on October 2010 Notice by foreign exchange swap or forward Global FX Division, at 12–14; Global FX Division because these transactions entail fixed 27 comment on NPD, at 3; Thomson Reuters, at 2. payment obligations. In this regard, because the actual amount of the cash 20 CLS, which began operations in September some commenters have outlined flow exchanged by a party is unknown 2002 and is the predominant global PVP settlement at the onset of the transaction; instead, system, currently provides settlement services for 22 See, e.g., BlackRock, Inc., at 2. in a currency swap, a payment 17 currencies that represent 93 percent of the total 23 Quantitative Investment Management, at 1; see obligation on either party is dependent daily value of foreign exchange swaps and forwards also, e.g., Council of Institutional Investors, at 1–2; traded globally; See date and figures issued by CLS, on the fluctuation of one or more Americans for Financial Reform, at 13. available at http://www.cls-group.com/About/ floating interest rates during the term of 24 Pages/History.aspx. Americans for Financial Reform, at 13; Better the transaction. As a result, the cash 21 Thomson Reuters, at 2 (supporting Treasury’s Markets, Inc., at 11–13. 25 flows underlying the transaction can be statement regarding the extent to which foreign Better Markets, Inc., at 2. exchange forwards trade on electronic platforms 26 See, e.g., Duffie, at 3–5; Better Markets, Inc., at and noting that ‘‘these figures rise steadily each 14–15. 28 Better Markets, at 17. year’’). 27 Better Markets, Inc., at 14. 29 Better Markets, Inc., at 16–19; Duffie at 5–9.

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affected by market volatility or used as a source of funding to hedge risk (ii) Settlement Risk Is the Main Risk and illiquidity. By contrast, foreign associated with short-term fluctuations Is Effectively Mitigated Through Various exchange swap and forward participants in foreign currency values and to Measures know their own and their manage global cash-flow needs. For As discussed above, counterparties to counterparties’ payment obligations and example, businesses that sell goods in foreign exchange swaps and forwards the full extent of their exposure at international trade, or that make face three distinct risks: (i) Counterparty settlement throughout the life of the investments in foreign countries, contract. Thus, while the mark-to- credit risk prior to settlement; (ii) frequently ask their banks to arrange market risk; and (iii) settlement risk. market value of a position in a foreign foreign exchange swaps and forwards to exchange swap or forward may vary Counterparty credit risk and market risk control the risk that their own country’s prior to settlement exist in foreign based on changes in the exchange rate currency will rise or fall against the or interest rates, the actual settlement exchange swaps and forwards other country’s currency while a sale or transactions, but the risk of economic amounts do not. The requirement to investment is pending.33 Other exchange the full principal amounts of loss largely is attributable to the derivatives, such as currency swaps or fluctuating exchange rate or interest rate two different currencies qualitatively interest rate swaps, are used for a distinguishes foreign exchange swaps of the two currencies. For example, if a broader range of purposes. For example, counterparty defaults on a foreign and forwards from other swaps, and a business that conducts transactions in contributes to a risk profile that is exchange forward prior to the settlement several countries, each with a different date (e.g., as a consequence of largely concentrated on settlement risk. currency, could use currency swaps to Second, foreign exchange swaps and bankruptcy) and the exchange rate of stabilize the value of its sales revenue forwards typically have much shorter the two specified currencies were to maturities as compared to other (or costs), instead of actually obtaining have moved during that period, the non- derivatives. For example, interest rate those currencies to fund transactions to defaulting party would be exposed to swaps and credit default swaps parties located in those countries. market risk if that party were to be generally have maturity terms between Likewise, a business that obtains a required to replace that contract (i.e., two and thirty years, and five to ten syndicated loan with a floating interest actually obtain the currency desired in years, respectively.30 In stark contrast, rate could use an interest rate swap to the original forward contract) at a higher over 98 percent of foreign exchange stabilize the level of its loan payments. price. swaps and forwards mature in less than Fourth, foreign exchange swaps and Settlement risk, in the context of a one year, and 68 percent mature in less forwards already trade in a highly foreign exchange swap or forward than one week.31 BIS data since 1998, transparent and liquid market. Market transaction, is the risk that the contract collected on a triennial basis, generally participants have access to readily will not be settled in accordance with show that foreign exchange swaps and available pricing information through the initial terms, including when one forwards consistently have had shorter multiple sources,34 and one commenter party to the transaction delivers the maturities, in line with the current noted that these developments have currency it owes the counterparty, but levels (i.e., prior reports also show lowered transactions costs.35 Today, it is does not receive the other currency due approximately 98 percent of these estimated that approximately 41and 72 from that counterparty. transactions maturing in less than one percent of foreign exchange swaps and The key distinction between year, and approximately 68 percent forwards, respectively, already trade counterparty credit risk prior to maturing in less than one week).32 Since across a range of electronic platforms.36 settlement and settlement risk is that, counterparty credit risk increases as the As a result, mandatory exchange trading with the latter, a party’s failure to term of a contract increases, foreign requirements under the CEA would be deliver a currency under a foreign exchange swaps and forwards carry unlikely to improve price transparency exchange swap or forward agreement significantly lower levels of significantly. Additionally, the entails a risk to the non-defaulting party counterparty credit risk, relative to other Depository Trust and Clearing of the loss of principal as a result of the swaps and derivatives. Correspondingly, Corporation (‘‘DTCC’’) has submitted an non-defaulting party’s delivery of the the market risk associated with foreign application to register with the CFTC as underlying principal sum of currency exchange swaps and forwards is a swap data repository (‘‘SDR’’), and is under the agreement coupled with the relatively lower because these testing a foreign exchange trade other party’s failure to deliver its transactions have shorter maturities. repository service through which DTCC required principal payment. Third, foreign exchange swaps and intends to provide both public and In contrast to other derivatives, forwards are not structured to evade regulatory reporting, as early as the first including other foreign exchange regulatory requirements that apply to 37 derivatives, the parties’ ultimate other types of swaps. Rather, the uses of quarter of 2013. payment obligations on a foreign foreign exchange swaps and forwards 33 exchange swap or forward are known are distinct from other swaps. Because AIMA, at 2. 34 and fixed from the beginning of the of their unique structure and duration, See, e.g., comment on October 2010 Notice by Global FX Division of the Securities Industry and contract and involve the actual as outlined above, foreign exchange Financial Markets Ass’n, Association for Financial ‘‘exchange’’ of a predetermined amount swaps and forwards are predominantly Markets in Europe, and the Asia Securities Industry 38 and Financial Markets Ass’n (‘‘Global FX of principal at settlement. 30 Foreign Exchange Committee (‘‘FXC’’), Division’’), at 11. The distinguishing characteristics of comment on October 2010 Notice (‘‘FXC Letter’’), at 35 Global FX Division, comment on NPD, at 2 foreign exchange swaps and forwards, 3. (noting that these developments have ‘‘resulted in as described above, result in a risk 31 tight spreads’’). FXC Letter, at 3; FXJSC survey data; Bank for profile that is largely concentrated on International Settlements (‘‘BIS’’) Triennial Central 36 NPD, 76 FR at 25,777; BIS, Greenwich Bank Survey of Foreign Exchange and Derivatives Associates, Oliver Wyman analysis. Market Activity, available at http://www.bis.org/ 37 See DTCC release, ‘‘DTCC Begins User Testing 38 By contrast, the payment obligations of most publ/rpfxf10t.htm. on Foreign Exchange Repository,’’ May 3, 2012, other derivatives occur on an interim basis (e.g., 32 BIS Triennial Central Bank Survey of Foreign available at http://www.dtcc.com/news/press/ monthly or quarterly), based on the incremental Exchange and Derivatives Market Activity, releases/2012/ profit or loss on a transaction and either party’s available at http://www.bis.org/publ/rpfxf10t.htm. press_release_dtcc_begins_user_testing.php. payment may be made with a common currency.

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settlement risk, rather than counterparty swaps and forwards and swaps that settlement process by introducing credit risk prior to settlement. otherwise are subject to regulation additional steps between trade The foreign exchange swap and under the CEA.41 execution and settlement that pose forward market relies on the extensive significant operational challenges. The (iii) Foreign Exchange Swaps and use of PVP settlement arrangements, existing settlement process for this which permit the final transfer of one Forwards Are Subject to Less market functions well and has been currency to take place only if the final Counterparty Credit Risk Prior To critical to mitigating this market’s main transfer of the other currency also takes Settlement Than Other Derivatives source of risk. The operational place, thereby virtually eliminating Counterparty credit risk increases challenges associated with the addition settlement risk. Even though these with the length of a contract because of a central clearing requirement, one settlement arrangements do not that increases the length of time during that is very different from the core guarantee performance on the contract, which a counterparty could suffer from clearing functions currently handled by they do prevent principal payment adverse developments. Foreign CCPs, and the potentially disruptive flows from occurring if either party exchange swap and forward contracts effects on transactions in the large defaults. have a very short average length. As market of foreign exchange swaps and As noted above, CLS, which began noted above, 68 percent of foreign forwards, outweigh the benefits that operations in September 2002 and is the exchange swap and forward contracts central clearing would provide, thus predominant global PVP settlement mature in less than a week, and 98 making these instruments ill-suited for system, currently provides settlement percent mature in less than a year. Other regulation as swaps. services for 17 currencies that represent derivatives, such as interest rate swaps, 93 percent of the total daily value of (iv) Foreign Exchange Swaps and generally have much longer maturity Forwards Transacted by Banks in the foreign exchange swaps and forwards terms (e.g., between two and thirty traded globally. CLS is a specialized Foreign Exchange Market Already Are years) than foreign exchange swaps and Subject to Oversight settlement system that operates a forwards, and thus pose significantly multilateral PVP settlement system to more counterparty credit risk than The foreign exchange market itself has reduce foreign exchange settlement risk foreign exchange swaps and forwards.42 long been subject to extensive and (but not credit risk, which is mitigated Central clearing could provide foreign coordinated oversight, reflecting its by other measures). CLS estimates that exchange swap and forward participants unique characteristics and functioning. it settles 68 percent of global foreign with protection against the risk of Since the introduction of floating exchange trading, through 63 settlement default by their counterparties (i.e., the exchange rates in the early 1970s, the member banks and approximately replacement cost of a transaction if a largest central banks and regulators have 15,000 third-party users.39 In the foreign counterparty fails to perform). However, undertaken strong and coordinated exchange swaps and forwards market in as noted in the NPD, imposing a central oversight measures for the foreign particular (exclusive of other clearing requirement on the foreign exchange market, given its critical role transactions involving currencies), CLS exchange swaps and forwards market in monetary policy and the global estimates that it settles more than 50 raises two concerns. First, requiring payments system. This global strategy, percent of foreign exchange swap and central clearing may lead to combining led by the Committee on Payment and forward transactions that are subject to clearing and settlement in one facility, Settlement Systems (‘‘CPSS’’), resulted settlement risk. which would create large currency and in the design and implementation of According to a September 2010 capital needs for that entity due to: (i) CLS and other PVP settlement Foreign Exchange Committee (‘‘FXC’’) The sheer size and volume of the foreign arrangements. The Federal Reserve survey, roughly 75 percent of foreign exchange swaps and forwards market; regularly conducts reviews of the risk exchange transactions are settled and (ii) the fact that the central clearing management and operational processes without settlement risk to either party.40 facility would be effectively of major foreign exchange market This figure includes trades settled by guaranteeing both settlement and participants. These reviews inform CLS, settled between affiliates of the market exposure to replacement cost. Basel Committee on Banking same corporation, and settled across a Treasury believes that it is unlikely a Supervision (‘‘BCBS’’) and CPSS single bank’s books for its clients. central counterparty (‘‘CCP’’) would be updates to bank supervisory guidelines (Transactions that are internally settled able to provide the settlement services on managing foreign exchange settlement risk.43 between corporate affiliates, cash required by this market, either directly As referenced above, banks, affiliates settled, or settled across a single-bank’s or in conjunction with another service books for its clients are not subject to in bank holding companies in the U.S., provider, such as CLS. and banking organizations operating in settlement risk.) The extensive use of Providing central clearing separately other jurisdictions are the key players in CLS and privately negotiated PVP from settlement presents the second the foreign exchange swaps and settlement arrangements between banks, concern, namely: required clearing forwards market. Roughly 95 percent of financial intermediaries, and their likely would disrupt the existing clients largely addresses settlement risk foreign exchange swaps and forwards transactions occur between banks acting in the market for foreign exchange 41 Additionally, the vast majority of foreign swaps and forwards, and, as a result, exchange swap and forward transactions are either on their own behalf or on behalf 44 constitutes an important, objective transacted by well-capitalized and regulated of their clients. More specifically, the difference between foreign exchange financial institutions; the financial and operational clients of banks that typically engage in safeguards used by these financial institutions foreign exchange swaps and forwards mitigates the settlement risk that a counterparty 39 See figures issued by CLS, available at http:// otherwise would face in a foreign exchange swap are companies, particularly multi- www.cls-group.com/About/Pages/History.aspx. or forward. 40 FXC Letter, at 5. Formed in 1978 under the 42 As noted above, some commenters contend that 43 See Bank for Int’l Settlements, Supervisory sponsorship of the Federal Reserve Bank of New counterparty credit risk ‘‘remains a significant guidance for managing risks associated with the York, the FXC is an industry group that produces concern in the foreign exchange markets,’’ even settlement of foreign exchange transactions, (Aug. best practice recommendations for the foreign though ‘‘non-crisis risk is more concentrated in 2012), available at http://www.bis.org/publ/ exchange industry, addressing topics such as longer-duration contracts.’’ Better Markets, Inc., at bcbs229.htm. management of risk in operations and trading. 14–15. 44 American Bankers Ass’n et al., at 1.

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national corporations, that engage in However, all foreign exchange statutory test.’’ 52 One commenter offers cross-border investments or other transactions would remain subject to the its belief that ‘‘exempting foreign commercial transactions that require CFTC’s new trade-reporting (but not the exchange forwards and swaps at this payments in the local currency.45 Banks real-time reporting) requirements,49 time from the clearing and trading are subject to ongoing consolidated enhanced anti-evasion authority,50 and requirements of [the Dodd-Frank Act] supervision, and supervisors regularly strengthened business-conduct could increase systemic risk at a time monitor their foreign exchange related standards.51 As noted above, the when regulators around the globe are exposures, internal controls, risk creation of a global foreign exchange trying to reduce it.’’ 53 management systems, and settlement trade repository, such as the SDR Regulating foreign exchange swaps practices. created by DTCC, will expand reporting and forwards under the CEA would require insertion of a CCP into an (v) The Foreign Exchange Swaps and to regulators and the public more broadly. already well-functioning settlement Forwards Market Already Is Highly process. Currently, no entity or system Transparent and Traded Over Electronic B. Statutory Considerations exists that can efficiently clear and Trading Platforms In considering whether to exempt settle the thousands of foreign exchange Foreign exchange swaps and forwards foreign exchange swaps and forwards swaps and forwards transactions that already trade in a highly transparent from the definition of the term ‘‘swap,’’ are executed on a daily basis, and market. Market participants have access the Secretary must consider, and has Treasury is not aware of any proposal to to readily available pricing information considered (including in light of the build sufficient capabilities in this area. through multiple sources. comments received), five factors, as Requiring the use of new systems and Approximately 41 percent and 72 follows. technologies could introduce new risks percent of foreign exchange swaps and and challenges for the settlement forwards, respectively, already trade (i) Systemic Risk, Transparency, process of foreign exchange swaps and across a range of electronic platforms Financial Stability forwards. Other derivative transactions, and the use of such platforms has been Treasury has considered several such as interest rate swaps and credit steadily increasing in recent years.46 factors to assess whether the required default swaps, create settlement The use of electronic trading platforms trading and clearing of foreign exchange obligations that equal only the change in provides a high level of pre- and post- swaps and foreign exchange forwards the market price or other financial trade transparency within the foreign would create systemic risk, lower variable relative to a fixed or predefined exchange swaps and forwards market.47 transparency, or threaten the financial amount—not the full principal Thus, mandatory exchange trading stability of the United States. As stated amounts—and, thus, result in materially requirements would not significantly in the NPD, given the reduced smaller daily payment obligations for improve price transparency or reduce counterparty credit risk profile of this those markets. While the existing CLS trading costs within this market. market as compared to the markets for and other PVP settlement systems (vi) Foreign Exchange Swaps and other swaps and derivatives, the protect against the risk of principal loss Forwards Will Be Subject to Oversight logistical challenges of implementing in the foreign exchange swaps and Under the CEA central clearing within this market forwards market, central clearing would significantly outweigh the marginal further protect a participant against the The Secretary’s determination that economic loss of profit on a transaction foreign exchange swaps and forwards benefits that central clearing and exchange trading might provide. if the counterparty to the transaction should not be regulated as ‘‘swaps’’ defaults before final settlement. Several commenters have challenged under the CEA does not affect the However, combining these two Treasury’s consideration of this application of relevant provisions of the functions in a market that involves statutory factor, contending, for CEA that are designed to prevent settlement of the full principal amounts evasion and improve market example, that Treasury’s proposed analysis regarding the ‘‘operational transparency. Commenters who oppose 52 Better Markets, Inc., at 8. Separately, an exemption argue that the exemption challenges’’ that would arise by Americans for Financial Reform (‘‘AFR’’) contends would create a large regulatory loophole interposing a CCP into the settlement that, under section 721 of the Dodd-Frank Act, that could exacerbate systemic risk.48 process ‘‘carries no weight under the ‘‘Treasury must present an actual independent analysis which clearly demonstrates that this risk is not significant.’’ AFR, at 8. Sections 1a(47)(E) and 45 For example, a U.S.-based company seeking to diverse foreign exchange market undercuts that 1b of the CEA do not require Treasury to conduct acquire specialized brewery equipment from a essential goal.’’ an ‘‘independent’’ analysis of each of the statutory manufacturer in Germany could agree to pay for the 49 7 U.S.C. 1a(47)(E)(iii). See also Swap Data factors, as AFR contends. Rather, section 1b(a) of purchase in euros, on a specified future date (e.g., Recordkeeping and Reporting Requirements, 77 FR the CEA plainly requires the Secretary to the delivery date of the equipment). If the U.S.- 2136 (Jan. 13, 2012); Swap Data Recordkeeping and ‘‘consider’’ each of the five factors, and does not based company needs to fix its payment of euros Reporting Requirements: Pre-Enactment and contain any provision that suggests that any one or based on the current exchange rate (to control the Transition Swaps, 77 FR 35200 (June 12, 2012). more of those factors may be pivotal in reaching any risk that the price of the euro will rise while the 50 See note 77, infra. determination. Furthermore, subsection 1b(b) of the sale is pending), then the company could enter into 51 7 U.S.C. 1a(47)(E)(iv). See also Business CEA requires the Secretary to ‘‘submit to the a foreign exchange forward with its bank under Conduct Standards for Swap Dealers and Major appropriate committees of Congress a determination which, on the specified date, (i) the company would Swap Participants with Counterparties, 77 FR 9734 that contains—(1) an explanation [regarding deliver the dollars to its bank and (ii) the bank (Feb. 17, 2012); Swap Dealer and Major Swap qualitative differences between foreign exchange would deliver the euros to the company, payable to Participant Recordkeeping, Reporting, and Duties swaps and forwards and other classes of swaps]; the manufacturer. Rules; Futures Commission Merchant and and (2) an identification of the objective differences 46 BIS, Greenwich Associates, Oliver Wyman Introducing Broker Conflicts of Interest Rules; and of foreign exchange swaps and foreign exchange analysis. Chief Compliance Officer Rules for Swap Dealers, forwards with respect to standard swaps that 47 American Bankers Ass’n et al., at 3. Major Swap Participants, and Futures Commission warrant an exempted status.’’ A ‘‘determination’’ 48 For example, Better Markets, Inc., at 3, states: Merchants, 77 FR 20128 (Apr. 3, 2012); that explains those ‘‘qualitative’’ differences and ‘‘[Exchange-trading and clearing systems] offer the Confirmation, Portfolio Reconciliation, Portfolio identifies those ‘‘objective’’ differences satisfies the only feasible way to create a marketplace that is Compression, and Swap Trading Relationship law; neither subsection 1b(b)(1) or 1b(b)(2) requires relatively free from the [information] asymmetry Documentation Requirements for Swap Dealers and Treasury to conduct an ‘‘independent’’ analysis of that can convert inevitable market disturbances into Major Swap Participants, 77 FR 55904 (Sept. 11, the type that AFR describes in its comment letter. catastrophes. An exemption for the large and 2012). 53 Commodity Markets Council, at 1–2.

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of the contracts would require massive entails considering whether the required risks.58 Such additional costs borne by capital backing in a very large number clearing can prudently be undertaken in non-financial end-users could lead to of currencies, representing a much conjunction with the settlement systems lower cash flows or earnings, which greater commitment for a potential CCP necessary for the foreign exchange would divert financial resources from in the foreign exchange swaps and swaps and forwards market. investment and discourage international forwards market than for any other type To date, no CCP has developed a trade, thereby limiting the growth of of derivatives market. practical solution to guarantee the U.S. businesses.59 Several commenters The CPSS and the Technical timely settlement of the payment also suggest that requiring centralized Committee of the International obligations of the extraordinarily large clearing of foreign exchange swaps and Organization of Securities Commissions volumes of transactions in foreign forwards could lead non-financial end- (‘‘IOSCO’’) recently issued principles for exchange swaps and forwards, users to move production facilities financial market infrastructures including the provision of or overseas in order to establish ‘‘natural (‘‘FMIs’’) (herein ‘‘FMI Principles’’) that coordination with the settlement hedges’’ through the consistent use of highlight the close connection between services that are essential to the local currencies and force them to clearing systems and settlement market.57 Introducing a central clearing reconsider the use of CLS in light of the systems.54 The FMI Principles are facility without settlement capabilities additional costs associated with central intended to apply to several types of would be inconsistent with the clearing.60 FMIs, including a CCP, and establish standards being developed by regulators heightened risk-management standards As noted above, the market for foreign through CPSS–IOSCO, and would not for the relevant FMIs in the jurisdictions exchange transactions is one of the most improve market functioning. Instead, of the CPSS–IOSCO members.55 In transparent and liquid global trading requiring central clearing would raise particular, the FMI Principles state: markets. Pricing is readily available unnecessary operational challenges by An FMI’s processes should be designed to through multiple sources and a large introducing additional steps between portion of foreign exchange trades complete final settlement, at a minimum no trade execution and settlement. Given currently are executed through later than the end of the value date. This that any risks created through the means that any payment, transfer instruction, electronic trading platforms.61 increased complexity would be or other obligation that has been submitted In light of these and similar factors to and accepted by an FMI in accordance magnified by the number of currencies with its risk management and other relevant involved, among other factors, requiring raised by the commenters, mandating acceptance criteria should be settled on the the use of a CCP for clearing foreign centralized clearing and exchange intended value date. An FMI that is not exchange swaps and forwards is not trading under the CEA for foreign designed to provide final settlement on the warranted. exchange swaps and foreign exchange value date (or same-day settlement) would forwards would actually introduce not satisfy this principle, even if the In response to the October 2010 Notice, end-users of foreign exchange operational challenges. These transaction’s settlement date is adjusted back challenges and risks could potentially to the value date after settlement * * *. swaps and forwards have expressed [D]eferral of final settlement to the next- significant concern that requiring lead to disruptive effects in this market business day can entail overnight risk centralized clearing would substantially which likely would outweigh any exposures. For example, if a [central increase the costs of hedging foreign benefits associated with mandated 62 securities depository] or CCP conducts its exchange risks. Commenters argue that clearing and exchange trading. money settlements using instruments or additional costs associated with arrangements that involve next-day collateral, margin, and capital 58 See, e.g., comment on October 2010 Notice by settlement, a participant’s default on its requirements required by the CCP National Ass’n of Manufacturers, at 4. settlement obligations between the initiation 59 See, e.g., comment on October 2010 Notice by and finality of settlement could pose would potentially reduce their 3M, Cargill Inc. et al., at 6. significant credit and liquidity risks to the incentives to manage foreign exchange 60 See, e.g., comment on October 2010 Notice by FMI and its other participants.56 Coalition for Derivatives End-Users, at 16–17. 61 Consistent with the FMI Principles, 57 In addition, even though a few commenters See, e.g., comment on NPD by Coalition for have outlined mechanisms for clearing foreign Derivatives End-Users, at 1–2 (‘‘[T]he [foreign considering whether the required exchange swaps and forwards, none of these exchange] market has pioneered the adoption of clearing for foreign exchange swaps and mechanisms clearly contemplate a system for more transparent electronic trading platforms. forwards would create systemic risk, clearing that would also settle those foreign Because the market is highly liquid and pursuant to section 1b(a)(1) of the CEA, exchange swaps and forwards, particularly given decentralized, liquidity can exist more easily on the scale and complexity for physical settlement of multiple electronic platforms and pricing multiple currencies in the current market for transparency is more readily available. Applying 54 Bank for Int’l Settlements, ‘‘Principles for foreign exchange swaps and forwards. See, e.g., the clearing and exchange trading requirements to financial market infrastructures,’’ Apr. 2012, Better Markets, Inc., at 16–19 (This commenter these transactions would not improve pricing available at http://www.bis.org/publ/cpss101a.pdf. outlines two mechanisms for clearing involving the transparency to any notable degree.’’). The FMI Principles were issued following a use of a derivatives clearing organization (‘‘DCO’’). Furthermore, Treasury understands that at least proposal, issued in April 2011, and public Under one option, the DCO apparently would one global foreign exchange trading repository has comment. The Federal Reserve Board and the conduct both the clearing and settlement functions been created pursuant to section 21 of the CEA (7 Federal Reserve Bank of New York are members of (but the outline does not describe how the DCO U.S.C. 24a, as added by section 728 of the Dodd- the CPSS, and the CFTC and Securities and itself would establish the systems necessary to Frank Act), which will expand reporting coverage Exchange Commission (‘‘SEC’’) are members of the settle the massive volume of currencies flowing for swaps, including foreign exchange swaps and Technical Committee of IOSCO. Treasury expects through the foreign exchange swaps and forwards forwards, regardless of whether the Secretary issues that the FMI Principles will be applied through contracts); the second option stipulates that the a determination that these transactions should not rules and regulatory guidance issued, as DCO would clear transactions, but settlement be regulated as ‘‘swaps’’ under the CEA. See DTCC appropriate, by the Federal agencies that supervise would be conducted through ‘‘CLS or a similar release, available at http://www.dtcc.com/news/ the relevant FMIs which are subject to their institution [that is] a PVP provider’’ or through an press/releases/2012/ jurisdiction. Accordingly, Treasury believes that the alternative mechanism.); Duffie, at 7–9 (outlining a press_release_dtcc_begins_user_testing.php. The FMI Principles reasonably should be taken into scheme using a ‘‘financial utility’’ that operates as CFTC has adopted final rules relating to the account with respect to the consideration of a ‘‘quasi-CCP,’’ only to compute and collect margin registration and regulation of SDRs. 17 CFR Part 49. clearing and settlement systems for foreign payments, and that operates independently of, yet See CFTC, Final Rule on Swap Data Repositories: exchange swaps and forwards. coordinated with, a PVP provider (such as CLS), Registration Standards, Duties, and Core Principles, 55 FMI Principles, at 5–7, 12. which settles the foreign exchange swaps and 76 FR 5453 (Sept. 1, 2011)). 56 FMI Principles, at 65. forwards). 62 See also comment by FXall, at 1.

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(ii) Regulatory Scheme Comparable to settlement ensures that the final transfer that the vast majority of established That of the CEA of one currency occurs only if a final regulatory schemes also actively Treasury has considered several transfer of the other currency or encourage the use of CSAs and master factors to assess whether foreign currencies takes place, thereby virtually netting agreements to reduce 68 exchange swaps and foreign exchange eliminating settlement risk. In order to counterparty credit risk exposures. forwards are already subject to a support such PVP arrangements, central Similar to changes made to enable the regulatory scheme that is materially banks undertook significant actions by use of PVP settlement arrangements, comparable to that established by the extending operating hours of payment central banks and governments worked CEA for other classes of swaps. systems, providing cross-border access to strengthen the legal foundations of One commenter has noted that foreign to central bank accounts and enhancing bilateral and multilateral netting. Master exchange swaps and forwards will not the legal certainty around such netting agreements mitigate credit risk fall outside of the scope of regulatory settlement arrangements. by enabling closeout netting in the event oversight under the CEA; ‘‘[o]n the The creation of CLS was an important of a default or bankruptcy. CSAs can contrary, foreign exchange swaps and outcome of this work. CLS is the also be negotiated as a supplement to forwards will be required to be reported predominant PVP settlement system, master agreements to further reduce and to swap data repositories and regulated settling the majority of all global foreign mitigate exposures to counterparties by swaps market actors (i.e., swap dealers exchange transactions in 17 currencies, collateralizing transactions. and major swap participants) will be through 63 settlement member banks and approximately 15,000 third party (iii) Adequacy of Supervision by Bank required to comply with applicable users. Regulators, Including Capital and conduct of business rules when A comparable regulatory scheme Margin Requirements engaging in foreign exchange swaps and 63 applies to the settlement system Treasury has assessed the extent to forwards transactions.’’ Other conducted through CLS. While the commenters, however, have stated that which bank regulators supervise Federal Reserve is the primary regulator participants in the foreign exchange currently there is no ‘‘regulatory for CLS, a CLS Oversight Committee 66 regime’’ that is ‘‘comparable to the market, including by imposing capital consisting of 22 central banks was and margin requirements. framework mandated under the Dodd- established to provide coordinated 64 The predominant participants in the Frank Act.’’ oversight of CLS by all central banks Since the introduction of floating foreign exchange swaps and forwards whose currencies are settled through its market are banks that long have been exchange rates in the early 1970s, system. As a result of this group’s central banks and regulators have subject to prudential supervision. In efforts, each participating central bank fact, nearly all trading within the foreign undertaken strong and coordinated now maintains accounts for CLS and oversight measures for the foreign exchange market involves bank has created a window period during counterparties.69 Roughly 95 percent of exchange market because of the critical which real-time gross settlement role this market plays in the conduct of foreign exchange trading involves banks systems are open to accommodate the acting in the capacity of either principal countries’ monetary policy. More funding necessary for the settlement of specifically, in 1996, the CPSS launched or agent. For a number of structural payment instructions. CLS also has reasons, banks have distinct advantages a globally coordinated strategy on behalf developed a set of risk management of central banks, calling for specific to provide the liquidity and funding tests that it applies to each instruction necessary to conduct foreign exchange actions by individual banks, industry it submits for settlement to mitigate the groups and central banks to address and swaps and forwards, which involve the associated credit, market and liquidity exchange of principal, rather than just reduce risk in the foreign exchange risks. market. This strategy has resulted in interim variable cash flows. In On July 18, 2012, the Financial conjunction with providing the specific actions undertaken to address Stability Oversight Council (‘‘Council’’) settlement risk, to mitigate counterparty liquidity, funding, and foreign exchange designated CLS as a financial market risk-management needed to conduct credit risk and, in conjunction with the utility that is systemically important, BCBS, to develop global supervisory these transactions, banks have efficient pursuant to section 804 of the Dodd- and ready access to CLS to settle guidelines on managing foreign 67 Frank Act. The designation of CLS by transactions on a PVP basis. Prudential exchange risk. Largely as a result of the Council subjects CLS to these measures, liquidity in the foreign supervisors regularly monitor the requirements under Title VIII of the activities, exposures, internal controls exchange market was maintained during Dodd-Frank Act, including risk- the recent financial crisis, and, as noted and risk management systems of these management standards, reporting and banks.70 In order to meet safety-and- by many market observers, the foreign recordkeeping requirements, and exchange market was one of the few examinations (as well as potential 68 With respect to this factor, one commenter parts of the financial market that enforcement actions) by the Federal states that ‘‘the ‘encouraged’ use of private remained liquid throughout the Reserve. contractual provisions is not a credible substitute financial crisis.65 Participants in the foreign exchange for mandatory clearing mechanisms operated by One of the key goals of this work was entities that are registered and subject to a host of swaps and forwards market largely core principles covering virtually every aspect of a to expand the use of PVP settlement consist of banks that are subject to clearing operation.’’ Better Markets, at 9. systems. Such systems largely eliminate prudential supervision, including 69 One commenter takes issue with this point, settlement risk, which is the comprehensive risk-management noting that while the ‘‘vast majority of trading in predominant risk in a foreign exchange oversight. In addition, Treasury notes foreign exchange swaps and forwards may involve swap or forward. As noted, PVP banks,’’ not all such transactions do. This commenter further argues that, in the absence of 66 Federal Reserve Board, ‘‘Protocol for ‘‘mandatory, uniform, and transparent margin 63 AIMA, at 2. See also Thomson Reuters, at 2 Cooperative Oversight Arrangement for CLS,’’ Nov. requirements,’’ there is ‘‘an ad hoc assortment of (commenting on the presence of ‘‘enhanced 25, 2008, available at http:// voluntary ‘banking’ practices aimed at ‘risk oversight’’). www.federalreserve.gov/paymentsystems/ management.’ ’’ Better Markets, at 10. 64 See Better Markets, at 8. cls_protocol.html. 70 See, e.g., supervisory and examination 65 See, e.g., Global FX Division, at 11–12. But see 67 12 U.S.C. 5463; 12 CFR part 1320 (Designation standards for wholesale payments systems Better Markets, Inc. at 19–28. of Financial Market Utilities). Continued

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soundness requirements, banks have objective to expand settlement services A ‘‘swap’’ regulated under the CEA, implemented monitoring systems, to include additional currencies, such as a currency swap, interest rate limits, internal controls, hedging increase volume capacity, and add swap, or other derivative, generally techniques, and similar risk- additional settlement times. Treasury involves a periodic exchange of a management measures. Furthermore, understands that the Federal Reserve floating amount of cash flows between counterparty credit risk management is and the CLS Oversight Committee are the counterparties based on the value of a fundamental issue for banking currently reviewing these plans, as well the underlying variable(s) on which the supervisors and is extensively as encouraging the expansion of other derivative contract is based. In contrast, addressed in bank supervisory PVP settlement services. Furthermore, a foreign exchange swap (which will be guidelines as well as under the Basel the vast majority of foreign exchange exempt from the definition of ‘‘swap’’ Accords. swaps and forwards that are not settled under this determination) involves a In addition to the supervisory with CLS, or through some other simple exchange of principal at one measures discussed above, the OTC internal netting mechanism, have a point in time and a reversal of that Derivatives Supervisors Group, which regulated banking entity as one (or both) exchange at some later date. For includes market and bank regulators of the counterparties. In light of the example, a user of a currency swap from the U.S., France, Germany, Japan, prudential supervision of these entities, could seek funding advantages by Switzerland and the U.K., has been particularly the controls that must be obtaining financing in a foreign securing commitments from market applied to meet the expectations of their currency and swapping those cash flows participants since 2005 to strengthen regulators, these financial institutions back to the user’s locally denominated market infrastructure, risk management must maintain adequate payment and currency. This would then entail paying practices, and transparency in the OTC settlement arrangements. or receiving a series of floating interest derivatives market. (v) Possible Use of Exemption To Evade rate payments (i.e., based on prevailing (iv) Adequacy of Payment and Requirements interest rates) over the life of the Settlement Systems transaction. This ability to receive Treasury has considered several periodic payments during the term of a Treasury also has assessed the extent factors to assess whether the use of an transaction is a significant feature of of adequate payment and settlement exemption for foreign exchange swaps ‘‘swaps’’ that will be regulated under systems for foreign exchange swaps and and foreign exchange forwards could be the CEA, which is absent from a foreign forwards. With respect to this factor, as used to evade otherwise applicable exchange swap or foreign exchange noted, the strategy developed by central regulatory requirements. Treasury forward. banks successfully resulted in the shares the concern, expressed by several As discussed above, in a foreign establishment of PVP settlement 73 commenters, that issuing an exchange swap transaction, the payment systems to virtually eliminate the exemption for foreign exchange swaps obligations are fixed at the onset of the settlement risk associated with foreign and forwards potentially could be transaction—with the prices of both legs exchange swaps and forwards, with CLS exploited by some market participants of the transaction set by highly being the primary example of this work. to evade regulatory requirements that transparent and liquid markets—and the Central banks undertook significant otherwise would apply to the substance actions to support these robust PVP payments must be made in the of a transaction. Nonetheless, the nature currencies involved in the swap. In settlement arrangements. As a result, of foreign exchange swaps and forwards roughly 75 percent of notional foreign contrast, the actual amount of the cash transactions (as defined by the CEA) flow exchanged by a party to a currency exchange is either settled through CLS makes it difficult for these products to or otherwise settled without risk, swap (or other derivatives transaction) be structured to replicate the cash flows is unknown at the onset of the including trades that are settled between associated with currency or interest rate affiliates of the same corporation or transaction. Instead, a payment swaps to evade regulatory requirements obligation on either party is dependent across a single bank’s books for its under the CEA. The likelihood that 71 on the future value of one or more rates clients. In the foreign exchange swaps foreign exchange swaps and forwards and forwards market in particular, CLS or some future event. The price of the might be structured to evade other payment itself can be hindered by estimates that it settles more than 50 regulatory requirements is further percent of foreign exchange swap and market volatility or illiquidity, which reduced by the extensive oversight by could affect the value of the transaction. forward transactions that are subject to regulators, particularly the supervision 72 While foreign exchange swaps could settlement risk. CLS also has of banks which are the main announced a multi-year strategic be used by some market participants to participants in this market. speculate on the short-term path of Unlike other types of swaps, foreign interest rates in some contexts, the developed by the Federal Financial Institutions exchange swaps and forwards are Examination Council, available at http:// operational challenges and transaction ithandbook.ffiec.gov/it-booklets/wholesale- distinct because, as defined by the CEA, costs associated with transforming these payment-systems/wholesale-payment-systems-risk- these transactions must (1) involve the instruments to replicate currency or management.aspx. exchange of the principal amounts of 71 interest rate swaps significantly reduce One commenter disputes this position, stating the two currencies exchanged, as that ‘‘[t]he CLS system completely disregards the the likelihood that market participants counterparty credit risk.’’ Americans for Financial opposed to a set of cash flows based would do so in order to evade regulatory Reform, at 12. This commenter asserts that ‘‘CLS upon some floating reference rate, and requirements under the CEA.75 merely settles transactions between the parties by (2) be settled on a physical basis.74 collecting payments from each party and distributing payments once all parties meet their 75 Some commenters share this view. Thomson obligations.’’ Id. 73 As one commenter contends, for example, Reuters, for example, states: ‘‘Although transactions 72 In this regard, one commenter notes that, ‘‘market participants have a boundless ingenuity for costs are becoming lower each year, transforming an notwithstanding the settlement of more than 50 developing new products and strategies that fall interest rate swap into a foreign exchange swap percent of foreign exchange swaps and forwards within the interstices of any regulatory framework.’’ would entail operational challenges and transactions by CLS, a ‘‘significant volume’’ of those Better Markets, Inc. at 11. transactions costs. Thomson Reuters believes that transactions are not settled by CLS, and asserts that 74 In this regard, Treasury notes that, in other increased reporting obligations for all swaps and ‘‘[t]his state of affairs is not ‘adequate’ under any swaps transactions, the parties may, by agreement, the enhanced CFTC anti-evasion authority will reasonable interpretation.’’ Better Markets, at 11. physically settle their obligations. deter participants from overbroad use of the FX

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To begin with, the transactions costs the planned opening of global foreign exchange forward that is ‘‘listed and associated with replicating currency exchange trade repositories will expand traded on or subject to the rules of a swaps through the use of foreign reporting to regulators and the public designated contract market or a swap exchange swaps likely would be more broadly. This additional reporting execution facility, or that is cleared by significant because a market participant will also provide regulators with a derivatives clearing organization, shall would need to regularly roll over its enhanced information that can be used not be exempt from any provision of foreign exchange swap position as it to detect attempts by market [CEA], or the amendments under [Title seeks to replicate a currency swap. For participants to use foreign exchange VII of the Dodd-Frank Act] prohibiting example, a participant would need to swaps or forwards to replicate the cash fraud or manipulation.’’ 78 Additionally, consider the costs associated with the flows associated with currency, interest a determination issued by the Secretary series of separate bid-ask spreads rate swaps, or other derivatives in order shall not ‘‘affect, or be construed to accompanying each of the foreign to evade regulatory requirements. affect, the applicability of [the CEA] or exchange swap transactions, as well as C. Implications of Determination; the jurisdiction of the [CFTC] with the costs of monitoring those positions. Treatment of NDFs respect to agreements, contracts, or Thus, whether a participant would transactions in foreign currency structure foreign exchange swap (i) Implications of a Determination To pursuant to section 2(c)(2) [of the CEA, transactions in order to replicate other, Exempt Foreign Exchange Swaps and regarding retail transactions].’’ 79 non-exempt swaps that are subject to Forwards From the Term ‘‘Swap’’ Under (ii) Treatment of NDFs Under the central clearing requirements would be the CEA Determination highly dependent on the costs Because the Secretary is issuing a associated with the operational or written determination to exempt both Several commenters who support systems arrangements necessary to foreign exchange swaps and forwards issuing a determination to exempt execute the foreign exchange swap from the definition of a ‘‘swap’’ under foreign exchange swaps and forwards transactions, relative to the costs the CEA, these transactions, as well as urge Treasury to extend the imposed by CCPs to clear the other, certain parties that engage in these determination to apply to NDFs non-exempt swap transactions, which transactions, will not be subject to some involving foreign exchange. could vary among market participants. requirements under the CEA, notably In general, an NDF is a swap that is Moreover, as discussed above, the clearing and exchange-trading cash-settled between two approximately 95 percent of foreign requirements. counterparties, with the value of the exchange swaps and forwards However, foreign exchange swaps and contract determined by the movement of transactions occur between banks. The forwards and the parties to such exchange rates between two currencies. systems that banks use to conduct transactions will still be subject to trade- On the contracted settlement date, the foreign exchange swaps and forwards reporting requirements, business profit to one party is paid by the other transactions are subject to consolidated conduct standards (including the anti- based on the difference between the supervision, including oversight of the fraud provision) in section 4s(h) of the contracted NDF rate (set at the trade’s internal controls used to monitor foreign CEA and the rules promulgated inception) and the prevailing NDF fix exchange swaps and forwards. Treasury thereunder by the CFTC, and anti- (usually a close approximation of the believes, as one commenter similarly evasion requirements promulgated by spot foreign exchange rate) on an agreed noted, that because regulated banks the CFTC. In this regard, section (c) of notional amount. NDF contracts do not conduct the bulk of foreign exchange the determination—which reflects the involve an exchange of the agreed-upon swaps and forwards transactions, the language of sections 1a(47)(E)(iii)–(iv) notional amounts of the currencies risk of using these transactions to evade and 1b(c) of the CEA—provides that, involved. Instead, NDFs are cash settled otherwise applicable regulatory notwithstanding this determination, in a single currency, usually a reserve requirements is relatively lower.76 certain requirements under the CEA will currency. NDFs generally are used when Importantly, a determination to apply to any foreign exchange swap or international trading of a physical exempt foreign exchange swaps and foreign exchange forward, or to any currency is relatively difficult or 80 forwards from regulation as ‘‘swaps’’ party engaged in such a transaction, to prohibited. under the CEA will not affect the the extent provided by such Several commenters acknowledge the application of other provisions that are requirements. distinction between NDFs and foreign designed to prevent evasion by market Under section 1a(47)(F) of the CEA, a exchange swaps and forwards, as participants and improve market foreign exchange swap or foreign defined by the CEA. One commenter, for transparency. In particular, under the example, states that ‘‘NDFs are cash- Dodd-Frank Act all foreign exchange Based Swap Agreement Recordkeeping, 77 FR settled, short-term forward contracts in swaps and forwards will remain subject 48,208, 48,253 (‘‘CFTC–SEC Joint Products Rule’’) a foreign currency, in which the profit to the CFTC’s new trade-reporting (addressing the application of certain reporting or loss is calculated as the difference requirements and business-conduct standards). In requirements, enhanced anti-evasion addition, Treasury notes that: (i) CEA section between the contractually agreed upon authority, and strengthened business- 1a(47)(F)(i), 7 U.S.C. 1a(47)(F)(i), provides that [foreign exchange] rate and the [foreign conduct standards for swaps dealers and foreign exchange swaps and forwards that are listed exchange] rate on the date of major swap participants.77 Furthermore, and traded on or subject to the rules of a designated settlement.’’ 81 Nonetheless, contract market or swap execution facility, or are cleared by a derivatives clearing organization, shall 78 exemption under consideration.’’ See also FX not be exempt from the fraud and manipulation 7 U.S.C. 1a(47)(F)(i). Investor Group, at 2. provisions of the CEA; and (ii) section 753 of the 79 7 U.S.C. 1a(47)(F)(ii) (referring, in turn, to 7 76 FX Investor Group, at 2 (observing that ‘‘there Dodd-Frank Act amends section 6(c) of the CEA to U.S.C. 2(c)(2)). is little risk of such institutions not ensuring that provide, in relevant part, that ‘‘it shall be unlawful 80 See CFTC–SEC Joint Products Rule, 77 FR at the spirit of this rule is met’’). for any person, directly or indirectly, to manipulate 48,254–255. 77 See CEA section 1a(47)(E)(iii) (reporting) and or attempt to manipulate the price of any swap, or 81 Coalition for Derivatives End-Users (iv) (business conduct standards), 7 U.S.C of any commodity in interstate commerce, or for (‘‘Coalition’’), at 3. See also Covington & Burling, 1a(47)(E)(iii) and (iv). See also Further Definition of future delivery on or subject to the rules of any LLP, at 2 (‘‘in an NDF, the trade closes out at ‘‘Swap,’’ ‘‘Security-Based Swap,’’ and ‘‘Security- registered entity.’’ 7 U.S.C. 9, 15. See also CFTC– maturity upon delivery of the net value of the Based Swap Agreement’’; Mixed Swaps; Security- SEC Joint Products Rule, 77 FR at 48,253, n. 512. Continued

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commenters who urge Treasury to Products Rule, the Commissions explain III. Procedural Analysis extend the proposed determination to that ‘‘NDFs do not meet the definitions A. Executive Order 12866 and Executive cover NDFs contend that ‘‘NDFs are of ‘foreign exchange forward’ or ‘foreign Order 13563 economically and functionally identical exchange swap’ set forth in the CEA to [foreign exchange] forwards, despite [because] NDFs do not involve an Executive Orders 13563 and 12866 the fact that they are cash settled in just ‘exchange’ of two different currencies direct an agency to assess all costs and one currency and do not involve the (an element of the definition of both a benefits of available regulatory exchange of underlying currencies foreign exchange forward and a foreign alternatives and, if regulation is because of currency controls or local exchange swap); instead, they are necessary, to select regulatory law restrictions in certain foreign settled by payment in one currency approaches that maximize net benefits jurisdictions.’’ 82 These commenters (usually U.S. dollars).’’ 88 Accordingly, (including potential economic, argue, therefore, that the grounds that Treasury concludes that an NDF would environmental, public health and safety Treasury identified in the NPD for effects, distributive impacts, and issuing an exemption for foreign not meet either definition under the CEA for the purposes of this equity). Executive Order 13563 exchange forwards likewise should emphasizes the importance of 83 determination.89 apply to NDFs. Moreover, one quantifying both costs and benefits, of commenter argues that the definition of The requirement in the definitions of reducing costs, of harmonizing rules, a ‘‘foreign exchange forward’’ in the ‘‘foreign exchange forward’’ and and of promoting flexibility. This rule CEA does not require the ‘‘physical ‘‘foreign exchange swap,’’ respectively, has been designated a ‘‘significant exchange’’ of the two currencies and, to ‘‘exchange’’ the two currencies regulatory action’’ although not thus, this term should not be interpreted should not be interpreted as requiring economically significant, under section as precluding the inclusion of an NDF each foreign exchange swap or forward 3(f) of Executive Order 12866. 84 within the scope of an exemption. transaction to be settled independently. Accordingly, the rule has been reviewed The statutory provisions that limit a Rather, an entity, such as CLS or any by the Office of Management and ‘‘foreign exchange forward’’ or a other operator of a multilateral PVP Budget. ‘‘foreign exchange swap’’ to an ‘‘exchange’’ of two different currencies settlement system, that settles a series of B. Regulatory Flexibility Act entail the actual delivery of those foreign exchange swap and forward The Regulatory Flexibility Act (5 currencies as an integral part of the transactions may use appropriate U.S.C. 601 et seq.) generally requires an transaction, rather than simply a mechanisms to net transactions agency to prepare a regulatory flexibility transfer of the value corresponding to involving the same parties and the same the difference in the prices of the two currencies, and deliver each of the analysis unless the agency certifies that currencies on a specified date.85 currencies to the respective parties. the rule will not have a significant Treasury observes that, recognizing the Applying appropriate mechanisms economic impact on a substantial foregoing, the CFTC and Securities and during the settlement process to net number of small entities. It is hereby Exchange Commission (collectively, the qualifying foreign exchange swap and certified that this determination would not have a significant economic impact ‘‘Commissions’’) have defined the term forward transactions conducted by a on a substantial number of small ‘‘swap’’ to include an NDF.86 group of parties should satisfy the entities. This certification is based on Correspondingly, the Commissions have limitations under the CEA because the determined that ‘‘foreign exchange the fact that entities that engage in essential elements of each of those foreign exchange swaps and forwards, forward’’ or ‘‘foreign exchange swap’’ do transactions—namely, an exchange of not encompass an NDF.87 In the as defined by the CEA and as described two different currencies at a predefined, in this determination, tend to be large preamble to the CFTC–SEC Joint 90 fixed rate—are left intact. entities. Accordingly, a regulatory underlying exchange, denominated in a pre- flexibility analysis is not required. 88 determined currency (usually the deliverable CFTC–SEC Joint Products Rule, 77 FR at currency in the currency pair)’’). 48,255. IV. Final Determination 82 89 Under section 712(d)(1) of the Dodd-Frank Act, Investment Company Institute, at 4. Pursuant to section 1a(47)(E)(ii), the 83 Investment Company Institute, at 4 (contending 15 U.S.C. 8302(d)(1), the Commissions are that ‘‘the minimal benefits to overseeing systemic authorized to further define the term ‘‘swap’’ under Secretary will submit this final risk from including NDFs within the central the CEA, and Treasury does not intend that the determination to the appropriate clearing and exchange trading regime do not justify Commissions’ joint rules in respect of the status of committees of Congress as of November the costs of narrowly interpreting the definition of NDFs as swaps be affected by this written determination issued under other provisions of the 20, 2012. For the reasons set forth in [foreign exchange] forward to exclude NDFs’’). sections I and II, which are incorporated 84 MFX Solutions, Inc., at 2 (‘‘[The definitions of CEA. foreign exchange forward and foreign exchange 90 Nothing in this paragraph is intended to: (1) into and made part of this section IV, swap] set limits on the scope of Treasury’s Address transactions described in footnote 539 of the Secretary issues a determination, as exemptive authority under Section 721 of the Dodd- the CFTC–SEC Joint Products Rule; or (2) establish follows: Frank Act and as such seem to rule out an a ‘‘bookout’’ right allowing parties to avoid exemption from the definition of ‘swap’ for non- exchanging currencies, each of which, depending (a) Definitions. fixed rate foreign exchange swaps and forwards. on the relevant facts and circumstances, may fall For the purposes of this The definitions, however, do not appear to preclude within CFTC regulation 1.3(xxx)(6)(ii). Regarding determination, the following definitions exemption of non-deliverable swaps and forwards the former, in the CFTC–SEC Joint Products Rule, since the need for a ‘physical exchange’ is not the Commissions stated: apply: specified in the CEA’s definitions.’’). [l]ikewise, the Commissions have determined that (1) Act means the Commodity 85 Accord Further Definition of ‘‘Swap’’; a foreign exchange transaction, which initially is Exchange Act. ‘‘Security-Based Swap’’; and ‘‘Security-Based Swap styled as or intended to be a ‘‘foreign exchange Agreement’’; Mixed Swaps; Security-Based Swap forward,’’ and which is modified so that the parties (2) Commission means the Agreement Recordkeeping, 77 FR at 48,256 (Aug. settle in a reference currency (rather than settle Commodity Futures Trading 13, 2012) (‘‘CFTC–SEC Joint Products Rules’’). through the exchange of the 2 specified currencies), Commission. 86 17 CFR 1.3(xxx)(3)(v)(C). does not conform with the definition of ‘‘foreign 87 17 CFR 1.3(xxx)(3)(iii) (defining the term exchange forward’’ in the CEA. (3) Dodd-Frank Act means the Dodd- foreign exchange forward); 17 CFR 1.3(xxx)(3)(iv) See CFTC–SEC Joint Products Rule at 48255 Frank Wall Street Reform and Consumer (defining the term foreign exchange swap). n.539 (internal citation omitted). Protection Act.

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(4) Foreign exchange forward shall exchange forwards to evade otherwise DEPARTMENT OF THE TREASURY have the same meaning as in section applicable regulatory requirements, and 1a(24) of the Act. finds that foreign exchange swaps and Open Meeting of the Financial (5) Foreign exchange swap shall have foreign exchange forwards, as defined Research Advisory Committee the same meaning as in section 1a(25) under the Act, are distinguished from AGENCY: Office of Financial Research, of the Act. other derivatives, widely used by Department of the Treasury. (6) Swap shall have the same meaning supervised banks for bona fide funding as in section 1a(47) of the Act. transactions, and not likely to be used ACTION: Notice of open meeting. (b) Authority and purpose. This to evade otherwise applicable regulatory determination is issued under sections SUMMARY: The Financial Research requirements because of operational and Advisory Committee for the Treasury’s 1a(47)(E) and 1b of the Act in order to transactions costs associated with implement the provisions of the Act Office of Financial Research is potentially transforming these convening for its first meeting on relating to the treatment of foreign instruments into other derivatives that exchange swaps and foreign exchange Wednesday, December 5, 2012 in the are subject to regulatory requirements Cash Room, Department of the Treasury, forwards as swaps under the Act. under the Act. (c) Findings and exemption. (1) 1500 Pennsylvania Avenue NW., (2) Exemption. Upon consideration of Washington, DC 20220, beginning at 10 Considerations. The Secretary has each of the factors set forth in section 1b considered— a.m. Eastern Time. The meeting will be of the Act, the Secretary finds that— open to the public via live webcast at (i) Whether the required trading and (i) Foreign exchange swaps and http://www.treasury.gov/ofr and limited clearing of foreign exchange swaps and foreign exchange forwards should not be seating may also be available. foreign exchange forwards would create regulated as swaps under the Act; and systemic risk, lower transparency, or (ii) Foreign exchange swaps and DATES: The meeting will be held on threaten the financial stability of the foreign exchange forwards are not Wednesday, December 5, 2012, United States, and finds that the structured to evade the requirements of beginning at 10 a.m. Eastern Time. required trading and clearing of these the Dodd-Frank Act, in violation of any ADDRESSES: The meeting will be held in instruments would introduce new rule promulgated by the Commission, the Cash Room, Department of the challenges and could result in negative pursuant to section 721(c) of the Dodd- Treasury, 1500 Pennsylvania Avenue consequences, without improving Frank Act (15 U.S.C. 8321)—and, NW., Washington, DC 20220. The transparency; accordingly, hereby determines that any meeting will be open to the public via (ii) Whether foreign exchange swaps foreign exchange swap or foreign live webcast at http://www.treasury.gov/ and foreign exchange forwards are exchange forward hereby is exempt ofr. A limited number of seats may be already subject to a regulatory scheme from the definition of the term ‘‘swap’’ available for those interested in that is materially comparable to that under the Act. attending the meeting in person, and established by this Act for other classes (d) Scope—As provided in sections those seats would be on a first-come, of swaps, and finds that the regulatory 1a(47)(E) and 1b(c) of the Act— first-served basis. Because the meeting scheme for foreign exchange swaps and (1) Reporting. Notwithstanding this will be held in a secured facility, foreign exchange forwards applicable in determination, all foreign exchange members of the public who plan to the U.S., as well as the regulatory swaps and foreign exchange forwards attend the meeting must contact the schemes in other jurisdictions, have shall be reported to a either a swap data Office of Financial Research (OFR) by required specific actions that address repository or, if there is no swap data email at settlement risk, mitigate counterparty repository that would accept such [email protected] by 5 credit risk, and manage other risks swaps or forwards, to the Commission, p.m. Eastern Time on November 26, associated with foreign exchange swaps pursuant to section 4r of the Act (7 2012 to inform the OFR of their desire and forwards; U.S.C. 6r) within such time period as to attend the meeting and to receive (iii) The extent to which bank the Commission may by rule or further instructions about building regulators of participants in the foreign regulation prescribe. clearance. exchange market provide adequate (2) Business standards. FOR FURTHER INFORMATION CONTACT: supervision, including capital and Notwithstanding this determination, Andrea Ianniello, Designated Federal margin requirements, and finds that any party to a foreign exchange swap or Officer, Office of Financial Research, regulators are adequately supervising forward that is a swap dealer or major Department of the Treasury, 1500 these participants, in part by requiring swap participant (as such terms are Pennsylvania Avenue NW., Washington, the implementation of risk-management defined under the Act or under section DC 20220, (202) 622–3002 (this is not a and operational processes, including the 721(c) of the Dodd-Frank Act (15 U.S.C. toll-free number), use of payment-versus-payment 8321)) shall conform to the business [email protected]. settlement arrangements for settling conduct standards contained in section Persons who have difficulty hearing or transactions and the adoption of credit 4s(h) of the Act (7 U.S.C. 6s(h)). support annexes with counterparties; (3) Effect of determination. This speaking may access this number via (iv) The extent of adequate payment determination shall not exempt any TTY by calling the toll-free Federal and settlement systems, and finds that foreign exchange swap or foreign Relay Service at 800–877–8339. these systems are adequate for foreign exchange forward traded on a SUPPLEMENTARY INFORMATION: Notice of exchange swaps and foreign exchange designated contract market or swap this meeting is provided in accordance forwards, particularly because a execution facility from any applicable with the Federal Advisory Committee specialized settlement system, which is anti-manipulation provision of the Act. Act, 5 U.S.C. App. 2, 10(a)(2), through subject to Federal oversight, has proven implementing regulations at 41 CFR capabilities to settle the majority of all Dated: November 16, 2012. 102–3.150. global foreign exchange transactions in Timothy F. Geithner, Public Comment: Members of the multiple currencies; and Secretary. public wishing to comment on the (v) The use of a potential exemption [FR Doc. 2012–28319 Filed 11–19–12; 8:45 am] business of the Financial Research of foreign exchange swaps and foreign BILLING CODE 4810–25–P Advisory Committee are invited to

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