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Federal Register/Vol. 77, No. 224/Tuesday, November 20, 2012

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Federal Register/Vol. 77, No. 224/Tuesday, November 20, 2012 69694 Federal Register / Vol. 77, No. 224 / Tuesday, November 20, 2012 / Notices 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. VerDate Mar<15>2010 15:12 Nov 19, 2012 Jkt 229001 PO 00000 Frm 00105 Fmt 4703 Sfmt 4703 E:\FR\FM\20NON1.SGM 20NON1 wreier-aviles on DSK5TPTVN1PROD with Federal Register / Vol. 77, No. 224 / Tuesday, November 20, 2012 / Notices 69695 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,
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