On April 29, 2011, the United States Department of the Treasury issued a proposed determination that would exempt foreign exchange (“FX”) swaps and forwards from the definition of “swap” for most Dodd-Frank purposes, including registration, clearing and trade execution. In proposing this determination, the Treasury Secretary is acting pursuant to the authority contained in Section 721 of Dodd-Frank to make such a determination if he finds that FX swaps and forwards should not be regulated as swaps and are not structured to evade the Dodd-Frank Act. FX swaps and forwards will be subject to swap data repository trade reporting requirements but will not be subject to “real-time” trade reporting requirements. For swap dealers and major swap participants, business conduct standards will also apply.
Other FX derivatives, including foreign exchange options, currency swaps and non-deliverable forwards, are not included in Dodd-Frank’s definitions of “foreign exchange swap” and “foreign exchange forward” and cannot be exempted by the Treasury Secretary. Treasury notes that FX swaps and FX forwards differ from these other FX derivatives in that they have fixed and predetermined payment obligations that make them more similar to funding instruments that are not covered by Dodd-Frank, involve the exchange of actual principal amounts, have a short time to maturity and are traded in a transparent and liquid market.
As required under Dodd-Frank, the proposal finds that:
- required trading and clearing of FX swaps and forwards would not create systemic risk, lower transparency or threaten the financial stability of the United States, as evidenced by the well-functioning settlement process for FX swaps and forwards and the disruptive effects required clearing and trading would introduce;
- regulatory schemes in the United States and in other jurisdictions have addressed risks associated with FX swaps and forwards;
- FX swap and forward market participants are appropriately supervised;
- payment and settlement systems for FX swaps and forwards are adequate, particularly due to the central role of CLS Bank International; and
- an exemption for FX swaps and forwards would not lead to evasion.
The proposal would not exempt FX swaps and FX forwards traded on a designated contract market or swap execution facility from any applicable antimanipulation provisions of the Commodity Exchange Act.
Comments on Treasury’s proposed determination are due 30 days after publication in the Federal Register, which is expected shortly.
 “Foreign exchange swap” is defined as a transaction that solely involves (A) an exchange of 2 different currencies on a specific date at a fixed rate that is agreed upon on the inception of the contract covering the exchange and (B) a reverse exchange of those two currencies at a later date and at a fixed rate that is agreed upon on the inception of the contract covering the exchange.
“Foreign exchange forward” is defined as a transaction that solely involves the exchange of two different currencies on a specific future date at a fixed rate agreed upon on the inception of the contract covering the exchange.
 Although Treasury does not define the term “currency swap” in the proposed determination, Treasury seems to use the term to refer to a broad class of instruments providing for periodic payments in different currencies, including instruments commonly known as “cross-currency swaps,” which generally include payments of floating amounts.