In a sense, introducing brokers act as gatekeepers to the futures and derivatives markets. Following the passage of the Dodd-Frank Act, certain OTC products which were formerly not regulated are now subject to the CFTC’s jurisdiction. Firms that deal with these products may need to be registered and the products traded may need to be cleared at an exchange. A customer may contact an introducing broker with a particular trade that it wants to make, but will probably not be concerned whether the trade is legally classified as a future, swap or forward. However, it will make a difference to the introducing broker. As registrants, introducing brokers need to be aware of these different products, especially those now classified as “swaps,” and the ramifications of this classification.
The CFTC’s definition of swaps includes those products traditionally considered swaps, such as credit default swaps, equity index swaps, and interest rate swaps.(1) However, also included in the CFTC’s definition are products which were not previously thought of as swaps. These “non-traditional swaps” typically involve foreign exchange and currency derivatives such as options on forex contracts and non-deliverable forwards involving foreign exchange, among others.(2) However, as a result of action by the Treasury Department in November 2012, foreign exchange swaps and foreign exchange forwards where delivery is anticipated will not be considered swaps for purposes of the Commodity Exchange Act.(3) Keeping track of which products are defined as swaps versus futures, retail forex or forwards can be difficult. As a very general guideline and subject to various exceptions, when the parties anticipate physically settling a contract, the contract will usually be treated as a forward which is not subject to the jurisdiction of the CFTC. When determining whether a particular trade or transaction is a swap or a forward, the introducing broker should contact its representative at the futures commission merchant (FCM) or retail foreign exchange dealer (RFED) as part of the due diligence process.
As swaps enter the regulated marketplace, intermediaries such as introducing brokers are becoming subject to additional swaps-related compliance requirements. Knowing whether a particular instrument is defined as a swap is the first step and may save the otherwise unwitting introducing broker from possible disciplinary action.
Michael D. Sefton
Henderson & Lyman
(312) 986-3229 Direct
(312) 986-6960 General
Email: [email protected]
(1) 7 U.S.C. §1a (47)(iii)
(2)17 C.F.R. §§1.3(xxx)(2)(i)(B) and (F)
(3)17 C.F.R. §§1.3(xxx)(3)(i) and U.S. Dep’t of Treasury Swap Determination, 77 Fed. Reg. 69,694, 69,704 (Nov. 20, 2012). Even though foreign exchange swaps and foreign exchange forwards are excluded from the definition of swaps, they will be still be subject to certain swap requirements such as reporting.
This article is published as a source of information only. The material contained herein is not to be construed as legal advice or opinion. Readers should seek specific legal advice before taking any action with respect to matters mentioned in this article. ©2013 Henderson & Lyman. All rights reserved.