FX Trader Magazine Article

54 FX TRADER MAGAZINE October - December 2015
A Brief Survey of CFTC Regulation
of Select FX Products
Introduction
The scope of Commodity Futures
Trading Commission (“CFTC”)
regulation of foreign exchange-
related (“FX”) products varies
widely depending on the nature of
the FX transaction. This is driven
primarily by the dictates of the
Commodity Exchange Act (“CEA”)
but in some cases stems from policy
choices made by the Commission.
This article discusses, and compares
and contrasts select elements of and
interesting relationships among,2
the CFTC’s regulation of various
FX transactions. The article
covers, among other FX products,
spot (unregulated, but residual
enforcement authority exists),3
foreign exchange forwards (“FXFs”)
and foreign exchange swaps
(“FXSs”) (more lightly regulated
than other swaps involving FX),
retail FX (“retail forex”) (subject
to its own regulatory regime) and
swaps overlying FX or FX rates, in
all their various forms, including FX
options (subject to robust regulation
under the Dodd-Frank Wall Street
Transparency and Accountability
Act of 20104
(“Dodd-Frank”)).
I. The Swap Definition
The CEA (as modified by Dodd-
Frank) expressly grants the CFTC
jurisdiction over currency swaps and
FXSs, which are enumerated in CEA
§§ 1a(47)(A)(iii)(VII) and (VIII),
respectively, although, as discussed
below, CFTC jurisdiction over
FXSs is limited. The CFTC also has
jurisdiction over FX options because
CEA § 1a(47)(A)(i) (added by Dodd-
Frank) clearly renders most FX
options (both options to purchase
currency and cash-settled options
on exchange rates) swaps,5
a result
by David Aron1
MARKET REGULATIONFX

FX TRADER MAGAZINE October - December 55
the CFTC enshrined in regulation
1.3(xxx)(2)(B).6
These changes to the CEA wrought by
Dodd-Frank and the related CFTC-
SEC rulemaking departed from the
historically light regulatory touch
applicable to FX
products under
the CEA/CFTC
regulations as
compared to
most other asset
classes.
II. Sources
of CFTC
FX Options
Authority
The starting
point for determining CFTC
jurisdiction generally is CEA § 2(a)
(1)(A),7
which grants the CFTC
exclusive jurisdiction, except as
otherwise provided in, among other
CEA and Dodd-Frank sections,
CEA § 2(c),8
over swaps, futures
and options on futures traded
on designated contract markets
(“DCMs”) and over swaps traded on
swap execution facilities (“SEFs”) or
any other board of trade, exchange or
market. CEA § 4c(b)9
also grants the
CFTC plenary authority over options
not otherwise carved out of the
CFTC’s jurisdiction.10
To avoid the
perception by some that all options
subject to CFTC jurisdiction would
become illegal (notwithstanding
that Dodd-Frank made them swaps
and subjected them as such to a
comprehensive regulatory scheme)
unless the CFTC authorized them
using its CEA § 4c(b) authority,11
the CFTC promulgated regulation
32.2, which makes options lawful
“if conducted in compliance with
and subject to the provisions of the
[CEA] . . . otherwise applicable to any
other swap.”12
However, the CFTC’s
jurisdiction over foreign currency
transactions, including FX options,
historically has been relatively
circumscribed.
III. The Treasury
Amendment and FX Options
In particular,
CEA § 2(c)
(1) (known as
the “Treasury
Amendment”)
states that,
with limited
exceptions not
relevant here,
nothing in the
CEA applies to
an agreement,
contract or
t r a n s a c t i o n
in, among other things, foreign
currency.13
Congress enacted the
Treasury Amendment as a part of
the Commodity Futures Trading
Commission Act of 1974,14
which,
among other things, created the
CFTC. In the words of the Supreme
Court in Dunn v. CFTC (“Dunn”):
The amendment was enacted on the
suggestion of the Treasury Department
at the time of a dramatic expansion
FXMARKET REGULATION
1
David Aron is Counsel in the Office of General Counsel (and
temporarily detailed to the Division of Market Oversight) at the
Commodity Futures Trading Commission, where he was one of the
principal draftsmen of the joint CFTC-Securities and Exchange
Commission (“SEC”) rulemaking further defining the term swap
(Further Definition of “Swap,” “Security-Based Swap,” and “Security-
Based Swap Agreement”; Mixed Swaps; Security-Based Swap
Agreement Recordkeeping, 77 Fed. Reg. 48,207 (Aug. 13, 2012)
(“Swap Adopting Release”)), including the FX sections thereof. The
research for this paper was conducted, and the paper was written by,
David Aron in his personal capacity and not in his official capacity
as an employee of the Commodity Futures Trading Commission
(“CFTC”). The analyses and conclusions expressed in this paper are
those of Mr. Aron, and do not reflect the views of other employees of
the CFTC Office of General Counsel, the CFTC Division of Market
Oversight, other CFTC staff, the Commission itself, or the United
States government. The author wishes to thank Guy C. Dempsey, Jr., a
partner in Katten Muchin Rosenman LLP’s Futures and Derivatives
practice, for his helpful comments and suggestions on this article. Any
errors, however, are the author’s alone.
2
The article is not intended to provide a full treatment of the CFTC/
CEA FX regulatory scheme.
3
See CEA §§ 9(a)(2) (making it a felony “to manipulate or attempt to
manipulate the price of any commodity in interstate commerce, or for
future delivery on or subject to the rules of any registered entity, or of any
swap . . . .”) (emphasis added), 6(c)(1) (rendering it unlawful to engage
in any of the same activity outlawed by 9(a)(2) if such activity is “in
contravention of such rules . . . as the Commission . . . promulgate[s] . . .
[within] 1 year . . . of enactment of . . . Dodd-Frank . . . .”) sand 6(c)(3)
(making it illegal to manipulate or attempt to manipulate the price of
a commodity in interstate commerce, a swap, or a futures contract on or
subject to the rules of a registered entity) and CFTC regulations 180.1
(rendering it unlawful to “intentionally or recklessly” engage in any one
of four enumerated types of misconduct “in connection with any swap,
or contract of sale of any commodity in interstate commerce, or contract
for future delivery on or subject to the rules of any registered entity. . . .”)
(emphasis added) and 180.2 ([“i]t shall be unlawful for any person,
directly or indirectly, to manipulate or attempt to manipulate the price
of any swap, or of any commodity in interstate commerce, or for future
delivery on or subject to the rules of any registered entity[]”)(emphasis
added) promulgated under the authority granted to the CFTC in
6(c). Regulation 180.1 implemented 6(c)(1), and regulation 180.2
implemented 6(c)(3).
4
Public Law 111–203, 124 Stat. 1376 (2010).
5
CEA § 1a(47)(A) states, in relevant part, that: the term “swap” means

in the scope of federal commodities
regulation. The Department expressed
concerns in a letter to the relevant
congressional committee that this
development might lead, inter alia, to
the unintended regulation of the off-
exchange market in foreign currency
futures. See S.
Rep. No. 93–
1131, pp. 49–
50 (1974) (“The
D e pa r t m e nt
feels strongly
that foreign
c u r r e n c y
futures trading,
other than
on organized
e x c h a n g e s ,
should not
be regulated
by the new
agency”) (letter
of Donald
Ritger, Acting General Counsel).
The Treasury Amendment, which
tracks almost verbatim the language
proposed by the Department . . . was
included in the legislation to respond
to these concerns.15
In Dunn, the Supreme Court held
that the CFTC had no jurisdiction
over over-the-counter (“OTC”) FX
options, interpreting the operative
exclusionary language (i.e., “[n]
othing in this Act shall be deemed to
govern or in any way be applicable to
transactionsinforeigncurrency...”)16
contained in the forerunner to CEA
§ 2(c)(1) as covering FX options,
on the basis that FX options are
“transactions in” FX. At the time
Dunn was decided, there was nothing
bringing OTC FX options back
into the CFTC’s jurisdiction: that
is, CEA § 2(a)(1)(A)(ii) contained
no language limiting the exclusion
from CFTC jurisdiction comparable
to current CEA § 2(c)(1)(A)’s “[e]
xcept as provided in paragraph (2) . . .”
In the wake of Dunn, however, the
Commodity Futures Modernization
Act of 2000 (“CFMA”)17
added two
express carve-outs
from the Treasury
A m e n d m e n t
and moved
the Treasury
Amendment from
CEA § 2(a)(1)(A)
(ii) to CEA § 2(c)
(1).18
The first carve-
out (current
CEA § 2(c)(2)
(A)(i)) codified
that options (as
well as futures
and options on
futures) on any commodity (other
than FX or securities) executed or
traded on an organized exchange19
were subject to the CEA and CFTC
jurisdiction. The second carve-out
codified that options (as well as
futures and options on futures) on
FX were subject to CEA and CFTC
MARKET REGULATIONFX
any agreement, contract, or transaction—
(i) that is a put, call, cap, floor, collar, or similar option of any kind that
is for the purchase or sale, or based on the value, of 1 or more interest
or other rates[] [or] currencies . . . The “for the purchase or sale . . . of”
language captures physically settled options; the “based on the value[]
of” language captures cash settled options. But see CEA §§ 1a(47)
(B)(i) (excluding from the swap definition agreements, contracts, and
transactions described in CEA § 2(c)(2)(C)(i) (which includes retail
forex options)) and 1a(47)(B)(iv) (excluding from the swap definition
FX-related options entered into on a registered national securities
exchange).
6
CFTC regulation § 1.3(xxx)(2)(B) states:
(2)Inclusionofparticularproducts.(i)Thetermswapincludes,without
limiting the meaning set forth in section 1a(47) of the Commodity
Exchange Act, the following agreements, contracts, and transactions:
. . .
(B) A currency option, foreign currency option, foreign exchange option
and foreign exchange rate option[.]
See also the FX options discussion in the Swap Adopting Release at
48,254.
7
CEA § 2(a)(1)(A) provides that:
(A) IN GENERAL.—The Commission shall have exclusive
jurisdiction, except to the extent otherwise provided in the Wall
Street Transparency and Accountability Act of 2010 (including
an amendment made by that Act) and subparagraphs (C), (D),
and (I) of this paragraph and subsections (c) and (f), with respect
to accounts, agreements (including any transaction which is of the
character of, or is commonly known to the trade as, an “option”,
“privilege”, “indemnity”, “bid”, “offer”, “put”, “call”, “advance
guaranty”, or “decline guaranty”), and transactions involving swaps
or contracts of sale of a commodity for future delivery (including
significant price discovery contracts), traded or executed on a contract
market designated pursuant to section 5 or a swap execution facility
pursuant to section 5h or any other board of trade, exchange, or
market, and transactions subject to regulation by the Commission
pursuant to section 19 of this Act.
8
CEA § 2(c) provides the following:
AGREEMENTS, CONTRACTS, AND TRANSACTIONS IN
FOREIGN CURRENCY, GOVERNMENT SECURITIES,
AND CERTAIN OTHER COMMODITIES.—(1) IN
GENERAL.—Except as provided in paragraph (2), nothing in this
Act (other than section . . . 5b[] or 12(e)(2)(B)) governs or applies to
an agreement, contract, or transaction in—(A) foreign currency . . . .
CEA § 2(c)(2)(A) provides that:
(2) COMMISSION JURISDICTION.—

jurisdiction when executed or traded
on organized exchanges (other
than national securities exchanges
registered with the SEC pursuant
to Securities and Exchange Act of
1934 § 6(a)).20
As a result, because (1)
“transactions in” FX, which Dunn
had held includes
FX options,
were excluded
from the CEA
and CFTC
jurisdiction by
the Treasury
A m e n d m e n t
and (2) neither
of the carve-outs
therefrom added
by the CFMA
brought OTC
FX options
back within the
coverage of the
CEA and CFTC
j u r i s d i c t i o n ,
the CFMA did not change Dunn’s
holding that OTC FX options were
excluded from the CEA and CFTC
jurisdiction.
Dodd-Frank § 722(c)(3) added a
third carveout (for swaps) from the
Treasury Amendment.21
As a result,
the Dodd-Frank swap definition, the
CFTC’s and SEC’s further definition
of “swap” and the CEA § 2(c)(2)
(A)(ii) carve-out from the Treasury
Amendment added by Dodd-Frank
all work together to subject OTC
FX options to the CEA and CFTC
oversight.
IV. Treatment of Certain
Other FX Products
The CFTC showed great flexibility
in its approach to FX products, other
than OTC FX options, in the Swap
Adopting Release, as did Congress,
by providing a very light regulatory
touch (vis-à-vis swaps fully regulated
under Dodd-Frank) for foreign
exchange forwards (“FXFs”) and
foreign exchange
swaps (“FXSs”)
in Dodd-Frank.
Dodd-Frank §
721(a)(21) added
to the CEA,
among other
provisions, §
1a(47)(E). CEA
§ 1a(47)(E)
provides, among
other things, that
if the Treasury
S e c r e t a r y
determines that
FXFs and/or
FXSs should
not be treated
as swaps and were not structured to
evade Dodd-Frank in violation of
any CFTC regulation promulgated
for that purpose, then such products
would not be treated as swaps22
and
would be subject only to afewreserved
provisions of the CEA and Dodd-
FXMARKET REGULATION
(A) AGREEMENTS, CONTRACTS, AND TRANSACTIONS
TRADED ON AN ORGANIZED EXCHANGE.—This Act
applies to, and the Commission shall have jurisdiction over, an
agreement, contract, or transaction described in paragraph (1) that
is—(i) a contract of sale of a commodity for future delivery (or an
option on such a contract), or an option on a commodity (other than
foreign currency or a security or a group or index of securities), that
is executed or traded on an organized exchange; (ii) a swap; or (iii)
an option on foreign currency executed or traded on an organized
exchange that is not a national securities exchange registered
pursuant to section 6(a) of the Securities Exchange Act of 1934.
9
CEA § 4c(b) provides that:
No person shall offer to enter into, enter into or confirm the execution
of, any transaction involving any commodity regulated under this
Act which is of the character of, or is commonly known to the trade
as, an “option”, “privilege”, “indemnity”, “bid”, “offer”, “put”,
“call”, “advance guaranty”, or “decline guaranty”, contrary to any
rule, regulation, or order of the Commission prohibiting any such
transaction or allowing any such transaction under such terms and
conditions as the Commission shall prescribe. Any such order, rule,
or regulation may be made only after notice and opportunity for
hearing, and the Commission may set different terms and conditions
for different markets.
10
See, e.g., CEA § 2(a)(1)(C)(i)(I) (example of an option over which
the CFTC does not have jurisdiction), which states that:
[e]xcept as provided in [CEA § 2(a)(1)(C)(i)](II), this Act shall not
apply to and the Commission shall have no jurisdiction to designate
a board of trade as a contract market for any transaction whereby any
party to such transaction acquires any put, call, or other option on
one or more securities (as defined in section 2(1) of the Securities Act
of 1933 or section 3(a)(10) of the Securities Exchange Act of 1934 on
the date of enactment of the Futures Trading Act of 1982), including
any group or index of such securities, or any interest therein or based
on the value thereof.
CEA § 2(a)(1)(C)(i)(II) grants the CFTC jurisdiction over such
options if the SEC exempts them on the condition that the CFTC
exercise concurrent jurisdiction.
11
The CFTC explained in the preamble to the final Commodity
Optionsrulethatitpromulgated§32.2to“remove[]anyuncertainty
as to whether CEA section § 4c(b) would otherwise prohibit . . .
commodity options” that are swaps. Commodity Options, 77 FR
25,320, 25,326 (Apr. 27, 2012).
12
See 17 C.F.R. § 32.2, stating, in relevant part:
[s]ubject to §§ 32.1, 32.4, and 32.5, which shall in any event apply
to all commodity option transactions, it shall be unlawful for any

MARKET REGULATIONFX
Frank. Those reserved provisions are:
(1) its business conduct provisions
(for swap dealers (“SDs”) and major
swap participants (“MSPs”));23
(2)
its swap data repository reporting
requirements;24
and (3) with respect
to FXFs and FXSs listed and traded
on or subject to the rules of a DCM
or a SEF, or
cleared by a
DCO, CEA
and Dodd-
Frank anti-
fraud and anti-
manipulation
provisions. 25
The Treasury
S e c r e t a r y
made that
determination
in 2012.26
A. Retail FX
Options
In one case, in analyzing a conflict
among three different provisions of
the CEA raising a question regarding
the Commission’s FX options
authority, the CFTC preserved the
legality of certain FX products when
the agency could have instead outlawed
them. CEA § 1a(47)(A)(i) defines
FX options (among other options) as
swaps. CEA § 2(e) makes it illegal for
retail counterparties (i.e., non-eligible
contract participants (“ECPs”)) to
enter into swaps (implicitly including
FX options because FX options are
swaps pursuant to CEA § 1a(47)(A)
(i)) other than on or subject to the
rules of a DCM. While CEA § 1a(47)
(B)(i) excludes CEA § 2(c)(2)(C)(i)
retail forex products (which could
include retail forex options) from the
swap definition, CEA § 1a(47)(B)
(i) does not contain a parallel swap
definition exclusion for CEA §
2(c)(2)(B)(i) (which expressly includes
retail forex options). CEA § 2(c)(2)
(B)(i) subjects FX options involving
a retail party to the CEA’s/CFTC’s
retail forex regime,27
implicitly
rendering them legal but for the
fact that such options at the same
time seemingly became swaps
pursuant to new CEA § 1a(47)
(A)(i), and various activity related
to such swaps apparently became
illegal under
the new CEA
§ 2(e) added by
D o d d - F r a n k .
In resolving
this conflict
among the
aforementioned
CEA sections,
the CFTC could
have favored
CEA §§ 1a(47)
(B)(i) and 2(e)
over CEA § 2(c)
(2)(B), thereby
rendering FX options involving
non-ECP counterparties illegal,
but chose instead to permit such
FX options, subject to CEA § 2(c)
(2)(B) and Part 5 of the CFTC’s
regulations, stating “[t]he CFTC
believes that Congress did not
intend to overrule and effectively
repeal another provision of the
CEA in such an oblique fashion.”28
person or group of persons to offer to enter into, enter into, confirm
the execution of, maintain a position in, or otherwise conduct
activity related to any transaction in interstate commerce that is a
commodity option transaction, unless:
(a) [s]uch transaction is conducted in compliance with and subject to
the provisions of the Act, including any Commission rule, regulation,
or order thereunder, otherwise applicable to any other swap . . . .
13
See supra note 8.
14
Public Law 93-463, 88 Stat. 1389.
15
519 U.S. 465, 471 n.8 (1997).
16
CEA § 2(a)(1)(A)(ii) was the forerunner of CEA § 2(c)(1)(A) and
stated: “[n]othing in this Act shall be deemed to govern or in any
way be applicable to transactions in foreign currency . . unless such
transactions involve the sale thereof for future delivery conducted on
a board of trade.”
17
Public Law 105–554, 114 Stat. 2763.
18
See CFMA § 102.
19
The term “organized exchange” is defined in CEA § 1a(37) as: a
trading facility that—(A) permits trading—(i) by or on behalf of a
person that is not an eligible contract participant; or (ii) by persons
other than on a principal-to-principal basis; or (B) has adopted
(directly or through another nongovernmental entity) rules that—
(i) govern the conduct of participants, other than rules that govern
the submission of orders or execution of transactions on the trading
facility; and (ii) include disciplinary sanctions other than the
exclusion of participants from trading.
20
The carveout currently is in CEA § 2(c)(2)(A)(iii); it was in CEA §
2(c)(2)(A)(ii) when the CFMA added it to the CEA.
21
SeeDodd-Frank§722(c)(3)(addingswapstothelistofagreements,
contracts and transactions that are excepted from the Treasury
Amendment’s exclusion of FX from the Commission’s jurisdiction).
See supra note 8 for the text of the change/CEA § 2(c)(2)(A)(ii).
22
See CEA § 1a(47)(E)(i).
23
See CEA § 1a(47)(E)(iv).
24
See CEA § 1a(47)(E)(iii).
25
See CEA § 1a(47)(F)(i). See also CEA § 1b(c) (stating that “[a]
determination by the Secretary [that FXFs and FXSs should not
be regulated as swaps] . . . shall not exempt any [FXFs] and [FXFs]
traded on a [DCM] or [SEF] from any applicable antifraud and
antimanipulation provision under this chapter.”).
26
See Determination of Foreign Exchange Swaps and Foreign
Exchange Forwards Under the Commodity Exchange Act, 77 Fed.
Reg. 69,694 (Nov. 20, 2012) (final determination) (“Treasury
Determination”).
27
The CFTC’s retail forex regime is set forth in CEA §§ 2(c)(2)(B)

FXMARKET REGULATION
B. Securities Conversion
Transactions
1. Foreign Exchange Forwards
Relief
In another
example of
the CFTC
p r o v i d i n g
relief through
interpretation,
the CFTC and
SEC interpreted
“ s e c u r i t i e s
c o n v e r s i o n
transactions”29
out of not
one but two
potential CEA
r e g u l a t o r y
schemes: FXFs
and retail forex.
The FXFs issue
implicated by securities conversion
transactions was that, were securities
conversion transactions considered
foreign exchange forwards, securities
conversion transactions “would
[have] be[en] subject to the CEA
reporting and business conduct
standards requirements applicable
to FXFs, even if the [Treasury
Secretary] determine[d] to exempt
foreign exchange forwards from
the definition of “swap.”30
Because
such transactions routinely included
delaying the otherwise applicable
FX settlement deadline beyond the
typical FX settlement timeline (i.e.,
T+2) in transactions involving the use
of FX to purchase foreign securities/
the receipt of FX from the sale of
foreign securities, the possibility of
securities conversion transactions
having been characterized as foreign
exchange forwards was real31
(and
securities conversion transactions
being considered evasive was an
outside possibility).32
Stating that
they “do not believe that Congress
intended, solely with respect to
foreign exchange transactions, to
extend the reach of the CEA to
t r a n s a c t i o n s
that historically
have been
considered spot
transactions[,]”33
the Commissions
provided an
interpretation
that “a bona
fide foreign
exchange spot
transaction, i.e., a
foreign exchange
transaction that
is settled on
the customary
timeline of the
relevant spot
market, is not within the definition of
the term ‘swap.’34
The CFTC stated
that it would consider securities
conversion transactions to be bona
fide spot transactions, thus effectively
equating the foreign securities and
related FX spot settlement deadlines
in the context of securities conversion
transactions.35
and (C) and Part 5 of the CFTC’s regulations (17 C.F.R. Part 5).
28
Swap Adopting Release at 48,258.
29
Generally, a “securities conversion transaction” is a transaction in
which (1) FX is used to purchase a foreign security or received from
the sale of a foreign security and (2) the settlement timing of the FX
leg of the transaction is delayed (beyond what it would have been
absent being used to buy, or being received from the sale of, a foreign
security) to match the longer settlement timeframe of the securities
leg so that the transactions as a whole can settle on a delivery-versus-
payment basis. The CFTC (and SEC) defined a securities conversion
transaction as:
[a]n agreement, contract or transaction for the purchase or sale of
an amount of foreign currency equal to the price of a foreign security
with respect to which (i) the security and related foreign currency
transactions are executed contemporaneously in order to effect
delivery by the relevant securities settlement deadline and (ii) actual
delivery of the foreign security and foreign currency occurs by such
deadline . . . Swap Adopting Release at 48,257.
30
Id.
31
This is because the intentional delay aspects of securities conversion
transactions could have been viewed as falling within the “specific
future date” element of the FXF definition. See FXF discussion infra
§ IV.C.; FXF definition infra note 40.
32
The Commissions stated that:
[t]he Commissions do not want to enable market participants simply
to label as “spot” foreign exchange transactions that regularly settle
after the relevant foreign exchange spot market settlement deadline,
or with respect to which the parties intentionally delay settlement,
both of which would be properly categorized as foreign exchange
forwards, or CEA section 2(c)(2) transactions (discussed separately
below), in order to avoid applicable foreign exchange regulatory
requirements.”
33
Id.
34
Id.
35
See id. at text accompanying n.567.
36
37
Id.
38
Securities are commodities for CEA purposes. See CEA §§
1a(9) (defining the word “commodity” broadly enough to include
securities); 1a(19)(i) (defining the term “excluded commodity” to
include,amongotherthings,securitiesandsecurityindexes). Butsee,
e.g., CEA §§ 2(a)(1)(A) (“[e]xcept as hereinabove provided, nothing
contained in this section shall (I) supersede or limit the jurisdiction
at any time conferred on the [SEC] . . . (II) restrict the [SEC] . . . from

2. Relief from the Retail Forex
Regime for Security Conversion
Transactions
The CFTC provided additional
certainty to securities conversion
transactions by interpreting
securities conversion transactions as
“not leveraged, margined or financed
within the meaning of [CEA] section
2(c)(2)(C)[,]” adding that:
[w]hile it is possible to view the fact
that the buyer of a currency in such a
transaction does not pay for the currency
until it is delivered as leverage (in that
the buyer puts nothing down until
taking delivery, thus achieving 100%
leverage) or a financing arrangement,
the CFTC does not interpret it as such
for purposes of CEA section 2(c)(2)
(C).36
The CFTC added that, just
because “Congress recognized that
settlement of bona fide spot foreign
exchange transactions typically takes
two days . . . [and] expressly excluded
these types of bona fide spot foreign
exchange transactions does not mean
that Congress intended to subject
Security Conversion Transactions
to regulation under the retail foreign
exchange regime[,]”37
pointing out
that:
Congress recognized that settlement in
various spot markets in commodities
other than foreign exchange [e.g., the
securities leg of a Security Conversion
Transaction]38
can be longer than
two days. See CEA section 2(c)(2)(D)
(ii)(III)(aa) (disapplying the DCM-
trading requirement for certain
commodity transactions with non-
ECPs when the contract “results in
actual delivery within 28 days or such
other longer period as the [CFTC]
may determine by rule or regulation
based on the typical commercial
practice in cash or spot markets for the
commodity involved”).”39
C. FXFs and FXSs
As alluded to above, Congress also
provided for reduced swap regulation
of 2 types of FX transactions settled
by exchanging different currencies—
FXFs40
and FXSs41
— by providing
that such products would not be
considered swaps if the Treasury
Secretary determined that FXFs
and FXSs should not be regulated as
swaps,42
which, as noted above, he did
in 2012.43
That treatment is in accord
with the historically lighter touch
CEA regulation of FX products.
However, in light of the financial
crisis, Congress expressed a desire44
to provide a high bar to regulating
FXFs and FXSs substantially less
than other swaps.45
D. Spot and Forward-like
FX Transactions vs. Retail
Forex
CEA § 2(c)(2)(C)(i)(II) provides still
another example of a deregulatory
approach to FX. Rather than cover
all FX transactions with retail
counterparties under the retail forex
regime, Congress provided that that
regime would not apply to a leveraged,
margined or financed “contract of
sale that—(AA) results in actual
deliverywithin2days;or(BB)creates
an enforceable obligation to deliver
between a seller and buyer that have
the ability to deliver and accept
delivery, respectively, in connection
with their line of business.”46
This
starkly contrasts with CEA § 2(c)
(2)(D), which, subject to several
important exceptions,47
renders it
illegal to enter into, or offer to enter
into, leveraged, margined or financed
transactions in commodities other
MARKET REGULATIONFX
carrying out . . . [its] duties and responsibilities . . .”); 2(a)(1)(C)(i)(I)
(“[e]xcept as provided in subclause (II), . . . [the CEA] shall not apply
to and the [CFTC] shall have no jurisdiction to designate a board of
trade as a contract market for any transaction whereby any party to
such transaction acquires any put, call, or other option on one or more
securities”). Other portions of CEA § 2 also circumscribe the CFTC’s
jurisdiction with respect to securities-related derivatives.
39
Id. at n. 571.
40
An FXF is defined in CEA § 1a(24) as “a transaction that solely
involves the exchange of 2 different currencies on a specific future date
at a fixed rate agreed upon on the inception of the contract covering
the exchange.” Interestingly, FXFs are not expressly defined as swaps,
although FXSs are. See CEA § 1a(47)(A)(iii)(VIII) (enumerating
an FXS as a swap). But see written statement by Sen. Blanche
Lincoln, 156 Cong. Rec. S. 5920 (July 15, 2010) (stating “[o]ne
should note that foreign exchange forwards are treated as swaps
under the CEA.”). Senator Lincoln’s statement referred to the
general state of affairs under the CEA prior to the Treasury Secretary
making a determination as to whether FXFs should be treated as
swaps. See CEA § 1a(47)(E)(i).
41
An FXS is defined in CEA § 1a(25) 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 the 2 currencies described in subparagraph
(A) at a later date and at a fixed rate that is agreed upon on the
inception of the contract covering the exchange.
42
See CEA § 1a(47)(E)(i).
43
See Treasury Determination, supra note 26.
44
See, e.g., written statement by Sen. Blanche Lincoln, 156 Cong.
Rec. S. 5920 (July 15, 2010) (stating that “[t]hese provisions [that
the Treasury Secretary must meet to conclude FXFs/FXSs should not
be regulated as swaps] and this process related to exempting [FXSs]
and [FXFs] from swaps regulation will be, and should be, difficult
for the Secretary of the Treasury to meet.”). CEA § 1b(a) lists 5 issues
that the Secretary of the Treasury had to consider when determining
whether FXFs/FXSs should be regulated as swaps. CEA § 1b(b)
further required the Treasury Secretary to explain to Congress why
such products are not suited for swap regulation and why they should
be exempt.
45
See notes 22-25 supra and accompanying text for a discussion of the
CEA provisions to which FXFs and FXSs remain subject.
46
CEA § 2(c)(2)(C)(i)(II)(bb).
47
The exceptions, including for transactions overlying securities, are

than FX with persons who are neither
ECPs nor eligible commercial entities
(a more restrictive standard), other
than on or subject to the rules of a
DCM (“2(c)(2)(D) Transactions”).48
2 ( c ) ( 2 ) ( D )
Transactions are
rendered illegal
by virtue of § 2(c)
(2)(D)(iii), which
applies CEA §
4(a) to 2(c)(2)
(D) Transactions
as if they were
futures.49
V. Non-
Deliverable
Forwards
(“NDFs”)
The CFTC has
categorized NDFs
as swaps.50
As the Commissions
explained in the Swap Adopting
Release, NDFs are swaps pursuant
to CEA § 1a(47)(A)(iii) because they
“provide for a future (executory)
payment based on an exchange rate,
which is an ‘interest or other rate[
]’ within the meaning of [CEA §
1a(47)](A)(iii).”51
The Commission
added that “[e]ach party to an NDF
transfers to its counterparty the risk
of the exchange rate moving against
the counterparty, thus satisfying the
requirement that there be a transfer
of financial risk associated with a
future change in rate[, which] . . .
transfer . . . is not accompanied by
a transfer of an ownership interest
in any asset or liability.”52
The
Commissions also supported their
determination that NDFs are swaps
by citing the fact that “at least some
market participants view NDFs as
swaps today, and thus NDFs also
may fall within clause (A)(iv) of the
swap definition as ‘an agreement,
contract, or transaction that is, or
in the future becomes, commonly
known to
the trade as
a swap’”53
and that the
T r e a s u r y
S e c r e t a r y
a g r e e d — i n
the notice
of proposed
determination
that FXFs
and FXSs
should not be
regulated as
s w a p s — t h a t
“his authority
to issue a
determination
‘is limited to foreign exchange
swaps and forwards and does not
extend to other foreign exchange
derivatives’ and noted that ‘NDFs
may not be exempted from the
CEA’s definition of ‘swap’ because
they do not satisfy the statutory
definitions of a foreign exchange
swap or forward.’”54
FXMARKET REGULATION
listed in CEA § 2(c)(2)(D)(ii).
48
The term “eligible commercial entity” is defined in CEA § 1a(17).
49
CEA § 4(a) makes it illegal, unless exempted by the CFTC under
CEA § 4(c) or exempted under CEA § 4(e) (certain transactions
entered into on foreign boards of trade) to enter into a futures
contract other than on or subject to the rules of a DCM.
50
See 17 C.F.R. 1.3(xxx)(2)(i)(F). See also Swap Adopting Release
at 48,254-48,256.
51
Swap Adopting Release at 48,254-48,255.
52
Id. at 48,255.
53
Id. n.537.
54
Id. n.538. The Secretary reiterated those sentiments with
respect to NDFs in Treasury’s final determination. See Treasury
Determination at 69695.
55
See Swap Adopting Release at 48,255-48,256 (discussing and
rejecting commenters’ arguments).
56
See Petition for Exemptive Relief for Non-Deliverable Foreign
Exchange Forwards (Feb. 26, 2013), available at https://
www.aba.com/Advocacy/LetterstoCongress/Documents/2-
26-13PetitionforExemptiveRelief.pdf. The petitioners were the
Investment Company Institute, ICI Global, the American Bankers
Association (“ABA”) and the ABA Securities Association.
57
See, e.g., Joe Parsons, CFTC eyes NDF clearing mandate, Futures
and Options Week (Sept. 26, 2014) (noting that the CFTC was
considering mandating clearing NDFs despite lingering cross-border
and other issues), available at http://www.fow.com/3384467/
CFTC-eyes-NDF-clearing-mandate.html. The Commission’s
Global Markets Advisory Committee (“GMAC”) held a meeting to
discuss NDF clearing on October 9, 2014. GMAC’s FX Markets
Subcommittee subsequently provided GMAC a memorandum
essentially advocating a “go slow” approach. See Response to request
for recommendation on an FX NDF mandate (Dec. 5, 2014)
(recommending that “[s]hould the . . . Commission . . . decide to
proceed with a clearing mandate for NDFs, such mandate should
contain a clear timeline and method of implementation to ensure
that market participants have appropriate opportunity to address
the issues outlined in this paper.”), available at http://www.
cftc.gov/ucm/groups/public/@aboutcftc/documents/file/gmac_
fxndfmandate122214.pdf.
58
See ESMA Feedback Statement on the Consultation on the
Clearing Obligation for Non-Deliverable Forwards (Feb. 4,
2015), available at http://www.esma.europa.eu/system/files/2015-
esma-234_-_ feedback_statement_on_the_clearing _obligation_
of _non_deliverable_ forward.pdf (stating “[b]ased on the feedback
received to this consultation, ESMA is not proposing a clearing

MARKET REGULATIONFX
obligation on the NDF classes at this stage.”).
59
See letter from the Coalition of Physical Energy Companies
(“COPE”) dated July 22, 2011, available at http://comments.cftc.
gov/PublicComments/ViewComment.aspx?id=47917&Search
Text=Coalition%20of%20Physical%20Energy%20Companies.
60
61
See U.S. Bank Web site at https://www.usbank.com/fxweb/
help/basic_spot-forward.pdf.
62
See, e.g., California Bank & Trust Web site at https://www.
calbanktrust.com/business-banking/international-banking/
foreign-exchange-services/window-forward-contracts.html
(noting that “ it’s often challenging to determine exactly when
a payment will take place. Production or shipment dates, the
conclusion of legal matters, and invoice discounting all can
impact when payments are released.”).
63
CEA § 1a(19) (defining an FXF). Emphasis added.
64
See CEA § 1a(19) (stating that “[t]he term “excluded
commodity” means—(i) an . . .exchange rate . . . [or] currency
. . .”).
65
CEA § 1a(47)(B)(ii) (emphasis added).
66
Swap Adopting Release at 48,232. See also CEA § 1a(20)
(defining an “exempt commodity” as “a commodity that is not
an excluded commodity or an agricultural commodity”; CFTC
regulation 1.3(zz) (defining “agricultural commodity”).
67
See Section 309 (Relief for End-Users Who Use Physical
Contracts With Volumetric Optionality) of H.R. 2289 (the
“Commodity End-User Relief Act”).
68
See Forward Contracts With Embedded Volumetric
Optionality, 80 Fed. Reg. 28,239 (May 18, 2015).
69
See written statement by Sen. Blanche Lincoln, 156 Cong. Rec.
S. 5920 (July 15, 2010) (observing that “[t]he foreign exchange
swaps and foreign exchange forward market is approximately $65
trillion and the second largest part of the swaps market.”).
70
But see CFTC Approves National Futures Association
[(“NFA”)] Rules Enhancing Protections for Retail Forex
Customers, CFTC Press Release PR7219-15 (Aug. 27, 2015),
available at http://www.cftc.gov/PressRoom/PressReleases/
pr7219-15 (noting that the NFA rule amendments and
interpretive notice enhance protections for retail customers
of NFA Forex Dealer Members (“FDMs”) by, among other
things: (1) imposing additional capital requirements on FDMs;
(2) requiring FDMs to collect security deposits from eligible
contract participants for retail forex transactions; (3) requiring
FDMs to adopt risk management programs; and (4) requiring
FDMs to provide additional disclosure to assist potential
While commenters on the
proposed further definition of swap
rulemaking made several arguments
why NDFs should be considered
FXFs, the Commissions rejected
all of them.55
Subsequently, several
industry associations petitioned
the CFTC for CEA § 4(c) relief
to permit NDFs to be regulated
as FXFs and FXSs.56
To date, the
CFTC has not taken action on the
petition. While the Commission
was considering issuing a clearing
determination for NDFs not long
ago,57
ESMA thereafter decided to
shelve such a requirement in Europe
for the foreseeable future.58
VI. Delivery Timing with
respect to Physically Settled
Transactions
The CFTC said in the Swap
Adopting Release, in response to
a letter from a commenter59
that
embedded optionality as to the
timing of delivery would not cause
a transaction that otherwise is a
forward to be considered an option.
More specifically, the CFTC stated
that:
embedded optionality as to delivery
points and delivery dates will not cause
a transaction that otherwise qualifies
as a forward contract to be considered
a swap. The CFTC emphasizes,
however, that delivery must occur
at some delivery point and on some
date, or the lack of delivery must be
due to the transaction being booked
out or otherwise be consistent with the
CFTC’s interpretation regarding the
forward exclusions from the swap and
future delivery definitions.60
VII. Window Forwards
An FX window forward (also
called “window FX forward,”
“window contract” and, in at
least one case, “Forward option-
dated transaction”61
) is a contract
that counterparties enter into to
physically exchange two currencies
at an price agreed upon upfront
on one or more dates during an
agreed time period (aka “window”).
These contracts require exchanging
physical currency on one or more
dates within the window. FX
window forwards are used when
entities do not know the specific
date on which they will need the
currency (for example because they
do not know when, within a certain
date range, a foreign supplier will
ship a particular shipment).62
The
optionality as to the delivery timing
means that FX window forwards are
not FXFs because they do not satisfy
the “specific future date” element
of the FXF definition (an FXF is “a
transaction that solely involves the
exchange of 2 different currencies on
a specific future date at a fixed rate
agreed upon on the inception of the
contract covering the exchange.”).63
Were a window forward based on an
exempt or agricultural commodity,
then, based on the CFTC statement,
cited above, that “embedded
optionality as to . . . delivery dates
will not cause a transaction that
otherwise qualifies as a forward
contract to be considered a swap[,]”
FX window forwards likely would be
within the forward exclusion from
the swap definition. Both currency
itself and exchange rates, however,
are excluded commodities,64
which
cannot be the basis of an agreement,
contract or transaction that is within
the forward exclusion from the
swap definition. That is because the
forward exclusion from the swap
definition states that “[t]he term
“swap” does not include . . . (ii) any

FXMARKET REGULATION
counterparties in their FDM due diligence); Keynote Speech of
CFTC Commissioner Sharon Y. Bowen before the Quadrilateral
Meeting at the European Central Bank (Frankfurt, Germany)
(June 24, 2015) (stating that “ it makes absolutely no sense
to me that retail fx trading is the least regulated part of the
over-the-counter swaps market . . . [because] [r]etail f[ore]
x caters directly to retail investors unlike the bulk of the
swaps market, which is traded by sophisticated financial and
commercial institutions[]”), available at http://www.cftc.gov/
PressRoom/SpeechesTestimony/opabowen-5. Commissioner
Bowen contended that “[t]he time has come to comprehensively
regulate this market[]” and [r]etail commodity trading should
occur on regulated exchanges[.]” Id. Commissioner Bowen
added that “I do not think these ideas require new legislation
– instead, we can implement these proposals within our current
rulemaking authority.” Id. In that regard, note the authority
provided to the CFTC in CEA §§ 2(c)(2)(B)(v) (granting the
CFTC the authority to “make, promulgate, and enforce such
rules and regulations as, in the judgment of the Commission,
are reasonably necessary to effectuate any of the provisions of, or
to accomplish any of the purposes of, this chapter in connection
with agreements, contracts, or transactions described in clause
(i) which are offered, or entered into, by a [futures commission
merchant, an affiliated person thereof or a retail forex
exchange dealer]” and 2(c)(2)(C)(iii)(III) (providing that “[t]
he Commission may make, promulgate, and enforce such rules
and regulations as, in the judgment of the Commission, are
reasonably necessary to effectuate any of the provisions of, or to
accomplish any of the purposes of, this chapter in connection with
[leveraged, margined or financed retail forex]”). See also CEA
§ 8a(5) (granting the Commission the authority to “make and
promulgate such rules and regulations as, in the judgment of the
Commission, are reasonably necessary to effectuate any of the
provisions or to accomplish any of the purposes of this chapter[.]”).
71
See, e.g., Working group to strengthen code of conduct standards
and principles in foreign exchange markets has commenced work,
July 24, 2015 BIS Press Release, available at https://www.bis.
org/press/p150724.htm; Bank of England Codes of Best Market
Practice and Shared Global Principles, available at http://
www.bankofengland.co.uk/markets/Documents/forex/fxjsc/
codes_best_practice.pdf. See also Katie Martin, Banking Lobby
Backs Stricter Codes of Conduct for Currency Traders, Wall
Street Journal (Aug. 13, 2014), available at http://www.wsj.
com/articles/banking-lobby-backs-stricter-codes-of-conduct-for-
currency-traders-1407924653.
sale of a nonfinancial commodity . . .
for deferred shipment or delivery, so
long as the transaction is intended
to be physically settled[,]”65
and
the CFTC interpreted the term
“nonfinancial commodity” to mean
“a commodity that can be physically
delivered and that is an exempt
commodity or
an agricultural
commodity.”66
Given that (1)
the optionality
in window
f o r w a r d s
extends solely
to the timing
of delivery,
unlike forwards
with embedded
v o l u m e t r i c
o p t i o n a l i t y
(where delivery may never occur)
and (2) Congress appears focused
on providing,67
and the CFTC has
provided,68
relief for forwards with
embedded volumetric optionality,
it is interesting that FX window
forwards and FXFs are treated
so differently. It’s particularly
interesting given that Congress was
comfortable, subject to a number of
conditions, largely excluding FXFs/
FXSs (which constituted a large
percentage of the swaps market)
from swap regulation, as discussed
above.69
H.R. 2289, which passed
the House 246-171 on June 9, 2015,
doesn’t include a provision changing
the status of FX window forwards as
swaps.
Conclusion
FX is one of the most nuanced and
dynamic areas of CFTC regulation.
FX regulation under the CEA has
evolved quite a bit over the years from
the Treasury Amendment’s “hands
off” approach (punctuated by Dunn
v. CFTC) to the establishment of
the “futures-lite” retail forex regime
to the more recent “swaps-lite” FXF/
FXSregime70
andthecomprehensive
regulation of other FX swaps under
Dodd-Frank. Given the widespread
manipulation of
exchange rates
in recent years,
which, among
other things
had a hand (as
did LIBOR
manipulation)
in prompting
Europe to
propose to
r e g u l a t e
b e n c h m a r k
providers, it
would seem that,
notwithstanding its freewheeling
past, FX products in general are
heading for more regulation (and
self-regulation).71
David Aron
Counsel, Division of Market
Oversight
CFTC

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