September 18, FX Forwards and FX Swaps. Dear Mr. Secretary and Chairman Gensler:

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1 September 18, 2012 The Honorable Timothy F. Geithner Secretary United States Department of the Treasury 1500 Pennsylvania Avenue, N.W. Washington, D.C The Honorable Gary Gensler United States Commodity Futures Trading Commission st Street, N.W. Washington, D.C Re: FX Forwards and FX Swaps Dear Mr. Secretary and Gensler: The American Bankers Association is writing to you on a matter of great urgency regarding significant problems arising from the interplay of the lack of a final determination from the Treasury on its proposal to exempt foreign exchange forwards and foreign exchange swaps (collectively, the FX Products ) from the definition of swap under the Commodity Exchange Act and the impending registration and other deadlines for swap dealers ( SDs ), major swap participants ( MSPs ), commodity pool operators ( CPOs ), commodity trading advisers ( CTAs ) and introducing brokers ( IBs ) under the CEA and related regulations. 1 As described below, we respectfully request that the Treasury promptly finalize its proposed determination to exempt the FX Products or, if not possible, the CFTC clarify that it will not treat the FX Products as swaps under the CEA until a reasonable amount of time after the Treasury issues its determination. We are greatly concerned that if Treasury or the CFTC does not act in the next several weeks, many participants in the markets for the FX Products -- including many smaller participants -- will have to either register in one or more capacities with the CFTC due to their activities in either or both of the FX Products or exit those markets so as to avoid registering. These issues affect both buy-side and sell-side market participants. Either option entails the expenditure of significant time and money to take 1 The American Bankers Association represents banks of all sizes and charters and is the voice for the nation s $14 trillion banking industry and its two million employees. See the ABA s web page at NY:

2 2 actions that could, in the very near future, prove to have been unnecessary if Treasury confirms its proposal to exempt the FX Products from the definition of swap. By providing the relief requested in this letter, Treasury and the CFTC would bring certainty to market participants, and avoid imposing unnecessary, unintended and avoidable negative consequences to the swap markets and market participants. As you know, on April 29, 2011, the Treasury issued its proposed determination to exempt the FX Products from the definition of swap under the CEA. It had been widely anticipated by market participants that the Treasury would have finalized its determination before now, but it has yet to do so. In the interim, the CFTC has finalized a variety of rules, including the product definition rules, which in turn trigger the effectiveness of rules requiring registration with the CFTC for SDs, MSPs, CPOs, CTAs and IBs. Under the product definition rules, the FX Products are included in the definition of swap unless and until Treasury determines that they should be excluded. Registration as an SD or MSP is determined by measuring trading or other volumes in swaps commencing after October 12, Similarly, the definitions of CPO, CTA and IB were amended by the Dodd-Frank Act to include swaps, effective as of October 12, The recent amendments to two key exclusions from the definition of CPO require the inclusion of swaps in the relevant measurements beginning December 31, 2012 (and, for some CPOs, registration is required as early as October 12, 2012). Absent final action from Treasury on or prior to these dates (or the provision of relief as proposed herein), volumes in the FX Products will be required to be taken into account by market participants as they evaluate their registration obligations in light of these rapidly-approaching registration deadlines. For a number of market participants, including entities that are active in the FX markets but not as active in the markets for other swap products, registration status will be entirely dependent upon whether the FX Products are excluded from the swap definition. If the FX Products are swaps, these entities will exceed a registration threshold, but if the FX Products are exempted, they will not. This regulatory issue is creating significant uncertainty for these market participants, and in the markets generally, as the registration deadlines approach. As you know, registration in any of the categories noted above is a major undertaking -- one that can easily consume significant amounts of money and management resources. Entities facing registration obligations solely due to their volumes in the FX Products are contemplating a very difficult decision. Should they embark on the time-consuming and costly efforts to register, should they restructure their business to withdraw from the markets in the FX Products so as to not trigger a registration obligation, or should they roll the dice and assume the Treasury will exempt the FX Products prior to a registration deadline and do neither? As registration deadlines and measurement dates approach (particularly the October 12, 2012 date), this uncertainty will increase in the absence of the Treasury s final determination. And, of course, if the Treasury ultimately determines to exclude the FX Products from the definition of swap, these efforts (and the related market impacts) will prove to have been unnecessary. The uncertainty caused by the absence of a final determination from the Treasury is also adversely affecting the competitive position of certain market participants. We are aware of end-users in the FX markets proposing to move their business in the FX Products to firms that intend to register as SDs due to concern that other firms will not be able to transact in the FX Products after October 12, We are also aware of larger dealers that are using this uncertainty to seek to dislodge client relationships by suggesting that entities that are not registering as SDs will be unable to transact in the FX Products after October 12. Competitive harm is being caused by this uncertainty; this harm is particularly acute for smaller entities competing with larger market participants that are likely to register regardless of the

3 3 Treasury s determination with respect to the FX Products. In addition, to the extent market participants are exiting the market for the FX Products, the number of trading partners for end-users is reduced, diminishing liquidity and depth in the markets. These inefficiencies will only increase as relevant registration deadlines and measurement dates approach. Many market participants will soon conclude that they can no longer wait if confirmation is not provided in the near term as to whether FX Products are in fact swaps. We respectfully urge you to act immediately to undertake coordinated action to address this issue. Proposed Solutions We respectfully request that either of the following actions should be taken in the very near term and, in any event, prior to the end of the month of September The preferable action would be for the Treasury to finalize its proposed determination to confirm that the FX Products are exempt from the definition of swap under the CEA. In the alternative, the CFTC should clarify that it will not treat FX Forwards or FX Swaps as swaps under Section 1a(47) of the CEA (or for purposes of Sections 1a(10), (11) and (12) of the CEA) until a reasonable amount of time after the Treasury issues its final determination. We suggest that duration of such a deferral should be no less than the date of publication of the Treasury s final determination in the Federal Register, if the Treasury confirms its proposal to exempt the FX Products, or until the date that is at least six months following the date of such publication, if the Treasury elects not to exempt either or both of the FX Products. 2 With respect to the first option, if there are any outstanding issues with respect to the regulatory treatment of the FX Products that the Treasury is currently considering but that will not affect its ultimate determination to exempt, the Treasury could issue its determination that both FX Products are not swaps in the form of a final determination or an interim final determination that, in either case, reserves any such issue for future determination. Pending issuance of the Treasury s final determination, market participants would thus determine their registration status based on their levels of swap activity excluding the FX Products. This means a significant majority of affected parties in the derivatives market would still register and otherwise comply with the mandates of Title VII of Dodd-Frank under the current timetables. Under the CEA, if the FX Products are exempted from the definition of swap by the Treasury, transactions in these products would nonetheless remain subject to the trade reporting requirements, business conduct standards for entities that are registered as swap dealers and anti-evasion requirements of the CEA to the same extent as other swaps. In addition, exemption of the FX Products from the definition of swap would not affect the CFTC s jurisdiction over retail foreign currency agreements, contracts or transactions under Section 2(c)(2) of the CEA. We would anticipate that any relief granted by the CFTC along the lines proposed above would contain these terms. 2 If either of these actions is taken, but after October 12, 2012 instead of the time frame requested, then it will also be necessary for the CFTC to provide retrospective relief to those entities that triggered a registration obligation after October 12 and prior to the effectiveness of the solution due solely to the status of the FX Products as swaps during that period.

4 4 We believe that it is imperative that any solution is tied directly to the date of issuance by the Treasury of its final determination, and not to a fixed date. Many of the issues created by the current uncertainty are the result of the impending approach of a fixed date. Simply pushing back to another fixed date would delay but not address these issues unless the date is so far in the future as to be at least six months after the date that the Treasury issues its final determination. We respectfully note that the September 10, 2012 guidance provided by the CFTC Staff to clarify questions as to the timing of SD registration rules, 3 while helpful for other purposes, does not address the issues described above. This guidance clarifies that any person required to register as a SD may do so in reliance upon the de minimis provisions of the CFTC s rules, and thus may avail themselves of a December 31, 2012 registration deadline, rather than the October 12, 2012 registration deadline for entities that intend to act as a SD. This guidance moves the SD registration deadline to a new fixed date that is two-and-a-half months in the future, but is still not calibrated to the date the Treasury ultimately takes action. It does not relieve entities from evaluating now whether they should take the costly and time consuming actions to prepare to register, whether under the SD, MSP, CPO or CTA rules, to exit the markets in the FX Products, or elect to roll the dice and assume that the Treasury will exempt the FX Products prior to the end of the year. We believe that many prudent market participants will elect to commence these efforts now, despite the provision of this guidance. And these efforts will prove to have been unnecessary if the Treasury determines to so exempt. Of course, if the Treasury were not to issue its final determination prior to the end of the year, these registration deadlines could again be extended. We respectfully submit, however, that extending these dates as then-current deadlines approach, perhaps multiple times, will only perpetuate the uncertainty, confusion and disruption in the markets that we seek to address in this letter. For these reasons, it is necessary to calibrate the solution to the specific issue -- the question of when the Treasury will issue its final determination. This will produce a clear and workable solution that will permit markets, and market participants, to proceed without the uncertainties and disruptions described above. * * * * * * * * * * 3 CFTC Staff Responds to Questions on Timing of Swap Dealer Registration Rules, CFTC Press Release PR (Sept. 10, 2012), available at

5 5 We appreciate your consideration of this important issue. If we can be of any further assistance, please feel free to contact the undersigned at or our counsel at Covington & Burling LLP: Bruce C. Bennett ( ), John C. Dugan ( ) or Allison P. Lurton ( ). Sincerely, /s/ Cecelia Calaby Cecelia Calaby Senior Vice President Center for Securities, Trust & Investments American Bankers Association cc: Mary J. Miller Under Secretary for Domestic Finance Cyrus Amir-Mokri Assistant Secretary for Financial Institutions Christopher J. Meade Acting General Counsel United States Treasury The Honorable Jill E. Sommers The Honorable Bart Chilton The Honorable Scott O Malia The Honorable Mark P. Wetjen Commodity Futures Trading Commission The Honorable Tim Johnson Senate Committee on Banking, Housing and Urban Affairs The Honorable Richard C. Shelby Senate Committee on Banking, Housing and Urban Affairs The Honorable Debbie Stabenow Senate Committee on Agriculture, Nutrition and Forestry The Honorable Pat Roberts Senate Committee on Agriculture, Nutrition and Forestry The Honorable Frank D. Lucas House Agriculture Committee The Honorable Collin C. Peterson House Agriculture Committee The Honorable Spencer Bachus House Financial Services Committee The Honorable Barney Frank House Financial Services Committee