CFTC Subcommittee Recommends Timeline for Clearing of Non-Deliverable Forwards

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On December 5, 2014, the Global Markets Advisory Committee, Foreign Exchange Markets Subcommittee (the “Subcommittee”) of the Commodity Futures Trading Commission (“CFTC”) submitted its recommendation to the Global Markets Advisory Committee on the timing of mandated clearing of foreign exchange non-deliverable forward (“NDF”) transactions.[1]

Parties to an NDF agree to settle on a pre-agreed date based on the difference between an exchange rate for a specified currency pair agreed on the trade date and the spot rate for the same currency pair at maturity.  At the time of settlement, one party delivers a payment to the other in the deliverable currency, which is usually U.S. dollars.  NDFs are expected to be the next type of swap that the CFTC will require to be centrally cleared through a derivatives clearing organization.[2]

Specifically, the Subcommittee recommended the following timeline for clearing NDFs:

  • Category 1 participants (i.e., swap dealers, major swap participants, or “active funds”) would be subject to the NDF clearing mandate on February 1, 2016. An “active fund” has been defined by the CFTC generally as any private fund under section 202(a) of the Investment Advisers Act of 1940, that is a not a third-party subaccount, and that executes 200 or more swaps per month based on a monthly average over the 12 months preceding the publication of the relevant clearing requirement determination in the Federal Register;[3]
  • Category 2 participants (i.e., commodity pools, private funds other than “active funds,” employee benefit plans, or persons predominately engaged in activities that are in the business of banking or “financial in nature,” excluding third-party subaccounts) would be subject to the NDF clearing mandate on May 1, 2016; and
  • Category 3 participants (i.e., third party subaccounts and non-financial commercial end users) would be subject to the NDF clearing mandate on August 1, 2016.

For a swap between counterparties in different Categories, the later of the two dates applies.

The Subcommittee intended its recommended timeline to align broadly with the clearing dates that the European Securities and Markets Authority (“ESMA”) may mandate for its jurisdiction,[4] despite slight divergences between the Categories of participants for the two regulators. In February 2015, however, ESMA stated that it is not planning to impose a clearing obligation with respect to NDFs for the time being.[5] The CFTC has not yet publicly indicated its official position in the wake of ESMA’s announcement.

[1] CFTC Global Markets Advisory Committee, Foreign Exchange Markets Subcommittee, Memorandum re: Response to request for recommendation on an FX NDF mandate, December 5, 2014 (available at http://www.cftc.gov/ucm/groups/public/@aboutcftc/documents/file/gmac_fxndfmandate122214.pdf).

[2] To date, the CFTC has issued a single clearing determination, requiring certain credit default swaps and interest rate swaps to be cleared.  Clearing Requirement Determination Under Section 2(h) of the CEA, 77 Fed. Reg. 74,284 (December 13, 2012).  A previous posting in Derivatives in Review (available here) reported on this clearing determination by the CFTC.

[3] Confirmation, Portfolio Reconciliation, Portfolio Compression, and Swap Trading Relationship Documentation Requirements for Swap Dealers and Major Swap Participants, 77 Fed. Reg. 55,903, 55,940 (September 11, 2012).

[4] See, e.g., European Securities and Markets Authority, Consultation Paper, Clearing Obligation under EMIR (no. 3), October 1, 2014 (available at: http://ww.esma.europa.eu/system/files/esma-2014-1185.pdf).

[5] European Securities and Markets Authority, Feedback Statement, Consultation on the Clearing Obligation for Non-Deliverable Forwards, February 4, 2015 (available at https://www.esma.europa.eu/sites/default/files/library/2015/11/2015-esma-234_-_feedback_statement_on_the_clearing_obligation_of_non_deliverable_forward.pdf).