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The U.S. Commodity Futures Trading Commission (CFTC) regulates non-deliverable forwards (NDFs) as “swaps” under the Dodd-Frank Act. In this capacity, the agency has authority to mandate that NDFs must be cleared through a regulated central clearing counterparty, also known as a clearinghouse or a CCP. For some currencies, such a rule seems to be coming soon. And although it won’t affect the majority of companies, corporate treasurers—especially those who preside over complex global organizations—should understand its intricacies.

In 2012, the U.S. Treasury Department determined that physically settled foreign exchange (FX) swaps and forwards, which require the actual trading of one currency for another, are exempt from most of the CFTC’s regulations, including the clearing mandate. However, Treasury did not exempt NDFs, transactions that involve cash settlement in a reserve currency—typically U.S. dollars—based on the difference between two other currencies’ current prices. Because they don’t involve physically exchanging an agreed-upon notional amount of the currencies in question, NDFs are fully regulated by the CFTC as swaps.

To date, the CFTC has mandated clearing for certain interest rate and index credit default swaps. At a public meeting on October 9, the CFTC announced that it is considering also mandating clearing of NDFs that have tenors of two years or less, that involve any of 12 emerging-market currencies, and that are settled in U.S. dollars.


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