CFTC Provides Foreign Exchange Prime Brokers Relief

The Commodity Futures Trading Commission (CFTC) gave last-minute relief to Foreign Exchange prime brokers after listening to complaints that the market could be threatened by new business conduct rules.

According to, the CFTC exempted the prime brokers from certain external business conduct rules under the Dodd Frank Act on April 30, a day before the new rules were to be enacted.

The new rules would have called for FX prime brokers to submit specific information to clients, such as a pre-trade mid-market quote and risk disclosures.

The problem with this is hedge funds generally negotiate trades with an executing dealer before they give up the trade to a prime broker to finalize the deal. The prime broker would not be able to meet the requirements because he only finds about the deal after it occurs.

Those who argued against the rules claimed that buy-side clients would have to either “sign trade documentation with all their executing dealers to enable them to trade bilaterally or trade solely with the bank providing the prime-brokerage arrangements.” They stated that this would lead to the destruction of the derivatives prime-brokerage model resulting in less competition, less efficiency and higher costs.

The CFTC relief for the prime brokers allows for external business conduct obligation to be split between the swap dealers involved in the deal. In addition, the US Treasury exempted foreign exchange swaps and forwards from Dodd-Frank clearing and trading requirements. However, swap dealers are still subject to external business conduct rules when trading these foreign exchange swaps and forwards.

Furthermore, the relief provided by the CFTC mandates that if an executing dealer for an exempt foreign exchange change is not a swap dealer, the primer broker does not have to provide the mid-market mark to the client.

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