Friday, April 29, 2011

Treasury Exempts Foreign Exchange Swaps from Dodd-Frank Derivatives Regime

As authorized by Section 721 of the Dodd-Frank Act, Treasury proposes to exempt both foreign exchange swaps and foreign exchange forwards from the definition of swap and invites comment on the proposal for 30 days. Unlike most other derivatives, foreign exchange swaps and forwards have fixed payment obligations, are physically settled, and are predominantly short-term instruments. This results in a risk profile that is different from other derivatives, as it is centered on settlement risk, rather than counterparty credit risk. Settlement risk in foreign exchange swaps and forwards already has been addressed through the extensive use of payment-versus-payment settlement arrangements. Even though central clearing could reduce counterparty credit risk, conceded Treasury, that risk is relatively small in the foreign exchange swaps and forwards market. Imposing central clearing and trading. Treasury also noted that regulating foreign exchange swaps and forwards under Dodd-Frank would introduce risks and operational challenges to the current settlement arrangements that significantly outweigh the marginal benefit.

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