Saturday, November 17, 2012

Treasury Exempts FX Forwards and Swaps from Dodd-Frank Clearing and Exchange-Trading Rules

The US Treasury has issued a final determination to exempt foreign exchange forwards and swaps transactions from the clearing and exchange trading requirements of the Dodd-Frank Act. This final determination is narrowly tailored. FX swaps and forwards will remain subject to the Dodd-Frank Acr's new requirement to report trades to repositories and remain subject to the Act's rigorous business conduct stndards. Also, Dodd-Framk makes it illegal to use these instruments to evade other derivatives reforms. Importantly, the final determination does not extend to other FX derivatives, such as options and currency swaps, which will be subject to mandatory clearing and exchange-traded requirements.

The FX swaps and forwards market is different from other derivatives markets, explained Treasury, in that existing practices mitigate risk and ensure stability. For example, FX swaps and forwards always require both parties to physically exchange the full amount of currency on fixed terms and market participants know the full extent of their own payment obligations to the other party to a trade throughout the life of the contract.

The Treasury exemption is a critical step in ensuring the safe functioning of a well performing market and in promoting clarity in the international regulatory regime, according to the Global Financial Markets Association, whicch added that subjecting FX transactions to mandatory clearing would have introduced new risks into a stable market that performed well during the crisis with serious negative consequences for corporate and asset manager end-users.

The Treasury decision also recognizes the FX industry’s efforts along with DTCC to develop a global trade repository to store FX trade information, thereby providing additional oversight for regulators and transparency for users. The global build out of this repository, already in testing, will increase its effectiveness for regulators and efficiency for participants.

According to James Kemp, managing director of GFMA’s Global FX Division, said that the final decision from the US Treasury provides the clarity the industry needs to now further develop the infrastructure of the future. Treasury has identified that the key risk in FX is settlement risk and that it is already effectively managed. He urged regulators in other jurisdictions to acknowledge the US Treasury’s key points and follow suit in exempting FX from mandatory clearing and execution requirements in order to ensure that the global FX market is not fragmented into different regimes and remains cost effect

1 comment:

Ronan C said...

Thanks for the update. I was just wondering if fx swaps and forwards remain partially regulated by the CEA and DFA Title VII to the extent as you say "FX swaps and forwards will remain subject to the Dodd-Frank Acr's new requirement to report trades to repositories and remain subject to the Act's rigorous business conduct standard". My understanding was that DFA Title VII regulates 'swaps', but given that Treasury has excluded FX swaps and forwards from this definition- and are therefore not swaps- are they not exempt from Title VII regulation entirely? I probably way off the mark but would be interested to hear your opionion on this. I note that a release from US law firm Davis Polk over the weekend simply states "The U.S. Treasury Department has issued a determination that foreign exchange swaps and foreign exchange forwards should not be regulated as swaps under the Commodity Exchange Act".