Foreign exchange markets have been in operational limbo for the past five months. The Dodd-Frank Act, which came into force in the US last July, introduced mandatory clearing for all over-the-counter derivatives and swaps. While the legislation had initially exempted the $2.5 trillion FX swaps and forwards market from the new rules, the final version contained no exemption. The final decision, left to the US Treasury secretary, is expected in the first quarter.
In the interim, FX participants have had no choice but to start preparing for that eventuality. But they are lobbying strongly their case that FX derivatives markets are a distinctly different animal from other asset classes, such as credit, which politicians and regulators successfully argued helped cause the financial crisis. Its inclusion in the OTC derivatives regulations would also mean oversight was turned over to the Commodity Futures Trading Commission (CFTC) from its existing regulator, the world’s main central banks.
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| "Unfortunately we’re resigned to the fact that it is going to be expensive to implement, all of which ultimately isn’t good for the end users" |
In mid November, the Global Foreign Exchange Division, a lobby group formed out of the three financial markets trade associations, AFME, Sifma, and ASifma, presented their written submissions to the US Treasury, and their case for FX swaps and forwards to be made exempt.