After more than year of consultation, the working group on margining requirements – a joint working group of the Basel Committee on Banking Supervision and the International Organization of Securities Commissions – is expected to concur with industry claims that the risk of physically settled foreign exchange swaps and forwards does not lie in potential changes in valuations.
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| James Kemp, FX division MD at GFMA |
“We don’t think margin is the right approach as what you risk doing is tying up huge amounts of collateral, increasing end-user costs and expending large amounts of energy on operational challenges when the market is well risk-managed already,” says James Kemp, FX division managing director at the Global Financial Markets Association (GFMA). In its consultations, the Basel Committee sought comment on initial and variation margins for physically settled foreign exchange swaps and forwards, and in particular whether contracts with different maturities should be subject to distinct treatments. The industry response was overwhelmingly that all FX swaps and forwards, which comprise around 57% of the $4 trillion daily FX market turnover, should be exempt.
The basis for the industry stance was that the replacement costs associated with margin requirements are already adequately covered in FX.