US Treasury proposes rule exempting forex swaps from Dodd-Frank regulation

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Late last month, the US Treasury proposed that foreign exchange (forex) swaps be exempt from Dodd-Frank Regulation. If forex swaps were to come under regulation, they would be required to be traded transparently on open trading platforms and cleared though clearinghouses. Some experts say that this would drive up operations costs.

The Dodd-Frank Act requires all other types of swaps come under regulation by the relevant agency; however, an exception was made for forex swaps.   The reason for proposed exemption is that unlike other currency swap cousins, the industry views forex swaps as relatively stable.   They are based on real currency exchange rather than financial abstraction, are generally short in duration, and outline payment agreement in their contracts.   Forex swaps are used almost exclusively for hedging (protecting corporations from volatile exchange rates), rather than commercial purposed.

This proposed exemption comes over the objection of consumer groups, who argue that all swaps should be regulated to prevent future market meltdowns. Consumer protection groups worry that dealers in other types of swaps will try and present their products as forex swaps to escape CFTC and SEC regulation.

However, the Treasury Department counters that forex swaps are less risky than some of their cousins because contracts stipulate fixed payment obligations. By and large the foreign exchange market continued to operate normally during the financial crisis.   Furthermore, a Treasury Department exemption would not preclude further international regulation on a global exchange in the future, and would still subject transactions to new reporting standards.

In addition, according to the Treasury Department, the bulk of forex swap are low-risk in part because they are short-term; 98% mature in less than a year and the majority in a week or less. Some have even taken issue with the classification of forex swaps in the same financial genus as other derivatives, arguing that they are not financial abstractions but real products already bound in global trade. It was because of these particular attributes that the Dodd-Frank bill leaves the future of the forex swap market in to the discretion Treasury Department.

There is a 30-day comment period open on the proposed rule.

Anna Timone (195 Posts)

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