The investment community has welcomed an exemption on foreign exchange forwards and swaps from clearing and exchange trading rules which will be applied to other derivatives products under impending Dodd-Frank Act rules.
The exemption by the US Treasury, with Congressional approval, was decided after regulators concluded that industry checks already in place were aligned with the aims of Dodd-Frank.
These checks include the Continuous Linked Settlement (CLS) system and efforts to develop a global trade repository for FX trades with the Depository Trust and Clearing Corporation.
James Kemp, managing director of the Global Financial Markets Association’s global FX division, urged other regulators to conclude that settlement risk was effectively managed and said creating multiple regulatory regimes would have a negative effect on end investors.
“Moving FX swaps and forward to centralised clearing would not only have created additional costs for businesses and investors, but also increased systemic risk. After such a detailed consultation period, this final decision from the US Treasury provides the clarity industry needs to now further develop the infrastructure of the future,” Kemp said.
The imposition of central clearing requirements for over-the-counter derivatives has already led to many participants moving from swaps to futures products since October, when new reporting rules from the Commodity Futures Trading Commission were established. Investment banks and asset managers trading swaps will be classified major swaps participants or swaps dealers, which will bring additional reporting requirements and increase trading costs.