The US Congress will remove the exemption for foreign exchange swaps and forwards from new central clearing requirements when two over-the-counter derivatives reform bills moving through the House of Representatives are reconciled on the House floor early next month. The forex exemption is the legacy of the 1974 Treasury Amendment to the Commodities Exchange Act. Until that year the statutes of the CEA had been limited to regulation of futures, options on futures and options on commodities. The expansion of the CEA in 1974, however, led to the inclusion of other products under the regulated framework. This led the Treasury Department to lobby for and secure an exemption for OTC transactions, including swaps and forwards on foreign currencies, from the newly expanded definition of a “commodity”, and to exclude such products from the purview of the CFTC. House Financial Services Committee chairman Barney Frank’s clarification should go some way to calm the concerns of the European Commission (EC), which is currently working on a cost/benefit impact assessment as a precursor to its own OTC reform legislation. The Commission is known to be conscious of the potential for regulatory arbitrage by regulated entities should forex products be excluded from clearing requirements in the US but not in the European Union.
“We are aware [of the EC’s concerns] and we plan to continue to work very closely with them so that we have harmonisation,” says Frank. Frank also reiterated what he wrote in a November 3 letter to the chairmen of both the Securities Exchange Commission (SEC) and the CFTC, confirming his intent to ensure the final law will give authority to the two regulators to determine which types of derivatives contracts are required to be cleared with a central counterparty.