FX Swaps Exempted from Dodd-Frank Regulation by U.S. Treasury


Foreign exchange (FX) swaps, the second largest derivatives trading market, is been exempted from Dodd-Frank regulation by the U.S. Treasury. Though some Democratic legislators criticized the move, the Treasury went forward with the exemption citing the high-levels of risk management inherent in FX trading.

“Unlike other derivatives, FX swaps and forwards already trade in a highly-transparent, liquid and efficient market,” the Treasury Department said. “This final determination is narrowly tailored.”

Others aren’t so sure. The Commodity Markets Council claimed last year that such an exemption could undercut the Dodd-Frank mandate.

“Exempting foreign exchange forwards and swaps at this time from the clearing and trading requirements of Dodd-Frank could increase systemic risk at a time when regulators around the globe are trying to reduce it,” stated a letter from the CMC to the Treasury.

The Treasury has exempted FX swaps from rules that will otherwise work to regulate the $640 trillion OTC derivatives market. Though, for now it appears that FX swaps will still contribute to the agencies reporting requirement. Last week the CFTC announced a weekly “Swaps Report” open for public comment now.

It also appears that FX options, currency swaps, and non-deliverable forwards will not be exempt from regulation.

FX Risks Made Worse by Technology?

Part of the Treasury’s argument is that FX swaps are already a self-regulating market, and that introducing new trading technologies could upset the balance.

“Treasury believes that requiring foreign exchange swaps and forwards to be cleared and settled through the use of new systems and technologies could introduce new, unforeseen risks in this market,” the department said in the final exemption order.

Many are not convinced. Citing the Treasury’s decision, Darrell Duffie, a professor at Stanford University’s business school, explains that according to the prevailing logic, any market could eventually escape the Dodd-Frank mandate.

“Does the logic of this exemption imply that credit default swaps or interest rate swaps should also be exempted from regulation once practices improve in those markets? Surely that should not be the case,” Duffie Said.

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