Late last week, the US Treasury proposed that foreign exchange (forex) swaps be exempt from Dodd-Frank Regulation. The agency argues that “[c]entral clearing requirements will strengthen the rest of the derivatives market, but could actually jeopardize practices in the foreign exchange swaps and forwards market that help limit risk and ensure that it functions effectively.” 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.
Nevertheless, watchdog groups were suspicious of the announcement, who advocate strict regulation of all derivatives to avert another market-wide meltdown. They are particularly worried that market participants will try to disguise other types of swaps as forex swaps in order to evade regulation.