Unlike other derivatives, FX swaps and forwards already trade in a highly-transparent, liquid and efficient market. This final determination is narrowly tailored.
The US Treasury Department has provided a significant exemption for certain foreign exchange (“FX”) contracts from Dodd-Frank clearing requirements. In a release issued on November 16, 2012, Treasury announced that over-the-counter FX swaps and forwards would not be required to be cleared through regulated trading platforms or clearinghouses, which stand between parties to guarantee trades. In drafting Dodd-Frank, Congress provided the Secretary of the Treasury with the authority to determine whether certain derivatives requirements, including central clearing and exchange trading, should apply to FX swaps and forwards, based on the recognition within Congress that the unique characteristics and pre-existing oversight of the FX swaps and forwards market already reflect many of the Dodd-Frank Act’s objectives for reform – including high levels of transparency, effective risk management, and financial stability.
According to the Treasury Department, a number of unique factors mitigate risk in the FX swaps and forwards market.
- Fixed terms, and the physical exchange of currency;
- An existing well-functioning settlement process; and
- The short duration of contracts.
In addition, Treasury also finds that FX swaps and forwards are already subject to a strong, comprehensive oversight framework that the Dodd-Frank Act further strengthens.
Subject to Strong, Comprehensive Oversight for Three Decades.
The FX swaps and forwards market and its key participants have been subject to strong, comprehensive, and internationally coordinated oversight by central banks for more than three decades. Prudential regulators impose capital and margin requirements and monitor the use of FX-related settlement arrangements and other measures to reduce counterparty credit risk. Through the Basel Committee on Banking Supervision and the Committee on Payment and Settlement Systems, central banks and prudential regulators continue to strengthen already robust risk management and settlement practices of FX market participants.
Oversight of FX Swaps and Forwards Further Strengthened through the Dodd-Frank Act.
The Dodd-Frank Act provides the Commodity Futures Trading Commission (CFTC) and banking regulators with additional oversight authority over the participants in the FX swaps and forwards market. It subjects these participants to heightened business conduct standards. It also provides the CFTC with strong powers to prevent market participants from using FX swaps and forwards to evade requirements imposed on other derivatives.
Despite their exemption from the clearing requirements, FX swaps and forwards are subject to the business and reporting requirements applicable to OTC derivatives. It also should be noted that the Treasury Department did not exempt FX options, currency swaps, and non-deliverable forwards.