U.S. Treasury Proposes Rule to Exempt Forex Swaps from Clearing and Exchange Trading

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Shipkevich Law Firm is a full service law firm focusing in foreign exchange and FX technology transactions, as well as credit and insolvency matters. (212) 252-3003.

Felix Shipkevich is a New York Attorney with an extensive background representing banks, broker-dealers, futures and forex firms. He began his career at UBS, NYSE, and the SEC. Before founding Shipkevich Law Firm, he was VP and General Counsel at CMS Forex, where he was responsible for supervising the firm’s global offices. fs@shipkevich.com

Elan Mendel is an associate with Shipkevich Law Firm, who comes from a boutique New York law firm specializing in bankruptcy law and insurance coverage. He previously worked in the legal department of a major Retail Foreign Exchange Dealer in New York, and performed internal AML/BSA and currency audits for Commerce Bank. emendel@shipkevich.com

On April 29th, the Treasury Department proposed that foreign exchange (forex) swaps be exempt from Dodd-Frank Regulation. If they were to come under regulation, forex swaps would be required to be traded transparently on open trading platforms and cleared via clearinghouses. This would necessarily drive up operation costs, some say prohibitively. Consequently, the Treasury Department has argued 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.”

The Dodd-Frank Act, passed in the wake of the financial crisis to bring stability and transparency to an financial products market ill-understood by the public. Though the bill requires all other types of swaps come under regulation by the relevant agency, an exception was made for forex swaps. This type of swap is seen by many in the industry as “safer”, even than other types of currency swaps. They are used almost exclusively for hedging (protecting corporations from volatile exchange rates), rather than commercial purposed.

According to the Treasury Department, the bulk of forex swap are low-risk in part because they are short-term; 98% mature in less than a year and the majority in a week or less. Some have even taken issue with the classification of forex swaps in the same financial genus as other derivatives, arguing that they are not financial abstractions but real products already bound in global trade. It was because of these particular attributes that the Dodd-Frank bill leaves the future of the forex swap market in to the discretion Treasury Department.

This proposed exemption comes over the objection of consumer groups, who argue that all swaps should be regulated to avert future market meltdowns. The Treasury Department counters that forex swaps are less risky than some of their cousins because contracts stipulate fixed payment obligations. By and large the foreign exchange market continued to operate normally during the financial crisis. Furthermore, a Treasury Department exemption would not preclude further international regulation on a global exchange in the future, and would still subject transactions to new reporting standards.

Dennis Kelleher, President of Better Markets, is not convinced: “The one thing we know for sure is that anytime there is an exemption from a regulatory rule, the financial engineers on

Wall Street figure out how to cram as many new financial instruments through the loophole as possible. The area where the profits are the greatest is where there is the least transparency.” Consumer protection groups worry that dealers in other types of swaps will try and disguise their products as forex swaps to escape CFTC and SEC regulation.

There is a 30-day comment period open on the proposed rule.

Read more on this Treasury Department proposal.

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