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The World Federation of Exchanges (WFE) and the International Options Market Association (IOMA) have submitted a public comment letter to U.S. Treasury Secretary Timothy F. Geithner urging the Treasury Department not to exempt over-the-counter (OTC) foreign exchange (FX) swaps and FX forwards from mandatory clearing and execution requirements that are imposed on other standardized derivatives products under the recently enacted Dodd-Frank Act. WFE represents more than 50 major regulated equity and derivatives exchanges worldwide; IOMA represents most of the world’s major equity options exchanges. A copy of the letter, signed by Ronald Arculli, Chairman of WFE; William J. Brodsky, immediate past Chairman of WFE; and Ravi Narain, Chairman of IOMA, is attached.
The letter states that there is not a sufficient basis for disparate regulatory treatment of foreign currency swaps and forwards from standardized swaps for several reasons:- First, there are not significant differences between foreign currency derivatives and other classes of swaps subject to the Act’s mandatory clearing and trading requirement that warrant such an exemption.
- Second, the risk dynamics present in OTC foreign currency derivatives markets are fundamentally different than the factors present in the foreign currency spot markets.
- Finally, we believe the current infrastructure in the foreign currency markets is adequate to address settlement risk in the spot market trading, but does not address the important counterparty credit risks inherent in the broader OTC foreign currency derivatives markets.
WFE and IOMA believe that implementing such an exemption at this time would create greater systemic risk, rather than mitigate risk. This cuts directly against the overarching goal of the (Dodd-Frank) Act and similar derivative reform proposals being contemplated by the European Commission and other policy bodies around the globe. The well-established benefits of a CCP clearing model, including financial sureties, daily mark-to-market adjustments, transparency, capital efficiencies through cross margining, and automated bookkeeping processes should be applied consistently across products. We urge Treasury to consider the key distinctions between spot and forward currency markets and the unwarranted regulatory gap that would be created with an exemption for foreign currency swaps and forwards from the definition of “swap.”
