The NY Fed releases US FX and Swap turnover survey results; FinReg rulemakers should take notice.
The New York Fed’s survey of FX and interest rate derivatives use over the past three years should convince the SEC and CFTC that corporates should keep their derivatives end-user exemption. The results, part of the Fed’s contribution to the Bank for International Settlement’s triennial FX and derivatives survey, reveal that non-financial users were just a small portion of all derivatives users.
Non-financial firms as counterparties made up just 12 percent of the total in FX trading and 9 percent of the total in FX and interest-rate derivatives trading. The big users in both categories were FX dealers and other financial firms. Although corporations were never implicated as contributors to the crisis, they risk being lumped in with the “perpetrators” in terms of derivatives rules. The Fed data confirms the corporate argument that they are a small part of the market, and use derivatives as a risk tool and not for profit.
As it stands, corporations have been granted an exemption from derivative clearing requirements when mitigating commercial risk, which is usually due to foreign exchange or interest rate exposures, and a carve-out for foreign exchange swaps and futures. Nonetheless, both the SEC and the CFTC, the appointed OTC derivative market rulemakers, have some leeway, not to mention the somewhat unknown and mostly opaque rulemaking crosscurrents that could easily nullify the exemption in some way. (See related story here.)
Overall, the Fed’s survey notes that FX and derivative transaction turnover increased due to “continued growth in market participation,” which was mainly “in the category of prime brokerage flows.” Despite corporates’ small contribution to the usage pie, the Fed survey noted that rising volumes were supported “by a return to more active management of currency risks and investment portfolios by corporations and portfolio managers” as sentiment improved in the financial markets after the credit crisis began to abate.
The Fed and the BIS (which coordinates the global survey) have conducted the FX surveys in April every three years since 1995. The BIS takes data from 54 central banks to compile data on turnover in the over-the-counter (OTC) foreign exchange and interest-rate derivatives markets.