Step right up! US Treasury Department is now taking comments on FX swap exemptions.
If you’re a corporate treasurer complaining to colleagues and others about the disaster that’ll ensue if FX swaps or forwards are aren’t exempt when Dodd-Frank goes into effect, then it’s time to commit those complaints to paper. That’s because the Treasury Department has given interested parties until the end of November to express why such instruments should be exempt from the central clearing requirements.
This is good news for corporate treasurers as it appears Treasury has opened the door and is looking for well articulated arguments as to why FX swaps and forwards should be exempt. For their part, corporations can now explain why no exemption would be harmful to their risk-mitigating strategies. And even if some, or even most, corporate users fall outside of the scope of what constitutes a “major swap participant” because of the end-user exemption, it’s not entirely certain that they won’t experience other knock-on effects; for example, if the bulk of the market has to go through clearing and exchanges, the associated costs of additional processing and collateral management could impact pricing and liquidity in the FX markets.
Luke Zubrod, director and part of the derivatives regulatory advisory services at Chatham Financial said that Treasury going through a comment process was good in that it will result in the Secretary having lots of direct information from industry “to support a view that providing an FX exemption won’t contribute to systemic risk.” Mr. Zubrod added that from a timing perspective, “it’s a hopeful sign because “the fact that they are gathering information now suggests they are moving toward a decision sooner rather than later.” Unlike other areas of Dodd-Frank that require rule writing within a certain amount of time, i.e., 360 days for the SEC and the CFTC to address swap rules, there is no timeline mandated on Treasury to make a decision on FX.
In a press release, the Treasury noted that under the Commodity Exchange Act it really didn’t have to offer a comment period but the Act does allow the Treasury Secretary to determine what is exempt and what is not. In determining this, the Secretary decided to solicit opinions on “whether such an exemption for foreign exchange swaps, foreign exchange forwards, or both, is warranted and on the application of the factors that the Secretary must consider in making a determination regarding these instruments.”
End users have until the end of November to submit their comments. In soliciting comments, Treasury is looking for answers to specific questions, which are listed on its site. For example, comment letters should address whether FX swaps or forwards are “qualitatively different from other classes of swaps in a way that makes them ill-suited for regulation as ‘swaps’ under the CEA?” Also, are there “objective differences between swaps” and FX swaps or forwards that should be exempt? Or are there objective differences between long-dated and short-dated FX forwards and swaps “such that one class may be less suited to regulation” as swaps under the CEA than the other? And what are the primary risks in the FX swaps and forwards market and how significant are they?
In answering these question, those submitting are encouraged to also send along supporting materials, including relevant transactional data, “that would assist the Secretary’s consideration of the issues relating to” exempting FX swaps or forwards, or both.