This last Friday, November 16, The Treasury issued a final determination signed by Timothy Geithner that foreign exchange swaps and forwards are exempt from the central clearing and exchange trading provisions of the Dodd-Frank Act amendment of the CEA (The Commodity Exchange Act). I would encourage everyone who has an interest to read the determination as the language is straightforward and it provides a very good summary of the arguments both for and against the exemption.
In addition to explaining why “foreign exchange” swaps and forwards are not included in the Dodd-Frank Act term “swap”, the issued ruling also explains why non-deliverable forwards are included and therefore not exempt from the same provisions. In essence the argument is that FX swaps and forwards are physically settled where the underlying principle amounts are exchanged (and known upfront) while NDFs are cash settled in a predetermined currency and therefore its amount is not known upfront. Again all this is interesting reading and I don’t think these arguments will sway those opposed to the exemption that the same risks present in other derivatives apply to FX swaps and forwards.
Detractors (particularly Better Markets quoted several times in the ruling) further argue that whatever the reasons to exempt which they disagree with, the very fact of the exemption allows market participants to structure other derivatives to fit into this FX loophole. This too is addressed and dismissed in the ruling (see here for rebuttal statement). The ruling further argues that the FX market does a good job regulating itself anyway and the additional requirements would just bring extra cost without much benefit. In the year 2012 it is hard to say “self-regulated” without a certain smirk and I wonder when the Treasury wrote this several times in the determination whether they could help themselves from pausing just a little. Finally, the ruling argues that the other provisions of Dodd-Frank such as reporting and business conduct standards still applies. All in all very interesting reading in a well layed out (though repetitive) format.