The Foreign Exchange Professionals Association (FXPA), a Forex trade body that commenced operations in September 2014, today announces that it has submitted comments to the U.S. Securities and Exchange Commission (SEC) regarding proposed rules governing the “Use of Derivatives by Registered Investment Companies and Business Development Companies”.
FXPA is calling for an exemption for FX swaps and forwards from the proposed rules.
The Association defends the view that FX forwards and FX swaps should be exempt from the developing rules on derivatives. The comments argue that introducing this regulation on FX products would be both impractical and self-defeating from a risk mitigation standpoint.
FXPA notes that “Impediments to asset managers’ use of FX derivatives to hedge commercial risk from global investment strategies could reduce asset managers’ abilities to deploy capital around the world, restricting investment strategies, tying asset managers’ systemic stability to US dollar-denominated investments, and could restrict long-term investment capital to businesses around the world”.
The FXPA points to the fact that the US Treasury exempted FX swaps and FX forwards from being regulated as swaps under the Commodity Exchange Act, and stresses that “unlike currency swaps, [FX forwards and FX swaps] are different because…the amount of the cash flow exchanged by the party is known at the onset of the transaction”, leading to minimal settlement risk.
The comments also highlight the risk-mitigation function that is often played by FX derivatives regarding asset management, pointing out that these “risk mitigating activities are the same activities identified by the US Treasury Department in its Determination to exempt these products from…regulation pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act”.
The Association refers to the US Treasury Department’s finding that settlement risk associated with FX swaps and forwards is “virtually eliminated” through the use of payment-versus-payment settlement arrangements.
The FXPA argues that FX futures and non-deliverable forwards (NDFs) should also be exempt from the proposed rules, as “these products are similarly relied upon by funds to reduce currency risk and promote cross-border investment by asset managers. Like FX swaps and FX forwards, these products pose relatively low risk to the financial system due to their liquidity and settlement dynamics and their short dated tenors”.
In addition, FXPA says that “limiting the use of FX derivatives may also prevent non-US companies from attracting US funds’ capital to grow their businesses and benefit from any comparative advantage they may possess.”
Thus, regulation of these products would, in the FXPA’s opinion, lead to outcomes that “seem antithetical to the competitive, liquid and stable global capital markets the SEC seeks to promote”.
You can view the announcement from FXPA by clicking here.
For the detailed comments from FXPA, as filed with SEC, click here.