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Foreign Exchange

FX comment: Regulation, education, legislation consternation

At lunch the other day with two senior FX faces, it was impressed upon me how much management time is taken up with education. Not the education of juniors but of politicians and representatives of regulatory bodies.

It is little surprise that those charged with determining regulation for the financial markets are not always clued-up with the detail of the products that they want to oversee.

As a result, senior staff at major financial institutions are spending lots of time bringing the regulators up to speed. And rightly so: it will take keen thought to arrive at equitable regulation that both makes sense and complies with the vague but comprehensive proposals from Dodd-Frank and the European Commission.

A few particular regulatory questions were pondered during my lunch. Prime among these was whether FX swaps would have to be CCP’d or cleared. I answered an emphatic: “No”. The counter argument came back: “There is no logic in FX swaps being out and NDFs, with their comparatively negligible settlement risk, being in”.

That stumped me at the time but I have since thought of an answer: Being net-settled, non-deliverable forwards are a good fit for being exchange-traded.

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