FX news: Regulation - Dodd-Frank Wall Street Reform and Consumer Protection Act


Trevor Carr
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The 2,000-plus pages of the Dodd-Frank Wall Street Reform and Consumer Protection Act have now been published and the bill has been voted through the House of Representatives, but the legislation has been subject to dilution and compromise.

Compromises have been made on the Volker rule and bank tax – less compromise, more excision.

The Volker rule – whereby banks would have to divest themselves of all interests in private equity and hedge funds – has been amended to allow them to invest up to 3% of their capital in such vehicles. This is considerably less draconian than Volker’s argued for; the 82-year-old ex-Fed governor is said to be disappointed.

The $19 billion tax on banks to fund the legislation that seemed to be set in stone last Friday will now be dropped entirely; instead $11 billion will be taken from Tarp funds with the balance made up from increased FDIC levies.

A less expected change to the legislation that was swiftly noticed and analysed by Isda was that theAct “could cost US companies as much as $1 trillion in capital and liquidity requirements... [as the] Act could lead to a requirement of initial and variation margin (also referred to as collateral posting) for all over-the-counter (OTC) derivatives that are not cleared, including those involving an end-user. The legislation presented to the conference committee would have explicitly exempted corporate end-users from margin requirements on such transactions. This exemption is no longer in the bill... regulators could significantly increase the costs of hedging exposures.”

Of course, collateral-posting isn’t a sunken cost but it would represent a remarkable drain on corporate liquidity. There was little appetite to put the corporate exemption back in the bill before it was passed but there is reported to be an intention to do so in a follow-up technical corrections bill.

Probably of most direct concern to our readership is a provision, included despite the objections of the US Treasury, whereby the US Commodities Futures Trading Commission will now regulate FX swaps and outright forwards. There is still a possibility that the Treasury will be able to override this provision and it does appear that the Treasury has been successful in averting the requirement for FX swaps to be exchange-traded and centrally cleared.

Throughout the drafting of the bill, CFTC chairman Gary Gensler lobbied, with the aid of Senate agriculture chairman Blanche Lincoln, to have FX forwards come under the CFTC’s jurisdiction. This is despite never truly making the case as to why it should be so; US banks will now be urging the US Treasury to come up with its written submission for the case against CFTC oversight.

Reuters reported ACI president Manfred Wiebogen arguing against undue FX regulation: “In some aspects there is a need to hurry. But regulation should avoid too many quick shots.” Reuters also reported that Wiebogen believed that mandating exchange trading for the currency market was not a solution: “Exchange trading comprises only 2% of market share, and that was true even during the credit crisis. The current system works.”

This is all true. But the administration wants to be seen to be taking action or ‘kicking ass’ – to use Obama’s favourite phrase – whether it makes sense or not.