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Foreign Exchange

FX swaps shouldn’t be centrally cleared, says ICI

Imposing central clearing and exchange trading requirements on the foreign exchange swaps and forwards market might actually increase, rather than decrease, systemic risk, according to the Investment Company Institute, a trade association which represents US investment companies.

In a June 6 letter to the Treasury Department, ICI said that requiring central clearing would concentrate risk in a clearing house, while imposing trading requirements could inhibit transparency if there is insufficient information for the market to determine an appropriate market price.

"The increased difficulty and costs for market participants to manage their currency exposures, if they are generally limited to using standardized foreign exchange swaps and forwards because of clearing and trading requirements likely would translate into increased risk to the financial system," the fund lobby maintained.

The Treasury Department on May 5 proposed to exempt foreign exchange swaps and forwards from the definition of "swap" added to the statute books by the Dodd-Frank Act—changes ICI supported. However, it opposed the centralization and uniformity the May 5 proposal would also impose on swap activity.

"Ultimately, the risks and operational challenges of adopting central clearing and trading practices would significantly outweigh the benefits by undermining the safety and efficiencies of the existing FX swaps and forwards market," argued ICI.

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