However, that does not mean FX products are completely out of the regulatory woods. There are still hurdles, particularly in Europe, to be overcome. At issue are Basel III proposals from the Basel Committee on Banking Supervision (BCBS) that would impose margins on uncleared FX swaps and forwards. FX market participants are concerned about how those proposals which were finalized this month will be applied consistently globally to enable a level playing field once the new Basel regime is fully implemented in all territories. The BCBS proposals would require that the small amount of risk in the market for uncleared FX swaps and forwards not covered by CLS be covered instead by mandatory voluntary margining and initial margining on all trades in the products. GFMAs James Kemp told EuromoneyFXNews in September there is only a 6% risk that trading in uncleared FX swaps and forwards could destabilize the market. Otherwise, settlement of trades in the products through CLS absorbs the remaining 94% of estimated maximum loss exposure in a trade for FX instruments with a maturity of six months, GFMA says. In February, Esma chairman Steven Maijoor said in a speech in London that the real issue when considering EU plans to match US plans to exempt FX swaps and forwards from central clearing is how strictly the bloc will decide to comply with the BCBS proposals on margining versus how the US decides to comply with the plans.
That debate is set to continue throughout 2013, as US regulators said earlier this month they do not expect the Basel III rules to take effect as planned on January 1.
Indeed, the possibility that the size of the margins for these non-cleared swaps and forwards could have the effect of driving the products toward clearing houses, says a regulatory specialist at a large European bank.
If the FX industry finds that the level of margin needed to secure trades in those products becomes prohibitively expensive long term, then clearing houses may become the most capital efficient option, he says.
While Esma does not have the same powers as the US Treasury to explicitly exempt FX, they will focus more on other products where central clearing will genuinely mitigate counterparty credit risk and more generally systemic risk, says Swinburne.
The industry may see this differently when it comes to doing the sums on its margin requirements.
This article was originally published by Euromoney FX News.