LEADER
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Comparison of outstanding OTC product maturities profiles
FX swaps and FX forwards are not ‘swaps’ in the traditional sense. Unlike the derivatives that will be regulated as ‘swaps’ under the Commodities Exchange Act (CEA), FX swaps and FX forwards are typically physically settled by delivery of the underlying currency. Like physically-settled forward contracts, they are often used to meet commercial obligations and should be excluded from the definition of ‘swap’ under the CEA.
FX swaps and FX forwards are also too economically related to be distinguished from one another - the term ‘FX swap’ is a convenient naming convention for a transaction that is, in fact, not a swap but, rather, either a spot transaction plus a forward contract or two forward contracts carried out simultaneously. Tere is also no difference between long-dated and short-dated FX instruments that would justify oversight under two distinct regulatory regimes. Te regulatory regime for foreign exchange should not be split, based merely on the relative duration of an instrument.
Tese key points show that the foreign exchange market, including FX forward and FX swaps, is qualitatively different from derivatives markets and should continue to be overseen by central banks, including the New York Federal Reserve.
26 | april 2011 e-FOREX
FX trading volume breakdown by instruments and tenor
Commodity Futures Trading Commission (CFTC) regulation of the foreign exchange market is inadvisable. Because it is critical to a central bank’s ability to carry out monetary policy, this market has long been under the scope of the Board of the Federal Reserve and other central banks. Tere are compelling macroeconomic reasons for the Federal Reserve to remain the primary supervisor of this activity in the U.S. Foreign exchange is even more important to monetary policy in the U.S. than elsewhere, because of the role of the U.S. dollar as the world’s principal reserve currency. Recent economic conditions in the U.S. have highlighted the need for the Federal Reserve to have maximum flexibility in effecting monetary policy. Te FX market’s strong operational infrastructure, developed under the supervision of the Federal Reserve in cooperation with other central banks, along with its liquid and transparent nature and the simplicity of FX products, have allowed the FX market to successfully withstand numerous market disruptions, including the recent financial crisis.
Short maturity
Unlike over-the-counter derivatives that will be regulated as swaps, FX swaps and FX forwards are overwhelmingly short-term instruments. Te chart below contrasts the short maturity profile of outstanding FX instruments with those of interest rate
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