What Are They Thinking?

Last week, sibling publication Risk broke the news that the U.S. House of Representatives was planning to scrap the exemption for the foreign exchange (FX) swaps and forwards as they reconcile two competing House bills reforming central clearing requirements for over-the-counter (OTC) derivatives.

It's safe to say that this has left many mouths in the industry agape. Considering the function these instruments play within the industry when it comes to international trading, it is like trying to prevent drag racing by outlawing tires. It might work, but it's going to affect ambulances, police cars and produce trucks as well.

It reminds me of the time several years ago when a few politicians from around the globe called for SwiftNet to be shut down "just until things could be sorted out" in terms of the information being subpoenaed by the U.S. government at the time.

At best, I'm sure that they mean well, but it's doubtful that most legislators would know the knock-on effects of this decision. I'm certain that the major FX banks and the various clearinghouses vying for the OTC business did not see this coming. How prepared are these clearinghouses to add this unexpected asset class to their clearing capabilities? Are the connections in place to handle the sudden and dramatic increase in message volume that this will cause?

In the long view, this really shouldn't have come as a total surprise to the industry. The regulatory backlash has been building for a long time and one of the first casualties of zealous behavior is nuance. Let's just hope that the regulators and Congress won't kill the patient in their attempts to save it.

Comments? Send them to me at rob.daly@incisivemedia.com.

Rob Daly
Editor