Stringent regulations and tight deadlines are heating up the world of FX options trading. But Rob Gray at Dion Global Solutions argues that this particular cloud has a silver lining.
The Dodd-Frank Act is a prime
example of regulation that has caused as much confusion as
clarity. The weightiest, lengthiest piece of financial
legislation in U.S. history has also produced some of the
weightiest, lengthiest post-legislative discussions on its
impact. The most recent of these discussion points was the
announcement in December 2012 that the FX market would be
exempt from its reporting and claring requirements.
For traders in FX options and swaps, the relief was almost
palpable. Facing an international legislative onslaught from
EMIR to MAD II, many traders â€" understandably
â€" seized the opportunity to put FX options on the
back burner and concentrate on what appear to be more pressing
concerns: the move to central clearing, with its attendant
reporting requirements, for other classes of derivatives.
Unfortunately, this sense of
reprieve is based on a misreading of the US
Treasuryâ€™s December announcement. The
exemptions apply only to the underlying FX instruments, as well
as their exchange swaps and forwards, as the US regulators
regard these to be well-run, well-capitalised markets.
Option swaps and NDFs, on the other hand, are not exempt. Every
aspect of the trading and decision-making process needs to be
recordable and auditable. Consequently, the original timetable
for establishing the necessary functionality for managing all
aspects of a bankâ€™s FX business, from sales
to central clearing, is still very much in play.
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