Trading of FX instruments subject to Dodd-Frank requirements, principally FX options and non-deliverable forwards (NDFs), is set to experience unprecedented changes in the face of proposed regulatory reform. The ultimate outcome remains uncertain but the next few months will undoubtedly be a period of adjustment and adaptation.
The Commodity Futures Trading Commission’s proposed rules regarding swap execution facilities (SEFs) have highlighted the unique nuances and requirements of the FX market and its participants. In a recent CFTC public meeting chaired by Commissioner Scott D. O'Malia, potential SEFs were called on to discuss the proposed rules. (Editor's note: Read tweets from TABB Group's Larry Tabb and Kevin McPartland from the SEF Showcase here.)
One area of concern regarding the CFTC’s proposed rules for SEFs is that they take away the end user’s flexibility to direct transactions to whomever they think is best suited for a specific trade. Under these proposals the client would not have the freedom to choose how they want to trade. End users’ ability to best hedge their risks and meet their business requirements can be compromised to the extent they are forced to trade with and disclose market information to multiple counterparties.