En route to an official visit to Israel, Neal Wolin, the US Deputy Secretary of the Treasury Department commented that the treasury dept is currently debating whether or not to exempt FX products from new U.S. derivatives regulation that would force OTC derivatives to be traded on exchange. In the first half of 2011 the US Treasury proposed to exempt certain Forex contracts including FX Swaps.
Wolin mentioned that there is no time table on when the decision to exempt Forex will be made but that discussions are currently ongoing. He said as things currently stand FX Swaps and FX Forwards will most likely go on exchange and there is now serious debate about whether or not to exempt spot Forex. However, he did mention spot Forex is much more likely to be exempt than FX Swaps and FX Forwards. The CFTC in the meanwhile has published final rules concerning Swap Dealers and Major Swap Participants and will require them to register with the NFA.
Should spot Forex not be exempted then it would mean a complete and total end of the American spot forex industry. While NFA tries to kill the industry blow by blow such a decision would completely annihilate the market. Going on an exchange would reduce the already very low margins of all forex brokers and would definitely make 8-10 of the remaining 12 or so brokers go out of business. Forex traders will in turn abandon the industry as well – as trading forex on an exchange is simply noncompetitive. Alternatively this would push many US forex traders to go back trading illegally with some foreign brokers who are happy to accept them.
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When asked about the MF Global collapse, Wolin mentioned that it was a good demonstration that the Dodd Frank bill is effective. The Deputy Treasury Secretary said that unlike Lehman Brothers, in MF Global’s case the entire system did not near the brink of collapse and that just relatively few people lost some money.
If that was such a good demonstration (tell it to thousands of clients who lost half a billion dollars) then it’s not very clear why CFTC is now introducing new requirements the purpose of which is to prevent another MF Global event from happening.
It appears that the effect of these new regulations will continue the trend of FX businesses declining in USA market while growing in the rest of the world. A secondary consequence could be reduced tax revenues in the United States as tax revenues will be shifted from the USA to the United Kingdom and other places.