On the Clearing of Foreign Exchange Derivatives

Thursday, May 12, 2011

Economics Working Paper WP11105

This note discusses the case for exempting foreign exchange derivatives from recent regu- latory requirements for over-the-counter derivatives, including clearing, trade competition, and minimum collateral requirements. My conclusion is that the arguments that have been made for such an exemption are not sucient. I focus mainly on the question of clearing, which gures prominently in arguments favoring exemption.

A derivatives contract is \cleared" when the performance of the buyer and the seller is eectively guaranteed by a special purpose nancial utility known as a central clearing party (CCP). The foreign exchange (FX) derivatives in question are traded over the counter (OTC) and commit the two parties of a given contract to an exchange of two currencies, for example dollars versus Euros, at prearranged prices, at one or more future dates.

On the Clearing of Foreign Exchange Derivatives