Mandatory FX Clearing in the U.S. Not an Immediate Priority

New International Swaps and Derivatives Association (ISDA) chief executive Scott O’Malia believes FX clearing mandates in the U.S. have been moved down the pecking order due to concerns over the ramifications of such rules.

With interest rate and credit derivatives already subject to central clearing, regulators are looking to apply the rules to all standardized OTC derivatives over time.

The size and complexity of the FX market may mean regulators are going to take more time over finalizing the rules, according to O’Malia.

“There has been a pause in clearing mandates,” he said at ISDA’s European conference. “Non-deliverable forwards could be the next product to make their way through clearing mandates.”

“FX goes through prime brokerages and that is a slightly different model. There is a difference in the players and the execution framework.”

He added that following non-deliverable forwards, it was likely that some additional interest rate currencies could be mandated to be centrally cleared, with FX falling into line after that.

Once being drawn into the Dodd-Frank clearing rules in the US, FX trades will have to be traded electronically on swap execution facilities (SEFs).

Along with commenting on the progress of the U.S. clearing mandates, O’Malia and ISDA chairman Stephen O’Connor reiterated to the audience that ISDA’s main focus going forward is on resolving the cross-border issues between the U.S. and Europe.

As the December 15 deadline for Europe to recognize U.S. clearing houses approaches, the market is growing increasingly nervous over the effects of a decision not being reached.

O’Malia described the process as “frustratingly slow” and has voiced his support for an outcome based approach to resolving the matter.

“You are doomed to failure if you read each rule and put substituted compliance over that. They know exactly what they need to do,” he says. “It is time to get in a room and work these things out.”