Forex trading involves purchasing and selling currencies on the global market 24 hours per day, five days a week for speculation and hedging purposes.
The Dodd-Frank Act tightened regulation on derivatives such as forex swaps and forwards, as well as increasing trade reporting transparency.
Volcker Rule
The Volcker Rule prohibits banking entities from engaging in proprietary trading and hedge fund/private equity fund investing activities outside of normal business operations or specific exceptions; such activities could include clearing activities, liquidity management, market making, hedging trades to satisfy delivery obligations or trades executed to satisfy profit sharing or pension plans of banks. It further requires Federal banking agencies to implement regulations setting additional capital requirements and quantitative limits for such activities.
FSOC is seeking input to assist agencies with creating these regulations. In particular, they seek feedback on whether a newly available exemption to foreign banking organizations should be further clarified to apply only when risk-taking decisions, risk assessment processes, arrangement negotiations execution financing of trading activities occur outside of the US – thus minimizing how this Rule might disrupt global markets.
Market Oversight
Dodd-Frank Act’s market oversight provisions are key components, designed to curb manipulation and fraud in the tradable allowance market. They also encourage exchange trading instead of over the counter trading to mitigate systemic risk by pooling risks and limiting exposure. Furthermore, these provisions may promote electronic registries resistant to hacking that limit exposure as well as know-your-customer rules which restrict who can open registry accounts and take part in market participation.
Dodd-Frank Act not only includes clearing and exchange trading requirements, but it also sets reporting and business conduct standards for swap dealers and major swap participants. While these measures have made the financial sector more fragile than before, such as with Silicon Valley Bank (SVB). Others, however, cite Dodd-Frank’s efforts to limit proprietary trading by banks as contributing factors.
Market Regulation
After the financial crisis, Congress issued Dodd-Frank as an expansive financial regulation. This legislation restricted banks from trading their own funds while strengthening systemic risk oversight and providing consumer protection initiatives.
Dodd-Frank strengthened regulators’ authority and instituted new requirements designed to limit risky investments by financial firms and facilitate orderly liquidation upon bankruptcy filings, thus helping prevent the collapse of one firm from destabilizing an entire economy.
Congress granted Congress gave Treasury Secretary the discretion to determine if certain derivatives requirements, such as central clearing and exchange trading, should apply to foreign exchange swaps and forwards. Their determination suggested that their structure, preexisting oversight and extensive use of payment systems reduce the chance that any individual market participant could use these instruments to bypass other obligations imposed upon them from trading or regulatory bodies. As per CFTC rules however, strong trade-reporting and anti-evasion requirements as well as strict business conduct standards will continue for major swap participants are in force.
Financial Stability Oversight Council
Dodd-Frank’s Financial Stability Oversight Council was created as a response to the financial crisis, collecting information from various federal regulatory agencies as well as monitoring financial markets and making recommendations regarding higher standards for risk management and other policies to the Board of Governors.
Dodd-Frank’s gains include higher prudential standards for capital, single point of entry failure resolution authority and enhanced transparency for derivative trading – measures which make institutions more resistant to stress and crises.
Dodd-Frank provisions that imposed costly tradeoffs include restrictions on Federal Reserve emergency lending authority and the Volcker Rule, which prevents banks from using their own funds to take speculative risks. Furthermore, many provisions remain incomplete or have not yet been completed and could benefit from more consolidation, expanded enforcement authority and examination authority and greater independence for FSOC.
