The Foreign Exchange Professionals Association (FXPA) submitted written comments in response to the Commodity Futures Trading Commission’s (CFTC) Market Risk Advisory Committee (MRAC) meeting held to look at how well the derivatives markets are functioning.

The MRAC meeting focused on the impact and implications of the evolving structure of derivatives markets on the movement of risk across market participants.

Supporting comments made by Angela Patel at Putnam Investments, FXPA concurred that there should be no settlement distinction between deliverable and non-deliverable FX forward contracts and FX swaps.

“Cash-settled NDFs should face a similar regulatory framework and allow US persons to trade both deliverable and non-deliverable forwards on non-SEF multilateral platforms,” said FXPA in comments submitted to CFTC. “For the reasons set forth below, the FXPA believes that the regulatory burdens stemming from the Dodd-Frank Wall Street Reform and Consumer Protection Act4 have, to date, stifled liquidity and increased costs to the detriment of global currency markets.

“First, as a result of a footnote in the preamble to the CFTC’s final swap execution facility (SEF) rules, NDF market participants find themselves, even without a mandatory SEF trading requirement for NDFs, facing SEF regulatory regime obligations, additional regulatory and compliance costs, and more expensive access to liquidity. Given the choice between those regulatory costs associated with trading on multilateral platforms, and avoiding those constraints by trading on off-facility bilateral platforms, as discussed at the MRAC public meeting, many buy side firms have chosen to transact on less transparent liquidity pools,” the FX association said.

FXPA added: “Compared to the goals of the SEF regime in the Dodd-Frank Act, which is to promote pre-trade price transparency and the trading of swaps on SEFs, the practical effect of footnote 88 has been the opposite. With respect to NDFs, footnote 88 has the practical effect of requiring market participants to on-board with SEFs (including detailed comparisons of various technologies and rulebook provisions) if they wish to access multiple-to-multiple liquidity pools and trading venues. Reviewing SEFs can be costly and labor-intensive for a market participant. The pre-emptive application of the SEF regime on NDF markets through footnote 88 has inhibited the trading of NDFs (including causing some options platforms from not registering as SEFs), promoted bilateral off-SEF activity, and reduced pre-trade price transparency.”

Additionally, FXPA stated: “The global currency market, including NDFs, operates around the world and at all hours of the day. Because of the global nature of these markets, it is vitally important that regulators coordinate and harmonise their regulatory frameworks. As the Mifid II January 2018 compliance date approaches, any gaps among the principal jurisdictions will become more pronounced. This includes any prospective clearing or trading mandate, post-trade reporting obligations, and regulatory burdens imposed on trading venues and other market infrastructure. The practical impact of disjointed global regulations will be siloed market activity by jurisdiction, fracturing liquidity and impeding competitive price discovery, which will negatively impact the vibrant global FX marketplace.”

“Most SEFs are likely to register as ‘multilateral trading facilities’ in Europe, and without mutual recognition of those platforms by each regulator, liquidity pools that had already been fractured between US and non-US persons will be further split between US, European, and other regions,” FXPA concluded.