banking and capital markets
November 19, 2012
Dodd-Frank Could Sideswipe the Nondeliverable Forward Market
The Dodd-Frank Wall Street Reform and Consumer Protection Act will have a big impact on the foreign exchange trade in nondeliverable forwards, which asset managers and corporations often use to hedge currency purchases.
By Charles Wallace
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FOREIGN EXCHANGE HASN'T ESCAPED THE SWEEPING IMPACT of the Dodd-Frank Wall Street Reform and Consumer Protection Act. One area that will probably take a serious hit is the trade in so-called nondeliverable forwards, U.S. dollar–denominated currency contracts for currencies such as the Chinese renminbi that can’t be delivered offshore because of capital controls.
The U.S. Commodity Futures Trading Commission, which is writing the rules for derivatives trading, still hasn’t laid out some key points of the new Dodd-Frank requirements. (Despite repeated requests, the CFTC refused to comment.) But the NDF market has already been buffeted by change.
One interdealer broker, who asked not to be named because his clients were involved, says that traders, mainly in Asia but also in Europe and elsewhere, have started demanding that all NDF trades be booked outside the U.S. to avoid the chance of getting swept up by Dodd-Frank. “These requests began to trickle in during September and turned into a torrent in October from the Far East, Europe and South America,” he explains. “They don’t want to face a U.S. entity.” ....