FOREX: Options and New Clearing House Rules

The Commodity Futures Trading Commission guidelines are part of the mandatory regulation of foreign exchange derivatives, which are predominantly used by banks and other institutions.

With the growing debate on how to best create and execute a viable clearing system, easy forex trading system has had a huge surge of growth and popularity. ETFs based on currencies are being introduced as well as an alternative to trading Forex and unforeseen problems with a new clearinghouse.

Last year the new Swap Executive Facilities SEF emerged mid-year with immediate disagreements and disorganization in several areas, as institutions struggled to choose from a large group of SEFs and understand the regulations in order to properly comply.

The problems with the various new SEF regulations, what types of products and package trades had to be cleared, and the conflict of whether the derivative product was required to be executed on a futures exchange or the SEF led to plenty of disgruntled and confused traders and institutions.

An overall decline in activity ensued and the overall swap derivatives market saw a drop in activity, as institutions sought out alternative trading instruments and products that had no conflicting regulatory elements.

With Forex facing a similar scenario this year many institutions are already moving to alternative trading instruments and products, to avoid the problems Forex will face as it moves through the clearinghouse regulatory process. It is expected that this process will be far more complicated, more confusing, with far more disagreement than the IRS and CDS regulatory clearinghouse shift.

Institutions are moving to several different types of instruments that are still based on foreign exchange instruments but traded on already established exchanges, thereby alleviating the risk of the complications of new regulations and new clearinghouse difficulties.

Here is what the institutions are starting to trade as an alternative:

Forex Options are very popular as this is a straight-forward exchange traded Forex derivative with simple calls and puts, which are very similar to a stock option call or put. The difference is that the Forex option transaction is buying a call or buying a put as a Forex trader would in the regular Forex market. SPOTs or Single Payment Options Trading are also available, and becoming more popular for many different institutions for various portfolio purposes.