The Foreign Exchange Professionals Association (FXPA) warns of risks associated with inconsistent regulation in the global FX derivatives market, calling for uniform oversight to ensure market fairness and protect integrity.
FXPA Pushes for Regulatory Balance in FX Derivatives Market
The FXPA has published a white paper urging global policymakers to address the growing disparity between regulated and unregulated foreign exchange (FX) derivatives trading platforms. The industry body argues that the current regulatory imbalance could jeopardize market integrity and diminish protections for customers.
In its report, FXPA points out the increasing number of unregulated FX derivatives platforms that compete directly with regulated venues. These unregulated platforms often operate with little to no oversight, offering advantages such as higher leverage and lower fees, but at the cost of reduced protections for customers.
“The longer these gaps in regulation between regulated and unregulated FX derivatives platforms remain unaddressed, the more other trading venues will try to replicate their model,” the FXPA warns in its white paper.
Key Differences Between Regulated and Unregulated Platforms
The association outlines several significant differences between regulated and unregulated FX trading platforms. Regulated venues are subject to strict compliance requirements, including investor protection, market surveillance, and transparent reporting. In contrast, unregulated venues often bypass these measures, creating a potential advantage by lowering operational costs.
This disparity, according to the FXPA, opens the door to regulatory arbitrage, where unregulated platforms may gain a competitive edge by offering better terms to customers, such as reduced costs or higher leverage, but at the expense of market fairness and integrity.
The association urges global regulatory bodies to evaluate the potential risks of allowing unregulated FX platforms to operate without sufficient oversight. FXPA suggests that these platforms should be treated in a similar manner to regulated entities, ensuring that all venues providing FX derivatives services are subject to comparable standards of oversight.
Call for Policy Reforms
FXPA calls on policymakers to consider how the lack of regulation in certain FX derivatives venues could impact systemic risk, market liquidity, and global competitiveness. The group recommends that regulatory bodies work toward harmonizing standards across jurisdictions to reduce the compliance burden on regulated entities and promote greater equivalence for companies operating in multiple markets.
Growth in OTC FX Derivatives Market
The over-the-counter (OTC) derivatives market experienced substantial growth in 2023, with the total value of outstanding contracts reaching $667 trillion, an 8% rise compared to the previous year. Key contributors to this growth were interest rate derivatives, which hit $530 trillion, and foreign exchange derivatives, which expanded to $118 trillion.
The Bank for International Settlements (BIS) noted significant fluctuations in the market throughout the year, with a 15% increase in notional amounts during the first half, followed by a 6% decline in the latter half, in line with seasonal trends observed in previous years.
While notional values surged, the gross market value of OTC derivatives saw a 13% drop, driven primarily by changes in the interest rate derivatives market as rate hikes began to moderate by 2023.
