The CFTC guidelines are part of the mandatory regulation of foreign exchange derivatives, which are mostly used by banks and other institutions.
With the growing debate about the best way to create and implement a viable clearing system, forex options trading has experienced a massive surge of growth and popularity. Currency-based ETFs are offered as well as an alternative to forex trading and unexpected problems with a new clearinghouse.
In the past year, new executive swap facilities emerged in the middle of the year with instant controversy and chaos in many areas, as organizations struggled to choose from a plethora of SEFs and understand regulations in order to properly comply.
Problems with the various new SEF regulations, the types of products and deal packages that need to be cleared, and conflict over whether a derivative product is required to be executed on the futures exchange or the SEF, has led to a lot of disgruntled and confused traders and institutions.
This was followed by a general decline in activity and the overall swap derivatives market saw a decline in activity, as institutions sought alternative trading instruments and products that did not have conflicting regulatory elements.
With forex facing a similar scenario this year, many institutions are already moving to alternative trading tools and products, to avoid the problems that forex will encounter as it moves through the clearinghouse regulatory process. This process is expected to be far more complex, and more confusing, with far more contention than the IRS regulatory clearinghouse transformation and SDG metrics.
Institutions are transitioning to several different types of instruments that are still based on foreign exchange instruments but are traded on existing exchanges, reducing the risk of the complexities of new regulations and the difficulties of the new clearinghouse.
Here’s what institutions are starting to trade in as an alternative:
Forex options are very popular because they are a forex derivative that is traded directly on the exchange with simple buying and selling, which is very similar to a stock option or a put option. The difference is that a forex option trade is to buy a call or buy a put as a forex trader would do in the normal forex market. SPOTs trading or single payment options are also available, and it’s becoming more and more popular for many different institutions for different portfolio purposes.
Forex options are gaining in popularity as they are relatively easy to learn to trade. These types of options for a forex trader and OTC transaction process are clearly defined and actually work while the new forex clearinghouses are completely new and untested, lack a complete system process, and are fraught with contentious debate about how to do it. They must be prepared.
In the meantime, institutions need a way to trade forex with lower risk and good upside potential. Forex options are a convenient option that eliminates many problems and requires the least trading time.
Another tool that many institutions are considering is exchange-traded Forex ETFs. They are traded just like stocks but are based on forex pairs. Simple orders and chart analysis is available for ETF tracking and trading.
Here’s what this means for the retail forex trader:
Forex is a huge and very complex market with many levels of access. Individual forex traders are located abroad with limited access to the real forex market. Individual forex traders trade against their brokers and not in the general forex market. The effect that the broker will feel is what the broker fills in for retail forex traders. Many brokers will be required to comply with the new forex trading regulations and clearinghouse rules.
The turmoil of the forex market from confusion, changes to the structure, defining parameters of what to clarify and how this will change the business models of institutions and the time it will take to fully integrate new regulations and clearinghouse rules are factors that make retail traders should not ignore. While things may look the same on the surface, basic stealth activity that retailers don’t see can cause retail problems they didn’t anticipate.
Forex trading may become more volatile. Forex options and forex pairs based ETFs will definitely increase with more and more activity on these two exchange platforms.
All individual forex traders should do what institutions do which is check out alternative forex trading tools, such as forex options or pairs ETFs. With the lower risk aspects of options trading, many forex traders may find that their profitability increases as their risk decreases.
Forex options trading is a solution for institutions at a time when the forex market is facing massive disruptive changes. Individual forex traders also need to check out all the different ways they can trade forex.