FX Swaps

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FX swaps are contracts whereby one party agrees to simultaneously buy an amount of currency at an agreed price and to resell the same amount of currency at a later date from the same counterparty, also at an agreed upon price. The first transaction is executed at one price and the second part of the trade is done at another. Both transactions, set simultaneously, are designed to offset each other.[1][2]

FX swaps are used by institutions in the markets to help fund their foreign exchange balances, as well as by large investors to hedge positions. Such transactions are part of the $4 trillion daily market for foreign exchange trades, according to the Bank of International Settlements.[3]

FX Swaps & Dodd Frank[edit]

FX swaps were exempted from regulatory oversight along with foreign exchange forwards by the US Treasury in November 2012. Other swaps such as interest rate and credit default swaps, however, were included in Dodd-Frank Act rules from the Commodity Futures Trading Commission. The move by the US Treasury was opposed by CFTC chairman Gary Gensler, who had argued for regulation of FX swaps on the grounds that traders could structure other types of derivatives that would look like forex swaps in order to evade regulation.[4] The US Treasury determined that FX swaps and forwards were short-term transactions that have a high degree of transparency and risk management.