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U.S. Treasury exempts FX swaps, forwards from Dodd-Frank rules

Timothy Geithner

The U.S. Treasury recently exempted foreign-exchange swaps and forwards from Dodd-Frank rules aimed at reducing risk and enhancing transparency in the shadowy derivatives market.

Several banks, including Deutsche Bank AG, Bank of New York Mellon Corp. and UBS AG urged Secretary of the Treasury Timothy Geithner to exempt the markets. The Treasury said last week that FX swaps and forwards already carry a high level of risk management and transparency.

“Unlike other derivatives, FX swaps and forwards already trade in a highly transparent, liquid and efficient market,” the Treasury said, according to Businessweek. “This final determination is narrowly tailored.”

American bank-holding firms reported $3.1 billion in revenue from FX trading, which became the second-largest source of derivatives trading revenue for U.S. bank-holding companies during the second quarter.

Dodd-Frank requires that most swaps be pushed through central clearinghouses that require collateral from traders in order to reduce the risk one participant’s default poses to the larger market, Businessweek reports.

James Kemp, the managing director of the Global Financial Markets Association’s FX department, said that pushing FX swaps and contracts through clearinghouses would have led to increased costs and risk.

“This final decision from the U.S. Treasury provides the clarity the industry needs to now further develop the infrastructure of the future,” Kemp said, according to Businessweek.

Some legislators and advocates of tighter regulations, however, attempted to discourage the Treasury from extending the exemption.

“Wall Street fought hard to convince Treasury to grant this loophole, which is unjustified by independent research,” Dennis Kelleher, the president and CEO of Better Markets, said, Businessweek reports. “That may be why, after two years of consideration, the [U.S.] Treasury announced such an important financial regulation decision on a Friday night at 5 p.m. when Congress is on recess and on the eve of the Thanksgiving holiday.”

The Commodity Futures Trading Commission and Securities and Exchange Commission are required under Dodd-Frank to write rules to govern the over-the-counter derivatives market in order to reduce risk and increase transparency.

The Treasury exempted FX swaps and forwards from the agencies’ rules, though the exemptions do not apply to Dodd-Frank’s reporting requirements and business conduct standards, FX options, currency swaps or non-deliverable forwards.

“Treasury believes that requiring [FX] swaps and forwards to be cleared and settled through the use of new systems and technologies could introduce new, unforeseen risks in this market,” the Treasury said in the final exemption order, according to Businessweek.

The exemption takes effect after it is published in the Federal Register.

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