May 19, 2024

Foreign Exchange Swaps to Be Exempt From Rule

WASHINGTON (Reuters) — In what was characterized as a victory for business, the Treasury Department proposed on Friday that commonly used foreign exchange swaps and forwards should be exempted from rules intended to tighten oversight of other derivatives.

The Treasury said that forcing these derivatives through clearinghouses and onto exchanges was not necessary because existing procedures in the foreign exchange market mitigate risk and ensure stability.

Any disruptions to the market “could have serious negative economic consequences,” the department said.

Foreign exchange swaps and forwards, which represent about 5 percent of the $600 trillion over-the-counter derivatives market, are used to lock in prices as protection against exchange rate fluctuations.

Businesses, big banks and the securities industry lobbied the administration to exempt the financial instruments from the rules. They argued that clearing requirements were unnecessary given that most contracts expired after one week.

The Treasury agreed.

“You would be putting more steps into the settlement process for trades that are largely short term in nature,” Mary J. Miller, the assistant secretary for financial markets, said.

Under the Dodd-Frank financial reform legislation enacted last year, the Treasury secretary was given the power to determine whether the narrow subset of foreign exchange derivatives should be tightly regulated.

The rest of the over-the-counter derivatives market will be forced through clearinghouses, which will stand between two parties and assume the risk if one party defaults.

The country’s biggest labor federation, the A.F.L.-C.I.O., criticized the Treasury’s decision. “We’re afraid it is going to open up an opportunity for arbitrage” in which derivatives users look to employ the least-regulated products, said Heather Slavkin, the federation’s senior legal and policy adviser.

The legislation was aimed, in part, at trying to ensure derivatives no longer pose the type of threat they did during the 2007-2009 credit crisis. Credit derivatives were implicated in the downfall of troubled financial giants Lehman Brothers and the American International GroupAIG. (NYSE:AIG).

Ms. Miller said the foreign exchange swaps market was different from other derivatives markets and that under Dodd-Frank it would be illegal to use the instruments to evade tougher scrutiny that applies to other derivatives.

The proposal is open for comment for 30 days. The Treasury’s final decision will be issued after that period.

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