Treasury decides central clearing and exchange trading requirements will not apply to FX swaps and forwards.
The US Treasury announced Friday that it has proposed exempting FX swaps and forwards from central clearing.
“Central clearing requirements will strengthen the rest of the derivatives market, but could actually jeopardize practices in the FX swaps and forwards market that help limit risk and ensure that it functions effectively,” the US Treasury Department said in a statement. “This market plays such an important role in helping businesses manage their everyday funding and investment needs throughout the world that disruptions to its operations could have serious negative economic consequences.”
The topic of exempting FX from derivative rules has been a hot one since before and after the Dodd-Frank was passed. Commodity Futures Trading Commission Chairman Gary Gensler had fought hard to have FX swaps included in the regulation. To prevent this, companies have waged a massive lobbying campaign, meeting repeatedly with CFTC in a number of meetings. For example in February, Kraft Foods met with the CFTC to argument for the exemption (see related story here). But companies always had an ally in Treasury Secretary Timothy Geithner, who was a strong proponent of the exemption from the start. Although he was not able to get it in writing in the exemption directly into Dodd-Frank, he was able to carve out a “veto” of sorts with the power to allow the exemption.
In its announcement today, Treasury appeared to try to temper the anticipated corporate euphoria by cautioning that, “This proposed determination is narrowly tailored. FX swaps and forwards will remain subject to Dodd-Frank’s rigorous new trade reporting requirements and business conduct standards. Additionally, the Dodd-Frank Act makes it illegal to use these instruments to evade other derivatives reforms. Importantly, the proposed determination does not extend to other FX derivatives, such as FX options, currency swaps, and non-deliverable forwards. These other FX derivatives will be subject to clearing and exchange requirements.”
Treasury said the public would have 30 days to comment on the proposed exclusions.