September 17, 2012 / 7:00 PM / 5 years ago

Forex players in lurch as Treasury bides its time over swaps

* Treasury proposed in April 2011 to exempt forex swaps

* FX players say final move needed soon as other rules loom

* Timing tricky for Treasury after banking scandals

By Alexandra Alper and Rachelle Younglai

WASHINGTON, Sept 17 (Reuters) - Businesses that use derivatives to protect against currency fluctuations are increasingly anxious about being swept up by new U.S. rules, despite some assurances from the Treasury Department that foreign exchange swaps would be exempt.

A new regime aimed at cutting risk in the $648 trillion over-the-counter swaps market is set to go into effect over the next few months, and market players say they need guidance now from Treasury about whether their foreign exchange swaps will face the same crush of rules.

The most pressing concerns come to a head on Oct. 12, when banks will have to start counting their swaps transactions to see whether they will need to register in December with U.S. regulators as “swap dealers”, and be hit with higher costs.

Industry players are in the dark about whether to count their foreign exchange swaps and forwards towards the $8 billion threshold.

Beyond the potential expense, companies run the risk of meeting the requirements only to find out later that they are exempt.

“We think it is important that the Treasury act before October 12 because that date triggers requirements under the swaps regime,” said Cecelia Calaby, senior vice president with bank lobby group the American Bankers Association.

“People need time to prepare for registration. It’s not just something you can turn a switch on,” said Calaby.

The association, which represents U.S. banks, is planning to send Treasury Secretary Timothy Geithner a letter asking him to make the decision before the October date.

That leaves Treasury Department in a tough spot: how to follow through on its proposal that exempts FX derivatives from the majority of rules without appearing to give banks light treatment after a series of high-profile banking scandals in recent months.

The Treasury has been widely expected to carve out foreign exchange derivatives from the rules crafted by the Commodity and Futures Trading Commission, which was tasked by the 2010 Dodd-Frank Act with boosting oversight of the opaque market.

Geithner has yet to finalize the exemption, leaving Wall Street banks and other big users of FX swaps in the lurch.


Geithner has said foreign exchange swaps are not as risky as other derivatives, which contributed to the 2007-2009 financial crisis and led to taxpayer bailouts of heavily exposed firms like insurer AIG.

When it issued its proposal in April 2011, the Treasury said forcing the derivatives onto exchanges or through clearinghouses could actually jeopardize practices in the market that help limit risk and ensure that it functions effectively.

In meetings this past summer, Treasury officials said that the agency was still on track to finalize Geithner’s proposal, which would exempt forex from swaps rules like margin and central clearing requirements, sources familiar with the matter said.

The sources said the only clue on time frame that Treasury officials gave was that the department could take action after the CFTC and the Securities and Exchange Commission issued long-awaited rules defining exactly what qualifies as a “swap”. Those rules were posted publicly in mid-August.

A Treasury spokeswoman declined comment.


The timing is tricky for Geithner.

Public outrage in the United States and abroad has been stoked in recent months by JPMorgan’s multi-billion-dollar trading blunder and by allegations that for years the world’s biggest banks tried to manipulate global benchmark interest rates.

Barclays has already admitted to trying to rig the London interbank offered rate, or Libor, which underpins some $360 trillion of loans and financial contracts.

Consumer groups are hoping the Libor scandal pressures Geithner to reconsider his position on forex, especially given recent criticism about his role as New York Fed chief when regulators first caught wind of the possible manipulation.

Geithner at the time alerted authorities to potential Libor-setting problems, but did not finger Barclays, according to Fed documents.

“The Libor scandal, in which a key input to FX swaps valuation was shown to be fraudulent and manipulated by participating banks, shows exactly how problematic this is,” said Marcus Stanley, policy director for advocacy group Americans for Financial Reform.

Others are still not convinced by Geithner’s argument that FX swaps do not carry the same kind of risks as other swaps. They say FX counterparties still face risks if one side defaults.

“There is a huge amount of risk and those that say we can afford to exempt this market because it is small, they are not paying attention to the numbers...the risks are very, very large,” said Darrell Duffie, a finance professor at Stanford University.

But big banks and the hundreds of companies that use the derivatives say that regardless of the outcome, they need clarity as soon as possible, especially because they’re also dealing with an uncertain regime in Europe.

The European Union, home to the world’s top FX trading center in London, has yet to decide which types of FX derivatives rules will come under its new regulations.

Britain wants all categories of FX excluded but regulators in continental Europe want some categories, including options and non-deliverable forwards, covered.

“Everyone is well aware that this (two sets of rules) would be a detriment to companies that use FX swaps,” said James Kemp, a managing director with the Global Financial Markets Association, a group representing securities firms worldwide.

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