Forex swaps to be exempted from Dodd-Frank rule

In what was characterised 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 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 per cent 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.