Treasury proposes exemptions for exchange swaps

While central clearing requirements will strengthen the rest of the derivatives market they could actually jeopardize practices in the foreign exchange swaps and forwards market that help limit risk and ensure that it functions effectively.  

“We think this narrow slice should be exempted,” Miller said. 

Under the financial overhaul law, Treasury Secretary Timothy Geithner was given the authority to determine if an exemption from derivatives rules was appropriate for certain contracts used by companies to hedge currency rates. The proposal will be released for 30 days of public comment.

Groups such as the National Association of Manufacturers say more oversight of these contracts would be expensive and unnecessary while critics argue that the over-the-counter derivatives needs stricter supervision.

“The use of foreign exchange swaps is critical for manufacturers of all sizes to guard against fluctuations in foreign currencies that could significantly increase costs, said Dorothy Coleman, vice president for Tax and Domestic Economic Policy at the National Association of Manufacturers (NAM) in a statement.

For many manufacturers, managing fluctuating currency exchange rates is the primary focus of their risk management and hedging programs, according to NAM. 

"As the U.S. economy continues to recover, it is critical that any new regulations on derivatives not inadvertently hinder economic growth," she said.

"In particular, regulations that make hedging too expensive will add additional burdens on manufacturers, limiting their ability to expand and create jobs.”

The American Bankers Association also backed the exemption proposal.

“The Treasury Department has taken a positive, progressive step for the foreign exchange markets and the economy generally," said Cecelia Calaby, executive director and ABA's senior vice president for regulatory policy.

"Treasury has recognized the low level of risk that the existing prudential framework presents for trading foreign exchange swaps and forwards," she said. 

But some groups consider the proposal a mistake. 

"It is the wrong policy decision," said John Carey, spokesman for Americans for Financial Reform in a statement. "We hope and expect that Secretary Geithner, and the administration as a whole, will reconsider this decision and take other steps to vigorously enforce the new law." 

Carey said AFR sent two letters -- one in November and a second in February -- urging Geithner not to exempt foreign exchange swaps and forwards from the definition of “swap” under the Commodity Exchange Act and thus from exchange trading and central clearing requirements.

The swaps carved out by Geithner represent about $30 trillion of the $600 trillion global market for over-the-counter derivatives, Treasury said. 

The new rules will apply to currency swaps, options and other contracts used for similar purposes.