U.S. Treasury to move by year end on plan to exempt forex swaps, sources say
By Emmanuel Olaoye
WASHINGTON, Oct. 24 (Thomson Reuters Accelus) – The U.S. Treasury Department will move ahead after the Nov. 6 U.S. national elections to issue its plan for exempting foreign exchange swaps, a banking industry source said. A senior government official said a decision on the issue was expected by year end, after international standards setters complete work on derivatives margin requirements.
The Treasury plan, which was proposed in April 2011, would exempt instruments such as foreign exchange swaps and forward contracts from new rules affecting dealers in the $650 trillion over-the-counter derivatives market.
The Treasury had been expected to finalize the plan before the October 13 deadline for registration for swap dealers. But the delay in finalizing the plan has made firms anxious about whether their foreign exchange swaps transactions will require them to register as swap dealers and be subject to higher costs.
A banking industry source told Compliance Complete that the Treasury was expected to act before the end of the year.
“I think that we have reason to expect that the Treasury will act before the end of the year. We also have reason to believe they will act with consistency to what they proposed last year,” the source said.
The Treasury proposal does not exempt foreign exchange swaps and forward contracts from trade reporting and external business conduct rules in the Dodd-Frank Act. But the plan is unpopular with advocacy groups and lawmakers who favor stronger financial regulation. They say the exemption creates a loophole that allows institutions to structure their other swaps products to qualify for the exemption.
In a joint letter to the Treasury in June 2011, advocacy groups including Americans for Financial Reform and the Consumers Federation of America said the Treasury failed to carry out enough analysis to determine the potential consequences of exempting forex swaps.
Earlier this month, the Commodity Futures Trading Commission moved to calm industry fears over the delay in finalizing the exemption. The agency issued a series of no-action letters providing temporary relief to firms who would have had to register as swap dealers by the October 12 deadline. The relief means that firms do not have to count their foreign exchange swaps transactions in the $8 billion calculation used to determine a firm’s status as a swap dealer.
Even if the Treasury decides not to move forward with the proposal, many banks are taking steps to prepare to register as swap dealers, said Robert Hatch, counsel for legal and regulatory affairs at the Financial Services Roundtable. He said firms had hired additional attorneys and put in place systems to comply with the swap dealer registration rules.
“Because frankly you can’t rely on the expectation that the exemption is going to happen so firms are put in a situation where for this two month period they have to prepare to tell their stockholders we did what was necessary to make sure we are in compliance with the new derivatives regulations.”
A senior administration official said the Treasury was working “through a complex set of outstanding issues, including those with international implications, regarding foreign exchange swaps and forwards.”
The official said no decision has been made on a final determination but she said any decision on the matter would likely be issued by the end of the year.
The delay in finalizing the exemption is partly because the Treasury is waiting for completion of an international process of derivatives standards, the official said. In July, the International Organization of Securities Commissions and the international Basel Committee of banking regulators released a consultation paper on margin requirements for non-centrally-cleared derivatives.
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