Timothy Geithner Stalls on Vital Decision over Foreign Exchange Swaps

on Sep 18, 2012

On 18 September Reuters reported that the majority of large Forex players are in anticipation of the Treasury Department’s decision on whether foreign exchange swaps will be exempt from new US regulations.

With the proposal issued in April 2011, the new regime is supposed to reduce the risk in the $648 trillion (£400 trillion) over-the-counter (OTC) swaps market and is scheduled to go into effect over the next few months.
The changes come from Title VII of the 2010 Dodd-Frank Act, which amends the Commodity Exchange Act and establishes a new regulatory framework for the treatment of derivatives most often defined as swaps. Dodd-Frank dictates that all swaps must be reported to a swap data repository or a relevant commission.

On October 12 banks will have to start counting the number of their swaps transactions to figure out whether they will have to register in December with the US regulatory authorities as “swap dealers” and incur the subsequent higher costs. Because it is unclear whether foreign exchange swaps will be exempt, industry players are not sure whether to count them towards the $8 billion (£6.12 billion) threshold. At the same time, companies are not keen on spending the funds to meet the requirements only to later find out that they were exempt.

The reason why foreign exchange swaps could be exempt is because Timothy Geithner, secretary of the Treasury, has said that they are not as risky as other derivatives, which greatly contributed to the 2007-2009 financial crisis. It is not an easy decision for Geithner and time is of the essence – he must take into account the recent public outrage in the United States and abroad over the series of high-profile banking scandals including JPMorgan’s multi-billion dollar trading blunder and the Libor manipulation.

Regardless of what the Treasury decides, big banks and hundreds of other financial companies insist that they need clarifications as soon as possible, especially because they are pre-occupied with the uncertain regime in Europe. The EU has yet to rule out on which types of FX derivatives will be excluded under the new regulations. With London as the world’s top FX trading centre the UK stands against tighter regulations on the Forex market and wants all categories of FX excluded.