Bloomberg News

Foreign Swap Exemption May Open ‘Loophole,’ Exchange Group Says

June 07, 2011

June 7 (Bloomberg) -- A U.S. Treasury Department proposal exempting foreign exchange swaps and forwards from Dodd-Frank Act regulations could increase risk in the financial system and undermine the regulatory overhaul, a trade association for exchanges and users of the derivatives market said.

The proposed exemption, released on April 29, doesn’t account for the credit risk that buyers and sellers face in the $4 trillion global daily foreign exchange market, the Washington-based Commodity Markets Council said in a letter yesterday to the Treasury Department. The council’s 40 members include the CME Group Inc., Kansas City Board of Trade and Archer-Daniels-Midland Co.

The council “believes exempting foreign exchange forwards and swaps at this time from the clearing and trading requirements of Dodd-Frank could increase systemic risk at a time when regulators around the globe are trying to reduce it,” according to the letter, which was submitted in response to the Treasury’s proposal. “Our concern is the creation of a loophole,” Christine M. Cochran, president of the association, said in an interview.

Dodd-Frank, the financial-regulatory overhaul enacted last July, left it to the Treasury Department to determine if foreign exchange swaps and forwards should be subject to new clearing and trading rules intended to reduce risk and boost transparency. The Commodity Futures Trading Commission and Securities and Exchange Commission are leading U.S. regulatory efforts to write new rules for the $601 trillion over-the- counter swaps market after largely unregulated trades helped fuel the 2008 credit crisis.

‘Narrow Slice’

The Treasury Department, in the April release, said that foreign exchange trades already have high levels of price transparency and effective risk management. “We think this narrow slice should be exempted,” Assistant Treasury Secretary Mary Miller said at an April 29 briefing for reporters. The proposal hasn’t yet been finalized.

A coalition of 20 financial firms including Deutsche Bank AG, Bank of New York Mellon Corp. and UBS AG, asked Treasury Secretary Timothy F. Geithner to grant an exemption.

Foreign exchange contracts were the largest source of trading revenue for banks’ derivatives and cash positions in 2010, according to the U.S. Office of the Comptroller of the Currency. U.S. commercial banks recorded $9.1 billion in revenue on trading of foreign exchange derivatives.

The exemption has also been opposed by the AFL-CIO labor union, Democratic Senators Carl Levin of Michigan and Maria Cantwell of Washington, and Americans for Financial Reform, a coalition of labor union and consumer watchdog groups.

--Editors: Lawrence Roberts, Maura Reynolds

To contact the reporter on this story: Silla Brush in Washington at

To contact the editor responsible for this story: Lawrence Roberts at

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