New OTC Derivatives Proposal Could Include Forex Provisions

U.S. Treasury and CFTC Chairman Disagree Whether Forex Regulations Should Be Included in OTC Derivatives Proposal

On April 13, Senate Agriculture Committee Chairman Blanche Lincoln (D., Ark.) met with top U.S. Treasury officials to discuss over-the-counter (“OTC”) derivatives and the proposal she is putting together to regulate them. These proposed regulations will affect institutional players, who have higher capital thresholds, and not retail customers, who are individuals and/or small businesses with less money to trade in the markets.

One issue Lincoln faces while drafting the proposal is whether or not to include foreign currency (“forex”) swaps and forwards in the new regulations, since a draft of the bill by the U.S. treasury Department presented to Congress last year did not include forex provisions.

It appears that the push to include forex in the proposal stems from the Commodity Futures Trading Commission (the “CFTC”) chairman Gary Gensler’s agreement that the forex exclusion could create loopholes, despite continued opposition from U.S. Treasury officials.

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For another article on this issue, click here.

The full text of the Down Jones Newswires Press Release is reprinted below and can also be found by clicking here.

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By Sarah N. Lynch

Of DOW JONES NEWSWIRES

WASHINGTON (Dow Jones)–Senate Agriculture Committee Chairman Blanche Lincoln (D., Ark.) said Wednesday she intends to include foreign-exchange swaps and forwards in her proposal to regulate over-the-counter derivatives, even though Obama administration officials have recommended excluding them.

“We are preparing a bill that will certainly provide regulation in the forex market,” Lincoln told Dow Jones Newswires after emerging from a meeting on the issue with top U.S. Treasury officials and the head of the federal futures regulator. “This is the second-largest part of this $600 trillion marketplace, and it’s completely unregulated right now. I think you are going to find us working hard to put together a bill that will have the type of regulation that is appropriate for that portion of the marketplace.”

A draft derivatives bill presented to Congress by the U.S. Treasury Department last year proposed excluding foreign currency swaps and forwards from regulations. Commodity Futures Trading Commission Chairman Gary Gensler, however, has openly disagreed with the Treasury on that provision and has fought to include them in new derivative rules amid fears that excluding them could create loopholes.

The new regulations potentially could cover a large chunk of the roughly $3.2-trillion-a-day foreign-exchange market, which is heavily used by Wall Street firms.

Lincoln on Wednesday appeared to be more moved by Gensler’s argument, saying she’d like to apply similar regulations for forex contracts in her bill to those she will propose for other derivatives like interest-rate swaps and credit-default swaps. She added that U.S. Treasury officials present at the meeting including Assistant Secretary for Financial Institutions Michael Barr hadn’t changed their minds about excluding those contracts from regulations for other derivatives.

A Treasury spokeswoman declined to comment, saying the department hadn’t seen the legislative proposal. Gensler told Dow Jones Newswires on Wednesday he felt the meeting went well and that he’s “very encouraged that we’re making progress toward the strong reform that we need.”

Lincoln plans on Thursday to release a discussion draft of her proposal to bring sweeping new regulations to the over-the-counter market with the hope it will be tucked into a broader financial overhaul bill approved recently by the Senate Banking Committee. Her plan will likely contain many provisions the Obama administration favors, including moving routine products onto trading venues and into clearinghouses, which guarantee trades.

Lincoln, who is facing a tough re-election campaign, was widely expected to propose a derivatives bill that would be friendlier to many of the corporate swap users lobbying for exemptions from the clearing requirement.

She surprised people Tuesday, however, after she sent fellow lawmakers a letter that said she plans to propose a tough bill that will empower regulators to move some contracts onto trading venues and provide corporate swap users with only a narrow clearing exemption.

The bill is expected to satisfy some of her more liberal critics, but it could potentially harm bipartisan negotiations. On Tuesday, the agriculture panel’s ranking Republican, Saxby Chambliss (R., Ga.), accused the CFTC and the Obama administration of political meddling.

The Senate Banking Committee’s financial overhaul bill, which will likely be voted on soon, currently contains a section on derivatives that is largely based on the Treasury Department’s proposed legislative language and excludes foreign-exchange swaps from the regulations. That part of the bill could eventually be merged, somehow, with a version that the Senate Agriculture Committee ultimately approves.

-By Sarah N. Lynch, Dow Jones Newswires; 202-862-6634; sarah.lynch@dowjones.com

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Other forex law blog articles include:

Bart Mallon, Esq. runs the Forex Law Blog and provides forex registration service through www.forexregistration.com. Mr. Mallon also runs the Hedge Fund Law Blog. He can be reached directly at 415-868-5345.

May 19, 2010 | Filed Under Forex Press Release

 

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