UPDATE: US Official Says Treasury 'Very Close' To Decision On FX Swaps, Forwards

A senior U.S. Treasury official said the Treasury is "very close" to deciding whether to exempt foreign exchange swaps and forwards from a raft of new rules for the over-the-counter derivatives market.

Asked about the decision at a U.S. Senate hearing Tuesday, Assistant Treasury Secretary Mary J. Miller said she regretted she didn't have a decision to announce yet.

Last year's Dodd-Frank law aimed to push over-the-counter derivatives transactions onto trading platforms and route them through clearinghouses, which guarantee trades. Today, swaps are mostly customized transactions between two counterparties conducted off exchanges and away from regulatory scrutiny. The law gives the Treasury secretary authority to exempt all foreign exchange swaps and forwards from the new regulations.

Treasury could announce the decision by the end of the month, with officials eager to provide clarity to regulators at the Commodity Futures Trading Commission who are seeking to finalize its derivatives rules by July, as the Dodd-Frank law requires.

It is also widely expected that Treasury will endorse some form of exemption, in part because Treasury Secretary Timothy Geithner expressed his support for such a move when the rules were being written. He argued in a December 2009 appearance on Capitol Hill that the products are "not really derivatives in this sense, and they don't present the same set of risks."

Sen. Richard Shelby of Alabama, the Senate Banking Panel's top Republican, pressed Miller about whether there is a need for more regulation of such foreign exchange transactions. "Are you aware of any failures in that area that would justify further regulation?" he asked.

"I think there were many parts of that market that were under severe financial stress during the financial crisis and some parts of it will be subject to Dodd-Frank regulation," Miller said.

Lawmakers at the hearing asked regulators about their rule-making process. Sen. Bob Corker (R., Tenn.) asked CFTC Chairman Gary Gensler whether a proposal to allow large derivatives trades a 15-minute delay before a real-time reporting requirement kicks allows market players enough time.

Gensler said the proposal was meant to keep promote transparency. "I think markets work best when they're transparent," he said.

Shelby, in his opening remarks, criticized the CFTC and SEC for not proposing rules spelling out the definition of a swap, which he argued was an essential step before the regulators could finalize other rules.

"This is just one example of how Dodd-Frank has created a confused derivatives rulemaking process that is not proceeding in a logical order and creates significant uncertainty in our markets," he said.

Industry representatives, in a second panel, took aim at certain moves by regulators to implement the rules.

CME Group Inc. (CME) Executive Chairman Terrence Duffy in his prepared remarks blasted the CFTC for what he called the regulator's "almost complete reversion to a prescriptive regulatory approach." Duffy argued the CFTC has wrongly applied the Dodd-Frank law to propose specific requirements for futures regulations that are meant to be rooted in core principles.

The regulator has become a "front-line decision maker that imposes its business judgments on the operational aspects of derivatives trading and clearing," Duffy said.

-By Jessica Holzer, Dow Jones Newswires; 202-862-9228; jessica.holzer@dowjones.com

--Michael R. Crittenden contributed to this article.

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