The U.S. Treasury secretary is on the verge of dashing the hopes of some financial companies by refusing to exempt certain foreign exchange options from new regulations, sources familiar with the matter said.
Foreign exchange is a multi-trillion dollar market and derivatives, including options, are used by companies that run the gamut from financial institutions like Goldman Sachs (GS.N: Quote, Profile, Research, Stock Buzz) to manufacturers like 3M (MMM.N: Quote, Profile, Research, Stock Buzz) to lock in prices as protection against swings in exchange rates.
The Dodd-Frank Wall Street reform law explicitly gives the Treasury secretary power to exempt the more commonly-used foreign exchange swaps and forwards from rules being written by the Commodity Futures Trading Commission.
But some experts have said the law is unclear about whether Treasury Secretary Timothy Geithner has the power to also exempt options on those contracts, a narrower group of related products used to hedge currency risk.
Geithner is poised to issue a decision on the matter soon.
The CFTC's new rules would force some of these derivatives into clearinghouses, which stand between parties to guarantee trades, and could drive up costs for investors protecting themselves against currency fluctuations.
"The Dodd-Frank Act appears vague as far as the Secretary of the Treasury's ability to exempt options on foreign exchange forwards and foreign exchange swaps," said Peter Malyshev, an attorney with Winston & Strawn.
"Given the magnitude and the volume ... of the options market on foreign exchange, the importance of a clear-cut designation becomes critical."
Geithner has not yet indicated publicly what he plans to do with foreign exchange swaps and foreign exchange forwards.
Two sources familiar with his decision-making process said Geithner had no plans to exploit the vagueness in the law and call for an exemption of options on foreign exchange swaps, which allow market players the right, but not the obligation, to enter into a forward or swap down the road.
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