REFILE-UPDATE 1-Geithner won’t shield forex options-sources

(Refiles to remove Friday from first paragraph. Interviews
occurred over the course of the week)

*Treasury will not consider exempting some forex options

*Some had hoped Treasury might protect options from rules
(Adds comments from derivatives experts, background)

By Sarah N. Lynch and Rachelle Younglai

WASHINGTON, March 25 (Reuters) – 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)
to manufacturers like 3M (MMM.N: Quote, Profile, Research) 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.
(Reporting by Sarah N. Lynch and Rachelle Younglai)

REFILE-UPDATE 1-Geithner won’t shield forex options-sources