UPDATE 3-Geithner won’t shield forex options-sources

* Treasury will not consider exempting some forex options

* Some had hoped Treasury might protect options from rules
(Adds comment from Treasury spokesman in 10th paragraph)

By Sarah N. Lynch and Rachelle Younglai

WASHINGTON, March 25 (Reuters) – The U.S. Treasury
Secretary is on the verge of dashing hopes of some financial
firms 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,” Peter Malyshev, an
attorney with Winston & Strawn, said in an interview this
week.

“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.

A Treasury spokesman said no decision has been reached.

Two sources familiar with his decision-making process said
this week that 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.

MIDDLE GROUND

The global trade association for over-the-counter
derivatives has been pushing for a wider exemption that would
extend to other kinds of foreign exchange derivatives.

“We are looking at this very broadly, as foreign exchange
encompasses all these products and is quite different from your
typical derivative,” Robert Pickel, executive vice chairman of
the International Swaps and Derivatives Association, said in an
interview this week. “The exemptive power ought to be extended
broadly.”

Geithner’s reluctance to take a broader view on exemptions
could strike a middle ground, especially if he does decide to
allow an exemption for foreign exchange swaps and forwards.

He has indicated in the past that foreign exchange swaps
and forwards should not be regulated.

In December 2009 he told a Senate panel, “The FX markets
are different. They are not really derivative in a sense, and
they don’t present the same sort of risk,” he said. “These
markets actually work quite well.”

CFTC Chairman Gary Gensler has said he fears an exemption
could lead to a loophole that would let investors escape the
new regulations.

Geithner must make the decision before the CFTC starts
finalizing rules that will define who will be forced to hold
more capital and what swaps must be cleared and regulated.

A decision after the statutory deadline of mid-July would
throw rules up in the air and create even more uncertainty in
the new order of derivatives regulation.
(Reporting by Sarah N. Lynch and Rachelle Younglai; Editing by
Andrew Hay)

UPDATE 3-Geithner won’t shield forex options-sources