The American Treasury contends that the market for the exempted derivatives is already stable and transparent enough, and that the new rules could be dangerously disruptive.
Asserting that regulation would be dangerous reinforces the Republicans’ anti-regulatory approach which Mr Obama attacked during the campaign. The exemption invites disruption, in that traders may be able to escape regulation by structuring various derivatives deals to fall under the exemption. The Treasury has pointed out that such manipulation would be illegal, but what would stop it when regulatory enforcement resources are already stretched? It is much more likely that the exemption will create another regulatory challenge without providing the resources to address it.
Under the exemption, foreign exchange swaps and forwards will not have to be cleared, a process that reduces the risk that one party to a transaction will not be able to pay. Nor will they have to be traded on an exchange, which helps to ensure that investors, taxpayers and regulators can stay on top of emerging dangers. The derivatives would have to adhere to other Dodd-Frank rules, including business conduct standards. But there is no substitute for clearing and exchange trading. So unless the Treasury reverses course, these deals will not be fully regulated until a future crisis forces the issue.
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