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By Sarah N. Lynch and Douwe Miedema
WASHINGTON, Nov 16 (Reuters) - Banks and other large market players that use certain derivatives to protect against currency fluctuations will be spared from the most costly new rules required by the 2010 Dodd-Frank Act, the U.S. Treasury Department said late Friday.
Foreign exchange swaps and forwards, common types of contracts found in the $640 trillion over-the-counter marketplace, will not be forced onto regulated trading platforms or clearinghouses, which stand between parties to guarantee trades.
They still will face some Dodd-Frank rules, such as data reporting and business conduct standards.
The Treasury's decision will be a welcome announcement for large banks, which heavily lobbied for an exemption. The Treasury justified its decision by noting that the market is "markedly different" and already has an infrastructure in place to reduce risks.
Although Treasury in April 2011 had signaled its support for such an exemption, its delay in releasing a final decision had left banks anxious because a key date - Oct. 12 - started the countdown for banks to begin complying with some of the Commodity Futures Trading Commission's new rules for over-the-counter derivatives.
Banks have until the end of the year to calculate their swaps transactions. If the annual volume exceeds $8 billion, they will need to register with the CFTC as swap dealers.
By exempting certain foreign exchange products, it may help prevent some companies from hitting the threshold and having to register.
CFTC Chairman Gary Gensler has previously pushed for Treasury to regulate all forex swaps, saying an exemption could be exploited to evade new rules.
A CFTC spokesman declined to comment on the Treasury's decision on Friday.
Nevertheless, the Treasury did not give an all-out victory to the banks.
The department said on Friday that some products - forex options, currency swaps and non-deliverable forwards - are not covered by the exemption.
These products, the Treasury said, "will be subject to mandatory clearing and exchange-trading requirements."
U.S. derivatives rules are being viewed skeptically by some banks in Asia and Europe.
Some of those mid-sized banks have told their brokers to stop doing trades with U.S. firms, in the hope of avoiding the burden of becoming a U.S.-regulated dealer.
Nordea, a Nordic bank, and DBS Group Holdings , southeast Asia's largest bank by assets, have already said they do not want to become U.S. regulated dealers.
Bank of America, Citigroup, Goldman Sachs , JP Morgan and Morgan Stanley alone handle more than a third of swaps trading, according to data provided by the International Swaps and Derivatives Association.