Geithner Nixed Dodd-Frank

Bruce Krasting's picture
Tim Geithner made a big choice Friday afternoon. He excluded FX spot and
forwards from the Central Clearing requirements of Dodd-Frank ("D-F").
Tim’s words:

Treasury is today issuing a Notice of Proposed Determination providing that central clearing and exchange trading requirements would not apply to FX swaps and forwards.

The basis for Tim’s big decision was made clear in the Treasury announcement:

In contrast to other derivatives, FX swaps and forwards always require both parties to physically exchange the full amount of currency on fixed terms that are set at the outset of the contract.

Okay! Got that? Interbank FX is excluded from D-F because it requires a settlement. Unlike FX futures that have zero expectation of actual cash settlement (AKA: A bet) the FX spot and forward market requires that the parties exchange the currencies.

I think many people will like this distinction. The thinking is that if
actually delivery of a commodity or currency is required, then it is a
commercial transaction and not a bet speculation. But actually those folks don’t understand how the system works. 

Tim Geithner knows how it works inside and out. He worked on the Fed desk in NY. Therefore he knows that the basis for his decision is flawed. The simple answer is that only a small fraction of interbank FX spot and forward transactions are actually settled for cash. They are netted out and settled by an outfit called CLS.

What’s CLS? A good description comes from Tim’s former employer, the Fed:

Is CLS a big deal? Does this outfit settle the lion’s share of all interbank spot and forward settlements? You bet it does. The Feb. numbers were a Multi-Trillion dollar blow out:

As a result of  CLS 98% of all FX spot and forward transactions are netted out and settled with no delivery of the underlying currencies. So the argument that Tim has put forward in defense of his big choice is actually bogus. And he knows it.


Let me take you in a different direction on this. A guess on how
the D-F FX market carve-out will be exploited. Follows are three slides
of the spot/forward swap/Euro deposit rates for the AUDUSD. There are a
bunch of numbers (sorry). I circle the numbers to focus on. I’ll try to
make this easy. (Note: all  currency pairs have similar swap rates)

Take the mid point of each of the swaps/rates for one year AUDUSD. Those numbers are:

Swaps = .0505
AUD Euro deposit = 5.43%
USD Euro Deposit = 0.83%
Spot AUDUSD = 1.0970.

Put this together.
The interest differential is 4.60% (5.43 - .83).
The swap differential is .0505, divide that by the spot rate of 1.0970 and you get 4.60%. Bingo!

Some observations on this:

-All forward swaps are = to interest differentials.
-All forward swaps are interest rate derivatives.
-All forward FX swaps have just been carved out of Dodd-Frank.
-One can make a bet on interest rate changes through the swaps market.
-The swaps markets are highly liquid. Forward swaps are available for virtually all currency  pairs.
a financial institution wanted to make a derivative bet on interest
rates AND avoid the central clearing requirements of Dodd-Frank they
could do it with no problem.
-Sharpies will figure this out. (they already have)

Ergo: Dodd-Frank has no teeth.
Ergo: We’re living in Joke Town.

 "Joke Town"


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Bruce Krasting's picture

Thanks for all these comments. Especially those that come from folks who seem to be trading fx for a living.

I will be forwarding this link to a number of those deciders in DC. I will ask them to read these comments. There is an "earful" below.


tradewithdave's picture

It only takes $50 billion in cash to leverage $1 trillion in foreign exchange under this scenario.  This is going to be crucial when they remove the fractional reserve component from part (a) of the new divorced currency system - the part that satisfies the double coincidence of needs and wants - i.e. the ATM machine money. 

The part that escapes me is how anyone can keep a straight face when they say that a larger, more integrated "smart planet" IBM system like the CLS Bank reduces systemic risk.  Indeed it increases oversight, but since when does building a huge tower, or twin towers for that matter, reduce systemic risk. 

This all about removing the intra-day counterparty risk like that encountered by Jame Dimon when he was DK'ing Barclay's transfers.  I'm still a firm believer that the flash crash was caused by the DTCC's Cede & Company ability to leverage of shares held in street name.  No one ever talks about the flash crash coinciding the Hank Paulson's testimony on the "shadow banking" cartel.  Sure, it was just a coincidence and the CLS Bank being exempt from Donk Fraud is a responsible solution to systemic risk.

Here's what Jamie Dimon had to say to the CEO of Barclay's.  A system like the CLS and their exemption from Donk Fraud will keep something like this from happening in the Foreign Exchange market.  Bigger is better as long as you're the one whose doing the oversight.  

Chaos reigned throughout Thursday evening. You sent another $40 billion in cash. Billions of dollars of securities were sent out and many were “DK’d” or otherwise sent back. By about 11 o’clock, when DTC shut down, you had apparently received a net total of approximately $42.7 billion of securities. All of the confusion was heightened by the absence of any definitive list of securities you were purchasing – an absence that we believe further supports the notion that you were taking all of the securities collateralizing our intraday advances.

There's one small issue however, and that is the booking of the assets and liabilities on the nostro and vostro accounts of the banks and corporations.  From an intraday perspective the CLS provides a leverage laundry allowing the banks to carry the asset at near full value while the CLS expresses that value fractionally.  Think of it as the global GAAP laundromat for foreign exchange leverage.  One entity reconciles daily while the other reconciles intra-day... how convenient.


Dave Harrison

Gloomy's picture

Even the NY Times knows this is BS. From todays editorial page:



April 30, 2011 Mr. Geithner’s Loophole


Until recently, the big threats to the Dodd-Frank financial reform law came from Republican lawmakers, who have vowed to derail it, and from banks and their lobbyists, who are determined to retain the status quo that enriched them so well in the years before, and since, the financial crisis. Now, the Obama Treasury Department has joined their ranks.

In an announcement on Friday afternoon — the time slot favored by officials eager to avoid scrutiny — the Treasury Department said it intends to exempt certain foreign exchange derivatives from key new regulations under the Dodd-Frank law. These derivatives represent a $4 trillion-a-day market, one that is very lucrative for the big banks that trade them.

A loophole in the law — which the bankers and their friends, including the administration, fought for — allows the Treasury secretary to exempt the instruments. The arguments in favor of exemption, beyond a desire to please the banks, were always unconvincing. They still are. The Treasury Department has asserted that the exempted market is not as risky as other derivatives markets, and therefore does not need full regulation.

That claim has been disputed by research, but even if it were true, it would be a weak argument. For instruments to be relatively safer than the derivatives that blew up in the crisis, necessitating huge bailouts, hardly makes them safe. Worse, dealers could probably find ways to manipulate the exempted transactions so as to hedge and speculate in ways that the law is intended to regulate.

The Treasury Department insists its exemption is narrow and regulators will have the power to detect unlawful manipulation. In their spare time, perhaps? The financial crisis made clear what happens when everyone doesn’t have to play by the same rules. And it made clear that the taxpayers are the ones who pay the price.

The department has also said that because the market works well today, new rules could actually increase instability. That is perhaps the worst argument of all. It validates the antiregulatory ethos that led to the crisis and still threatens to block reform.

The Treasury’s plan will be open for comment for 30 days. Count us opposed.

Bruce Krasting's picture

Is the NYT reading me? Just a coincidence.....

Kataphraktos's picture

Hi Bruce,  I used to do FX arbitrage for a living back in the 1990s, creating cheap dollar funding by borrowing in foreign currencies and then using an FX swap to convert to USD. In the 1980s, you could make 30-50 basis points doing this, but everyone got in on it, and by the early 1990s, margins collapsed to 5-8 basis points - still worth it to get slightly cheaper USD funding. Then I got my own prop limit, but I continued using arb to make a few extra points where it was available, because why not? Nobody cared about settlement risk yet.


I can assure you, not only have the vultures looking for an out from D-F figured this out, this was probably the plan all along. They still have a large currency delivery left over from the swap/forward combo, but I'm sure they have a solution in the works for that.

Ted K's picture


Fascinating you like to mention Dodd and Frank for the work they did trying to stop the CDS and CDO madness/fraud perpetrated by AIG and the large banks.  How convenient, as a Republican, that you chose not to mention the real villains: Senator Dickhead Shelby of Alabama and Senator Bob Corkfucker of Tennessee for watering down and stifling what could have been a very good piece of legislation.

Bruce Krasting's picture

Been called a lot of names of late. But now you're talking dirty. I ain't no Republican. Never have been.

Basically, I hate all of them.

stardust669's picture

Ditto on Bob Corkfucker. Tennessean here and watching him run for office was like watching some pipsqeak trying to pledge the financial fraternity. Pick me mr chairman! Pick me! You want me to screw the public Im your guy!!!!

NOTaREALmerican's picture

Bruce, can't comment at my Zombie (the site is blocked, and I refuse to use modern technology) but always enjoy reading your posts and your website.  

Fred Hayek's picture

Excellent work Bruce.  Thank you.

One wishes that a congressman or mainstream media member would be sufficiently interested and honest to do something about this in their respective ways.  But such wishes increasingly seem like fantasies.

NOTaREALmerican's picture

The political sociopaths and MSM elite are all part of the top 1% too.    They get nothing for truth and everything for covering-up the scams.   What you actually want is a functional democracy; way to late for that. 

Coldfire's picture

Interest rates swaps, eh? Don't these have something or other to do with keeping the very foundation of the US government from collapsing in on itself?

Rick64's picture

The biggest part of the 600T+ derivatives market.

Bruce Krasting's picture

Yeah. You got that right. This is the bricks and mortar. Fuck this up and the whole house falls down.

onlooker's picture

I dont know if they are more bold or more exposed.

ebworthen's picture


The more I learn the more oppressed and powerless I feel, and that just makes me more and more furious.

I feel no loyalty to this nation anymore and that makes me sad.

I do feel more and more resolved to rebel; duty bound to tear it down.


NOTaREALmerican's picture

The sociopaths (aka predators) run all societies; it's what survivial-of-the-fittest means.    All you can do it try to avoid the sociopaths.   If you can afford it (and are young enough and have no ties) move to New Zealand.  There's less sociopaths  per square mile there simply because most of them move to Australia to prey on the people there.  


Vlad Tepid's picture

Our plutocratic overlords are getting more bold, no?

Yen Cross's picture

I have 5m reasons why you are wrong!

DaddyO's picture


Why who is wrong, Krasting or Orly?


Orly's picture

Orly is almost always wrong.  But at least she has an opinion!


Yen Cross's picture

So, Orly you understand CFTC accreditation requirements? I'm starting to like your input.

Orly's picture

Accreditation?  Not even close.  Just a plebe trying to understand things that are, apparently, not understandable...


falak pema's picture

do you trade or just parade like me in a trade blog room like a butterfly drunk on orange juice?

Yen Cross's picture

It's apparent you live off shore. (Plebe)? I think we fixed our thoughts on another thread! Best thoughts.

Orly's picture

I am afraid I'm not getting this.  Please, pardon my inexperienced brain.

Is there a difference between trading 4X on a retail scale or buying "swaps," which sound like giant chunks of trades initiated at once by international banks?  It sounds like the same trade, only bank to bank instead of trader to broker.

If one is long AUDUSD, then the interest accumulated is 4.6% because of the carry.  If one is short AUDUSD, the interest paid is 4.6%.  When a 4X trade is closed, someone wins, someone loses (or, in my case, I lose, they win...) and all exchange is done electronically.  In other words, it's a wash; a net-zero exchange.

These are all just credits and nothing tangible ever gets traded.  It's all numbers.  Interest is credited or debited automatically by the bank you spoke of, as a third party referee, I suppose.

I don't see how this changes anything at all or why one would want to change this at all.  It seems to me that adding another layer of bureaucracy will just add to costs, which will be passed down to plebian traders such as myself.

If the law applied to me, then what if I were required to close all my positions on a daily basis and re-open them after the new day, each day (like the rip-off artists at FXCM used to do without my permission...)?  My costs would go through the roof and that would be another blow to the small-time trader to get into the game.  The more the merrier, I say.

If the skirting of the law means that more banks can involve themselves in the 4X market, then good- again, the more the merrier and the lesser chance of some sort of manipulation (unless, of course, you're a ginormous country with literally a ton of money...).

Sorry, I just don't see what the big deal is...


Speaking of the AUDUSD, the technicals are saying that this puppy could actually extend to 1.1522 (150% Fibonacci level...) before it turns around.  That is just amazing.  Jaw-dropping.  Unbelievable.

It is starting to look very much like the chart of the NASDAQ in the bubble.

Anyway, thanks again, Bruce.  You're the bestestest!


Bruce Krasting's picture

You trade forex. You try to make a buck based on the change in values between two currency pairs. You could trade the AUDUSD or you might like to trade the Yen cross or AUDJPN.

That's not swaps at all. Swaps are a different bet and the outcome is not determined by the change in spot FX rates. The swaps move with changes is interest rates. So you could bet (a) UK rates will rise faster than US rates. You could also wager (b) that US rates will rise faster than Japanese rate. Or (c) you could double up and play UK rates versus Japan.

My point; D-F was supposed to limit/monitor/control interest rate bets. But the FX carve out keeps the window open.

Is this a big deal? No, not really. Nothing will happen on Monday or any otherday as a result of this. So it is a non event.


But it a 180 degree U-Turn on what was sold to the American people a few years ago. To me that is the point. We are told we are going down in one direction, but when it is determined that to do so would be inconvenient we change direction. We debate big laws and pass them and then never implement them. A bit silly. And a hell of a waste of time.

Tim G knew this was a bad idea so he shit canned what Congress did. Funny way to run a railroad.

Orly's picture

Thanks for the info.  I'll get myself edumacted on this...

Your point is very well taken but it certainly did not begin with Frank-Dodd.  Even at the beginning of this mess, we were told one thing and another was done.  Remember Paulson's one-page "bill" for a trillion bucks or so that was supposed to buy up all the poison mortgage derivatives?  Threats of riots in the streets, martial law?

Three years later and we're literally handing giant banks $90B a day through POMO?  And the housing market is still in a shambles?  And the Federal Reserve is holding all of this garbage in our stead?

This is not a funny way to run a railroad.  This is a funny way to railroad the American people, pure and simple.

As a poster above said, it is really not about the laws on the books.  It is about the selective enforcement of those laws and the SEC has done a piss-poor job in this arena for years and years.  Remember Chris Cox?  Another Bilderberger, I'm sure.

It cannot be a coincidence that all of these key people, all very bright in their own right, were in place by accident and all of them suddenly became incompetent as the Peter Principle kicked in with a vengeance.  It just doesn't make sense.

We need to get to the core of the problem and root out the corruption at the highest level.  The United States simply must be the most corrupt nation on the globe by now.  I can see paying the Ukrainian postal clerk a few hrivnias to find my package, as it is graft that is blatant and out in the open.  But this insidious corruption under the guise and banner of patriotism must be the first thing rooted out.

I am afraid, though, that the corruption seeps through the very top of American "leadership."  Every one of them are ciminals, in my opinion.  Who is going to have the huevos to tackle that one?  Looks like we're doomed, all right.

banksterhater's picture

And look at the CFTC Chilton goon, they marginalized (sodomized?) him! Big tough-talker 6 months ago now he looks like a deer in the headlights, saying "they need more data..." (on HFT) Absolute pushover clown, like all of them, you could blatantly see he was parsing every word to not piss-off the someone giving him his next job on the other side of the revolving door.

NOTaREALmerican's picture

America has always been corrupt.   The difference now is there's less for the peasants after the sociopaths have taken most of the loot; so the peasants are "noticing" something is "wrong".    Americans have wanted a survival-of-the-fittest economic system for (at least) the last 50 years.   What most of the dumbasses didn't figure on was THEY were the prey.   Well,  too bad, so sad.   There's nothing left of a representative government, the government is now run BY the predators.  

Wouldn't it be nice to have a government that protected its citizens (quant word) FROM the predators instead of delivering the citizens TO the predators.  Oh well,  survival-of-the-fittest...

lynnybee's picture

i'm still a learner, a new person to this kind of article; & it was difficult for me to read.   however, i did learn one thing, banks rule & we have some kind of OBAMA / CHICAGO / MOBSTERS running our country.   .......... all i know is that it wasn't like this when i was a kid.   i earned $2.64 / hr. working at the HEINZ pickle factory in the summer in 1969 ......... how come i can't find a job now for anything over $8.50 !!! ?   & how are people making it these days?  what ?  are we all living 10 to a household & pooling our money to meet the bills ?   in 1969 my 1/2 of the electric bill was $4 !  

banksters, nothing but damn banksters ...... pay me interest again on my money in a savings account.    i don't want to borrow any money at my age anymore.   i want to save my money, not overconsume, live frugally & get paid for saving my money in a bank !

the young people nowadays aren't even taught the wonders of compound interest anymore !   i'll bet if they were paid interest on their savings accounts, they'd be saving instead of spending.

forgive the rant, this isn't what i'd bargained for in my old age.   i thought i'd be o.k. after paying off my little home & saving money.

Bruce Krasting's picture

Lynn, Sorry if I lost you, but thank you for trying. Swaps and derivatives are easy to understand, but only if you come from Mars. Your words however, have a bit of poetry in their simplicity and dead on accuracy. Write more like this my friend:

i'll bet if they were paid interest on their savings accounts, they'd be saving instead of spending.


banksterhater's picture

Lynn, Bernanke has robbed us of over $1 trillion a yr in interest, based on an historical 4.5% yield. The Census showed 5 mil more, many over 65 went into poverty in the reported year (2009-2010) because of this larglely. You have to find preferred stocks, MLPs. All the good bonds are gone, I can't find any BBB worth a crap- too risky now.

Hate to say it but I keep 500 shares of GYB, that's Goldman's asset-backed paper pays 4.3%, sometimes you have to get in bed with the Mafia. I bought their bank notes out to 2015 pays only 3.55% cuz we saved and still have cash searching for yield too. Nobody represents seniors.

Hot Piece of Bass's picture

How does Tim Geithner get to make that call?

anony's picture

The fact that grown ups are doing this,

"....Unlike silver, no one is going to run out of treasury certificates, or currency, are they?  When I settle a butterfly spread, I want the net.  I don't want to be forced to exercise all three legs.  That just adds commissions.

What is the specific abuse or potential abuse you see here?

Is it simply that the lack of central clearing hides net exposure...."

for a living, that Timmay is making a ruling on it, and that you are writing about it tells the world that a lot of people with some quant skills are making a pretty damned good buck, peso, or florint without actually doing one thing that is constructive.

What is the difference between what they are doing and, say.....making mudpies? Aside from the money that moves from one pocket to another?

LongSoupLine's picture



This NEEDS to be copy-posted to all Congressional representative's email inboxes to let them know WE know the real deal.

Bruce Krasting's picture

Ever try to contact an out of state Senator of Congressman? It's simply not possible. They make you go through a bunch of loops. To contact everyone would be impossible. It would take days.

They don't read stuff like this either.

I spend an hr a day sending things I think should be read. Most I get is one of those polite form letters. They don't give a shit.

Jo's picture

Just don't forget to do a spot hedge equiv to the notional interest rate cashflows.

Otherwise you can end up with a huge problem.

eg you s/b aussie through the swaps, you got a short Aud/Usd forex exposure.

Dirtt's picture

TY Bruce.  Top shelf.

cdskiller's picture

Wow, Bruce. That's the shining star of all the ZH posts I have ever read. Heroic. Precise. Irrefutable. Cutting edge. Nowhere else, from no other person on the planet, could we have gotten that.

You just gave me my next several weeks of screaming at people about that rotten, deceptive punk. Wow.

max2205's picture

How the Fuck is it that no matter how crappy congress writes laws, the executive branch continues to pick and choose what they want their buddies to comply with.

Congress writes crappy laws which everyone ignores until millions are spent to get it to the supreme court 5 years later. No wonder I and most think we should eliminate the house and senate and replace it with crowdsourced based laws. Fuck these people

TumblingDice's picture

Wow a very enlightening post. So basically they can regulate anything to a small extent, just not the global game of chess concerning currencies and their countries respective interest rates.

In my opinion the American government doesn't even want to regulate these because it has placed its faith in the financial sector. The American government doesn't get captured for that cheap, or at least I'd like to think so. The American market and Wall St. are still at the top of the financial food pyramid and that helps out America. It does so at a very steep and inhumane price, but it is what it is. So the US government is not going to clear the smoke and mirrors from the main arena that it getting its edge.

This is definitely a short sighted and bad decision, but that is the thinking behind it. The whole thing is a cosmic joke from a bystander's point of view.

Boilermaker's picture

You mean that was all a diversionary flea circus?

I didn't expect that.

kaiserhoff's picture

Trying to follow you, but not quite getting it Bruce.  Unlike silver, no one is going to run out of treasury certificates, or currency, are they?  When I settle a butterfly spread, I want the net.  I don't want to be forced to exercise all three legs.  That just adds commissions.

What is the specific abuse or potential abuse you see here?

Is it simply that the lack of central clearing hides net exposure?

Bruce Krasting's picture

As you describe what you do, you will be required to settle through a central clearing. That is what Dodd-Frank wants from you.

But you are not the interbank market that turns over $4 trillion a day.

I'm not apposed to the FX carve out. I think the whole thing (D-F) is silly. I wrote this just to bust Tim's balls.....

D-F is, at best, a half loaf as a result of this. My guess is that in less than five years all of the mumbo jumbo will get reversed. In the meantime you have to pay a price. Citi GS MGT WFC ETC, they won't feel a thing.


malek's picture

D-F is, at best, a half loaf as a result of this. My guess is that in less than five years all of the mumbo jumbo will get reversed.

Nope. I vividly remember when some years ago I thought the same of SOX...

Fantastic article, Bruce - thanks a lot!

kaiserhoff's picture

Thanks.  I think until we get a real audit of the Fed, we're all flying blind.  Cheers.

Bansters-in-my- feces's picture

Have you's not blown that guy/creature up yet....?

SuperRay's picture

Thanks Bruce for that excellent read.  Keep that two-faced, smarmy SOB on his toes...