Significant Development on the Smart FTT

Guest Blog by Angus Cunningham, Principal, Authentix Coaches,, March 2011

The New York Times carried an article yesterday by Gretchen Morgenson, who often writes on issues of financial reform, in which the US Treasury appears, so far, to be supporting the case of big banks for unrestricted freedom in the realm of derivative trading. Here’s an extract:

As you may recall, Dodd-Frank was supposed to shed light on derivatives trading so that the risks and costs of these instruments would be clear to regulators and market participants. To this end, the law required derivatives to be cleared and traded on exchanges or through other approved facilities. But Dodd-Frank contained a big loophole: the Treasury secretary can exempt foreign-exchange swaps from the regulation.

Currency trading is enormous: on average, about $4 trillion of these contracts change hands each day. Major banks are huge in this market. According to the Comptroller of the Currency, trading in foreign-exchange contracts generated revenue of $9 billion in 2010 at the nation’s top five banks. That’s more than was produced by any other type of derivative.

No one was shocked when the banks began pushing the Treasury to exempt these swaps from regulatory scrutiny. From last November through January, Treasury officials met to discuss foreign-exchange swaps with 34 representatives of large financial institutions, the Treasury’s Web site shows.

A spokesman for Timothy F. Geithner, the Treasury secretary, said last week that Mr. Geithner had not made up his mind on this matter. If Mr. Geithner sides with the banks, he will have bought into their argument that foreign-exchange swaps are different from other derivatives, that this market performed ably during the financial crisis and does not need additional oversight.

OTHERS disagree. Testifying before the House Financial Services Committee in October 2009, Gary Gensler, the chairman of the Commodity Futures Trading Commission, said: “Any exception for foreign-currency forwards should not allow for evasion of the goal of bringing all interest rate and currency swaps under regulation to protect the investing public.”

Good for Gensler.

Foreign-exchange swaps are different from other derivatives, and it is not impossible to make a plausibly logical argument that that segment of the derivative market behaved as it should have behaved during the financial crisis. But any such argument would be disingenuous if not outright dishonest, and in ANY case irrational, because interest rate and currency swaps are frequently component derivatives in a larger derivative interaction — their presence being necessary to achieve arbitraging between different currencies and different contracts involving interest rates. (Should anyone want to get a glimpse into how complex derivative contracts can be, here is a link to a Wikipedia example).

The dsFCF, or smart FTT (financial transaction tax), has been designed to help honest investers, traders, raters, insurers, and market makers in derivatives make a living that benefits others, just as bakers of good bread make a living that benefits those not having time to bake their own good quality bread. It does this by distinguishing between speculators, whose interest in making a living that benefits others is eclipsed by their desire to make money regardless of the consequences to others, from investors, who have a less narcissistic interest. Copies of the dsFCF paper are in the hands of a senior Financial Counsellor at the IMF, and over 500 links to the dsFCF concept paper have been followed by readers of related articles in the NYT, Economist, WSJ, FT, and Financial Post.

I have therefore followed up a previous letter on this subject to Ms. Morgenson with this email:

Once again a very important, insightful look, Gretchen. at the Wall Street game-players in derivatives! Thank you.

Geithner is well known among the sustainable economy community as a dinosaur. So his hedged remarks shows that he is being either disingenuous or dishonest on this issue, and your article did a good job of helping to expose that breach of integrity. I hope your next article will make it possible for the Attorney General to force his resignation.

Have you had a chance to read my paper on the dsFCF differential speculative financial transaction fee? About 500 visits to various versions of its incarnation over the past 15 months from links to it included in comments I have posted at the NYT, the Economist, WSJ, FT, Financial Post, and Ethical Markets. A copy has also been placed, after a 5-minute conversation I managed to get with him, in the hands of Jose Vinals, Financial Counsellor at the IMF i/c of the IMF’s Capital Markets division. This paper carefully distinguishes speculation from investment, a distinction to which Wall Street and the City has either become oblivious or is actively conflating for the purposes of extending its bonuses on derivative profits that have a high probability of turning out to be illusory, and would then require taxpayer bailouts. Starting with this distinction the paper proposes a way of taxing speculative but not investment derivatives, and thus of preventing the meltdown that many see coming soon in food, energy, and rare metal commodity markets.

So far, no one in authority has taken up the dsFCF concept but I can say that it has sympathisers in Christine Lagarde (the French Finance Minister), the Bank of England, the German Chancelry, the Office of the Superintendent of Financial Institutions of Canada, the White House, and a miscellany of people at both high and low levels at the IMF. The paper is at: .

I hope you will take advantage of this paper and its dsFCF concept in articles serving the aim of prodding the US Treasury, Gensler, and the Fed to advance the dsFCF in the G20 process.

The full article by Gretchen Morgenson appears at this URL:

Perhaps we are approaching a tipping point in North America with regards to the smart FTT. Certainly conditions are again building where it or an alternative achiving the same aims will be necessary, and it appears that Gary Gensler is heading into the same fight with Geithner as Brooksley Born had with Rubin and Greenspan.