AFR Letter on Transparency in the Forex Market

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Americans for Financial Reform

1629 K St NW, 10th Floor, Washington, DC, 20006


February 10th. 2011

The Honorable Timothy Geithner


United States Department of the Treasury

1500 Pennsylvania Avenue, NW

Washington, DC 20220

CC: Chairman Gary Gensler, Commodity Futures Trading Commission CC: Chairman Mary L. Schapiro, U.S. Securities and Exchange Commission CC: National Association of States Attorneys General CC: Attorney General of the State of Virginia CC: Attorney General of the State of California

Re: Transparency In The Foreign Exchange Market

Dear Secretary Geithner:

Americans for Financial Reform is an unprecedented coalition of over 250 national, state and local groups who have come together to reform the financial industry. Members of our coalition include consumer, civil rights, investor, retiree, community, labor, religious and business groups as well as leading economists.

On November 29, 2010 Americans for Financial Reform (“AFR”) and other groups concerned about transparency and stability in the derivatives market sent you a letter laying out the case against exempting foreign exchange (FX) swaps from the exchange trading and clearing requirements in the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”). We believe that exempting FX swaps and forwards from exchange trading and clearing requirements creates a damaging and unnecessary loophole in Dodd-Frank requirements that continues to allow derivatives speculation which could endanger the stability of the financial system. In addition, the lack of a regulatory structure in the foreign exchange markets can lead to situations where the participants in such markets are exploited by market insiders.

In light of these concerns, we wish to draw your attention to the recent news of multiple lawsuits filed against major financial institutions concerning systematic overcharging of state pension funds for foreign exchange transactions. The lawsuits allege that banks acting as custodians for FX transactions deliberately overcharged state pension funds in Virginia, California, and Florida by hundreds of millions of dollars through manipulating the reported prices of currency trades. Other state pension funds are investigating this issue to determine if they too have been overcharged. Major fund managers like Blackrock and Fidelity Investments are also alleging that they have been overcharged by the custody banks they trusted to perform their FX transactions.

These abuses show that even the spot FX market – which is far less complex than the market for FX derivatives – is often opaque and lacking in transparency for even sophisticated customers. A transparent and properly regulated exchange could protect market users against these kind of abuses, while also helping to ensure that the financial speculation that takes place in the FX markets does not threaten the financial stability of the United States. These cases also point up the need for strict business conduct standards to govern the behavior of FX dealers.

Once again AFR and its 250 affiliated organizations urge you not to exempt foreign exchange (“FX”) swaps and forwards from the definition of “swap” under the Commodity Exchange Act (the “CEA”) and thus from exchange trading and central clearing requirements of the Dodd-Frank Act. We look forward to hearing from you on this important matter.


Americans for Financial Reform


Additional materials:

1) Wall Street Journal “Suspicion of Forex Gouging Spreads”

2) Federal Register Notice from U.S. Department of Treasury seeking comment on exempting FX swaps:

3) AFR letter objecting to the exemption: