AFR Statement on Secretary Geithner’s Decision to Exempt Foreign Exchange Swaps from Regulation and Oversight

April 29, 2010

CONTACT: John Carey 202-466-1854

AFR Statement on Secretary Geithner’s Decision to Exempt Foreign Exchange Swaps from Regulation and Oversight

Washington, DC – Americans for Financial Reform, a coalition of more than 250 national and state organizations working together for strong Wall Street reform, issued the following statement today:

We are deeply disappointed by Secretary Geithner’s decision to exempt the foreign exchange (FX) market from regulation and oversight. It is the wrong policy decision. We hope and expect that Sec. Geithner, and the Administration as a whole, will reconsider this decision and take other steps to vigorously enforce the new law.

AFR sent a letter in November and a second letter in February to Sec. Geithner urging him not to exempt FX swaps and forwards from the definition of “swap” under the Commodity Exchange Act and thus from exchange trading and central clearing requirements.

This blanket FX exemption opens up an unacceptable loophole in Dodd-Frank derivatives reforms. FX derivatives can approximately simulate many of the interest rate swaps that make up almost 80 percent of the world OTC swaps market, so the FX exemption could open up avenues to evade other derivatives rules. We believe that requiring these transactions to be cleared and traded on exchanges is a crucial part of increasing market transparency and avoiding future threats to the financial stability of the United States.

Clearing and exchange trading are designed to reduce risk by bringing transparency to the market and requiring adequate capital to be set aside in case of default. Without these requirements, we remain vulnerable to situations such as the disruptions in the FX market during 2007 and 2008, which climaxed after the Lehman bankruptcy when there was a “virtual shut-down” of the FX swaps market. The crisis in the FX market was only resolved with a massive multi-trillion dollar bailout by the Federal Reserve and the opening of practically unlimited transatlantic swap lines with foreign central banks.

This exemption for FX swaps and forwards creates a damaging and unnecessary loophole in Dodd-Frank, leaving this large market hidden and exempting it from sensible requirements for margin and collateral. This decision allows continued unregulated derivatives speculation that could endanger the stability of the financial system.