BETTER MARKETS OPPOSES TREASURY DECISION TO KEEP SHADOW MARKET FOR FOREX SWAPS
Better Markets, a watchdog group promoting the public interest in the capital and commodity markets, expressed disappointment today by the Treasury Department decision exempting foreign exchange swaps and forwards from Dodd-Frank mandates of clearing and exchange trading, noting that it ignores the unprecedented failure of the market during the 2008 financial crisis.
The Treasury decision ignored the fact that the Federal Reserve pumped $5.4 trillion dollars into swap lines with foreign central banks to prevent the collapse of the foreign exchange swap markets after the Lehman Brothers bankruptcy. This was done because the foreign exchange market stopped working as a mechanism to get U.S. dollars overseas. The Fed’s swap lines were a mechanism to replace that broken market.
Instead, it endorses an industry request to remain in the shadow market, which is indefensible for the $4 trillion-a-day market. Numerous researchers and experts have concluded the foreign exchange swap market froze after the Lehman failure, and was on the verge of collapse until the Fed action.
“It is very disappointing that the secretary disregarded the independent evidence and rubber-stamped an unsupported request by the financial industry,” said Dennis Kelleher, president and chief executive officer of Better Markets. “This decision will needlessly put taxpayers at risk.”
The Federal Reserve lent dollars – through the parallel market of central-bank swap lines – to satisfy the foreign need for U.S. dollars because they could not be obtained elsewhere in the foreign exchange markets. The shortage of dollars was solely because the foreign exchange market froze – just as the repo and commercial paper market also froze in the United States – with liquidity dropping dramatically and interest-rate spreads widening sharply.
“The secretary should not be endorsing markets without transparency or oversight. That’s what led to the last financial disaster, and that’s what will lead to the next one,” Kelleher said. “This is a step back from needed reform.”
