The Dodd-Frank bill signed into law in July allows Geithner to decide whether the vast market in foreign-exchange swaps - a type of financial instrument that businesses often use to guard against fluctuations in foreign-exchange rates - should be subject to heightened regulations as other derivatives are. "It will be very significant," Karen Shaw Petrou, managing partner at Federal Financial Analytics, said of Geithner's decision, adding that it will have major implications for the global, multitrillion-dollar foreign-exchange market.
The coming determination is one element of Geithner's broad new authority granted by the law. For example, Geithner now chairs the new Financial Stability Oversight Council, a group of top regulators that has power to seek additional regulation for large, complex financial companies whose failure could threaten the nation's financial stability. Geithner is also in charge of the creation of the Consumer Financial Protection Bureau until the Senate confirms a permanent director.
Although Harvard professor Elizabeth Warren has overseen much of that work, Geithner ultimately has the reins over the powerful new watchdog until it becomes an independent bureau aimed at protecting borrowers from abuses by lenders. Meanwhile, the decision about foreign-exchange swaps, which could come this week, has placed Geithner at the crossroads between big banks, which argue that such deals do not require additional oversight, and some regulators and lawmakers who believe they do.
In an effort to provide greater transparency, the Dodd-Frank law requires that most swaps be traded on exchanges and be backed by clearinghouses that would ensure parties set aside enough collateral to pay off any bets that go bad. The debate over how to handle foreign-exchange swaps was part of a much larger fight over how to create oversight of various kinds of derivatives, some of which helped exacerbate the financial crisis by amplifying risks.
The Treasury sought comment last fall on whether foreign-exchange swaps should be subject to the new rules and received nearly 70 letters from those on both sides of the issue. Many financial companies argue that foreign-exchange swaps did not contribute to the financial crisis and that they are far less risky than other types of derivatives transactions - and that they would still be subject to certain reporting and business-conduct standards if exempted from the new rules. In addition, they note that the Dodd-Frank law defined foreign-exchange swaps very narrowly in an effort to avoid creating loopholes that other types of derivatives dealers could exploit.
"Today's foreign exchange markets operate with high levels of transparency . . . and have performed extremely well throughout the recent market crisis," wrote officials from the Financial Services Roundtable and Institute of International Bankers, whose organizations represent companies that participate heavily in the market.
"[Foreign-exchange] trades are not the traditional derivatives trade," said Bob Pickel, executive vice chairman of the International Swaps and Derivatives Association. He said that foreign exchange swaps consist largely of short-dated transactions and that forcing the industry to go through the expense and effort of setting up a clearinghouse would be costly and unnecessary for a market that has operated relatively peacefully for decades.