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The financial derivatives market, especially over-the-counter (OTC) markets helped to cripple the economy, said Geithner when testified before the House Financial Services Committee and House Agricultural Committee.
"Although derivatives bring substantial benefits to our economy by enabling companies to manage risks, they also pose very substantial challenges and risks," he said.
Establishing a comprehensive framework to monitor the complex financial instruments is "crucial to laying the foundation for a safer, more stable financial system," he added.
"The lack of transparency in the OTC derivative markets combined with insufficient regulatory policing powers in those markets left our financial system more vulnerable to fraud and potentially to market manipulation," said Geithner.
The OTC derivative markets grew explosively in the decade leading up to the ongoing financial crisis, with the notional amount or face value of the outstanding transactions rising more than six-fold to almost 700 trillion U.S. dollars at the market peak in 2008. Over this same period, the gross market value of OTC derivatives rose to more than 20 trillion dollars.
Derivatives are financial instruments whose value are derived from something else, such as a mortgage-backed security or a commodity like oil.