CFTC CHAIRMAN CHILTON'S SPEECH ON FINANCIAL REFORM

Photo:  CBOT.  Credit:  Wikimedia.
FROM:  U.S. COMMODITY FUTURES TRADING COMMISSION
Speech of Commissioner Bart Chilton before Americans for Financial Reform, Washington, DC
May 9, 2012
Introduction
Thank you for the introduction. I appreciate the opportunity to be with you today to discuss cost/benefit analysis (CBAs). As we know, this has been the matter of lawsuits and countless meetings in the wake of the passage of the Wall Street Reform and Consumer Protection Act, otherwise known as Dodd-Frank. It is an important topic.
Load of Compromisin’

For me, most things that are resolved in this town result from an appropriate equilibrium. The truth or answer isn’t found on the outskirts of issues; they reside on the inside, in the medium. Most things I’ve worked upon or have seen worked upon seem to resolve themselves better when there is cooperation and compromise. That usually means some level of concession from all parties. When something is approved and everyone is grumbling a bit, that typically indicates it is legitimately worthy, in general. At least, that is what I’ve found.

The thing is: in order to reach an agreement, to reach that balance, sometimes it is sort of like that oldRhinestone Cowboy lyric, “There’ll be a load of compromisin’ on the road to my horizon.” For those of you who were too young, or don’t recall the song, made famous by country singer Glen Campbell, it is your loss. It was a huge hit. By the way, I saw a neat tee shirt last weekend. On it was written, “I’m old, but I got to see all the cool bands.” Nevertheless, for most things good to get done in this town, the fact of the matter is that there is a load of compromisin’ on the road to that horizon.
The D.C. Quadrakill

My experience, however, is once upon a time in a faraway land when and where people actually wanted to get some things done. There is a contingent now that simply wishes to take the Nancy Reagan approach to a lot of things and “Just say no.” (By the way, one is getting old when a lot of your references seem like they need references, or foot notes). Not gonna do it on that one. She was a great First Lady. If you don’t know “Just say no,” that’s why we have Google. Nowadays, there are a lot of people who just say “no” to a lot of things. There is no load of compromisin’ going on. There is no compromisin’ period. And, that’s why precious little legislation is coming from the Hill these days and why frustration with Washington is rampant.

I do have a point. We are working toward cost/benefit analysis. Hang on my brothers and sisters. There is a little-articulated Washington play book section. I call it the D.C. Quadrakill. It isn’t an innovative thing, and it is a tried and true strategy, for sure. First, if you don’t like a bill, amendment or provision thereof, you try to defeat it with a vote. Just say, then vote, no (or nay, or whatever). If that fails, go to stage two. You can try to defund it through the appropriations process. If that doesn’t work, there is stage three. This is where you can try to stop it, change it or delay it through the regulatory rulemaking process. If all of those things fail, you can go to DEFCON four: litigation. That’s the D.C. Quadrakill: 1. kill bill; 2. defund it; 3. regulate it; and, 4. litigate it.

There is no shame in availing yourself of this Quadrakill strategy, although not everyone can do the full meal Quadrakill deal. Sure people can lobby their Representatives and Senators regarding voting for, or funding of, some legislation. Maybe they will get some gallery chamber passes, too. Perhaps they will have a quick photo op. That stuff takes place all the time. But the thing is: the other two stages of the Quadrakill—regulate and litigate—those are for serious societies—the class of folks who have some buckaroos. No lobbyist wants a tour of the CFTC or a photo with a Commissioner. It is all work. And as far as litigation, watch out. That’s long, laborious and lavish—only those with the big bucks can do stage four Quadrakill: litigation.

This brings me to my point, and I do have one, despite those that questioned it. The thing is: we are seeing a lot of stage four Quadrakill dialogue and action out there. There is more trash talk and more action regarding litigation related to financial regulation than ever before. Frankly, it has become an unprecedented problem and a dilemma for regulators. Unfortunately, the thing is: that is part of the purpose of those that talk about or live to litigate.

More Perfect Regulation 
I think we all need to take a step back and think about Quadrakill stage four a little more. Let’s take a breath and think thoughtfully, and a little more calmly than seems to me to have been done in the last several months. This event is the perfect venue to do just that.
In the preamble to the Constitution of the United States, there is this wonderful aspirational language:

“We the people of the United States, in order to form a more perfect union, establish justice, insure domestic tranquility, provide for the common defense, promote the general welfare, and secure the blessings of liberty to ourselves and our posterity, do ordain and establish this Constitution for the United States of America.”

“In order to form a more perfect union.”   Those words, “in order to”—they meant that our forefathers were working toward, hoping, aspiring, to form a more perfect union. It wasn’t perfect, and it might not reach perfection, but they were trying to get there.  Here’s something to think about:  those wonderful “planks” toward making that “more perfect union”—establishing justice, insuring domestic tranquility, promoting the general welfare—each one of those distinct factors didn’t in and of themselves create “The More Perfect Union.”  Rather, each facet was a building block that the Founding Fathers intended to use to “get there,” to get to that “More Perfect Union.”   In other words, “providing for the common defense,” wasn’t the be all and end all, but instead it was one of the important pieces used to get to the ultimate goal:  a more perfect union.

 In a similar approach, cost/benefit analyses in regulatory rulemaking are analogous to those discrete building block factors in the Constitution’s preamble.  The thing is: a CBA is not the ultimate goal of rulemaking, although if you listen to some you might think it so.  A CBA is an important piece of reaching the ultimate goal:  a “more perfect regulation.”  Like the framers of our Constitution, regulators aspire to reach objectives that protect the common weal.  That’s our job.  In the recent past, however, our jobs have been made significantly more difficult by a contortion. The thing is: we have seen an obnoxious bastardization of the conduct and use of CBAs in regulatory rulemaking.

This by no means is a new phenomenon. It isn’t a paranormal event.  It has cropped up over the years, time and again, as a convenient tool to scuttle regulatory initiatives.  Its’ use at this moment in history is, however, particularly rampant and greatly galling, given the focus of the regulations that are being decelerated and the harm that was caused to the public as a result of the economic crisis of 2008.

There are a bevy of bellowers booing about the “costs” of regulation.  To those catcalls, I’d simply ask, what were the complete “costs” of the $414 billion taxpayer funded bailout?  What are the “costs” of families losing their homes or of folks who can’t get a job?  What are the “costs” to our economy of skyrocketing oil and gas prices, fueled by unbridled excessive speculative activity?  What could be the added “costs” if regulations that Congress and the President have required are not put in place? My view is that there is not a single benefit to not doing these regulations, but there are unacceptable costs if we don’t go forward. Without these rules and regulations, there will be unacceptable costs to consumers, to businesses, to markets, to our economy and our country.

I wouldn’t go so far as paraphrasing Samuel Johnson and saying that litigation is the last refuge for scoundrels. But, the cost-benefit bellowers are openly trying to impose a discredited economic philosophy (that just happens to serve their financial interests) on regulators by beseeching the courts to adopt their extreme interpretation of our statutory duty to “consider” the costs and benefits of our regulations. This economic philosophy is, in short, that the financial markets work just fine on their own and there’s no need for regulators to ensure a minimum level of safety in these markets or a maximum level of speculation. The market can police itself, thank you very much. They want us to write off the 2008 financial crisis as an aberration and ignore countless reputable scholars who’ve found that the costs of opaque, unregulated derivatives markets are borne by the public. The truth is speculation without limits can fuel bubbles, and left unaccountable, the captains of finance may veer the economy into dangerous waters in search of bigger and riskier profits. In short, these bellowers want us to go beyond a “consideration” of costs and benefits to making their narrow conception of costs (discounting the social costs to the public of deregulation) and benefits (discounting the social benefits of the public of smart regulation), the crucible for judging all financial regulations.

The thing is: CBAs are being used, as I have said before, as a Sword of Damocles over regulatory agencies.  We are virtually paralyzed by intimidation—or, indeed, the reality—of lawsuits brought (haphazardly, in my assessment) on the foundations of allegedly poor CBAs.  When this occurs, regulators are sort of like those ghost hunters seen on television, looking for the scary litigation risk in every corner or closet. Did you hear what it said? “Wha, wha, wha.” We used an especially sensitive machine and after analysis in the lab, it appears that what the voice said was this: “If you regulate, we will litigate,” or perhaps “Ready for stage four Quadrakill.” Hmm, because I thought it just sounded like “Wha, wha, wha.” The thing is: either way, the rulemaking action slows, or slogs to a stop—and that is the clear-cut intent of some of those who threaten, design, and bring, these lawsuits.

Take this example: our position limits rule took up 81 pages in the Federal Register. Guest how much of the text was cost/benefit analysis? 19 pages. Yup, almost a fourth—and yet we’re still getting sued.

At the same time, American citizens and businesses and our economy endure more than is fair for a gallon of gas and the resultant impact on our Gross Domestic Product. We continue to see devalued homes, and continue to face higher-than-they-could-be unemployment rates. The potential for further damage due to a still yet unimplemented new regulatory regime is out there. How do we measure those harsh “costs?”  If those costs are not more scary than the threat of litigation due to cost/benefit analysis, then regulators should seek a new line of work.

So today, I’m suggesting that CBAs be expanded to include not just the quantitative, quantifiable elements of a rule but its qualitative aspects as well. In other words the social costs and benefits need to be taken into account. I by no means want to slow the rulemaking process down in any way but I really believe some of the most important cost-benefit effects of rules go beyond P & L statements, so I’ll ask my colleagues to consider painting a more complete picture of what—without these rules—the societal cost might be. Memories fade with time and we need to be mindful of the costs of not doing these things right in the context of the colossal calamity of late ’08.

The thing is: it’s time to put some sense (and cents) back into CBAs, and to criticisms of rules.  By that I mean, I’d like to see reasonable, accurate, and well-supported analyses, and those who criticize our CBAs should berequired to provide, not “masked data,” with no clear or hard figures, but real, verifiable dollars and cents to rebut our analyses.  If we are all held to the same reasonable standards, not just trying to create ghastly ghosts in an effort to slow the process down, CBAs might actually be useful as they were intended:  as a factor in forming “more perfect regulations.”
Conclusion

Look, I understand that people have to represent themselves and take advantage of the opportunities which exist to make their case, on the Hill, in the agencies, or in court. That doesn’t mean I have to agree with them. It seems to me this has gone too far. They may mean well. I’m just not sure they are well.

The thing is: we had, and have, an economic mess created by lax or non-existent regulations in our financial markets. That isn’t a joke or a scary story for millions of people. It is an unfortunate and seemingly unforgiving reality. We need to do all we can to appropriately implement the Dodd-Frank rules to not only protect consumers, businesses, and markets alike, but to fuel inject the economic engine of our democracy. This new law—and the regulations that go with it if done properly—are the blueprints for how our economy can thrive. If we all work together as honest partners in the rulemaking process, I am confident we not only can, but will move our nation forward.
Thank you.

SEC COMMISSIONER GALLAGHER SPEAKS ON GLOBAL CAPITAL MARKET REFORMS

The following excerpt is from the U.S. SEC website:

“Ongoing Regulatory Reform in the Global Capital Markets
by Commissioner Daniel M. Gallagher
U.S. Securities and Exchange Commission
Annual Conference of the Institute of International Bankers
Washington, D.C.
March 5, 2012
Thank you for that very nice introduction. I am very pleased to be here today.
Before I continue, I need to provide the standard disclaimer that my comments today are my own, and do not necessarily represent the positions of the Commission or my fellow Commissioners.

My topic today is “Ongoing Regulatory Reform in the Global Capital Markets.” I’d like to discuss the SEC’s role in that process, with a special emphasis on the Volcker Rule. After all, the IIB, writing jointly with the European Banking Federation, shared 51 pages worth of thoughts on the Rule in a February 13th comment letter, so it seems only fair that I share a few of mine with you this afternoon.

The IIB’s comment letter went to all of the agencies involved in the joint rulemaking process for implementing the Volcker Rule: Treasury, the Fed, the FDIC, the OCC, the CFTC, and the SEC. The leaders of all of these agencies, as well as those of the Consumer Financial Protection Bureau, the Federal Housing Finance Agency, and the National Credit Union Administration, along with an independent member “having insurance expertise,” all serve as voting members of the Financial Stability Oversight Council, or FSOC. Before moving on to the Volcker Rule, I’d like to take a moment to say a few words about that unique regulatory body.

Those of you hanging on my every word — the vast majority of the audience, I’m sure — may have noted my emphasis on the word “leaders.” The membership of FSOC, as set forth explicitly in the Dodd-Frank Act,1consists not of the regulatory agencies themselves, but of the heads of agencies, ex officio. This is an almost unprecedented arrangement for a formal inter-agency group charged with matters of such great import to the country.
As such, while the Chairman of the Securities and Exchange Commission is a member of FSOC, the Commission itself is not. This distinction is especially important given the structure and composition of the SEC — indeed, of almost all of the agencies whose leaders sit on FSOC. While the Secretary of the Treasury and the Director of the FHFA can speak in a single voice on behalf of their agencies, the Chairman of the SEC is only one of a five member, bipartisan commission, with each Commissioner having a single vote on all matters that come before the Commission. The heads of the CFTC, the FDIC, the NCUA, and Fed are similarly situated, each leading an agency that has multiple voting members, each with an equal vote. What’s more, with the exception of the Fed, the board or commission of each of those agencies is statutorily mandated to be comprised of members with differing political affiliations. Although the leader of each of these agencies is generally from the President’s party, his or her vote counts no more than that of any other member of the commission or board.

In addition, while all of the agencies whose leaders sit on FSOC are constitutionally part of the executive branch, only Treasury is a federal executive department led by a Cabinet secretary who serves at the pleasure of the President. All of the other agencies are either independent agencies or government corporations, and their governing boards or commissions are comprised of appointees with fixed terms designed to guarantee a measure of independence for the agencies. The Chair of FSOC, however, is the Secretary of the Treasury — the only member of the group who may be removed by the President at will.

So to sum up, the membership of FSOC is comprised primarily of theindividual leaders of independent agencies, who will usually almost exclusively be drawn from the same party. What’s more, this group of leaders of agencies that were deliberately designed, and are statutorily required, to be bipartisan is led by the individual in the most partisan position of all, a Cabinet appointee that the President can dismiss at will. One would hope that these agency chiefs would always be sure to represent the views of their colleagues — from both parties — and the interests of their agencies. The statute, however, is silent on that point.

Not surprisingly for a body comprised primarily of banking regulators, FSOC is tasked with a “safety and soundness” mandate. The purposes of FSOC, as set forth in the establishing provisions of Dodd-Frank, are:

…to identify risks to the financial stability of the United States that could arise from the material financial distress or failure, or ongoing activities, of large, interconnected bank holding companies or nonbank financial companies, or that could arise outside the financial services marketplace; to promote market discipline, by eliminating expectations on the part of shareholders, creditors, and counterparties of such companies that the Government will shield them from losses in the event of failure; and to respond to emerging threats to the stability of the United States financial system.

This mandate has some overlap with the SEC’s; specifically, the goal of promoting market discipline would seem to be in accordance with the SEC’s mission to “maintain fair, orderly, and efficient markets.” Absent from the FSOC mandate, however, are references to the goals of protecting investors and facilitating capital formation that are also at the core of the SEC’s mission.

Were FSOC simply an advisory body, this omission might not be cause for concern. FSOC, however, is vested with unprecedented authority with respect to the agencies from which its members are drawn. Perhaps the most important of these authorities is to “provide for more stringent regulation of a financial activity by issuing recommendations to the primary financial regulatory agencies to apply new or heightened standards and safeguards” in critical areas of regulation, including capital, leverage, and disclosure requirements as well as leverage limits, concentration limits, and overall risk management. Pursuant to the statute, FSOC may provide such recommendations if it “determines that the conduct, scope, nature, size, scale, concentration, or interconnectedness of such activity or practice could create or increase the risk of significant liquidity, credit, or other problems spreading among bank holding companies and nonbank financial companies, financial markets of the United States, or low-income, minority, or underserved communities.”

In addition to this “recommendation” authority, Title VIII of the Dodd-Frank Act vests FSOC with even greater power with respect to certain financial market utilities and, even more broadly, certain payment, clearing, or settlement activities conducted by “financial institutions.” Specifically, upon FSOC’s designation, by a two-thirds vote, of a financial market utility or a payment, clearing, or settlement activity as “systemically important,” it may direct the Fed, in consultation with the relevant supervisory agencies and FSOC itself, to prescribe risk management standards. With respect to “designated” utilities or to “designated” activities conducted by financial institutions for which the SEC or CFTC is the primary regulator, Title VIII sets forth “special procedures” pursuant to which the Fed may, if it determines that the risk management standards set by the SEC or the CFTC are “insufficient,” impose its own standards. If the SEC or CFTC object within 60 days, FSOC decides, again by a two-thirds vote of its ten voting members, which standards apply.

In other words, FSOC has the power to make “recommendations” to the primary regulators of any “financial companies” regarding their core areas of regulation, and can even allow the Fed to supplant the primary regulators. The decisions made by this group of presidential appointees, which will almost always be comprised exclusively or almost exclusively by members of the same party led by a member of the President’s Cabinet, can take place behind closed doors.

This is not a political or partisan concern. Although the work being performed by the present membership of FSOC may be some of the most important work the council ever does, with consequences to financial markets that could last for decades, Presidents from both parties will have the authority to appoint the agency heads that will serve on FSOC, and as administrations change, so will the political affiliations of FSOC’s members. Instead, this is a concern over the concentration of power in a group made up of leaders of agencies with different goals and missions, including leaders of bipartisan, multi-member agencies who have no statutory requirement to consult with their agency colleagues.

Now, let me stress that FSOC’s mandate, broadly speaking, to preserve the financial stability of the U.S., is of crucial importance — indeed, those of us who were in the trenches during the financial crisis would have been surprised if Congress had not created a systemic risk regulator. But FSOC’s mandate is not the SEC’s mandate. The core of bank regulation is safety and soundness, both on an individual scale, by, for example, guaranteeing bank customers’ deposits, and on a national — indeed, global — scale by managing systemic risk. The SEC, on the other hand, regulates markets that are inherently risky. Indeed, the risks taken by investors are absolutely critical to capital allocation, which in turn is critical to economic growth. The SEC works to protect investors willing to accept the risk of securities markets in the hopes of greater returns by ensuring that those markets are fair and efficient, not risk-free, and does so with the benefit of nearly eight decades of experience in regulating those markets. Were FSOC to interpret its bank-oriented mandate as a license to impose a bank-oriented model of regulation on the SEC and the markets it regulates, the results could have a devastating effect on markets.

Which brings me to the Volcker Rule and the SEC’s role in its implementation. The Volcker Rule, which may have a more dramatic impact on world markets and U.S. competitiveness than perhaps any other rule regulators are promulgating under Dodd-Frank, addresses, at its heart, a topic about which the SEC traditionally has — among all the regulators writing rules in this space — the most experience and expertise in regulating. For those reasons — because it is potentially so significant and because it implicates areas of the SEC’s core competence — it is a perfect case study for how to think about approaching Dodd-Frank rulemaking and the SEC’s role in that rulemaking.

I want to begin by talking a bit about the statute and the proposed rules. Section 619 of the Dodd-Frank Act, commonly known as the “Volcker Rule” even though it is a statutory provision, imposes two significant prohibitions on banking entities and their affiliates. First, the Rule generally prohibits banking entities that benefit from federal insurance on customer deposits or access to the discount window, as well as their affiliates, from engaging in proprietary trading. Second, the Rule prohibits those entities from sponsoring or investing in hedge funds or private equity funds. The Rule identifies certain specified “permitted activities,” including underwriting, market making, and trading in certain government obligations, that are excepted from these prohibitions but also establishes limitations on those excepted activities. The Volcker Rule defines — in expansive terms — key terms such as “proprietary trading” and “trading account” and grants the Federal Reserve Board, the FDIC, the OCC, the SEC, and the CFTC the rulemaking authority to further add to those definitions.

The statute also charges the three Federal banking agencies, the SEC, and the CFTC with adopting rules to carry out the provisions of the Volcker Rule. It requires the Federal banking agencies to issue their rules with respect to insured depositary institutions jointly and mandates that all of the affected agencies, including the Commission, “consult and coordinate” with each other in the rulemaking process. In doing so, the agencies are required to ensure that the regulations are “comparable,” that they “provide for consistent application and implementation” in order to avoid providing advantages or imposing disadvantages to affected companies, and that they protect the “safety and soundness” of banking entities and nonbank financial companies supervised by the Fed.

In October of last year, the Commission jointly proposed with the Federal banking agencies a set of implementing regulations for the Volcker Rule,2with the CFTC issuing a substantively identical set of proposals in January. The proposing release includes extensive commentary designed to assist entities in distinguishing permitted trading activities from prohibited proprietary trading activities as well as in identifying permitted activities with respect to hedge funds and private equity funds.

In her Opening Statement introducing the joint rule proposals at an SEC Open Meeting last October, Chairman Schapiro praised the collaborative effort among the five agencies involved in the drafting process, noting that it involved “more than a year of weekly, if not more frequent, interagency staff conference calls, interagency meetings, and shared drafting.”3 It is telling, however, that in his recent testimony before a House Financial Services Subcommittee, CFTC Chairman Gensler, noting his agency’s role as a “supporting member” in the rulemaking process, stated, “The bank regulators have the lead role.”4

I think, however, that both the statute and our expertise compel the SEC to play a strong and vigorous role in the rulemaking. The Volcker Rule applies to “banking entities” and their affiliates, affecting a wide range of financial institutions regulated by the five different agencies. Regardless of the nature of the regulated entities, however, the Rule addresses a set of activities — the trading and investment practices of those entities — that fall within the core competencies of the SEC. Indeed, the Rule expressly envisions that quintessential market-making activity continue within these firms.

As such, if we at the SEC play our role properly, we can and should ensure that the Volcker Rule meets the aims of Congress without destroying critically important market activity explicitly contemplated by the statute. The issues addressed in the proposed rules — prohibited activities with exceptions to those prohibitions — and limitations to those exceptions — that make complex issues exponentially more so — are the bread and butter of the SEC. For almost eighty years, the SEC has addressed these and similar issues with commensurate levels of complexity. For example, many of you are familiar with the SEC’s extensive array of rulemaking and interpretive releases concerning exceptions for bona fide hedging or market making in the context of short sales. These exceptions, which date back to the early 1980s, built upon the bona fide hedging exceptions to the Commission’s proprietary trading rules for members of national securities exchanges set forth in a 1979 rulemaking.5 The SEC has been dealing with these issues for a long, long time.

By taking a leadership role, the SEC can also ensure that the final rule is consistent with our core mission of protecting investors, maintaining fair and efficient markets and promoting capital formation. These considerations, coupled with the expertise that the SEC brings to the table, should ensure that the bank regulators’ focus on safety and soundness and Dodd-Frank’s overarching focus on managing systemic risk (although many have argued whether the statute will in the end reduce such risk) are balanced by legitimate considerations of investor protection and the maintenance of robust markets.

The Volcker Rule comment period — during which commenters were asked to share their thoughts on over 1,300 questions on nearly 400 topics — ended last month, and although it would of course be premature to share my thoughts on the proposed rules today, even a quick review of the many substantial comment letters the Commission received reveals widespread fears regarding the effect of the proposed rules on the proper functioning of global markets and the competitiveness of the U.S. financial industry might — fears that I share with the commenters.

Our foreign regulatory counterparts have also expressed serious concerns with the proposed rules. The Japanese FSA and the Bank of Japan filed a comment letter to express their concerns over “the potentially serious negative impact on the Japanese markets and associated significant rise in the cost of related transactions for Japanese banks” that they believe would arise from the extraterritorial application of the Volcker Rule.6 British Chancellor of the Exchequer George Osborne wrote recently to Fed Chairman Bernanke to express his fear that the proposed rules’ effect on market making services for non-U.S. debt would make it “more difficult and costlier” for banks to trade non-U.S. sovereign bonds on behalf of clients.7 Bank of Canada Governor Mark Carney — who was recently named Chairman of the G-20’s Financial Stability Board — has stated that he and other Canadian officials have “obvious concerns” about the proposed rules. He cited the lack of clarity in the proposed rules’ definitions of “market making” versus “proprietary trade,” the effect the rules would have on non-U.S. government bond markets, and what he viewed as the Rule’s inappropriate “presumption” that trades are proprietary.8 Lastly, Michel Barnier, the European Commissioner for Internal Markets and Services, has written to Fed Chairman Bernanke and Treasury Secretary Geithner that “[t]here is a real risk that banks impacted by the rule would also significantly reduce their market-making activities, reducing liquidity in many markets both within and outside the United States.”

The aggregate impact of the rulemakings we and our fellow regulators are promulgating is massive, the costs are enormous, and we are introducing these massive and costly rule proposals at a time when our economy is still — hopefully — limping towards recovery. These factors all argue for an approach that is careful, systematic, but most importantly regulatorily incremental. It is important to remember that regulators’ authority and oversight responsibilities do not end when final rules are promulgated, and that continued oversight will ensure that regulators can refine and improve the rules as markets organize and develop in response to the rules we write. Importantly, we can and should recalibrate the rules as markets develop and regulators learn more and gather and analyze relevant data. We must avoid regulatory hubris and should not regulate — particularly where the changes are so novel or comprehensive — with the belief that we completely understand the consequences of the regulations we may impose. In many of these areas, including Volcker, missing the mark could have dire and perhaps irreversibly negative consequences. As such, I believe that this approach - careful, systematic, and regulatorily incremental — should serve as an appropriate guiding principle as we undertake not only our consideration of the Volcker Rule but also other significant rulemaking mandated under Dodd-Frank.

Consistent with this approach, especially in light of the voluminous comments received, regulators must be willing to re-examine our initial efforts and, if necessary, go back to the drawing board to make sure we regulate wisely, rather than just quickly. In a recent speech, my colleague and friend Commissioner Troy Paredes stated that if the proposed implementing regulations for the Volcker Rule need to change as much as it looked to him like they do, the responsible course for the Commission to follow would be to issue a reproposal.10 I couldn’t agree with him more, both regarding the potential need for extensive changes to the proposed rule and the wisdom of reproposing the amended rule to garner the benefit of another round of comment. The comments we’ve received so far, including those I've cited today, provide invaluable insights as to the potential impact of the Volcker Rule. These comments provide powerful evidence that the benefits the proposed rule was designed to provide may come at an unacceptably high cost. It would be a dereliction of our duty as regulators to ignore them.

As Commissioner Paredes stated in his recent speech, the virtue of a reproposal is the benefit of another round of comment. We owe it to investors and all market participants to review each and every comment letter with the goal of learning more about the potential real-world impact of the rules, and given the extensive revisions that I believe the proposed rule requires, we owe it to them to provide another opportunity to comment on a set of reproposed rules.
Thank you for your attention and for inviting me here today. I would be happy to answer any questions you may have.”

ASSISTANT SECRETARY FOR FINANCIAL MARKETS MARY MILLER SPEAKS

The following excerpt is from a Department of Treasury e-mail:

Remarks by Assistant Secretary for Financial Markets Mary Miller at the Annual Washington Conference of the Institute Of International Bankers (IIB)
“As prepared for delivery
 WASHINGTON - Good morning and welcome to Washington. I welcome the chance to meet with a group that is focused on the perspectives of the international banking community in the United States.  As the Assistant Secretary for Financial Markets at the Treasury Department, I am part of the Office of Domestic Finance.  But as this group knows well, our financial markets are global and interconnected.  In my work at Treasury, I deal with the international nature of our markets every day. Two of my main responsibilities are managing the U.S. Government’s debt issuance and helping implement the Dodd-Frank Wall Street Reform and Consumer Protection Act.  While both of these roles have fairly obvious connections to global financial markets, they are also more closely connected to each other than you might think. The financial crisis and its aftermath took a heavy toll on our nation’s economy and our fiscal situation.  Millions of jobs were destroyed, countless families have lost their homes, and billions of dollars of Americans’ savings were wiped out. We had no choice but to take aggressive steps to stabilize financial markets and help restart economic growth.  And at the same time, the fallout from the crisis caused tax receipts to go down while payments for programs like unemployment insurance were going up. To pay for these measures, we had to issue more debt.  Although government borrowing peaked two years ago and deficits are coming down relative to GDP, our debt is still growing and economic growth remains moderate.  Interest rates remain at historically low levels and have helped keep the costs of responding to the crisis much lower than they otherwise might have been. But interest rates won’t stay this low forever, and the long-term fiscal trend in the U.S. is unsustainable.  As one of the officials responsible for our debt issuance, I know that American workers, families, homeowners and entrepreneurs can’t afford another crisis. And the government can’t either.  Fortunately, in the wake of the crisis, the President asked Congress to pass the reforms our outdated financial regulatory system needed, before memories of the crisis faded.  Congress’s response, the Dodd-Frank Act, put in place a number of important measures to strengthen and modernize the safeguards for our financial system. Much of the basic framework of these reforms is already coming into effect.  The Federal Deposit Insurance Corporation has finalized rules for winding down large firms that fail through an orderly bankruptcy-like process that will help limit the fallout from their failure. Had this “resolution authority” been in place in 2008, we would have had much more effective tools to mitigate the financial crisis.  The Consumer Financial Protection Bureau is up and running and undertaking initiatives for better disclosure to consumers.  Regulators are deploying new authority and greater enforcement resources on a more coordinated basis to go after fraud and unfair practices.  The majority of the new initiatives for reducing risk and improving the transparency of the previously unregulated derivatives markets have been proposed and more rules are being finalized with each passing month.  2012 should bring much more clarity to firms adjusting for these changes. As a result of the reforms we have been putting into place, the financial system is getting stronger and safer.  Financial institutions are better capitalized, less leveraged, and more liquid, which reduces systemic risks.  Some of these changes have already been required, some anticipate Basel III, and some simply reflect caution after the financial crisis. But the gains we have made will erode over time if we are not able to complete the work that is underway. Given the stark reality presented by our fiscal situation, the deep and widespread damage that the crisis inflicted, and the continuing uncertainty in markets overseas, we must be careful not to succumb to a collective amnesia about how close we came to a complete financial collapse less than four years ago.  As Secretary Geithner wrote in the Wall Street Journal on Friday, “Remember the crisis when you hear complaints about financial reform – complaints about limits on risk-taking or requirements for transparency or disclosure.” But as we continue moving forward, rest assured that we are not just trying to get reforms done so that we can check a box.  We are focused on getting the reforms right so that they reduce risk, improve transparency and help restore market discipline in our system, while preserving the best features of our markets and the competitiveness of our financial institutions.        We aren’t just looking at individual rules in isolation.  Partly through the efforts of the Financial Stability Oversight Council, we are also beginning to look at the way rules interact with each other and assess their combined impact across the financial system.  We want to be careful to get the balance right—building a more stable financial system, with better protections for consumers and investors, while allowing for healthy financial innovation in support of economic growth. *** Usually when I talk about progress on financial regulatory reform, I focus on the reforms we are putting in place at home and only have the opportunity to briefly discuss the importance of establishing strong and comparable standards and safeguards throughout the world.  But given this audience, I would like to switch that around today and focus more on some of the international aspects of our reform efforts. While regulations are adopted at the national level, markets are global and difficult cross-border issues are bound to arise.  This is complex terrain, and we must work hard to align our national frameworks and develop high-quality international standards.  We should strengthen international coordination and always keep in mind our collective goals to protect the safety and soundness of our markets; to achieve a level playing field globally; and to realize the economic benefits of global finance. To protect our economy from risks that arise outside the United States, and to provide a fair and level playing field for U.S. firms, we need comparable international standards.  And it’s important to realize the benefits of setting high standards, not just in terms of reducing risks and promoting financial stability but also in terms of attracting investors and capital. Before I came to Treasury, I worked for 26 years as an investor and manager of clients’ assets.  As an investor in global fixed income assets I did not look for the least regulated markets, with the lowest transparency, the weakest investor protections, and the greatest risks.  I looked for opportunities with expectations of reasonable returns, with appropriate disclosures, and with strong legal and financial protections for the safety of the investments.  Whether acting directly as investors or advising your clients, I expect that many of you share this view.     Comparable standards are particularly important in the reforms that toughen rules on capital, margin, liquidity and leverage, as well as in the global derivatives markets.  In these areas we are working to discourage other nations from applying softer rules to their institutions that could create systemic risks for the global financial system.  Specific challenges include:

aligning the developing derivative regimes around the world;
preventing attempts to soften the national application of new capital rules;
and designing the rules for resolution of large global financial institutions whose operations cross national borders.
        Aligning the substance of the rules as much as possible is not enough, however. It’s also important to align the timing as much as possible, to avoid leaving gaps that present risks to financial stability in the interim as well as creating competitive advantages for institutions in jurisdictions that are not as far along the path of reform.  There’s a delicate balance between leading with strong regulatory reform proposals in the U.S. and striving for timely adoption of comparable measures in other jurisdictions. Also, in certain areas, U.S. reforms are tougher or just different from the rules forthcoming in other markets, so we need to figure out sensible ways to apply those rules to the foreign operations of U.S. firms and the U.S. operations of foreign firms.  This is very complicated, and another example of where we need a clearly articulated consistent approach across the U.S. regulatory agencies. The Volcker rule provides a good example of an area where the U.S. is pursuing reforms to reduce risk and conflicts of interest, but where most other nations have not followed.  As you likely know, the comment period for the notice of proposed rulemaking to implement the Volcker rule recently closed for four of the five rule-writing agencies.  Treasury is not writing the Volcker rule but the Secretary, as Chairperson of the Financial Stability Oversight Council, does have a specific statutory role as the coordinator of that process for the five agencies that are charged with implementing it. More than 16,000 comments have been submitted in response to the proposed rule. Although the vast majority of those comments are identical form letters, there are still hundreds of unique comment letters, some of which run over a hundred pages in length.  As you know, the Institute of International Bankers (IIB) submitted a comment letter, and dozens of other commenters have weighed in on a variety of issues relating to the international implications of the proposed rule. A number of the issues that IIB raised in its comment letter are reflected in other letters that we received from individual market participants and foreign governments as well.  Some of these issues include – but are certainly not limited to:
the treatment of foreign government securities;

the definition of activities that are conducted solely outside of the United States;
the treatment of foreign funds that are comparable to U.S. mutual funds; and
the compliance and reporting requirements that would apply to institutions.
 
We welcome this input, view it as an essential part of the process, and firmly believe that the final rule will benefit from the additional information, perspectives, and insights we receive through the comment process. Getting the Volcker rule right is an important issue for the safety of our financial markets and for preserving their liquidity and efficiency.  It’s important to separate risky proprietary trading activity from the federal safety net.  But as a former investor, including during the financial crisis, I also appreciate the role of market-making and know the importance of deep, liquid markets.  It is essential to have buyers who are willing to step up and buy a position, particularly during times of market stress. The statutory language of the Volcker Rule recognizes the importance of striking that balance, and so does the study issued by the Financial Stability Oversight Council last January.  We are equally committed to achieving the right balance in the final rule.  Along with the rule-writing agencies, Treasury is actively reviewing the comments, absorbing the valuable information they provide, and beginning to consider the best ways to address them as we coordinate the process for finalizing the rules. *** While the Treasury Secretary has a specific statutory role in coordinating the Volcker rule, Treasury is not a rule-writer for many parts of financial regulatory reform. We still have some important responsibilities either through coordination or direct assignments.  I would like to provide two examples where we are engaged in activities of interest to foreign institutions. One area where the Dodd-Frank Act does give Treasury specific responsibility is for a decision regarding foreign exchange swaps and forwards.  This is also an area where a common international approach is important, because the foreign exchange market, by its very nature, is a global one. Treasury has issued a Notice of Proposed Determination that central clearing and exchange-trading requirements would not apply to foreign exchange swaps and forwards.  Consistent with the statutory factors, the proposed determination is based on an assessment that the unique characteristics and existing oversight of the foreign exchange swaps and forwards market already reflect many of Dodd-Frank’s objectives for derivatives reform, including high levels of transparency and strong settlement practices. As with the Volcker rule and all rulemaking processes, we are carefully considering the comments we received in response to the proposed determination, but have not made a final determination.  We are also closely monitoring the evolution of   foreign exchange market structure, especially with regard to reporting.  We are very interested, for example, in the global trade repository that is being set up to provide more insight and transparency into the foreign exchange market. This issue is a good example of how there are multiple ways for regulators and industry participants to work together to improve the financial system.  The private sector doesn’t have to wait on regulators and governments to act to implement reforms that could reduce risks, improve returns, increase transparency to market participants, and strengthen financial institutions.  As industry continues to develop the global FX trade repository, we are closely watching to see what kind of information the trade repository will provide publicly. We believe it is possible to provide detailed market information without compromising confidentiality.  Industry has a chance to collectively decide whether it will make useful information available on a timely basis.  Finally, because the foreign exchange market is a global market, having a global trade repository should be very beneficial to both market participants and regulators.  Both should be able to benefit from consolidating information in a single location. Another important initiative that we are working on to promote international consistency and that should benefit both regulators and market participants,  is the development of a global standard for identifying parties to financial transactions: a legal entity identifier, or LEI.  If legal entity identifiers had been in place during the financial crisis, regulators, policymakers, and market participants would have had a much better understanding of exposures and interconnectedness across financial institutions.  Precise identification of counterparties would have helped wind down complex, troubled institutions.  In the near future, the LEI initiative should lead to more accurate data collection at a lower cost.  Specifically, it should allow you to report to regulators with the same data you use in your management information and risk-management systems, and to run those systems better. The LEI initiative continues to move forward globally with significant coordination among domestic and international regulators and financial trade associations. U.S. and global regulators will soon build its use into their reporting systems. We are confident that this effort will enhance the effectiveness of oversight tools for regulators and provide substantial risk management benefits to the market. *** These two very practical examples of public-private collaboration illustrate ways that we can work together to strengthen the global financial marketplace.  I believe we share common interests in safe, strong, and competitive financial markets, not just in the United States but throughout the world.  We have made progress on a number of fronts, but much remains to be done.  We will continue to remain focused on implementing reform as quickly as practical to provide not only clarity and certainty, but more importantly, the measures we need to keep our financial system the safest and strongest in the world.Thank you very much for your time and attention, and I look forward to taking a few of your questions.”