CFTC OFFICIAL'S TESTIMONY REGARDING FUTURES MARKET OVERSIGHT

FROM:  COMMODITY FUTURES TRADING COMMISSION 

Testimony of Vincent McGonagle, Director Division of Market Oversight, Commodity Futures Trading Commission Before the Financial Institutions and Consumer Protection Subcommittee Senate Committee on Banking, Housing, and Urban Affairs

January 15, 2014

Chairman Brown, Ranking Member Toomey, and Members of the Subcommittee, thank you for the opportunity to appear before you today. I am Vincent McGonagle and I am the Director of the Division of Market Oversight of the Commodity Futures Trading Commission (CFTC).

Background on Commodity Exchange Act and the CFTC Mission

The purpose of the Commodity Exchange Act (CEA) is to serve the public interest by providing a means for managing and assuming price risks, discovering prices, or disseminating pricing information. Consistent with its mission statement and statutory charge under the CEA, the CFTC is tasked with protecting market participants and the public from fraud, manipulation, abusive practices and systemic risk related to derivatives – both futures and swaps – and to foster transparent, open, competitive and financially sound markets. In carrying out its mission and statutory charge, and to promote market integrity, the Commission polices derivatives markets for various abuses and works to ensure the protection of customer funds. Further, the agency seeks to lower the risk of the futures and swaps markets to the economy and the public. To fulfill these roles, the Commission oversees designated contract markets (DCMs), swap execution facilities (SEFs), derivatives clearing organizations, swap data repositories, swap dealers, futures commission merchants, commodity pool operators and other intermediaries.

The CEA has for many years required that any futures transaction, unless subject to an exemption, be conducted on or subject to the rules of a board of trade which has been designated by the CFTC as a DCM. Sections 5 and 6 of the CEA and Part 38 of the Commission’s regulations provide the legal framework for the Commission to designate DCMs, along with each DCM’s compliance requirements with respect to the trading of commodity futures contracts. With the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), DCMs were also permitted to list swap contracts. Along with this expansion of product lines that can be listed on DCMs, the Dodd-Frank Act also amended various substantive DCM requirements, under CEA Section 5, and adopted a new regulatory category for exchanges that provide for the trading of swaps (SEFs).1 The Commission revised its DCM regulations to reflect these new requirements, and also adopted regulations to implement the Dodd-Frank Act’s SEF requirements.

Under the CEA and the Commission’s contract and rule review regulations, all new product terms and conditions, and subsequent associated amendments, are submitted to the Commission before implementation. In submitting new products and associated amendments, DCMs and SEFs are legally obligated to meet certain core principles; one of the most significant being the prohibition, in DCM and SEF Core Principle 3, on listing contracts that are readily susceptible to manipulation.2 DCMs and SEFs self-certify most of their products to the Commission, as allowed under the CEA,3 and self-certified contracts may be listed for trading shortly after submission.4 The Commission has provided Guidance to DCMs and SEFs on meeting Core Principle 3 in Appendix C to Part 38 of the Commission’s regulations. Failure of a DCM or SEF to adopt and maintain practices that adhere to these requirements may lead to the Commission’s initiation of proceedings to secure compliance.

Among other things, a DCM or SEF that lists a contract that is settled by physical delivery should design its contracts in such a way as to avoid any impediments to the delivery of the commodity in order to promote convergence between the price of the futures contract and the cash market value of the commodity at the time of delivery. The specified terms and conditions considered as a whole should result in a deliverable supply that is sufficient to ensure that the contract is not susceptible to price manipulation or distortion.5 The contract terms and conditions should describe or define all of the economically significant characteristics or attributes of the commodity underlying the contract, including: quality standards that reflect those used in transactions in the commodity in normal cash marketing channels; delivery points at a location or locations where the underlying cash commodity is normally transacted or stored; conditions that delivery facility operators must meet in order to be eligible for delivery, including considerations of the extent to which ownership of such facilities is concentrated and whether the level of concentration would render the futures contract susceptible to manipulation; delivery procedures that seek to minimize or eliminate any impediment to making or taking delivery by both deliverers and takers of delivery to help ensure convergence of cash and futures at the expiration of a futures delivery month.

Commission staff utilizes considerable discretion and can request that DCMs and SEFs provide full explanations of their compliance with the Commission’s product requirements. Commission staff may ask a DCM or SEF at any time for a detailed justification of its continuing compliance with core principles, including information demonstrating that any contract certified to the Commission for listing on that exchange meets the requirements of the Act and DCM or SEF Core Principle 3.

Expansion of CFTC Enforcement Authority Under Dodd-Frank

The Commission’s responsibilities under the CEA include mandates to prevent and deter fraud and manipulation. The Dodd-Frank Act enhanced the Commission’s enforcement authority by expanding it to the swaps markets. The Commission adopted a rule to implement its new authorities to police against fraud and manipulative schemes. In the past, the CFTC had the ability to prosecute manipulation, but to prevail, it had to prove the specific intent of the accused to affect prices and the existence of an artificial price. Under the new law and rules implementing it, the Commission’s anti-manipulation reach is extended to prohibit the reckless use of manipulative schemes. Specifically, Section 6(c)(3) of the CEA now makes it unlawful for any person, directly or indirectly, to manipulate or attempt to manipulate the price of any swap, or of any commodity in interstate commerce, or for future delivery on or subject to the rules of any registered entity. In addition, Section 4c(a) of the CEA now explicitly prohibits disruptive trading practices and the Commission has issued an Interpretive Guidance and Policy Statement on Disruptive Practices.6

In addition, the Dodd-Frank Act established a registration regime for any foreign board of trade (FBOT) and associated clearing organization who seeks to offer U.S. customers direct access to its electronic trading and order matching system. Applicants for FBOT registration must demonstrate, among other things, that they are subject to comprehensive supervision and regulation by the appropriate governmental authorities in their home country or countries that is comparable to the comprehensive supervision and regulation to which Commission-designated contract markets and registered derivatives clearing organizations are respectively subject.

CFTC Coordination with Foreign and Domestic Regulators

The Commission recognizes that commodity markets are international in nature and, accordingly, regularly consults with other countries’ regulators. In particular, staff regularly consult with staff of the FCA (the LME’s home regulatory authority) as to market conditions with respect to products of mutual interest, including the LME’s recent introduction of warehouse reforms. The two agencies also participate in mutual information-sharing agreements for both market surveillance and enforcement purposes.

Similarly, the Commission formally and informally consults and coordinates with other domestic financial regulators. For example, the CFTC and the Federal Energy Regulatory Commission (FERC) have had a memorandum of understanding (MOU) in place since 2005 that provides for information exchange related to oversight or investigations. Earlier this month, FERC and the CFTC signed two Memoranda of Understanding (MOU) to address circumstances of overlapping jurisdiction and to share information in connection with market surveillance and investigations into potential market manipulation, fraud or abuse. The MOUs allow the agencies to promote effective and efficient regulation to protect the nation’s energy markets and increased cooperation between the agencies.

Again, thank you for the opportunity to appear before the Subcommittee. I will be pleased to respond to any questions you may have.

1 In addition to the provisions regarding listing of swaps on DCMs and SEFs, the Dodd-Frank Act provides that, unless a clearing exception applies and is elected, a swap that is subject to a clearing requirement must be executed on a DCM, SEF, or SEF that is exempt from registration under CEA, unless no such DCM or SEF makes the swap available to trade.

2 DCM and SEF Core Principle 3 states, “Contract Not Readily Subject to Manipulation—The board of trade shall list on the contract market only contracts that are not readily susceptible to manipulation.”

3 For example, while contracts can be submitted for approval, of the almost 5,000 contracts submitted by DCMs and SEFs since the Dodd-Frank Act was enacted, all were submitted on a self-certification basis, and over 2,000 contracts were certified in calendar year 2013 alone.

4 A DCM or SEF need wait only one full business day after the contract has been submitted to list the contract for trading.

5 Deliverable supply means the quantity of the commodity meeting the contract’s delivery specification that reasonably can be expected to be readily available to short traders and salable by long traders at its market value in normal cash marketing channels at the contract’s delivery points during the specified delivery period, barring abnormal movement in interstate commerce.

6 Antidisruptive Practices Authority, 78 FR 31890 (May 28, 2013),


Last Updated: January 15, 2014

LABOR SECRETARY USES BLOG TO PROMOTE INCREASING THE MINIMUM WAGE

FROM:  U.S. LABOR DEPARTMENT 
Holiday Belt-Tightening for Minimum Wage Workers
by SECRETARY TOM PEREZ on NOVEMBER 26, 2013 

“I’m living out of a spare room at my children’s house.”

“I’m working 70 hours a week…my day starts at 6am…I want to go to college, [but] I don’t have time [and] I can’t afford it.”

“I shouldn’t have to decide: am I going to pay the electric bill or do I pay the heat? I’m a thousand dollars behind in rent now…where is this money going to come from?”

“I’ve worked since I was 15 years old, and I’ve never been fired or asked to leave a job. I can’t work more than 8 hours a day or I’ll lose my day care… If I lose that, I’ll lose access to food assistance. I’m barely staying above water now as it is.”

This is just a sampling of what I’ve heard from low-wage workers I’ve met with recently. I come away from these conversations more convinced than ever that we have to raise the federal minimum wage.

In a nation as wealthy as ours, one based on the belief that anyone can make it if they try, it’s unconscionable that people working full-time are living in poverty and resorting to safety net programs for their very survival. As one young man who works in fast food in Milwaukee told me: “This fight – it’s about the minimum wage, but it’s about respect.”

This is a time of year for plentiful family gatherings. But while many of us are fortunate to enjoy a Thanksgiving of abundance and relaxation, the holidays are too often a source of even greater economic anxiety than usual for those earning at or near the minimum wage.

The American Farm Bureau Federation has estimated that feeding a table of 10 this Thanksgiving will cost $49 on average. But it takes minimum wage workers nearly a full shift to earn that much (and many will have to work on Thanksgiving anyway). For them, putting any meal on the table, let alone a multi-course feast, is a penny-squeezing struggle. So while many Americans will be loosening their belts after helpings of turkey and stuffing, it’s another day of belt-tightening for workers trying to get by on the minimum wage.

But increasing the minimum wage isn’t about holiday giving or charity. This is smart economic policy with universal benefits. In an economy driven by consumer demand, more purchasing power for working families means more sales at businesses large and small. With tens of millions of people heading to stores to start their holiday shopping this weekend, imagine how much more retailers could benefit if low-wage workers had more to spend. I can’t put it any better than one worker who told me: “If they would pay us what we need, we could put money back into the economy and pay for what we need. And that strengthens all of us.”

Minimum wage workers are proud and hardworking. They need and deserve a raise. And that’s not just Tom Perez talking — more than three-quarters of Americans agree, according to a recent Gallup poll. As a matter of social justice and economic common sense, it’s time for Congress to act.

WEST, TEXAS FEDERAL DISASTER ASSISTANCE TOPS $5 MILLION

FROM: U.S. FEDEERAL EMERGENCY MANAGEMENT AGENCY
AUSTIN, Texas. – In just over a month since the emergency disaster declaration for the fertilizer plant explosion in West, Texas, the Federal Emergency Management Agency (FEMA) and the U.S. Small Business Administration (SBA) have approved more than $5.6 million in disaster assistance or low-interest loans for survivors.

This total includes more than $694,000 in Housing and Other Needs Assistance and Transitional Sheltering Assistance (TSA) from the state of Texas and FEMA. The SBA has approved more than $4.91 million in low-interest disaster assistance loans for 59 disaster-impacted residents and businesses. SBA federal disaster loans help pay for residential and business property losses as well as disaster working capital needs for eligible small businesses and nonprofit organizations.

"We are all working together to get the disaster assistance where it needs to be — in the hands of survivors," said the Federal Coordinating Officer Kevin L. Hannes of FEMA. "Survivors are taking advantage of low-interest disaster loans. We will continue to coordinate with and support our federal, state and local partners as the residents of West work to rebuild and recover."

To date, 742 individuals and families have registered for assistance. More than 900 residents have taken advantage of services provided by the Disaster Recovery Center in West and TSA has provided funding for 359 nights at hotels in West and nearby communities to provide eligible residents with a safe place to stay.

DEPUTY SECRETARY OF THE TREASURY SPEAKS BERORE SENATE COMMITTEE ON WALL STREET REFORM

FROM:  U.S. DEPARTMENT OF TREASURY
Testimony by Deputy Secretary Neal Wolin before the Senate Committee on Banking, Housing, and Urban Affairs on “Implementing Wall Street Reform: Enhancing Bank Supervision and Reducing Systemic Risk”

As prepared for delivery
WASHINGTON – Chairman Johnson, Ranking Member Shelby, and members of the Committee, thank you for the opportunity to appear here today to discuss progress implementing the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act).

The Dodd-Frank Act represents the most significant set of financial reforms since the Great Depression.  Its full implementation will help protect Americans from the excessive risk, fragmented oversight, and poor consumer protections that played such leading roles in bringing about the recent financial crisis.

That crisis, and the recession that accompanied it, cost nearly 9 million jobs, erased a quarter of families’ household wealth, and brought GDP growth to a low of nearly negative 9 percent.

Today, our economy has improved substantially, although more work remains ahead.  More than 4.3 million private sector jobs have been created over the past 27 months and, since mid-2009, our economy has grown at an average annual rate of 2.4 percent.

As part of our broader efforts to strengthen the economy, Treasury is focused on fulfilling its role in implementing the Dodd-Frank Act to build a more efficient, transparent, and stable financial system—one that contributes to our country’s economic strength, instead of putting it at risk.

The Dodd-Frank Act’s reforms address key failures in our financial system that precipitated and prolonged the financial crisis.  The Act’s core elements include:

Tougher constraints on excessive risk-taking and leverage across the financial system.  To lower the risk of failure of large financial institutions and reduce damage to the broader economy in the event a large financial institution does fail, the Dodd-Frank Act provides authority for regulators to impose tougher safeguards against risks that could threaten the stability of the financial system and the broader economy.

The Federal Reserve has proposed new standards to require banks to hold greater capital against risk and fund themselves more conservatively.  New rules restricting proprietary trading under the Volcker Rule and limits to the size of financial institutions relative to the total financial system have been proposed or will be proposed in the coming months.  Safeguards against excessive risk-taking and leverage will not only apply to the biggest banks, but also designated nonbank financial companies.  Importantly, the bulk of these requirements do not apply to small and community banks, and help level the playing field for these smaller participants by helping eliminate distortions that previously favored the biggest banks that held the most risk.

The Dodd-Frank Act also established the Financial Stability Oversight Council (the Council) to coordinate agencies’ efforts to monitor risks and emerging threats to U.S. financial stability, and the Office of Financial Research (OFR) to collect and standardize financial data, perform essential research, and develop new tools for measuring and monitoring risk in the financial system.

Orderly liquidation authority.  The Dodd-Frank Act created a new orderly liquidation authority to resolve a failed or failing financial firm if its failure would have serious adverse effects on the financial stability of the United States.  The statute makes clear that taxpayers will not be put at risk in the event a large financial firm fails.  Investors and management, not taxpayers, will be responsible for the cost of the failure.

The FDIC has completed most of the rules necessary to implement the orderly liquidation authority, and is engaging in planning exercises with Treasury and other regulators to coordinate how it would work in practice.  This summer, the largest bank holding companies will submit the first set of “living wills” to regulators and the Council.  These documents will lay out plans for winding down a firm if it faces failure.

Comprehensive oversight of derivatives.  The Dodd-Frank Act created a new regulatory framework for over-the-counter derivatives markets to increase oversight, transparency, and stability in this previously unregulated area of the financial system.

Regulators have proposed almost all the necessary rules to implement comprehensive oversight of the derivatives markets, and we expect most to be finalized this year.  We are already seeing signs of standardized derivatives moving to central clearing, and substantial work is being done to build out new financial infrastructure to move trades into clearing and onto electronic trading platforms.

Stronger consumer financial protection.  The Dodd-Frank Act created the Consumer Financial Protection Bureau (CFPB) to consolidate consumer financial protection responsibilities that had been fragmented across several federal regulators into a single institution dedicated solely to that purpose.  The CFPB’s mission is to help ensure consumers have the information they need to make financial decisions appropriate for them, enforce Federal consumer financial laws, and restrict unfair, deceptive, or abusive acts and practices.

The CFPB is currently working to improve clarity and choice in consumer financial products through the Know Before You Owe project, which aims to simplify mortgage forms, credit card disclosures, and student financial aid offers.  The CFPB is also focused on helping improve consumer financial protections for groups like servicemembers and older Americans, as well as bringing previously unregulated consumer financial institutions, like payday lenders, credit reporting bureaus, and private mortgage originators, under federal supervision for the first time.  Earlier this year, the CFPB commenced its supervision of debt collectors and credit reporting agencies.

Transparency and market integrity.  The Dodd-Frank Act included a number of measures that increase disclosure and transparency of financial markets, including new reporting rules for hedge funds, trade repositories to collect information on derivatives markets, and improved disclosures on asset-backed securities.

This summer, the largest hedge funds and private equity funds will be required to report important information about their investments and borrowing for the first time, helping regulators understand exposures at these significant investment vehicles.  New swaps data repositories are being created that will provide regulators and market participants with a stronger understanding of the scale and nature of exposures within previously opaque derivatives markets.

Treasury’s core responsibilities in implementing the Dodd-Frank Act include the Secretary’s role as Chairperson of the Council, standing up the Office of Financial Research and Federal Insurance Office, and coordinating the rulemaking processes for risk retention for asset-backed securities and the Volcker Rule.

The Financial Stability Oversight Council
The Dodd-Frank Act created the Financial Stability Oversight Council to identify risks to the financial stability of the United States, promote market discipline, and respond to emerging threats to the stability of the U.S. financial system.

The Council is actively engaged in these activities and has begun to institutionalize its role.  To date, the Council has held 17 principals meetings, four since I last testified in December.  In recent months, the Council’s principals have come together to share information on a range of important financial developments as the Council, its members, and staff have actively engaged in monitoring the situation in Europe, in housing markets, the interaction of the economy and energy markets, and the lessons to be drawn from recent errors in risk management at several major financial institutions, including the failure of MF Global and trading losses at JPMorgan Chase.  In addition to regular engagement at the principals level, the Council has active staff discussions through twice monthly deputies level meetings and ongoing staff work on individual committee and project workstreams.

The Council expects to release its second annual report on financial market and regulatory developments and potential emerging threats to our financial system in July.  In addition to providing new recommendations, the report will include an update on the progress made on last year’s recommendations, which focused on enhancing the integrity, efficiency, competitiveness, and stability of U.S. financial markets, promoting market discipline, and maintaining investor confidence.

One of the duties of the Council is to facilitate information-sharing and coordination among its members regarding rulemaking, examinations, reporting requirements, and enforcement actions.  Through meetings among principals, deputies, and staff, the Council has served as an important forum for increasing coordination among the member agencies.  Some argue that the Council should be able to ensure particular outcomes in independent agencies’ rules, or perfect harmony between rules with disparate statutory bases.  While the Council serves a very important role in bringing regulators together, the Dodd-Frank Act did not eliminate the independence of regulators to write rules within their statutory mandates.

Nonetheless, the Dodd-Frank Act implementation process has brought about unprecedented cooperation among agencies in writing new rules for our financial system.  As Chair of the Council, Treasury continues to make it a top priority that the work of the regulators is well-coordinated.

The Treasury Secretary, as Chairperson of the Council, is coordinating the rulemaking required for the Dodd-Frank Act’s risk retention requirements, which are designed to improve the alignment of interests between originators of risk and securitizers of, and investors in, asset-backed securities.  After the proposed rule was released, the rule-writers received over 13,000 comment letters, and they are continuing to review feedback as they work towards a final rule.

The Council has also made progress on two of its direct responsibilities under the Dodd-Frank
Act: designating financial market utilities (FMUs) and nonbank financial companies for enhanced prudential standards and supervision.

In July 2011, the Council finalized a rule setting the process and criteria for designating FMUs and, in August, began working to identify FMUs for consideration in accordance with the statue and the rule.  In January 2012, an initial set of FMUs were notified that they would be under consideration for designation.  In May, the Council unanimously voted to propose the designation of an initial set of FMUs as systemically important.  This vote is not a final determination, and FMUs may request a hearing before the Council to contest a proposed designation.  The Council expects to make final determinations on an initial set of FMU designations as early as this summer.

In April 2012, the Council issued a final rule and interpretive guidance establishing quantitative and qualitative criteria and procedures for designations of nonbank financial companies.  The Council has begun work to apply the process described in the guidance.  The Council recognizes that the designation of nonbank financial companies is an important part of the Dodd-Frank Act’s implementation and intends to proceed with due care as expeditiously as possible.

The Dodd-Frank Act also provides for limits on the growth and concentration of our largest financial institutions.  The Council has released a study and recommendations on the effective implementation of these limitations, and the Federal Reserve is expected to propose a rule to implement concentration limits later this year.

The Office of Financial Research
The Dodd-Frank Act established the Office of Financial Research to collect and standardize financial data, perform essential research, and develop new tools for measuring and monitoring risk in the financial system.

In December 2011, President Obama nominated Richard Berner to be the OFR’s first Director.  I appreciate this committee’s support of Mr. Berner’s nomination.  Confirmation by the full Senate is important to ensure the OFR can fulfill its critical role.

A key component of the OFR’s mission is supporting the Council and its member agencies by analyzing financial data to monitor risk within the financial system.  Currently, the OFR is working on a number of projects with the Council, including providing analysis related to the Council’s evaluation of nonbank financial companies for potential designation for Federal Reserve supervision and enhanced prudential standards; providing data and analysis in support of the Council’s second annual report on financial market and regulatory developments and potential emerging threats to our financial system; and, in collaboration with Council member agencies, developing metrics and indicators related to financial stability.

To avoid duplicating existing government collection efforts or imposing unnecessary burdens on financial institutions, the OFR is focused on ensuring it relies on data already collected by regulatory agencies whenever possible.  The OFR is working with regulators to catalogue the data they already collect, along with exploring ways it could promote stronger data sharing for the regulatory community to generate efficiencies and improved interagency cooperation.

As part of its mission, the OFR is also promoting standards to improve the quality and scope of financial data, which in turn should help regulators and market participants mitigate risks to the financial system and provide firms with important efficiencies and cost-savings.  One ongoing priority is establishing a Legal Entity Identifier (LEI), or unique, global standard for identifying parties to financial transactions, to improve data quality and consistency.  The OFR is playing a lead role in the international process coordinated by the Financial Stability Board (FSB) to develop an LEI.  Just last week, the FSB endorsed recommendations the OFR developed in conjunction with its international counterparts to establish a global LEI system.  This recognition allows market participants to begin preparing for the implementation of the global LEI next year.

A more comprehensive understanding of the largest and most complex financial firms’ exposures is critical to identifying risks to the financial system and mitigating future crises.  However, some have expressed concerns about the OFR—involving its accountability, access to personal financial information, and ability to secure sensitive data—that are unfounded.

First, Congress has oversight authority over the OFR, and the statute requires the Director to testify regularly before Congress.  Consistent with requirements under the Dodd-Frank Act, the OFR will provide the Congress with its first Annual Report on its activities this summer and a second report, on the Office’s human resources practices, later this year.  In addition, the Dodd-Frank Act provides authority for Treasury’s Inspector General, the Government Accountability Office, and the Council of Inspectors General on Financial Oversight to oversee the activities of the OFR.

Second, regarding data collection, the Dodd-Frank Act does not contemplate and the OFR will not collect personal financial information from consumers.  The OFR, like other banking regulators, only has the authority to collect information from financial institutions, not individual citizens.  The OFR will only utilize data required to fulfill its mission—assessing threats to stability across the financial system.

Lastly, data security is the highest priority for the OFR.  As an office of the Department of the Treasury, the OFR utilizes Treasury’s sophisticated security systems to protect sensitive data.  The OFR is also implementing additional controls for OFR-specific systems, including a secure data enclave within Treasury’s IT infrastructure.  Access to confidential information will only be granted to personnel that require it to perform specific functions, and the OFR will regularly monitor and verify its use to protect against unauthorized access.  In addition, the OFR is working in collaboration with other Council members to develop a mapping among data classification structures and tools to support secure collaboration and data sharing. Such tools include a data transmission protocol currently used by other Council members that will enable interagency data exchange and a secure collaboration tool for sharing documents.

The Federal Insurance Office
The Dodd-Frank Act created the Federal Insurance Office to monitor all aspects of the insurance industry, identify issues or gaps in regulation that could contribute to a systemic crisis in the insurance industry or financial system, monitor the accessibility and affordability of non-health insurance products to traditionally underserved communities, coordinate and develop federal policy on prudential aspects of international insurance matters, and contribute expertise to the Council.

As a member of the Council, FIO, in addition to two additional Council members that focus on insurance, has been actively involved in the rulemaking establishing the process for the designation of nonbank financial companies.  FIO will be engaged in the review of nonbank financial companies as this process moves forward.

Until the establishment of FIO, the United States was not represented by a single, unified federal voice in the development of international insurance supervisory standards.  FIO is providing important leadership in developing international insurance policy.  Recently, FIO assumed a seat on the executive committee of the International Association of Insurance Supervisors (IAIS).  The IAIS, in cooperation with the Financial Stability Board (FSB), is developing the methodology and indicators to identify global systemically important insurers, and FIO is actively engaged in that process.  Additionally, FIO established and has provided necessary leadership in the EU-U.S. insurance dialogue regarding such matters as group supervision, capital requirements, reinsurance, and financial reporting.  FIO also participated in the recent U.S.-China Strategic and Economic Dialogue in Beijing.  Importantly, FIO has and will continue to work closely and consult with state insurance regulators and other federal agencies in its work.

Priorities Ahead
Under the Dodd-Frank Act, Treasury is charged with coordinating the implementation of the Volcker Rule.  Treasury is actively engaged with the independent regulatory agencies in their work to finalize the Volcker Rule and make sure it is implemented effectively to prohibit proprietary trading activities and limit investments in and sponsorship of hedge funds and private equity funds.

The five Volcker Rule rulemaking agencies released substantially identical proposed rules, which reflect the commitment of Treasury and the regulators to a coordinated approach.  The comment periods for all five rulemaking agencies are now complete, and we are reviewing and analyzing over 18,000 public comment letters.  Treasury is hosting and actively participates in weekly interagency meetings to review those comments, and remains committed to fulfilling our coordination role and working with the rulemaking agencies to achieve a strong and consistent final rule.

Regulators are still in the process of conducting their evaluation of what happened with respect to recent losses at JPMorgan Chase, and why.  The lessons learned from the recent failures in risk management at JPMorgan are an important input into the ongoing efforts to design strong safeguards and reforms, including, of course, those in the Volcker Rule.

The Volcker Rule, as reflected in the statutory language enacted as part of the Dodd-Frank Act and in the proposed rule, explicitly exempts from the prohibition on proprietary trading the ability of firms to engage in “risk-mitigating hedging activities in connection with and related to individual or aggregated positions…designed to reduce the specific risks to the banking entity.”  To that end, the final rule should clearly prohibit activity that, even if described as hedging, does not reduce the risks related to specific individual or aggregate positions held by a firm.

The exposures accumulated by JPMorgan, in the words of its executives, resulted in potential losses that exceeded its internal limits and those estimated by its internal risk management systems.  This raises concerns that go well beyond the scope of the Volcker Rule.  Among other things, regulators should require that banks’ senior management and directors put in place effective models to evaluate risk, strengthen reporting structures to ensure risks are assessed independently and at appropriately senior levels, and establish clear accountability for failures in risk management.  Regulators should make sure that they have a clear understanding of exposures and that banks and their senior management are held accountable for the thoroughness and reliability of their risk management systems.  To further accountability, there should also be appropriate public transparency of risk management systems and internal limits.

Ultimately, the true test of reform is not whether it prevents firms from taking risk or from making mistakes, but whether our financial regulatory system is tough enough and designed well enough to prevent those mistakes from hurting the broader economy or costing taxpayers money.  We all have an interest in achieving this outcome.

I emphasize the broader framework of reforms because our ability to protect the economy from financial mistakes in banks depends on the authority and resources we have to enforce tougher capital, leverage, and liquidity requirements on banks and the largest, most complex nonbank financial companies.

It depends on our ability to put in place the full framework of protections in the Dodd-Frank Act on derivatives, from margin requirements and central clearing of standardized derivatives to greater transparency into risks and exposures.

It depends on the resources available to the SEC, the CFTC, the CFPB and the other enforcement authorities to police and deter manipulation, fraud, and abuse.

It depends on our ability to protect taxpayers from future financial failures, in particular our ability to safely unwind a large firm without the broad collateral damage and risk to the taxpayer that we experienced in 2008.

And it depends on making sure that no exception built into the law is allowed to swallow the rule, frustrate the core purpose of the legislation, or otherwise undermine the impact of the tough safeguards we need.

The challenges our economy continues to experience since the financial crisis in 2008 only increase our commitment to make sure we meet our responsibility to the American public to implement lasting financial reform.

Recent events provide an additional reminder that comprehensive reform must continue to move forward.  The Administration will continue to resist all efforts to roll back reforms already in place or block progress for those that remain to be implemented.  The lessons of the financial crisis should not be left unlearned or forgotten, nor should American workers—or American taxpayers—be left unprotected from the consequences of future financial instability.

I appreciate the opportunity to discuss the priorities and progress associated with our work implementing the Dodd-Frank Act, and the leadership and support of this committee in those efforts.

Thank you.