STATE DEPARTMENT OFFICIAL'S TESTIMONY ON P5+1 JOINT PLAN OF ACTION WITH IRAN

FROM:  U.S. STATE DEPARTMENT 
Assessing the P5+1 Joint Plan of Action With Iran
Testimony
Wendy R. Sherman
Under Secretary for Political Affairs 
Written Statement Before the Senate Committee on Banking, Housing and Urban Affairs
Washington, DC
December 12, 2013

Good morning, Chairman Johnson, Ranking Member Crapo, distinguished members of the committee. Thank you for inviting me to discuss the details of the Joint Plan of Action (JPA) concluded with Iran and our P5+1 partners on November 24 in Geneva.

Let me begin by noting that the diplomatic opportunity before us is a direct result of the cooperation between Congress and the Administration to put in place and implement a comprehensive and unprecedented sanctions regime designed to press Iran to address international concerns with its nuclear program.

Our collaboration on sanctions is what brought Iran to the table. However, it is important to underscore that what we do from this point forward is just as critical, if not more so, in terms of testing Iran’s intentions. In that regard, I look forward to our consultations over the important weeks and months ahead.

Today, I want to give you the facts about what was agreed to in Geneva, so you can judge the merits of the JPA for yourself.

Iran Commitments

We have long recognized that the Iranian nuclear program constitutes one of the most serious threats to U.S. national security and our interests in the Middle East. Thanks to the sanctions pressure, and a firm and united position from the P5+1 (China, France, Russia, UK, U.S. and Germany, in coordination with the EU), we have reached an understanding that constitutes the most significant effort to halt the advance of Iran’s nuclear program in nearly a decade. As a consequence, the JPA agreed to in Geneva is profoundly in America’s national security interest, and makes our regional partners safer and more secure.

The JPA is sequenced, with a 6-month period designed explicitly to block near-term Iranian pathways to a nuclear weapon, while creating space for a long-term comprehensive solution. The goal of that comprehensive solution is to resolve the international community’s concerns with Iran’s nuclear program. What this initial plan does is help ensure that Iran’s nuclear program cannot advance while negotiations towards that solution proceed.

Upon implementation in the coming weeks, this initial step will immediately: halt progress of the Iranian nuclear program; roll it back in key respects; and introduce unprecedented monitoring into Iran’s nuclear activities. Taken together, these measures will prevent Iran from enhancing its ability to create a nuclear weapon and increase the confidence in our ability to detect any move towards nuclear break-out or diversion of material towards a covert program.

The details demonstrate why this is the case. First, as stated, Iran must halt the progress of its enrichment program. This means, under the express terms of the JPA, that Iran cannot increase its enrichment capacity. Iran’s stockpile of 3.5 percent enriched uranium hexafluoride (UF6) cannot grow – it will be the same amount or less at the end of the six month period as it is as the beginning. Iran cannot build new enrichment facilities for the production of enriched uranium. Iran cannot install additional centrifuges of any type in their production facilities, operate more centrifuges, nor replace existing centrifuges with more advanced types. Moreover, Iran must limit centrifuge production to those needed to replace damaged machines; thus Iran cannot expand its stockpile of centrifuges.

Second, during this initial phase, Iran will roll back or neutralize key aspects of its program. Iran must cease all enrichment over five percent. The piping at Fordow and Natanz that is used to more efficiently enrich uranium over five percent must be dismantled. Iran must neutralize its entire 20 percent stockpile of enriched uranium hexafluoride by diluting it to a lower level of enriched uranium hexafluoride or converting it to oxide for fuel for the Tehran Research Reactor.

Finally, Iran cannot advance work on the plutonium track. At Arak, Iran cannot commission the heavy water reactor under construction nor transfer fuel or heavy water to the reactor site. Iran cannot test additional fuel or produce more fuel for the reactor nor install remaining components for the reactor. Iran cannot construct a facility for reprocessing spent fuel. Without reprocessing, Iran cannot separate plutonium from spent fuel and therefore cannot obtain any plutonium for use in a nuclear weapon. As such, this first step freezes the timeline for beginning operations at the Arak reactor and halts progress on any plutonium pathway to a weapon.

Significantly, the monitoring measures outlined in the JPA will provide much more timely warning of a breakout at Iran’s declared enrichment facilities and add new checks against the diversion of equipment for any potential covert enrichment program. Some have rightfully asked why we should trust Iran to live up to these commitments. As Secretary Kerry has said, the JPA is not based on trust, it is based on verification – and the verification mechanisms set forth in the JPA are unprecedented.

Under its express terms, Iran must permit daily access by International Atomic Energy Agency (IAEA) inspectors to the facilities at Natanz and Fordow and allow more frequent access to the Arak reactor. Iran must allow IAEA inspectors access to sites related to centrifuge assembly and production of centrifuge rotors (both key aspects of the program). Iran must allow IAEA inspectors access to uranium mines and mills. Iran must provide design information for the Arak heavy water reactor. These monitoring mechanisms will provide additional warning of breakout or diversion of equipment all along the nuclear fuel cycle and would not be in place without the understanding reached in Geneva.

In summary, even in its initial phase, the JPA stops any advances in each of the potential pathways to a weapon that has long concerned us and our closest allies. It eliminates Iran’s stockpile of 20 percent enriched uranium hexafluoride. It stops installation of additional centrifuges at production facilities, especially Iran’s most advanced centrifuge design, together with freezing further accumulation of 3.5 percent enriched uranium hexafluoride. And it ensures that the Arak reactor cannot be brought on line while we negotiate a comprehensive solution.

P5+1 Commitments

In return for these concrete actions by Iran and as Iran takes the required steps, the P5+1 will provide limited, temporary, and reversible relief while maintaining the core architecture of our sanctions regime – including key oil and banking sanctions. And we will vigorously enforce these and all other existing sanctions.

We estimate that this limited relief will provide approximately $6-7 billion in revenue.

First, we will hold steady Iran’s exports of crude oil at levels that are down over 60 percent since 2011. This means that Iran will continue to lose $4-5 billion per month while the JPA is in effect compared to 2011. Let me be clear, however. We will not allow Iran’s exports to increase and we will continue collaboration with our international partners to ensure that they understand that any increases in Iranian oil purchases – or any new purchases of Iranian oil – remain subject to sanctions.

Second, we are prepared to allow Iran to access $4.2 billion in its restricted assets, not in a lump sum, but in monthly allocations that keep up with verified Iranian progress on its nuclear commitments. Remember, Iran will continue to lose $4-5 billion a month due to our oil sanctions compared to 2011, so this access to funds is less than one month of those losses. And this is a fraction of Iran’s total needs for imports or its budget shortfall.

Third, the P5+1 agreed to suspend certain sanctions on gold and precious metals, Iran’s auto sector and on Iran’s petrochemical exports. The suspension of the sanctions on gold and precious metals will not allow Iran to use restricted assets to purchase gold and precious metals, rather it allows Iranians to import and export gold and precious metals. The suspension of the sanctions on the auto industry will allow Iran to obtain support and services from third countries for the assembly and manufacturing of light and heavy vehicles. The suspension of sanctions on petrochemical exports means Iran will be able to sell petrochemicals and retain the revenues from these sales. We estimate that Iran will earn approximately $1.5 billion in revenue from the temporary suspension of these sanctions.

We will also license the supply and installation of spare parts for the safety of flight for airplanes to occur in Iran. We will also license safety inspections and related services to occur in Iran. Notably, this will not apply to any airline subject to sanctions under our counter-terrorism authorities.

In addition, solely for the financing of humanitarian transactions and tuition assistance for Iranians studying abroad, we will facilitate access to Iran’s overseas accounts for these specific transactions. Even before the JPA, we never intended to deprive the Iranian people of humanitarian goods, like food and medicine. In fact, Congress has explicitly exempted these transactions from sanctions.

There have been some that have incorrectly represented the limited relief as being far more. So, let me reiterate. The total relief envisioned in the JPA amounts to between $6-7 billion – nowhere near the $20 or $40 billion that some have reported. The total relief for Iran envisioned in the JPA would be a modest fraction of the approximately $100 billion in foreign exchange holdings that are inaccessible or restricted because of our ongoing sanctions pressure. This sanctions pressure, moreover, will continue to increase over the six months of this initial phase through the continued enforcement of our sanctions.

Continued Enforcement of Sanctions

It is important to understand that the overwhelming majority of our sanctions remain in place and we will continue to vigorously enforce those sanctions to ensure that Iran receives only the limited relief that we agreed to. This will include aggressive enforcement of sanctions under the Comprehensive Iran Sanctions Accountability and Divestment Act of 2010 (CISADA), the Iran Sanctions Act, the Iran Threat Reduction and Syria Human Rights Act of 2012, and the Iran Freedom and Counter-Proliferation Act of 2012. This means that sanctions will continue to apply to broad swaths of Iran’s economy including its energy, financial, shipping, and shipbuilding sectors. By rigorous monitoring we will also prevent abuse of the relief that is part of the JPA. Were we to see increased purchases of oil or sanctions evasion, we are prepared to act swiftly to sanction the offenders.

Moreover, the U.S. trade embargo remains in place and U.N. Security Council’s sanctions remain in place. All sanctions related to Iran’s military program, state sponsorship of terrorism, and human rights abuses and censorship remain in place. Our vigilance will continue.

What is also important to understand is that we remain in control. If Iran fails to live up to its commitments as agreed to in Geneva, we would be prepared to work with Congress to ramp up sanctions. In that situation, we would be well-positioned to maximize the impact of any new sanctions because we would likely have the support of the international community, which is essential for any increased pressure to work

In comparison, moving forward on new sanctions now would derail the promising and yet-to-be-tested first step outlined above, alienate us from our allies, and risk unraveling the international cohesion that has proven so essential to ensuring our sanctions have the intended effect.

The Way Ahead

In assessing this deal on the merits, we must compare where we would be without it.

Without the JPA, Iran’s program would continue to advance: Iran could spin thousands of additional centrifuges; install and spin next-generation centrifuges that reduce its breakout times; advance on the plutonium track by fueling and commissioning the Arak heavy water reactor and install remaining components ; and grow its stockpile of 20 percent enriched uranium hexafluoride. It could do all of that, moreover, without the new inspections that are part of this deal and give us new tools to help detect breakout.

With the JPA, we halt the program in its tracks, roll it back in key respects, and put time on the clock to negotiate a long-term, comprehensive solution with strict limits and verifiable assurances that Iran’s nuclear program is solely for peaceful purposes.

In a perfect world, we could get to such a comprehensive solution right away. But the reality is that in the absence of the JPA, we would have had an Iranian nuclear program that could double its enrichment capacity, grow its stockpile of enriched uranium, and make progress on starting up the Arak reactor.

We are now moving forward to prepare for implementation. This week, our experts are in Vienna discussing with their P5+1 counterparts, Iran, and the IAEA, the mechanisms and timeframes for beginning implementation and setting a start date. These are technical and complex discussions, and it is critical that we do them well and right -- working to protect our national security interests at every step along the way.

At the same time, the JPA and its implementation is only a first step. There are still many issues related to Iran’s nuclear program that must be addressed, and in the process, Iran must work with the IAEA to resolve all past and present issues of concern. That is why our ultimate aim is a comprehensive agreement that fully addresses all of our longstanding concerns.

Conclusion

Finally, let me be clear about one thing: Our policy with regard to Iran has not changed. The President has been clear that he will not allow Iran to acquire nuclear weapon. While his strong preference is for a diplomatic solution, he is prepared to use all elements of American power to prevent that outcome.

Our commitment to working with our partners, in the region and elsewhere, to hold Iran accountable for all its actions also remains firm. These negotiations will solely focus on Iran’s nuclear program. So we will continue to counter Iran’s destabilizing activities in the region. We will continue to hold Iran accountable for its support for terrorism. Iran remains listed as a State Sponsor of Terror and our sanctions for their support of terror remain in place.

Our sanctions on Iran’s human rights abusers will also continue and so will our support for the fundamental rights of all Iranians. Last week, National Security Advisor Rice reiterated our support for the UN Special Rapporteur on Human Rights and called on Iran to allow him to visit Iran. We will continue to speak forcefully for the oppressed inside Iran, including through our support, later this month, for a resolution before the UN General Assembly condemning Iran’s human rights practices

We call on Iran to release Saeed Abedini and Amir Hekmati and support our efforts to bring Robert Levinson home. As Secretary Kerry has said, one day is too long to be in captivity, and one day for any American citizen is more than any American wants to see somebody endure. Mr. Abedini, Mr. Hekmati, and Mr. Levinson have been gone too long and we will continue to do everything we can, using quiet diplomacy.

And we will prevent Iran from obtaining a nuclear weapon. That is what these negotiations are all about. We have been encouraged that nearly 70 countries have expressed support for the understandings reached in Geneva, including statements of support from our partners in the Gulf Cooperation Council, with whom we remain closely engaged. The sentiment from our partners has been clear: give this process a chance. If Iran lives up to its commitments then the world will become a safer place. If it does not, then we retain all options to ensure that Iran can never obtain a nuclear weapon. The coming months will be a test of Iranian intentions, and of the possibility for a peaceful resolution to this crisis.

Throughout, and as always, we look forward to working closely with the Congress to ensure that U.S. national security interests are protected and advanced.

Thank you.

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.