CFTC ISSUES ADVISORY REGARDING COMMODITY TRADING ADVISORS AND SWAPS

FROM:  COMMODITY FUTURES TRADING COMMISSION 
CFTC’s Division of Swap Dealer and Intermediary Oversight Issues Advisory Concerning Commodity Trading Advisors and Swaps

Washington, DC — The U.S. Commodity Futures Trading Commission’s (CFTC or Commission) Division of Swap Dealer and Intermediary Oversight (DSIO) today issued an advisory that provides guidance regarding requirements imposed on commodity trading advisors (CTAs) resulting from the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act).

The Dodd-Frank Act amended the statutory definition of CTA to include any person who engages in the business of advising others on swaps. Additionally, certain CTAs who were previously exempt from registration with the CFTC are now required to register because of the CFTC’s rescission of Commission Regulation 4.13(a)(4) and amendments to Commission Regulation 4.5. As a result, provisions of the Commodity Exchange Act (CEA) and CFTC regulations applicable to CTAs might, depending on the circumstances, result in new advisory obligations.

This advisory provides guidance on the potential new advisory obligations of CTAs arising from the Dodd-Frank Act. It also informs the newly expanded class of CTAs and those previously exempt CTAs as to the general regulatory framework, including: (1) provisions of the CEA and CFTC regulations applicable generally to CTA activities; (2) CTA advisory obligations with respect to swap risk disclosures; and (3) requirements relevant to CTAs that advise Special Entities on swap transactions.

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.

U.S TREASURY ON WALL STREET REFORM

FROM:  U.S. DEPARTMENT OF THE TREASURY
Wall Street Reform for U.S. Department of the Treasury
As prepared for delivery
NEW YORK – Good afternoon.  It is a privilege to address the International Section of the American Bar Association, and to be speaking about international regulatory reform. The subject matter is particularly timely given that the world’s finance ministers will gather in Washington, D.C. for the G-20 this weekend.

We have learned from recent events, including the financial crisis, that financial systems and markets around the world are more integrated than ever.  Therefore, financial reforms around the globe must be consistent and convergent.

I will touch on three key priorities that were agreed upon by the G-20 – capital, resolution, and OTC derivatives – as well as insurance regulation.
We are transitioning now from regulatory design to implementation.  We must acknowledge that the task is both difficult and complex. We must work together through the G-20 and the Financial Stability Board to make the new rules effective. We all share a common interest in a global financial system that is safe and resilient, and that supports growth.

The Importance of Reform
Let me begin by retreading familiar ground: the financial crisis revealed that the risks facing our system can be correlated and crosscutting, and that they can affect multiple firms, markets, and countries simultaneously. The crisis laid bare the fundamental weaknesses of the previous financial regulatory infrastructure.
To preserve financial stability, it became essential to establish a regulatory structure that could properly assess the financial system as a whole, not simply its component parts – a regulatory structure in which the failure of one firm, or problems in one corner of the system, would not risk bringing down the entire financial system.  It was important to establish a modern regulatory framework that could keep pace with financial sector innovations, restore market discipline, and safeguard financial stability in both the United States and abroad.  The United States has played a leading role in this global financial reform by enacting the Dodd-Frank Act.

Some have argued that these new rules and standards put U.S. financial firms at a competitive disadvantage.  While we must always work towards having a level competitive playing field, I believe such arguments are misplaced.
First, by moving quickly, we in the United States have been able to lead from a position of strength in setting the international reform agenda.

Second, there is already evidence that our actions – both the immediate response to the crisis and permanent reforms under the Dodd-Frank Act – have bolstered the recovery of the U.S. financial system.  Bank balance sheets are stronger. Tier 1 common equity at large bank holding companies has increased by more than 70 percent or by $560 billion since the first quarter of 2009. Additionally, at the four largest bank holding companies, for example, reliance on short-term wholesale financial debt has decreased from a peak of 36 percent of total assets in 2007 to 20 percent at the end of 2011. The firms’ liquidity positions are more robust and their funding sources are more reliable. Firms have significantly reduced leverage. Recent stress tests showed that the bank holding companies are better able to withstand significant shocks.

Third, I believe that consumers, investors, and businesses feel more secure when they deal with financial institutions that are well-regulated and transparent, because these attributes engender trust. Trust is essential for the financial system to perform its most basic functions, including credit intermediation. For many years, investors from all over the world have trusted the U.S. financial system. Regulation that is both strong and sensible is essential to continue that trust.

Over the past three years, we have made substantial progress in restoring this trust to our financial system and thereby improving financial stability. Long-term economic growth and credit intermediation are only sustainable under a model in which there is confidence in financial stability.

International Coordination
All of this being said, it is nevertheless important to remember that financial systems are interconnected and that risks both transcend and migrate across national borders. Therefore, we must work towards building a system where there is broad global agreement on the basic rules of the road.

Global coordination is important not only for maintaining a level playing field, but also for promoting financial stability.  We can ill afford the risk of regulatory arbitrage.  If riskier activities migrate unchecked to jurisdictions with inadequate rules and supervision, the threats that will emerge will have implications not just for the host country, but for the global financial system. The financial crisis exposed the failure of weak regulation.

Europe has taken important steps toward reform.  The EU is working through its most extensive financial services reform.   It has proposed or adopted around thirty reform measures, including almost all of the key measures agreed to by the G-20.  The United States and the EU are aligned on the fundamental goals of regulatory reform, and are united by a shared view that it is necessary to complete at an international level the work that is underway.  Treasury and U.S. regulatory agencies have worked closely with our counterparts in the European Commission and the European Supervisory Agencies to align our regulations more closely.

It is unlikely that we and our European counterparts will attain perfect alignment.  But most of the differences between us are technical, not matters of principle.  While we must work diligently to resolve our technical differences, we should not let them overshadow our shared commitment to reform. We must also see to it that other regions follow through on implementing reforms, particularly Asia, given the importance of financial centers like Hong Kong, Singapore, and Tokyo. The global financial system will continue to strengthen as a result of our efforts. Backtracking on reforms is not an option.

G-20 and the Joint Reform Agenda
The G-20 has been, and will continue to be, a key vehicle for coordinating our reform efforts. Since the first meetings of the G-20, and especially since the Pittsburgh meetings during the height of the financial crisis in 2009, the Group has worked to increase the strength and effectiveness of the international regulatory framework through a comprehensive agenda for reform. This agenda has been reaffirmed and further developed at each subsequent Summit.  The Financial Stability Forum, which was expanded and strengthened as the Financial Stability Board (FSB) in 2009, has also played a key role in this process, with support from the global standard-setting bodies.

This year in the G-20, the United States is emphasizing progress on implementation in three key areas: capital, resolution, and OTC derivatives.  Let me now turn to discussing these three priorities as well as international coordination around insurance, which will also be an area of focus in the coming year.

Capital
The crisis showed that financial institutions were not sufficiently capitalized to withstand significant market pressures.  To maintain financial stability, taxpayers in countries across the globe had to provide capital support to financial institutions in order to prevent their failure.  There was little question that, going forward, banks needed to be more resilient, with better quality capital buffers.  

The international regulatory community acted with dispatch and urgency to achieve consensus on Basel 2.5 and Basel III capital standards.  The new Basel capital standards provide a uniform definition of capital across jurisdictions, and it requires banks to hold significantly more and higher-quality capital.  The reforms to the Basel Capital Standards also establish a mandatory leverage ratio and a liquidity coverage ratio.
More work remains with respect to the Basel Capital Standards.  International agreement on standards must be followed with implementation by G-20 members.  Moreover, important debates continue around issues such as liquidity run-off ratios and measurement of capital deductions. The Basel Committee is now working toward more consistent measurement of risk-weighted assets across jurisdictions.

While these points are relatively technical, it is important that the new rules be consistent not only in principle, but also in practice. Consistent cross-border application of capital standards is important to maintaining a level playing field.

Resolution
Strengthening cross-border resolution regimes is complicated.  But it is a critically important topic.

The U.S. experience with Lehman Brothers showed the potentially devastating consequences to financial stability of the disorderly bankruptcy of a financial firm. Thus, the Dodd-Frank Act provides for orderly resolution of financial companies, including non-bank financial institutions. The FDIC and Federal Reserve have already adopted a number of rules pursuant to these new authorities, including a “living wills” rule that requires large bank holding companies and designated nonbank financial companies to prepare resolution plans.  The largest bank holding companies will submit the first living wills in July.
The goal of international convergence was furthered this year when the G-20 endorsed the “Key Attributes of Effective Resolution Regimes for Financial Institutions.”   This new international standard addresses such critical issues as the scope and independence of the resolution authority, the essential powers and authorities that a resolution authority must possess, and how jurisdictions can facilitate cross-border cooperation in resolutions of significant financial institutions. The Key Attributes provide guidelines for how jurisdictions should develop recovery and resolution plans for specific institutions and for assessing the resolvability of their institutions.  This new international standard also sets forth the elements that countries should include in their resolution regimes while avoiding severe systemic consequences or taxpayer loss.

Therefore, much progress has already been made and even more will be completed by the end of this year: cross-border crisis management groups for the largest firms have been established, additional cross-border cooperation agreements will be put in place, and recovery and resolution plans are being developed.

Derivatives
The crisis also showed that we did not have a sufficient understanding of derivatives, which are an important means of interconnection between firms.  The flaws attendant to this area of financial transactions were many: poor access to useful data such that, at critical times, neither supervisors nor counterparties knew who owed what to whom; poor risk management such that firms were not able to satisfy their contractual obligations with respect to collateral; and a generally fragmented and opaque market. It is common ground that the lack of oversight in the derivatives markets exacerbated the financial crisis.
The Dodd-Frank Act creates a comprehensive framework of regulation for the OTC derivatives markets.  The elements of this framework include regulation of dealers, mandatory clearing, trading, and transparency.  The framework established under the Dodd-Frank Act is consistent with that of the G-20.  The CFTC and SEC are well into their rule-making process.  Once again, the United States and the EU have closely cooperated in this area, and have adopted parallel approaches to important issues such as central clearing, trading platforms, and reporting to trade repositories.

While the reforms set forth a framework for on-exchange-traded derivatives, it is also important for us to make progress on establishing a global regime for margin for bespoke, un-cleared derivatives transactions.  Both the United States and the EU support international work on global margin standards for trades that are not cleared through a central counterparty. Margin requirements are critical to promoting the safety and soundness of the dealers, and thereby lower risk in the financial system.
While we have made some progress, there is still much work to be done on derivatives, including completing the implementation efforts and meeting agreed G-20 timetables.

Insurance
Finally, I would like to turn to insurance regulation.  Important strides have been made in this area. The Dodd-Frank Act created and placed within the Treasury Department the Federal Insurance Office (FIO). While FIO is not a regulator, it has broad responsibilities to monitor all aspects of the insurance industry and is the first federal office in this sector. Among its duties, FIO is charged with coordinating federal efforts and developing federal policy on prudential aspects of international insurance matters, including representing the United States in the International Association of Insurance Supervisors, or IAIS. Notably, FIO recently joined the Executive Committee of the IAIS.

FIO’s establishment coincides with the rapid internationalization of the insurance sector and work ongoing in various international regulatory bodies that will affect U.S.-based companies operating around the world. FIO’s international priorities include the IAIS initiative to create a common framework for the supervision of internationally active insurance groups, or ComFrame. FIO is also engaged in the IAIS work stream to develop a methodology that will identify globally significant insurance institutions, an assignment given to the IAIS by the Financial Stability Board. Finally, FIO is leading an insurance dialogue between the United States and the EU that aims to establish a platform for insurers based on both sides of the Atlantic to compete fairly and on a level playing field.

Conclusion
We must continue to work with our partners in the G-20 and the Financial Stability Board to ensure a consistent international financial reform agenda.  It is not enough to mitigate risk within the United States.  Reform must be global in nature.

But, financial reform cannot just respond to events of the past.  It must be forward-looking and it must help lay the foundations for sustainable growth.  Financial reform, embodied by responsible and robust regulation, is critical to establishing and maintaining confidence.  Confidence is critical for long-term financial stability and growth.
Our past experience confirms our current judgment.  In the decades following the Great Depression, the United States set the highest standards for disclosure and investor protection, the strongest protections for depositors, and sophisticated market rules. We did not lower our standards even when others might have.  Financial regulation became a source of strength for our financial system and led to a period of significant growth and prosperity.

Today, as our predecessors did in the wake of the Great Depression, we also have the opportunity to restore trust in the global financial system through a smart regulatory framework that could support sustainable economic expansion.
Thank you.