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 Remarks of Acting Deputy Secretary and Under Secretary for Domestic Finance Mary Miller at the Annual Washington Conference of the Institute of International Bankers (IIB)



As prepared for delivery


WASHINGTON - Good morning and welcome to Washington. Thank you for inviting me to join you again this year at your annual conference. 

Today I will say a few words about what we accomplished on financial regulatory reform last year, discuss our ongoing work, and then turn to Treasury’s priorities in the year ahead.




2013 was certainly busy. We made significant progress on Basel III capital requirements, the designation of nonbank financial companies for enhanced prudential standards, derivatives market reforms, and, of course, the Volcker Rule, to name some highlights.  Let me briefly address each of these topics, and a few other significant milestones.


Last summer, the Federal Reserve, Federal Deposit Insurance Corporation (FDIC) and the Comptroller of the Currency finalized an important set of rules to implement the Basel Committee’s risk-based capital requirements.  These are intended to increase both the quantity and quality of regulatory capital held by banks.


The banking regulators also proposed a backstop to the risk-based capital requirements, which would require the largest banks to reduce their overall leverage.  An international group of regulators is making significant progress toward finalizing a consistent leverage ratio across different jurisdictions. Specifically, they have recently agreed on a global framework for calculating both the numerator and the denominator.


Last April, the Financial Stability Oversight Council (FSOC or Council) released its third annual report, which identified potential emerging threats to financial stability and made recommendations to enhance the stability of the financial system. The FSOC continues to carefully evaluate whether large, complex nonbank financial companies could pose a threat to U.S. financial stability and should be subject to supervision by the Federal Reserve.  Last summer, the FSOC designated AIG, GE Capital, and Prudential.  These actions are in addition to the eight financial market utilities that were designated in 2012. 


We continued to make progress on derivatives reform. Implementing reporting and clearing rules was a critical step forward in improving the safety and transparency of the derivatives market.  In September, an international working group, co-chaired by the Federal Reserve and including the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC), finalized margin standards for non-centrally cleared derivative transactions.  U.S. regulators are now working to incorporate these standards domestically, and we expect these rules to be finalized this year. 

In addition, by the end of last year there were 22 swap execution facilities (SEFs) registered with the CFTC.  Trading volume on those platforms has increased significantly in recent weeks, now that certain interest rate derivatives are required to be traded on SEFs.


This past December, the five independent rulemaking agencies finalized the Volcker Rule.  Secretary Lew, in his capacity as Chairperson of the FSOC, was responsible for coordinating the writing of the rule.  It is important to point out that we achieved our goal of having a single rule, when we could have ended up with as many as four separate rules – a less workable outcome for the market.   Finalizing a single rule was a priority for Secretary Lew, and I assure you it was no small feat. 


Equally as important, the agencies produced a final rule that was true to President Obama’s proposal and the statute’s intent. It will protect taxpayers by restricting banks’ speculative trading activities, while preserving their ability to help maintain deep and liquid financial markets. The rule’s requirement that the largest firms’ CEOs attest to the maintenance and enforcement of compliance programs will help foster a top down understanding of the need to match practices with the Volcker Rule’s intent.


Recently, the Federal Reserve issued a slate of enhanced prudential standards intended to increase safety and soundness at the largest and most complex banks.  One part of these standards is a new capital requirement for foreign banking organizations operating in the United States.  This rule will level the playing field with U.S. firms operating domestically, and, perhaps more importantly, respond to weaknesses identified during the financial crisis.  Extended phase-in periods and higher thresholds for application should help mitigate transition issues.


We also made substantial progress improving the tools at our disposal to resolve a failing company, while minimizing the impact on the rest of the U.S. financial system and economy.  The bankruptcy process, aided by Dodd-Frank’s living wills requirement, continues to be the primary method for winding down firms.  All firms required to submit living wills have done so, and the largest bank holding companies submitted their second round of living wills last fall.  These developments have provided regulators with critical information to facilitate an orderly resolution through bankruptcy should a firm fail.  In connection with these efforts, we have heard anecdotally that some of these firms have found this process helpful.  Some have already begun to simplify their corporate structures as a result.


However, if bankruptcy cannot be used to resolve a failing financial company without serious adverse effects on U.S. financial stability, the Dodd-Frank Act provides new authority to create a process for an orderly resolution of a large and complex firm.  In December, the FDIC issued and sought public comment on an important document detailing its “single point of entry” strategy for resolving a financial institution using orderly liquidation authority.  This strategy is designed to allow the critical operating subsidiaries of a failing firm to remain in business during the resolution, while also preserving market discipline in accordance with the law’s requirements.  This means that losses are borne by shareholders and creditors, that management is held accountable, and that taxpayers bear no losses.  International cooperation is critical to ensure a resolution is workable across borders, a topic I’ll discuss in more detail shortly.


The new institutions created by Dodd-Frank and housed at Treasury, including the FSOC, the Office of Financial Research (OFR), and the Federal Insurance Office (FIO), are each making important contributions to the international agenda on financial reform.  With the establishment of FIO, which represents the United States at the International Association of Insurance Supervisors and other international forums, there is now a federal voice on international insurance matters. 


In addition to its international work, in 2013 FIO completed a report on how to modernize the U.S. system of insurance regulation.  The Modernization Report included 27 recommendations on how to build on our existing federal-state framework for insurance regulation, solve longstanding regulatory issues, and adopt measures so that the U.S. has a strong, modern, and efficient regulatory system.




While our recent progress is significant, there are a number of important reforms that are still under construction. 


Our banking regulators will continue their work on global capital, leverage and liquidity requirements, beginning with the recently agreed-upon framework for calculating the leverage ratio. 


The Federal Reserve has also indicated that it will be analyzing the business models of designated nonbank financial companies, with a view toward tailoring enhanced prudential standards for those companies.


Treasury and the FSOC remain focused on emerging threats that might arise outside, or on the periphery of, the traditional banking sector, including potential vulnerabilities in short-term funding markets. To that end, the SEC has proposed rules to enhance the regulation of money market funds, and we expect them to issue a final rule later this year to address these risks.


On another front, FSOC is analyzing the extent to which there are potential threats to U.S. financial stability arising from asset management companies or their activities, and whether such threats would best be mitigated by designations or other regulatory steps.  As part of this analysis, the FSOC requested that the OFR conduct a study of the asset management industry.  The Council is in the early stages of its analysis and will conduct a thorough review, with engagement from stakeholders, before determining whether additional measures are appropriate.


As was the case with the Volcker Rule, the Treasury Secretary, as Chairperson of the FSOC, is responsible for coordinating the so-called “risk-retention” rule.  This rule generally requires securitizers of asset-backed securities to have skin in the game by retaining a 5 percent interest in the securities they sell to third parties. The rule was re-proposed last year, following an extensive public engagement. Treasury and the six agencies responsible for writing the rule have continued to meet regularly with a goal of completing the rule in 2014.


Housing finance reform is an important priority for Treasury and the Administration. Last August, the President outlined the Administration’s core objectives:  return private capital to a dominant role in providing mortgage credit; ensure creditworthy borrowers, including first time homeowners, have broad access to safe and responsible mortgages; put in place strong safeguards to protect taxpayers; and help ensure access to affordable rental options.  We remain hopeful that comprehensive, bipartisan housing finance reform consistent with those principles is achievable this year.




Two years ago, when I spoke at this conference, I discussed the importance of global coordination on financial regulatory reform. I stressed the importance of establishing strong and aligned standards around the world, and the goals we share with our counterparts to protect the safety and soundness of markets, achieve a level playing field globally, and realize the economic benefits of global finance.


Today I want to revisit those themes because they feature prominently in our goals for 2014.  Following the 2008 financial crisis, the U.S. moved quickly to put in place important reforms that would reduce our vulnerability to future crises.  We felt an obligation, first and foremost to the American people, but also to the international community, to show leadership in financial reform.  As a result of going first, we have often been the target of criticism.  After all, no rule or set of rules is perfect or will make everyone happy.


But given the global nature of our financial system, we must continue working with foreign regulators to forge alignment.  From the onset of the crisis, the time and energy we put into domestic regulatory reform have been paired with international efforts to promote high-quality standards and reduce risk.  We have made considerable progress through the G-20 and the Financial Stability Board (FSB) in designing a more stable and resilient global financial system.  Now we need to follow through with concrete actions.


Last month, Secretary Lew met with G-20 finance ministers in Australia, and used that opportunity to call on the leadership of the world’s largest economies and most active markets to bear down even more forcefully on implementation.


In 2014, we expect to focus on global outcomes that are well-synchronized.   An important piece of that is making sure banks move quickly to build strong and high-quality capital.  The international agreement reached earlier this year on the leverage ratio helps ensure more consistency across jurisdictions.  We also support ongoing international efforts to achieve as much alignment as possible in the calculation of risk-weighted assets.


There is also ongoing international work to develop a basic capital requirement for globally systemically important insurers. This capital requirement is an essential step in the development of a common supervisory framework for the largest, most interconnected global insurers.


Derivatives reforms have been a particular focus of global coordination efforts.  We understand that for derivatives reforms to work correctly, they should align globally.  Last summer, the CFTC finalized its guidance on how to apply its derivatives reforms to cross-border transactions.  In a related development, the CFTC and European Commission issued a joint “Path Forward.”  In recent weeks, the CFTC has continued on that path by working with its counterparts in the UK and Europe to raise global standards for electronic trading platforms, while at the same time preserving flexibility and protecting against potential market fragmentation. 


When it comes to recognizing the comparability of other regulatory approaches to derivatives, we support an approach designed to achieve similar outcomes rather than identical regulatory text.  However, it is vital that the rules are strong enough to achieve desired results and accomplish the overall goals of raising global standards and creating a level playing field.


One area where I personally plan to focus attention this year is on trying to deliver on Dodd-Frank’s promise of greater transparency in derivatives markets.  I'm speaking about the need for an effective swaps data reporting regime, one designed to ensure that we have the information necessary to develop a comprehensive picture of market exposures and risks. 


While the development of trade repositories around the world to collect transaction data is significant, we have not yet achieved global standards for data aggregation and reporting. Treasury, the CFTC, and our international counterparts all recognize the importance of getting this right. 


Related to the work on swaps data repositories, the OFR is leading the implementation of the global Legal Entity Identifier, a code that uniquely identifies parties to financial transactions.  The LEI is now being used for regulatory reporting in the U.S., Canada, Europe and parts of Asia.  Over 200,000 codes have been issued in the U.S. and Europe, so the system is up and running.  The OFR plays a leadership role in this international initiative, working with almost sixty global authorities to establish a framework to manage the system.  Treasury is working with other FSOC members to incorporate the LEI into their own rules so this standard becomes ubiquitous.


As I noted earlier, we have made great progress in the U.S. in implementing Title II of the Dodd-Frank Act, most recently aided by the FDIC’s request for comment on its “single point of entry” resolution strategy.  But in order to be most effective and credible, resolution will need to be workable for globally-active institutions.  This will require coordination among U.S. regulators and our counterparts overseas.  The FDIC has signed information sharing agreements with the U.K., Canada, and China, and continues to work on similar agreements with other countries.


The FDIC and Bank of England have also worked closely to develop a resolution strategy that would be feasible and credible in a cross-border context.  In addition, the FSB is working toward proposals for the cross-border recognition of resolution actions to facilitate consistent treatment of domestic and foreign counterparties.  


The FDIC has conducted table-top exercises to test how an orderly liquidation would be executed domestically.    It would be valuable to do a similar simulation with our international counterparts.


Last year, the FSOC’s annual report identified reliance on market reference rates as a vulnerability, specifically LIBOR and related interest-rate benchmarks.  Since that time, concerns have emerged regarding the reliability of certain foreign-exchange related benchmarks as well.  National regulators and international bodies have undertaken several efforts to improve the governance of existing benchmarks and root out practices that undermine their integrity.  Regulators are also working on possible alternatives to existing benchmarks. However, we must make sure that potential alternatives are viable and that we can smoothly manage a transition.


A final area of international interest I wanted to touch on is trade, specifically the Trans-Atlantic Trade and Investment Partnership, or “T-TIP.”  A high-standard T-TIP agreement would promote growth and create good jobs.  In the financial sector it is important that T-TIP expand on the market access obligations that the EU and U.S have already undertaken in the WTO. Regarding financial regulatory issues, cooperation is best pursued through the forums that are already at the forefront of advancing global financial reforms, such as the FSB and the G-20, and through bilateral forums such as the U.S.-EU Financial Markets Regulatory Dialogue.




But let’s be honest—coordination is hard work.  Coordination among our domestic regulators is hard enough, as I learned helping to move the Volcker Rule over the finish line.  And the task of international coordination is significantly more difficult.  However, we all must aim for high regulatory standards that will help mitigate the effects of the next financial crisis.


Let me end on a positive note. On a recent trip to Singapore, Hong Kong and Tokyo, I was encouraged by the sense of purpose among regulators there.  Each regulator expressed concern about the potential for regulatory arbitrage.  While they object to a one-size-fits-all approach, they also know that in order to function smoothly global markets require strong global standards.  Participation and engagement from all regions is essential to foster the kind of cooperation we need to build a resilient global financial system. I believe that is a shared objective.


Thank you very much for your attention today and the opportunity to share these points with you.




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