[Senate Hearing 112-594]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 112-594
 
INTERNATIONAL HARMONIZATION OF WALL STREET REFORM: ORDERLY LIQUIDATION, 
                   DERIVATIVES, AND THE VOLCKER RULE 

=======================================================================

                                HEARING

                               before the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                      ONE HUNDRED TWELFTH CONGRESS

                             SECOND SESSION

                                   ON

    EXAMINING ORDERLY LIQUIDATION, DERIVATIVES, AND THE VOLCKER RULE

                               __________

                             MARCH 22, 2012

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs


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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                  TIM JOHNSON, South Dakota, Chairman

JACK REED, Rhode Island              RICHARD C. SHELBY, Alabama
CHARLES E. SCHUMER, New York         MIKE CRAPO, Idaho
ROBERT MENENDEZ, New Jersey          BOB CORKER, Tennessee
DANIEL K. AKAKA, Hawaii              JIM DeMINT, South Carolina
SHERROD BROWN, Ohio                  DAVID VITTER, Louisiana
JON TESTER, Montana                  MIKE JOHANNS, Nebraska
HERB KOHL, Wisconsin                 PATRICK J. TOOMEY, Pennsylvania
MARK R. WARNER, Virginia             MARK KIRK, Illinois
JEFF MERKLEY, Oregon                 JERRY MORAN, Kansas
MICHAEL F. BENNET, Colorado          ROGER F. WICKER, Mississippi
KAY HAGAN, North Carolina

                     Dwight Fettig, Staff Director

              William D. Duhnke, Republican Staff Director

                       Charles Yi, Chief Counsel

                     Laura Swanson, Policy Director

                   Glen Sears, Senior Policy Advisor

                      Jeff Siegel, Senior Counsel

                     Jeannette Quick, OCC Detailee

                 Jana Steenholdt, Legislative Assistant

                 Andrew Olmem, Republican Chief Counsel

                   Michelle Adams, Republican Counsel

               Mike Piwowar, Republican Senior Economist

                       Dawn Ratliff, Chief Clerk

                     Riker Vermilye, Hearing Clerk

                      Shelvin Simmons, IT Director

                          Jim Crowell, Editor

                                  (ii)



                            C O N T E N T S

                              ----------                              

                        THURSDAY, MARCH 22, 2012

                                                                   Page

Opening statement of Chairman Johnson............................     1

Opening statements, comments, or prepared statements of:
    Senator Shelby...............................................     2

                               WITNESSES

Lael Brainard, Under Secretary for International Affairs, 
  Department of the Treasury.....................................     4
    Prepared statement...........................................    37
    Responses to written questions of:
        Senator Hagan............................................    70
        Senator Toomey...........................................    70
Daniel K. Tarullo, Member, Board of Governors of the Federal 
  Reserve
  System.........................................................     6
    Prepared statement...........................................    40
    Responses to written questions of:
        Senator Toomey...........................................    72
Elisse B. Walter, Member, Securities and Exchange Commission.....     7
    Prepared statement...........................................    43
    Responses to written questions of:
        Senator Hagan............................................    75
        Senator Toomey...........................................    77
Martin J. Gruenberg, Acting Chairman, Federal Deposit Insurance
  Corporation....................................................     9
    Prepared statement...........................................    52
John G. Walsh, Acting Comptroller, Office of the Comptroller of 
  the Currency...................................................    10
    Prepared statement...........................................    58
Jacqueline H. Mesa, Director of the Office of International 
  Affairs, Commodity Futures Trading Commission..................    12
    Prepared statement...........................................    66

              Additional Material Supplied for the Record

Letter submitted by Senator Merkley from Thierry Philiponnat, 
  Secretary General, Finance Watch...............................    79

                                 (iii)


INTERNATIONAL HARMONIZATION OF WALL STREET REFORM: ORDERLY LIQUIDATION, 
                   DERIVATIVES, AND THE VOLCKER RULE

                              ----------                              


                        THURSDAY, MARCH 22, 2012

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 9:48 a.m., in room SD-538, Dirksen 
Senate Office Building, Hon. Tim Johnson, Chairman of the 
Committee, presiding.

           OPENING STATEMENT OF CHAIRMAN TIM JOHNSON

    Chairman Johnson. I call this hearing to order.
    I thank our witnesses for joining us.
    Today, this Committee continues its oversight of the 
implementation of the Wall Street Reform Act. Since our last 
Wall Street Reform hearing in December, there have been 
significant developments on implementation, including new 
proposed and final rules in areas critical to strengthening 
market oversight and stability.
    Among the many lessons apparent from the recent financial 
crisis is that the financial system is truly global and that 
risks and regulations in one country can have significant 
effects on institutions and markets worldwide. Last month, we 
held a hearing to examine the European debt crisis and any 
potential spillover effects in the U.S. Today's hearing will 
focus on the possible effects of our new financial rules on 
international markets and on international competitiveness for 
U.S. institutions.
    Some of the most complex and critical rulemakings of the 
Wall Street Reform Act are the ones with international 
implications that we will focus on today. The FDIC's new 
orderly liquidation authority, as well as the creation of 
living wills and the SIFI designation, will together help 
ensure that large, multinational, interconnected financial 
institutions may be quickly wound down in times of stress 
without exposing taxpayers to losses or threatening the 
financial system.
    In order to fully implement these important rules, our 
agencies must work closely with their international partners to 
make cross-border resolutions orderly and coordinated so that 
global firms will no longer be too big to fail. I look forward 
to the agencies providing an update on efforts to harmonize 
regulations.
    The Volcker Rule also raises a number of complicated issues 
with potential international effects. It is important to 
carefully implement the rule's prohibitions on prop trading and 
fund investments in a manner that does not impair market 
making, underwriting, client services, hedging, and other 
permitted activities so important to our economy. Market 
participants need greater clarity about the conformance period 
and what will be required of them starting this July. I look 
forward to hearing the witnesses' comments on these issues as 
well as their views on the rule's potential impact on capital 
markets, Governments, and institutions around the world.
    Additionally, international coordination is key to bringing 
greater stability and transparency to the $700 trillion global 
derivatives market. Ideally, the rules the CFTC, SEC, and 
prudential regulators are working to finalize should have no 
substantive degree of variance and only differ for kinds of 
firms and transactions the rules are being applied to. In 
addition, global harmonization and rules relating to margin, 
capital, and clearing will be essential to promoting financial 
stability, effective oversight, and competitiveness of U.S. 
companies doing business abroad.
    I welcome the regulators' updates on these developments and 
on the next steps for strengthening the global financial 
system.
    While our economy is starting to show signs of recovery 
from the financial crisis, we must remain vigilant in ensuring 
that Wall Street Reform is implemented thoughtfully and with 
full consideration of international implications. The Wall 
Street Reform law gave our regulators the tools to address 
global threats to financial stability as well as oversight over 
new, uncharted areas of the international financial markets. We 
have already seen good progress in the recently announced 
stress tests, showing U.S. banks in a much stronger position 
than they were before the crisis. But until the new rules are 
fully implemented, our financial system remains vulnerable to 
threats both from within the U.S. and from abroad.
    I believe our Committee's robust oversight of Wall Street 
Reform has reaffirmed the need for, and improved the 
implementation of, this important legislation. As I have said 
before, I am open to the idea of improving Wall Street Reform 
by making technical corrections and fixing unintended 
consequences, but in today's political environment, there will 
need to be broad bipartisan support to get anything approved.
    Senator Shelby, your opening statement.

             STATEMENT OF SENATOR RICHARD C. SHELBY

    Senator Shelby. Thank you. Thank you, Mr. Chairman. 
Welcome, everyone.
    Today, our financial regulators will update us on their 
efforts to harmonize the requirements of the Dodd-Frank Act 
with the financial regulations of other countries. I think this 
is an important issue due to the global nature of modern 
financial markets.
    Today, nearly all major U.S. financial institutions have 
operations overseas, and most major foreign financial 
institutions have operations, of course, in the U.S. The 
globalization of finance has generally been a positive 
development. It helps firms raise capital at lower rates and 
more effectively manage their risk. This, in turn, helps 
financial institutions lend more cheaply to businesses and to 
consumers.
    Yet the globalization of finance means that regulators need 
to be mindful of how their regulations interact with the 
regulations of other countries. Poorly conceived loans or 
ineffective coordination by regulators can easily undermine the 
efficiency of the international economic system. And although 
such regulatory failures often go largely unnoticed, the 
consequences can be significant.
    The impacts show up in the form of higher interest rates 
and fees for consumers and higher operating costs for 
businesses. Ultimately, higher prices reduce economic growth 
and job creation.
    We only need to recall how poor international economic 
coordination in the 1930s stemming from the Smoot-Hawley Act 
and other laws worsened the Great Depression. Accordingly, I 
believe it is critical that Congress and our financial 
regulators make sure that Dodd-Frank does not worsen an already 
troubled economy by unnecessarily impeding the international 
financial system.
    I think it is worth noting that 2 years ago, when Dodd-
Frank was passed, the thought that Dodd-Frank would create any 
international coordination problems was not on the minds of the 
Act's supporters. Rather, we were told here that the rest of 
the world would follow our lead and adopt legislation similar 
to Dodd-Frank. Of course, this has not happened.
    To the contrary, foreign regulators and Governments have 
publicly expressed serious concerns about Dodd-Frank. Canada, 
Germany, Japan, the United Kingdom, as well as European Union 
have all identified profound problems with the implementation 
of Dodd-Frank. These problems include reducing the liquidity of 
their Government bond markets and the discriminatory treatment 
of foreign firms.
    In addition, many market participants have expressed 
concerns about the extraterritorial reach of Dodd-Frank. They 
justifiably fear that they will find themselves caught in a 
regulatory trap, as many Dodd-Frank rules may conflict with 
theirs. These concerns have been worsened by the fact that our 
financial regulators have already missed 70 percent of the 
Dodd-Frank rulemaking deadlines. And as a consequence, 2 years 
after the passage of Dodd-Frank, market participants are still 
unclear if and how Dodd-Frank rules will apply to their 
international banking operations.
    The risk of having to comply with Dodd-Frank's costly 
regulations is causing many firms to reconsider doing business 
in the U.S. The U.S. should be the market of choice because it 
is the most sophisticated and modern. It should not be the 
market firms desperately seek to avoid due to its costly and 
heavy-handed regulatory approach.
    But looking forward, it is my hope that our regulators will 
take the time to ensure that the Dodd-Frank rulemakings have as 
few unintended consequences as possible. I hope to hear today 
how our financial regulators are working with their foreign 
counterparts to address legitimate concerns about Dodd-Frank. 
In particular, I hope to hear how our regulators are working to 
address the major discrepancies that exist between the U.S. and 
international derivatives rules, especially with respect to 
margin and capital requirements.
    I also hope to learn today what specific steps regulators 
have taken to ensure that the FDIC's new orderly liquidation 
authority can effectively wind down a large international firm. 
As we saw with the failure of Lehman and, more recently, MF 
Global, the collapse of an international financial firm can 
leave customer assets frozen in several countries, making 
resolution of a firm substantially more difficult. Hopefully, 
the next time a major international financial institution 
fails, regulators will have a far more efficient and effective 
response than the CFTC's response to MF Global.
    Unfortunately, in the nearly 2 years since the passage of 
Dodd-Frank, regulators have done little to instill confidence 
that Dodd-Frank will do anything other than increase the cost 
of doing business in America.
    Thank you, Mr. Chairman.
    Chairman Johnson. Thank you, Senator Shelby.
    Are there any other Members who wish to make a brief 
opening statement?
    [No response.]
    Chairman Johnson. Thank you all. I want to remind my 
colleagues that the record will be open for the next 7 days for 
opening statements and any other material you would like to 
submit.
    Now, I will briefly introduce our witnesses. Lael Brainard 
is the Under Secretary for International Affairs at the U.S. 
Department of the Treasury.
    Dan Tarullo is currently serving as a Member of the Board 
of Governors of the Federal Reserve System.
    Elisse Walter is currently serving as a Commissioner on the 
U.S. Securities and Exchange Commission.
    Marty Gruenberg is the Acting Chairman of the Federal 
Deposit Insurance Corporation.
    John Walsh is the Acting Comptroller of the Office of the 
Comptroller of the Currency.
    Jacqueline Mesa is Director of International Affairs at the 
U.S. Commodities Futures Trading Commission.
    I thank you all again for being here today. I would like to 
ask the witnesses to please keep your remarks to 5 minutes. 
Your full written statements will be included in the hearing 
record.
    Under Secretary Brainard, you may begin your testimony.

 STATEMENT OF LAEL BRAINARD, UNDER SECRETARY FOR INTERNATIONAL 
              AFFAIRS, DEPARTMENT OF THE TREASURY

    Ms. Brainard. Thank you, Chairman Johnson, Ranking Member 
Shelby, and distinguished Members of the Committee.
    There is an important debate over the merits of moving slow 
or fast, of moving first or last. As you know, partly due to 
the efforts of this Committee, we moved both fast and first to 
reform our financial system and this strategy is already 
demonstrating its effectiveness, both in terms of the strength 
of our institutions and their ability to weather shocks and in 
bringing the world to our standards.
    From 2009 through the end of 2011, Tier I common equity of 
large bank holding companies increased by more than $400 
billion. Short-term wholesale funding at the four largest bank 
holding companies decreased from 36 percent to 20 percent. And 
core deposits as a share of total liabilities at FDIC-insured 
institutions increased from a low of 44 percent to 64 percent. 
Far from disadvantaging U.S. institutions and harming credit, 
these early actions put U.S. banks in a stronger position as we 
entered the financial volatility at the end of last year and, 
indeed, supported credit growth of 11 to 12 percent annual 
rates in the third and fourth quarters.
    By contrast, as you know, Europe opted to move more slowly. 
As a result, many Euro area banks were less resilient in the 
face of shocks last year, contributing to financial stress and 
a negative spiral.
    By moving first, we led from a position of strength in 
setting the international reform agenda and elevating the 
world's standards to our own. The alternatives, either 
following the reform standards set by other countries or 
subjecting our firms to a divergent set of standards across the 
board, would have been unacceptable. It is also worth noting 
that not only the established financial centers in advanced 
economies but also up-and-coming emerging market financial 
centers are signing up for the same set of standards.
    As you know, going into the crisis, too many financial 
institutions had too much leverage and too little liquidity. We 
have now gotten across the international system new global 
capital liquidity and leverage standards. We have identified 
globally systemic important banks and agreed globally to 
subject them to enhanced prudential measures, including a 
capital surcharge. We are, of course, remaining vigilant as 
these rules are implemented, and we are pressing to ensure 
banks across the world measure risk-weighted assets similarly.
    Going into the crisis, few understood the magnitude of 
aggregate derivatives exposures in the system. Now, we have 
secured agreement on international standards for the OTC 
derivatives markets for the first time, requiring consistent 
reporting, moving trading onto exchanges, and requiring central 
clearing. Of course, as these rules are implemented, we have to 
guard against fragmentation or weaknesses in the global 
payments infrastructure and avoid geographic mandates for 
clearing. We are also pressing for accelerated time tables. We 
are also pressing, with success, to finalize a global standard 
for posting margin on uncleared derivatives transactions to 
reinforce the incentives for central clearing.
    And finally, going into the crisis, countries lacked tools 
to resolve systemically important financial institutions, 
effectively rendering them too big to fail. Going forward, all 
major financial jurisdictions have agreed to put in place the 
tools to resolve large cross-border firms. Implementation is 
already underway. The UK, Germany, and Canada have already 
passed resolution legislation and the European Commission is 
developing a draft for the second quarter of this year. The FSB 
is working actively to ensure regulators and the major global 
banks developed cross-border living wills by the end of 2012, 
criteria to improve the resolvability of these institutions, 
and institution-specific resolution cooperation arrangements.
    New laws and rules aimed at the home market of any major 
financial center will inevitably, as you recognized in writing 
the law, have cross-border implications. Regulators now have to 
sort out whose rules apply, how, and where. Aligning the 
substance the timing of reforms across jurisdictions is perhaps 
the first best insurance we have in that process. The greater 
the convergence around high-quality standards, the greater the 
scope for deferring to jurisdictions that have similar 
regulatory regimes.
    There are only one or two notable exceptions. As you know, 
the United States has moved ahead of others on the Volcker 
Rule, but it is important to recognize that other jurisdictions 
are grappling with the same issues pertaining to the structure 
of risk taking. In the UK, the Vickers Commission proposed 
rules to ring fence core financial intermediation activities, 
and in the EU, Commissioner Barnier has set up a commission to 
look at this issue with particular interest in studying the 
implementation of the Volcker Rule.
    We cannot lose sight of the costs of the last crisis, nor 
can we lose sight of the causes. That is why we think it is 
critical to complete the work we have begun. Thank you.
    Chairman Johnson. Thank you.
    Governor Tarullo, please proceed.

 STATEMENT OF DANIEL K. TARULLO, MEMBER, BOARD OF GOVERNORS OF 
                   THE FEDERAL RESERVE SYSTEM

    Mr. Tarullo. Thank you, Mr. Chairman, Senator Shelby, other 
Members of the Committee.
    Let me run down briefly for you my perspective on the 
significant international activities that are either quite 
directly or more generally related to the Dodd-Frank Act.
    The Members of this Committee will not be surprised that I 
put capital at the top of the list of regulatory imperatives, 
both here in the United States and internationally. Basel 2.5, 
which deals with market risk, and Basel III, which deals with 
both the amount and quality of required capital, were already 
done or nearly done when Dodd-Frank was passed, but Dodd-Frank 
did add a new requirement that we have enhanced capital 
standards for large banking organizations. We supported what 
turned out to be a successful international effort to agree on 
capital surcharges for banking organizations of global systemic 
importance, and the Federal Reserve intends to implement the 
Dodd-Frank requirement in a manner consistent with that 
international agreement.
    We have had a lot of progress on capital internationally, 
and I would say that in this area the principal task in the 
near term will be to ensure that these various agreements are 
being implemented rigorously, both at national levels and 
within individual banking organizations. I am pleased that the 
Basel Committee has now launched what is far and away its most 
significant effort ever to monitor implementation at both the 
national and firm level.
    On liquidity standards, here too we would like to make the 
Basel agreement consistent with our implementation of the Dodd-
Frank requirements of enhanced liquidity standards for large 
institutions. Unlike the capital standards, though, the 
liquidity standards are in need of further study and revision, 
which is currently in progress internationally.
    On resolution mechanisms, Title II of the Dodd-Frank Act is 
fully consistent with the international standards that have 
been adopted, and other jurisdictions are gradually putting in 
place their own generally comparable mechanisms. However, even 
if all major financial centers follow suit, not all cross-
border resolution problems will be solved. So we will continue 
the work that we have begun, along with the FDIC, in addressing 
these continuing problems in both multilateral and bilateral 
fora.
    On OTC derivatives, implementation of the G20 commitments 
for reform is proceeding internationally, but I would 
characterize it at a somewhat uneven pace from jurisdiction to 
jurisdiction. Here, I think our top international priority 
should be agreement on margin requirements for uncleared 
derivatives.
    And finally, I have noted in my prepared testimony a number 
of specific issues implicating international interests in parts 
of the Dodd-Frank Act where there is less likely to be an 
international initiative. In these instances, we do not have 
the realistic option of trying to conform an international 
agreement to domestic practice, or vice-versa, for that matter. 
So here we are going to have to be considering carefully all 
these concerns in our own rulemaking as we move forward.
    Thank you, Mr. Chairman.
    Chairman Johnson. Thank you.
    Commissioner Walter, please proceed.

STATEMENT OF ELISSE B. WALTER, MEMBER, SECURITIES AND EXCHANGE 
                           COMMISSION

    Ms. Walter. Thank you, Chairman Johnson, Ranking Member 
Shelby, and Members of the Committee, for the opportunity to 
testify on behalf of the Securities and Exchange Commission 
about international cooperation in the realm of financial 
regulation.
    The impact of regulation across borders has become ever 
more important as business has become increasingly global. And 
thus, as part of our rulemaking efforts to implement the Dodd-
Frank Act, the SEC has been actively engaged with our 
counterparts abroad to coordinate our regulatory reforms. Our 
international efforts include both informal and formal 
bilateral discussions and arrangements and working through 
multilateral organizations. Due to the extensive international 
coordination efforts undertaken by the SEC and our colleagues 
at other U.S. financial regulatory agencies within 
international bodies, the recommendations and international 
standards being developed by these groups are broadly 
consistent with the Dodd-Frank Act and the G20 objectives.
    As the SEC's representative to the Financial Stability 
Board and the International Organization of Securities 
Commissions, I have detailed our international efforts in my 
written testimony, but I would like to highlight just a few 
areas this morning.
    First, international coordination is particularly important 
in reform of the global over-the-counter derivatives markets. 
Following the 2008 financial crisis, Congress recognized the 
need to bring transparency to these markets and the G20 leaders 
shared this concern. SEC and CFTC staff have been working with 
our international counterparts to coordinate the technical 
issues relating to regulation of derivatives transactions. In 
December, global leaders and senior representatives of 
authorities responsible for regulation of OTC derivatives 
markets met to discuss significant cross-border issues related 
to the implementation of new legislation and rules.
    Given the global nature of the market, the SEC intends to 
address the international implications of its Dodd-Frank 
derivatives rules in a single proposal in order to give 
interested parties, including investors, market participants, 
and foreign regulators, an opportunity to consider as an 
integrated whole our approach to cross-border security-based 
swap transactions.
    The second area that requires robust international 
coordination and cooperation is the identification and 
mitigation of cross-border risks. The SEC has worked to enhance 
its capability to spot and address proactively emerging issues 
before they have the potential to cause serious harm to U.S. 
markets and the global financial system. We have opened lines 
of communication and shared data with our international 
counterparts to discuss emerging risks and to react promptly to 
new developments.
    A third area where international cooperation is important 
is the implementation of the Volcker Rule. In the proposal, we 
requested and received comment on several international issues. 
For example, the proposal, which closely tracks the statute, 
includes an exemption for proprietary trading in certain U.S. 
and municipal Government obligations, but not for foreign 
Government obligations. Many commenters, including some foreign 
Governments, have requested that such an exemption be adopted 
and have expressed concerns about the proposed rule's potential 
impact on liquidity in foreign sovereign debt markets. However, 
some commenters have indicated that such an exemption would not 
be necessary or would not meet the statutory requirement that 
it promote and protect safety and soundness.
    The Volcker Rule's general prohibition on covered fund 
activities includes certain non-U.S. funds in an effort to 
prevent circumvention by simply relocating activities offshore. 
Some commenters have stated that this definition may be too 
broad, sweeping in foreign retail mutual funds or other types 
of regulated pooled investment vehicles. Our Commission staff 
is reviewing and considering the comments we have received, 
including those on the cross-border implications of Volcker.
    A fourth area where we and our foreign counterparts have a 
common interest is market efficiency and integrity in light of 
the rapid development of new trading technologies and trading 
platforms.
    Another key priority is assuring meaningful oversight of 
registrant firms wherever they are located. In an 
interconnected world, increased international supervisory 
cooperation is critical. Unfortunately, there currently are 
limitations on the ability of some U.S. regulators to achieve 
meaningful inspections in some foreign jurisdictions.
    Finally, I would like to mention our longstanding bilateral 
and multilateral efforts in the enforcement arena.
    In conclusion, our ability to further shared objectives and 
strengthen cooperative relationships with our counterparts is 
an increasingly critical part of our mission. We simply must 
work together.
    Thank you again for this opportunity to testify.
    Chairman Johnson. Thank you.
    Chairman Gruenberg, please proceed.

  STATEMENT OF MARTIN J. GRUENBERG, ACTING CHAIRMAN, FEDERAL 
                 DEPOSIT INSURANCE CORPORATION

    Mr. Gruenberg. Thank you, Mr. Chairman. Chairman Johnson, 
Ranking Member Shelby, and Members of the Committee, thank you 
for the opportunity to testify on international harmonization 
issues related to implementation of the Dodd-Frank Wall Street 
Reform and Consumer Protection Act.
    While there are several issues addressed in my written 
testimony, I thought I would focus my oral remarks on progress 
we have made on cross-border cooperation on the resolution of 
systemically important financial institutions, the so-called 
SIFIs.
    Section 210 of the Dodd-Frank Act requires the FDIC ``to 
coordinate to the maximum extent possible'' with appropriate 
foreign regulatory authorities in the event of a resolution of 
a SIFI with cross-border operations. The FDIC has been working 
on both a multilateral and a bilateral basis with our foreign 
counterparts in supervision and resolution to address these 
important cross-border issues.
    In October of last year, the Financial Stability Board of 
the G20 countries released the Key Attributes of effective 
resolution regimes for financial institutions. These Key 
Attributes set out the features of a legal and regulatory 
regime that would allow authorities to resolve financial 
institutions in an orderly manner without taxpayer exposure. 
They address such critical issues as the scope and independence 
of the resolution authority and how jurisdictions can 
facilitate cross-border cooperation in resolutions of 
significant financial institutions. The FDIC was deeply 
involved in the development of the Key Attributes and many of 
them parallel the provisions of the U.S. resolution regime 
under Title II of the Dodd-Frank Act.
    In November of last year, the G20 endorsed these Key 
Attributes, and as a result, financial regulators from the G20 
member Nations are required to move toward a resolution 
framework to resolve SIFIs in an orderly manner that protects 
global financial stability.
    Now, in addition to the Key Attributes, the FDIC and its 
U.S. and foreign financial regulatory counterparts have formed 
what have been called Crisis Management Groups under the 
auspices of the Financial Stability Board for each of the 
internationally active SIFIs. These are the so-called G-SIFIs, 
or Global SIFIs, identified by the G20 at the November meeting 
last year. These Crisis Management Groups, consisting of both 
home and host country authorities, are intended to enhance 
institution-specific planning for possible future resolution.
    The FDIC has participated in Crisis Management Group 
meetings hosted by authorities in various foreign 
jurisdictions. In addition, the FDIC has hosted Crisis 
Management Group meetings for the five largest U.S. G-SIFIs and 
met with specific foreign regulators to discuss the progress 
these firms have made on their recovery and resolution plans as 
well as other related cross-border issues. These meetings 
assist the FDIC in developing and refining its own resolution 
strategies for these institutions and helps regulators in 
identifying and overcoming impediments to cross-border 
resolution.
    Finally, the FDIC is also actively reaching out on a 
bilateral basis to the foreign supervisors and resolution 
authorities with jurisdiction over the foreign operations of 
key U.S. firms. The goal is to be prepared to address issues 
regarding cross-border regulatory requirements and to gain an 
in-depth understanding of the cross-border resolution regimes 
and the concerns that face our international counterparts.
    It is worth noting that although U.S. SIFIs have foreign 
operations in dozens of countries around the world, these 
operations tend to be concentrated in a relatively small number 
of key foreign jurisdictions, particularly the United Kingdom. 
While the challenges to cross-border resolution are formidable, 
they may be more amenable than is commonly thought to effective 
management through bilateral cooperation.
    Our initial work with foreign authorities has been 
encouraging. In particular, the U.S. financial regulatory 
agencies have made substantial progress with authorities in the 
UK in understanding how our respective resolution regimes and 
resolution strategies would work. To facilitate bilateral 
discussions and cooperation, the FDIC is negotiating Memoranda 
of Understanding pertaining to resolutions with regulators in 
various countries.
    In conclusion, through multilateral and bilateral 
engagement, we believe we have made significant progress in 
developing a foundation for effective cross-border cooperation 
in the event of a future failure of an internationally active 
systemically important financial institution. Thank you.
    Chairman Johnson. Thank you.
    Comptroller Walsh, please proceed.

STATEMENT OF JOHN G. WALSH, ACTING COMPTROLLER, OFFICER OF THE 
                  COMPTROLLER OF THE CURRENCY

    Mr. Walsh. Thank you. Chairman Johnson, Ranking Member 
Shelby, and Members of the Committee, I appreciate this 
opportunity to provide my perspective on the international 
implications of the Dodd-Frank Act and on efforts currently 
underway to harmonize U.S. regulatory requirements with 
international standards.
    My written testimony provides greater detail on the 
intersection of Dodd-Frank and international efforts in five 
key areas: Capital standards, liquidity requirements, orderly 
resolution of large complex firms, derivatives activities, and 
the Volcker Rule.
    Since the financial crisis of 2008, much has been 
accomplished to improve the safety and soundness of financial 
systems and institutions. Internationally, the G20 Governments, 
the Financial Stability Board, the Basel Committee on Banking 
Supervision, and other international bodies have developed and 
are introducing standards to increase capital and liquidity, 
create better mechanisms for resolving large financial 
institutions, centralize derivatives clearing, and strengthen 
supervision in a number of other areas. Implementation of this 
reform agenda is underway in all the G20 countries.
    Within the United States, the Dodd-Frank Act encompasses 
many important parts of the international reform agenda. It 
enhances the resiliency of the U.S. financial system, requires 
higher capital and liquidity standards for large financial 
institutions, and imposes steps to preclude future taxpayer 
bailouts. The Act also seeks to strengthen operations and 
safeguards pertaining to derivatives activities by enhancing 
transparency and reducing counterparty credit risks.
    Most of these efforts are still works in progress and I 
believe paths are available for international harmonization in 
many of these areas. However, even where there is broad 
international consensus, there will be areas where policy 
makers in individual countries have chosen to tailor standards 
to their countries' specific circumstances rather than adopt 
the totality of the international approach.
    In the U.S., for example, the Dodd-Frank Act has added two 
requirements that will cause our implementation of 
international capital standards to differ from those of other 
countries. For example, the Collins Amendment requires the same 
generally applicable minimum capital requirements to be applied 
to bank holding companies as to banks, and places a floor under 
the capital requirement for large banks, applying Basel's 
advanced approaches capital framework. This goal is to ensure 
that capital requirements for large banks do not decline below 
generally applicable minimum capital requirements, but it also 
means that U.S. banks pursuing safer loans or lower-risk 
securities would not obtain a capital benefit for doing so.
    Section 939(a) of Dodd-Frank requires all Federal agencies 
to remove references to and reliance on credit ratings from 
their regulations and replace them with appropriate 
alternatives for evaluating creditworthiness. Basel III, in 
contrast, continues to rely on credit ratings in many areas, so 
implementation of those provisions of Basel III will differ 
from international standards and generally be more stringent in 
that U.S. credit ratings are referenced in various places, 
including in noncapital regulations. While we fully agree that 
blind reliance on credit ratings should be stopped, the 
cumulative impact of precluding any reference to credit 
ratings, even in conjunction with other factors, will be 
challenging, particularly for community banks.
    The Dodd-Frank Act also contains certain provisions that 
have no foreign equivalent, and unlike capital and liquidity 
requirements, currently are not the subject of international 
harmonization efforts, most notably the Volcker Rule. This 
provision generally prohibits a bank from engaging in 
proprietary trading and from making investments in and having 
certain relationships with a hedge fund or private equity fund. 
This is a policy aimed at the organization of activities within 
the U.S. banking system, not part presently of a broader 
international policy consensus, and as such the legislation 
reflects a determination that these policy objectives need to 
predominate over competitive considerations.
    The OCC is committed to consistent implementation of the 
Dodd-Frank Act and international financial regulatory 
agreements, and as we move forward with implementing Dodd-
Frank, we must be mindful of the need to strike an appropriate 
balance between enhanced regulations, better supervision, and 
market restrictions. Achieving a level playing field for 
internationally active institutions is an important objective, 
but it is never fully achieved and sometimes national policy 
choices place other important national objectives above 
competitive equity.
    Thank you for the opportunity to discuss the international 
obligations of Dodd-Frank and to update the Committee on 
efforts underway to harmonize U.S. regulatory requirements with 
international standards and frameworks. I am happy to answer 
your questions.
    Chairman Johnson. Thank you.
    Ms. Mesa, please proceed.

  STATEMENT OF JACQUELINE H. MESA, DIRECTOR OF THE OFFICE OF 
  INTERNATIONAL AFFAIRS, COMMODITY FUTURES TRADING COMMISSION

    Ms. Mesa. Good morning, Chairman Johnson, Ranking Member 
Shelby, and Members of the Committee. Thank you for the 
opportunity to testify today regarding international aspects of 
the Dodd-Frank Act.
    The financial crisis has generated international consensus 
on the need to strengthen financial regulation by improving 
transparency, mitigating systemic risk, and protecting against 
market abuse. In September 2009, the G20 leaders agreed that 
OTC derivatives contracts should be reported to trade 
repositories, standardized contracts should be cleared and 
traded on exchanges or platforms, and noncleared contracts 
should be subject to higher capital requirements.
    In 2010, less than 1 year following that G20 commitment, 
Congress broadened the CFTC's and SEC's jurisdiction to include 
oversight of the previously unregulated swaps and security-
based swaps market. The CFTC is developing regulations to 
implement the Dodd-Frank Act and to establish a regulatory 
framework for swaps.
    As CFTC rulemakings have progressed, one issue that has 
arisen is how Dodd-Frank requirements might apply to swap 
activities occurring on a cross-border basis. The CFTC 
recognizes that the swaps business flows across national 
borders with agreements negotiated and executed between 
counterparties in different jurisdictions and individual 
transactions often booked and risk managed in other 
jurisdictions.
    In addressing cross-border issues, the CFTC is charged with 
implementing Section 722(d) of the Dodd-Frank Act, which 
provides that Title VII provisions shall not apply to swaps 
activities outside the United States unless those activities 
have a direct and significant U.S. connection or contravene 
anti-evasion regulations. The CFTC plans to provide guidance on 
the application of Title VII and the Commission's regulations 
to non-U.S. entities and to swaps activities occurring on a 
cross-border basis and we will seek public input on that 
guidance.
    In line with the G20 commitments, efforts to regulate OTC 
derivatives are underway not only in the United States, but 
also abroad. Japan has already passed reform legislation and 
the EU is finalizing legislation that provides for mandatory 
clearing, reporting, and risk mitigation for OTC derivatives. 
Other countries, such as Canada, Hong Kong, and Singapore, have 
published consultation documents on the regulation of OTC 
derivatives. The global and interconnected nature of the swaps 
market makes it imperative that the United States consult and 
coordinate with foreign regulators.
    The fact that all major market jurisdictions are developing 
their OTC requirements pursuant to the G20 directive provides 
an opportunity to create a harmonized framework. Congress 
directed the CFTC and other U.S. regulators to consult and 
coordinate with foreign regulatory authorities on the 
establishment of consistent international standards. The CFTC 
is fulfilling this statutory mandate through comprehensive and 
ongoing bilateral consultation and global coordination. The 
CFTC has considered international standards and principles in 
developing regulations, and staff has shared our rulemaking 
drafts with international counterparts throughout this process.
    The CFTC Chairman and Commissioners have met with foreign 
regulators to discuss financial reform, and Chairman Gensler 
and I have traveled to Brussels several times to discuss 
implementation of Title VII. Chairmen Gensler and Schapiro have 
met with Canadian, European, and Asian regulators last December 
to discuss cross-border issues related to OTC derivatives, and 
an even broader group of regulators will meet again in May.
    At a staff level, the CFTC and SEC are holding an 
unprecedented number of meetings to coordinate regulatory 
approaches, specifically with counterparts in Canada, the EU, 
Hong Kong, Japan, and Singapore. These discussions will 
continue as other jurisdictions develop their own regulatory 
requirements for OTC derivatives. In addition, CFTC staff is 
participating in the several standard-setting initiatives and 
cochairs the IOSCO task force on OTC derivatives.
    Throughout implementation of the Dodd-Frank Act, the CFTC 
is working with foreign regulators in an effective way to 
coordinate regulatory approaches and requirements to the 
greatest extent possible.
    Thank you, and I would be happy to answer any questions.
    Chairman Johnson. Thank you for your testimony.
    As we begin questions, I will ask the Clerk to put 5 
minutes on the clock for each Member.
    Secretary Brainard, I believe the U.S. has led the way with 
the comprehensive package of Wall Street reforms as to the 
financial crisis. Do you agree, and going forward, how will the 
U.S. continue to lead while working toward a level playing 
field internationally?
    Ms. Brainard. Mr. Chairman, I have participated in multiple 
international negotiations, both at the G20 and the FSB, where 
our goal has been to bring the world to convergence around the 
very strong protections put in place under Dodd-Frank in order 
to guard against a competitive disadvantage and also to protect 
the safety and soundness of our system.
    I would say that, having participated in a lot of 
international negotiations over the years in a whole number of 
subject areas, we have achieved remarkable success across the 
whole host of areas where convergence is seen to be critically 
important. OTC derivatives in the area where there really is no 
international regulation at all, we now have commitments across 
the Financial Stability Board members to put in place 
protections that are really modeled in many respects on the 
protections under the Dodd-Frank Act.
    As Governor Tarullo mentioned, we have a very strong 
agreement on capital liquidity and leverage across 
internationally active banks, and, for the first time, 
agreement that the largest, most complex institutions should be 
subjected to additional prudential standards as well as a 
capital surcharge that will be equivalent across countries.
    Chairman Johnson. Chairman----
    Ms. Brainard. I am sorry.
    Chairman Johnson. Chairman Gruenberg, can you give us your 
assessment of the progress made with foreign regulators on how 
to address cross-border resolution issues.
    Mr. Gruenberg. Thank you, Mr. Chairman. I think it is fair 
to say we have made significant progress in what is admittedly 
a very challenging area. I outlined in my testimony the 
international set of standards that have been agreed to, the 
so-called ``Key Attributes,'' which sets sort of a baseline for 
Governments across the world to use in establishing resolution 
regimes, and that simply has not existed before. So, the 
international acknowledgement of the importance of the issue of 
having cross-border cooperation and a capacity to place large 
systemically significant institutions into an effective 
resolution process, I would suggest, is really an important 
step forward.
    And, there has been tremendous attention to the systemic 
institutions of particular importance. The Crisis Management 
Groups--organized under the auspices of the Financial Stability 
Board--bringing together the multiple regulators of these 
globally significant financial institutions has been really a 
valuable tool in getting mutual understanding among us about 
the operations of these companies.
    And I will tell you, we do put particular importance on 
developing bilateral relationships. When you are dealing with a 
systemic company that gets into difficulty, you have got to be 
able to work as an operational matter with your counterpart, 
the supervisor of the country where the foreign operations are. 
At the end of the day, that really comes down to the 
relationship of our regulators here with the individuals in the 
other country. And if you do not have that personal 
relationship established, an understanding of the respective 
legal requirements that apply, and some common understanding of 
the strategies we are considering for resolving these 
companies, it becomes very difficult to carry out the 
authorities of the Act.
    I think what is encouraging is that we have the authorities 
here in the United States. We are developing the capability. 
And I think we are making progress in terms of establishing the 
relationships with our key counterparts to enable us to manage 
an orderly resolution of one of these companies.
    Chairman Johnson. Governor Tarullo, on the Volcker Rule, 
will the agencies provide any formal guidance detailing what 
current or prospective activities banks need to unwind or stop 
in July, and what will happen during the 2-year conformance 
period? Also, since the Volcker Rule amends the Bank Holding 
Company Act, will the Fed lead the ongoing supervision, 
interpretation, and enforcement of the final rule?
    Mr. Tarullo. Mr. Chairman, with respect to the 
implementation and what happens with enforcement in any 
intervening period, I think there are a couple of things to 
say.
    First, the Dodd-Frank Act required the Federal Reserve to 
promulgate a conformance period regulation within 6 months of 
passage, which we did. But, of course, that was promulgated 
before we knew what the substantive proposed rule was going to 
look like and so it was a bit in the dark as to what activities 
the firms were actually going to have to conform.
    And I would say that some of the issues that have been 
raised by a number of you, a number of your colleagues on the 
House side, and by some of the institutions themselves have led 
a lot of people to think we probably need to provide some 
clarification in light of the proposed rule itself. We do not 
have Board action, so I cannot speak to what that would be 
specifically, but I can tell you people are aware of the issue.
    With respect to the July 21 issue, that would presumably 
arise if, first, we do not get a final rule out by then, and 
second, regardless of whether we do, whether there is a 
question about something being immediately effective and, 
therefore, enforceable as opposed to falling under the 
conformance period. There is obviously a real possibility that 
we do not meet the July 21 date, although I personally think we 
should keep trying to do so. However, if we are not going to, I 
think it is incumbent on all the regulators to provide some 
guidance for firms to let them know exactly what the 
expectations will be and not let this hang out there as an 
unknown, and I think we should be able to do that, if needed.
    You also asked about Volcker Rule implementation. The 
Volcker Rule is a joint enterprise. It is actually going to be 
two different rules--one, the three prudential regulators, the 
other, the two market regulators--so we are obviously trying to 
coordinate the terms of the rule and I hope that we would 
coordinate our data gathering and enforcement efforts 
thereafter.
    But I would not say that we would be in the lead, 
particularly because in terms of the actual activity to be 
regulated, the Federal Reserve would be supervising a 
relatively small group of the activities in question. Since the 
broker-dealers are primarily regulated by the SEC, the national 
banks by the OCC, the Federal Reserve has the nonbank, non- 
broker-dealer affiliates of holding companies which do engage 
in trading activities, but not in the amounts that those other 
two groups do.
    Chairman Johnson. One more question. Commissioner Walter 
and Director Mesa, I am concerned that the SEC and the CFTC may 
not take a unified approach to the potential application of 
U.S. swap rules abroad. How will the CFTC and the SEC harmonize 
efforts in this area, and would not a unified approach improve 
compliance? When will your agencies release these plans?
    Ms. Walter. Mr. Chairman, the efforts are ongoing between 
our two agencies to reach a harmonized solution. Although we 
have taken different procedural approaches, we have been 
actively engaged in discussions about what we are going to 
suggest, and there will be public comment on which people will 
be able to react to both the SEC proposal and the CFTC 
proposal. Those discussions are not only concerning broad 
principles, but also digging down into the details, and our 
efforts so far both in that area and in other areas of 
cooperation and coordination under Dodd-Frank are going forward 
quite smoothly.
    Chairman Johnson. Director Mesa.
    Ms. Mesa. I would just add to that to say, as a point of 
fact, we even had a meeting between high-level staff at the SEC 
and CFTC this week to coordinate our approaches, and I think as 
conversations are ongoing, we are going to get closer and 
closer on our approaches.
    Chairman Johnson. When will your agencies release these 
plans?
    Ms. Walter. For our part, our international release raising 
the cross-border issues, which will cover all of Title VII, is 
being drafted as we speak and should be out in the public 
domain in a relatively short period of time, although I cannot 
give you a precise date.
    Chairman Johnson. Ms. Mesa.
    Ms. Mesa. Staff is working very hard to complete something 
to provide to our Commission. We think that in the coming 
weeks, we will actually be able to provide something for our 
Commission to then provide staff feedback and eventually 
release to the public.
    Chairman Johnson. Senator Shelby.
    Senator Shelby. Thank you, Mr. Chairman.
    Governor Tarullo, as I mentioned in my opening statement, 
as I understand it, Dodd-Frank fails to exempt foreign 
Government securities from the prohibition on proprietary 
trading by banks. A lot of Governments, such as Japan and 
Canada, have filed comments stating that this provision of 
Dodd-Frank could--could--adversely affect the liquidity and 
pricing of foreign Government bonds. Do you believe there is 
any merit to these concerns, and have you performed any 
analysis at the Fed of the proposed rule's potential impact on 
Government bond markets, and if not, why not?
    Mr. Tarullo. Mr. Chairman, I certainly understand the 
foreign Governments' observation of the asymmetric treatment 
and, as you noted, there have been a lot of comments filed with 
the agencies in response to the proposed rule.
    We have, in fact, tried to start collecting information, 
which goes to several points. First--actually, we also tried to 
provide some information, because there is some misconception 
among at least some of the foreign observers--not all, but some 
who, for example, were not aware of the fact there is a market 
making exception and were not aware of the fact that if a 
foreign sovereign debt obligation is held for investment and 
not a matter of short-term trading, then that is not covered, 
either.
    So we have tried to provide that information and then, in 
turn, ask for information about the holdings by U.S. entities, 
or the holdings by U.S. affiliates of foreign parents of the 
sovereigns in question. That is, we are trying to figure out 
how much is market making, how much is held for longer-term 
investment, and what proportion of those bonds were arguably 
part of a proprietary trading operation. To date, at least, I 
think there has not been as much information breaking things 
down in that way as would be useful, but I am hopeful we will 
get more of that and, thus, be able to make a better judgment 
as to what kind of impact this may have.
    The other thing I would add, of course, is there are other 
firms that are not subject to the Volcker Rule who are out 
there who may take up any slack that does exist.
    Senator Shelby. In a recent speech, Secretary Geithner 
defended Dodd-Frank claiming that there is, and I will quote 
him, ``no credible evidence to support the argument that these 
reforms are having a material negative effect on the economy,'' 
end quote. Secretary Brainard, do you believe that Dodd-Frank's 
imposition of price controls on debit interchange rates has had 
a positive impact on the economy?
    Ms. Brainard. Well, I think, generally speaking, many of 
these reforms are being implemented. It is a little early to 
speak to them. I do not think--we have looked across a variety 
of areas and have not seen a negative impact. As I said 
earlier, arguably, the inclination to move early, we have 
already seen a test of why it put our firms in a better 
position to withstand financial stresses and actually supported 
the recovery at a time when in Europe we saw a retreat of 
credit.
    So I think we, obviously, have to be very careful as we are 
moving forward to be looking carefully at the potential impact 
on the economy and to be vigilant to ensure there are not 
unintended consequences. But the flip side of that, as I said 
earlier, is that by moving forward with this framework, we 
really set the terms for the international debate and were able 
to move other countries to our framework at a time when if we 
had not, we would have been on the defensive and been reacting 
to their proposals.
    Senator Shelby. Has there been any quantitative evidence 
that you know about that Dodd-Frank actually has had a material 
positive effect on the economy? If you have, would you furnish 
that to the Committee.
    Ms. Brainard. I do not think there have been, as I said 
systematic empirical studies either on the negative or on the 
positive side. It is still very early days in terms of the 
implementation. There have been attempts to look, for instance, 
in the international context at the potential long-term 
implications of the new capital standards, where a negative 
effect was not found. But again, these are not backward-
looking. There has not yet been enough time to have a 
systematic empirical analysis of rules that are really only now 
being implemented in many cases.
    Senator Shelby. Commissioner Walter, the SEC's Inspector 
General recently conducted a review of cost-benefit analyses in 
Dodd-Frank rulemaking. Among the many troubling findings, the 
report by the Inspector General found that the SEC did not 
consider that its proposed rules for securities-based swaps 
might cause market participants to move swaps trading from the 
U.S. to foreign jurisdictions. In light of the Inspector 
General's findings, the Inspector General of the SEC, what 
specific actions has the SEC taken or plan to take to ensure 
that swap trading does not move out of this country to other 
jurisdictions?
    Ms. Walter. I can assure you, Senator, that both in that 
context and in other contexts, we do consider issues of 
competitiveness and what happens to the marketplace. Perhaps we 
did not reflect that as well as we might have liked in the 
documents that the--our Inspector General issued. But in light 
of his report as well as other external input on cost-benefit 
analysis from the D.C. Circuit, from the GAO, we have 
undertaken a fairly continual review process of how to enhance 
our efforts to adequately consider those issues.
    Senator Shelby. I would like to direct this question back 
to you, Commissioner Walter, and also Secretary Brainard. 
Section 763 of the Dodd-Frank law includes a provision that 
requires swap data repositories and clearinghouses to obtain an 
indemnification from regulators before sharing critical data 
with them. This indemnification requirement makes it difficult 
for foreign regulators to obtain information on swap 
transactions. Should Congress repeal the indemnification 
requirement in 763?
    Ms. Walter. Yes, we do support that. It is problematic for 
data that takes place in a global business to be available only 
easily to certain regulators.
    Senator Shelby. In other words, I know a SEC staffer 
testified yesterday that the SEC recommends that Congress 
consider repealing the indemnification requirement. Is that 
what your testimony is?
    Ms. Walter. Yes. We do agree that that should be done.
    Senator Shelby. OK. Secretary Brainard, do you agree?
    Ms. Brainard. Well, I certainly share the observation that 
our market regulators are trying to work through this issue 
with foreign market regulators and it is challenging. I think 
more broadly, we believe that we are still in early stages of 
the implementation of the Dodd-Frank Act. There are a few areas 
of technical challenge, but that we think, generally speaking, 
that we should push ahead on implementation of the Dodd-Frank 
Act, try to work through some of these changes----
    Senator Shelby. I was not asking----
    Ms. Brainard. ----and give ourselves a little more time----
    Senator Shelby. I was not asking you----
    Ms. Brainard. ----before we contemplate any changes to 
the----
    Senator Shelby. ----a general question. Do you disagree 
with the Commissioner?
    Ms. Brainard. We generally share the observation that this 
presents challenges to the market regulators, but we are not 
recommending a legislative fix to any of the provisions that--
in Dodd-Frank at the moment.
    Senator Shelby. So you disagree with the SEC.
    Governor Tarullo, one more question. In a recent speech, 
Secretary Geithner said, to provide a fair and level playing 
field for U.S. firms, we need a more level playing field 
globally. This is particularly important in the reforms, that 
is, in the global derivatives markets. These are the 
Secretary's words. Is there any class of OTC derivatives on 
which you do not expect European and other foreign regulators 
to impose margin requirements comparable to those required by 
Dodd-Frank, and is there any aspect of derivatives or bank 
regulations where you believe that foreign regulators have 
adopted a better approach than the approach set forth in Dodd-
Frank?
    Mr. Tarullo. Senator, I think the discussions are at too 
early a stage to make a judgment as to whether any of the 
eventualities that you hypothesize may come to pass. As I said 
in both my written and oral testimony, I think for us as a 
country, the highest priority internationally with respect to 
derivatives ought to be the harmonization of margin rules, and 
at least as of this moment, I have not detected any important 
divergence in the potential views of countries as to how they 
would apply those rules.
    On the second part of your question, I think this is a case 
in which the United States has been leading, and as I said in 
my statement, I think that other countries are implementing the 
best practices and the kind of commitments that have been made. 
At this juncture, though, the pace of implementation does vary 
some. The Europeans are probably closest to us, but they, too, 
are somewhat behind. So I think on this one, we will have to 
come back next year for you to ask the same question. I suspect 
we will have a better sense then.
    Senator Shelby. I will not get the same answer, will I?
    Mr. Tarullo. Well, I hope not. I hope by then either 
something will have been agreed to or we will be able to say, 
yes, here are a few areas in which agreement looks hard to 
achieve.
    Chairman Johnson. Senator Bennet.
    Senator Bennet. Thank you, Mr. Chairman, and thank you for 
holding this hearing. I want to just underscore an observation 
you made a minute ago, that as we think about this 
international harmonization, it also is, I think, the interest 
of many people on this Committee that our agencies reach 
harmonization domestically, as well. So anything we can do to 
move ourselves forward in that direction, I would support.
    I also want to pick up just where the Ranking Member left 
off, Governor Tarullo. As you know, financial institutions 
under the Wall Street Reform bill who use the Fed's discount 
window or deposit insurance must create separate entities to 
engage in certain types of swap dealing. This was typically 
referred to as the push-out rule. And in your written 
testimony, you noted that it was unlikely that this was going 
to be followed in other places. I wonder whether you could talk 
a little bit about the consequences of that potential gap.
    Mr. Tarullo. Certainly, Senator. On that one, I think there 
are consequences probably on both sides, both for U.S. firms 
and for foreign firms. For the U.S. firms, I think the 
potential consequences are fairly self-evident, meaning that 
they will not be able to have all their derivatives trading 
concentrated in the insured depository institution, usually a 
large national bank. And that means they would have to have 
separate risk management capabilities and separate 
capitalization for the different derivatives activities. It 
also means that the counterparty with whom they deal would not 
obviously be able to net their trading with the two different 
parts of the same bank holding company.
    The other side of it, the impact on the foreign firms----
    Senator Bennet. Is that--just on that side, does that 
present something unworkable, or is it just----
    Mr. Tarullo. The amount of derivatives from many 
institutions that would have to be pushed out is relatively 
small, meaning it is not like 50 or 60 or 70 percent. But what 
I said a moment ago is that it would presumably increase the 
costs of that kind of trading because you would have to 
duplicate some of your risk management and you would not have 
the counterparty netting arrangements that you do when it is a 
single counterparty.
    On the other side, the push-out requirement does provide 
that insured depository institutions in the United States get 
an exemption for activities which are basically bank compliant 
or for derivatives activities which involve instruments that 
the Federal banking laws allow banks to engage in. But because 
it applies only to insured depository institutions by the terms 
of the statute, it seems not to apply to the branches of 
foreign commercial banks here in the United States. And as a 
result, seemingly, those branches will be subject to the rule 
but without the exemption that applies to U.S.-insured 
depository institutions, and I say ``seemingly'' because there 
is at least one interpretation that that would not be the case, 
but that, I think, is the concern that has been expressed.
    Senator Bennet. And what are the implications of that?
    Mr. Tarullo. The implications of that would be that the 
branch of a foreign commercial bank here in the United States 
would not be able to engage in the kinds of derivatives 
activities in which a U.S. commercial bank located here in the 
United States, one of Comptroller Walsh's supervised 
institutions, would be able to engage.
    Senator Bennet. Director Mesa, as you know, the derivatives 
title of the bill was generally limited to transactions within 
the United States, and the law, as you said in your testimony, 
can be applied on an extraterritorial basis when the 
international activities of U.S. firms have a direct and 
significant effect on U.S. commerce. You mentioned that you are 
working on this, that you are going to be seeking public 
comment on it. I wonder if you could talk just a little bit for 
the Committee about how the CFTC is going to implement this 
provision and what are we likely to hear in the public comment.
    Ms. Mesa. I can speak about what staff may recommend to the 
Commission, but ultimately, the Commission will make the final 
decision. At a staff level, we clearly need to give guidance on 
what is a direct and significant effect to the U.S. commerce or 
activities in the U.S., and so an example of that would be if 
there is a foreign-based entity that has a significant amount 
of transactions with a counterparty in the U.S. How many 
transactions make that significant and direct, and that is the 
kind of guidance that we seek to put forward. But once there is 
a direct and significant connection with the U.S., then what 
regulations and rules will apply to that entity?
    Also, the CFTC has had a long history of reliance on 
comparable regulation abroad if there is comparable regulation 
to the U.S. regulation. I think we are also considering some 
aspects of that in this release.
    Senator Bennet. Thank you, Mr. Chairman.
    Chairman Johnson. Senator Crapo.
    Senator Crapo. Thank you, Mr. Chairman.
    I want to return to the question that the Chairman raised 
earlier with regard to the implementation of the Volcker Rule 
and the problem that we see with the July 21 deadline. Federal 
Reserve Chairman Ben Bernanke recently stated before the Senate 
Banking Committee and the House Financial Services Committee 
that the interagency Volcker Rule will likely not be ready by 
the July date, and I think you confirmed that is a likelihood 
today, Mr. Tarullo, although you say you would like to keep 
working toward that objective.
    He also said that we certainly do not expect people to obey 
a rule that does not exist and that the agencies will certainly 
make sure that firms have all the time they need to respond. 
And again, Mr. Tarullo, you said today that you think that 
somehow the agencies have got to address this issue in the 
process.
    But it is not that simple. The problem is that this section 
of the Dodd-Frank Act is self-executing and has an effective 
date of July 21, irrespective of whether the final rules are in 
place. And market participants are understandably concerned 
about what they should do on the July 21 deadline if the 
agencies have not been able to coordinate effectively and 
promulgate a final rule. I know that there has been a 2-year 
conformance period raised and some have suggested that that 
should allay all concerns.
    But many commenters have raised the discrepancy between the 
2-year conformance period and the statute and the pending 
proposed rule, which states that the agencies expect full 
compliance as soon as practicable after the effective July 21 
date. A lot of folks are raising concerns about the fact that 
legal experts are advising their clients now that if the July 
21 date arrives and we do not have a final promulgated rule, 
that the banks, in order to be safe, are going to have to start 
shutting down significant securitization activities that are 
expected to be authorized in the rule and we could have 
significant disruption in the market in the United States.
    As a result of that concern, earlier today, Senators 
Warner, Corker, Toomey, Hagan, and Carper and I have introduced 
legislation, bipartisan legislation, that corrects this aspect 
of the statute and simply links the effective date of the 
Volcker Rule to 12 months after the issuance of a final rule. 
It just changes two words in the statute so that instead of 
saying the earlier of, it says the later of the dates, which 
would provide the kind of clarity to the marketplace, and I 
would think provide the kind of support to the agencies as they 
try to move forward with these deadlines looming to enable us 
to calm the waters and proceed more effectively with the 
rulemaking process.
    Mr. Tarullo, I would like to ask you first whether you see 
any concern or problem with this kind of legislation and 
whether it would be helpful or not.
    Mr. Tarullo. Senator, we should be able to address the 
concerns through two means. One is, as I mentioned earlier, 
guidance provided by the agencies, and this, by the way, is not 
unprecedented. There have been occasions in the past where a 
statutory provision by its terms takes effect and the 
implementing regulation has not yet been enacted. So there is 
some precedent for the way this could be dealt with, and that 
would deal with any gap between the promulgation of the rule 
and July 21.
    With respect to the applicability, scope of the conformance 
period, what it covers and what it does not cover, again, I 
think that we, the Federal Reserve Board, have the authority to 
change that conformance period regulation in order to clarify 
the questions which have arisen, as I say, because I think that 
when we promulgated the conformance period regulation, we did 
not know what the substantive regulation was going to look 
like.
    So that is a long way of saying I think we can deal with 
both issues here without legislation and we will try to go 
ahead and do so regardless of what legislative path is 
followed.
    Senator Crapo. Is there any reason why legislation would 
not assist in that process, though? I understand that you think 
you can clarify everything, but the statute is self-executing. 
Why would it not be helpful for us to have that clarification 
made?
    Mr. Tarullo. I think you alluded to this. The statute says 
it becomes effective, but then in the next subsection it says, 
the activities need to be conformed within the conformance 
period that is provided for in the statute. So I think that the 
coverage can be achieved through that mechanism, but there may 
be other readings of the statute. That is the one I think that 
we are proceeding under.
    Senator Crapo. Mr. Walsh, could you comment on the same 
issue.
    Mr. Walsh. Certainly, Senator. As to the logic of what is 
being proposed, the suggestion is to do in this area what the 
statute does in other areas, which is link the application to a 
time period after issuance of a regulation. But it is certainly 
true that there are a variety of places in the Dodd-Frank Act 
where we will have to deal among the agencies and 
administratively with problems of this kind and I do not 
disagree with Governor Tarullo that we will make the effort to 
make sure that the banks both understand--those affected 
understand what our expectations are and the conformance period 
does provide a period of breathing room, if you will, during 
which banks are expected to comply.
    Senator Crapo. Would the clarification of the statute's 
impact of the nature that I just described have any negative 
impact on the rulemaking process and the conformance period 
that the agencies are working on?
    Mr. Walsh. There is always the pressure of deadlines to 
keep people focused, and the suggestion that we continue to 
work toward this deadline even though it is approaching and 
seems increasingly challenging to meet. But the pressure of 
deadlines is a meaningful pressure.
    Senator Crapo. But a deadline that is executing a rule that 
has not been created yet may be a difficult deadline that 
creates legal difficulties in the marketplace. It seems to me 
that we would not be changing the deadline of the 
implementation of the rule, which it has already been 
acknowledged is going to be passed without meeting that 
deadline. The question remains, as I see it, why would we not 
want to try to fix the problem and make it clear legally that 
there is not going to be the kind of disruption of our markets 
that could happen if the statute self-executes. Mr. Walsh.
    Mr. Walsh. Well, Senator, Congress has set the deadlines. 
If Congress changes the deadline, we will adapt to the change. 
But in the meantime, we will continue to try to work toward 
both meeting the deadline and providing guidance so that during 
this period of what will be hopefully a brief period of 
potential uncertainty, that those affected will understand how 
to respond.
    Senator Crapo. Thank you.
    Chairman Johnson. Senator Merkley.
    Senator Merkley. Thank you very much, Mr. Chair, and thank 
you all for your testimony and for helping us wrestle with how 
the work we are doing here interacts with the international 
environment.
    I want to start by noting a letter from Finance Watch that 
was received by Committee Members and ask if it can be entered 
into the record.
    Chairman Johnson. Without objection.
    Senator Merkley. Thank you. Finance Watch is a European 
group set up by European parliamentarians to help wrestle with 
some of these same issues and they note in this letter, let me 
assure you, European financial regulators are committed to 
adopting critical elements of the financial reform agenda set 
out under your leadership in the Dodd-Frank Wall Street Reform 
and Consumer Protection Act. These include higher capital 
requirements across the banking system, and toward clearing, 
transparency--transparent trading, margin and capital for 
derivatives regulation of hedge funds and private pools of 
capital, orderly restriction for failing--resolution for 
failing firms, reform of credit rating agencies and shadow 
banking, retail investment products, and so forth, many of the 
things that this Committee has been working on for quite some 
time.
    I found it interesting in the third page of the letter. 
They turned to the failure of MF Global. The recent failure of 
MF Global helped remind us of the grave dangers that highly 
leveraged bets can pose to a firm. Fortunately, because MF 
Global was a small nonbank of little significance to the 
broader financial system, the consequences of its mistakes did 
not ripple far. If, however, the U.S. were to not press forward 
with implementation of the Volcker Rule, these very same 
activities would continue eating away at the integrity of the 
global banking system, endangering not only your large firms 
and threatening much more consequences for the broader economy, 
but also putting intense pressure on European regulators not to 
address the issue of structural reform of the European Union 
banking sector.
    Indeed, I think in some ways, MF Global sums up the 
situation of why you have tried to put a firewall between hedge 
fund style activities and deposit taking, loan making, banking 
essential to providing liquidity for families and businesses 
across America. So I just wanted to remind folks that, somehow, 
we lose track of what the Volcker Rule is all about. That is 
the hedge fund firewall issue that it was addressing.
    And some of these conversations about, well, why not trade 
in foreign currencies as a liquidity provision in between 
making loans, well, that puts exactly, basically--that has 
opened the door exactly to what MF Global was doing, and if you 
want that problem inside our banking system, we have been 
there. It was destructive and let us not do it again.
    Turning to some of the recent news, I want to understand 
your all's perspective on Goldman's announcement that they 
are--let me see if I can capture this--they have announced that 
they are looking to become a monoline bond insurer, that is, a 
group that writes insurance on bonds and presumably executes 
trades with revenues from the premiums, not unlike CDS. What do 
you make of that? Let me see. Yes, here is the title, ``Goldman 
Eyes Monoline Move''. Is this an effort to open the door to 
proprietary trading? Any thoughts or insights on what is going 
on with that?
    Mr. Tarullo. For reasons you will understand, Senator, I am 
not going to address any comments to a particular institution 
that the Federal Reserve supervises, but maybe I can make a 
couple of general comments, one about the Fed and one about 
financial institutions.
    So the one about the financial institutions is, I think, as 
everybody recognizes, firms are still in the process of 
adjusting to what the nature of financial services is going to 
be in the postcrisis, postrecovery, postadaptation period. So I 
think you see a number of firms, banks, nonbank financial 
institutions--regulated and unregulated--trying to determine 
where there are opportunities which will provide them with 
profit opportunities, on the one hand, while on the other hand 
fitting within the new regulatory framework that will exist. 
And I think we have seen any number of instances of that, some 
of which the institutions follow through on, some of which they 
appear not to follow through on.
    From the Federal Reserve's point, with respect to any 
regulated financial institution that is proposing to or does 
get into any new line of business, we do apply close 
supervisory scrutiny with respect to the capacity of the firm 
prudently to engage in the business in question, to the 
relative degree of risk that will be associated with that 
business, and obviously, to the capital and liquidity levels of 
the firm. So while, again, I am not commenting on anything 
specifically, I can assure you that as firms, for the first 
reason I mentioned, begin to think about different activities, 
we will be applying the same kind of prudential supervisory 
scrutiny that should always be applied in such instances.
    Senator Merkley. Thank you. Let me ask another quick 
question on recent news, and that is today's news in the 
Financial Times that the Deutsche Bank is dropping its U.S. 
bank holding company in order to minimize capital that must be 
held under U.S. rules, which leaves only its highly leveraged 
investment bank inside the U.S. Sheila Bair is quoted as saying 
she is concerned, because when a bank fails, it is principally 
the capital that is located within the country that is 
available for resolution. Does this undermine or change our 
U.S. resolution authority or capability?
    Mr. Tarullo. As Chairman Gruenberg said a few moments ago, 
there are a lot of multilateral, and now some bilateral efforts 
to get a better understanding between countries of how 
resolution would proceed in the event that a firm fails--that 
is, what host countries would do with respect to operations of 
their firms in other countries. Having said that, as I think 
about the appropriate modes of regulation and supervision of 
foreign banking organizations in the United States, the 
development to which you just alluded has certainly affected my 
thinking about how we do structure regulation of foreign bank 
organizations, and I think we will need to respond to that.
    Senator Merkley. Thank you.
    Chairman Johnson. Senator Corker.
    Senator Corker. Thank you, Mr. Chairman, and I thank all of 
you as witnesses. I think this has been a very good hearing, 
and I know in your opening comments, Mr. Chairman, you talked 
about a technical corrections bill. I do think that this 
hearing and many others have pointed out the need for that and 
I just want you to know that should you and the Ranking Member 
decide that you are going to go forward with one, I would look 
forward to working with you in a way that really is just a 
technical corrections bill and not some political statement. So 
if you decide to do that, please let me know, OK.
    Speaking of that, I know, Mr. Tarullo, you talked a little 
bit about the swap desk issue and as it relates--the impact it 
is having on foreign banks here, which, by the way, provide 
about 18 percent of the commercial industrial loans here in the 
United States. We have an amendment to try to correct that, and 
should the Chairman and Ranking Member decide to go forward 
with a technical corrections bill, I hope you would support 
that.
    But I want you to, if you will, comment on the MSR issue, 
the mortgage servicing rights issue. I know that when you all 
meet with international folks, there is a spirit of 
collegiality, if you will, and you try not to create exemptions 
that are different for the U.S., and I understand that. But we 
have a very unique situation in our country where, because of 
the GSEs, when the large institutions originate loans, they 
have to hold 25 basis points as mortgage servicing rights and 
it ends up affecting capital. I know you all talked about 
limiting the amount of capital that that can go forward, and I 
know we have had numbers of institutions coming in and talking 
to us about how it is going to handicap them over time. I am 
just wondering if you might comment on that and the exception 
we might create in that regard.
    Mr. Tarullo. Senator, that was one of many quality of 
capital related issues that were discussed during Basel III 
negotiations and they are incorporated in the Basel III 
agreement. So the flip side of that, if you will, is the 
limitation that Basel III places upon the capital treatment of 
minority interests held in other financial firms, which is 
something that particularly affects a lot of European 
institutions.
    On the mortgage servicing rights issue, the limitation on 
the amount of MSRs that can be treated as capital derives from 
the basic premise that common equity really does need to be the 
true buffer against losses that can be suffered from any 
activity of any sort, seen and unforseen, and events that are 
seen and unforseen. The issue of MSRs, of course, arises 
because, by and large, a firm cannot treat a receivable as if 
it is part of capital. You have a contractual obligation that 
says, I am going to be paid in the future such and so much 
money. Therefore, I can include it as capital. When you get the 
money, then it can be treated as capital.
    MSRs were traditionally treated differently, presumably on 
the rationale that they were readily marketable and, thus, like 
a security, there would be funding available in the event that 
the firm needed it.
    Senator Corker. Let me--so I do not----
    Mr. Tarullo. I am sorry. If I can just finish. But the 
rationale for the limitation is that it is not at all clear 
that a firm could readily market MSRs, a huge amount of MSRs, 
and thus there should be a limit on the degree to which they 
can count as capital, not completely eliminating them.
    Senator Corker. So I think we ought to at least look at 
maybe should it be 25 basis points, and I know that is 
something we need--it is a whole another subject----
    Mr. Tarullo. Right. It is.
    Senator Corker. But maybe it is 12-and-a-half basis points, 
maybe it is something else, but that is something we should 
wrestle with here.
    You know, the Volcker Rule, we talked about a great deal. I 
know Senator Crapo offered a semi-solution. We know it is 
creating lots of issues and we have talked about it a great 
deal. You alluded to some market making exemptions. I know you 
were in our office recently. And obviously, I think, now that 
Volcker is part of the mantra here, I think most of us just 
want to make sure that market making is not excluded. We 
understand about prop trading.
    You mentioned an exemption. So are you feeling like you 
have--there is going to be really no issue as it relates to 
institutions here in the United States of America being able to 
deal with central market making activities? Is that your 
present stance? It is, I think, a little different than when 
you were in our office a few weeks ago.
    Mr. Tarullo. No, I would not say that, Senator. I think my 
perspective on it is the following. Volcker explicitly excludes 
market making from the definition of prop trading. Then the 
regulatory exercise is to distinguish between proprietary 
trading and market making, and to take the extreme example, if 
someone just took their prop trading desk and then said, oh, 
this is market making----
    Senator Corker. Yes----
    Mr. Tarullo. ----we presumably would not allow that. Now, 
there are going to be----
    Senator Corker. But let me just--I want to have a two-way 
conversation here. The market making piece, then, you think 
that there is going to be no issue with ultimately having rules 
that allow market making, real market making within banking 
institutions, is that what you are saying?
    Mr. Tarullo. No, I would not say there will be no issues. I 
think that just in the structure of the interagency rules, you 
can see that issue of distinguishing between market making and 
proprietary trading is not a straightforward one and it is one 
that varies from instrument to instrument because of the 
different liquidity characteristics, like----
    Senator Corker. You mentioned other firms would take up the 
slack. Would not those mostly be other firms that were 
unregulated taking up the slack if much of this moved out of 
the regulated----
    Mr. Tarullo. For pure prop trading, yes.
    Senator Corker. Let me ask you, would we not come up with a 
much better rule, would the regulators not be engaged together 
a little bit more if we did not exclude Treasuries and 
mortgage-backed securities, that all debt instruments were 
treated equally? Would that not be a much better place for us 
to be in creating these rules? Why have we decided to 
differentiated between Treasuries, which you can lose your 
shirt on, or mortgage-backed securities, which you certainly 
can lose your shirt on? Why have we left them out of this 
particular area, do you think?
    Mr. Tarullo. That was not our decision. That was a 
Congressional decision to do that----
    Senator Corker. Would you be open to that coming back in so 
we came up with a real fair--we would not have countries like 
Japan and Canada and others worried about it? Would you be OK 
with that?
    Mr. Tarullo. I think one does have to bear in mind the role 
that Treasuries and their equivalents in other countries play--
both the relationship of financial institutions to the 
Government--the finance ministry, the central bank, or both--
and to the use of those instruments in a lot of the regulatory 
apparatus of the firms. I suspect that was the motivation for 
excluding Treasuries and that what we are hearing from other 
countries is, yes, there is a good rationale there. Why do you 
not exclude our sovereign bonds, as well, for the same reason.
    Senator Corker. Mr. Chairman, I have a number of questions, 
but I know Senator Johanns is here and I would like to have a 
second round, so thank you.
    Chairman Johnson. Senator Johanns.
    Senator Johanns. Thank you, Mr. Chairman. To all of you, 
thank you for being here today.
    Let me follow up on a question or observation offered by 
Senator Merkley, and it is a good one and it gets to the heart 
of what I think the problem is here with Dodd-Frank. And I am 
going to quote from a Wall Street Journal article that just 
popped up within the last hour or so. It points out that 
Deutsche Bank changed the legal structure of its huge U.S. 
subsidiary to show that from new regulations that would have 
required the German bank to pump new capital into the U.S. arm, 
it points out that the bank on February 1 reorganized its 
subsidiaries so that it is no longer classified as a bank 
holding company, according to disclosures by the bank. It goes 
on to point out that they are not the first. As you know, 
Deutsche Bank is at least the second large European bank to 
make such a change following in the footstep's of UK's 
Barclays.
    It is something we talked about a lot and I warned about, 
and that is the more aggressively you regulate, because you 
have been directed to do so by Dodd-Frank, the more tempting it 
is for somebody to say, see you around. We do not have to be in 
the United States. And they do not.
    So let me just ask a specific question. Can anybody on the 
panel name three countries that have passed into law, signed by 
their leader, Dodd-Frank-type regulations? Oh, that is not so 
good.
    Mr. Tarullo. Secretary Brainard may want to address this. 
Certainly, I do not think anybody has had something that looks 
like Dodd-Frank. Several people have already alluded to the 
UK's set of initiatives, which includes the Vickers Commission 
proposals that would work a substantial change in the structure 
of the UK financial services----
    Senator Johanns. But they have not been passed into law.
    Mr. Tarullo. No, they have not, and again, Secretary 
Brainard should comment on this because it is in the realm of 
political spheres of their Government--but my understanding is 
there is support for that, and, I should add, under its 
existing regulatory authority, the Financial Services Authority 
has already promulgated some constraints upon relationships 
among different parts of their firms which do not apply in the 
United States, are not included in Dodd-Frank. They just did 
not need legislation to do it.
    Senator Johanns. You know, I cannot even begin to describe 
how meaningless that last statement is to me, and here is why. 
Our institutions are being regulated under a whole new set of 
rules and principles that you folks cannot even agree on, that 
you debate. How will you ever administer these things in a 
sensible way so people know what they can and they cannot do, 
irrespective of the issue that folks are just going to say, why 
bother with the United States any more? And that is exactly 
what is happening here.
    Now, let me just say, Mr. Gruenberg, I heard your comments 
about the importance of bilateral relations. Not to be 
disrespectful, but to me, that is just happy talk, and here is 
why I believe that. I will tell you, as Secretary of 
Agriculture, I think I had great bilateral relations with 
countries like Japan. I could call their Secretary of 
Agriculture on the phone and address them by first name and on 
and on. It did not stop them 1 minute from doing the things 
that they wanted to do. They would close their country to our 
beef. And I could go country after country and describe that.
    So I am glad you get along with your colleagues well, but 
it still does not solve the problem we have here, and that is I 
am now seeing evidence that folks are just deciding not to do 
business in the United States because of what is happening with 
Dodd-Frank. Do you agree with that?
    Mr. Gruenberg. Well, Senator, just to respond specifically 
to the point you made, you know, in my comments, I was 
referring to the relationships we are developing with respect 
to the resolution authorities in the United States and other 
countries in regard to systemically important financial 
institutions.
    I guess the reference I was making was particular to the 
United Kingdom, where there is a significant concentration of 
the foreign operations of our major institutions. Among the 
countries of the world in regard to the specific area of 
resolution authority, I think it is fair to say that the U.S. 
and the UK have actually adopted statutory provisions that 
provide powers that did not exist before and there seems to be 
a commitment on both sides by the policy makers to make 
effective use of those authorities.
    I could not agree with you more that just because people 
are polite or friendly to each other, it does not necessarily 
mean you are going to get the outcome at the end of the day, 
particularly if problems develop. So I do not mean to----
    Senator Johanns. But would you agree with me that no 
country--you know, I think I asked for three--but no country 
has passed anything anywhere near what Dodd-Frank has required?
    Mr. Gruenberg. Yes. I think it is fair to say I am not 
aware of an individual country that has passed the sort of 
comprehensive legislation that we have undertaken here, so----
    Senator Johanns. So if you are--let us say you are an 
insurance company and in the effort here to regulate them, and 
you reach the conclusion that they present a systemic risk to 
the U.S. economy, all of these additional burdens are placed on 
them, why would they not just leave? Why would they not locate 
someplace else where the regulatory atmosphere is better for 
them? And what would stop them?
    Mr. Gruenberg. Well, if you are talking about the foreign 
operations of a U.S.--of a company here in the United States 
that is based in some country that is overseas, there is the 
balancing issue raised in terms of the obligations we impose 
here and how it might impact foreign companies and their 
willingness to operate here.
    I do believe that the core issues that the Dodd-Frank 
legislation tries to address in terms of a set of prudential 
standards on our biggest systemically important financial 
institutions, particularly in the area of capital, and the 
expanded authorities relating to resolution so that we can hold 
these, effectively, too big to fail companies accountable to a 
certain market discipline, I think those are the core 
authorities and I think those were important authorities to 
enact in the aftermath of what we have been through.
    Senator Johanns. Let me just wrap up with this, because 
this is very important. Not only is it the competitive 
disadvantage we have placed the United States in at a time 
where our economy is struggling, but second, as a former 
Secretary, as a former cabinet member, there is a point at 
which these regulations become so impossible to interpret that 
you cannot train your employees to the result you are trying to 
get, and that is what your employees are telling me and, I will 
bet, other Members of this Committee, is how do we ever train 
to get to this result, because nobody understands it, whether 
it is the Volcker Rule or whatever. And even if we could get 
that far, how are we ever going to get the people up to speed 
to get the job done?
    That is what they are saying. They are saying, how do we 
train our people to get there? And I think that is a very 
serious problem. That is not even addressing the fact that we 
do not even have agreement with our own agencies and 
departments about what Dodd-Frank says and does not say. I 
think it is a serious problem.
    Ms. Brainard. Can I just jump in to answer his first 
question?
    Chairman Johnson. Yes, you may.
    Ms. Brainard. Thanks. So on resolution, Canada, the UK, 
Germany have already passed legislation to put in place 
resolution authorities that they did not have before. 
Jurisdictions have moved actually quicker than we have in many 
cases to promulgate rules to put in place Basel III new capital 
requirements. In the case of Switzerland, they are imposing an 
additional surcharge, very substantial, on capital.
    So I think, generally, the pattern is that jurisdictions 
are moving at different paces on the core reforms, but what, 
again, is quite remarkable is that we have heads of State of 
all the jurisdictions that are significant in the international 
financial system committed to a set of rules that converge to 
our own and that all of the jurisdictions, including in Japan, 
for instance, where they have also moved forward with 
legislation, for instance, on derivatives very quickly, that 
all of those jurisdictions are actually moving forward on all 
the core elements in a way that we have never seen before.
    Chairman Johnson. Senator Hagan.
    Senator Hagan. Thank you, Mr. Chairman, and I want to thank 
all of our witnesses here for testifying today and for all that 
you do.
    I just wanted to ask a question on gas prices, because 
everybody is--we are all so concerned about the increase and 
the rise of gas. And as you know, American companies use 
derivatives to hedge the risk inherent in their daily 
operations. For example, airlines are using the derivatives 
contracts to hedge their cost for fuel. And currently, banking 
entities are the primary source of commodities hedging 
liquidity for our large corporations.
    Have you thought about what impact the Volcker Rule will 
have on the price of fuel prices for U.S. airlines and U.S. 
consumers at the gas pumps? Ms. Mesa, if you could start, and 
anybody else who would like to address this issue.
    Ms. Mesa. Well, the CFTC is not a price-setting agency, but 
we do ensure that the markets are open, transparent, 
competitive, and free from fraud and manipulation. Given what 
is going on currently in the prices, it is no different from 
normal practice that we have heightened surveillance in these 
markets to make sure that those things--free from fraud and 
manipulation--our regular surveillance is going on.
    I might not talk about the Volcker Rule and might let Dan 
Tarullo do that if he wants to take that one on, but tell you 
that on an international scale, on a global scale, we are 
making sure that regulation is consistent because oil markets 
are global. They trade on not only U.S. exchanges, but other 
exchanges around the world. Last year, there was a global 
consensus on managing positions in the markets, on having daily 
large trader reports like the CFTC does so that we can surveil 
who is in the market on a daily basis, and I am making sure all 
authorities--that the regulators have all necessary 
authorities, including attempted manipulation, to attempted 
manipulation, and I think that is an important one, because 
prior to 2012, European Union Nations did not have attempted 
manipulation authority and I think that is an important matter 
to know.
    Mr. Tarullo. Senator, on the overall issue of the impact of 
both Volcker and, I would say, probably the derivatives push-
out rule----
    Senator Hagan. Right.
    Mr. Tarullo. ----is where you are probably going to see the 
effect here. On the derivatives push-out, I had mentioned 
earlier that there was a relatively small proportion of 
derivatives that would need to be pushed out of most national 
banks, but commodities is one of those areas. And so if we are 
going to see an effect----
    Senator Hagan. Is one of those areas that needs----
    Mr. Tarullo. That would have to be pushed out, that is 
right. The commodities derivatives would have to be pushed out. 
So there, if there is an effect, I think that is probably where 
you are going to see it.
    Senator Hagan. And when you say pushed out----
    Mr. Tarullo. The derivative cannot be written within the 
national bank. And the reason why that has an effect is that 
you are going to need to set up a separate operation for your 
derivatives in your nonbank affiliate. The relative amount of 
cost associated with that is presumably going to vary from 
organization to organization because there may be a holding 
company that does a lot of derivatives work already in a 
nonbank affiliate, and thus for them the cost would be fairly 
incremental. But one can imagine, at least, that there would be 
an institution which would have to set up a separate apparatus 
and thus the cost would be higher.
    Senator Hagan. How much do you think that jobs would be 
lost overseas in this scenario?
    Mr. Tarullo. I do not think we have the kind of precise 
data that would allow us to project that. I think probably from 
our perspective the concern is, are you making what are 
otherwise safe and sound transactions more costly than they 
otherwise would be. And even if you cannot trace that through 
to a particular job number, that is not a circumstance you 
usually want to have, when you are just increasing costs where 
it is not necessary to achieve safety and soundness.
    Senator Hagan. Well, obviously, we are concerned about 
safety and soundness, but I, too, am concerned about jobs in 
the U.S. on a daily basis.
    Legislation has been proposed that would exempt certain 
interim affiliate transactions of swap dealers from meeting 
margin and clearing requirements, and if these contracts are 
classified as separate transactions, there is a concern that it 
will increase cost for the customers of these products to 
appropriately manage the business risk. Has the CFTC acted to 
provide this exemption for interaffiliate transactions, and if 
not, if you have not acted in this area, can you provide an 
explanation about when you expect the CFTC to act.
    Ms. Mesa. We have not provided such an exemption in this 
area, but it is something that the industry has heavily 
commented to the agency about and it is something we are 
considering at a staff level and the Commission is fully aware 
that staff is developing something in this area.
    Senator Hagan. Well, it is my understanding that the SEC 
may treat interaffiliate transactions differently than the 
CFTC, and does it make sense for market participants to have to 
comply with two different sets of rules for similar products.
    Ms. Mesa. As mandated under Dodd-Frank, we are, of course, 
coordinating, consulting with the SEC, and we will work with 
them as we think through this issue.
    Senator Hagan. I think there are a lot of issues that are 
arising because of the two different entities regulating the 
same transactions.
    And then I understand that certain aspects of Basel III 
with respect to regulatory capital intersect with changing 
accounting standards in the U.S. and internationally, and it 
has been brought to my attention that if such changes are 
adopted in the U.S., as proposed, it may produce several 
unintended consequences, such as a narrowing of the investor 
base for longer-term debt, public debt instruments, including 
our U.S. Treasuries, mortgage-backed securities, and municipal 
bonds. Prior to U.S. implementation, do Treasury, FDIC, and/or 
the OCC intend to study the issue or to propose alternatives in 
light of the above-mentioned concerns? Governor Tarullo, do you 
want to start that one.
    Mr. Tarullo. There has been a series of accounting issues 
that have an impact on capital. I think our aim--at least the 
Federal Reserve's aim, I will let the other prudential 
regulators speak for themselves--has been to maintain 
substantial if not overwhelming congruence between the 
accounting standards that FASB applies for purposes of investor 
protection and transparency, on the one hand, and regulatory 
capital on the other, the reason for that being that otherwise 
you have got different sets of books, in essence, that 
investors have to look at.
    Having said that, there have been some areas in which I 
think the accounting standards do not--have not--or at least 
some of the proposals have not well reflected the reality of 
certain assets. The proposal that was floating around for a 
while to insist on fair value treatment for loans written by a 
community bank and held to maturity, I think, was sort of a 
stunning example of that.
    So my own sense is that our effort as regulators ought to 
be to try to take our observations on what are sensible 
accounting standards for all investors and to urge those in 
appropriate channels on the FASB, and I think FASB is listening 
to those kinds of arguments. Our chief accountants from the 
three agencies frequently get together to talk about these 
kinds of issues and then try to make representations, as 
appropriate.
    Chairman Johnson. Neither Senator Shelby nor I have any 
further questions, but does Senator Corker have a concluding 
question?
    Senator Corker. I do. I have several concluding questions. 
Thank you.
    [Laughter.]
    Senator Corker. And I took a lot less time than most of our 
questioners, so thank you for the time now.
    Mr. Tarullo, I thought your answer on MSRs was actually a 
very good one and I think that we should deal with how much--
what the basis point set-aside should be. That is something 
that has nothing to do with you, but I thought that was very 
good. Sometimes I think they are wrong answers, but it was a 
very good one.
    But let us move to the Treasuries. You were talking about 
them playing a very unique role, Treasuries and mortgage-backed 
securities, and, therefore, we should treat them differently 
than other types of debt instruments, and Volcker does that, of 
course. Should we really have a bias in our private banking 
system toward Government debt, or should all debt not be 
treated the same? I mean, is this bias something that is 
healthy for us in this free enterprise economy that we have?
    Mr. Tarullo. Senator, the special treatment of U.S. 
Treasuries, for example, is grounded in substantial part on the 
risk-free character of those Treasuries and, thus, they serve 
as both a capital and liquidity backstop for firms----
    Senator Corker. But they are not risk-free as it relates to 
interest rate changes.
    Mr. Tarullo. No. No.
    Senator Corker. OK.
    Mr. Tarullo. You are absolutely right, and that is why we 
have interest rate risk supervision. But I would say, I do not 
think--so the argument for a preference, for an identification, 
I think, is very strong. But it is not all encompassing.
    And so, for example, on liquidity regulation, which 
basically looks to make sure that a firm could sustain a major 
market shock and keep operating long enough to allow order to 
be restored--I do not think we want to rely solely on U.S. 
Government securities or, indeed, any Government securities. 
There, I think we do want to look to the actual experience. We 
now have, unfortunately, a real world experiment, which is to 
say 2008, 2009, where we can see how different instruments--the 
liquidity value of different instruments was realized over that 
period of time. And in the revision of the liquidity coverage 
ratio internationally, that is the position we have urged, is 
to look and see how instruments actually performed and give 
credit where nongovernments are, in fact, liquid, even in times 
of stress.
    Senator Corker. Thank you very much.
    Mr. Gruenberg, we yesterday spent a good deal of time with 
Sheila Bair just talking a little bit about orderly 
liquidation. I was on a panel a few weeks ago and there are 
portions of Title II that I am really proud of because I was 
highly involved in, and other portions, not so much.
    But there has been a lot of discussion about the SIFI piece 
which precludes that, I think maybe in Title I, and people are 
concerned as they look at orderly liquidation. And if you are a 
SIFI--we have had numbers of people who deal with financial 
institutions--their thinking is that if orderly liquidation 
occurred with a significantly important financial institution, 
then they would be treated differently than if they were 
creditors to a smaller institution, and their fears are that if 
an institution starts going bad and it is not a significantly 
important institution, that it is going to be like a run of 
people away from that institution.
    I am not seeing that myself, but we certainly had an hour 
yesterday with Sheila talking about that. I am wondering if you 
have bumped into that or have any comments in that regard.
    Mr. Gruenberg. Well, you know, it is an important issue, 
Senator. I would note that the premise of the legislation is 
that the orderly liquidation authority would be invoked only 
if, for some reason, there was a judgment that the bankruptcy 
courts could not handle the failure without some systemic 
consequences----
    Senator Corker. And on that note, would you urge some 
changes in the Bankruptcy Code to make the Bankruptcy Code work 
even better for institutions?
    Mr. Gruenberg. Well, I do not know that I have changes to 
suggest. I think we are certainly open, and we have talked 
about this in the past, to engaging with you on that issue.
    But just to the point of the treatment of creditors, I 
think in the first instance, the effort will be to utilize the 
bankruptcy process as it would normally be used. If you had an 
extraordinary circumstance where the failure of a company, it 
would appear, could not be handled by the bankruptcy process 
without some larger systemic consequence, then we have these 
admittedly extraordinary authorities under Title II. But even 
then, the directive in Title II in terms of the treatment of 
creditors is to try to follow, as a general practice, the 
practices under the bankruptcy process.
    So I think the goal would be to be as consistent with that 
as we possibly can and that is certainly the premise of all the 
planning we have done in terms of our resolution authority.
    Senator Corker. One of the nuances that I just recently--
and I am embarrassed to say this--have picked up, but orderly 
liquidation really would only be used in a case where the bulk 
of the assets were of a banking nature. And if that were not 
the case, then if the assets were generally not of a normal 
depository institution, you would probably lean toward 
bankruptcy in those cases instead of orderly liquidation. Is 
that the way you understand----
    Mr. Gruenberg. I am not sure that is--I think the proviso 
of the statute is really a judgment, and it is a joint judgment 
of the Federal Reserve and the FDIC making determinations and 
recommendations to the Treasury Department, which would then 
have to make a judgment in consultation with the President, and 
that authority could apply to any financial company, and the 
key there is whether the failure of the company would cause 
significant disruption to the financial system. So that 
authority, while, I think, in the most likely case would apply 
to a bank holding company, given the nature of the large and 
systemically important institutions in our country, it could be 
applied to a nonbank financial company, as well.
    Senator Corker. I know the Chairman----
    Mr. Tarullo. Is that the question you were asking, Senator? 
I thought you were asking about whether the authority was 
likely to be applied only to bank holding companies where most 
of the assets were traditional commercial----
    Senator Corker. That is what I was asking.
    Mr. Tarullo. Yes. So that is not your intention, right?
    Mr. Gruenberg. Where most of the assets are not in 
traditional--whether they were in the bank or not----
    Mr. Tarullo. No, I think the Senator was asking whether 
Title II is likely to apply only to bank holding companies 
where traditional commercial banking assets are the 
preponderance----
    Senator Corker. Are the majority of the assets, yes.
    Mr. Gruenberg. I do not think that is necessarily the case.
    Senator Corker. It would still be, in each case, solely--we 
have had differing responses to this, but in your mind as the 
chief liquidator----
    [Laughter.]
    Senator Corker. ----our Nation's ``chief liquidator''--that 
is quite a title--it would be a judgment call made relative to 
whether this institution would create a lot of problems 
throughout the banking industry if it went through bankruptcy 
instead of orderly liquidation.
    Mr. Gruenberg. Yes, sir.
    Senator Corker. Mr. Chairman, thank you for your 
generosity. I think the witnesses have been outstanding and I 
do hope we will pursue a technical corrections bill at the 
right time.
    Chairman Johnson. Senator Merkley.
    Senator Merkley. Thank you, Mr. Chair.
    I wanted to begin, Ms. Mesa, with following up on Senator 
Hagan's thoughts. Under Dodd-Frank, CFTC was given power to 
establish position limits and there has been a lot of 
frustration with how slowly the CFTC has moved, and although 
you have got the rule done, you still have not implemented it. 
And we have seen growth from 30 percent of folks trading in the 
market not having an end use, if you will, to 70 percent. In 
recent months, a lot of folks seeing the conflict in the Middle 
East and the conflict regarding Iran have said, well, a lot of 
other folks are going through the same thing and they are going 
to worry about oil and they are all going to bet, so I will get 
in and bet, too. So we see this huge surge in speculation and 
the CFTC sitting on your hands. Can you explain why you have 
been so slow and missed the deadline and at great cost to 
American consumers at the pump?
    Ms. Mesa. We have, actually, as you noted, passed our final 
rule on position limits. The final rule talks about aggregating 
futures positions with swaps positions, and in the final rule, 
we said that we would collect 1 year of data of swaps positions 
before the position limits would be effective, and so that 1 
year has not run yet. When it does, they will go into effect. 
So that----
    Senator Merkley. All right. Well, there is a big sense in 
America that while CFTC fiddles, the American consumer is 
getting burned, and I just want to express that concern because 
I hear my constituents on each and every trip----
    Ms. Mesa. I will take that concern back.
    Senator Merkley. ----back home. Thank you.
    Ms. Walter, I wanted to address a little bit the issue of 
crowdfunding. We are going to be voting on it later today. The 
House laid out a strategy for folks being able to invest over 
the Internet in small dollar amounts that involved no 
requirements on companies for information, no accountability 
for whatever information the companies did put out there, full 
legal permission for companies to hire people to pump their 
stocks with no consequences, and it looked to me like a path, 
really, a paved path to predatory activity that would damage a 
lot of folks who are thinking they are participating in a fair 
market but would not be. Do you share any of those concerns 
about the House legislation?
    Ms. Walter. Well, first, I must say that the Commission 
itself has not voted on this, so I am speaking for myself. I 
welcome adding investor protection provisions to the 
crowdfunding aspect. I see some value in crowdfunding itself, 
but I do think it should be done with appropriate investor 
protections attached to it, and those are terribly important.
    Senator Merkley. Have you had a chance to look at the bill, 
the amendment that Senator Bennet and I have worked on to 
provide those investor protections?
    Ms. Walter. Unfortunately, I have not. I have been told 
about certain aspects of it, but I have not had the opportunity 
to read it.
    Senator Merkley. Well, we are going to be voting--I was 
going to get your wisdom before I vote on my own amendment this 
afternoon.
    Ms. Walter. And I have missed my opportunity to influence 
you.
    [Laughter.]
    Senator Merkley. Well, I do appreciate your general 
sentiment, we should add some investor protections, and we do 
require three different levels of information, depending on how 
much a company is raising. We hold the officers and directors 
accountable for the accuracy of that information. We set up a 
streamlined Web portal of structure so people cannot simply 
sell without any structure, which was true in the House bill, 
and a number of other factors.
    But one of the things that we also do is set up a cycle for 
the SEC to be right on top of predatory practices that develop 
and be able to develop rules to address those predatory 
practices because this is a new, uncharted territory, and to 
make capital formation work well, it has to be something 
investors believe that they are getting a fair shake on. And so 
we are going to be counting on you all.
    Ms. Walter. We will do our best, as always.
    Senator Merkley. Thank you very much, and Mr. Chair, thank 
you for holding the hearing and I appreciate you all's input on 
these very complicated and very important issues for capital 
across the planet and the strengthening of our collective 
economies.
    Chairman Johnson. Thank you all, all the witnesses for your 
testimony and for being here today.
    There is no doubt that continued cooperation and 
harmonization of financial regulatory reforms is important to 
the stability of our global economy. The recent years have 
highlighted the interconnected nature of the global financial 
system and the importance of international coordination. I look 
forward to continuing to work with all of you and the Members 
of the Committee to ensure the successful implementation of 
these important reforms.
    This hearing is adjourned.
    [Whereupon, at 11:51 a.m., the hearing was adjourned.]
    [Prepared statements, responses to written questions, and 
additional material supplied for the record follow:]
                  PREPARED STATEMENT OF LAEL BRAINARD
 Under Secretary for International Affairs, Department of the Treasury
                             March 22, 2012
    Chairman Johnson, Ranking Member Shelby, and Members of the 
Committee, thank you for the opportunity to discuss our international 
financial reform agenda.
    In the wake of the financial crisis, the United States responded 
swiftly and aggressively. We took forceful measures to stabilize 
financial markets, including through transparent and groundbreaking 
stress tests. Congress moved rapidly to enact the Dodd-Frank Act--which 
provides the most significant set of financial reforms in generations. 
And in parallel we secured unprecedented commitments from our 
international partners in the G20 and the Financial Stability Board--
the same commitments from the emerging economies as from the advanced 
economies.
    There is a vigorous debate over the merits of moving slow or fast--
of moving first or last. This is an important debate with direct 
bearing on the pace and tone of the recovery, the safety and soundness 
of our financial system, and the fairness of the international playing 
field. The United States moved fast and first to repair and reform our 
financial system, and we believe that strategy is already beginning to 
demonstrate its effectiveness.
    Some argued that strengthening the safety and soundness of our 
financial institutions should wait until after the recovery is 
complete. I disagree. A strong and stable financial system is a 
precondition for a growing and competitive U.S. economy. It was 
important to take action while the urgency of the crisis was still 
fresh in our memories. There are substantial lead times built into many 
of these reforms, allowing markets time to adapt. Now is not the time 
to increase uncertainty in the market by backtracking.
Making Our Financial System Stronger, Safer, and More Transparent
    U.S. supervisors responded early and forcefully by compelling U.S. 
financial institutions to build capital, reduce leverage, and 
strengthen liquidity buffers. Far from disadvantaging U.S. institutions 
and harming credit, these early actions built greater resilience and 
helped to safeguard credit flows in the face of elevated financial 
stress in the second half of 2011.
    Because we acted early and fast, U.S. banks built larger and 
higher-quality capital buffers. Tier 1 common equity at large bank 
holding companies increased by more than $400 billion to $960 billion 
from the first quarter of 2009 through the fourth quarter of 2011, a 
more than 70 percent increase. The ratio of Tier 1 common equity to 
risk-weighted assets at these institutions has increased from 6 percent 
to over 10 percent during this period.
    U.S. financial institutions have strengthened their funding models: 
short-term wholesale financial debt has decreased as a share of total 
financial institution assets from a peak of 29 percent in 2007 to 17 
percent in the fourth quarter of 2011, and regulatory filings show that 
short-term wholesale funding at the four largest bank holding companies 
has decreased from a peak of 36 percent of total assets to 20 percent 
over this period. Depository institutions have built a more stable base 
of funding. Core deposits as a share of total liabilities at FDIC-
insured institutions increased from a low of 44 percent in 2008 to 64 
percent in the fourth quarter of 2011.
    Risks have diminished outside of the banking sector as well. The 
size of the U.S. shadow banking system has fallen substantially, with 
prime money market funds shrinking by 32 percent and the triparty repo 
market shrinking by nearly 40 percent since their peaks in 2008.
    And credit availability has improved during this time, even as 
safety and soundness have materially strengthened. Bank credit to U.S. 
companies increased by annual rates of 11-12 percent in the third and 
fourth quarters of 2011.
    By contrast, Europe opted to move more slowly on stress test 
disclosures and measures to build capital and improve funding. As a 
result, many euro area banks were less resilient in the face of shocks 
last year, putting pressure on funding and credit and raising financial 
stress in a negative spiral. Since that time, European authorities have 
taken steps to strengthen the capital position of euro area banks. 
These actions, and the critically important actions taken by the 
European Central Bank to strengthen liquidity, have helped to reduce 
financial stress.
    Far from disadvantaging our firms, the early actions to strengthen 
bank balance sheets and improve funding put U.S. banks in a stronger 
position to withstand financial stress relative to many of their 
international peers, while supporting credit flows to U.S. households 
and businesses at a critical time for the recovery.
International Convergence on Financial Reform
    Some argue that by moving first, we have put the United States at a 
competitive disadvantage. To the contrary, by moving early, we have 
been able to lead from a position of strength in setting the 
international reform agenda and elevating the world's standards to our 
own. The alternative would have been to follow the reform standards set 
by other countries or subject our firms to a divergent set of 
standards. Of course, we will need to be vigilant in addressing the 
inevitable inconsistencies and lags on implementation. But this should 
not detract from the remarkable degree of convergence we are seeing on 
a comprehensive reform agenda spanning bank capital and liquidity, 
resolution, and over-the-counter (OTC) derivatives markets for the 
first time. This common, comprehensive set of reform commitments 
encompasses not only the established financial centers in advanced 
economies but also up-and-coming financial centers in emerging markets. 
Moving first and ensuring that others enact reforms consistent with our 
own are the best ways to reduce opportunities for regulatory arbitrage 
and a race to the bottom, to prevent firms from exploiting gaps in 
regulation, to provide a fair and level playing field for U.S. firms, 
and to protect our economy from risks emanating beyond our shores.
    Going into the crisis, too many financial institutions had too much 
leverage, too little liquidity, and inadequate loss absorbing capacity. 
This led to a downward spiral in confidence among counterparties. Going 
forward, we have agreed to new global capital standards that raise the 
quality and quantity of capital so that banks can withstand losses of 
the magnitude seen in the crisis and reduce the risks of financial 
system collapse as a result of financial excesses. We have also secured 
agreement internationally to strengthen liquidity standards and limit 
leverage. We have identified the globally systemically important banks, 
agreed to a capital surcharge for these institutions, and developed a 
comprehensive set of enhanced prudential measures to address risks from 
globally active financial institutions.
    However, there is much more work that needs to be done. We must 
remain vigilant against attempts to soften the national application of 
new capital, liquidity, and leverage rules. It is essential for banks 
across the world to measure risk-weighted assets similarly, to ensure 
that markets and investors can be confident that the capital adequacy 
ratios stated by banks are consistent across borders. The United States 
is pursuing comparability by urging greater visibility into 
supervisors' scrutiny of how banks measure risk-weighted assets. We are 
pleased that the Basel Committee has added this important work to its 
agenda for 2012.
    Going into the crisis, few understood the magnitude of aggregate 
derivatives exposures in the system because derivatives such as credit 
default swaps (CDS) were traded over the counter on a bilateral basis 
and without transparency. Going forward, we have agreed to stronger 
international standards for the OTC derivatives markets, including 
requiring greater transparency, moving their trading onto exchanges, 
and requiring them to be centrally cleared.
    Now we must ensure that national authorities continue to coordinate 
closely to align implementation; our frameworks for derivatives must be 
tightly aligned or differences could lead firms to move activities to 
jurisdictions with lower standards, increasing risks to the global 
financial system. We must guard against fragmentation of the global 
payments infrastructure, ensuring that global infrastructure is 
adequately safeguarded, and avoid geographic mandates for clearing. It 
is critical that others across the globe follow the U.S. lead and 
accelerate timetables where needed.
    We must also finalize work on a global standard for posting 
collateral (or margin) on uncleared derivatives transactions. To 
reinforce the push towards central clearing and enhance safety and 
soundness, the charges associated with uncleared derivative 
transactions must exceed those on cleared transactions. Both the United 
States and the European Commission are developing margin requirements 
for OTC derivatives that are not centrally cleared, and the G20 and the 
FSB have committed to developing a global standard.
    Going into the crisis, countries lacked tools to resolve 
systemically important financial institutions, effectively rendering 
them too big to fail. Going forward, we have reached an important 
agreement that all major financial jurisdictions should have the tools 
to resolve large cross-border firms without the risk of severe 
disruption or taxpayer exposure to loss. The FSB is working actively to 
see that this international commitment is implemented on a national 
level to ensure that in addition to national resolution regimes, 
regulators and the major global banks develop cross-border recovery and 
resolution plans by the end of 2012; develop criteria to improve the 
``resolvability'' of systemically important institutions; and negotiate 
institution-specific cross-border resolution cooperation arrangements.
    Strengthening cross-border resolution is a difficult issue given 
the diverse national laws and the infeasibility of a single global 
bankruptcy regime. The UK, Germany, and Canada have already passed 
resolution legislation, and the European Commission is developing a 
draft for the second quarter of 2012. We are working to put in place 
cross border cooperation agreements; establish cross border crisis 
management groups for the largest, most complex institutions; and 
finalize recovery and resolution plans by the end of this year.
    Going into the crisis, supervisors and market participants did not 
have adequate visibility into the buildup of concentrations of risky 
activities in the financial markets. Going forward, a global Legal 
Entity Identifier (LEI) system will uniquely identify parties to 
financial transactions, ensuring greater transparency and more 
efficient data collection across the global financial system, and 
enabling better understanding and management of systemic risk. Working 
with our international counterparts and the financial industry, we must 
finalize the global LEI framework and the reporting systems to support 
it by the G20 Leaders Summit in June.
    New laws and rules aimed at the home market of any major financial 
center will inevitably impact other jurisdictions, given the globalized 
nature of cross-border flows. In these circumstances, aligning the 
substance and timing of reforms across jurisdictions will be critical. 
Regulators will have to sort out whose rules apply, how, and where. We 
need to figure out sensible ways to apply and enforce rules across 
major jurisdictions in consistent ways. The greater the degree of 
convergence around high quality standards, the greater the scope for 
deferring to foreign jurisdictions that have regulatory regimes as 
strong as that of the United States.
    Regulators are grappling with common issues pertaining to the 
structure of risk-taking in their national markets. The Volcker rule, 
which limits proprietary trading and hedge fund activities for banks, 
is a good example of where the United States has moved ahead of others, 
continuing in a long tradition of recognizing structural differences 
across countries, reflecting national history and laws. The U.S. 
Federal depository insurance net--which has served our country well--
was not designed to be extended to the riskiest trading activities of 
U.S. banks. But even in this instance, while regulators are sifting 
through the 16,000 comments that were submitted on the rule, other 
jurisdictions are grappling with the same issues. In the UK, the 
Vickers Commission proposed rules to insulate core financial 
intermediation activities from riskier business lines in order to 
promote financial stability. In the European Union, Commissioner 
Barnier has assembled a commission to explore possible regulations for 
proprietary trading.
Conclusion
    With financial markets that are more globally integrated than ever, 
we need financial reforms that are more globally convergent than ever.
    In today's highly interconnected global financial markets, the risk 
of regulatory arbitrage carries real impact. It means the potential 
loss of jobs if firms seek to move overseas where regulation is weaker. 
It means a race to the bottom for standards and protections. And it may 
mean a heightened risk of a future financial crisis if riskier 
activities migrate to areas with less transparency and laxer 
supervision.
    In cooperation with the regulatory agencies represented here today, 
Treasury is intensely focused on ensuring global convergence on 
regulation and resolution of large, complex financial institutions and 
on regulation of derivatives markets--the three areas with the greatest 
potential for discrepancies in national regulations to create 
disproportionate dislocations in global markets that could negatively 
impact our economy and our firms. This is a necessary response to the 
crisis.
    Since the outset of the crisis, the G20 and the FSB have played an 
increasingly critical and welcome role, alongside the international 
standard setting bodies, in shaping the international regulatory reform 
agenda and promoting sound regulation and more resilient financial 
markets. Recognizing there will be discrepancies when it comes to 
implementation at the national level, the Treasury and U.S. regulatory 
agencies buttress our cooperation through the G20 and the FSB with 
extensive bilateral engagement. Each day, we talk with our colleagues 
in Europe and conduct ongoing dialogues across the major financial 
centers. This helps us get the details right. Additionally, the FSB and 
the standard-setting bodies have jointly developed an implementation 
monitoring framework that will report annually on our collective 
progress to the FSB, the G20, and the public.
    Undoubtedly, we will not attain perfect alignment and we will not 
get everything right. Despite this, nothing could be more costly than 
backtracking on reforms. We cannot lose sight of the costs of the last 
crisis--millions of jobs and trillions of dollars in lost wealth. Nor 
can we lose sight of the causes--inadequate risk management, imprudent-
risk taking, opaque instruments whose risks were not understood or 
overseen, and failures by our regulators. This is why it is necessary 
to complete the work that is underway in the United States and 
internationally. The system is stronger today and will continue to 
strengthen in the future as a result of our efforts.
                                 ______
                                 
                PREPARED STATEMENT OF DANIEL K. TARULLO
        Member, Board of Governors of the Federal Reserve System
                             March 22, 2012
    Chairman Johnson, Ranking Member Shelby, and other Members of the 
Committee, thank you for the opportunity to testify on implementation 
of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 
2010 (Dodd-Frank Act) and its international implications.
    Although banking regulation has long included an important 
international dimension, the recent financial crisis has brought 
renewed attention, both in the United States and abroad, to the 
interconnectedness among national financial markets and, consequently, 
the importance of international cooperation in safeguarding those 
markets. In recognition of the fact that financial distress can quickly 
and dramatically cross national borders, we seek to protect our own 
financial system by promoting the global adoption of strong, common 
regulatory standards and effective supervisory practices. Such common 
standards and practices should also help prevent major competitive 
disadvantages for U.S. firms.
    Today I will touch on several aspects of the implementation of the 
Dodd-Frank Act that have significant international implications: 
regulation of systemically important financial institutions (SIFis), 
reform of the over-the-counter (OTC) derivatives market, and a number 
of discrete issues that are arising as we work to implement the Dodd-
Frank Act.
Regulation of SIFIs
    The Dodd-Frank Act and postcrisis international regulatory reform 
efforts both place great emphasis on containing the systemic risk 
potentially posed by major financial institutions. The most important 
points of intersection include efforts to strengthen capital 
requirements, to develop international quantitative liquidity 
standards, and to put in place mechanisms for the orderly resolution of 
these firms.
Capital Regulation
    Strong capital requirements remain the cornerstone of prudential 
regulation because capital can provide a buffer against losses at 
financial firms from any source or activity. The best way to safeguard 
against taxpayer-funded bailouts in the future is for our large 
financial institutions to have adequate capital buffers, sized to 
reflect their own risk profiles and the damage that would be done to 
the financial system were such institutions to fail. Achievement of 
this aim requires both improvement of the traditional, firm-based 
approach to capital regulation and creation of a more systemic, or 
macroprudential, component of capital regulation.
    With respect to improving the traditional approach to capital 
regulation, international work on common, global standards was already 
quite advanced by the time the Dodd-Frank Act was enacted in July 2010. 
The so-called Basel 2.5 agreement, which strengthened the market risk 
capital requirements ofBasel II, had already been finished. Just a few 
months after the Dodd-Frank Act was enacted, agreement was reached on 
the Basel III reforms, which require improvement of the quality of 
regulatory capital, an increase in the quantity of minimum required 
capital, maintenance of a capital conservation buffer, and--for the 
first time internationally--compliance with a minimum leverage ratio. 
In the coming months, the banking agencies will be finalizing 
regulations to implement Basel 2.5 in the United States and will be 
proposing regulations to implement Basel III in the United States.
    With respect to macroprudential capital regulation, section 165 of 
the Dodd-Frank Act mandated that the Board establish enhanced risk-
based capital standards for large bank holding companies that would be 
graduated based on the relative systemic importance of those companies. 
Consistent with this requirement, we espoused proposals in the Basel 
Committee for capital surcharges on the world's largest, most 
interconnected banking organizations based on their global systemic 
importance. Last year, agreement was reached on a framework for such 
surcharges, to be implemented during the same transition period 
applicable to Basel III. The Board's aim has been to fashion the 
enhanced capital requirements of section 165 and the associated 
international framework in a simultaneous and congruent manner. Both 
the Dodd-Frank Act provision and the Basel systemic surcharge framework 
are motivated by the fact that the failure of a systemically important 
firm would have dramatically greater negative consequences on the 
financial system and the economy than the failure of other firms. 
Stricter capital requirements on systemically important firms should 
also have the benefit of helping offset any funding advantage these 
firms derive from their perceived status as too-big-to-fail and 
providing an incentive for such firms to reduce their systemic 
footprint.
    If the benefits of all these improvements to existing capital 
requirements are to be realized, it is crucial that capital standards 
be not only agreed upon globally, but also implemented consistently 
across jurisdictional boundaries. We have strongly supported efforts 
within the Basel Committee to monitor implementation--not only in the 
laws and regulations of member countries, but also at the level of 
individual large banking organizations, including an assessment of the 
consistency of risk-weighting practices by banks. We look forward to 
the evolution of the Basel Committee's new plans for conducting this 
monitoring exercise, which are considerably more ambitious than any 
pursued in the past.
Liquidity Standards
    In recognition of the fact that liquidity squeezes at some 
financial institutions played a key role in the financial crisis, the 
Basel III agreements also introduced, for the first time, quantitative 
liquidity requirements for application to internationally active banks. 
One standard, the Liquidity Coverage Ratio (LCR), is designed to ensure 
a firm's ability to withstand short term liquidity shocks through 
adequate holdings of highly liquid assets. The other standard, the Net 
Stable Funding Ratio (NSFR), is intended to avoid significant maturity 
mismatches over longer-term horizons. Again, there is a parallel to 
this international initiative in section 165 of the Dodd-Frank Act, 
which calls for enhanced, graduated liquidity standards for large bank 
holding companies.
    Precisely because this was the first effort on quantitative 
liquidity regulation by the Basel Committee, there were some questions 
about potential unintended consequences, as well as a desire to ensure 
that the new standards reflected actual experience with the stability 
of various funding sources and the relative liquidity of different 
financial instruments during the financial crisis. For these reasons, 
the Federal Reserve, with support from a number of other central banks 
and supervisors, suggested at the time of adoption of Basel III in 2010 
a multiyear study period before the rules take effect. Since then, the 
U.S. banking agencies and a Basel Committee working group have been 
collecting data, analyzing the potential effects of the LCR on 
financial markets and the broader economy, and considering what 
amendments might be warranted. The Basel Committee will likely suggest 
a set of changes to the LCR later this year, with a goal of introducing 
the LCR in 2015. Work on the NSFR is on a considerably slower track; 
the current plan is for implementation in 2018.
Resolution of SIFIs
    A third core regulatory reform goal of both the Dodd-Frank Act and 
international policy makers is to enhance the ability of regulators to 
resolve failing SIFis. The Basel Committee and the Financial Stability 
Board (FSB) have set forth standards for national resolution regimes 
that will allow resolution of SIFis in an orderly fashion, without 
taxpayer exposure to losses through solvency support. Here in the 
United States, the Dodd-Frank Act provides for an orderly resolution 
process to be administered by the Federal Deposit Insurance Corporation 
(FDIC), and resolution planning by SIFis to be overseen by the FDIC and 
the Federal Reserve. Together these provisions of the Dodd-Frank Act 
are fully consistent with the Basel Committee and FSB standards.
    In developing the orderly liquidation authority established by 
Title II of the Dodd-Frank Act, the FDIC has recently expressed a 
preference for resolving a failed SIFI under a single receivership and 
internal recapitalization model. Under this model, the parent company 
of the failed SIFI is placed into receivership; all, or substantially 
all, of the assets of the parent company are transferred to a bridge 
entity; the parent company and its residual assets are liquidated; and 
the bridge entity is capitalized, in part, by converting the holders of 
long-term unsecured debt of the parent company into equity holders in 
the bridge. Under the single receivership model, the major subsidiaries 
of the SIFI continue to operate as going concerns. This approach holds 
great promise, but ensuring its viability as a resolution option 
requires, among other things, that each SIFI maintain an amount of 
long-term unsecured debt that is sufficient to absorb very significant 
losses at the firm.
    Some other jurisdictions have, or are planning to, put in place 
special resolution mechanisms that conform to the emerging 
international standards. But even continued progress along this path 
may not solve all the possible problems associated with failure of a 
SIFI. The coexistence of internationally active firms with nationally 
based insolvency regimes means that there could be important cross-
border legal complications when a home jurisdiction places into 
receivership a firm with significant assets, subsidiaries, and 
contractual arrangements in other countries. A comprehensive, treaty-
like instrument for a global bank resolution regime to address these 
issues is surely an unrealistic prospect for the foreseeable future. 
The Federal Reserve and the FDIC are working together with counterparts 
from other countries to identify opportunities for more limited 
cooperation agreements, coordinated supervisory work on resolution 
plans, and other devices to make the orderly resolution of a large, 
internationally active firm more feasible.
OTC Derivatives Regulatory Reforms
    Another key part of the Dodd-Frank Act that involves significant 
international considerations is OTC derivatives reform. In the United 
States, administrative agencies are implementing the requirements of 
the Dodd-Frank Act to strengthen the infrastructure and regulation of 
the OTC derivatives market. This task includes enhancing the role of 
central counterparties, which can be an important tool for managing 
counterparty credit risk in the derivatives market; improving 
regulation and supervision of dealers and key market participants; 
introducing minimum margin requirements for certain derivatives 
transactions that are not cleared with a central counterparty; and 
increasing transparency.
    A roughly parallel international initiative got under way in 2009, 
when the Group of Twenty (G20) leaders set out commitments related to 
reform of the OTC derivatives markets. Since work on the G20 
commitments is being pursued in a number of international groups and 
foreign jurisdictions, continued attention will be required to ensure 
that the global convergence process continues in a timely fashion. Such 
attention will be particularly important in areas where international 
convergence is desirable to avoid a significant fracturing or 
regionalization of the existing global structure of the swaps market, 
or to prevent undue constraints on the ability of U.S. firms to compete 
in foreign markets. A good example of this is the introduction of 
margin requirements for uncleared derivatives. U.S. and foreign 
regulators have formed a joint working group of the Basel Committee and 
the International Organization of Securities Commissions (IOSCO) to 
develop internationally consistent margin standards that appropriately 
address the risks of uncleared derivatives while ensuring that U.S. and 
foreign firms compete on a level playing field.
    Other key areas of OTC derivatives reform present similar 
international challenges and will demand similar levels of 
international collaboration. These areas include the creation and 
regulation of central counterparties, swap execution facilities, and 
swap data repositories, including mutual recognition by U.S. and 
foreign regulators where appropriate. Issues also arise around the 
treatment of governmental entities in derivatives reforms in the United 
States and abroad. For example, title VII of the Dodd-Frank Act 
generally exempts from swaps regulation any transaction to which the 
Federal Reserve is a party, but does not contain a similar exemption 
for transactions to which a foreign central bank is party. Foreign 
central banks have expressed concerns that the application of certain 
parts of title VII may interfere with the manner in which they conduct 
their national monetary policies.
    In addition to its involvement in specific derivatives reforms 
related to the Dodd-Frank Act, the Federal Reserve also participates in 
a variety of international groups that serve as broader forums for 
coordinating policies related to the participants and the 
infrastructure of derivatives markets. These forums include the Basel 
Committee, which has recently enhanced international capital, leverage, 
and liquidity standards for derivatives, as well as the Committee on 
Payment and Settlement Systems, which is working with IOSCO to update 
international standards for systemically important clearing systems, 
including central counterparties that clear derivatives instruments, 
and trade repositories. These collaborative exercises are intended to 
support the development of a consistent international approach to the 
regulation and supervision of derivatives products, dealers, and market 
infrastructures. Here, as in other international contexts, our aims are 
to promote the financial stability of the United States and fair 
competitive conditions for U.S. financial institutions.
Other Implementation Issues
    As noted in the preceding discussion, even where there is broad 
international consensus to adopt a particular regulatory approach, 
there can be discrete issues raised as countries implement that 
approach in the context of their own legal, financial, and political 
systems. This circumstance is hardly unique to the area of financial 
regulation; it is familiar to anyone who has worked on virtually any 
regulatory issues that affect international trade and investment. There 
are also some elements of the Dodd-Frank Act that are unlikely to be 
pursued internationally in any comparable form. These areas of U.S.-
only regulatory reform can present particular challenges in 
implementation, both in terms of the potential impact that they may 
have on the ability of U.S. financial institutions to compete abroad 
and the extent to which they may affect the activities of foreign 
financial institutions in U.S. markets and with U.S. counterparties. In 
these instances of regulatory reforms being pursued only in the United 
States, there are not likely to be obvious answers to the resulting 
international complexities.
    For example, there has been considerable recent attention paid to 
the international aspects of section 619 of the Dodd-Frank Act, more 
commonly known as the ``Volcker Rule''. Concerns have been expressed 
about the Volcker Rule's potential international implications in three 
principal areas. First, because the Volcker Rule applies to the 
worldwide operations of U.S. banking entities, but only to the U.S.-
connected operations of foreign banks, concerns have been raised 
regarding the relative competitiveness of U.S. firms that have 
significant operations in overseas markets. Second, and conversely, 
because the Volcker Rule also applies to the activities of foreign 
banks unless such activities are ``solely outside the United States,'' 
several foreign banks and their supervisors have expressed concern 
regarding the potential extraterritorial impact that those restrictions 
may have on trading or fund activity of foreign banks that has both 
U.S. and non-U.S. characteristics. Third, because the Volcker Rule 
includes a statutory exemption for proprietary trading in U.S. 
Government debt securities, but not in foreign sovereign debt 
securities, several constituencies have raised concerns regarding this 
asymmetry. In each of these areas, U.S. regulators will need to 
carefully consider the concerns that have been raised and the broader 
international implications of the Volcker Rule as we work to finalize 
our implementing rules.
    Similarly, the swaps ``push-out'' requirement in section 716 of the 
Dodd-Frank Act also appears unlikely to be pursued internationally. 
Under section 716, U.S. insured depository institutions and U.S. 
branches and agencies of foreign banks will be required to ``push out'' 
certain types of derivatives dealing activities to affiliated entities. 
The global effects of the swaps push-out provision are multifaceted. On 
the one hand, the provision will require U.S. banking firms to 
restructure their global derivatives dealing activities in ways that 
will not be required of foreign banks abroad. At the same time, the 
provision may require U.S. branches and agencies of foreign banks to 
restructure their derivatives dealing activities in ways that will not 
be required of U.S. banks.
    Thank you very much for your attention. I would be pleased to 
answer any questions you might have.
                                 ______
                                 
                 PREPARED STATEMENT OF ELISSE B. WALTER
               Member, Securities and Exchange Commission
                             March 22, 2012
    Chairman Johnson, Ranking Member Shelby, and Members of the 
Committee, thank you for inviting me to testify on behalf of the 
Securities and Exchange Commission (SEC) about international 
cooperation in the realm of financial regulation.
    Markets are global, and regulators have long been mindful that 
domestic changes can have an impact outside their own countries. The 
impact of regulation across borders has become ever more important as 
business has become increasingly global. As part of our rulemaking 
efforts to implement the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (Dodd-Frank Act), the SEC has been actively engaged in 
discussions with our counterparts abroad to encourage international 
coordination of regulatory reforms.
    Our international efforts include both informal and formal 
bilateral discussions and arrangements, and we also work through 
multilateral organizations, where we have leadership roles in several 
task forces and working groups.
    My testimony will highlight some of the key areas in which the SEC 
is working internationally to identify risks to the global markets, 
what regulatory responses might be desirable, and how to best 
coordinate such cross-border regulatory responses.
International Coordination Efforts
    Since the financial crisis began, the G20 has identified major 
financial issues it believes should be addressed by the individual 
member jurisdictions to mitigate risks in the global financial system. 
As an independent agency, the SEC does not participate directly in G20 
Leaders' or Finance Ministers' meetings, but we coordinate with our 
domestic and international counterparts who participate in these 
meetings to identify concerns in the global capital markets that are 
relevant to the work we do.
    The G20 often asks other multilateral organizations to conduct in-
depth studies of the concerns that impact the global financial markets, 
which have taken the form of surveying various approaches in different 
jurisdictions and developing broad policies or principles to guide 
regulatory authorities as they develop their own rules and regulations 
consistent with their unique national mandates.
    In recent years, the Financial Stability Board (FSB) has played an 
increasingly active role in coordinating international efforts to 
implement G20 objectives. The FSB includes officials from banking 
supervisors and capital markets regulators around the globe, along with 
representatives from finance ministries and central banks and the 
international financial institutions, and aims to identify and discuss 
broad trends affecting the financial system.
    Currently, I represent the SEC in the FSB. My colleagues from the 
Federal Reserve Board and the Department of the Treasury, Governor 
Tarullo and Under Secretary Brainard, respectively, also represent the 
United States in the FSB. The SEC staff regularly communicates with 
staffs of these agencies as well as the staffs of the Office of the 
Comptroller of the Currency, the Commodity Futures Trading Commission 
(CFTC), and the Federal Reserve Bank of New York in order to present 
unified positions in FSB policy discussions and working groups.
    The G20 and, in turn, the FSB also seek input from other 
international bodies, including the International Organization of 
Securities Commissions (IOSCO) and other standard setters. I also serve 
as the SEC's Head of Delegation to IOSCO.
    Due to the extensive international coordination efforts undertaken 
by the SEC and other U.S. financial regulatory agencies within the 
context of these international bodies, the recommendations and 
international standards being developed by these groups are broadly 
consistent with the Dodd-Frank Act and the G20 objectives.
    The SEC also participates in multilateral discussions with regional 
authorities, and the SEC facilitates targeted, multilateral discussions 
with key jurisdictions on its highest priority topics. For example, the 
SEC is active in the Council of Securities Regulators of the Americas 
(COSRA) on issues of regional importance in the Americas.
    We also recognize the need and value of holding discussions outside 
of the FSB and IOSCO with regulators from other jurisdictions. While 
bodies such as the G20, FSB, and IOSCO play an important role in the 
international policy dialogue, national regulatory bodies such as the 
SEC continue to exercise the authority granted to them in a manner that 
is necessary and appropriate to carry out their statutory missions and 
legislative mandates. International bodies, such as the G20, FSB, and 
IOSCO, neither legislate nor write governing rules; rather, mandates 
for regulation come from national authorities. In addressing the risks 
identified by the G20, all jurisdictions do not necessarily follow the 
same approach. Additionally, not all jurisdictions are members of the 
G20 and FSB. Within IOSCO, market regulators from around the world 
participate, but not all entities with the authority to shape relevant 
rules and regulations are members.
    Because of the detailed nature of the discussions required or the 
country-specific nature of the issues involved, certain regulatory 
initiatives have proven to be managed more effectively in smaller 
forums or on a bilateral basis. To this end, the SEC has several 
ongoing bilateral dialogues with regulators in key international 
regulatory jurisdictions, including the United Kingdom, India, China, 
Korea, Turkey, and Japan.
    These dialogues are intended to facilitate identification and 
discussion of common issues of regulatory concern, enhance enforcement 
cooperation, and, in some cases, expand on existing training and 
technical assistance efforts. The dialogues have taken on increasing 
importance as regulators around the globe engage in financial 
regulatory reform efforts in their respective jurisdictions.
    For example, the SEC participates alongside the Department of the 
Treasury and the Federal Reserve Board in the Financial Markets 
Regulatory Dialogue (FMRD) with the European Union. The FMRD was 
created in 2002 as a forum to discuss regulatory initiatives in their 
early stages with a focus on avoiding unnecessary conflicts of law 
between the United States and the European Union. It has evolved into a 
vehicle for in-depth discussion of regulatory issues of mutual concern, 
enhancement of understanding of each other's regulatory systems, and 
exploration of areas of regulatory cooperation and convergence in the 
development of high-quality regulation.
OTC Derivatives
    One area where international coordination is particularly important 
is reform of the global OTC derivatives markets. After the 2008 
financial crisis, Congress recognized the need to bring transparency to 
these markets, and the G20 Leaders shared this concern. At the 
Pittsburgh Summit in September 2009, the G20 Leaders called for global 
improvements in the functioning, transparency and regulatory oversight 
of OTC derivatives markets. Specifically, the G20 stated that:

        [a]ll standardized OTC derivative contracts should be traded on 
        exchanges or electronic trading platforms, where appropriate, 
        and cleared through central counterparties by end-2012 at the 
        latest. OTC derivative contracts should be reported to trade 
        repositories. Noncentrally cleared contracts should be subject 
        to higher capital requirements. We ask the FSB and its relevant 
        members to assess regularly implementation and whether it is 
        sufficient to improve transparency in the derivatives markets, 
        mitigate systemic risk, and protect against market abuse. \1\
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     \1\ G20 Meeting, Pittsburgh, 25 September 2009. Available at 
http://www.treasury.gov/resource-center/international/g7-g20/Documents/
pittsburgh_summit_leaders_statement_250909.pdf.

    In subsequent summits, the G20 Leaders have reiterated their 
commitment to OTC derivatives regulatory reform and have asked the FSB 
to monitor OTC derivatives reform progress.
    Congress also recognized the need for coordination in this area and 
directed the SEC to consult with its foreign counterparts, as 
appropriate, in several key areas under Title VII of the Dodd-Frank 
Act. Specifically, the Dodd-Frank Act states that

        in order to promote effective and consistent global regulation 
        of swaps and security-based swaps, the CFTC, the SEC, and the 
        prudential regulators . . . , as appropriate, shall consult and 
        coordinate with foreign regulatory authorities on the 
        establishment of consistent international standards with 
        respect to the regulation (including fees) of swaps, 
        securities-based swap, swap entities, and security-based swaps 
        entities and may agree to such information-sharing agreements 
        as may be deemed to be necessary or appropriate in the public 
        interest or for the protection of investors, swap 
        counterparties, and securities-based swap counterparties. \2\
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     \2\ Dodd-Frank Wall Street Reform and Consumer Protection Act 752 
(Pub. L. 111-203, H.R. 4173) (2010).

    The SEC and the CFTC have conducted staff studies to assess 
developments in OTC derivatives regulation abroad. For example, as 
directed by Congress in Section 719(c) of the Dodd-Frank Act, \3\ on 
January 31, 2012, the SEC and CFTC jointly submitted to Congress a 
``Report on International Swap Regulation'' (Swap Report). \4\ The Swap 
Report discusses swap and security-based swap regulation and 
clearinghouse regulation in the Americas, Asia, and European Union and 
identifies areas of regulation that are similar and other areas of 
regulation that could be harmonized. The Swap Report also identifies 
major clearinghouses, clearing members, and regulators in each 
geographic area and describes the major contracts (including clearing 
volumes and notional values), methods for clearing swaps, and the 
systems used for setting margin in each geographic area. \5\ In 
addition, on April 8, 2011, SEC and CFTC staff submitted a joint study 
to Congress on the feasibility of requiring the derivatives industry to 
adopt standardized computer-readable algorithmic descriptions which may 
be used to describe complex and standardized financial derivatives. \6\ 
In preparing this report, staff coordinated extensively with 
international financial institutions and foreign regulators.
---------------------------------------------------------------------------
     \3\ Dodd-Frank Wall Street Reform and Consumer Protection Act 
719(c) (Pub. L. 111-203, H.R. 4173) (2010).
     \4\ Available at http://www.sec.gov/news/studies/2012/sec-cftc-
intlswapreg.pdf.
     \5\ The Swap Report points out that major dealers could not be 
identified as of the date of the report because rules requiring swap 
dealers to register as such had not been adopted yet. Neither could any 
major swap exchanges be identified in the report as no exchange was 
offering swaps or security-based swaps for trading as of the date of 
the report.
     \6\ Available at http://www.sec.gov/news/studies/2011/719b-
study.pdf.
---------------------------------------------------------------------------
    SEC and CFTC staff have also been working on a bilateral basis with 
counterparts from Canada, the European Union, Hong Kong, Japan, and 
Singapore to coordinate technical issues that are in the interest of 
leveling the playing field for the regulation of derivatives 
transactions. In December, leaders and senior representatives of the 
authorities responsible for the regulation of the OTC derivatives 
markets in these jurisdictions met in Paris to discuss significant 
cross-border issues related to the implementation of new legislation 
and rules governing the OTC derivatives markets, including concerns 
about possible regulatory gaps, conflicts, arbitrage, and duplication. 
In addition to agreeing to continue staff-level bilateral technical 
dialogues, the leaders are planning to meet again as a group this 
spring.
    We also have worked through multilateral organizations to 
facilitate further international cooperation. SEC staff represents 
IOSCO as a cochair of the FSB's OTC Derivatives Working Group (ODWG). 
The FSB published a report on implementing OTC derivatives market 
reforms in October 2010. \7\ This report, which was endorsed by the G20 
Leaders, \8\ includes 21 recommendations addressing practical issues 
that authorities may encounter in implementing the G20 commitments 
concerning standardization, central clearing, exchange or electronic 
platform trading, and reporting OTC derivatives transactions to trade 
repositories. The ODWG conducts semi-annual reviews of jurisdictions' 
efforts to implement the G20 objectives for OTC derivatives reforms and 
submits reports on its findings to the G20.
---------------------------------------------------------------------------
     \7\ Available at http://www.financialstabilityboard.org/
publications/r_101025.pdf.
     \8\ G20 Leaders' Meeting, Seoul, Korea, 12 November 2010. 
Available at http://www.treasury.gov/resource-center/international/
Documents/1%20%20FINAL%20SEOUL%20COMMUNIQUE.pdf.
---------------------------------------------------------------------------
    In October 2010, IOSCO formed a Task Force on OTC Derivatives 
Regulation to take a leading role in coordinating market regulators' 
efforts to work together in the development of supervisory and 
oversight structures related to the derivatives markets. 
Representatives from the SEC, CFTC, United Kingdom Financial Services 
Authority (UK FSA), and the Securities and Exchange Board of India 
(SEBI) serve as cochairs of this Task Force. The Task Force was formed 
primarily to assist regulators in coordinating their derivatives 
legislative and regulatory reform efforts and in developing consistent 
regulatory standards, with a focus on derivatives clearing, trading, 
trade data collection and reporting, and the oversight of certain 
derivatives market participants.
    In February 2011, the Task Force published a ``Report on Trading of 
OTC Derivatives'' (Report on Trading). \9\ The Report on Trading sets 
out a framework for international regulators to consider when 
implementing the G20 Leaders' commitment to trade all standardized OTC 
derivatives on exchanges or electronic trading platforms, where 
appropriate, by the end of 2012. The Report on Trading analyzes the 
benefits, costs, and challenges associated with increasing exchange and 
electronic trading of OTC derivative products and contains 
recommendations aimed at assisting the transition of the trading of 
standardized derivatives products from OTC venues onto exchanges and 
electronic trading platforms (organized platforms) while preserving the 
efficacy of those transactions for counterparties. Following on that 
effort, earlier this year, the Task Force completed the ``Follow-On 
Analysis to the Report on Trading'', which describes the different 
types of organized platforms currently available for the execution of 
OTC derivatives transactions in IOSCO member jurisdictions and seeks to 
highlight the different approaches global regulators are taking or 
envisage taking to mandate the use of organized platforms for trading 
OTC derivatives. \10\
---------------------------------------------------------------------------
     \9\ Available at http://www.iosco.org/library/pubdocs/pdf/
IOSCOPD345.pdf.
     \10\ Available at http://www.iosco.org/library/pubdocs/pdf/
IOSCOPD368.pdf.
---------------------------------------------------------------------------
    The Task Force also collaborated with the Basel-based Committee on 
Payment and Settlement Services (CPSS) to publish the ``Report on OTC 
Derivatives Data Reporting and Aggregation Requirements'' earlier this 
year (Data Report). \11\ The Data Report specifies minimum requirements 
for the reporting of data to trade repositories and for trade 
repositories reporting to regulators, as well as types of acceptable 
data formats, and discusses issues relating to authorities' and 
reporting entities' access to data and the dissemination of OTC 
derivatives data to the public. The Data Report also describes data 
aggregation mechanisms and tools needed to enable authorities to 
aggregate data in a manner that fulfills their regulatory mandates, 
including methods, rationales and possible tools to implement data 
aggregation, such as legal entity identifiers. The Task Force plans to 
complete its work later this year when it finalizes reports setting 
forth international standards for mandatory clearing and the oversight 
of derivative market intermediaries.
---------------------------------------------------------------------------
     \11\ Available at http://www.iosco.org/library/pubdocs/pdf/
IOSCOPD366.pdf.
---------------------------------------------------------------------------
    Additionally, the SEC is working through IOSCO to review and 
improve international standards for financial market infrastructures. 
This project is a joint effort of IOSCO and the CPSS. In March 2011, 
CPSS-IOSCO issued a ``Consultation Report on Principles for Financial 
Market Infrastructures'' (FMI Report). \12\ The FMI Report proposes new 
and more demanding international standards for systemically important 
payment systems, central securities depositories, securities and 
settlement systems, central counterparties and trade repositories 
(collectively, financial market infrastructures, or FMIs).
---------------------------------------------------------------------------
     \12\ Available at http://www.iosco.org/library/pubdocs/pdf/
IOSCOPD350.pdf.
---------------------------------------------------------------------------
    The new standards (referred to as principles) presented in the FMI 
Report are designed to ensure that the essential payment and 
settlements infrastructure supporting global financial markets is more 
robust and better placed to withstand financial shocks. The FMI Report 
contains a comprehensive set of 24 principles designed to apply to all 
systemically important FMIs and five responsibilities for central 
banks, market regulators, and other relevant authorities. CPSS-IOSCO 
plans to publish the final report this spring.
    Finally, given the global nature of the derivatives market, the SEC 
intends to address the international implications of its rules arising 
under Subtitle B of Title VII in a single proposal in order to give 
interested parties, including investors, market participants, and 
foreign regulators, an opportunity to consider as an integrated whole 
our approach to the registration and regulation of foreign entities 
engaged in cross-border security-based swap transactions involving U.S. 
parties. We understand that our approach to the cross-border 
application of Title VII must both achieve effective domestic 
regulatory oversight and reflect the realities of the global 
derivatives market. As we do so, the SEC is continuing to actively 
coordinate with our counterparts in other jurisdictions to help achieve 
consistency and compatibility among approaches to derivatives 
regulation.
Identification and Mitigation of Systemic Risk
    A second area that requires robust international cooperation is the 
identification and mitigation of risks that could have cross-border 
impact on markets. The SEC has worked to enhance our capability to spot 
emerging issues and to address proactively these issues before they 
have the potential to cause serious harm to the U.S. financial markets 
and the global financial system. For example, we have open lines of 
communication with our international counterparts to discuss emerging 
risks and to promptly react to new developments. In addition, our 
bilateral efforts and work in multilateral organizations also give us 
insight into concerns faced by other jurisdictions.
    The ability to collect and share compatible data is also essential 
to regulators' efforts to identify and mitigate systemic risk. An 
example of this information sharing is the Commission's work with other 
regulators, including the UK FSA and the Hong Kong Securities and 
Futures Commission, to develop an internationally agreed upon template 
that would form the basis for future data collection efforts to better 
understand the hedge fund industry.
    We worked through IOSCO first, to survey the role of hedge funds in 
other markets and to develop high-level, international general 
principles for regulation of the hedge fund sector. The template was 
published in February 2010 and contains a list of broad proposed 
categories of information (with examples of potential data points) that 
regulators could collect for general supervisory purposes and to help 
in the assessment of systemic risk (including, for example, product 
exposure and asset class concentration, geographic exposure, liquidity 
information, extent of borrowing, and credit counterparty exposure).
    After the Dodd-Frank Act was passed, we continued to work closely 
with the UK FSA, the EC, and the European Securities and Markets 
Authority (ESMA) to discuss cross-border issues that have emerged as we 
implemented Title IV, including the development of Form PF. At the same 
time we were developing Form PF, which was finalized on October 31, 
2011, \13\ ESMA was developing its data collection form, which was 
published on November 11, 2011, as part of ESMA's formal advice to the 
EC on implementation of its Alternative Investment Fund Managers 
Directive. Given that each regulator must develop its reporting 
requirements based on its unique mandates, policies, and objectives, 
the forms are understandably not exactly the same. Nevertheless, due to 
our extensive coordination efforts, the two forms generally are 
compatible and will facilitate international efforts to compare, 
aggregate, and learn from the data.
---------------------------------------------------------------------------
     \13\ Summary and final rule are available at http://www.sec.gov/
news/press/2011/2011-226.htm and http://www.sec.gov/rules/final/2011/
ia-3308.pdf.
---------------------------------------------------------------------------
    In addition to our bilateral coordination efforts, we have worked 
in multilateral organizations to ensure that future efforts to identify 
and mitigate risk will benefit from international coordination. For 
example, early last year, IOSCO published a discussion paper entitled 
``Mitigating Systemic Risk--A Role for Securities Regulators'' 
(Systemic Risk Paper), which focused on the role securities regulators 
play in addressing systemic risk. \14\ The Systemic Risk Paper was 
intended to promote discussion among securities regulators on the ways 
in which systemic risk intersects with their mandates and to provide 
insight on how IOSCO and its members can better identify, monitor, 
mitigate, and manage systemic risk. We are also playing a lead role in 
IOSCO's new Standing Committee on Risk Research, created to bring 
together economists from major market regulators to discuss these 
issues on a regular basis. We continue to work internationally to 
facilitate dialogue about systemic risk among securities regulators as 
well as with the broader international regulatory community.
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     \14\ Available at http://www.iosco.org/library/pubdocs/pdf/
IOSCOPD347.pdf.
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Volcker Rule
    Section 619 of the Dodd-Frank Act, commonly referred to as the 
Volcker Rule, may also have international implications. The Volcker 
Rule generally prohibits a banking entity from engaging in proprietary 
trading and having certain interests in, or relationships with, a hedge 
fund or private equity fund (covered funds), subject to certain 
exemptions. The defined term ``banking entity'' determines the scope of 
entities subject to the Volcker Rule and includes any: (i) insured 
depository institution, (ii) company that controls an insured 
depository institution, (iii) foreign bank with a branch, agency or 
subsidiary in the United States, and (iv) affiliates and subsidiaries 
of the foregoing entities. The Commission proposed a rule jointly with 
the Federal banking agencies to implement the Volcker Rule in October 
2011 (Proposed Rule), and the CFTC issued its proposal in January 2012.
    In the Proposed Rule, the five regulatory agencies requested and 
received comment on several international issues. For example, the 
Proposed Rule, which closely follows statutory construction, includes 
an exemption for proprietary trading in certain U.S. and municipal 
Government obligations, but does not establish an additional exemption 
for proprietary trading in foreign Government obligations. Many 
commenters, including some foreign Governments, have requested that 
such an exemption be adopted and have expressed concerns about the 
proposed rule's potential impact on liquidity in foreign sovereign debt 
markets. Moreover, consistent with the statute's exemptive authority, 
some of these commenters have suggested ways that such an exemption 
would promote and protect the safety and soundness of banking entities 
and the financial stability of the United States. However, some 
commenters have indicated that such an exemption would not be necessary 
or would not meet such standards.
    In addition, the proposal also includes the statutory exemptions 
for foreign banking entities' activities conducted ``solely outside of 
the United States.'' The Proposed Rule sets forth certain requirements 
for these exemptions that are intended to give effect to the statutory 
language. Some commenters have stated that the exemption's requirements 
may result in unintended extraterritorial application of the Volcker 
Rule's restrictions on a foreign banking entity's offshore activity. 
The proposed definition of ``covered funds'' also includes certain non-
U.S. funds, and this may have international implications. In an effort 
to prevent circumvention of the Volcker Rule's general prohibition on 
covered fund activities by simply relocating covered fund-related 
activities offshore, the proposal defined ``covered fund'' to include 
certain types of non-U.S. funds. Some commenters have stated that this 
definition may be too broad and could include foreign retail mutual 
funds or other types of regulated pooled investment vehicles.
    Commission staff is reviewing and considering the comment letters 
that we have received on this proposal, including comments on the 
international implications of the Proposed Rule. I anticipate that 
staffs of the five regulatory agencies will have in-depth discussions 
about these topics as they work together through the next steps of the 
rulemaking process.
Market Efficiency and Integrity
    A fourth area where we and our foreign counterparts have an 
interest is market efficiency and integrity. In early 2010, the SEC 
issued a Concept Release on Equity Market Structure to begin an in-
depth review to ensure that the U.S. equity markets remain fair, 
transparent and efficient in light of new technology and trading 
strategies. \15\ Not surprisingly, many other jurisdictions face 
similar challenges. The rapid developments in trading technologies and 
trading platforms have had a profound impact on the structure of 
markets around the world.
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     \15\ Available at http://www.sec.gov/rules/concept/2010/34-
61358fr.pdf.
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    As we have considered these issues, the EC also has been reviewing 
its Markets in Financial Instruments Directive (MiFID) in light of new 
technology, and in October 2011, the EC issued proposals to amend 
MiFID, focusing on developing safeguards for algorithmic and high 
frequency trading activities. Throughout this process, we have had 
ongoing discussions with our international counterparts.
    On October 14, 2011, Chairman Schapiro and her regulatory 
counterparts in Europe, the Americas, Asia, and Australia spent a full 
day discussing the impact of advances in technology, new trading 
strategies, and the increasing integration and globalization of markets 
as part of an international roundtable of regulators that the SEC 
cohosted with the UK FSA in London. The discussion focused on sharing 
views about automated trading strategies, high frequency trading, 
market fragmentation, and dark pools.
    Last year, the SEC also adopted a large trader reporting system, 
providing us with access to better data to help us assess the impact of 
high frequency traders and other major market participants on the 
quality of our markets, as well as to assist in our surveillance and 
enforcement efforts. \16\ In addition, we are continuing to work toward 
the adoption of a consolidated audit trail system to further help 
regulators keep pace with new technology and trading patterns in the 
markets. \17\ As we utilize and develop new tools, we are also 
coordinating with our international counterparts to share knowledge and 
develop complementary strategies that will ultimately facilitate the 
sharing of information for supervisory and enforcement purposes.
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     \16\ See, Securities Exchange Act Release No. 64976 (July 27, 
2011), 76 FR 46960 (August 3, 2011).
     \17\ See, Securities Exchange Act Release No. 62174 (May 26, 
2010), 75 FR 32556 (June 8, 2010).
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    To that end, SEC staff also is engaged actively with IOSCO to 
address the continuing challenges that technological changes pose for 
regulators in their market surveillance, including: the fragmentation 
of markets and the resulting dispersal of trading information; the 
increased speed of trading; and regulators' ability to gather and 
process the increased volume of trading data.
    In addition, in the fall of 2010, the G20 Leaders asked IOSCO to 
develop ``recommendations to promote markets' integrity and efficiency 
to mitigate the risks posed to the financial system by the latest 
technological developments.'' In response, IOSCO undertook a review of 
global perspectives on the impact of technological developments, 
including work on trading halts, direct electronic access, dark 
liquidity, and high frequency trading. In April 2011, IOSCO published 
principles to assist regulators in minimizing the potential adverse 
effects of the increased use of dark liquidity, focusing on 
transparency and price discovery, market fragmentation, knowledge of 
trading intentions, fair access, and the ability to assess actual 
trading volume in dark pools.
    In October, IOSCO published the ``Report on Regulatory Issues 
Raised by the Impact of Technological Changes on Market Integrity and 
Efficiency'' (Technological Changes Report). \18\ The Technological 
Changes Report analyzes significant technological developments and 
related microstructural issues that have arisen in financial markets in 
recent years, notably high frequency trading, and their impact on 
market structure, participants' behavior, price discovery and 
formation, and the availability and accessibility of liquidity. In 
addition, the Technological Changes Report recognizes the benefits of 
technology, including facilitating the establishment of globally 
competitive markets, enabling market participants to reduce transaction 
time, generation of electronic audit trails, enhancement of order and 
trade transparency, enabling markets and market participants to develop 
and apply (and regulators to monitor) automated risk controls.
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     \18\ See, http://www.iosco.org/library/pubdocs/pdf/IOSCOPD361.pdf
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Supervisory Cooperation
    Another key priority for the G20 is increasing the effectiveness of 
global supervision of financial institutions and other market 
participants. In a world with interconnected markets and actors with 
cross-border operations, more effective supervision will require 
increased international supervisory cooperation.
    The SEC has long recognized the importance of international 
cooperation to its own supervisory mission, especially in our 
examination program. The SEC staff has been developing arrangements 
and, where possible, entering into formal Memoranda of Understanding 
(MOUs), to facilitate supervisory cooperation with foreign regulators. 
These agreements generally establish clear mechanisms for consultation, 
cooperation and the exchange of supervisory information. Such 
mechanisms minimize the need to address supervisory information sharing 
on an ad hoc basis and seek to address new information sharing needs 
created by globally active firms and cross-border affiliated markets.
    The SEC's supervisory cooperation agreements can vary in scope and 
purpose. To date, the SEC has entered into bilateral MOUs that cover 
information sharing and cooperation related to, among other things, 
firms registered with both the SEC and a foreign authority; the 
oversight of markets in the U.S. and a foreign jurisdiction affiliated 
through common ownership structure; and the sharing of nonpublic issuer 
specific information relating to the application of International 
Financial Reporting Standards.
    This month, the SEC entered in a supervisory MOU with the Cayman 
Islands Monetary Authority (CIMA) Concerning Consultation, Cooperation 
and the Exchange of Information Related to the Supervision of Cross-
Border Regulated Entities (CIMA MOU). The CIMA MOU covers those 
entities that are regulated by the SEC and the CIMA and operate or 
provide services across our respective borders. It also sets forth the 
terms and conditions for the sharing of information regarding regulated 
entities, such as broker-dealers and investment advisers. The scope of 
the CIMA MOU is broad, allowing our cooperation to evolve and adapt to 
a changing regulatory landscape and covers not only regulated entities 
that currently operate on a cross-border basis, but also those that may 
come under our respective jurisdictions in the future.
    In September 2011, the SEC entered into an expanded supervisory MOU 
with its Canadian counterparts. The Canadian MOU is a comprehensive 
arrangement that will help to facilitate the supervision of regulated 
entities that operate across the U.S.-Canadian border. The SEC and 
Canadian provincial securities authorities have a long history of 
cooperation, particularly in securities enforcement matters. The 
Canadian MOU extends this cooperation beyond enforcement by 
establishing a framework for consultation, cooperation, and information 
sharing related to the day-to-day supervision and oversight of 
regulated entities. The supervision of regulated entities is critical 
to encouraging compliance with the securities laws, which in turn helps 
to protect investors and the securities markets generally.
    The SEC is also actively engaging its regulatory counterparts 
abroad to develop new supervisory cooperation tools. For example, the 
SEC and the European Securities Markets Authority recently concluded an 
MOU that would allow us to share information regarding the oversight of 
credit rating agencies that are registered in both our markets. The MOU 
lays out the processes by which we could conduct examinations of the 
offices of credit rating agencies located in each other's 
jurisdictions. In addition, the MOU provides a clear mechanism by which 
the SEC and ESMA staffs can share observations about the compliance 
cultures of registered credit rating agencies to better inform both 
agencies.
    The SEC also has comprehensive supervisory MOUs with the securities 
regulators in the United Kingdom, Germany, and Australia, as well as 
several tailored arrangements and protocols for information sharing 
with other regulators. \19\ Under these agreements, SEC staff is 
increasingly able to obtain and exchange documents and information 
about cross-border regulated entities and globally active market 
participants. SEC staff has also conducted many on-site examinations of 
SEC registrants located overseas in cooperation with foreign 
authorities. These types of arrangements improve our ability to share 
information at the operational level and to have frank, open 
discussions with our counterparts abroad about the entities we 
regulate, such as broker-dealers and investment advisers.
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     \19\ See, Cooperative Arrangements With Foreign Regulators at 
http://www.sec.gov/about/offices/oia/oia_cooparrangements.shtml.
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    To complement our bilateral supervisory cooperation efforts, the 
SEC worked within IOSCO to establish a Task Force on Supervisory 
Cooperation. This SEC-led task force developed principles for 
supervisory cooperation and a model MOU that was endorsed by IOSCO's 
Technical Committee and published in 2010. \20\ The model MOU was 
designed to assist securities regulators in building and maintaining 
cross-border cooperative relationships with one another and has proven 
helpful in our ongoing efforts to expand the number of bilateral 
agreements focused on supervision.
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     \20\ Available at http://www.iosco.org/library/pubdocs/pdf/
IOSCOPD322.pdf.
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    With the SEC's authority under the Dodd-Frank Act to supervise 
additional market participants such as hedge fund advisers, security-
based swaps dealers, and major security-based swaps participants, SEC 
staff will seek to expand its cooperative networks with foreign 
counterparts on supervisory matters. We also anticipate that the FSB 
and IOSCO will continue to consider ways to improve international 
supervisory cooperation, and we will continue to work in these 
multilateral forums to support our bilateral efforts and fulfill our 
supervisory mission.
    In addition to enhancing our ability to oversee registrants that 
operate cross-border, SEC staff has assisted other U.S. regulators in 
carrying out their mandates. As you know, the SEC also has oversight 
responsibilities for the Public Company Accounting Oversight Board 
(PCAOB), which oversees both foreign and domestic public accounting 
firms that audit U.S. public companies. The Commission continues to 
work closely with the PCAOB on efforts to achieve meaningful inspection 
of PCAOB registered firms overseas.
    Unfortunately, at the present time, the PCAOB is unable to conduct 
inspections in a number of European countries, as well as the People's 
Republic of China. While the PCAOB continues its efforts to enable 
inspections of registered firms to be conducted in these countries, the 
Board has taken a number of interim steps to help protect investors. 
These steps include regularly publishing information that provides 
transparency around the status of firms' ability to be inspected, such 
as the jurisdictions that are not allowing PCAOB inspections, the firms 
that are overdue for inspections and are in jurisdictions that will not 
allow those inspections to go forward, as well as a list of companies 
whose audit firms have not been inspected by the PCAOB. In addition, 
the PCAOB has reevaluated its approach to considering registration 
applications from firms in jurisdictions where the PCAOB is unable to 
conduct inspections. The inability to conduct inspections can and has 
resulted in the PCAOB determining to disapprove a registration 
application. The PCAOB continues to work, with SEC support and at the 
urging of the Commission, to achieve the goal of accomplishing 
meaningful oversight of registrant firms wherever they may be.
Enforcement Cooperation
    Finally, the cornerstone of any effective regulatory regime is its 
enforcement. In global markets, bad actors can wreak havoc both at home 
and abroad, and the proceeds of their violations can and do move 
throughout our global marketplace. No matter how robust and coordinated 
global regulation and supervision may be, if those rules are not 
enforced, or if investors are not confident that the markets are fair, 
the global financial system will not function efficiently. The SEC has 
over 35 bilateral MOUs with its counterparts for information sharing 
for enforcement purposes. These agreements vary in scope, but generally 
allow for broad information sharing, including provisions for 
assistance with locating individuals of interest and conducting 
testimony abroad.
    While international enforcement cooperation has long been important 
to our mission, and many of our enforcement cooperation agreements are 
now more than 20 years old, I want to highlight our international 
enforcement cooperation for two reasons. First, now more than ever, it 
is essential to the success of our enforcement program. Last year, 
nearly 30 percent of the SEC's enforcement cases had an international 
element that required the agency to reach out to foreign authorities. 
As just one example, in a major insider trading case where we charged a 
doctor in France with tipping a U.S. hedge fund manager about clinical 
drug trials, the French Autorite des marches financiers (AMF) 
accomplished the important task of helping us obtain bank records, 
phone records, and compelled testimony--key evidence crucial to our 
success in the case. \21\
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     \21\ SEC v. Yves Benhamou, Lit. Rel. No. 21721 (November 2, 2010), 
available at http://www.sec.gov/litigation/litreleases/2010/
lr21721.htm; see, also related action SEC v. Joseph ``Chip'' Skowron 
Lit. Rel. No. 22158 (November 17, 2011), available at http://
www.sec.gov/litigation/litreleases/2011/lr22158.htm.
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    During fiscal year 2011, the SEC made 772 formal requests to 
foreign authorities for enforcement assistance, and frequently 
conducted informal discussions with our partners about investigations 
with cross-border elements. Importantly, our cooperation is not one-
way; in the same year, the SEC responded to 492 requests from abroad. 
We are less than halfway through FY2012 and are well on track to meet 
or exceed these record numbers yet again.
    Second, our international enforcement cooperation efforts also 
illustrate the efficacy of the multifaceted international coordination 
strategies we employ. In May 2002, IOSCO developed a Multilateral 
Memorandum of Understanding Concerning Consultation and Cooperation and 
the Exchange of Information (MMoU). The MMoU is a multilateral 
enforcement information-sharing and cooperation arrangement. It 
provides an international benchmark for the types of information 
securities regulators should have authority to share as well as the 
terms under which information sharing should occur. The MMoU provides a 
baseline as to what is expected of a regulator in order to cooperate 
fully in global efforts to combat securities fraud. When a jurisdiction 
applies to become a signatory, IOSCO conducts a rigorous review to 
assess the jurisdiction's ability to fulfill its obligations under the 
MMoU.
    This multilateral effort also has expanded significantly the number 
of securities regulators who have the ability to gather information and 
share information with the SEC for enforcement investigations and 
proceedings. The international pressure on nonsignatory jurisdictions 
increased after the financial crisis, when IOSCO set a goal of January 
1, 2013, for all of its members to acquire the powers and authorities 
necessary to become full signatories to the MMoU. As of the 2011 IOSCO 
Annual Meeting, over 80 securities regulatory authorities have become 
signatories to the MMoU, and another 30 have made the necessary 
commitment to seek national legislative changes to allow them to do so 
by the 2013 deadline.
    Similarly, the FSB is actively encouraging global cooperation in 
information sharing. In 2010, the FSB launched an initiative to 
encourage the adherence of all countries and jurisdictions to 
international cooperation and information exchange standards. As part 
of this initiative, the FSB reviewed the policies and practices of 61 
jurisdictions to evaluate and rate compliance with international 
cooperation and information exchange standards. This past November, the 
FSB published the results of its review, including the names and 
categories of the evaluated jurisdictions. The United States was 
referenced as a jurisdiction demonstrating sufficiently strong 
adherence.
    In addition to participating in multilateral efforts to raise 
standards for cooperation, the SEC has a long-standing commitment to 
training foreign regulatory and law enforcement officials in 
enforcement strategies and techniques. Every fall, we hold an 
International Enforcement Institute (Enforcement Institute), a flagship 
event for securities enforcement professionals worldwide that provides 
an excellent opportunity to develop important relationships with our 
counterparts, while serving to strengthen their capacity to conduct 
effective enforcement in their respective jurisdictions. Similarly, we 
also host an annual International Institute on Securities Market 
Development, which is a key part of our efforts to strengthen global 
capital markets and lays a strong foundation for bilateral engagement 
around the world. In addition to these successful outreach efforts, we 
continue to work bilaterally and regionally to provide technical 
assistance to regulators around the world in many topic areas.
    Finally, I want to highlight one of the SEC's major current efforts 
focused in the enforcement arena, the Cross-Border Working Group, an 
interdivisional team that brings various experiences and expertise to 
address risks associated with U.S. issuers whose primary operations are 
located overseas. This team emerged out of an SEC proactive risk-based 
inquiry into U.S. audit firms with a significant number of issuer 
clients with primarily foreign operations. That inquiry revealed 
serious accounting irregularities among certain U.S. issuers based 
abroad. The efforts of this group have resulted in a wide array of 
actions to protect U.S. investors, including suspending trading in at 
least 20 foreign-based entities because of deficiencies in information 
about the companies, instituting stop orders against foreign-based 
entities to prevent further stock sales under materially misleading and 
deficient offering documents, revoking the securities registration of 
at least a dozen foreign-based issuers, and instituting administrative 
proceedings to determine whether to suspend or revoke the registrations 
of 27 more. The majority of issuers in the United States whose 
operations are primarily overseas are located in the PRC region; 
accordingly, most of these actions have involved companies based in 
China. The Cross-Border Working Group's endeavors also extend outside 
of the enforcement area and include reaching across borders to enhance 
cooperation with SEC counterparts.
Conclusion
    Our ability to develop shared objectives and cooperative 
relationships with our counterparts abroad is a critical part of our 
mission, and increasingly more so every year. Since the 2008 financial 
crisis, through the SEC's work in the FSB and IOSCO, participation in 
bilateral dialogues, and discussions with SEC staff who work on these 
issues on a day-to-day basis, I have observed a reinvigorated global 
commitment to the core objectives shared by securities regulators: 
protecting investors; promoting fair, efficient, and transparent 
markets; and facilitating capital formation to fuel global economic 
growth. However, shared objectives alone are not sufficient. We must 
also pursue a shared commitment to work together to identify compatible 
regulatory approaches in pursuit of those objectives. The SEC works 
tirelessly to pursue such commitment through cooperation with 
counterparts throughout the international regulatory landscape and will 
continue to pursue and promote international cooperation.
    Thank you for the opportunity to testify today on this important 
set of issues. I am happy to answer any questions you may have.
                                 ______
                                 
               PREPARED STATEMENT OF MARTIN J. GRUENBERG
         Acting Chairman, Federal Deposit Insurance Corporation
                             March 22, 2012
    Good morning Chairman Johnson, Ranking Member Shelby, and Members 
of the Committee. Thank you for the opportunity to testify on 
international harmonization issues related to Wall Street reform.
    The financial crisis of 2008 exposed a number of serious 
vulnerabilities in the U.S. financial system and in other financial 
systems around the world. In the years leading up to the crisis, 
misaligned incentives, excessive leverage and risk taking, and gaps in 
regulation all contributed to a serious and, at the time, unrecognized 
increase in systemic risk. The financial crisis that followed in 2008-
09 led to the most severe economic downturn since the 1930s.
    In the immediate wake of the financial crisis, the Group of Twenty 
(G20) Nations, through the Financial Stability Board, jointly resolved 
to strengthen financial regulation across jurisdictions and enhance 
cross-border cooperation among financial regulators. \1\ This broad-
based commitment to reform recognized both the highly interconnected 
nature of the global financial system and the enormous economic costs 
of the financial crisis. The intended result is to reduce the 
likelihood and severity of future financial crises, and to enhance the 
effectiveness of the international regulatory response should crises 
occur. As implementation of the Dodd-Frank Act proceeds in the United 
States, the FDIC continues to work with our international counterparts 
to undertake reforms that will be needed for a stronger and more stable 
global financial system in the future.
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     \1\ The G20 is comprised of the finance ministers and central bank 
governors from 19 countries (including the United States) and the 
European Union, with representatives of the International Monetary Fund 
and the World Bank. Collectively, the countries represent more than 80 
percent of the global gross national product.
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    My testimony today will discuss three key areas where the 
postcrisis implementation of financial reforms in the United States 
have an important international component: (1) the cross-border 
resolution of large, systemically important financial institutions; (2) 
capital standards; and (3) capital market reforms.
Cross-Border Resolution of Large, Systemically Important Financial 
        Institutions (SIFIs)
    Section 210 of the Dodd-Frank Act requires the FDIC to 
``coordinate, to the maximum extent possible'' with appropriate foreign 
regulatory authorities in the event of a resolution of a covered 
financial company with cross-border operations. The FDIC has been 
working diligently on both multilateral and bilateral bases with our 
foreign counterparts in supervision and resolution to address these 
crucial cross-border issues.
    The FDIC has participated in the work of the Financial Stability 
Board through its membership on the Resolution Steering Group, the 
Cross-border Crisis Management Group and a number of technical working 
groups. The FDIC also has cochaired the Basel Committee's Cross-border 
Bank Resolution Group since its inception in 2007.
Key Attributes
    In October 2011, the Financial Stability Board released ``Key 
Attributes of Effective Resolution Regimes for Financial 
Institutions''. The Key Attributes build on the set of recommendations 
developed by the Cross-border Bank Resolution Group that were published 
in March 2010 following its assessment of lessons learned during the 
crisis. The Key Attributes set out the parameters of a legal and 
regulatory regime that would allow authorities to resolve financial 
institutions in an orderly manner without taxpayer exposure to loss 
while maintaining continuity of vital economic functions. They address 
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 also provide guidelines for how 
jurisdictions should develop recovery and resolution plans for specific 
institutions and for assessing the resolvability of their institutions. 
The FDIC was deeply involved in the development of the Key Attributes 
and many of them parallel the provisions of the U.S. resolution regime 
under Title II of the Dodd-Frank Act. The United States has been 
recognized for its leadership in developing a credible resolution 
process for large nonbank financial companies.
    In November 2011, the G20 endorsed the Key Attributes. As a result, 
financial regulators from the G20 member Nations are required to move 
toward a resolution framework to resolve SIFIs in an orderly manner 
that protects global financial stability. A methodology to assess 
countries' progress toward implementing the Key Attributes is now under 
development.
Crisis Management Groups
    The FDIC and its U.S. and foreign financial regulatory counterparts 
have formed Crisis Management Groups under the auspices of the 
Financial Stability Board for each of the internationally active SIFIs 
(termed Global SIFIs or G-SIFIs) identified by the G20 at their 
November 4, 2011, meeting. These Crisis Management Groups, consisting 
of both home and host country authorities, are intended to enhance 
institution-specific planning for possible future resolution. These 
groups allow regulators to identify impediments to a more effective 
resolution based on the unique characteristics of a particular 
financial company.
    The FDIC has participated in Crisis Management Group meetings 
hosted by authorities in various foreign jurisdictions. These meetings 
have focused on crisis management, recovery and resolution planning, 
and implementation issues associated with G-SIFIs from those 
jurisdictions. The FDIC has also hosted Crisis Management Group 
meetings for the five largest U.S. G-SIFIs and met with specific 
foreign regulators to discuss the progress these firms have made on 
their recovery and resolution plans as well as other related cross-
border issues. The Crisis Management Group meetings have provided 
opportunities for the exchange of information on resolution planning 
and policy. We expect these meetings to assist the FDIC in developing 
and refining its resolution strategies for G-SIFIs and to help 
regulators in identifying and overcoming impediments to resolution, 
particularly with respect to cross-border issues.
FDIC Bilateral Discussions and Agreements
    Since G-SIFIs present complex international legal and operational 
issues, the FDIC is also actively reaching out on a bilateral basis to 
the foreign supervisors and resolution authorities with jurisdiction 
over the foreign operations of key U.S. firms. The goal is to be 
prepared to address issues regarding cross-border regulatory 
requirements and to gain an in-depth understanding of cross-border 
resolution regimes and the concerns that face our international 
counterparts in approaching the resolution of these large international 
organizations. As we evaluate the opportunities for cooperation in any 
future resolution, and the ways that such cooperation will benefit 
creditors in all countries, we are forging a more collaborative process 
as well as laying the foundation for more reliable cooperation based on 
mutual interests in national and global financial stability.
    It is worth noting that although U.S. SIFIs have foreign operations 
in dozens of countries around the world, those operations tend to be 
concentrated in a relatively small number of key foreign jurisdictions, 
particularly the United Kingdom (UK). While the challenges to cross-
border resolution are formidable, they may be more amenable than is 
commonly thought to effective management through bilateral cooperation.
    The focus of our bilateral discussions is to: (i) identify 
impediments to orderly resolution that are unique to specific 
jurisdictions and discuss how to mitigate such impediments through rule 
changes or bilateral cooperation and (ii) examine possible resolution 
strategies and practical issues related to implementation of such 
strategies with respect to particular jurisdictions. This work entails 
gaining a clear understanding of how U.S. and foreign laws governing 
cross-border companies will interact in any crisis. Our initial work 
with foreign authorities has been encouraging. In particular, the U.S. 
financial regulatory agencies have made substantial progress with 
authorities in the UK in understanding how possible U.S. resolution 
structures might be treated under existing UK legal and policy 
frameworks. We have engaged in in-depth examinations of potential 
impediments to efficient resolutions and are, on a cooperative basis, 
in the process of exploring methods of resolving them.
    To facilitate bilateral discussions and cooperation, the FDIC is 
negotiating the terms of memoranda of understanding pertaining to 
resolutions with regulators in various countries. These memoranda of 
understanding will provide a formal basis for information sharing and 
cooperation relating to our resolution planning and implementation 
functions under the legal framework of the Dodd-Frank Act.
Resolution Planning Progress in the United States and Impact on Foreign 
        Banking Organizations
    In the United States, we are far along in the process of 
implementing the SIFI resolution provisions of the Dodd-Frank Act. We 
issued a final rule on our Title II orderly liquidation authority (OLA) 
in July 2011, and a joint final rule with the Board of Governors of the 
Federal Reserve System (Federal Reserve Board) on Title I financial 
company resolution plans in November 2011. These combined provisions 
give the FDIC new authorities and responsibilities for planning and 
implementing the orderly liquidation of a SIFI.
    Since the enactment of the Dodd-Frank Act in 2010, the FDIC has 
been developing detailed resolution plans pursuant to our Title II 
resolution authorities. In addition, Title I of the Dodd-Frank Act 
requires SIFIs to submit resolution plans for review by the FDIC and 
the Federal Reserve Board. These plans detail how the firms could be 
resolved under the U.S. Bankruptcy Code. The FDIC would act under the 
Dodd-Frank Title II orderly liquidation authority only where the 
necessary parties agree that resolution under the Bankruptcy Code would 
have serious adverse effects on U.S. financial stability. If the firms 
are successful in their resolution planning, the likelihood of such 
action would be greatly reduced.
    Similar to its application to U.S. based G-SIFIs, Section 165(d) of 
the Dodd-Frank Act requires foreign banking organizations (FBOs) with 
$50 billion or more in total consolidated assets to submit resolution 
plans. However, the plans submitted by the FBOs and any other specified 
foreign-based covered companies will focus their information and 
strategic analysis upon the firms' U.S. operations.
    Submission of resolution plans will be staggered based on the asset 
size of a covered financial company's U.S. operations. Financial 
companies with $250 billion or more in U.S. nonbank assets must submit 
plans on or before July 1, 2012. All of the SIFIs in this initial group 
have been designated G-SIFIs by the Financial Stability Board. 
Companies with $100 to $250 billion in total U.S. nonbank assets must 
submit plans on or before July 1, 2013; and all other covered financial 
companies must submit plans on or before December 31, 2013. A company's 
plan is required to be updated annually or as directed by the FDIC and 
the Federal Reserve Board.
    As with U.S. G-SIFIs, FBOs are to submit their plans in phases 
according to the size of their U.S. nonbank assets. Thus, FBOs with a 
U.S. footprint of $250 billion or more in U.S. nonbank assets will be 
required to submit plans by July 1, 2012. Those having $100 billion or 
more in U.S. nonbank assets will be required to submit plans by July 1, 
2013, and the remaining covered FBOs will submit their plans by 
December 31, 2013.
    If a resolution plan does not meet the statutory standards, after 
affording the covered company an opportunity to remedy its 
deficiencies, the agencies may jointly decide to impose more stringent 
regulatory requirements--such as increased liquidity requirements or 
limits on credit exposures--on the covered company. Further, after 2 
years following the imposition of the more stringent standards, if the 
resolution plan still does not meet the statutory standards, the FDIC 
and the Federal Reserve Board may--in consultation with the Financial 
Stability Oversight Council (FSOC)--direct a covered financial company 
to divest certain assets or operations.
    In addition, in January 2012, the FDIC issued a final rule 
requiring any FDIC-insured depository institution with assets of $50 
billion or more to develop, maintain, and periodically submit 
contingency plans outlining how depository institutions could be 
resolved under the FDIC's traditional authority in the Federal Deposit 
Insurance Act. While not required by the Dodd-Frank Act, this 
complements the joint final rule on resolution plans for SIFIs.
    These two resolution plan requirements are designed to ensure 
comprehensive and coordinated resolution planning for the insured 
depository institution, its holding company and any affiliates in the 
event that an orderly liquidation is required. Both of these 
requirements will improve efficiencies, risk management and contingency 
planning at the institutions themselves. The process of developing 
resolution plans also provides the FDIC important information for the 
refinement of our potential resolution strategies for SIFIs under the 
OLA.
FSOC Joint Rulemaking and Guidance on SIFI Designations
    While all bank holding companies with more than $50 billion in 
assets are automatically designated as SIFIs by the Dodd-Frank Act, the 
Act also authorized the FSOC to determine whether a nonbank financial 
company is systemically important. The FDIC has been working with the 
other FSOC members to finalize the rule and interpretative guidance to 
implement this authority. When the rule and guidance are finalized, 
which is expected in the near future, the FSOC will begin the process 
of evaluating nonbank financial companies to determine whether material 
financial distress at one or more of them would pose a threat to the 
financial stability of the United States. The nonbank designation rule 
applies to U.S. nonbank financial companies and to foreign nonbank 
financial companies operating in the United States. Once designated as 
a SIFI, a nonbank financial company will be subject to all the 
supervisory and resolution requirements that apply to systemically 
important bank holding companies.
Improvements in Capital Standards
    In the aftermath of the financial crisis, there has been an 
intensive international effort to strengthen bank capital standards. 
The result of these efforts is the Basel III capital agreement. In 
broad terms, the Basel III capital standards aim to improve the quality 
and increase the level of bank capital. Collectively, Basel III and 
other standards published by the Basel Committee address a number of 
features of capital regulation that allowed for an excessive use of 
leverage in the years leading up to the crisis. There are a number of 
such issues that are being addressed by Basel III and in a 
complementary way by the Dodd-Frank Act.
    One of the lessons of the crisis was that high quality, loss-
absorbing capital is essential to ensuring the safety and soundness of 
financial institutions. Basel III addresses this by establishing 
regulatory capital as ``common equity tier 1.'' This results in a 
measure that is much closer to pure tangible common equity than the 
present tier 1 definition. Meeting regulatory requirements for common 
equity tier 1 capital will provide a much more realistic and meaningful 
assurance of a bank's ability to absorb losses.
    In addition to the definition and quality of capital, Basel III 
also addresses the level of capital. At the beginning of the crisis, as 
today, the minimum tier 1 risk-based capital requirement was 4 percent 
of risk-weighted assets. Tier 1 capital was required to be 
``predominantly'' equity. Thus, equity could comprise as little as 2 
percent of risk-weighted assets.
    Basel III increases the numerical minimum risk-based capital 
ratios. For the new concept of common equity tier 1, the Basel III 
minimum ratio is 4.5 percent of risk-weighted assets. For tier 1 and 
total capital the Basel III minimums are 6 percent and 8 percent, 
respectively. Capital buffers comprising common equity equal to 2.5 
percent of risk-weighted assets are added to each of these minimums to 
enable banks to absorb losses during a stressed period while remaining 
above their regulatory minimum ratios.
    Basel III also includes a ``countercyclical buffer'' intended to 
act as a stabilizer against significant asset bubbles as they develop. 
Specifically, regulators could increase the capital buffers by up to an 
additional 2.5 percent if they deem the economy to be in a period of 
excessive credit creation.
    Basel III establishes, for the first time, an international 
leverage ratio. The Basel III leverage ratio is an important tool to 
ensure that capital exists to cover losses that the risk-based rules 
may categorize as minimal, but that can sometimes materialize anyway. 
The Basel Committee has also agreed that the largest internationally 
active banks should be subject to additional capital charges ranging 
from 1 percent to 2.5 percent of riskweighted assets to account for the 
additional risk they pose to the financial system should they 
experience difficulties. \2\
---------------------------------------------------------------------------
     \2\ The Basel Committee also established an ``empty bucket'' with 
a 3.5 percent additional capital charge designed to discourage banks 
from becoming more systemic.
---------------------------------------------------------------------------
    In addition, to strengthen capital standards for trading book risk, 
the U.S. banking agencies issued a Notice of Proposed Rulemaking (NPR) 
in January 2011, to implement important reforms agreed to by the Basel 
Committee. These reforms will increase capital requirements to levels 
more appropriate for trading book assets. A second Market Risk NPR was 
issued in December 2011 to respond to section 939A of the Dodd-Frank 
Act. This NPR provides an alternative to credit ratings in computing 
trading book capital requirements. We are committed to working with our 
fellow regulators to finalize the important reforms to trading book 
capital requirements as soon as possible upon reviewing and 
appropriately addressing the public comments we receive.
    The Basel Committee agreed that Basel III would be phased-in over a 
5-year period starting in 2013, and the banking agencies are drafting 
an NPR to implement Basel III in the United States. We believe that 
most U.S. banks currently hold sufficient capital to meet the Basel III 
capital standards. Banks that need more time by and large appear well 
positioned to meet the standards far ahead of the Basel timeline and 
mostly with retained earnings. Now that agreement has been reached on a 
more robust international capital standard, it is vital that the 
standard be implemented in a uniform manner. A comprehensive monitoring 
framework will be coordinated by the Basel Committee's Standards 
Implementation Group and will rely on peer reviews. It entails a review 
of members' domestic adoption and implementation timelines for the 
Basel regulatory capital framework.
Capital Market Reforms in the Dodd-Frank Act
    Beyond the development of an effective resolution regime for SIFIs, 
and the capital reforms of Basel III, two provisions of the Dodd-Frank 
Act with potential international implications are Section 619, relating 
to proprietary trading, and the margin and capital requirements for 
over-the-counter derivatives found in Title VII.
The Volcker Rule
    Section 619 of the Dodd-Frank Act, known as the Volcker Rule, is 
designed to strengthen the financial system and constrain the level of 
risk undertaken by firms that benefit, either directly or indirectly, 
from the Federal safety net provided by Federal deposit insurance or 
access to the Federal Reserve's discount window. The Volcker Rule 
prohibits proprietary trading by banking organizations and limits 
investments in hedge funds and private equity funds that they organize 
and offer, subject to certain exemptions for such permissible banking 
activities as underwriting, market making, and risk-mitigating hedging.
    The challenge for regulators in implementing the Volcker Rule is to 
prohibit the types of proprietary trading and investment activity that 
Congress intended to limit, allowing banking organizations to provide 
legitimate intermediation in the capital markets and maintain market 
liquidity.
    Last November, the FDIC, jointly with the Federal Reserve Board, 
the Office of the Comptroller of the Currency (OCC), and the Securities 
and Exchange Commission (SEC), published an NPR requesting public 
comment on a proposed regulation implementing the Volcker Rule 
requirements. On December 23, 2011, the agencies extended the comment 
period for an additional 30 days until February 13, 2012. The comment 
period was extended as part of an interagency effort to allow 
interested persons more time to analyze the issues and prepare their 
comments, and to facilitate coordination of the rulemaking among the 
responsible agencies.
    The agencies have received a significant number of comments from 
international banking organizations and foreign financial services 
regulators regarding concerns about the potential extraterritorial 
reach of the Volcker Rule and the proposed regulations. Commentators 
have raised concerns about the proposed regulation's potential effects 
on foreign sovereign debt markets, the ability of foreign organizations 
to continue to utilize U.S. market infrastructure, and the difficulties 
associated with properly distinguishing permissible foreign funds from 
impermissible funds. The agencies are in the process of reviewing and 
carefully considering all of the comments received as we work toward 
the development of a final regulation.
    As of February 13, 2012, the agencies had received approximately 
17,500 comment letters from a wide variety of stakeholders. The FDIC is 
committed to developing a final rule that meets the objectives of the 
statute while preserving the ability of banking entities to perform 
important underwriting and market-making functions, including the 
ability to effectively carry out these functions in less-liquid 
markets.
Margin and Capital Requirements for Covered Swap Entities
    In June 2010, the G20 leaders reaffirmed a global commitment to 
clearing standardized OTC derivatives through a clearinghouse, and this 
commitment was incorporated into the Dodd-Frank Act. For derivatives 
that lack sufficient standardization for clearing, the Dodd-Frank Act 
requires dealers and major participants in such transactions to 
register with the Commodities Futures Trading Commission or SEC, as 
applicable. The Dodd-Frank Act also requires the prudential 
regulators--the FDIC, the Federal Reserve Board, the OCC, the Farm 
Credit Administration, and the Federal Housing Finance Agency--to 
jointly adopt margin requirements for uncleared OTC derivatives entered 
into by entities they regulate that also fall within the Dodd-Frank 
Act's dealer and major participant terms. In May 2011, the prudential 
regulators published an NPR proposing these margin requirements and 
have received numerous comments that are being carefully considered.
    Since the issuance of the NPR, the Federal Reserve Board has 
initiated an effort to develop an international convergence in margin 
requirements for uncleared OTC derivatives and has asked the Basel 
Committee, in conjunction with the International Organization of 
Securities Commissions, to develop a consultation document by June 
2012. Staffs from the FDIC and the other banking agencies are actively 
participating in the Working Group on Margin Requirements initiative. 
In order to reduce competitive concerns, the agencies intend to take 
into consideration, to the extent possible, the margin recommendations 
in the consultative document in the development of a final uncleared 
OTC derivative margin rule.
Conclusion
    Today's testimony highlights the work of the FDIC, in conjunction 
with other U.S. regulators and our international counterparts, to 
improve resolution and regulatory regimes for the global financial 
system. As the global reach of the financial crisis made clear, cross-
border cooperation and harmonization are essential for effective 
implementation of reforms. The FDIC is committed to working with our 
fellow Federal agencies as well as our foreign counterparts to achieve 
this important goal.
    Thank you. I would be glad to respond to your questions.
                                 ______
                                 
                  PREPARED STATEMENT OF JOHN G. WALSH
     Acting Comptroller, Office of the Comptroller of the Currency
                             March 22, 2012
    Chairman Johnson, Ranking Member Shelby, and Members of the 
Committee, I appreciate the opportunity to provide the Committee with 
the Office of the Comptroller of the Currency's (OCC) perspectives on 
the international implications of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act (Dodd-Frank Act) and on efforts currently 
underway to harmonize U.S. regulatory requirements with international 
standards and frameworks for the financial services sector.* In 
particular, the Committee's letter of invitation requests that I 
testify about areas of reform that have international implications, 
such as orderly liquidation authority, derivatives oversight, and the 
prohibitions on proprietary trading and private equity and hedge fund 
investments commonly known as the Volcker Rule.
---------------------------------------------------------------------------
     * Statement Required by 12 U.S.C. 250: The views expressed herein 
are those of the Office of the Comptroller of the Currency and do not 
necessarily represent the views of the President.
---------------------------------------------------------------------------
    Since the 2008 financial crisis, the international regulatory 
community has taken many steps to strengthen the global financial 
system. In particular, the G20 Governments, the Financial Stability 
Board, the Basel Committee on Banking Supervision, and other 
international regulatory bodies embarked upon an ambitious series of 
reforms. Standards have been developed and are being introduced to 
increase capital and liquidity, create better mechanisms for resolving 
large financial institutions, centralize derivatives clearing, and 
strengthen supervision in a number of other areas. National 
implementation of this reform agenda is underway in all the G20 
countries.
    The Dodd-Frank Act encompasses the U.S. response to the crisis and 
implements important parts of the international reform agenda. It seeks 
to enhance the resiliency of the U.S. financial system, among other 
ways, by requiring higher capital and liquidity standards for large 
U.S. financial institutions. In the event that a bank failure were to 
occur, the Dodd-Frank Act imposes steps to preclude future taxpayer 
bailouts and abolish ``too big to fail'' by requiring orderly 
resolution regimes for such institutions. The Dodd-Frank Act also seeks 
to strengthen operations and safeguards pertaining to derivatives 
activities through a variety of mechanisms, including enhanced 
transparency through increased reporting and reduced counterparty 
credit risks through centralized clearing arrangements and higher 
margin for over-the-counter swap transactions.
    Given the intersection of U.S. and international efforts, many of 
the Dodd-Frank Act mandates in these areas complement work underway by 
regulators internationally to enhance the resilience of the global 
financial system. While most of these efforts are still works in 
progress, I believe paths are available for international harmonization 
in many of these areas. However, even when broad consensus on 
international standards is reached, there will be areas of difference 
where policy makers in individual countries have chosen to tailor 
standards to their country and institutions rather than adopt the 
totality of the international approach. This is the case in the U.S., 
for example, where the Dodd-Frank Act has established certain 
standards--such as the prohibition on the use of credit ratings in our 
regulations--that will cause our implementation of the international 
capital standards to differ in some aspects from those of other 
countries.
    Other provisions of the Dodd-Frank Act that impose structural and 
operational requirements for conducting certain financial activities 
have no equivalent in international workstreams or efforts to harmonize 
approaches. The most notable, in terms of potential international 
effects, is the Volcker Rule prohibitions on proprietary trading and 
private equity and hedge fund investments. The lack of a parallel 
international workstream and the resulting implications for both U.S. 
and foreign firms are areas of concern that have been raised in comment 
letters that the OCC and other agencies have received on our proposed 
rulemaking.
    My testimony today will describe in greater detail the intersection 
of Dodd-Frank and international efforts in five key areas: capital 
standards, liquidity requirements, orderly resolution of large and 
complex firms, derivatives activities, and the Volcker Rule.
I. Capital Standards
    Since the 1980s, the Federal banking agencies have worked with 
their international counterparts through the Basel Committee on Banking 
Supervision (Basel Committee or BCBS) to develop and implement 
regulatory capital requirements. In 1989, the Federal banking agencies 
first implemented minimum risk-based capital requirements for U.S. 
banking organizations based on the ``International Convergence of 
Capital Measurement and Capital Standards'' (Basel I), which was 
published by the Basel Committee in 1988. \1\
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     \1\ BCBS, International Convergence of Capital Measurement and 
Capital Standards (July 1988), available at: http://www.bis.org/publ/
bcbs04a.htm.
---------------------------------------------------------------------------
    In 1997, the OCC, FDIC, and Federal Reserve Board implemented 
revisions to their risk-based capital rules, consistent with revisions 
to Basel I published the previous year by the Basel Committee. These 
provisions added a market risk framework requiring banks to address 
exposures to market risk associated with foreign exchange and commodity 
positions and positions located in the trading account.
    On December 7, 2007, the Federal banking agencies implemented the 
advanced approaches risk-based capital rules for the largest 
internationally active banks based on a new international capital 
adequacy framework (Basel II). \2\ The advanced approaches rules were 
intended to promote improved risk measurement and management processes 
and better align minimum risk-based capital requirements with risk by 
incorporating certain Basel II approaches (advanced internal ratings-
based approach for credit risk and the advanced measurement approaches 
for operational risk).
---------------------------------------------------------------------------
     \2\ BCBS, ``International Convergence of Capital Measurement and 
Capital Standards: A Revised Framework'', (June 2006), available at: 
http://www.bis.org/publ/bcbs128.htm.
---------------------------------------------------------------------------
    These longstanding international cooperative efforts were stepped 
up in response to the financial crisis, resulting in a broad consensus 
across jurisdictions that it was necessary to further enhance the 
quality and quantity of bank capital. The OCC has been an active 
participant in these efforts and is working with the other Federal 
banking regulators to implement regulations domestically.
    In 2009 and 2010, the Basel Committee published revisions to both 
the market risk framework and the treatment of certain securitization 
exposures (collectively, these revisions are referred to as Basel 
II.5), \3\ and in December 2010, the Basel Committee published Basel 
III, which represents the collective work of numerous country 
participants to develop new capital standards for promoting a more 
resilient banking sector. \4\ As I will describe, many of the key 
provisions and objectives of Basel III complement key capital 
provisions of the Dodd-Frank Act.
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     \3\ The Basel Committee published the revisions in two documents 
in 2009 and then updated them in June 2010. The 2009 documents 
included: Revisions to the Basel II Market Risk Framework, Guidelines 
for Computing Capital for Incremental Risk in the Trading Book, and 
Enhancements to the Basel II Framework. The June 2010 revisions are 
available at: http://bis.org/press/p100618/annex.pdf.
     \4\ Bank for International Settlements, Basel Committee on Banking 
Supervision, Basel III: A global regulatory framework for more 
resilient banks and banking systems (December 2010, revised June 2011).
---------------------------------------------------------------------------
    Among the more significant changes in Basel III is the introduction 
of a new common equity tier 1 minimum risk-based capital ratio that 
will require banks to hold a minimum amount of common equity to total 
assets. The financial crisis demonstrated that common equity is 
superior to other capital instruments in its ability to absorb losses. 
Therefore, this new requirement should enhance banks' ability to 
withstand periods of financial stress. As envisioned, common equity 
capital requirements will increase substantially from levels preceding 
the financial crisis.
    The existing tier 1 and total risk-based capital requirements also 
will become more rigorous due to a narrower definition of regulatory 
capital that excludes funds raised through hybrid capital instruments, 
such as trust preferred securities, that generally do not absorb losses 
to the same extent as common equity. This provision is broadly 
consistent with section 171(b) of the Dodd-Frank Act that directs the 
Federal banking agencies to remove these types of instruments from the 
definition of regulatory capital. Basel III also places strict limits 
on the amounts of mortgage servicing assets and deferred tax assets 
that may count as regulatory capital.
    The amount of capital that a bank is required to hold also is a key 
feature of the Basel III reforms, and implementation is to be achieved, 
in part, through substantial increases to a bank's overall minimum 
required risk-based capital ratios. The Basel III reforms set higher 
capital requirements that essentially will move the common equity tier 
1 ratio from a minimum of roughly 2 percent under current rules to 4.5 
percent. These increases are to be supplemented by two regulatory 
capital ``buffers''--a capital conservation buffer of 2.5 percent 
common equity tier 1 (bringing the minimum common equity tier 1 
requirement to 7 percent), which a bank would be expected to draw down 
during times of economic stress, and a countercyclical buffer, which 
banking supervisors can activate to curb excessive credit growth. As a 
bank's capital levels near the minimum requirements and dip into the 
buffers, the bank will face progressively more stringent restrictions 
on its ability to make capital distributions (including dividends) and 
to make discretionary bonus payments. The largest U.S. banks have 
already made meaningful progress in reaching the higher thresholds 
under Basel III as evidenced by the recently announced stress test 
results.
    In the U.S., the leverage ratio has always been a key component in 
assessing a bank's capital adequacy, acting as a back-stop to the risk-
based capital requirements. Basel III also adds an international 
leverage ratio requirement for the first time. The international 
requirement is broader than the current U.S. requirement because it 
will include certain off-balance sheet exposures. During the recent 
financial crisis it became apparent that some banks had built-up 
excessive on- and off-balance sheet leverage while continuing to 
present strong risk-based capital ratios. In fact, some of the largest 
financial institutions significantly increased their off-balance sheet 
exposures, which were not captured in the U.S. leverage ratio 
calculation. This led to a build-up of leverage that moved onto banks' 
balance sheets and, in the most critical periods of the crisis, banks 
were forced by the markets to reduce their leverage in a manner that 
significantly increased downward pressure on asset prices, exacerbating 
losses and leading to a reduction in capital levels and a contraction 
in credit availability. The scope of the Basel III leverage ratio is 
broadly consistent with the provisions in section 165 of the Dodd-Frank 
Act that directs that off-balance-sheet activities be included in the 
regulatory capital calculation for bank holding companies with total 
consolidated assets equal to or greater than $50 billion.
    Another way in which the capital framework was strengthened in 
response to the crisis is reflected in section 171 of the Dodd-Frank 
Act, the ``Collins Amendment,'' which requires bank holding companies 
to be subject to strict bank-level capital requirements. In the lead up 
to the crisis, capital requirements applicable to banks were more 
rigorous in certain respects than those applied to bank holding 
companies. The Dodd-Frank Act requires the application of the same 
requirements to both banks and bank holding companies. This is 
important because even though banks were generally well capitalized 
leading up the financial crisis, their holding companies suffered 
substantial losses, and it is the bank holding companies that were the 
primary focus of efforts to shore up the financial system at that time 
and of the Dodd-Frank Act's new enhanced resolution framework.
    Finally, the financial crisis focused attention on the risk that 
large internationally interconnected firms present to global financial 
stability. Both Basel III and the Dodd-Frank Act address this concern, 
but they take different approaches. Basel III calls for adopting a 
capital surcharge that would apply only to the 29 largest global, 
systemically important banks, 7 of which are U.S. entities. Section 165 
of the Dodd-Frank Act requires the Federal Reserve Board to consult 
with the other Federal banking regulators and implement heightened 
prudential standards, including capital requirements, for the 34 U.S. 
bank holding companies with total consolidated assets of $50 billion or 
more.
    The Federal banking agencies have been working diligently to assess 
the key features of Basel III and to translate them into a workable and 
effective set of capital standards for U.S. financial institutions. 
While there are many common elements between Basel III and the capital 
provisions of the Dodd-Frank Act, the Dodd-Frank Act introduces several 
capital related provisions unique to U.S. financial institutions and, 
therefore, the U.S. capital standards necessarily will deviate from the 
international standards in several significant respects.
    The Collins Amendment, as previously noted, requires the Federal 
banking agencies to apply the same generally applicable minimum capital 
requirements to all banks and bank holding companies. But in addition, 
in a statutory requirement unique to the U.S., the Collins Amendment 
provides that any regulatory capital requirement that the Federal 
banking agencies apply to any subset of banks (such as the advanced 
approaches rules, which are required only for large internationally 
active banks) is permitted to increase the capital requirements 
relative to the generally applicable minimum capital requirements, but 
is not permitted to decrease them. Additionally, the Collins Amendment 
requires that the generally applicable minimum capital requirements may 
never be ``quantitatively lower'' than the current Basel I-based 
minimum capital requirements.
    Thus, for large internationally active U.S. banks, the simpler 
generally applicable minimum capital rules will still govern even 
though they are undertaking the complex and costly task of implementing 
the more risk-sensitive advanced approaches risk-based capital 
framework. Without the risk sensitivity of the advanced approaches, 
banks will have less incentive to pursue safer loans or lower risk 
securities because they will not obtain the capital benefit of doing 
so. And a foreign bank pursuing the same strategy and operating without 
the floor would enjoy a market advantage over their U.S. counterparts.
    Another divergence from Basel III arises from section 939A of the 
Dodd-Frank Act, which requires all Federal agencies to remove 
references to, and requirements of reliance on, credit ratings from 
their regulations and to replace them with appropriate alternatives for 
evaluating creditworthiness. Basel III, in contrast, continues to rely 
on credit ratings in many areas, making it difficult to implement those 
provisions domestically.
    On December 29, 2011, the Federal banking agencies published a 
notice of proposed rulemaking to revise their market risk capital rule 
consistent with enhancements made by the Basel Committee and with 
section 939A of the Dodd-Frank Act. This proposal, which built on a 
proposal that the agencies published in January 2011, was the Federal 
banking agencies' first proposal to replace references to credit 
ratings in their risk-based capital regulations. The Federal banking 
agencies are reviewing the comments received on the December 2011 
proposal and are considering how best to implement the market risk rule 
in final form. The agencies also expect to propose to replace 
references to credit ratings more generally in the coming months.
    A common set of standards or rules is only one aspect of 
international harmonization. Equally important is how those standards 
or rules are implemented in practice. As I have highlighted in previous 
testimony, different countries have implemented the advanced approaches 
qualification requirements with varying degrees of rigor. \5\ While 
many international regulators permitted large banks in their 
jurisdictions to move to the advanced approaches framework several 
years ago, the Federal banking agencies have held U.S. banks to more 
stringent standards and have yet to approve a single U.S. bank to apply 
the advanced approaches.
---------------------------------------------------------------------------
     \5\ Testimony of John Walsh, Acting Comptroller of the Currency, 
before the Committee on Financial Services, United States House of 
Representatives (June 16, 2011), available at: http://www.occ.gov/news-
issuances/congressional-testimony/2011/pub-test-2011-73-written.pdf.
---------------------------------------------------------------------------
    To address the inconsistent application of its standards across 
jurisdictions, the Basel Committee has initiated a peer review process 
to monitor, on an ongoing basis, the status of members' adoption of the 
Basel rules, including the Basel III agreement. Under this process, 
teams of banking supervisors from different jurisdictions will review 
the compliance of members' domestic rules or regulations with the 
international minimum standards and identify differences that could 
raise prudential or level playing field concerns.
    The OCC is participating in this initiative and supports its 
objectives. Effective implementation of the Basel standards should be a 
top priority and to that end, the OCC has committed staff and resources 
necessary to participate in the peer review process to the fullest 
extent possible.
II. Liquidity Requirements
    During the early phase of the financial crisis, many banks, despite 
adequate capital levels, still experienced difficulties because of 
inadequate liquidity. Consequently, the Basel Committee and the Dodd-
Frank Act, through enhanced supervision and heightened prudential 
standards, sought to mitigate these concerns by focusing on the 
importance of effective liquidity management to the proper functioning 
of financial markets and the banking sector.
    Basel III introduces two explicit quantitative minimum liquidity 
ratios to assist a bank in maintaining sufficient liquidity during 
periods of financial stress: the Liquidity Coverage Ratio and the Net 
Stable Funding Ratio. These ratios are designed to achieve two separate 
but complementary objectives. The Liquidity Coverage Ratio, with a one-
month time horizon, addresses short-term resilience by ensuring that a 
bank has sufficient high quality liquid resources to offset cash 
outflows under acute short-term stresses. The Net Stable Funding Ratio 
is targeted toward promoting longer-term resilience by creating 
additional incentives for a bank to fund its ongoing activities with 
stable sources of funding. Its goal is to limit over-reliance on short-
term wholesale funding during times of robust market liquidity and 
encourage better assessment of liquidity risk across all on- and off-
balance sheet items.
    The Basel Committee included a lengthy implementation timeline for 
both ratios to provide regulators the opportunity to conduct further 
analysis and to make changes as necessary. The Federal banking agencies 
currently are working together, and with the Basel Committee, to 
develop and recommend changes to the Liquidity Coverage Ratio to ensure 
that it will produce appropriate requirements and incentives, 
especially during economic downturns, and to otherwise limit potential 
unintended consequences.
    As mentioned previously, the Dodd-Frank Act's heightened prudential 
standards are intended to address risks to the financial stability of 
the U.S. that may arise from large, interconnected financial 
institutions and includes the establishment of liquidity requirements 
to address some of those concerns. Section 165 of the Act requires the 
Federal Reserve Board to establish prudential liquidity requirements 
for nonbank financial companies supervised by the Board and bank 
holding companies with total consolidated assets equal to or greater 
than $50 billion. The Federal Reserve Board has issued a proposal that 
builds on the 2010 Interagency Policy Statement on Funding and 
Liquidity Risk Management issued by the Federal banking agencies and 
the Conference of State Bank Supervisors and includes, among other 
things, projected cash flows, stress testing, and contingency funding 
plan requirements as well as provisions addressing board of director 
and senior management responsibilities for overseeing and implementing 
a company's liquidity program. The proposed standards also would 
require affected firms to maintain liquidity buffers of highly liquid 
assets and to establish limits on funding concentrations and 
maturities--concepts that are broadly consistent with the goals of the 
Basel III liquidity ratios.
    Under the proposal, the liquidity requirements would increase in 
stringency based on the systemic risk of a covered institution. Thus, a 
covered company would take into consideration its capital structure, 
risk profile, complexity, activities, size, and other appropriate risk-
related factors in implementing the proposed liquidity requirements. 
Furthermore, the proposal would permit the Federal Reserve Board to 
subject a covered company to additional or further enhanced liquidity 
prudential standards where the Board determines that compliance with 
the proposed rule does not sufficiently mitigate the risks to U.S. 
financial stability posed by the failure or material financial distress 
of the covered company.
    While the OCC supports the more rigorous liquidity standards that 
the Basel Committee and the Federal Reserve Board's proposals would 
establish, we believe it is essential to calibrate these standards 
appropriately and to harmonize to the fullest extent possible the 
definitions and data upon which they are based. The OCC has stressed 
the need to ensure that the Dodd-Frank Act and Basel III liquidity 
standards being developed reflect empirical analysis and are carried 
out in a coordinated manner so as to enhance the safety and soundness 
of the U.S. and global banking systems, while not unduly restricting 
access to credit.
III. Cross-Border Resolutions
    A key objective of the Dodd-Frank Act is ending the perception that 
a firm is ``too big to fail'' by requiring, among other things, more 
robust resolution planning regimes. The orderly resolution of large, 
complex financial institutions also is a key objective of the 
international supervisory community. The international efforts have 
focused, in large part, on the establishment of cooperative structures, 
including crisis management groups working alongside supervisory 
colleges, as a way to provide meaningful planning and timely exchange 
of information.
    Supervisory colleges are international working groups that assist 
supervisors to develop a better understanding of the risk profile of an 
international banking group. They are not formal decision-making 
bodies, but rather provide a forum to discuss broader issues such as 
the planning of supervisory assessments and the sharing of information 
and perspectives by home country and host country participants relating 
to the risk assessment of an international banking group. Colleges 
facilitate effective crisis management by assisting in planning the 
crisis management meeting, encouraging the banking group to produce 
appropriate information for crisis management, and serving as a conduit 
for information sharing.
    In November 2011, the G20 endorsed a new standard (Financial 
Stability Board's Key Attributes of Effective Resolution Regimes) as an 
internationally agreed model for reform of national resolution regimes. 
\6\ Rather than creating a single, global legal framework for the 
resolution of cross-border financial institutions, the Key Attributes 
set out the responsibilities, instruments, and powers that all national 
resolution regimes should have to enable authorities to resolve failing 
financial firms in an orderly manner. The Key Attributes include 
requirements for crisis management groups, resolvability assessments, 
and recovery and resolution planning for global systemically important 
financial institutions (G-SIFIs), and for the development of 
institution-specific cross-border cooperation agreements so that home 
and host authorities of G-SIFIs are better prepared for dealing with 
crises.
---------------------------------------------------------------------------
     \6\ ``Key Attributes of Effective Resolution Regimes for Financial 
Institutions'', Nov. 4, 2011, available at: http://
www.financialstabilityboard.org/publications/r_111104cc.pdf.
---------------------------------------------------------------------------
    The current U.S. legal framework, as enhanced by Title II of the 
Dodd-Frank Act, establishes a resolution regime that conforms with the 
Key Attributes in that it applies in a clear and transparent way to 
financial institutions whose failure could be systemically significant 
or critical. It also authorizes U.S. regulatory agencies to require 
domestically incorporated global systemically important financial 
companies to develop recovery and resolution plans, including a group 
resolution plan. U.S. regulatory agencies can require regular 
resolvability assessments for these companies and enter institution-
specific cross-border cooperation agreements. Similarly, certain large 
insured depository institutions are required to provide plans for their 
resolution.
    The current U.S. legal framework is also consistent with the Key 
Attributes provisions concerning conditions for cross-border 
cooperation. U.S. law generally permits U.S. resolution authorities to 
cooperate with resolution measures by foreign home resolution 
authorities. Similarly, the Dodd-Frank Act directs the Financial 
Stability Oversight Council (FSOC), the Federal Reserve Board, and the 
Secretary of the Treasury to consult with other international 
regulatory authorities on matters related to systemic risk and 
supervision of financial institutions. The Dodd-Frank Act also directs 
the FDIC, as receiver for a systemically important financial company, 
to coordinate, to the maximum extent possible, with appropriate foreign 
financial authorities regarding the orderly liquidation of a 
systemically important financial company that has assets or operations 
in a country other than the U.S. The Dodd-Frank Act empowers the FDIC, 
for purposes of carrying out liquidation and receivership authorities 
under the Dodd-Frank Act, to request assistance from a foreign 
financial authority or to assist any foreign financial authority in 
conducting any investigation, examination, or enforcement action.
    Consistent, harmonized implementation is critical to the 
effectiveness of the model Key Attributes. Legislative changes will be 
required in many jurisdictions to implement the Key Attributes and to 
strengthen supervisory mandates and capabilities. Other requirements 
will demand a high degree of active cooperation among authorities and 
reviews by firms of their structures and operations. The Cross-Border 
Crisis Management Working Group (CBCM) of the Financial Stability Board 
(FSB) is conducting surveys to assess the status of work in the various 
jurisdictions relating to Crisis Management Groups (CMGs), recovery and 
resolution planning, and resolvability assessments. In addition, the 
FSB, with the involvement of the International Monetary Fund, the World 
Bank, and the standard setters, is also drawing up a methodology to 
assess implementation of the Key Attributes standards, and the OCC is 
participating in the development of the methodology. Supervisory 
colleges and CMGs can also complement these wider peer review processes 
by promoting a coherent, cross-jurisdictional approach to the 
consistent and effective implementation of the Key Attributes.
IV. Derivatives Regulation
    In 2009, G20 leaders committed to reforming over-the-counter (OTC) 
derivatives markets by year-end 2012, to require clearing of 
standardized contracts through central counterparties, and to improve 
transparency of noncleared derivatives and subject them to additional 
capital requirements. In Title VII of the Dodd-Frank Act, the U.S. 
established the legislative infrastructure for these and other reforms 
in our derivatives markets. As the U.S. makes orderly progress through 
the implementation of Title VII, we also face questions about the 
progress of other G20 Nations.
    Effective restructuring of the derivatives market, in the manner 
envisioned in Title VII, will be difficult to achieve if traders have 
the option to conduct their derivative transactions in other, less 
heavily regulated jurisdictions. If international efforts are 
successful in implementing robust restrictions in all significant 
market jurisdictions, we will protect U.S. institutions and markets 
from exposure to systemic risk in the form of market contagion from 
under-supervised large traders. Even with such broad harmonization, the 
goals of Title VII may be affected by smaller differences with other 
countries.
    The G20 leaders have charged the FSB with regularly monitoring the 
progress of implementation by G20 Nations towards the 2009 commitments 
on OTC derivatives. The FSB, through the OTC Derivatives Working Group, 
is currently in the process of wrapping up its information-collection 
activities antecedent to publishing its fourth progress report. While 
the reports thus far show that the U.S. and some other major market 
jurisdictions have established the legislative infrastructure necessary 
to meet the 2012 commitment, many other jurisdictions have not yet 
undertaken this important step.
    On the positive front, international regulators are making 
important progress in establishing ground rules that will support a 
global approach to central clearing on a cross-border basis through 
recognized counterparties. This has the potential to facilitate greater 
standardization and liquidity in derivatives, increasing the proportion 
of contracts that can be cleared. In November of 2011, an international 
working group was established to address this issue and, more broadly, 
coordinate other international workstreams on OTC derivatives. Other 
established international supervisory coordinating bodies, such as the 
Basel Committee, the Committee on Payment and Settlement Systems, and 
the International Organization of Securities Commissions (IOSCO) are 
preparing standards, consultative documents, and study papers on 
international derivatives implementation issues falling within their 
respective jurisdictions. The Securities and Exchange Commission (SEC) 
and the Commodity Futures Trading Commission also have been 
coordinating with international counterparts in several major 
jurisdictions to coordinate implementation issues with cross-border 
impact.
    Notwithstanding these preliminary moves, U.S. regulators have been 
hampered in their work with regulators in other jurisdictions that have 
not yet established a legislative framework for OTC market 
restructuring. While it is understandable that these jurisdictions, 
which currently have smaller levels of OTC market activity, might wish 
to ``wait and see'' how the U.S. and European regulators complete their 
approach before proceeding with their own measures, the ``wait and 
see'' approach also creates the risk of regulatory arbitrage, and slows 
the pace of international coordination.
    Important progress also is being made on the implementation of 
margin requirements backing noncleared derivatives. The OCC, along with 
the other U.S. banking, commodities, and securities regulators, are 
participating in an international supervisors' working group, 
established in the fall of 2011 under the auspices of the BCBS and 
IOSCO, to address this topic. U.S. banking and commodities regulators 
were the first to issue specific proposed margin requirements, in the 
spring of 2011. The banking agencies' proposal requested public comment 
on the international application of U.S. margin requirements to 
noncleared derivatives executed by foreign branches and subsidiaries of 
U.S. banks that are swaps dealers or major swap participants. 
Commenters expressed concerns that U.S. and foreign regulators must 
coordinate as to the level and effective dates of their respective 
margin requirements, and anticipated that unilateral U.S. 
implementation of margin rules would eliminate U.S. banks' ability to 
continue competing in foreign markets that are behind the U.S. in 
formulating margin rules for their own dealers. We anticipate the BCBS-
IOSCO working group will be in a position to issue a consultative paper 
on international margin standards by this summer.
    To summarize, in the key aspects of OTC derivatives market 
restructuring, the G20 leaders have committed to core changes, channels 
of communication between supervisors have been established, and the 
parties are working toward convergence, though the final outcome 
remains to be seen. Given our commitment to convergence with 
international standards, our primary concern with the ongoing efforts 
to reform OTC derivatives markets is one of timing. If the U.S. is 
unable to implement market reforms in a coordinated and contemporaneous 
fashion with all significant derivatives market jurisdictions, we face 
the risk that trades will move to an unregulated market. This would 
thwart the intended result of Title VII reforms, and negatively affect 
the ability of U.S. financial institutions to compete for international 
market share.
    In addition, there is one particular aspect of Title VII for which 
there appears to be no equivalent policy among our foreign 
counterparts: the ``push out'' provisions of section 716, which 
dictates where in a U.S. bank holding company certain aspects of 
derivatives dealing business can be conducted. The language of the 
section is ambiguous in important respects, but the U.S. appears to be 
alone in espousing the basic approach in section 716 of limiting the 
flexibility of holding companies to conduct some aspects of their 
derivatives dealing business within depository institutions.
V. Volcker Rule
    The Dodd-Frank Act contains certain provisions, like section 619 
(the ``Volcker Rule''), that have no foreign equivalent and, unlike 
capital and liquidity requirements, currently are not the subject of 
international harmonization efforts. Section 619 generally prohibits a 
banking entity, which includes a U.S. banking entity and a foreign bank 
with certain U.S. operations, \7\ from engaging in proprietary trading 
and from making investments in, and having certain relationships with, 
a hedge fund or private equity fund. The statute excepts from these 
prohibitions certain activities, including market-making related 
activities, underwriting, risk-mitigating hedging, trading in U.S. 
Government obligations, and activities conducted by qualifying foreign 
banking entities ``solely outside of the United States.''
---------------------------------------------------------------------------
     \7\ Section 619 applies to any foreign bank that ``is treated as a 
bank holding company for purposes of section 8 of the International 
Banking Act of 1978'' and its affiliates worldwide.
---------------------------------------------------------------------------
    On November 7, the Federal banking agencies and the SEC issued a 
notice of proposed rulemaking to implement the Volcker Rule (the 
Proposal). \8\ The public comment period on the Proposal closed on 
February 13, and the agencies are now considering the over 16,000 
comment letters received. These include comment letters from both U.S. 
and foreign banking entities, trade associations, and governmental 
authorities, including the Governments of Canada, the European Union, 
France, Germany, Mexico, Japan, and the United Kingdom.
---------------------------------------------------------------------------
     \8\ The CFTC published a notice of proposed rulemaking 
implementing section 619 on February 14, 2012. The CFTC proposal, which 
adopts the same rule text as the Proposal, is open for comment through 
April 16, 2012.
---------------------------------------------------------------------------
    It is clear from these comment letters and meetings with our 
foreign counterparts that the U.S. restrictions on banking entities' 
high-risk trading and investment activities are unique. As our foreign 
counterparts have pointed out, the G20 did not endorse regulation of 
proprietary trading and hedge and private equity fund investments as an 
area of the financial system requiring reform and, to our knowledge, 
other countries have not adopted such measures.
    Instead, other countries have chosen different measures to guard 
against the financial and operational risks banking entities may face 
from businesses perceived as high risk. Most countries are relying 
primarily on enhanced capital and liquidity requirements and new 
resolution frameworks for globally systemic banks to address such 
risks. The United Kingdom has proposed additional measures (known as 
the ``Vickers Proposal'') to restructure its banks: its so-called 
``retail ring-fencing'' measures would require banks to conduct retail 
and investment banking services in separate subsidiaries, thereby 
limiting capital and liquidity transfers from the retail arm of the 
banking group to the wholesale side of the business. The Vickers 
Proposal, in contrast to the Volcker Rule, would not prohibit 
proprietary trading in a banking organization, but rather require that 
it be conducted outside of the retail bank.
    These comment letters also raise significant issues relating to the 
international implications of the Proposal by addressing the potential 
impact of the Proposal on competitiveness and on the extraterritorial 
reach of U.S. laws. Some of these issues flow from the provisions of 
the statute, while others are the result of how the agencies have 
proposed to implement the statute. For example, U.S. banking entities 
have expressed concern that they will be at a competitive disadvantage 
internationally when they conform their worldwide operations to the 
requirements of the Proposal because foreign banking entities not 
covered by the Volcker Rule would be permitted to engage in proprietary 
trading and make hedge fund and private equity investments, subject 
only to applicable foreign laws. In addition, foreign banking entities 
covered by the Volcker Rule may engage in proprietary trading and make 
hedge fund and private equity investments ``solely outside of the 
United States'' by the terms of the statute. U.S. banking entities have 
pointed out that this difference in treatment could result in 
regulatory arbitrage, regulatory uncertainty, and unfair competition 
and could affect the competitiveness of all U.S. companies that depend 
on U.S. markets for liquidity and capital formation. They have noted 
that reduced liquidity, on a macroeconomic level, could restrain 
economic development, job creation, and the international 
competitiveness of U.S. businesses. Many of these complaints are about 
the basic policy contained in the statute, but we are carefully 
considering these concerns to determine the extent to which they are 
exacerbated by the Proposal.
    Foreign Governments and foreign banking entities have expressed 
concern about the extraterritorial impact of the Proposal, including 
the agencies' approach to implementing the statutory exception which 
permits qualifying foreign banking entities to engage in prohibited 
trading and covered fund activities ``solely outside of the United 
States.'' Commenters have asserted that the Proposal construes this 
exception too narrowly, and, as a result, foreign banking entities will 
need to rely on other exceptions in the Proposal in order to engage in 
activities outside of the U.S. Commenters have maintained that these 
exceptions impose U.S. legal requirements on foreign banking entities 
operating outside of the U.S., which may conflict with applicable 
foreign laws and may be inconsistent with the regulatory approach 
adopted by foreign regulators.
    Commenters also have criticized the application of the statutory 
backstops and the proposed compliance and reporting requirements to 
operations of foreign banking entities outside of the U.S. The 
backstops provide that a banking entity may not engage in any permitted 
activity that would involve or result in a material conflict of 
interest or a material exposure to a high-risk asset or trading 
strategy or threaten the safety and soundness of the banking entity or 
the financial stability of the U.S. Section 619 requires the agencies 
to issue rules regarding internal controls and record keeping to ensure 
compliance with the statute. The Proposal imposes the statutory 
backstops, a detailed compliance program, and extensive reporting 
requirements on all banking entities subject to section 619, including 
foreign banking entities. Commenters have urged the agencies to limit 
the scope of these requirements to foreign banking entities' U.S. 
operations.
    Finally, commenters have objected to the preferential treatment 
afforded to U.S. Government obligations as compared to obligations 
issued by foreign Governments. They have urged the agencies to treat 
foreign sovereign bonds like U.S. Government obligations by creating an 
exception for trading in foreign sovereign debt. Commenters have argued 
that foreign sovereigns are used as collateral and for asset liability 
management purposes and that disrupting their trading will jeopardize 
banking entities' safety and soundness. In addition, they have noted 
that making sovereign debt harder to trade, especially by primary 
dealers, will make the market for that debt less liquid. This could 
hinder central monetary operations and thereby decrease financial 
stability. Moreover, the commenters have suggested that providing 
preferential treatment to U.S. sovereign debt may result in retaliatory 
efforts by other countries.
    We plan to carefully consider all comments received in implementing 
the regulation. In particular, we plan to consider both the 
extraterritorial reach of the Proposal and the potential for regulatory 
overlaps and inconsistencies the Proposal may create for banking 
entities' worldwide operations.
Conclusion
    The OCC is committed to effective implementation of international 
financial regulatory agreements and the Dodd-Frank Act. As we move 
forward with Dodd-Frank Act implementation and toward convergence with 
international standards, we must be mindful of the need to strike an 
appropriate balance between enhanced regulation, better supervision, 
and market restrictions.
    Achieving a level playing field for internationally active 
institutions is an important objective, but it is never fully achieved, 
and sometimes national policy choices, like a number of those I have 
noted in the Dodd-Frank Act, place other national objectives above 
competitive equity. Still, it is important to appropriately reconcile 
the enhanced U.S. requirements with the enhanced international 
standards wherever possible, or run the risk of placing U.S. banks at a 
competitive disadvantage that may drive important elements of financial 
services and financial intermediation out of the banking system or out 
of the United States.
    Thank you for the opportunity to discuss the international 
implications of the Dodd-Frank Act and to update the Committee on the 
efforts currently underway to harmonize U.S. regulatory requirements 
with international standards and frameworks. I am happy to answer your 
questions.
                                 ______
                                 
                PREPARED STATEMENT OF JACQUELINE H. MESA
  Director of the Office of International Affairs, Commodity Futures 
                           Trading Commission
                             March 22, 2012
    Good morning Chairman Johnson, Ranking Member Shelby, and Members 
of the Committee. I am Jacqueline Mesa, the Director of the Office of 
International Affairs at the Commodity Futures Trading Commission. 
Thank you for the opportunity to testify today regarding international 
aspects of the Dodd-Frank Wall Street Reform and Consumer Protection 
Act (Dodd-Frank Act). This morning, I will provide an overview of 
global commitments for over-the-counter (OTC) derivatives reform, an 
update on Dodd-Frank Act implementation efforts at the Commodity 
Futures Trading Commission (CFTC or Commission), global initiatives to 
bring financial reform to OTC derivatives, and coordination with 
international regulators in regulating the swaps market.
G20 Commitment for OTC Derivatives Reform
    The financial crisis generated international consensus on the need 
to strengthen financial regulation by improving transparency, 
mitigating systemic risk, and protecting against market abuse. As a 
result of the widespread recognition that transactions in the OTC 
derivatives market increased risk and uncertainty in the economy and 
became a significant contributor to the financial crisis, a series of 
policy initiatives were undertaken to better regulate the financial 
markets.
    In September 2009, leaders of the Group of 20 (G20)--whose 
membership includes the European Union (EU), the United States, and 18 
other countries--agreed that: (1) OTC derivatives contracts should be 
reported to trade repositories; (2) all standardized OTC derivatives 
contracts should be cleared through central counterparties and traded 
on exchanges or electronic trading platforms, where appropriate, by the 
end of 2012; and (3) noncentrally cleared contracts should be subject 
to higher capital requirements. In addition, the Financial Stability 
Board (FSB) issued a report in October 2010 that set forth a detailed 
set of assignments to financial standard-setting bodies in order to 
meet the G20 directives, and the FSB continues to publish semi-annual 
reports concerning progress by major market jurisdictions to meet the 
G20 mandates by the end-2012 deadline.
Dodd-Frank Act Implementation
    In 2010, less than 1 year following the G20 commitment to lower 
risk and increase transparency in the OTC derivatives market, Congress 
broadened the CFTC's jurisdiction to include oversight of the 
previously unregulated swaps marketplace and also broadened the 
jurisdiction of the Securities and Exchange Commission (SEC) to cover 
security-based swaps. With respect to the CFTC, Title VII of the Dodd-
Frank Act: (1) provides for the registration and comprehensive 
regulation of swap dealers and major swap participants; (2) imposes 
clearing and trade execution requirements on standardized swaps, 
subject to certain exceptions; (3) creates record keeping and real-time 
reporting regimes; and (4) enhances the CFTC's rulemaking and 
enforcement authorities with respect to certain products, entities, and 
intermediaries subject to the Commission's oversight.
    The CFTC is developing regulations to implement the Dodd-Frank Act 
and to establish a regulatory framework for overseeing the swaps 
market, which is seven times the size of the futures market and far 
more complex. Last summer, the CFTC moved forward from the proposal 
phase for rulemaking to finalizing its regulations. The Commission has 
completed 29 final rulemakings, with approximately 20 regulations 
remaining.
    Section 712 of the Dodd-Frank Act calls on the CFTC to consult and 
coordinate with the SEC and the prudential regulators for purposes of 
assuring regulatory consistency and comparability of rulemakings under 
the legislation. The SEC has jurisdiction over security-based swaps, 
and the CFTC is working closely with the SEC in developing regulations. 
In certain areas, the CFTC and SEC are issuing joint regulations. The 
Commission also is working closely with the prudential regulators, 
which are charged with developing capital, margin, and other 
requirements for banking entities.
    One example where we are coordinating with our sister agencies is 
the procedure to implement the Volcker Rule, where there is a specific 
requirement in the Dodd-Frank Act mandating consultation and 
coordination between the banking regulators and the CFTC and the SEC. 
Section 619 of the Dodd-Frank Act prohibits certain banking entities 
from engaging in proprietary trading, yet also permits certain 
activities such as market making and risk-mitigating hedging. The 
Office of the Comptroller of the Currency, Federal Reserve Board, 
Federal Deposit Insurance Corporation, and SEC published proposed 
regulations last November to implement this statutory provision. The 
CFTC is charged with promulgating rules to implement Volcker Rule 
requirements for CFTC-registered affiliates and subsidiaries of banking 
entities. The Commission issued proposed regulations in January, with a 
comment period that closes on April 16th. U.S. regulators are working 
together to coordinate their approaches.
    As CFTC rulemakings have progressed, one issue that has arisen is 
how Dodd-Frank Act requirements might apply to swaps activities 
occurring on a cross-border basis. In connection with the CFTC's and 
SEC's joint proposed regulation to further define the term ``swap 
dealer,'' for example, public input has been received in connection 
with a range of concerns related to the application of Title VII and 
the Commission's regulations to transactions in which a foreign swap 
dealer is transacting with U.S. persons or to certain activities of a 
U.S. swap dealer operating from a foreign location.
    The CFTC recognizes that swaps business currently flows across 
national borders, with agreements negotiated and executed between 
counterparties in different jurisdictions and individual transactions 
often booked and risk-managed in other jurisdictions. CFTC and SEC 
staff held a public roundtable last August to discuss international 
issues related to implementation of Title VII. The roundtable agenda 
included cross-border transactions, global entities, and market 
infrastructure. As required by Section 719(c) of the Dodd-Frank Act, 
CFTC and SEC staff conducted a study and released a report in January 
that examined international swap regulation and set forth several 
issues for further monitoring across jurisdictions.
    In addressing cross-border issues, the CFTC is charged with 
implementing Section 722(d) of the Dodd-Frank Act, which amended the 
Commodity Exchange Act (CEA) to provide that Title VII provisions 
``shall not apply to activities outside the United States unless those 
activities: (1) have a direct and significant connection with 
activities in, or effect on, commerce of the United States; or (2) 
contravene such rules or regulations as the Commission may prescribe or 
promulgate as are necessary or appropriate to prevent the evasion of 
any provision of [the CEA] that was enacted by the [Dodd-Frank Act]''. 
The CFTC plans to provide guidance regarding the application of Title 
VII and the Commission's regulations to non-U.S. entities and to swaps 
activities occurring on a cross-border basis, seeking public input on 
that guidance.
    Another issue that has arisen involves the indemnification 
requirement for registered swap data repositories in Section 21(d) of 
the CEA. Some foreign regulators have raised concerns regarding their 
ability to directly access information maintained in such repositories 
due to the indemnification requirement. The CFTC is working to ensure 
that both domestic and international regulators have access to swap 
data to support their regulatory mandates, and the Commission continues 
to review the indemnification provisions of the CEA. Recently, the 
Chairman directed Commission staff to draft, for the Commission's 
consideration, proposed interpretative guidance stating the 
Commission's view that access to swap data reported to a trade 
repository that is registered with the CFTC will not be subject to the 
CEA's indemnification provisions if such trade repository is regulated 
pursuant to foreign law and the applicable requested data is reported 
to the trade repository pursuant to foreign law. Subject to the 
Commission's approval, this proposed interpretative guidance would be 
published for public comment.
Global Reform in the OTC Derivatives Market
    In line with the G20 commitment, efforts to regulate OTC 
derivatives are under way not only in the United States but also 
abroad. Japan has passed reform legislation, and the EU is finalizing 
the European Market Infrastructure Regulation (EMIR) that includes 
mandatory clearing, reporting, and risk mitigation for OTC derivatives. 
Last October, the European Commission published two draft proposals, 
the Markets in Financial Instruments Directive (MiFID) and the Markets 
in Financial Instruments Regulation (MiFIR), that provide for 
additional requirements for swaps that will further align U.S. and EU 
swaps reform. Others, such as Canada, Hong Kong, and Singapore, have 
published consultation documents to gather public comment on the 
appropriate regulation of OTC derivatives. CFTC staff will continue to 
monitor international developments and to work with the foreign 
regulators to establish consistent standards for OTC derivatives 
regulation.
International Coordination
    The global and interconnected nature of the swaps market makes it 
imperative that the United States consult and coordinate with foreign 
regulators. Market participants domiciled both inside and outside of 
the United States regularly enter into swaps transactions with one 
another and engage in cross-border swap activities that could be 
subject to U.S. and non-U.S. regulatory oversight.
    The fact that all major market jurisdictions are developing their 
OTC requirements at the same time and in a coordinated fashion pursuant 
to the G20 directives also provides an opportunity to create a 
consistent framework. Congress directed the CFTC, SEC, and prudential 
regulators in Section 752(a) of the Dodd-Frank Act to ``as appropriate 
. . . consult and coordinate with foreign regulatory authorities on the 
establishment of consistent international standards with respect to the 
regulation . . . of swaps, security-based swaps, swap entities, and 
security-based swap entities'' in order to ``promote effective and 
consistent global regulation of swaps and security-based swaps.'' The 
CFTC is fulfilling this statutory mandate by reaching out 
internationally--in a comprehensive approach and on an ongoing basis--
to promote robust and consistent standards and to avoid conflicting 
requirements wherever possible.
    The CFTC has considered international standards and principles in 
developing regulations, and staff has consulted and coordinated with 
international counterparts throughout the rulemaking process. 
Commission staff has shared comment summaries and drafts of proposed 
and final regulations with the international community, and has 
carefully considered the constructive feedback we have received. As the 
Commission moves forward in finalizing regulations, we will continue to 
do so.
    CFTC Chairman Gary Gensler and Commissioners have met with foreign 
regulators to discuss financial reform in the United States and abroad. 
Commissioner Jill Sommers, as Chair of the CFTC's Global Markets 
Advisory Committee and the Commission's representative to the 
International Organization of Securities Commissions (IOSCO), has 
organized advisory meetings to discuss international coordination of 
financial reform. In addition, Chairman Gensler, SEC Chairman Mary 
Schapiro, and senior representatives of the CFTC and SEC met with 
regulators from Canada, the EU, Hong Kong, Japan, and Singapore last 
December to discuss cross-border issues related to OTC derivatives, and 
an even broader group of regulators will meet again in May. Last week, 
the CFTC hosted a meeting with 28 foreign regulators on access to swaps 
trade repository data, regulation of the OTC derivatives market and 
participants, and customer fund protection.
    At the staff level, ongoing bilateral discussions and technical 
dialogues with foreign regulators are designed to increase the 
understanding of our respective regulatory approaches and to coordinate 
regulatory proposals to the greatest extent possible. CFTC and SEC 
staffs have been holding an unprecedented number of dialogues with 
counterparts in Canada, the EU, Hong Kong, Japan, and Singapore. These 
staff discussions will continue as Dodd-Frank Act implementation 
progresses and as other jurisdictions develop their own regulatory 
requirements for OTC derivatives.
    CFTC staff is participating in the FSB OTC Derivatives Working 
Group, which monitors progress being made in implementing OTC 
derivatives market reforms. The CFTC also cochairs the IOSCO Task Force 
on OTC Derivatives, which recently completed work on three reports and 
currently is developing a report relating to the oversight of OTC 
derivatives market intermediaries. The published reports address 
mandatory clearing, exchange and electronic platform trading, and 
reporting to trade repositories.
    CFTC staff also is engaged in several other international projects 
related to OTC derivatives. For example, the Committee on Payment and 
Settlement Systems and IOSCO are developing principles for financial 
market infrastructures, including derivatives central counterparties 
and trade repositories, which are expected to be published next month. 
In addition, IOSCO and others have established a working group on 
international standards regarding margin requirements for noncentrally 
cleared derivatives, with a consultative report expected in June.
    Regulators also are coordinating internationally with regard to 
limits on speculative positions. Last September, IOSCO adopted a 
commodity markets report that embraces a position management regime. 
The report also includes recommendations for more transparency, similar 
to aggregated position reports (Commitments of Traders) that are 
published weekly by the CFTC, and enhanced enforcement authority to 
pursue attempted manipulation.
Conclusion
    The CFTC is working with foreign regulators in an effective way to 
coordinate regulatory approaches and requirements to the greatest 
extent possible. On a number of different issues, the CFTC already has 
used the process of international consultation to highlight possible 
differences and to work out a solution that addresses the concerns of 
each jurisdiction involved in the discussion. We are committed to 
working closely with our international counterparts in this effort.
    Thank you, and I would be happy to answer questions.
        RESPONSES TO WRITTEN QUESTIONS OF SENATOR HAGAN
                       FROM LAEL BRAINARD

Q.1. Primary dealers serve as trading counterparties of the New 
York Fed in its implementation of monetary policy set by the 
Federal Open Market Committee. These dealers distribute debt 
issued by the U.S. Treasury in exchange for revenue generated 
through the appreciation of financial positions they take on at 
weekly auctions.
    It is common for primary dealers to enter into derivative 
transactions to hedge the risks that arise from participation 
in an auction; however the nature of an auction makes it 
difficult for dealers to perfectly predict the specific risks 
that they will hold following the auction.
    The Volcker Rule limits the ability of primary dealers to 
trade in derivatives on Government obligations and the ability 
of primary dealers to hedge risks in advance of a U.S. Treasury 
auction.
    Is the Treasury Department concerned that the inability of 
primary dealers to use derivatives on Government obligations 
could lead to lower bids and higher yields at auctions?

A.1. Primary dealers play an important role in the auction 
process and market for U.S. Treasury obligations, including 
through their underwriting and market making activities. In 
addition to the Volcker Rule's exemption for trading in 
obligations of the United States, the Volcker Rule also 
explicitly permits market making, underwriting, and risk-
mitigating hedging. Regulators are in the process of analyzing 
public comments, including comments from primary dealers, and 
Treasury is working to coordinate the interagency effort to 
develop a final rule that includes appropriate exemptions that 
protects deep and liquid markets for U.S. Government 
obligations.

Q.2. The list of primary dealers includes both banking entities 
subject to the Volcker Rule and broker dealers that are not 
subject to the rule. How would the implementation of the 
Volcker Rule, as currently drafted, impact the competitive 
landscape among primary dealers?

A.2. A primary dealer will generally be subject to the Volcker 
Rule if it is, or is an affiliate or subsidiary of, an insured 
depository institution, a company that controls an insured 
depository institution, or a foreign company treated as a bank 
holding company. In addition, nonbank financial companies 
supervised by the Board of Governors of the Federal Reserve 
System are subject to certain provisions of the Volcker Rule. 
Thus, the rule provides regulators the ability to regulate 
banking entities and certain nonbank financial companies in a 
similar manner.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR TOOMEY
                       FROM LAEL BRAINARD

Q.1. Do you anticipate a situation where a U.S. company is not 
designated a SIFI by FSOC but is designated a G-SIFI by the 
Financial Stability Board? If that would occur, how would you 
regulate that institution?

A.1. U.S. financial institutions will be regulated in 
accordance with U.S. laws and regulations. Through active 
participation in the G20 and FSB, Treasury and U.S. regulators 
work to ensure that international standards of the highest 
quality are aligned with our national framework. For example, 
the FSB tasked the International Association of Insurance 
Supervisors (IAIS) with proposing the criteria and methodology 
for identifying globally systemically important insurers (G-
SIIs). Through its membership on both the Financial Stability 
Oversight Council (Council) and IAIS committees involved with 
development of the criteria and methodology, Treasury's Federal 
Insurance Office (FIO) is pursuing an international consensus 
that aligns the IAIS criteria, methodology, and timing with the 
Council.

Q.2. Do property-casualty insurers regulated in the business of 
insurance pose a systemic risk? If not, have you made those 
arguments to the Financial Stability Board and what has been 
their response?

A.2. The example of AIG illustrates that nontraditional 
activities undertaken within an insurance group can expose an 
insurance affiliate to harm and pose a threat to the broader 
financial system. Rather than exempt an entire industry, the 
FSB has tasked the insurance sector regulators, through the 
IAIS, with proposing the criteria and methodology for 
identifying G-SIIs. It would be inappropriate to prejudge the 
work of the IAIS, especially prior to the public consultation 
period through which the IAIS will obtain input from interested 
parties. Through FIO, Treasury is participating in the IAIS 
process and working to align the criteria, methodology, and 
timing of the IAIS approach with that of the Council. To the 
extent that the IAIS proposes a criteria and methodology 
inconsistent with Treasury's expectations, then, working with 
other FSB members, Treasury will modify or force 
reconsideration of the IAIS proposal.

Q.3. The proposed Volcker Rule applies to all companies that 
own an insured depository, and all subsidiaries and affiliates. 
In addition to traditional banks and bank holding companies, 
the rule seems to fully cover commercial companies that own a 
thrift or an industrial loan company, as well as all of the 
companies in which these covered entities may have a 
significant investment that makes the recipient of the 
investment an ``affiliate.'' (Under the Bank Holding Company 
Act, investments as low as 5 percent can trigger affiliate 
status.) The so-called goal of the Volcker Rule was designed to 
limit risks at insured depositories so that banks wouldn't be 
using Government insured deposit funds to ``gamble'' through 
proprietary trading or fund investing. But it seems that in 
reality, the rule will cover all sorts of industrial and 
commercial companies just because they are in some way 
``affiliated'' with a depository. Similarly, the rule would 
cover a company that makes a large investment in another 
company that controls a depository, dissuading these types of 
strategic investments for fear of the investor becoming 
``infected'' with the Volcker Rule.
    Does it make any sense to apply the full restrictions and 
regulatory requirements to nonfinancial companies?

A.3. Congress amended the Bank Holding Company Act to include 
the Volcker Rule. The statute defines ``banking entities,'' 
which are subject to the Volcker Rule, to include any affiliate 
or subsidiary of an insured depository institution or of a 
company that controls an insured depository institution. The 
proposed rule reflects this statutory mandate.

Q.4. What can your agencies do in the regulations, particularly 
regarding your standards for determining what is an 
``affiliated'' company, to make sure that the Volcker Rule does 
not burden nonfinancial companies in a way that was completely 
unintended by Congress?

A.4. While the Secretary of the Treasury, as Chairperson of the 
Financial Stability Oversight Council, is coordinating the 
regulations to be issued under the Volcker Rule, Congress did 
not provide the Treasury Department with rulemaking authority 
for the Volcker Rule. The rulemaking agencies--the Board of 
Governors of the Federal Reserve System, the Office of the 
Comptroller of the Currency, the Federal Deposit Insurance 
Corporation, the Commodity Futures Trading Commission, and the 
Securities and Exchange Commission--have rulemaking authority 
to implement the Volcker Rule, including with respect to the 
definition of terms and any additional exemptions.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR TOOMEY
                     FROM DANIEL K. TARULLO

Q.1. Do you anticipate a situation where a U.S. company is not 
designated a SIFI by FSOC but is designated a G-SIFI by the 
Financial Stability Board? If that would occur, how would you 
regulate that institution?

A.1. In considering whether to determine that a nonbank 
financial company could pose a threat to U.S. financial 
stability and subject the company to Federal Reserve Board 
(Board) supervision and prudential standards, the Financial 
Stability Oversight Council (FSOC) is required by statute to 
consider various factors set forth in the statute that could 
result in a different determination (either including or 
excluding a firm) by the FSOC under the Dodd-Frank Wall Street 
Reform and Consumer Protection Act (Dodd-Frank Act) than a 
determination that may be made by the Financial Stability Board 
(FSB). For instance, one factor that the FSOC must consider is 
the degree to which a firm is already regulated by another 
financial regulatory agency.
    The Board and the FSOC are working with the FSB on a number 
of initiatives, including the process for identifying globally 
systemically important financial institutions and financial 
market infrastructures. Furthermore, the Board and the FSOC are 
working to ensure the consistency of the approaches used by the 
FSB and the FSOC for assessing whether a nonbanking company is 
systemically important and to better understand the potential 
for different determinations.
    Systemically important nonbank firms designated by the FSOC 
and bank holding companies with total consolidated assets 
greater than $50 billion will be subject to enhanced prudential 
standards established by the Board. By contrast, firms that are 
not designated by the FSOC and are not bank holding companies 
with total assets greater than $50 billion that are designated 
as G-SIFis by the FSB would be subject to internationally 
agreed-upon standards.

Q.2. Do property-casualty insurers regulated in the business of 
insurance pose a systemic risk? If not, have you made those 
arguments to the Financial Stability Board and what has been 
their response?

A.2. Section 113 of the Dodd-Frank Act authorizes the FSOC to 
subject a nonbank financial company to supervision by the Board 
and prudential standards if either the company's material 
financial distress, or the company's activities, could pose a 
threat to the financial stability of the United States. The 
statute requires the FSOC to consider the potential threat to 
U.S. financial stability posed by an individual nonbank 
financial company rather than by a particular financial 
industry.
    When the FSOC issued its final rule and interpretive 
guidance earlier this year regarding nonbank financial company 
designations, the FSOC noted that many commenters on the FSOC's 
proposed rule and guidance suggested that nonbank financial 
companies operating in particular financial industries do not 
pose a threat to U.S. financial stability and should not 
generally be subject to FSOC designation. In response to these 
comments, the FSOC stated that any designation of a nonbank 
financial company will be based on an evaluation of whether the 
nonbank financial company meets the statutory standards, taking 
into account the statutory considerations set forth in section 
113 of the Dodd-Frank Act. The FSOC has not made any 
determinations under section 113 of the Dodd-Frank Act but is 
continuing to consider whether any nonbank financial company 
could pose a threat to U.S. financial stability.

Q.3. Federal Reserve Chairman Bernanke indicated in an 
appearance before the House Financial Services Committee last 
month that the final rules implementing Section 619 of the 
Dodd-Frank Act, commonly known as the ``Volcker Rule,'' would 
not be ready by July 21, 2012. However, this section of the 
Dodd-Frank Act is self-executing and has an effective date of 
July 21, irrespective of whether or not the final rules are in 
place. This creates a great deal of confusion and legal 
uncertainty among companies that are impacted by the Volcker 
Rule or that may be impacted by the Volcker Rule.
    How do you plan to deal with this circumstance and do you 
anticipate that the Fed and other prudential regulators will 
make a formal announcement delaying enforcement of the Volcker 
Rule until the final rules are published?

A.3. Section 619 required the Federal Reserve to adopt rules 
governing the conformance periods for activities and 
investments restricted by section 619, which the Federal 
Reserve did on February 9, 2011. The conformance rules may be 
found at http://www.federalreserve.gov/newsevents/press/bcreg/
2011_0209a.htm. In its final rule establishing the conformance 
periods, the Federal Reserve explained that it would revisit 
the conformance period rule in light of the requirements of the 
final rule implementing the substantive provisions of the 
Volcker Rule. Subsequently, the Federal Reserve received a 
number of requests for clarification of the manner in which 
this conformance period would apply and how the prohibitions 
would be enforced. On April 19, 2012, the Federal Reserve 
announced its approval of a statement clarifying that an entity 
covered by section 619 has the full 2-year period provided by 
statute to fully conform its activities and investments to the 
requirements of section 619 and any implementing rules adopted 
in final under that section, unless the Board extends that 
conformance period. All of the Federal agencies charged with 
implementing and enforcing the provisions of section 619 (i.e., 
the Federal Reserve, OCC, FDIC, SEC, and CFTC) announced that 
they plan to administer their oversight of banking entities 
under their respective jurisdictions in accordance with the 
Federal Reserve's conformance rule and the April statement.

Q.4. At a Dodd-Frank anniversary hearing held at the Committee 
last summer, Chairman Bernanke indicated that if European and 
other regulators did not impose comparable margin requirements 
for uncleared swaps, U.S.-domiciled financial institutions 
would be placed at a significant competitive disadvantage. 
Chairman Bernanke suggested that the best solution was a global 
agreement.
    What progress has been made towards such a global 
agreement?

A.4. In October of 2011, an international group of regulators 
was constituted to reach an international agreement on margin 
requirements for uncleared swaps. The proposal by the Basel 
Committee on Banking Supervision (BCBS) and the International 
Organization of Securities Commissions (IOSCO) was developed in 
consultation with, and with the active participation of, the 
Committee on Payment and Settlement Systems (CPSS) and the 
Committee on the Global Financial System (CGFS). This group has 
been meeting regularly since October to formulate a global 
proposal for margin requirements on uncleared derivatives.
    The BCBS/IOSCO issued its proposal in July 2012. The 
proposal is articulated through a set of key principles that 
primarily seeks to ensure that appropriate margining practices 
will be established for all noncentrally cleared OTC derivative 
transactions. These principles will apply to all transactions 
that involve either financial firms or systemically important 
nonfinancial entities. The BCBS/IOSCO requested comments on the 
proposal by September and expects to finalize the proposal 
later this year.

Q.5. The proposed Volcker Rule applies to all companies that 
own an insured depository [institution], and all subsidiaries 
and affiliates. In addition to traditional banks and bank 
holding companies, the rule seems to fully cover commercial 
companies that own a thrift or an industrial loan company, as 
well as all of the companies in which these covered entities 
may have a significant investment that makes the recipient of 
the investment an ``affiliate.'' (Under the Bank Holding 
Company Act, investments as low as 5 percent can trigger 
affiliate status.) The so-called goal of the Volcker Rule was 
designed to limit risks at insured depositories so that banks 
wouldn't be using Government insured deposit funds to 
``gamble'' through proprietary trading or fund investing. But 
it seems that in reality, the rule will cover all sorts of 
industrial and commercial companies just because they are in 
some way ``affiliated'' with a depository. Similarly, the rule 
would cover a company that makes a large investment in another 
company that controls a depository, dissuading these type of 
strategic investments for fear of the investor becoming 
``infected'' with the Volcker Rule.
    Does it make any sense to apply the full restrictions and 
regulatory requirements to nonfinancial companies?
    What can your agencies do in the regulations, particularly 
regarding your standards for determining what is an 
``affiliated'' company, to make sure that the Volcker Rule does 
not burden nonfinancial companies in a way that was completely 
unintended by Congress?

A.5. Section 619 by its terms applies to any affiliate or 
subsidiary of any company that controls an insured depository 
institution. See 12 U.S.C. 1851(h)(l). In formulating the 
proposed rule, the Agencies sought to limit the potential 
impact of the proposed rule on banking entities that engage in 
little or no activity prohibited by the Volcker Rule provisions 
of the Dodd-Frank Act, including nonfinancial companies that 
meet the definition of banking entity. In particular, the 
Agencies proposed to reduce the effect of the proposed rule on 
these banking entities by limiting the application of the 
reporting, record keeping, and the compliance program 
requirements of the proposed rule, to those banking entities 
that engage in little or no covered trading activities or 
covered fund activities and investments. The Agencies also 
requested comment on whether an alternative definition of 
banking entity would be more effective in light of the language 
and purpose of the statute, the costs and burdens associated 
with the proposal, and any significant alternatives that would 
minimize the impact of the proposal on smaller, less-complex 
banking entities. The Federal Reserve will carefully consider 
the public comments received on these points and take those 
comments into account in crafting a final rule consistent with 
the statute.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR HAGAN
                     FROM ELISSE B. WALTER

Q.1. Companies form joint ventures and wholly owned 
subsidiaries in order to engage in ordinary course investing 
and lending--including making extensions of credit, providing 
internal funding within an organization, and hedging risks. 
Such transactions should not be disallowed simply because they 
are made through a subsidiary that relies on the exclusion 
contained in section 3(c)(1) or 3(c)(7) of the Investment 
Company Act.
    Corporate subsidiaries allow these normal corporate 
activities to be properly overseen within the larger corporate 
structure, allow nonaffiliated companies to partner to spread 
risk beyond a single entity, and help reduce risk.
    The proposed rule provides some recognition that banking 
entities form joint ventures and wholly owned subsidiaries in 
order to engage in ordinary course investing and lending and 
acknowledges that forcing companies to divest of these entities 
would not achieve any reduction in risk.
    I appreciated that in our December 6, 2011, Dodd-Frank 
Oversight hearing, Chairman Schapiro acknowledged that the 
agencies sought to create exemptions there for joint ventures 
that are ``operating companies or vehicles that are used to 
merge an entity with or into a banking entity or its 
affiliates.'' However, the proposed rule still appears to leave 
certain questions:
    A. The Volcker rule was clearly not intended to disrupt 
ordinary course investing and lending activities without an 
offsetting reduction in risk to taxpayers and depositors.

    Why should these activities be disallowed or 
        significantly impaired simply because they are made 
        through a corporate subsidiary?

    It seems indisputable that conducting these 
        transactions through a corporate subsidiary permits 
        proper oversight, spreads risk beyond a single entity 
        and reduces the risk to the larger corporate entity by 
        any individual transaction. Accordingly, is it possible 
        that the elimination of these structures could increase 
        risk at the institutions the rule is intended to 
        protect?

    B. The proposed rule provides exceptions for on-balance 
sheet, wholly owned subsidiaries that provide liquidity 
management services. Is it correct that this exception covers a 
small fraction of the wholly owned subsidiaries that would 
suffer disruption under the rule?
    C. The proposed rule makes exceptions to the prohibitions 
contained in the Volcker rule instead of simply removing these 
corporate structures from the definition of ``covered funds.'' 
This approach leaves these entities subject to the prohibition 
on ``covered transactions,'' as defined in Section 23A of the 
Federal Reserve Act, without incorporating any of the 
provisions in Section 23A that provide exemptions from the 
prohibitions in that section for certain types of covered 
transactions.

    Wouldn't this approach, as a practical matter, 
        render the excepted entities largely useless, in effect 
        allowing the maintenance of the entity but prohibiting 
        the entity from conducting business transactions within 
        the larger corporate structure?

    Wouldn't the better approach be for the agencies to 
        determine that these corporate vehicles--which look and 
        act nothing like a hedge fund or private equity fund--
        simply are not ``covered funds'' in the first place?

A.1. The proposed definition of covered fund adheres closely to 
the statutory text and includes vehicles that rely solely on 
the exclusion in section 3(c)(1) or (7) of the Investment 
Company Act. To the extent that a corporate vehicle relies 
solely on one of these exclusions, it would be a covered fund 
under the proposed rule.
    The proposed rule recognizes that banking entities may 
engage in traditional banking activities through the use of 
vehicles that rely on the exclusions in sections 3(c)(1) and 
(7), but that do not raise the safety and soundness concerns 
the statute was intended to address. Therefore, the proposal 
permits a banking entity to invest in or sponsor certain wholly 
owned subsidiaries, joint ventures and acquisition vehicles. 
However, as you point out, transactions between the banking 
entity and these structures would be subject to Section 23A of 
the Federal Reserve Act--a consequence of the agencies' 
decision to closely track the statute.
    The questions you have raised also were identified by 
commenters on the proposed rule. The SEC will carefully 
consider these comments before moving forward with 
implementation of the Volcker Rule.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR TOOMEY
                     FROM ELISSE B. WALTER

Q.1. The proposed Volcker Rule applies to all companies that 
own an insured depository, and all subsidiaries and affiliates. 
In addition to traditional banks and bank holding companies, 
the rule seems to fully cover commercial companies that own a 
thrift or an industrial loan company, as well as all of the 
companies in which these covered entities may have a 
significant investment that makes the recipient of the 
investment an ``affiliate.'' (Under the Bank Holding Company 
Act, investments as low as 5 percent can trigger affiliate 
status.) The so-called goal of the Volcker Rule was designed to 
limit risks at insured depositories so that banks wouldn't be 
using Government insured deposit funds to ``gamble'' through 
proprietary trading or fund investing. But it seems that in 
reality, the rule will cover all sorts of industrial and 
commercial companies just because they are in some way 
``affiliated'' with a depository. Similarly, the rule would 
cover a company that makes a large investment in another 
company that controls a depository, dissuading these types of 
strategic investments for fear of the investor becoming 
``infected'' with the Volcker Rule.
    Does it make any sense to apply the full restrictions and 
regulatory requirements to nonfinancial companies?
    What can your agencies do in the regulations, particularly 
regarding your standards for determining what is an 
``affiliated'' company, to make sure that the Volcker Rule does 
not burden nonfinancial companies in a way that was completely 
unintended by Congress?

A.1. As you know, section 13 of the Bank Holding Company Act 
(BHC Act), commonly referred to as the ``Volcker Rule,'' 
applies to any ``banking entity.'' The term ``banking entity'' 
is defined in section 13(h)(1) of the BHC Act to include any: 
(i) insured depository institution (other than certain limited 
purpose trust institutions), (ii) company that controls an 
insured depository institution, (iii) company that is treated 
as a bank holding company for purposes of section 8 of the 
International Banking Act of 1978, and (iv) affiliate or 
subsidiary of any of the foregoing entities. Section 13 of the 
BHC Act does not separately define the terms ``affiliate'' or 
``subsidiary,'' but the BHC Act includes definitions of these 
terms in section 2 of the Act. The agencies proposed to 
incorporate these existing definitions of ``affiliate'' and 
``subsidiary'' in the Volcker proposal.
    The SEC has rule-writing authority for the types of 
``banking entities'' for which we are the ``primary financial 
regulatory agency,'' as defined in section 2(12)(B) of the 
Dodd-Frank Act, which includes SEC-registered broker-dealers, 
SEC-registered investment advisers, and SEC-registered 
security-based swap dealers. Thus, the SEC's proposed rule 
would not cover commercial companies that own a thrift or an 
industrial loan company.
    That said, the Commission and staff appreciate the many 
detailed comment letters we have received concerning these 
important issues and will continue to carefully review and 
analyze the comment letters as we consider further action on 
the proposal.
              Additional Material Supplied for the Record
LETTER SUBMITTED BY SENATOR MERKLEY FROM THIERRY PHILIPONNAT, SECRETARY 
                         GENERAL, FINANCE WATCH

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