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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 

( 

Available at: http://www.fdsys.gov/ 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

TIM JOHNSON, South Dakota, Chairman 

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

ROBERT MENENDEZ, New Jersey 

DANIEL K. AKAKA, Hawaii 

SHERROD BROWN, Ohio 

JON TESTER, Montana 

HERB KOHL, Wisconsin 

MARK R. WARNER, Virginia 

JEFF MERKLEY, Oregon 

MICHAEL F. BENNET, Colorado 

KAY HAGAN, North Carolina 

RICHARD C. SHELBY, Alabama 

MIKE CRAPO, Idaho 

BOB CORKER, Tennessee 

JIM DEMINT, South Carolina 

DAVID VITTER, Louisiana 

MIKE JOHANNS, Nebraska 

PATRICK J. TOOMEY, Pennsylvania 

MARK KIRK, Illinois 

JERRY MORAN, Kansas 

ROGER F. WICKER, Mississippi 

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)

(1) 

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 crossborder 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 

2 

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. 

3 

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 DoddFrank, 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 

4 

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 DoddFrank, regulators have done little to instill confidence that DoddFrank 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 

5 

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 

6 

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, 

7 

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, includVerDate Nov 24 2008 09:45 Jan 16, 2013 Jkt 048080 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\03-22 ZDISTILLER\32212.TXT JASON
8 

ing investors, market participants, and foreign regulators, an opportunity to consider as an integrated whole our approach to crossborder 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. 

9 

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 crossborder 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 DoddFrank 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. 

10 

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 crossborder 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 

11 

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 DoddFrank 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 someVerDate Nov 24 2008 09:45 Jan 16, 2013 Jkt 048080 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\03-22 ZDISTILLER\32212.TXT JASON
12 

times 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 DoddFrank 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 

13 

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 

14 

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 

15 

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 

16 

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, 

17 

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 DoddFrank 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 

18 

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 DoddFrank 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? 

19 

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 pushout 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 

20 

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 

21 

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. 

22 

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 

23 

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. 

24 

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 

25 

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 secuVerDate Nov 24 2008 09:45 Jan 16, 2013 Jkt 048080 PO 00000 Frm 00029 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\03-22 ZDISTILLER\32212.TXT JASON
26 

rity, 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. 

27 

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 mortgagebacked 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 

28 

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? 

29 

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 

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30 

tions, 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. 

31 

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 

32 

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. 

33 

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 sysVerDate Nov 24 2008 09:45 Jan 16, 2013 Jkt 048080 PO 00000 Frm 00037 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\03-22 ZDISTILLER\32212.TXT JASON
34 

temic 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. 

35 

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.] 

36 

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:] 

37 

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. 

38 

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 crossborder recovery and resolution plans by the end of 2012; develop criteria to improve 

the ‘‘resolvability’’ of systemically important institutions; and negotiate institutionspecific 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, GerVerDate Nov 24 2008 09:45 Jan 16, 2013 Jkt 048080 PO 00000 Frm 00042 Fmt 6621 Sfmt 6621 L:\HEARINGS 2012\03-22 ZDISTILLER\32212.TXT JASON
39 

many, 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 risktaking 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 

40 

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 DoddFrank 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 sysVerDate Nov 24 2008 09:45 Jan 16, 2013 Jkt 048080 PO 00000 Frm 00044 Fmt 6621 Sfmt 6621 L:\HEARINGS 2012\03-22 ZDISTILLER\32212.TXT JASON
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temically 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 riskweighting 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 DoddFrank 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 signifiVerDate Nov 24 2008 09:45 Jan 16, 2013 Jkt 048080 PO 00000 Frm 00045 Fmt 6621 Sfmt 6621 L:\HEARINGS 2012\03-22 ZDISTILLER\32212.TXT JASON
42 

cant 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 DoddFrank 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 

43 

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. 

44 

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 

45 

1G20 Meeting, Pittsburgh, 25 September 2009. Available at http://www.treasury.gov/resource-center/international/g7-g20/Documents/pittsburghlsummitlleaderslstatementl250909.pdf. 2Dodd-Frank Wall Street Reform and Consumer Protection Act §752 (Pub. L. 111-203, H.R. 

4173) (2010). 3Dodd-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. 5The 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. 

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

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

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. 

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. 

46 

7 Available at http://www.financialstabilityboard.org/publications/rl101025.pdf. 8G20 Leaders’ Meeting, Seoul, Korea, 12 November 2010. Available at http:// 

www.treasury.gov/resource-center/international/Documents/ 

1%20%20FINAL%20SEOUL%20COMMUNIQUE.pdf. 9 Available at http://www.iosco.org/library/pubdocs/pdf/IOSCOPD345.pdf. 10 Available at http://www.iosco.org/library/pubdocs/pdf/IOSCOPD368.pdf. 11 Available at http://www.iosco.org/library/pubdocs/pdf/IOSCOPD366.pdf. 12 Available at http://www.iosco.org/library/pubdocs/pdf/IOSCOPD350.pdf. 

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. 

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

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. 

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). 

The new standards (referred to as principles) presented in the FMI Report are designed to ensure that the essential payment and settlements infrastructure supVerDate Nov 24 2008 09:45 Jan 16, 2013 Jkt 048080 PO 00000 Frm 00050 Fmt 6621 Sfmt 6621 L:\HEARINGS 2012\03-22 ZDISTILLER\32212.TXT JASON
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13Summary 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. 14 Available at http://www.iosco.org/library/pubdocs/pdf/IOSCOPD347.pdf. 

porting 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. 

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 regVerDate Nov 24 2008 09:45 Jan 16, 2013 Jkt 048080 PO 00000 Frm 00051 Fmt 6621 Sfmt 6621 L:\HEARINGS 2012\03-22 ZDISTILLER\32212.TXT JASON
48 

15 Available at http://www.sec.gov/rules/concept/2010/34-61358fr.pdf. 

ular basis. We continue to work internationally to facilitate dialogue about systemic 

risk among securities regulators as well as with the broader international regulatory community. 

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. 

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 

49 

16See, Securities Exchange Act Release No. 64976 (July 27, 2011), 76 FR 46960 (August 3, 

2011). 17See, Securities Exchange Act Release No. 62174 (May 26, 2010), 75 FR 32556 (June 8, 

2010). 18See, http://www.iosco.org/library/pubdocs/pdf/IOSCOPD361.pdf 

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. 

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. 

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 crossborder 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. 

50 

19See, Cooperative Arrangements With Foreign Regulators at http://www.sec.gov/about/offices/oia/oialcooparrangements.shtml. 20 Available at http://www.iosco.org/library/pubdocs/pdf/IOSCOPD322.pdf. 

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 dayto-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. 

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 crossborder cooperative relationships with one another and has proven helpful in our ongoing efforts to expand the number of bilateral agreements focused on supervision. 

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 conVerDate Nov 24 2008 09:45 Jan 16, 2013 Jkt 048080 PO 00000 Frm 00054 Fmt 6621 Sfmt 6621 L:\HEARINGS 2012\03-22 ZDISTILLER\32212.TXT JASON
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21SEC 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. 

ducted 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 marche ́s 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

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 counVerDate Nov 24 2008 09:45 Jan 16, 2013 Jkt 048080 PO 00000 Frm 00055 Fmt 6621 Sfmt 6621 L:\HEARINGS 2012\03-22 ZDISTILLER\32212.TXT JASON
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tries 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 inVerDate Nov 24 2008 09:45 Jan 16, 2013 Jkt 048080 PO 00000 Frm 00056 Fmt 6621 Sfmt 6621 L:\HEARINGS 2012\03-22 ZDISTILLER\32212.TXT JASON
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1The 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. 

crease 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. 

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 

54 

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 

55 

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 FDICinsured 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. 

56 

2The Basel Committee also established an ‘‘empty bucket’’ with a 3.5 percent additional capital charge designed to discourage banks from becoming more systemic. 

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 riskbased 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 riskweighted 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

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, 

57 

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. 

58 

* 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. 

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. 

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 

59 

1 BCBS, International Convergence of Capital Measurement and Capital Standards (July 

1988), available at: http://www.bis.org/publ/bcbs04a.htm. 2 BCBS, ‘‘International Convergence of Capital Measurement and Capital Standards: A Revised Framework’’, (June 2006), available at: http://www.bis.org/publ/bcbs128.htm. 3The 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). 

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

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). 

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. 

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 

60 

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 offbalance 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 DoddFrank 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. 

61 

5Testimony 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. 

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. 

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 

62 

6 ‘‘Key Attributes of Effective Resolution Regimes for Financial Institutions’’, Nov. 4, 2011, 

available at: http://www.financialstabilityboard.org/publications/rl111104cc.pdf. 

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. 

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 

63 

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 DoddFrank 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 PayVerDate Nov 24 2008 09:45 Jan 16, 2013 Jkt 048080 PO 00000 Frm 00067 Fmt 6621 Sfmt 6621 L:\HEARINGS 2012\03-22 ZDISTILLER\32212.TXT JASON
64 

7Section 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. 

ment 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.’’ 

65 

8The 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. 

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. 

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 imVerDate Nov 24 2008 09:45 Jan 16, 2013 Jkt 048080 PO 00000 Frm 00069 Fmt 6621 Sfmt 6621 L:\HEARINGS 2012\03-22 ZDISTILLER\32212.TXT JASON
66 

poses 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 

67 

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 standardsetting 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 DoddFrank 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 DoddFrank 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 

68 

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 

69 

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. 

70 

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? 

71 

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? 

72 

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 

73 

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 selfexecuting 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/2011l0209a.htm. 

In its final rule establishing the conformance periods, the Federal 

Reserve explained that it would revisit the conformance period rule 

74 

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 

75 

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. 

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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 

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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 

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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. 

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ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

LETTER SUBMITTED BY SENATOR MERKLEY FROM THIERRY 

PHILIPONNAT, SECRETARY GENERAL, FINANCE WATCH 


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E.U. banking sector recently appointed by Commissioner Barnier and led by 

Erkki Liikanen. American determination to move these issues forward has 

been fundamental, and the ' Dodd-Frank Act began building the foundation for 

a safer, more stable financial system. It is essential that you press forward 

with these urgent reforms. 

It is true that as we move toward a more modern regulatory regime, some 

segments of the industry will have to change. Certainly, those who must 

change have been vocal in letting legislators and regulators know of their 

concerns. They have done so in Europe as well as the United States, and 

their arguments have been the same in both places. In the U.S., they say the 

Europeans are not following your lead and U.S. rules will put U.S. firms at a 

disadvantage. In the E.U., we hear that the U.S. did not adopt Basel II and 

will not finalize their other rules and that Basle III will put European banks at a 

competitive disadvantage as it favors the "American banking model". You 

know as well as I that these arguments do not stand - unless industry 

succeeds in convincing regulators and legislators on both sides of the Atlantic 

to slow down or stop needed reform. I strongly urge you not to let that 

happen. 

Certain banks in the U.S. augment their arguments with a threat of flight to 

Europe or even Asia, where supposedly lower standards and bigger 

opportunities for risk-taking would make for a more attractive banking 

environment. These threats fool only the uninformed for a number of 

different reasons: firstly, certainly for Europe, the assertion of lower regulatory 

standards is not founded; secondly, major banks take on a national 

characteristic, and their ability to pick up and flee to a foreign capital is highly 

limited; finally, it is ironic to also hear the very same argument put forward by 

banks to European authorities when they threaten to leave the E.U. to 

operate exclusively from the U.S. or Asia. Despite their public threats, big 

banks simply cannot extract themselves from their national backers. 

Let me also emphasize that the E.U. and the U.S. can be on the same page 

without reading exactly the same lines. Our two jurisdictions have long had 

somewhat different approaches to regulating a range of financial activities -

the most notable example being the period during the Glass-Steagall Act 

enforced separation of investment banking from commercial banking. 

Academic research suggests this separation actually helped make U.S. 

investment banks more competitive. So those who would argue that certain 

differences in approaches to regulation will make one nation's banks less 

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competitive (whether it be the U.S. from the Volcker Rule, Switzerland from 

much higher capital requirements and contingent capital, or the U.K. with 

Vickers Commission ring fencing) should carefully consider historical 

precedent. Moreover, we are convinced that the enormous economic and 

social cost of financial crises, and therefore the benefit of financial stability, 

should also be considered. 

Indeed, industry's arguments continue to overlook the competitive 

advantages arising from a sound banking sector. If market disclosure is 

properly robust, well-capitalized banks that avoid high-risk activities and 

conflicts of interest will attract more demand from investors, customers, and 

depositors. Corporate treasurers will think twice before putting large deposits 

with banks that take high risks, and investors will think twice before 

conducting trades with institutions that bet against them. 

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 non-bank 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 

dire consequences for the broader economy, but also putting intense 

pressure on European regulators not to address the issue of structural reform 

of the E.U. banking sector. 

From my work with European regulators, I am convinced that Europe has no 

intention of becoming a safe haven for banks that engage in unwise and 

inefficient risk-taking. On the contrary, provisions such as the Volcker Rule 

offer a useful model for us to build on as Europe, too, seeks to strengthen its 

banks and safeguard its economies. Indeed, despite what you may hear from 

some banks, there is now a real push in Europe to join the United States in 

structurally reforming our financial system. As clearly stated in its mission 

statement, the High-level Expert Group on structural reform of the E.U. 

banking sector will be carefully studying the work you are doing in the U.S. on 

the Volcker Rule and similar efforts in the U.K. and will be making 

recommendations on reforms of E.U. banking structures that could contribute 

to the objective of establishing a safe, stable and efficient banking system 

serving the needs of citizens and of the E.U. economy. This is a topic that 

Finance Watch will be following very closely. 

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The legislative and regulatory process in Europe has sometimes been 

described as being slower than in the U.S .. The reality is that. due to a 

different institutional and legal environment. it takes a different form. I would 

also note that nearly two years since the passage of the Dodd-Frank Act. 

many of your most critical reforms are yet to be finalized by the regulatory 

agencies when the E.U. has already adopted a number of important 

legislations. I should hope that Europe does not beat America to the finish 

line as it did with Basel II. In conclusion. I would like to make mine the advice 

delivered by Commissioner Bamier during a speech in Washington in 2011: "I 

have heard calls here in the United States that the Dodd-Frank 

implementation should be postponed or weakened.... Delay is not the 

answer. Europe is committed. We will deliver. And I call on the United States 

to do the same." 

Best regards. 

Thierry Philipponnat 

Secretary General 

Finance Watch 

cc: Members of the Senate Banking Committee 

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