CFTC CHAIRMAN MASSAD'S REMARKS BEFORE GLOBAL EXCHANGE AND BROKERAGE CONFERENCE

FROM:  U.S. COMMODITY FUTURES TRADING COMMISSION 

Remarks of Chairman Timothy Massad before the Global Exchange and Brokerage Conference (New York)

June 3, 2015

As Prepared For Delivery

Thank you for inviting me today, and I thank Rich for that kind introduction. It’s a pleasure to be here.

Next month, we will observe the fifth anniversary of the passage of the Dodd-Frank Act. As you know, this law made dramatic changes to our regulatory system in response to the worst financial crisis since the Great Depression. In particular, it aimed to bring transparency and oversight to the over-the-counter swaps market, and gave the CFTC primary responsibility to accomplish that task.

The timing of this speech is significant to me in another way, as it was exactly one year ago today that I was confirmed by the Senate as chairman of the CFTC. So in light of those two anniversaries, it seems like a good time to take stock. Where are we in implementing these reforms? Is the new regulatory framework achieving the goals envisioned in Dodd-Frank? And what have we done over the last year in particular to advance those objectives? What are our priorities going forward?

All of you appreciate the important role that the derivatives markets play in our economy. In 2008, however, we saw how the build-up of excessive risk in the over-the-counter swaps market made a very bad crisis even worse. There were many causes of the crisis, but particularly because of that excessive swap risk, our government was required to commit $182 billion just to prevent the collapse of a single company – AIG – because its failure at that time, in those circumstances, could have caused our economy to fall into another Great Depression. Our country lost eight million jobs as a result of the crisis. I spent five years at Treasury helping our nation recover from that crisis – including getting all that money back from AIG. I also had a long career working as a corporate lawyer, which included helping to draft the original ISDA master agreements and advising businesses on all sorts of transactions, including derivatives. So I appreciate both the need for reform and the importance of implementing these reforms in a way that ensures that these markets can continue to thrive and contribute to our economy.

The Dodd-Frank Act enacted the four basic reforms agreed to by the leaders of the G-20 nations to bring transparency and oversight to this market: central clearing of standardized swaps, oversight of the largest market participants, regular reporting, and transparent trading on regulated platforms.

Today that framework is largely in place. The vast majority of transactions are centrally cleared. Trading on regulated platforms is a reality. Transaction data is being reported and publicly available. And we have developed a program for the oversight of major market participants.

There is more work to do in all these areas, as I will discuss in a moment. But as I see it, there are a lot of parallels between where we are today with swaps market reform and what happened with securities market reform in the 1930s and 40s. Coming out of the Great Depression, we created a framework for securities regulation and trading which proved tremendously successful. Many of its mandates were revolutionary at the time and therefore quite controversial. When the Securities Exchange Act was passed and required periodic reporting by public companies, the President of the New York Stock Exchange said it was “a menace to national recovery.” History has proved otherwise. Today, the concept of periodic reporting by public companies is about as controversial as seat belts. Indeed, the basic framework created in the 1930s of disclosure, transparency, periodic reporting and trading on regulated exchanges has been the foundation for the growth of our securities markets.

I believe the swaps market reforms we have put in place are similar. I believe the basic framework is one that will benefit our markets and the economy as a whole for decades to come. Is that framework perfect? No. Is there more to do? Yes. So let’s look at where we are.

Congress required that the rules be written within a year of passage of Dodd-Frank, and the agency worked incredibly hard to meet that goal. Now we are in a phase of making necessary minor adjustments to the rules, which is to be expected with any change as significant as this. And so a priority of mine over the last year has been to do just that: to look at how well the new rules are working and to make adjustments where necessary.

So let me give you a quick big picture view of where we are on each of the four key reforms of the OTC swaps market, as well as what I see as the next steps in each of those areas, and then discuss in more detail a couple of key priorities for the months ahead.

Clearing

First is the goal of requiring central clearing of transactions. This is a critical means to monitor and mitigate risk. Here we have accomplished a great deal. Our rules require clearing through central counterparties for most interest rate and credit default swaps, and the percentage of transactions that are centrally cleared in the swaps markets we oversee has gone from about 15 percent in December 2007 to about 75 percent today. That’s a dramatic change.

Importantly, our rules do not impose this requirement on commercial end-users. Nor do we impose the trading mandate on commercial end-users. And an important priority for me over the last year has been to make sure this new framework as a whole does not impose unintended burdens on commercial end-users. They were not the cause of the crisis or the focus of the reforms. And we want to make sure that they can still use these markets to hedge commercial risk effectively.

What are the next steps when it comes to clearing? First, we must recognize that for all its merits, central clearing does not eliminate risk, and therefore we must make sure clearinghouses are strong and resilient. The CFTC has already done a lot of work in this area. Over the last few years, we overhauled our supervisory framework and we increased our oversight. But there is more to do, and there will be significant efforts taking place, including through international organizations.

We will be looking at stress testing of clearinghouses, and whether there should be international standards for stress testing that give us some basis to compare the resiliency of different clearinghouses. And while we hope never to have to use these tools, we will be looking further at recovery and resolution planning.

You may also know that we are engaged in discussions with Europe on cross-border recognition of clearinghouses. While this issue is taking longer to resolve than I expected, I believe we have narrowed the issues and are making good progress. For those interested, I recently gave a speech to a committee of the European Parliament that describes the issues we are discussing in more detail. I believe my counterpart in these discussions, Lord Jonathan Hill of the European Commission, wants to resolve this soon, as I do, and we are working in good faith toward that end. I also believe we can resolve this without disruptions to the market, and I am pleased that the EC has again postponed capital charges toward that end.

Oversight of Swap Dealers

Let me turn to the second reform area, general oversight of major market players. We have made great progress here as well, as we have in place a regulatory framework for supervision of swap dealers. They are now required to observe strong risk management practices, and they will be subject to regular examinations to assess risk and compliance with rules designed to mitigate excessive risk.

Next steps in this area include looking at the swap dealer de minimis threshold. Under the swap dealer rules adopted in 2012, the threshold for determining who is a swap dealer will decline from $8 billion to $3 billion in December of 2017 unless the Commission takes action. I believe it is vital that our actions be data-driven, and so we have started work on a comprehensive report to analyze this issue. We will make a preliminary version available for public comment, and seek comment not only on the methodology and data, but also on the policy questions as to what the threshold should be, and why. I want us to complete this process well in advance of the December 2017 date so that the Commission has some data, analysis, and public input with which to decide what to do.

Another priority for us over the next few months in the area of general oversight is to finalize our proposal on margin requirements for uncleared swaps. This is one of the most important Dodd-Frank requirements that remains to be finalized, and one of the most important overall. There will always be a large part of the swaps market that is not and should not be centrally cleared, and therefore margin is key to minimizing the risk to our system that can come from uncleared bilateral trades. The proposal applies to swap dealers, in their transactions with one another and their transactions with financial institutions that exceed certain thresholds. As with the clearing and trading mandates, commercial firms are exempted.

We are working closely with the bank regulators on this rule. They have the responsibility to issue rules that apply to swap dealers that are banking entities under their respective jurisdictions, and our rule will apply to other swap dealers. It is vitally important that these rules be as consistent as possible, and we are making good progress in this regard. We are also working to have our U.S. rules be similar to rules being considered by Europe and Japan. I expect that they will be consistent on many major issues.

Reporting

With regard to reporting, the public and regulators are benefiting from a new level of market transparency – transparency that did not exist before. All swap transactions, whether cleared or uncleared, must be reported to registered swap data repositories (SDRs), a new type of entity responsible for collecting and maintaining this information. You can now go to public websites and see the price and volume for individual swap transactions. And the CFTC publishes the Weekly Swaps Report that gives the public a snapshot of the swaps market. This means more efficient price discovery for all market participants. Equally important, this reporting enables regulatory authorities to engage in meaningful oversight, and when necessary, enforcement actions.

While we have much better data today than in 2008, we have a lot more work to do to get to where we want to be. One step is revising our rules to bring further clarity to reporting obligations. Later this summer I expect that we will propose some initial changes to the swap reporting rules for cleared swaps designed to clarify reporting obligations and, at the same time, improve the quality and usability of the data in the SDRs. And we are looking at other possible changes as well to improve the data reporting process and usefulness of the information.

This is also an international effort. There are around two dozen data repositories globally. And there are participants around the world who must report. We and the European Central Bank currently co-chair a global task force that is seeking to standardize data standards internationally. While much of this work is highly technical, it is vitally important to international cooperation and transparency.

We will also make sure participants are taking their obligations seriously to provide us good data in the first place. We have taken, and will continue to take, enforcement action against those who do not.

Transparent Trading

Let me turn to the last reform area, which is trading. Today, trading swaps on regulated platforms is a reality. We have nearly two dozen SEFs registered. Each registered exchange is required to operate in accordance with certain statutory core principles. These core principles provide a framework that includes obligations to establish and enforce rules, as well as policies and procedures that enable transparent and efficient trading. SEFs must make trading information publicly available, put into place system safeguards, and maintain financial, operational, and managerial resources necessary to discharge their responsibilities.

So we are making progress, but here too, there is more work to do. We have been looking at ways to improve the framework, focusing on some operational issues where we believe adjustments can improve trading. We have taken action in a number of areas, including steps to make it easier to execute package trades and correct error trades, and steps to simplify trade confirmations and reporting obligations. We are looking at additional issues pertaining to SEF trading as well. For example, we are planning to hold a public roundtable later this year on the made-available-for-trade determination process, where many industry participants have suggested that the agency play a greater role in determining which products should be mandated for trading and when.

We have also been working to harmonize our trading rules with the rules of other jurisdictions where possible. CFTC staff worked with Australian swap platforms to clarify how they can permit U.S. participation under our trading rules. One platform, Yieldbroker, confirmed that it intends to apply for relief and achieve compliance by this fall. This is an important step and we are open to working with other jurisdictions and platforms.

Responding to Changes in the Market

I began by saying that the approaching five year anniversary of Dodd-Frank was a good time to take stock of what has been accomplished in terms of implementing the reforms required by the law. Equally important to consider is: How have the markets changed over the last five years? How does that impact what we are doing? After all, there is always the danger that as regulators, we focus on fighting the last war.

It is beyond the scope of my speech today to discuss all the significant changes to markets over the last few years, or how regulatory actions may be affecting market dynamics and costs. These are important, complex subjects, but they are well beyond the time I have today to explore. Today, however, I’d like to take a few minutes more to just note one major way in which our markets are changing, and how that is affecting our work.

That change has to do with the increased use of electronic and automated trading. Some speak of “high frequency trading” or HFT, a classification that is hard to define precisely. I will focus on automated or algorithmic trading. Over the last decade, automated trading has increased from about 25 percent to well over 50 percent of trading in U.S. financial markets. Looking specifically at the futures markets, almost all trading is electronic in some form, and automated trading accounts for more than 70 percent of trading over the last few years.

I commend to you a recent paper by our Chief Economist office which gives some interesting data on our markets. This looked at over 1.5 billion transactions across over 800 products on CME over a two year period. It found that the percentage of automated trading in financial futures – such as those based on interest rates, currencies or equity indices – was 60 to 80 percent. But even among many physical commodities, there was a high degree of automated trading, such as 40 to 50 percent for many energy and metals products. The paper also provides a lot of rich detail on what types of trades are more likely to be automated.

The increase in electronic, and particularly automated, trading has changed what we do, and how we do it. Let me say at the outset that the increased use of electronic trading has brought many benefits, such as more efficient execution and lower spreads. But it also raises issues. These are somewhat different in the futures markets than in the cash equity markets where they have received the most attention, in part because typically in the futures market, trading of a given product occurs on only one exchange. Nevertheless, the increased use of automated, algorithmic trading poses challenges for how we execute our responsibilities, and it raises important policy questions. For example, it creates profound changes in how we conduct surveillance. The days when market surveillance could be conducted by observing traders in floor pits are long gone. Today, successful market surveillance activities require us to have the ability to continually receive, load, and analyze large volumes of data. We already receive a complete transactions tape, but effective surveillance requires looking at the much larger sets of message data—the bids, offers, cancelations which far outnumber consummated transactions.

And consider that we oversee the markets in a wide range of financial futures products based on interest rates, currencies and equities, as well as over 40 physical commodity categories, each of which has very different characteristics.

Surveillance today requires a massive information technology investment and sophisticated analytical tools that we must develop for these unique environments. And we must have experienced personnel who understand the markets we oversee, who can discern anomalies and patterns and who have the experience, judgment, and skills to know when to investigate further.

The increased use of high speed and electronic trading has impacted our enforcement activity as well. We have recently brought several spoofing cases, where market participants used complex algorithmic strategies to generate and then cancel massive numbers of bids or offers without the intention of actually consummating those transactions in order to affect price. Some have asked, does that mean I cannot cancel a trade without fear of enforcement coming after me? Hardly. Intent is a key element that we must prove. There is a difference between changing your mind in response to changed market conditions and canceling an order you previously entered, and entering an order that you know, at the time, you have no intention of consummating.

The Commission is also looking at automated trading and specifically the use of algorithmic trading strategies from a policy perspective. We have adopted rules requiring certain registrants to automatically screen orders for compliance with risk limits if they are automatically executed. The Commission has also adopted rules to ensure that trading programs, such as algorithms, are regularly tested. In addition, the Commission issued a Concept Release on Risk Controls and System Safeguards for Automated Trading Environments. We received substantial public comment, and we are currently considering what further actions may be appropriate.

Although we have not made any decisions yet, let me note a few areas we are thinking about. Traditionally, our regulatory framework has required registration by intermediaries handling customer orders and customer funds. In addition, proprietary traders who were physically present on the floor of the exchange and active in the pits had to register as floor traders. Today, the pits are gone, and physical presence on the floor of an exchange is no longer a relevant concept. We are considering whether the successors to those floor traders – proprietary traders with direct electronic access to a trading venue – should be subject to a registration requirement if they engage in algorithmic trading.

We are considering the adequacy of risk controls, and in particular pre-trade controls, with respect to algorithmic trading. The exchanges, and many participants themselves, have put controls in place. The question is whether our rule framework should set some general principles to require measures such as message and execution throttles, kill switches, and controls designed to prevent erroneous orders. We also may consider standards on the development and monitoring of algorithmic trading systems.

We are also considering who should have the responsibility to implement controls. This may include persons using algorithmic trading strategies as well as the exchanges. But what about the role of clearing members who do not see the orders of customers using direct electronic access? Today, our rules require exchanges that permit direct electronic access to have systems to facilitate the clearing member’s management of the financial risk of their direct access customers. Should there be a similar requirement for the exchanges to facilitate the management by clearing members of risks related to those customers’ use of algorithmic trading?

We are looking self-trading – that is, when orders from distinct trading desks or algos from the same firm transact – and its potential implications and effects on the markets. In addition, we are looking at the adequacy of disclosure by exchanges of market maker and incentive programs.

Conclusion

I said at the outset that where we are today in the implementation of reforms of the swaps market has many parallels to the reforms of the securities market after the Great Depression. The framework created then – including public disclosure and regular reporting, and trading on regulated platforms – was controversial at the time. But it has proven to not only be effective, it has provided a vital foundation on which our securities markets grew to become the most dynamic in the world. I believe we can achieve the same result with the derivatives market. We must always be attentive to how the market is changing, and adapt core principles to those changes. I look forward to working with you to achieve that goal.

Last Updated: June 3, 2015

U.S. TREASURY OFFICIAL'S REMARKS ON WALL STREET REFORM

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

ETHIOPIA'S DIRECTOR OFFICE OF INTERNATIONAL AFFAIRS SPEAKS

The following is an excerpt from the SEC website:

Risk Taking -- Banks & Markets
by
Ethiopis Tafara
Director
Office of International Affairs
U.S. Securities and Exchange Commission
G20 NEW FINANCIAL LANDSCAPE WORKSHOP
Measures to Promote Competition, Efficiency and Innovation
7 July 2011
Paris, France
Thank you, Malcolm (Edey) for that kind introduction.

First, permit me to give the SEC's standard disclaimer- what I say represents my own views and not necessarily the views of the Commission or other members of the Commission staff.

The topic for this panel is measures to promote competition, efficiency and innovation. I'd like to focus my remarks on innovation, because I think it is the most likely of these three to suffer from our current regulatory trends. More particularly, I'd like to focus on real as opposed to financial innovation.

What are the prerequisites of real innovation? First and foremost, it requires the presence of entrepreneurs, who can bring together technology and resources in new ways, to meet evolving needs and wants, in the form of a viable business model. This, in turn, requires a rare combination of technical savvy, extraordinary boldness and risk taking. After all, it is something new that is being generated here. There are no studies to show you how to do it. There is no metric that can tell you these are risks worth taking. No one has done it before this way. That is the point. It is innovation.

Of all these ingredients to innovation, perhaps the most important is boldness.

The philosopher of science, Karl Popper, argued that there was a dynamic "logic" to scientific discovery, which entailed an interactive series of bold conjectures, criticism, response to criticism and further conjecturing. The "logic" of innovation is much the same. Entrepreneurs put forth the bold conjectures-in the form of their innovative vision. The market, of course, provides the criticism; the product or service is purchased only if it effectively fulfills needs or wants, and the enterprise is only profitable if it delivers this product or service with efficiency. If the market rejects the entrepreneur's vision, she can adjust and perfect it in light of the market's "criticism". Alternatively, if the entrepreneur fails to adjust her model, her enterprise will fail and other businesses will fill the void. The possibility-and even the likelihood-of failure is an intrinsic part of the process. Just as science evolves through conjectures and refutations, real innovation is driven by an interactive dance of bold ideas and the market's tough, pointed criticism.

And innovation, whether in the form of green or biotechnology, is critical to our future prosperity. As you may have noticed, I have failed to mention one of the key ingredients to innovation, and that is, of course, finance. In the wake of the recent financial crisis, our regulatory reform efforts have-quite properly-focused upon the reduction of systemic risk. Among the regulatory challenges here, I believe, is the grave danger that our efforts to reduce systemic risk may result in a reduction of the kind of risk taking that drives real innovation. This could result in substantially reduced economic growth-foregone economic growth that might, in fact, serve to address current economic straits.

Our policy challenge is the following: how do we ensure that finance continues to find its way to the kind of productive risk taking that I have described, while at the same time we effectively address the instabilities identified in the recent financial crisis? More specifically, we must ask ourselves: what is the right blend of regulatory tools to meet this challenge?

Traditionally, banking regulators have focused on prudential regulation, while securities regulators have focused on disclosure, transparency and enforcement. Where should we extend the traditional tools of the banking regulator and where should we extend those of the securities regulator?

There is little denying that the recent financial crisis, while involving all types of market participants, was essentially a banking crisis. Although unusual perhaps in the number of non-banks that undertook bank-like activities and certainly unique in that securitized financial products were the instigators, the pattern of the crisis differed from other banking crises only in its depth. Financial firms- closely linked to each other through leverage and counterparty arrangements-exposed themselves to too much risk. And when that risk became apparent, there was a "run" on these financial institutions.

As the heart of the problem is the maturity mismatch that characterizes traditional banking. The dangers of a maturity mismatch were amplified, however, by the potential for increased volatility on the asset side of the balance sheet attributable to the "embedded leverage" inherent in certain securitized products. Potential volatility was further increased through derivative products.

Now, clearly, it is important that we understand why these widely varying financial firms were acting like traditional banks. Moreover, I think most of us would agree that when systemically risky financial firms take on the role of banks, they should face the same kind of prudential regulation as do banks. But we must pause here and ask ourselves: if all major sources of financing today are to be treated as banks - with more or less one-size-fits-all capital requirements and conservative risk measurement mandates - where is the financing to come from for the next wave of high-risk/high-payoff innovations? Who will finance the next great development in transportation, or medicine, or artificial intelligence?

If we look back at the many fundamental economic innovations of the 20th century-Aircraft, antibiotics, the Internet, the transistor and semiconductor, the mass produced automobile and the plastics that Mr. McGuire told us to invest in the movie, "The Graduate"-we see relatively little bank financing, at least not at the inception of each innovation's lifecycle. This is unsurprising because, as we know, banks are the archetype of systemically risky financial entities. Consequently, banking regulation, when it is done properly, imposes a certain degree of financial conservatism.

But we must ask: as we reform our markets in light of the recent crisis, where will the financing come from for the truly risky enterprises of the 21st century? This is where the traditional tools of the securities regulator come into play. While banking regulation is designed to control and, to a certain extent, suppress risk taking, securities regulation is, in stark contrast, designed to facilitate it. In the financing of economic pursuits that entail substantial risk, the traditional tools of securities regulators-that is, disclosure, transparency and rigorous enforcement efforts to police fraud and abuse-have a substantial comparative advantage over banking regulatory tools. As mentioned above, failure is an essential part of the innovative process. But that's precisely what the banks should try to avoid.

In our collective efforts to reform our markets in light of the systemic crisis, the danger is that the tools of the banking regulator come to dominate the regulation of capital markets and thereby unintentionally suppress needed real innovation. As regulators, we must look at what capital needs to do to support economic growth. We must be careful to recognize why different avenues for financing exist. We need to recognize why securities regulation has historically differed from banking regulation. As legendary venture capitalist William Draper recently put it in an interview: "Facebook couldn't go to a bank and get a commercial loan to start up a company."

There is much at stake here. If we want to encourage innovation and realize its benefits, financial regulation has to make a space for risk-taking. Only by recognizing the inherent functional differences between capital markets and banking can we succeed in both addressing systemic risk while at the same time spurring economic growth through innovation. Those economies that recognize these differences, and which regulate and supervise accordingly, will grow and prosper and become the leaders in the 21st Century.

Thank you.