Remarks by Treasury Secretary Paulson

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We have similar facilities for other asset classes, such as the Depository Trust and Clearing Corporation (DTCC).

Such an industry cooperative must capture all significant processing events over the entire lifecycle of trades. It must have the capability to accommodate all major asset classes and product types. It must be operationally reliable and scaleable, and use automation to promote standardization that will create efficiency and moderate excessive complexity.

In addition, the infrastructure must have a flexible and open architecture for interoperability, upgrades, and improvements. The facility also should enhance counterparty risk management through netting and collateral agreements by promoting portfolio reconciliation and accurate valuation of trades.

Some steps can be implemented quickly; others will take longer, but we need movement on all. With the continued leadership of the Federal Reserve Bank of New York, we also need to work with market participants to establish ambitious standards for trade data and for accurate and timely trade resolution. The industry also should incorporate, without delay, cash settlement protocol into standard documentation. We don't need good ideas sitting on the shelf; we need good ideas put into practice. All market participants, not just the dealer community, need to participate in the solution.

Supervisors, PWG, and Treasury

The PWG recommendations would not be complete unless they also included steps for regulators, including PWG member agencies. Regulators should take steps to ensure that investors improve due diligence and have greater awareness of risk characteristics. To further support this, regulators should work closely with FASB, to review accounting issues and implement policies that ensure aggregation of exposure across business lines and rigorous valuation of instruments and exposures.

Supervisors and regulators of global and U.S. institutions must closely monitor to ensure that institutions address risk management weaknesses and take action as needed. Regulators should also review capital requirements, as this plays such an important role in financial institution behavior. To this end, the Basel Committee on Banking Supervision should review the Basel II capital requirements for resecuritizations and off-balance sheet commitments, and promptly complete its liquidity management guidance update.

Efforts in Addition to These Recommendations

Today's recommendations are part of a much larger effort that spans multiple fronts. Treasury has commissioned a study on the cause of financial restatements. As I mentioned earlier, there is a financial regulatory review that will be released as a regulatory blueprint in the weeks ahead. We also have private sector committees developing best practices for investors and hedge fund managers and anticipate publishing guidelines for public comment next month.

Investors in vibrant capital markets require accurate financial statements, and that can only occur with a vibrant accounting profession. Recognizing the challenges facing this industry, last spring the Treasury Department formed an advisory committee to review the sustainability of the auditing profession. The committee will report its final recommendations this summer.

Together, these additional committees and efforts will provide further guidance to enhance market integrity, investor protection and mitigate systemic risk.

Conclusion

We have learned many lessons from this period and we may learn still more as events unfold. Today I have summarized the results of a great deal of hard work by the PWG member agencies. We have laid down objectives and recommendations, which form a good start. Although we haven't yet worked completely through this period of market turmoil, and that is our highest priority today, it is not too early to suggest appropriate policy responses.

No silver bullet exists to prevent past excesses from recurring. In these remarks, I have focused a great deal on challenges related to excessive complexity, but complexity is only one of many issues we face. I believe today's recommendations put us on the path towards more transparent, better-functioning, and better-managed markets, which are integral to attracting and allocating capital to fuel our economic growth and prosperity. We will continue to re-assess conditions, monitor progress, put forward new recommendations and take additional steps as necessary.