Markets Wired

As Prepared for Delivery 

Thank you very much for the opportunity to be here today, and a particular thank you to our hosts, John Williams, Fabiola Ravazzolo, and their team at the Federal Reserve Bank of New York. This conference is a timely and welcome addition to the range of engagements the New York Fed hosts. Foreign exchange markets are critical to so much economic activity, from hedging to trade financing, and they are evolving rapidly. We have come a long way from the days when spot markets were dominant, and the New York Fed has been a positive force at every step along the way. 

Let me state at the outset that these are unusual circumstances in which to be giving a policy speech. I serve as Treasury’s Assistant Secretary for International Finance and was nominated for this role by President Biden. Given the results of the U.S. presidential election, I’ll be ending my service in just a couple of months’ time. But the U.S. cross-border payments agenda is an area where there is significant and broad-based agreement across the public and private sectors, and across both political parties. We need a modern system of payments, guided by strong U.S. international financial leadership. As such, the U.S. cross-border payments agenda has many elements where actions across administrations can build towards shared goals. 

One of these shared goals is to improve the efficiency and safety of the infrastructure that underlies international commerce. Another is to maintain and strengthen the conditions that lead to the important global roles of the U.S. financial sector and the U.S. dollar, with the resulting benefits these bring for governance, our national security, financial stability, and the global economy. We all also aim to have high standards with respect to privacy and the enforcement of anti-money laundering and countering the financing of terrorism (AML/CFT) requirements. 

We are pursuing these goals across three lines of effort. First, we are directly encouraging and participating in responsible payments innovation and experimentation. Second, we are coordinating with the private sector and foreign partners to better align legal, regulatory, and supervisory frameworks, which are the foundations of a more efficient and effective payments system. And third, we are supporting strong international standards and high-quality compliance regimes, which ensure the stability of payments and of the broader financial system.  I believe the United States must lead when it comes to cross-border payments to maximize the chances that any new systems with significant international usage reach the quality and standards we prefer when it comes to governance and support for financial stability. My comments today will review these efforts in turn, relate them to the role of the dollar, highlight some areas where we need to be cautious, and suggest some next steps for moving forward.

THE PROBLEM OF CROSS-BORDER PAYMENTS

Cross-border payments are essential to global business and finance. But in my experience as a policymaker, there is a widely held complaint that cross-border payments are slow, costly, unreliable, or unsafe. I have heard this from large multinational corporations and representatives of small business, in advanced economies, emerging markets, and low-income countries alike.

Wholesale payments are typically the fastest and least expensive mode of payment, and over 90% of wholesale payments utilizing the SWIFT system typically reach the beneficiary bank within an hour.  However, customers experience a high degree of variation across regions.  In Africa, more than 20 percent of even wholesale payments take more than a day to reach the account of the end customer. In Asia-Pacific and the Middle East, this figure is greater than 10 percent.[1] At the retail level, too, cross-border transfers remain slow and costly. The average cost of a $200 remittance in 2024 was 6.4 percent, including roughly 2 percent for foreign exchange conversion and roughly 4 percent for service fees. In many parts of the world, 40% of remittances take more than one day to reach the beneficiary.^[2]

Some of this cost and delay is deliberately built into the system as a feature, not a bug. For example, some is due to batching and delayed settlement in legacy payment arrangements, which may help mitigate credit, legal, and liquidity risk. And, separately, some delay may result from faithful compliance with AML/CFT requirements, which is of course critically important. 
But there’s clearly room to make cross-border payments faster, cheaper, more accessible, and more transparent, without exacerbating risk or neglecting compliance. And doing so would bring great benefits. It would improve the functioning and competitiveness of a broader set of trade corridors and, with key partner countries, reinforce diversification efforts like the “friendshoring” Secretary Yellen has prescribed. It would reduce barriers for retail transfers like remittances and cross-border payments to small businesses, enabling new business models and fostering entrepreneurship. And making the dollar-oriented system faster and more efficient would strengthen our hand in upholding U.S. values like privacy and in bolstering both our national security and that of our allies. 

PARTICIPATION IN RESPONSIBLE PAYMENTS INNOVATION AND EXPERIMENTATION

Let me start with our efforts to foster responsible innovation and experimentation in payments technology.  The landscape is evolving, in part, from the integration of well-known tools, like application programming interfaces (APIs) and quick response (QR) codes, into existing payments infrastructure. Some innovations build on more recent technologies, like distributed ledgers, that could bring fundamental change to payment, clearing, and settlement. 

Around the world, public authorities and private firms have started applying this range of innovations to their domestic payment systems. As of March 2024, 89 percent of Brazil’s population had initiated a payment through its Pix real-time payment system. Pix is free to individuals for most payments, and according to IMF data, the cost to merchants accepting a Pix payment is 85 percent less than accepting a credit card.^[3] Similarly, India’s Unified Payment Interface (UPI) is credited by the World Economic Forum with reducing payment fees to Indian consumers by more than $67 billion since its inception in 2016.^[4]In the United States, the private and public sectors have developed new solutions for domestic instant payments, some of which gave rise to new products that are able to reach households less likely to otherwise participate in the financial sector.^[5] 

U.S. policy seeks to maximize the chances that these kinds of technological innovations can also increase the safety and efficiency of cross-border payments. 

As one example, the United States is directly leading, participating in, or observing various experiments or new offerings of domestic and cross-border payment solutions. In 2023, following several years of exploration, the Federal Reserve launched FedNow, an instant payment infrastructure that allows businesses and individuals to send and receive domestic payments in real time through participating depository institutions. The Fed has also proposed extending operating hours for its other payment services, the Fedwire Funds Service and National Settlement Service. Together, and in combination with private-sector efforts like The Clearing House’s RTP Network among others, these developments bring the benefits of near round-the-clock payments and improved liquidity management for domestic payments.

Further, the Fed is contributing to international projects to improve cross-border payments. Together with six other central banks and over forty private sector firms, including several U.S. firms, the Fed is participating in Project Agorá, an initiative of the Bank for International Settlements to explore the integration of tokenized central bank and commercial bank money on the same platform. Last year, with the Monetary Authority of Singapore, the Fed concluded Project Cedar x Ubin+, an exploration of improvements to multi-currency wholesale cross-border payments on a bilateral and technology-neutral basis.

Finally, the Treasury and other agencies are exploring the possibility of enhancing bilateral payment system connectivity with select other jurisdictions. This might be achieved in multiple ways, including interconnecting fast payment systems or supporting the participation of foreign banks in domestic payment platforms. Improving connectivity in these ways requires the United States and its partners to develop a better understanding of each other’s payments technology and protocols, to formulate and agree on a governance system, and to take care to ensure that payments integrity programs and AML/CFT compliance controls in the partner countries meet international standards. 

Improvements in bilateral connectivity may not only offer economic benefits for American consumers and businesses, they may also offer the promise of greater adherence to global standards and shared national security gains. Enhancing connectivity with the U.S. system may offer significant commercial benefit for our partners, and that presents an opportunity for the United States to invite a deeper and more transparent commitment to shared policy goals, like combatting illicit finance.

Of course, even though I have only highlighted public sector activity so far, the United States government recognizes that the private sector has an essential role to play in improving cross-border payments. Regulated U.S. financial institutions are at the forefront of exploring global, “always on” real-time payments, clearing, and settlement, using a variety of technologies, and we wish to create a climate that ensures these institutions can remain at the frontier. Relatedly, we believe that policymakers should preserve optionality as to what form innovation takes. Governments should avoid picking winners and losers in payments technology.

Now, I should note, not all payments system experimentation is as responsible, cautious, and transparent as the efforts I just described. This is no small matter. If a poorly designed payments system were widely adopted, it would not only fail to resolve cross-border payments challenges, it could do significant harm to international financial stability and economic security. Policymakers and industry participants should take that risk seriously and be very skeptical of any project that seeks to wipe the slate clean, or avoid safeguards in the current system, or omit, elide, or avoid strong and transparent governance and oversight. One reason the United States must continue to lead on innovation and governance for cross-border payments is precisely to avoid the proliferation of opaque systems that may introduce unacceptable macro-financial, illicit finance, and operational risks into the global financial system.

IMPROVING LEGAL, REGULATORY, AND SUPERVISORY FRAMEWORKS

Next, I would like to share how the United States is engaging to improve legal, regulatory, and supervisory frameworks in support of responsible innovation, reduced frictions in payments, and greater competition and transparency. 

Internationally, one line of U.S. effort since 2020 has been to provide intensive support for the G20’s Roadmap to Enhance Cross-border Payments. As part of this Roadmap, Treasury has been encouraging legal and regulatory changes in foreign jurisdictions, including so that more financial data, not less, can move freely across borders. Localization and other restrictions on cross-border data sharing, if implemented beyond narrow national security considerations, can restrict firms from working with the best data or compliance service providers, if those providers happen to be in a foreign country. That harms U.S. business. And, such restrictions can also become major obstacles to the highest quality risk management and most efficient cross-border payment technologies. 

Domestically, Treasury and the Financial Stability Oversight Council have repeatedly recommended that Congress develop a clear regulatory framework for stablecoins, a technology often described as showing promise in facilitating cross-border transactions.^[6],^[7] But stablecoins are structurally vulnerable to runs, which can pose risks to consumers and investors, and to financial stability. Analogous to how, in pegged currency regimes, foreign reserves back the value of the exchange rate, most stablecoin issuers require dollar-denominated liquid assets to peg their stablecoin to the dollar. Doubts about the quality of those backing reserves, or about the redeemability of the stablecoin at par, can lead to runs on the issuer. This is not theoretical. In the last three years, we’ve seen prominent stablecoins break their peg during periods of market stress. And in 2022, we saw the complete collapse of the Terra/Luna arrangement, which had a totally inadequate mechanism for trying to stabilize the value of its token. 

Last year, the Financial Stability Board published high-level recommendations for the oversight, supervision, and regulation of broadly adopted stablecoins, consistent with the key features we have advocated in a U.S. stablecoins framework.^[8] Treasury has also advocated for common-sense reforms of its tools and authorities to address the increasing use of stablecoins by a variety of illicit actors, including to evade sanctions.

Finally, Treasury has also called, as Under Secretary Liang did in a speech last month, for a federal payments framework.^[9]The current framework for the regulation of non-bank and e-money payment service providers has requirements that vary from state to state. This raises risks for the integrity of payment systems and public trust in money. It also raises barriers to entry, limiting competition and innovation. A federal payments framework would help maintain the global leadership of U.S. financial firms. 

SUPPORTING STRONG INTERNATIONAL STANDARDS AND COMPLIANCE

Finally, we must navigate these technological innovations, and changing laws and regulations, without abandoning our commitment to strong international standards and compliance regimes. Standards and compliance regimes limit economic risk and help protect citizens around the world from fraud and other illicit finance threats.

I’ve used the phrase “standards” several times now. But in plain English, what do I mean? Standards can specify requirements for how payments technology must work, including elements related to the underlying programming code and messaging used to send and process payment requests. Standards can set the rules to determine who is allowed to participate in a payments system and when, and what users must do to manage risk and to make sure payments can continue to flow in the face of certain threats or disruptions. Operational standards might describe who has responsibility for oversight of various parts of the system and what pieces of information must be transparent and disclosed. Standards can define precisely what it means for a payment to be settled. 

Domestically, high quality, clear standards promote a safe and level playing field for firms, and invite stakeholder trust in their critical infrastructure. Internationally, standards can facilitate the spread of best practices and interoperability among systems—making it possible for the system in one country to “speak” to the system in another, both technically and legally.

One example of these standards is the Principles for Financial Market Infrastructures (PFMI), which provide guidance for managing the credit, collateral, and liquidity risks of payment system participants, as well as consideration of the operational risks than arise when system upgrades are rolled out.  Another example is Financial Action Task Force (FATF) standards, which specify steps that countries should implement in order to combat money laundering, terrorist financing, and proliferation financing. They are critical in our efforts to prevent or trace financial activity involving fraudsters, drug traffickers, terrorists, and other bad actors. Currently, the United States is actively involved in the revision of FATF Recommendation 16 on payment transparency to reflect evolutions in the payments landscape over the last two decades and ensure the standard remains technologically neutral. A final example is the standards Committee on Payments and Market Infrastructures (CPMI), which recently published a harmonized international Organization for Standardization (ISO) 20022 messaging standard to reduce complications in cross-border payments created when different countries use different messaging formats.

These payment system standards are typically technology neutral. They apply just as well to new systems as they do to old ones. As we enter a period when legacy and innovative payment solutions coexist, standards will facilitate interoperability, not only across jurisdictions but also between diverse technologies. And accordingly, we will continue to encourage the application of these existing standards to new systems. 

But we have to remain vigilant. Innovation can often give rise to new, implicit standards, long before the appropriate standard-setting organizations have reacted or caught up to the new technology. Therefore, the United States is and should continue to be an active and vocal participant in international standard-setting processes, ensuring that the responsible institutions keep pace with change. Public authorities, including Treasury and the Federal Reserve, represent the United States in groups like the FATF and CPMI.  But we also rely on private sector firms to develop and advance standards, including those that apply internationally. For example, the American National Standards Institute, which is the U.S. member of the ISO, convenes experts across the private and public sectors, including Treasury, as well as academia. These and similar bodies are setting standards for critical and emerging technologies, and U.S. engagement is essential.

Treasury also supports the good work of the IMF and World Bank to provide payment system technical assistance and capacity development. This work helps embed and put into practice high quality technical, legal, and regulatory standards around the world. In the process, it helps deliver real benefits for the functioning of many domestic and cross-border payment systems in emerging market and developing economies.

Conversely, we should be wary of innovations that fail to meet international standards for safety, and soundness. For example, the United States has pressed international organizations to end any involvement with payment initiatives that are specifically designed to undermine or skirt global AML/CFT rules, sanctions, and other illicit finance controls. And we will discourage participation in payment systems that are not subject to high-quality international standards and supervision.  

POSITIVE EXTERNALITIES, CURRENCY CHOICE, AND THE INTERNATIONAL ROLE OF THE DOLLAR

How does all of this relate to the role of the U.S. dollar? The fact that the dollar’s global usage far exceeds the U.S. share of global economic and financial activity reflects features that are mostly unrelated to payments. It more likely stems from the fact that the dollar is supported by a transparent and reliable legal system, an independent central bank, and a government committed to sound macroeconomic policies and a freely floating currency. Dollar dominance is also likely buoyed by the global importance of U.S. capital markets, which support open, deep, and liquid trades in dollar-denominated securities.^[10]

That said, we do not – and must not – take for granted the benefits of the dollar system.  And we should be appropriately humble with respect to our understanding of the demand for dollar use. After all, the fall of the pound and rise of the dollar roughly 100 years ago stands among the few observed shifts from one globally dominant currency to another. That’s not a lot of data points to use to test hypotheses.

So, while there is little evidence from recent history that payments technology is a driver of currency choice, we must still at least entertain the possibility that new, high-quality, and safe payments infrastructures that are based on, or compatible with, the U.S. dollar, would bolster the dollar’s important international role. 

To be clear, the United States has not sought to compel anyone to use the dollar in cross-border or foreign transactions. Rather, we believe that emerging cross-border payment arrangements should preserve currency choice, including the ability to use a vehicle currency in foreign exchange transactions. All else equal, this will help reduce the overall cost of cross-currency payments. And if we succeed in keeping the U.S. public and private sectors central to payments innovations, operating within a well-designed domestic and global legal and regulatory environment, and upholding high-quality global standards and compliance regimes, the continued dominant use of the dollar strikes me as both the likely outcome and one that is in the interests of Americans as well as our allies and partners around the world. 

To achieve that vision, the United States is seeking to advance payment rails innovation, implement sound regulatory frameworks internationally and at home, and promote international standards that improve safety and address illicit finance risks. We should step up our commitment to explore the potential benefits of tokenization solutions, pass strong and responsible domestic stablecoin legislation, and press international organizations to avoid supporting any payments innovations that could undermine existing, high-quality standards. And all together, these efforts can help maintain the continued primacy of the dollar and support the strength of the U.S. financial system, to the benefit of Americans and the world. 

The steps I’ve outlined above speak to core U.S. values and the need for sustained U.S. public and private sector engagement. The payments landscape is evolving in ways that have far reaching implications, from natural security to economic prosperity. The future of the financial system, global markets, and the U.S. and global economies demands our continued leadership. 

Thank you. 

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As Prepared for Delivery 

Good afternoon.  I’d like to start by thanking our panelists today for sharing their perspectives and engaging in an important and insightful discussion.  On the U.S. Government side, each of you is a close partner, and I appreciate the tremendous effort you put into carrying out our national security mission.  I also see many members of the CFIUS bar, the business community, as well as compliance professionals.  Thank you for your collaboration in the CFIUS process as well – you have an important role to play in supporting our work.  

At this conference last year, I spoke about the Committee’s compliance and enforcement work as well as our enhancements to transaction reviews and efficiencies; we also discussed mitigation agreement monitoring, third-party processes, non-notified transactions, and planned regulatory updates.  Today, I want to highlight the progress made in furtherance of those priorities, and some of the work that lies ahead.  

In addition to handling hundreds of cases and ongoing monitoring responsibilities, we have made important regulatory updates, as previewed last year.  We have also redoubled our efforts on enforcement, now levying eight civil monetary penalties in the past two years, four times more in that period than in the Committee’s history.  

In addition, fulfilling our mandate in the Foreign Investment Risk Review Modernization Act of 2018, or FIRRMA, to regularly consult and meet with allies and partners, we have also been active across the globe in sharing best practices regarding robust investment screening, the importance of timely reviews, and how to promote open investment consistent with the protection of national security.  We certainly can and must do both. 

Our work and the status of the United States as the world’s top destination for foreign direct investment highlights that this balance is possible.  In the past two years alone, CFIUS has cleared hundreds of transactions with a collective value of nearly $500 billion.  

Our national security work requires depth, breadth, and resources. Over the past year, we have continued to strengthen our analytical and operational capabilities.  We have done this by building and implementing sophisticated tools, platforms, and methodologies for assessing and addressing national security risks. We employ cutting-edge information technology platforms to securely manage and facilitate novel aspects of CFIUS’s work.  We have expanded and deepened our human capital and today have a team with widely diverse backgrounds, from lawyers to science Ph.D.s to intelligence professionals to bankers to compliance professionals and former prosecutors. And across the Committee, we benefit from a much broader team with incredible subject matter expertise.  

I want to take a moment to recognize the hard work of the career public servants who carry out the work of CFIUS.  In addition to Treasury’s role as chair of CFIUS, there are eight other agency political appointees who lead this work across the Committee, but there are hundreds of career staff who do the hard work and in-depth analysis that underpins each transaction we review.  Working with this group of dedicated national security professionals has been an honor, and our national security is stronger as a result of their contributions.

The work of our outstanding team, in conjunction with our ongoing technological improvements, have enabled us to be more efficient and effective as we contend with two core challenges.  First, transactions are increasingly complex.  And second, the global security landscape is constantly changing, and CFIUS is identifying and addressing more national security risks than in years past as a result, including as it relates to sensitive data and technologies.  

We have also been paying particular attention to the role of limited partners in investment funds.  The reality is that not all LP arrangements are the same and it is often important for the Committee to understand the identity and role of LPs when relevant to understanding a transaction and assessing whether it poses national security risk.  We recognize that sometimes a fund sponsor, for example, may have a contractual commitment to keep confidential the identity of an LP, and to that end, I can reassure you that we have processes and procedures in place to ensure that information filed with the Committee is handled appropriately.  Indeed, the Committee strictly adheres to its statutory confidentiality obligations.  And we’ve done a lot of thinking around the issue of LP investments, benefitting from, among other things, the work of the Department of Commerce in this area.  In the same way that financial institutions are obligated to “know your customer,” I often tell businesses seeking funding they should know their investor – because CFIUS certainly will.  LP agreements, side letters, and other informal arrangements can all be potential vectors for national security risk.  

On that note, I want to take a moment to recognize our colleagues in the Intelligence Community.  The Committee is a voracious consumer of the IC’s work, which gives Committee members critical information and analysis to fully understand the potential “threat” for each and every transaction that comes before CFIUS.  This is a fundamental input to our work.  

I mentioned efficiency as an important part of our work – and we take that seriously.  We are working through cases faster than in years before.  In 2023, CFIUS cleared 66 percent of distinct transactions without mitigation measures in either the 30-day assessment period for a declaration or the initial 45-day review period for a notice – compared to 58 percent in 2022. In 2024, preliminary data shows this clearance rate continuing to climb ever further.  

CFIUS also improved its efficiency by decreasing the frequency of withdrawn and refiled transactions from 23 percent of notices in 2022 to 18 percent of notices in 2023.  This is the first such reduction in five years, and a trend we see continuing into 2024. These changes are not incidental; instead, they reflect the focus we’ve placed on improving efficiency at every step in our process and the dedicated work of Committee staff.

We have also transformed how we approach compliance with mitigation agreements.  Today, we are actively monitoring mitigation measures in approximately 240 cases.  We have expanded and devoted significant resources to monitoring, nearly doubling the size of Treasury’s team over the last several years, including hiring professionals with audit and other relevant compliance experience.  

In 2023, Treasury and other agencies went on over forty site visits, both domestically and internationally, to monitored businesses. In addition to the Committee’s monitoring role, the use of third parties and internal compliance professionals is a critical piece of ensuring the protection of national security – from third party monitors and auditors to trustees to security officers and security directors, all of whom play an integral role in working with mitigated companies and the Committee to protect national security.

We also remain vigilant in our enforcement of mitigation agreements, and as I mentioned earlier we’ve made tremendous advancement in this space. 

In an effort to increase transparency with regard to enforcement actions, in August, we debuted an updated enforcement website that provides further information regarding how the Committee approaches compliance and enforcement.  This includes new information regarding the penalties CFIUS has levied in the past few years, including the $60 million penalty imposed for a company’s failure to take appropriate measures to prevent unauthorized access to certain sensitive data and failure to promptly report unauthorized access.  I can also share that, in the last year, CFIUS has – for the first time – utilized its subpoena authority in support of its national security mission.  

As many of you know firsthand, we have continued to improve our ability to identify transactions that may pose a risk to national security and were not notified to the Committee by the parties.  The Committee leverages multiple tools and data sources – including public reporting, subscription services, tips from the public, Committee members or Congress, and classified reporting – to identify and analyze such non-notified transactions.  Treasury’s non-notified team screens thousands of transactions, ultimately putting forward those that may raise national security considerations to the Committee for consideration to request a filing.  The President’s order in May of this year prohibiting the purchase and requiring the divestment of certain real estate operated as a cryptocurrency mining by facility by MineOne initially came to the Committee’s attention through our non-notified process after we received a tip from the public. 

The MineOne case also showcases the importance of our jurisdiction over real estate transactions.  CFIUS reviewed and investigated this transaction pursuant to authorities provided by Congress in FIRRMA to cover real estate transactions in close proximity to certain sensitive U.S. facilities.  We have been focused on updates to our real estate jurisdiction, working closely with the Department of Defense.  Last year, we added eight military installations to our real estate regulations and earlier this month, we issued a final rule that expands CFIUS’s ability to review certain real estate transactions by foreign persons near more than 60 military bases and installations across 30 states. This is the result of a recent comprehensive assessment conducted by the Department of Defense regarding its military installations.  

And just yesterday, we issued a final rule to sharpen our investigation and enforcement tools.  Among other things, this rule expands our authority to request and subpoena information for non-notified transactions, increases the maximum monetary penalty available for certain violations, and expands the instances in which CFIUS may use its subpoena authority, including in the non-notified context.  After taking into consideration the public comments we received on the proposed rule, the final rule allows the CFIUS Staff Chairperson to impose a deadline with respect to party responses to mitigation agreement drafts not as a default, but where appropriate.  We see this as a necessary tool in certain instances.  These enhancements are drawn from lessons learned as we have increased our focus on compliance, monitoring, and enforcement over the last few years.  

We also remain engaged with Congress as one of our key stakeholders. In July, I again testified before the Senate Banking Committee regarding the work of the Committee.  We regularly engage with congressional staff and members regarding potential legislation, and pursuant to our statute, from time-to-time provide case briefings on covered transactions after concluding action. 

Our protection of national security does not stop at the border; indeed, our national security is linked to the security of our allies and partners.  Therefore, it is essential to U.S. national security that our allies and partners develop and maintain effective national security-focused investment screening processes.  This has been an important part of our work and in 2023 and 2024 alone, alongside the State Department, we have had hundreds of engagements with our foreign allies and partners, including an investment screening Memorandum of Intent that Treasury Secretary Yellen signed last year with her counterpart in Mexico. Over the past few years, the work we have done has contributed to the proposal, creation, or enhancement of investment screening programs in over 30 countries.  

I am proud of Treasury and the Committee’s efforts in all of these areas, but I also recognize that there is more work to do.  While some of us will be departing our roles during this transition period, the incredible career staff will carry on with the same high caliber of professionalism and competence that you all have come to expect. In doing so, I fully anticipate that the Committee will remain focused on promoting and enforcing compliance with our regulations and agreements, improving our efficiency, and honing our authorities to ensure the protection of national security, all the while creating a welcoming environment for foreign investment.  
 

Thank you again for joining us today.

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Final rules will improve access to direct pay for co-owned clean energy projects, helping to expand the buildout of the clean energy economy.

WASHINGTON – Today, the U.S. Department of the Treasury and the IRS released final regulations that will expand the reach of the Biden-Harris Administration’s Inflation Reduction Act by helping entities that co-own clean energy projects access clean energy tax credits through elective pay – commonly known as direct pay.

Prior to the Inflation Reduction Act, many entities – like state and local governments, Tribes and territories, public school districts, rural electric co-ops, and tax-exempt organizations like churches, hospitals, higher education institutions, and non-profits – could not benefit from clean energy tax credits because they had little or no federal tax liability. Direct pay enables these entities and organizations to access the full value of clean energy incentives and helps projects get built more quickly and affordably to reduce costs and benefit businesses and communities. 

The guidance Treasury is issuing today provides greater clarity and flexibility for direct pay eligible entities that want to jointly invest in clean energy projects – for example, a tax-exempt entity co-investing in a clean energy project with a for-profit developer, or multiple tax-exempt entities or governments that are seeking to jointly invest in clean energy projects.

“The Biden-Harris Administration is focused on continuing the clean energy investment boom and ensuring all Americans benefit from the growth of this sector. Direct pay is helping more clean energy projects be built quickly and affordably, and American communities are benefitting as a result. Today’s rules will increase the availability of capital for clean energy projects by providing certainty and flexibility for state and local governments, Tribes and territories, non-profits, and more to benefit from these resources,” said U.S. Deputy Secretary of the Treasury Wally Adeyemo. 

Specifically, Treasury’s final regulations make targeted modifications to existing partnership tax rules clarifying how co-owned projects in the clean energy space can elect not to be treated as partnerships for tax purposes, and providing such projects additional flexibility. These changes are important because under the Inflation Reduction Act, partnerships are not among the entities that are generally eligible for direct pay. By collectively electing out of partnership status, co-owners that are eligible for direct pay can take advantage of direct pay for the share of the project that they own while co-owners that are not eligible for elective pay could use transferability.

In response to comments received, the final regulations clarify that eligible co-ownership arrangements can be organized to own and operate property giving rise to any of the Inflation Reduction Act credits where elective pay is available. It also enables such arrangements to invest in clean energy projects through a noncorporate entity.

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WASHINGTON — Today, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) is designating six senior Hamas officials, including the terrorist group’s representatives abroad, a senior member of the Hamas military wing, the Izz Al-Din Al-Qassam Brigades, as well as individuals involved in supporting the terrorist group’s fundraising efforts and weapons smuggling into Gaza.

“Hamas continues to rely on key officials who seemingly maintain legitimate, public-facing roles within the group, yet who facilitate their terrorist activities, represent their interests abroad, and coordinate the transfer of money and goods into Gaza,” said Acting Under Secretary of the Treasury for Terrorism and Financial Intelligence Bradley T. Smith. “Treasury remains committed to disrupting Hamas’s efforts to secure additional revenue and holding those who facilitate the group’s terrorist activities to account.”  

This action marks OFAC’s ninth sanctions tranche since October 7, 2023, targeting Hamas and its supporters. The most recent action on October 7, 2024 targeted Hamas’s use of sham charities and one of its prominent international supporters. OFAC also targeted Hamas cyber actors on April 12, 2024 and some of their financial facilitators and sources of funding on October 18, 2023 and October 27, 2023. The United States government has also worked closely with its key international partners and allies in countering Hamas, including a joint designation with Australia and the United Kingdom on January 22, 2024, as well as three actions with the United Kingdom on March 27, 2024, December 13, 2023, and November 14, 2023, all targeting Hamas leaders and financiers. 

Individuals targeted today are being designated pursuant to Executive Order (E.O.) 13224, as amended, which targets terrorist groups and their supporters.

HAMAS LEADERS AND FINANCIERS ACTIVE ABROAD

Abd al-Rahman Ismail abd al-Rahman Ghanimat (Ghanimat) is a longtime member of Hamas’s military wing, the Izz Al-Din Al-Qassam Brigades. While he is now based in Türkiye, Ghanimat, who also founded a section of Hamas responsible for supporting Hamas interests in the West Bank, has been involved in multiple attempted and successful terrorist attacks, including the 1997 daytime bombing of a café in Tel Aviv. 

Musa Daud Muhammad Akari (Akari) is a senior Hamas official based in Türkiye who facilitates the flow of funds from Türkiye into Gaza and the West Bank for Hamas. Akari was previously convicted of kidnapping and murdering an Israeli border police officer. 

Salama Mari (Mari) is a Hamas official based in Türkiye involved in financial facilitation for the group. Mari was previously imprisoned for his role in a 1993 attack in the West Bank that killed an Israeli soldier. 

Mohammad Nazzal (Nazzal) is a Hamas official who has provided support to the terrorist group for over 30 years. As a senior leader serving on Hamas’s Council on International Relations, Nazzal represents Hamas’s interests to a variety of international audiences.

Basem Naim (Naim) is a senior Hamas member based in Gaza, who has participated in Hamas’s engagements with Russia and been a part of Hamas delegations to other countries. Naim also holds a leadership role on Hamas’s Council on International Relations.

Ghazi Hamad (Hamad) is a long-time Gaza-based Hamas leader who served as the editor of Hamas propaganda outlets and is authorized to speak publicly on behalf of Hamas. In addition to these public facing and propaganda roles, Hamad previously served as a Hamas senior official overseeing border crossings at Gaza. While these border crossings were one of the primary ways Hamas smuggled weapons into Gaza, these crossings were also used to smuggle the construction equipment and materials Hamas needed to build an extensive tunnel network they intentionally interspersed among Palestinian civilians.

OFAC is designating Ghanimat, Akari, Mari, Nazzal, Naim, and Hamad pursuant to E.O. 13224, as amended, for having acted or purported to act for or on behalf of, directly or indirectly, Hamas, a person whose property and interests in property are blocked pursuant to E.O. 13224.

SANCTIONS IMPLICATIONS

As a result of today’s action, all property and interests in property of the designated persons described above, and of any entities that are owned directly or indirectly, 50 percent or more by them, individually, or with other blocked persons, that are in the United States or in the possession or control of U.S. persons are blocked and must be reported to OFAC. Unless authorized by a general or specific license issued by OFAC, or exempt, OFAC’s regulations generally prohibit all transactions by U.S. persons or within (or transiting) the United States that involve any property or interests in property of designated or otherwise blocked persons.

U.S. persons must comply with OFAC regulations, including all U.S. citizens and permanent resident aliens regardless of where they are located, all persons within the United States, and all U.S.-incorporated entities and their foreign branches. Non-U.S. persons are also subject to certain OFAC prohibitions. For example, non-U.S. persons are prohibited from causing or conspiring to cause U.S. persons to wittingly or unwittingly violate U.S. sanctions, as well as engaging in conduct that evades U.S. sanctions. Violations of OFAC regulations may result in civil or criminal penalties.

OFAC may impose civil penalties for sanctions violations based on strict liability, meaning that a person subject to U.S. jurisdiction may be held civilly liable even if such person did not know or have reason to know that it was engaging in a transaction that was prohibited under sanctions laws and regulations administered by OFAC. OFAC’s Economic Sanctions Enforcement Guidelines provide more information regarding OFAC’s enforcement of U.S. economic sanctions, including the factors that OFAC generally considers when determining an appropriate response to an apparent violation. For additional information on complying with U.S. sanctions and export control laws, please see the Department of Commerce, Department of the Treasury, and Department of Justice Tri-Seal Compliance Note.

Furthermore, engaging in certain transactions with the individuals designated today entails risk of secondary sanctions pursuant to E.O. 13224, as amended. Pursuant to this authority, OFAC can prohibit or impose strict conditions on opening or maintaining, in the United States, of a correspondent account or a payable-through account of a foreign financial institution that knowingly conducts or facilitates any significant transaction on behalf of a Specially Designated Global Terrorist.

The power and integrity of OFAC sanctions derive not only from OFAC’s ability to designate and add persons to the Specially Designated Nationals and Blocked Persons (SDN) List, but also from its willingness to remove persons from the SDN List consistent with the law. The ultimate goal of sanctions is not to punish, but to bring about a positive change in behavior. For information concerning the process for seeking removal from an OFAC list, including the SDN List, please refer to OFAC’s Frequently Asked Question 897 here. For detailed information on the process to submit a request for removal from an OFAC sanctions list, please click here.

Click here for more information on the individuals designated today.

Additional Treasury resources on countering the financing of terrorism:

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WASHINGTON — Today, the Department of the Treasury’s Office of Foreign Assets Control (OFAC) sanctioned a network of nine Mexican nationals involved in fentanyl, heroin, and other deadly drug trafficking and money laundering. Individuals designated in this network also engage in human smuggling in furtherance of their drug trafficking activities. Additionally, as members of the Cartel Jalisco Nueva Generacion (CJNG), some of the individuals sanctioned today played a prominent role in the early stages of the U.S. opioid crisis, a leading factor driving the United States’ modern fentanyl crisis. CJNG is a violent Mexico-based drug trafficking organization responsible for a significant proportion of fentanyl and other deadly drugs trafficked into the United States. 

“Today’s action underscores our commitment to target the networks of suppliers and facilitators that enable the illicit flow of deadly drugs into the United States, endangering the lives of our citizens,” said Acting Under Secretary of the Treasury for Terrorism and Financial Intelligence Bradley T. Smith. “The United States, in close coordination with our Mexican government partners, will continue to leverage all available tools to disrupt these criminal schemes and safeguard our communities.” 

Treasury plays a leading role in countering the trafficking of fentanyl and other illicit drugs as part of President Biden’s Unity Agenda, leveraging its expertise to fight illicit financing and financial crimes to disrupt the flows of money that criminal organizations rely on to operate. Over the past two years, Treasury has sanctioned more than 300 targets for involvement in drug trafficking activities at all stages of the supply chain, from major cartel leaders to under-the-radar labs, transportation networks, and chemical suppliers. Last year, Secretary Yellen launched the Counter-Fentanyl Strike Force, which brings together Treasury’s expertise and resources in fighting financial crime, led by the Office of Terrorism and Financial Intelligence (TFI) and IRS Criminal Investigation (CI). Secretary Yellen has also engaged with international partners to combat fentanyl trafficking, including during her travel to Mexico last year. In April, Secretary Yellen also announced the launch of an exchange with the People’s Republic of China (PRC) to enhance cooperating in combatting money laundering associated with drug trafficking and other crime.

Today’s action is taken pursuant to Executive Order (E.O.) 14059, which targets persons involved in the Global Illicit Drug Trade. Today’s action was coordinated closely with the U.S. Attorney’s Office for the District of Colorado (USAO-CO), the U.S. Attorney’s Office for the Southern District of California (USAO-SDCA), the Drug Enforcement Administration (DEA), and the Government of Mexico, including La Unidad de Inteligencia Financiera (UIF), Mexico’s Financial Intelligence Unit.

BRIEF HISTORY OF THE U.S. OPIOID CRISIS

According to the final report of the congressionally established, bipartisan U.S. Commission on Combating Synthetic Opioid Trafficking published by the RAND Corporation in February 2022, the rise in illicit fentanyl and other synthetic opioid misuse and related deaths has its origins in the U.S. Food and Drug Administration’s approval of the prescription opioid painkiller OxyContin in 1995. Starting in the mid-1990s, OxyContin and other prescription opioids were falsely marketed as nonaddictive treatments for pain. As a result, prescription opioid dependence and addiction increased dramatically in the United States. This dependence created a market opportunity for traffickers and other criminals to exploit as people with substance-use disorders, unable to continue obtaining prescription drugs, often turned to heroin. 

In particular, heroin traffickers, like the “Bonques Brothers” designated today, from Xalisco, Nayarit, Mexico were among the first to successfully exploit the opioid-addicted market in the United States in the 1990s. Xalisco is a Mexican municipality near the Pacific Coast where poppies grow well. 

In less than a decade, illegal U.S. drug markets that were once dominated by diverted prescription opioids and heroin became saturated with illegally manufactured synthetic opioids, such as fentanyl. Synthetic opioids are cheaper and easier to produce than heroin and they do not require growing seasons, making them attractive alternatives to criminals who lace them into heroin and other illicit drugs or press them into often-deadly counterfeit pills. Today, Mexican cartels such as CJNG and the Sinaloa Cartel are responsible for a significant proportion of fentanyl and other deadly drugs trafficked into the United States. Mexican cartels manufacture fentanyl in clandestine laboratories with precursor chemicals sourced largely from the PRC.

BUSTING THE BONQUES BROTHERS

The “Bonques Brothers” are an influential group of heroin and cocaine trafficking associates from Xalisco, Nayarit, Mexico, led by Roberto Castellanos Meza (Castellanos Meza) (a.k.a. Beto Bonques) and composed of brothers Ivan Atzayacatl Castaneda Meza, Giovanni Castaneda Meza, and Juan Carlos Castaneda Meza. As members of CJNG, the “Bonques Brothers” are close associates of OFAC designees, Ruben Oseguera Cervantes (a.k.a. “El Mencho”) and Audias Flores Silva (a.k.a “El Jardinero”), CJNG leader and CJNG regional commander of Nayarit, respectively. The “Bonques Brothers” were among the prominent heroin trafficking families from Xalisco, Mexico that had made their way into California by the early 1990s and were, therefore, well-positioned to exploit a U.S. market expanded by prescription drugs.

Castellanos Meza owns opium fields in the mountains of Nayarit and produces heroin. As such, the “Bonques Brothers” have great influence over heroin trafficking in the Xalisco area and are the suppliers for the majority of Xalisco-based, heroin-trafficking families as well as many of the heroin distribution networks operating in cities throughout the United States. 

In addition to heroin, the “Bonques Brothers” are involved in cocaine trafficking. Castellanos Meza has been involved in the brokering of cocaine sales and the transport of cocaine from Colombia via small airplanes and boats. On November 18, 2024, the USAO-SDCA unsealed an indictment charging Castellanos Meza with conspiracy to distribute cocaine. 

In November 2007, Ivan Atzayacatl Castaneda Meza and Juan Carlos Castaneda Meza were involved in an altercation with Mexican authorities who were responding to a tip regarding an alleged clandestine drug laboratory in Xalisco, Nayarit. The altercation escalated into a shooting standoff which resulted in Ivan Atzayacatl Castaneda Meza’s arrest, Juan Carlos Castaneda Meza’s hospitalization, and the seizure of heroin. 

OFAC designated Roberto Castellanos Meza, Giovanni Castaneda Meza, Ivan Atzayacatl Castaneda Meza, and Juan Carlos Castaneda Meza pursuant to E.O. 14059 for having engaged in, or attempted to engage in, activities or transactions that have materially contributed to, or pose a significant risk of materially contributing to, the international proliferation of illicit drugs or their means of production.

THWARTING FENTANYL FACILITATORS 

Jose Adrian Castillo Lopez (Castillo Lopez) is among those supplied with heroin by Roberto Castellanos Meza. Based in Pantanal, Nayarit, Mexico, Castillo Lopez works on behalf of CJNG and is the current plaza boss for the Tepic, Xalisco, and Pantanal areas of Nayarit, Mexico. He is known to supply narcotics to drug trafficking networks operating in Colorado, Nevada, and California. 

Working directly for Castillo Lopez, Luis Alonso Navarro Quezada (Navarro Quezada) is also based in Pantanal, Nayarit, Mexico, and is involved in fentanyl and other drug trafficking, money laundering, and human smuggling. He maintains drug distribution networks in Colorado, Nevada, and California. On November 15, 2023, a federal grand jury in the U.S. District Court for the District of Colorado returned an indictment against Navarro Quezada, charging him with 108 counts, including multiple charges related to the distribution of over 3,240 grams of fentanyl between April 3, 2023 and November 14, 2023. Navarro Quezada’s other charges included distribution of heroin, methamphetamine, and cocaine as well as laundering proceeds derived from fentanyl and other drugs. According to the indictment, members involved in the conspiracy moved drug proceeds from Colorado to Navarro Quezada in Mexico via wire transfers, using different names and addresses to conceal their identities.

Navarro Quezada has also been involved in human smuggling in furtherance of his drug trafficking and money laundering activities. Specifically, Navarro Quezada is known to pay fees to human smugglers, colloquially referred to as “coyotes,” to illegally bring his trusted associates across the U.S. border. His associates then work for him as drug and/or money runners, picking up and delivering narcotics, including fentanyl, and drug proceeds at his direction to pay off the debt incurred for the smuggling fees fronted by Navarro Quezada.

Navarro Quezada’s wife, Erandiny Jazmin Arias Ponce (Arias Ponce), is one of Navarro Quezada’s conspirators who has assisted with the collection and transfer of drug profits.

Navarro Quezada receives fentanyl from a husband-and-wife duo based in Sinaloa, Mexico. Araceli Castillo Peinado (Castillo Peinado) and her husband, Jose Sinue Castro Alvarez (Castro Alvarez), transfer multi-kilogram quantities of drugs, including fentanyl, into the United States. They direct U.S.-based third parties to pick up large quantities of fentanyl pills at prearranged locations and deliver them to distribution networks such as the one operated by Navarro Quezada. 

OFAC designated Castillo Lopez, Navarro Quezada, Arias Ponce, Castillo Peinado, and Castro Alvarez pursuant to E.O. 14059 for having engaged in, or attempted to engage in, activities or transactions that have materially contributed to, or pose a significant risk of materially contributing to, the international proliferation of illicit drugs or their means of production.

PREVIOUS ACTIONS AGAINST CJNG

On April 8, 2015, OFAC sanctioned CJNG pursuant to the Kingpin Act for playing a significant role in international narcotics trafficking. On December 15, 2021, OFAC also designated CJNG pursuant to E.O. 14059. In other actions, OFAC has sanctioned numerous CJNG-linked individuals and companies pursuant to both the Kingpin Act and E.O. 14059 that played critical roles in CJNG’s revenue-generating enterprises such as drug trafficking, money laundering, timeshare fraud, and fuel theft in an effort to curtail CJNG’s ability to traffic fentanyl and other deadly drugs into the United States.

SANCTIONS IMPLICATIONS

As a result of today’s action, all property and interests in property of the designated persons described above that are in the United States or in the possession or control of U.S. persons are blocked and must be reported to OFAC. In addition, any entities that are owned, directly or indirectly, individually or in the aggregate, 50 percent or more by one or more blocked persons are also blocked. Unless authorized by a general or specific license issued by OFAC, or exempt, OFAC’s regulations generally prohibit all transactions by U.S. persons or within (or transiting) the United States that involve any property or interests in property of designated or otherwise blocked persons. U.S. persons may face civil or criminal penalties for violations of E.O. 14059 and the Kingpin Act. Non-U.S. persons are also prohibited from causing or conspiring to cause U.S. persons to wittingly or unwittingly violate U.S. sanctions, as well as engaging in conduct that evades U.S. sanctions. OFAC’s Economic Sanctions Enforcement Guidelines provide more information regarding OFAC’s enforcement of U.S. sanctions, including the factors that OFAC generally considers when determining an appropriate response to an apparent violation.

Today’s action is part of a whole-of-government effort to counter the global threat posed by the trafficking of illicit drugs into the United States that is causing the deaths of tens of thousands of Americans annually, as well as countless more non-fatal overdoses. This action also complements a recent Financial Crimes Enforcement Network supplemental advisory to U.S. financial institutions on new trends, typologies, and red flag indicators associated with the illicit fentanyl supply chain and the illicit procurement of fentanyl precursor chemicals and manufacturing equipment by Mexico-based transnational criminal organizations. OFAC, in coordination with its U.S. government partners and foreign counterparts, and in support of President Biden’s Unity Agenda, will continue to hold accountable those individuals and businesses involved in the manufacturing and sale of illicit drugs. 

The power and integrity of OFAC sanctions derive not only from OFAC’s ability to designate and add persons to the SDN List, but also from its willingness to remove persons from the SDN List consistent with the law. The ultimate goal of sanctions is not to punish, but to bring about a positive change in behavior. For information concerning the process for seeking removal from an OFAC list, including the SDN List, please refer to OFAC’s Frequently Asked Question 897 here. For detailed information on the process to submit a request for removal from an OFAC sanctions list, please click here.

To view the chart on the individuals designated today, click here.

For more information on the individuals designated today, click here.

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As Prepared for Delivery

Thank you for the invitation to be part of this conference and to speak with you today. The conference agenda lays out some of the significant opportunities and challenges of expanding central clearing in the Treasury market, and I look forward to hearing your perspectives.

In my remarks, I will focus on the critical roles and evolution of the Treasury market, and review the significant progress made to strengthen the Treasury market as well as what remains to be done. I will highlight the recent work done under the umbrella of the Inter-Agency Working Group on Treasury Market Surveillance (IAWG), which was formed in 1992, to strengthen the resilience of the Treasury market.^[i] I would emphasize that an efficient and resilient Treasury market has been a shared goal and is a place for common ground across Administrations and over time. I will conclude with the importance of expanded central clearing for resilience and financial stability, as market participants and regulators, some in the audience today, move forward with implementation.

The Critical Roles of the Treasury Market and its Liquidity

The Treasury market serves a range of critical functions. A strong Treasury market is key for financing our government at the lowest cost to the taxpayer over time. It is also at the core of global financial markets and provides the benchmark risk-free yield curve. It helps to underpin the dollar in global transactions. And being the deepest and most liquid market in the world, it serves as a key source of safe and liquid assets for investors and is used for liquidity risk management by many financial firms. This last point is increasingly relevant for nonbank financial institutions, and in particular investment funds, who do not have access to central bank liquidity and rely on Treasury market liquidity in periods of stress.

There is no larger thoroughfare for global capital than the U.S. Treasury market, which averages around $900 billion in transactions per day, with high volume days in recent years around $1.5 trillion.^[ii] There is roughly $4 trillion in repo financing each day.^[iii] And the U.S. Treasury futures market is itself large and important, with an average daily trading volume of about $750 billion in notional so far in 2024.^[iv]

The depth and liquidity of the Treasury market are central to serving its critical functions. Currently, primary markets are functioning well, helped by Treasury’s longstanding “regular and predictable” issuance strategy.[v] On this slide, you can see two commonly used metrics to assess primary market functioning. One indicator is the bid-to-cover ratio, which has been stable and well above 2 over the past several years, for both the 2- and 10-year Treasury notes, even as issuance has been increasing. Similarly, as shown on the right, auction tails — which compare the yield set in the auction with the yield in when-issued trading — indicate that auction results have fluctuated within a pretty tight range (about +/- 3 basis points), even as the variability increased when interest rate volatility moved up starting in 2022. Both figures indicate continued strong demand for Treasury securities.

Turning to secondary markets, liquidity conditions are often proxied by actual trading costs. An index based on bid-ask spreads, market depth, and price impact measures is shown on the left; higher values indicate higher costs and less liquidity. While these costs generally do not vary significantly day-to-day, they have been slightly higher since mid-2022 than in prior years. This pattern reflects the positive correlation with interest rate volatility, which has risen, and is shown by the upward slope between costs and volatility on the chart to the right.

Another notable feature of market liquidity is that it can deteriorate quickly when unexpected shocks hit. This was evident in March 2020 at the onset of the pandemic, as well as in March 2023, when some banks faced rapid depositor runs. Also, as can be seen by the red dots on the figure to the right, illiquidity was worse than might be expected given the volatility in March 2020. These dots illustrate the “dash for cash” when the desire to sell Treasury securities surged, especially by investment funds, and exceeded the ability or willingness of dealers to supply liquidity. As you know, the market dysfunction was resolved only after the Federal Reserve itself provided liquidity by directly purchasing Treasury securities in significant amounts.

In contrast to 2020, during the bank deposit runs in 2023 — shown by the purple dots — the increase in transaction costs was relatively in line with the rise in volatility. Importantly, moderately-reduced liquidity did not amplify volatility during that period, and market conditions remained orderly, though likely helped by the actions taken by the Treasury and Federal Reserve to reduce contagion from the bank failures. More recently, as highlighted by the green dots for 2024, Treasury market liquidity did not deteriorate unusually following the steep drop in global stock prices and unwinding of carry trades in early August of this year.

The Evolution of the Treasury Market

But this is not where the story ends as Treasury market structure is changing continually. It has evolved significantly over the last couple decades, driven in part by regulatory and technological changes as more data have become available and computing power has advanced.

One such change is increased electronic trading and how shifting types of market intermediaries have transformed the provision of market liquidity. While traditional dealers had been the main participants in the interdealer cash market, principal trading firms (PTFs) now represent most trading activity in the futures and electronically brokered interdealer cash markets. We saw an implication of these changes in the Treasury “flash rally” on October 15, 2014. It was that event that led to the expansion of the work of the IAWG.

At the same time, we have seen an increase in the amount of Treasury securities outstanding relative to the capacity of dealers to provide liquidity to those markets, partly reflecting the regulations adopted in response to the Global Financial Crisis (GFC) of 2007-09.^[vi] Moreover, the investor base has shifted as holdings by more price sensitive investors, including private funds with liquidity mismatch or leverage, have increased. Currently, money market and mutual funds hold about 16% of total outstanding Treasury debt, respectively, and the household sector, which includes hedge funds, holds about 10%.^[vii] 

A Review of Recent Efforts to Increase the Resilience of the Treasury Market

In response to these changes and the events of March 2020, the IAWG initiated a comprehensive review and set out a program to strengthen the Treasury market.

In its 2021 public report, the IAWG proposed six guiding principles for public policy in the Treasury markets.^[viii] At its core, policy should promote a Treasury market where prices reflect the current and expected economic and financial conditions, liquidity in the market is resilient and elastic, and both are underpinned by effective infrastructure, appropriate risk management, and transparency. We set out five workstreams that are outlined on this next slide. I will highlight some of the work that has been done, and what remains.

First, we have significantly improved the quality and availability of data on the Treasury market. In February 2023, FINRA began to publish aggregate transaction volume data on a daily basis—only weekly data were available before then. Earlier this year, FINRA began to disclose daily transaction-level data for on-the-run securities. These data represent about one-half of overall daily trading and about 75% of the daily activity in nominal coupon securities. While the IAWG’s efforts have led to greatly expanded data availability, we also have been deliberate to avoid potential harms, such as to confidential positions by placing caps on trade sizes.

In addition, we are closing a large data gap in the repo market for non-centrally cleared bilateral repo. Treasury’s Office of Financial Research (OFR) has been working with dealers so that everyone is prepared to start the data collection at the transaction level in the first week of December. Based on the pilot conducted in 2022 and earlier work, the new data from this collection may give the official sector insights into the more than 45% percent of the repo market that has been opaque since before the GFC.^[ix]

Moreover, the Securities and Exchange Commission (SEC) is collecting more information on hedge funds through recent improvements in Form PF filings. In addition, OFR launched a new Hedge Fund Monitor that makes aggregated data on hedge fund activities from Form PF and other sources more accessible to the public. An example from this monitor is shown on this next slide, which highlights a significant increase in repo (mostly Treasury) and prime brokerage borrowing underlying an increase in leverage of some hedge funds. And starting in March 2025, Form PF will collect more detailed data for large hedge funds, such as separate reporting of Treasury cash and derivatives.

Turning back to the IAWG workstreams, the second one is to improve the resilience of market intermediation. We have put in place a number of changes here as well. Earlier this year, Treasury started a buyback program that creates predictable opportunities for dealers to sell off-the-run securities to support market liquidity. While the program is modest in size and not designed to respond to crises, it should free up dealer balance sheets allocated to less-liquid positions. Since the launch of the program in May, Treasury has purchased close to $40 billion of securities in 24 operations, sometimes buying less than the stated maximum depending on the offers we receive relative to prevailing market prices. We recently posted some metrics on the operations and are monitoring the effects of this program.^[x]  

In addition, since March 2020, the Federal Reserve has put in place two facilities that should support liquidity in periods of stress: the Standing Repo Facility (SRF) to finance Treasury repo with pre-authorized banks and primary dealers, and the Foreign and International Monetary Authorities facility for certain foreign central banks. We saw that the SRF was tapped at the last quarter-end, indicating initial signs of success by the regulators to encourage its use and avoiding stigma.

One idea that remains open is to reconsider changes to the supplementary leverage ratio (SLR), which currently requires firms to hold the same amount of capital on reserves and Treasury securities as they do on risky debt. Proposed options vary and can include excluding reserves held at the central bank and perhaps some Treasury securities from the SLR calculation. Another is to make the enhanced-SLR buffer countercyclical, to be released in periods of market-wide stress based on triggers that are defined ex ante so that banks could plan ahead. This could be accomplished without reducing the overall amount of required capital in the system.

The third and fourth workstreams focus on ensuring efficient and effective infrastructure, recognizing the emergence of new types of firms and trading practices mentioned earlier. The SEC adopted new rules this year that require firms with significant liquidity-provision roles, such as PTFs, to register with the SEC as a dealer. It also has been working to finalize its proposed amendments to Regulation ATS to enhance the resilience of alternative trading venues. Another key infrastructure reform is expanded central clearing, which I will turn to shortly in more detail.

The fifth workstream focuses on the potential for surges in demand for Treasury liquidity in periods of stress from liquidity mismatch and excessive leverage of some types of investment funds. For example, open-end bond and loan mutual funds have a liquidity mismatch between daily redemptions offered to shareholders and the longer time it takes to sell the underlying bonds and loans. The SEC proposed a rule with options to address this “phantom” liquidity to help avoid a repeat of the surge in Treasury sales in March 2020, though there was substantial industry pushback because of operational impediments to swing pricing. However, as these funds have grown to hold a significant share of corporate credit, the SEC and the industry should continue to explore possible solutions.

In addition, we saw in March 2020 that excessive leverage in the Treasury market could become destabilizing. Much attention has focused on the cash-futures basis trade, in which hedge funds take short positions in Treasury futures corresponding to long positions by asset managers, and finance their long cash Treasury hedges with repo. This basis trade supports Treasury market functioning in normal times by tying together cash and futures markets and serving as an important source of demand for Treasury securities.

However, the basis trade is typically highly leveraged — research has highlighted the leverage arising both from zero haircuts on bilateral uncleared Treasury repo offered to hedge funds, and from long futures positions at asset managers. Asset managers may prefer futures to repo because futures are less operationally cumbersome, but also because they do not require the interest expense reporting that repo does.^[xi] Hedge fund leverage in this trade may be mitigated by portfolio and cross-margining not reflected by the zero haircuts on repo, but practices are opaque. It is important for regulators to mitigate excessive leverage to prevent forced unwinds during stress periods, especially as the cash basis trade has continued to grow.

The Central Clearing Mandate and What Comes Next

This brings us to expanded central clearing for Treasury securities transactions, which is an important structural change.^[xii] Central clearing is used for a number of other asset classes, including equities and exchange-traded derivatives. In addition, parts of the Treasury market are already centrally cleared, such as the entire futures market and parts of the cash and repo markets.

Evaluating expanded central clearing was put forward by the IAWG to increase intermediation capacity and reduce risk. Expanded central clearing should increase the intermediation capacity of bank-affiliated dealers because bank capital and leverage requirements recognize the risk-reducing effects of multilateral netting of centrally-cleared trades. Combined with increased disclosures, it may also enable a path forward to some all-to-all trading. On the risk side, central clearing should lead to better risk management by enhancing and standardizing practices. A central counterparty (CCP), for example, could establish margins that better reflect the market risk and concentration of positions rather than just the low-risk nature of Treasury securities. The centralization of transactions also provides greater visibility into market conditions.

Last year, after substantive engagement with market participants and other regulators, the SEC finalized rules to require central clearing of Treasury securities transactions, with deadlines for cash securities by year-end 2025 and for repo by the end of June 2026. Market participants now are moving deliberately and quickly to implement and to meet interim deadlines and an important date is fast approaching. By March 31, 2025, covered CCPs need to implement customer clearing models and segregate house and customer margins, among other requirements.

I know some have noted that expanded central clearing could cause the Treasury transactions costs to increase because CCPs would impose costs related to meeting risk management and other operational requirements. As a result, some intermediaries could pull back from the market or widen bid-ask spreads. However, private costs to individual market participants may not reflect the systemic costs to the broader financial system. Expanded central clearing that requires market participants to internalize costs of better risk management should prevent excessive risk taking and reduce systemic risk. Moreover, to avoid unnecessary cost increases, there is room in implementation to look at the cross-margining of futures and cash securities such that margins are calibrated appropriately to the economic risks. While cross-margining can already be used for house accounts, how it is extended to customer accounts and the implications for systemic risk should be considered carefully.

Turning to the implementation work ahead, there are many open issues to ensure market participants are ready, including around market structure, client access models, accounting, regulatory capital, and MMF access. I will comment on just two of these issues.

Starting with market structure, the new mandate will lead to a significant increase in the volume of transactions to be centrally cleared. Treasury clearing activity is expected to increase by more than $4 trillion each day, and at least 7,000 new relationships between direct and indirect participants are expected to be needed in advance of the deadlines.^[xiii] Currently there is only one CCP for U.S. Treasuries, though some firms are actively considering entering this market. Entry could lead to greater competition and innovation and bring with it different clearing offerings and pricing, and from a macro perspective, there could be gains to operational resilience from multiple CPPs. These are important potential benefits even as there are some open questions about a loss in netting benefits and fragmentation of liquidity pools when there is more than one CCP.

The issue of market structure also is tied to client access models. The current Treasury market practice for centrally cleared trades is for trade clearing and execution to be bundled together, following a “done-with” model, as dealers have preferred to link the use of their scarce balance sheet with revenues from execution. But there is significant demand for “done-away” models, which are commonplace in other markets with central clearing, namely futures and swaps. In this model, trades executed with one counterparty can be cleared separately through a different clearinghouse member. As such, a big advantage is that it could provide greater competition in trade execution and trade clearing, which would support improved market functioning.

Of course, there are operational issues to wrestle with to achieve expanded central clearing. SIFMA’s new report and its work on developing master clearing agreements for done-with models are helpful steps to support the upcoming transition, alongside the work under way at many other organizations here today.^[xiv] Taking a step back, though, the work to expand central clearing offers significant benefits by reducing risks to financial stability, increasing competition and innovation, and improving operational resilience.

Conclusion

To conclude, Treasury and the financial regulators, working closely with the industry, have made significant progress to strengthen the resilience of the Treasury market and implementing expanded central clearing is advancing in ways that would reduce systemic risk and expand product offerings. Some work remains, however, to address reduced bank-dealer capacity and a growing nonbank sector that relies on Treasury market liquidity in periods of stress. Given the critical role the Treasury market plays in the U.S. and the global economy, it is imperative to continue to execute on the current program and evaluate the market’s performance against the principles laid out earlier. This work has become more significant with projections for elevated levels of issuance over the coming years. I want to thank you for your engagement and cooperation throughout the reform efforts. Industry and policymakers working together has been critical to the progress and I encourage you to continue this important work.

The slides and figures referenced in these remarks are available here.

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_[i] The IAWG was formed in 1992 by the Treasury Department, the Securities and Exchange Commission (SEC), and the Board of Governors of the Federal Reserve System (the Federal Reserve Board) to improve monitoring and surveillance and strengthen interagency coordination with respect to the Treasury markets following the Salomon Brothers auction bidding scandal.  See U.S. Department of the Treasury, Securities and Exchange Commission, and Board of Governors of the Federal Reserve System, 1992, “Joint Report on the Government Securities Market,” U.S. Government Printing Office, January 22.  Today, the IAWG consists of staff from the Treasury Department, SEC, Federal Reserve Board, Federal Reserve Bank of New York, and Commodity Futures Trading Commission.

_[ii] Treasury Daily Aggregate Statistics | FINRA.org.

_[iii] US Repo Statistics – SIFMA – US Repo Statistics – SIFMA.

_[iv] U.S. Treasury futures, options, and cash – CME Group.

_[v] Remarks by Assistant Secretary for Financial Markets Joshua Frost on Principles of U.S. Debt Management Policy | U.S. Department of the Treasury.

_[vi] Liang, Nellie and Pat Parkinson (2020), “Enhancing Liquidity of the U.S. Treasury Market Under Stress,” Hutchinson Center Working Paper #72, Brookings, December, and Duffie, Darrell, Michael Fleming, Frank Keane, Claire Nelson, Or Shachar, and Peter Van Tassel (2023), “Dealer Capacity and U.S. Treasury Market Functionality” Federal Reserve Bank of New York Staff Reports, no. 1070, August.

_[vii] TBACCharge2Q32024.pdf (treasury.gov).

_[viii] IAWG (2021) report “Recent Disruptions and Potential Reforms in the U.S. Treasury Market: A Staff Progress Report,” November 8, 2021.

_[ix] Non-centrally Cleared Bilateral Repo | Office of Financial Research and OFR’s Pilot Provides Unique Window Into the Non-centrally Cleared Bilateral Repo Market | Office of Financial Research.

_[x] TreasurySupplementalQ42024.pdf.

_[xii] See IAWG (2021) report “Recent Disruptions and Potential Reforms in the U.S. Treasury Market: A Staff Progress Report,” November 8, 2021; Duffie, Darrell (2020), “Still the World’s Safe Haven? Redesigning the U.S. Treasury Market After the COVID-19 Crisis,” Hutchinson Center Working Paper #62, Brookings, June;  Liang, Nellie and Pat Parkinson (2020), “Enhancing Liquidity of the U.S. Treasury Market Under Stress,” Hutchinson Center Working Paper #72, Brookings, December.

_[xiii] Treasury Clearing Mandate Survey White Paper | DTCC and U.S. Treasury Central Clearing.

_[xiv] US Treasury Central Clearing: Industry Considerations Report – SIFMA – US Treasury Central Clearing: Industry Considerations Report – SIFMA and SIFMA and SIFMA AMG Publish Master Treasury Securities Clearing Agreement.

WASHINGTON — Today, the Department of the Treasury’s Office of Foreign Assets Control (OFAC) is sanctioning Amana the Settlement Movement of Gush Emunim Central Cooperative Association Ltd (Amana), a settlement development organization that is involved with U.S.-sanctioned individuals and outposts that perpetrate violence in the West Bank, and its subsidiary Binyanei Bar Amana Ltd. This action, taken pursuant to Executive Order (E.O.) 14115, is part of an ongoing multilateral approach by the United States and its partners to hold accountable those who are threatening the peace, security, and stability of the West Bank. Amana has also been sanctioned by the United Kingdom and Canada.

“The United States, along with our allies and partners, remains committed to holding accountable those who seek to facilitate these destabilizing activities, which threaten the stability of the West Bank, Israel, and the wider region,” said Deputy Secretary of the Treasury Wally Adeyemo.

Concurrently, the Department of State is designating three individuals and one entity under E.O. 14115. For more information on these targets, please see the Department of State press release at this link.

The United States has consistently opposed violence in the West Bank, as well as other acts that unduly restrict civilians’ access to essential services and basic necessities and risk further escalating tensions and expanding the conflict in the region. As noted in FinCEN’s February 1, 2024 Alert and July 11, 2024 Supplemental Alert, Treasury remains concerned by reports of escalating violence in the West Bank and encourages continued reporting by financial institutions of suspicious activity potentially related to the financing of these violent acts.

MAJOR SETTLEMENT ORGANIZATION IN WEST BANK

Amana is a key part of the Israeli extremist settlement movement and maintains ties to various persons previously sanctioned by the U.S. government and its partners for perpetrating violence in the West Bank. For example, Amana provided a loan to Israeli settler Isaschar Manne, and served as a partner in the formation of Meitarim Farm. The U.S. Department of State sanctioned Isaschar Manne and Meitarim Farm on July 11, 2024 pursuant to E.O. 14115. The settlers and farms that Amana supports play a key role in developing settlements in the West Bank, from which in turn settlers commit violence. More broadly, Amana strategically uses farming outposts, which it supports through financing, loans, and building infrastructure, to expand settlements and seize land. 

OFAC today is also sanctioning Amana’s subsidiary, Binyanei Bar Amana Ltd (BBA). BBA is a construction and development company that builds and sells homes in settlements and outposts in the West Bank.

OFAC is sanctioning Amana pursuant to E.O. 14115 for being a foreign person that is responsible for or complicit in, or has directly or indirectly engaged or attempted to engage in, planning, ordering, otherwise directing, or participating in seizure or dispossession of property by private actors, affecting the West Bank. OFAC is sanctioning BBA pursuant to E.O. 14115 for being a foreign person that is owned or controlled by, or has acted or purported to act for or on behalf of, directly or indirectly, Amana.

SANCTIONS IMPLICATIONS

As a result of today’s action, all property and interests in property of the designated persons described above that are in the United States or in the possession or control of U.S. persons are blocked and must be reported to OFAC. In addition, any entities that are owned, directly or indirectly, individually or in the aggregate, 50 percent or more by one or more blocked persons are also blocked. Unless authorized by a general or specific license issued by OFAC, or exempt, OFAC’s regulations generally prohibit all transactions by U.S. persons or within (or transiting) the United States that involve any property or interests in property of designated or otherwise blocked persons. U.S. persons must comply with OFAC regulations, including all U.S. citizens and permanent resident aliens regardless of where they are located, all persons within the United States, and all U.S.- incorporated entities and their foreign branches. Non-U.S. persons are also subject to certain OFAC prohibitions. For example, non-U.S. persons are prohibited from causing or conspiring to cause U.S. persons to wittingly or unwittingly violate U.S. sanctions, as well as engaging in conduct that evades U.S. sanctions. 

U.S. persons may face civil or criminal penalties for violations of E.O. 14115. OFAC’s Economic Sanctions Enforcement Guidelines provide more information regarding OFAC’s enforcement of U.S. sanctions, including the factors that OFAC generally considers when determining an appropriate response to an apparent violation.

Financial institutions and other persons that engage in certain transactions or activities with the sanctioned entities and individuals may expose themselves to sanctions or be subject to an enforcement action. The prohibitions include the making of any contribution or provision of funds, goods, or services by, to, or for the benefit of any designated person, or the receipt of any contribution or provision of funds, goods, or services from any such person. 

The power and integrity of OFAC sanctions derive not only from OFAC’s ability to designate and add persons to the Specially Designated Nationals and Blocked Persons (SDN) List, but also from its willingness to remove persons from the SDN List consistent with the law. The ultimate goal of sanctions is not to punish, but to bring about a positive change in behavior. 

For information concerning the process for seeking removal from an OFAC list, including the SDN List, please refer to OFAC’s Frequently Asked Question 897 here. For detailed information on the process to submit a request for removal from an OFAC sanctions list, please click here.

Click here for more information on the persons designated today.

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WASHINGTON – Today, the U.S. Department of the Treasury (Treasury), as Chair of the Committee on Foreign Investment in the United States (CFIUS), issued a final rule to enhance certain CFIUS procedures and sharpen its penalty and enforcement authorities. The final rule is the first substantive update to the monitoring and enforcement provisions of the CFIUS regulations since the implementation of the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA), which amended CFIUS’s governing statute (section 721 of the Defense Production Act of 1950). The final rule issued today follows a proposed rule issued in April and responds to public comments received in response to the proposed rule.

“This rule enhances CFIUS’s ability to vigorously defend the national security of the United States by ensuring our investment screening regime has a sharper scalpel to more quickly and effectively address national security risks that arise in CFIUS reviews,” said Assistant Secretary for Investment Security Paul Rosen.

CFIUS is authorized to review certain transactions involving foreign investment into U.S. businesses and certain transactions by foreign persons involving real estate in the United States in order to determine the effect of such transactions on the national security of the United States. CFIUS enforces transaction parties’ compliance with its statute and regulations, as well as agreements entered into and conditions and orders imposed under such authorities, through its authority to impose civil monetary penalties and seek other remedies. In recent years, CFIUS has enhanced its compliance and monitoring capabilities, along with its ability to identify and investigate transactions that were not notified to CFIUS. This final rule reflects and builds upon those enhancements to help CFIUS accomplish its national security mission consistent with the United States’ open investment policy.

The final rule enhances CFIUS’s authorities through the following key changes:

• Expanding the types of information CFIUS can require transaction parties and other persons to submit when engaging with them on transactions that were not filed with CFIUS;
• Allowing the CFIUS Staff Chairperson to set, as appropriate, a timeline for transaction parties to respond to risk mitigation proposals for matters under active review to assist CFIUS in concluding its reviews and investigations within the time frame required by statute;
• Expanding the circumstances in which a civil monetary penalty may be imposed due to a party’s material misstatement and omission, including when the material misstatement or omission occurs outside a review or investigation of a transaction and when it occurs in the context of CFIUS’s monitoring and compliance functions;
• Substantially increasing the maximum civil monetary penalty available for violations of obligations under the CFIUS statute and regulations, as well as agreements, orders, and conditions authorized by the statute and regulations, and introducing a new method for determining the maximum possible penalty for a breach of a mitigation agreement, condition, or order imposed;
• Expanding the instances in which CFIUS may use its subpoena authority, including in connection with assessing national security risk associated with non-notified transactions; and
• Extending the time frame for submission of a petition for reconsideration of a penalty to CFIUS and the number of days for CFIUS to respond to such a petition.

In assessing compliance and whether to bring an enforcement action in a particular case, CFIUS will continue to evaluate the facts and circumstances surrounding the conduct including the aggravating and mitigating factors described in the CFIUS Enforcement and Penalty Guidelines.

The final rule will become effective 30 days after publication in the Federal Register and is available at https://www.cfius.gov/.

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As Prepared for Delivery

Good afternoon. Let me start by thanking you for your continued work promoting financial literacy and education and for being part of today’s Financial Literacy and Education Commission (FLEC) meeting.

The FLEC provides a crucial forum to coordinate the government’s efforts to help consumers make informed, sound decisions that enhance their financial well-being. And today we are pleased to focus our discussion on a key recent effort: the Department of the Treasury’s (Treasury) National Strategy for Financial Inclusion in the United States, which we published at the end of October. 

The Strategy is based on extensive research and stakeholder engagement across the public, private, and non-profit sectors, including with many of you. And it’s part of Treasury’s and the Biden-Harris Administration’s broader focus on reaching people and places that have been underserved in order to advance a more inclusive financial system and strengthen our economy. When families lack access to financial services or affordable credit, they are less able to weather economic shocks or invest in their futures. And this creates friction in our economy. 

The Strategy is designed to address these issues head-on—setting out a plan to make our financial system more inclusive and our economy more dynamic and resilient. And it importantly focuses not just on increasing access to the financial system but also on leveraging that access to drive better consumer outcomes like increased financial resilience, well-being, and wealth. 

The Strategy emphasizes the need for unbiased, clear, and relevant financial information to equip consumers to make informed financial decisions. And it puts forward five key objectives: promote access to transaction accounts; increase access to safe and affordable credit; increase retirement and emergency savings opportunities; improve government financial services; and strengthen consumer protections. 

I know that many of you are already doing important work to further financial inclusion. Federal partners in the FLEC, for example, are investing in faster payments, better consumer protections, and improved financial education. Others listening today are providing valuable feedback on their communities’ needs and working with financial service providers to remove barriers to access. 

Successful implementation of the Strategy will depend on continued strong interagency collaboration, strategic public-private partnerships, and trusted community partners. 

We saw powerful examples of interagency collaboration during the pandemic, such as the partnership between the Internal Revenue Service and the Federal Deposit Insurance Corporation to help consumers without bank accounts identify and open accounts. The unbanked rate fell to 4.5 percent, the lowest in decades.

Many of these new accounts were Bank On accounts, low-cost accounts with reduced overdraft fees, demonstrating the potential of public-private partnerships to expand access. 

And let me emphasize that community development financial institutions and minority depository institutions are key examples of community partners that have earned the trust of underserved communities, with strong track records of facilitating financial inclusion, building wealth, and ensuring that community leaders and those they represent are heard. Our continued support of community financial infrastructure is critical. 

As we look ahead, I call on my fellow federal agencies and other partners attending today to build on our work to date and take concrete additional steps: to review existing programs and products for opportunities to enhance financial inclusion; to strengthen partnerships; and to share best practices. We can together build a financial system that serves all Americans and fuels innovation and economic growth. 

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