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P a g e | 1 Inter n atio na l A s s oci a t ion of R isk a nd Co mpl i a n c e Pr o f e s s io na l s ( I A RCP) 12 0 0 G St re e t N W Su i t e 8 0 0 W a s h i ng t o n, D C 2 000 5 - 67 0 5 U SA T e l : 2 0 2 - 449 - 9750 www .ri s k - c ompl i ance-a ss o c i a tion . c om.

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P age |1

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

1200GStreet NWSuite800Washington,DC20005-6705USATel:202-449-9750www.risk-compliance-association.com

Top10riskandcompliancemanagementrelatednewsstoriesandworldeventsthat(forbetterorforworse)shapedthe week'sagenda,andwhatisnext

DearMember,

Doyouknow whatiscontagiousness?

“Wedistinguishbetweencontagiousness(the

shareoftotalbankingassetsrepresentedbythosebanks thataspecificbankbringsdownbycontagion)andvulnerability(thenumberofbanksbywhichabankisbroughtdownbycascadingfailures).”

“Thepurposeofthispaperis toanalyze(hypothetical)contagiousbankdefaults,i.e.defaultsnotcausedbythefundamentalweaknessofagivenbankbuttriggeredbyfailuresinthebankingsystem.”

Butthisissuperb!!!Whowrotethat?

Atnumber10ofourlist,(FinancialStabilityReport,Oesterreichische Nationalbank,page64)Claus Puhr,ReinhardtSeligerandMichaelSigmund,fromtheOesterreichischeNationalbank,FinancialMarketsAnalysisandSurveillanceDivision,atthepaper“ContagiousnessandVulnerability intheAustrianInterbankMarket”

Areyougoodinmathematics?Iftheanswerisyes,youwillenjoyNumber

10.Istartedmycareerasamathematician,butittookme4hourstoreadthepaper.Itisabsolutelybrilliant.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


P age |2

Ihavealongflighttomorrow,andguesswhat…IhaveprinteditandIwilltakeitwithme,toread itagain.

Iknow…itlooksstrange…Itoldittooneofmyfriends,anattorney,andhesentmeapaperentitled:“Theimpactoffluctuatingworkloadsonwell-beingandthemediatingroleofwork−nonworkinterferenceinthisrelationship.”

Oh,no,hebelievesthatmyproblemiscalledoccupationalpsychosis …heiswrong…

Ok,whenIsleepIdodreamofSIFIs andregulatoryarbitrageopportunities,butitisquitenormalIbelieve.OfcourseIsometimesexperiencetheoppressivefeelingofguilt,thesenseofnothavingliveduptoBaseliiiframework’sexpectations(Baseliiiisagainstregulatoryarbitrage),butIcannotresist.

Afterthisanalysis,Ihavedecidedwhattoread duringtheflight:Thepaper“ContagiousnessandVulnerabilityin theAustrianInterbankMarket”

DidItellyouthat“wedistinguishbetweencontagiousness(theshareoftotalbankingassetsrepresentedbythosebanksthataspecificbankbringsdownbycontagion)andvulnerability(thenumberofbanksbywhichabankisbroughtdownbycascadingfailures).”?

Yes,Idid,Iremembernow.

ReadmoreatNumber10below.

Welcome totheTop10list.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


P age |3

GovernorDanielK.Tarullo

AttheCornellInternationalLawJournalSymposium:TheChangingPoliticsofCentralBanks,NewYork,NewYork

InternationalCooperationinFinancialRegulation

NextmonthmarksthefifthanniversaryofthefailureofBearStearns--inretrospect,thebeginningofthemost acutephaseofthefinancialcrisis.

GabrielBernardino,ChairmanofEIOPA

IMD2andSolvencyII–Theroadtobetterpolicyholderprotectionandfinancialstability

WorkshoporganisedbytheEuropean FederationofInsuranceIntermediaries(BIPAR)Brussels

SubmittingaSuspiciousActivityReport(SAR)withintheRegulatedSector

ThisisaUnitedKingdomFinancialIntelligenceUnit(UKFIU)communicationsproduct,producedinlinewiththeSeriousOrganisedCrimeAgency's(SOCA)commitmenttosharingperspectivesontheSuspiciousActivityReports(SARs)Regime.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


P age |4

Thisdocumentseeks to provideadviceandrelaybestpracticewhenmakingaSuspiciousActivity Report(SAR),apieceofinformationthatalertsLawEnforcementAgencies(LEAs)thatcertainclient/customeractivityisinsomewaysuspiciousandmightindicatemoneylaunderingorterroristfinancing.

FinancialStabilityBoardreportstoG20onprogressoffinancialregulatoryreforms

TheChairmanofthe FinancialStabilityBoard(FSB)reported to theG20FinanceMinistersandCentralBankGovernorsonprogressinthefinancialregulatoryreformprogramme.

Financialregulatoryfactorsaffectingtheavailabilityoflong-terminvestmentfinance

ReporttoG20FinanceMinistersandCentralBankGovernors

ThemostimportantcontributionoffinancialregulatoryreformstoLTinvestmentfinanceis to promoteasafer,sounderandthereforemoreresilientfinancialsystem.

Ifimplementedintimelyandconsistentmanner,thesereformswillhelprebuildconfidenceintheglobalfinancialsystem,whichwillenhanceitsability to intermediatefinancialflowsthroughthecycleandfordifferentinvestmenthorizons.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


P age |5

Keynote

JamesR.Doty,Chairman

FloridaBarAssociation31stAnnualFederalSecuritiesInstitute,MiamiBeach,FL

“Today,Iwouldliketo talktoyouaboutsomeofthePCAOB'sinitiativestoenhancetherelevance,credibilityandtransparencyoftheaudittopromotehighqualityfinancialreporting.

Wemeetinthemidstofarobustand

wide-rangingglobal debateonhow topromoteauditquality.Whatevertheoutcome,itisclearthattheauditisindeedavalued,criticalfeatureoftheU.S.financialsystem,anditenjoysanimportantpositionin theeyesofpeoplearoundtheworld.”

StrategicGoals2013to2016

TheSwissFinancialMarketSupervisory

AuthorityFINMAisaninstitutionunderpubliclawwithitsownlegalpersonality.

ItisresponsibleforimplementingtheFinancialMarketSupervisionActandfinancialmarketlegislation.

Asanindependentsupervisoryauthority,FINMA acts toprotecttheinterestsofcreditors,investorsandinsuredpersons,and to ensuretheproperfunctioningofthefinancialmarkets.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


P age |6

ManuelSánchez:Mexico’seconomicoutlookandchallenges

RemarksbyMrManuelSánchez,DeputyGovernoroftheBankofMexico,attheConference

“Regulatoryreform,theglobaleconomicoutlook,andtheimplications

forMexico’sfinancialsector”,organizedbytheInstituteofInternationalFinanceandBanorte,MexicoCity

“TheSECSpeaksin2013”

CommissionerDanielM.Gallagher

U.S. SecuritiesandExchangeCommissionWashington,D.C.

ContagiousnessandVulnerabilityin theAustrianInterbankMarket

Claus Puhr,ReinhardtSeliger,MichaelSigmund,Oesterreichische Nationalbank,FinancialMarketsAnalysisandSurveillanceDivision

Thepurposeofthispaperistoanalyze(hypothetical)contagiousbankdefaults,i.e.defaultsnotcausedbythefundamentalweaknessofagivenbankbuttriggeredbyfailuresinthebankingsystem.

Asfailingbanksbecomeunable tohonortheircommitmentsontheinterbankmarket,theymaycause otherbanks todefault,whichmayinturnpush evenmorebanksovertheedgein so-calleddefaultcascades.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


P age |7

GovernorDanielK.Tarullo

AttheCornellInternationalLawJournalSymposium:TheChangingPoliticsofCentralBanks,NewYork,NewYork

InternationalCooperationinFinancialRegulation

NextmonthmarksthefifthanniversaryofthefailureofBearStearns--inretrospect,thebeginningofthemostacutephaseofthefinancialcrisis.

Thecross-borderdimensionsofthecrisisitselfandtheglobaleffectsoftheGreatRecessionthatfollowedprovokedamajoreffort tostrengtheninternationalcooperationinfinancialregulation.

Whileagooddealhasalreadybeenaccomplished,this

eveningIwillsuggestthenextstepsthatwouldbemostuseful in

advancingglobalfinancialstability.

Ofcourse,thefashioningofaninternationalagendarequiresaclearunderstandingofthe overallregulatoryaimsofparticipatingnationalauthorities.

Hereiswhereinternationalregulatorycooperationlinkstothesubjectofthisconference--ifnotquitethechangingpoliticsofcentralbanks,thenatleasttheirchanging policy goalsinthewakeofthefinancialcrisis.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


P age |8

Almostbydefinition,systemiccrisesrevealfailuresacrossthefinancialsystem,frombreakdownsin riskmanagementatmanyfinancialfirmstoseriousdeficienciesingovernmentregulationoffinancialinstitutionsandmarkets.

Whiletherecentcrisiswasnoexception,ithaspresentedparticularchallengestothepolicyfoundationsofcentralbanks,especiallythoseliketheFederalReservethatcarryoutregulatorymandatesalongsidetheirmonetarypolicymissions.

SoIbeginwithsomeremarksonthenatureofthosechallenges,beforeturningtoadiscussionofhowchangesinapproachshouldinforminternationalcooperationin financialregulation.

CentralBanks andtheFinancialCrisis

In surveyingthefailingsoffinancialauthorities,bothhereandabroad,one cancertainlyidentifysomespecific characteristicsofpre-crisisregulationthatlooktoday tohavebeensignificantlymisguided,rather thantheadvancestheywereformerlythoughttobe.

So,forexample,regulatorsbecameprone to placetoomuchconfidenceinthe capacityoffirmstomeasureandmanagetheirrisks.

Indeed,thedecadeorsopriortothecrisishadseenanaccelerationoftheshiftfromadominantlyregulatoryapproachto achievingprudentialaims--onethatrestson activitiesandaffiliationrestrictions,andotherreasonablytransparentrules--towardgreateremphasisonasupervisoryapproach,whichreliesonamoreopaque,firm-specificprocessofwatchingoverbanks' own risk-managementandcompliancesystems.

Yetthebreadthanddepthofthefinancialbreakdownsuggestthatithasmuchdeeperroots.

In manyrespects,thiscrisiswastheculminationoffundamentalshiftsinboththeorganizationandregulationoffinancialmarketsthatbeganinthe1970s.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


P age |9

TheNewDealreformsoffinancialregulation,themselvesspawnedbyasystemiccrisis,hadseparatedcommercialbankingfrominvestmentbanking,curedtheproblemofcommercialbankrunsbyprovidingfederaldepositinsurance,andbroughttransparencyandinvestorprotections to tradingandothercapitalmarketsactivities.

Thisregulatoryapproachfosteredacommercialbankingsystemthatwas, forthebetterpartof40years,quitestableandreasonablyprofitable,thoughnotparticularlyinnovativeinmeetingtheneedsofdepositorsand borrowers.

In the1970s,however,turbulentmacroeconomicdevelopmentscombinedwith technologicalandbusinessinnovations toproduceanincreasinglytightsqueezeonthetraditionalcommercialbankingbusinessmodel.

Thesqueezecamefromboththeliabilitysideofbanks'balancesheets,intheformofmoreattractivesavingsvehiclessuchasmoneymarketfunds,andfromtheassetside,withthegrowthofpublic capitalmarketsandinternationalcompetition.

Thelargecommercialbanking industrythatsawbothitsfundinganditscustomerbasesunderattacksoughtremovalorrelaxationoftheregulationsthatconfinedbankactivities,affiliations,andgeographicreach.

Whilesupervisorsdifferedwithbanksonsomeimportantparticulars, theyweresympathetictothisindustryrequest,inpartbecauseofthepotentialthreattotheviabilityofthetraditionalcommercialbankingsystem.

TheperiodofrelativelegalandindustrystabilitythathadfollowedtheNewDealthusgavewayinthe1970stoanearly30-yearperiodduringwhichmanyprevailingrestrictionsonbanks wererelaxed.

Agoodnumberwereloosenedthroughadministrativeactionbythebankingagencies,butimportantstatutorymeasuresheadedin thesamedirection.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


P age |10

Thislegislativetrend culminatedintheGramm-Leach-BlileyActof1999,whichconsolidatedandextendedtheadministrativechangesthathadallowedmoreextensiveaffiliationsofcommercialbanks withinvestmentbanks,broker-dealers,privateequityfirms,andotherfinancialentities.

ButinsweepingawaytheremnantsofonekeyelementoftheNewDealregulatorysystem,neitherGramm-Leach-Blileynorfinancialregulatorssubstitutednewregulatorymechanismstomatchthewholesalechangesinthestructureofthefinancialservicesindustryandthedramaticgrowth ofnovelfinancialinstruments.

In fact,Iwouldgeneralizethislastobservationtosaythattheneed toaddresstheconsequencesoftheprogressiveintegrationoftraditionallending,tradingactivities,and capitalmarketsliesattheheartofthreepost-crisischallenges to thepolicy foundationsoftheFederalReserveand,to agreaterorlesserdegree,manyothercentralbanks.

MicroprudentialRegulation

Thefirstchallengeposedbythecrisiswas totraditional,microprudentialregulation,whichfocusesonthesafetyandsoundnessofeach prudentiallyregulatedfirm.

Notallcentralbankshavemicroprudentialregulatoryauthority,ofcourse,and--asintheUnitedStates--thosethatdosometimesshareitwith otheragencies.

Buttheshortcomingsofpre-crisisregulatoryregimeshavebeenofconcerntoallcentralbanks.

Mostnotably,capitalrequirementsforbankingorganizations,particularlythelargeonesthatmightberegardedas too-big-to-fail,simplywerenotstrongenough.

Risk-weightsweretoolow forcertaintradedassetsthathadproliferatedascreditand capitalmarketsintegratedmorethoroughly.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


P age |11

In somecases,thearbitrageopportunitiespresentedbyexistingcapitalrequirementswereanincentiveforsecuritizationand othercapitalmarketsactivities.

Theexposurescreatedbyoff-balance-sheetactivitiessuchasstructuredinvestmentvehicles(SIVs)werebadlyunderweighted.

Minimumcapitalratioswerenothighenoughand,inmeetingeventhoseinadequaterequirements,firmswereallowedtocountliabilitiesthatdidnotreallyprovidetheability to absorblossesandstillmaintainthefirmsasviable,functioningintermediaries.

Therehasalreadybeenasubstantialresponsetothischallenge.

WiththesupportoftheFederalReserveandotherU.S.bankregulators, theBaselCommitteeonBankingSupervisionhasstrengthenedcapitalrequirementsbyraisingrisk-weightingsfortradedassetsandimprovedthequalityofloss-absorbingcapitalthroughanewminimumcommonequityratio.

Thecommitteealsohascreatedacapitalconservationbufferandintroducedaninternationalleverageratio.

TheseBasel2.5andBaselIIIreforms eitherhavebeen,orsoonwillbe,implementedintheUnitedStatesandmostothercountriesthatarehometointernationally activebankingfirms.

Also,theBaselCommitteehasjustrecently adoptedtheLiquidityCoverageRatio(LCR),afirststepinaddressingliquidityproblems.

In theUnitedStates,someimportantadditionalstepshavebeentaken.Beginningatthepeakofthecrisis,theFederalReservehasconductedstress testsoflargebankingorganizations,makingcapitalrequirementsmoreforward-lookingbyestimatingtheeffectofanadverseeconomicscenarioonfirm capitallevelsinamannerlessdependentonfirms'internalrisk-measurementinfrastructure.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


P age |12

AndtheprovisionoftheDodd-FrankActpopularlyknownas theCollinsAmendmentensuresthatbankingorganizations cannotuse

models-basedapproaches to reducetheirminimum capitalbelowgenerallyapplicable,morestandardizedrisk-basedratios.

MacroprudentialRegulation

Asecondchallengeforcentralbanksisthatthecrisisrevealedtheneedforamuchmoreactiveset ofmacroprudentialmonitoringandregulatorypolicies--thatis,areorientationtowardsafeguardingfinancialstability throughthecontainmentofsystemicrisk.

Thefailure to attendto,orevenrecognize,financialstabilityriskswasperhapsthemostglaringpublicsectordeficiencyinthepre-crisisperiod.Thiswasafaultbynomeanslimited to centralbanks.

Onthecontrary,systemicriskhadalsocometoseemmoretheoreticalthanrealtomanyacademicsandfinancialmarketparticipants.

Evenmostofthoseinsideandoutsidetheofficialsectorwhoarguedforstrongercapitalorotherprudentialstandardsdidnotappreciatethedegreetowhichthesecondarymortgagemarkethadturnedintoahouseofcards.

Still,regardlessofformalmandates,centralbanks arebetterpositionedthanmostothergovernmentagenciestoseeandevaluatetheemergenceofassetbubbles,excessiveleverage,andothersignsofpotentialsystemicvulnerability.

In somerespectsthissecondchallengeisanextensionofthefirst,sincethesafetyandsoundnessoflargeinstitutionsmust takeaccountoftherelativecorrelationoftheirassetholdings,interconnectedness,commonliquidityconstraints,andothercharacteristicsoflargebankingorganizationsasagroup.

Similarly,systemicrisksandtoo-big-to-failproblemscanincreaseiflarge,highlyleveragedfirmsmayoperateoutsidetheperimeterof

InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


P age |13

statutorymicroprudentialoversight,aswasthecasepriorto2008withthelarge,free-standinginvestmentbanksintheUnitedStates.

Andmarketdisciplinewillbebadlycompromisediffinancialmarketparticipantsbelievethataninsolventcounterparty cannotberesolvedinanorderlyfashionandthusislikelytoreceivegovernmentassistanceunderstress.

Hereagain,domesticandinternationaleffortshavealreadyproducedsignificantreformprograms,thoughimplementationofsomeoftheseprogramsislessadvancedthanBasel2.5andBaselIII.

Domestically,theFederalReserve'sannualstresstestsexaminetheeffectsofunexpectedmacroeconomicshocksonassetclassesheldwithinallmajorregulatedfirms.

TheDodd-FrankActgavetheFinancialStabilityOversightCouncil(FSOC)authoritytobringsystemicallyimportantfirmsthatarenotalreadybankholdingcompanieswithintheperimeterofFederalReserveregulationandsupervision.

TheFSOCis activelyconsideringseveralfirmsforpossibledesignation.

Finally,theDodd-FrankActgavetheFederalDepositInsuranceCorporationorderlyliquidationauthorityforsystemicallyimportantfinancialfirms,therebycreatinganalternative to theHobson'schoiceof bailoutorbankruptcythatauthoritiesfacedin2008.

Internationally,theBaselCommitteehasagreedtoaregimeofcapitalsurchargesforlargebanksbasedontheirsystemicimportance.

Thereisalsoaninitiative toparallelU.S.efforts to identifynon-banksystemicallyimportantfirms.

TheBaselCommitteeandtheFinancialStabilityBoardhavedevelopedinternationalprinciplesforresolutionauthority,thoughmostoftherestoftheworldisbehindtheUnitedStatesinactuallyimplementingthoseprinciples.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


P age |14

Butmeetingthemacroprudentialchallengewillrequiremeasuresbeyondamorecomprehensive,cross-firmapproachtomicroprudentialregulation.

Muchacademicandpolicy workofthepastseveralyearshasrevivedandelaboratedthepreviouslysomewhatheterodoxviewthatfinancialinstabilityisendogenous tothefinancialsystem,oratleastthekindoffinancialsystemwenowhave.

Consider,forexample,how theintertwiningoftraditionallendingandcapitalmarketsgaveriseto whathasbecomeknownastheshadowbankingsystem.

Shadowbanking,whichreferstocreditintermediationpartlyor whollyoutsidethelimitsofthetraditionalbankingsystem,involvesnotonlysizeablecommercialandinvestmentbanks,butmanyfirmsofvaryingsizesacross arangeofmarkets.

Whilesomeofthemorenotoriouspre-crisiscomponentsoftheshadowbankingsystemareprobablygoneforever,currentexamplesincludemoneymarketfunds,thetripartyrepomarket,andsecuritieslending.

Fromtheperspectiveoffinancialstability,thepartsoftheshadowbankingsystemofmostconcernarethosethatcreateassetsthoughttobesafe,short-term,andliquid--ineffect,cashequivalents.

Foravarietyofreasons,demandforsuchassetshasgrownsteadilyinrecentyears,andisnotlikelytoreversedirectionintheforeseeablefuture.

Yetthesearetheassetswhosefundingismostlikelytoruninperiodsofstress,asinvestorsrealizethattheirresemblancetocashorinsureddepositsinnormaltimeshasdisappearedinthefaceofuncertaintyabout theirunderlyingvalue.

And,aswasgraphicallyillustratedduringthecrisis,theresultingforcedsalesofassetswhosevaluesarealreadyunderpressurecanacceleratean adversefeedbackloop, in whichallfirmswithsimilarassetssuffer

mark-to-marketlosses,which,inturn,canlead tomorefiresales.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


P age |15

Thiskindofcontagionlayattheheartofthefinancialstressesof2007and2008.

Asalreadynoted,pre-crisisshortcomingsattheintersectionofmicroprudentialandmacroprudentialregulationhavemotivatedavarietyofreforms,manyexplicitlydirectedattheproblemoftoo-big-to-failinstitutions.

Whilesomeofthesereformsremainunfinished,andsomeadditionalmeasuresareneeded,therehasbeenconsiderableprogress.

Unfortunately,thesame cannotbesaidwithrespect to shadow bankingand,moregenerally,thevulnerabilitiesassociatedwithwholesale

short-termfunding.

Thesevulnerabilitiesinvolvebothlarge,prudentiallyregulatedinstitutions,andthus too-big-to-failconcerns,andthebroaderfinancialsystem.

ExceptfortheliquidityrequirementsagreedtointheBaselCommittee,however,theliabilitysideofthebalancesheetsoffinancialfirmshasbarelybeenaddressedinthereformagenda.

Yethereiswherethesystemicproblemsofinterconnectednessandcontagionaremostapparent.

And,asevidencedbythefundingstressesexperiencedbyanumberofEuropeanbankspriortothestabilizingmeasurestakenbytheEuropeanCentralBank,theseproblemsarestillvery muchwithus.

WithintheUnitedStates,reformeffortsareunderwayinsomediscrete,butimportant,areas.

TheprovisionsofDodd-Frankrequiringmorecentralclearingof derivativesandminimummarginsforthosethatremainunclearedaredesignedtoprovidemoresystemicstability.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


P age |16

Astoshadowbankingitself,theFSOCrecentlyproposedoptions toaddressthestructuralvulnerabilitiesinmoneymarketmutualfunds,withaneyetowardrecommendingactionbytheSecuritiesandExchangeCommission.

AndtheFederalReservehasbegunusingitssupervisoryauthority topressforareductionin intradaycreditrisk inthetripartyrepomarket.

Butthesemeasuresare incomplete,anddonotextend to allformsofshort-termfundingthat canposerunrisks,auniversethatislikelytoexpandasprudentialconstraintsbegintoapplytolargeexistingshadowbankingchannels.

MonetaryPolicy

Whilethefirsttwo policy challengesareshared amongregulatoryandfinancialagencies,thethirdliessolelywithcentralbanks.

In thewakeofthecrisis,weneed toconsidercarefullytheviewthatcentralbanksshouldassesstheeffectofmonetarypolicy onfinancialstabilityand, in someinstances,adjusttheirpolicy decisionsto takeaccountoftheseeffects.

Thedramaticriseinhousingprices,andtheassociatedhighamountsofleveragetakenonbybothhouseholdsandinvestors,occurredduringanextendedperiodoflow inflation.

Somehavesuggestedthat,bynotraisingratesbecauseinflationremainedsubdued,monetarypolicy intheUnitedStatesandelsewheremayhavecontributed to themagnitudeofthehousingbubble.

Whateverthemeritsofthatmuch-contestedpoint,itseemswisetoaddressthisissueaswefacewhatcouldwellbeanotherextendedperiod oflow inflationandlow interestrates.

Itisimportanttonotethatincorporatingfinancialstabilityconsiderationsintomonetarypolicydecisionsneednotimplythecreation ofanadditionalmandateformonetarypolicy.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


P age |17

Thepotentiallyhugeeffectonpricestabilityandemploymentassociatedwithboutsofseriousfinancialinstabilitygivesamplejustification.

HereIwanttomentionsomecommentsbymycolleagueJeremySteinacoupleof weeksago.

Afterreviewingthetraditionalargumentsagainstusingmonetarypolicy inresponsetofinancialstabilityconcernsandrelyinginsteadonsupervisorypolicies,GovernorSteinofferedseveralreasonsforkeepingamoreopenmindonthesubject.

First,regulationhasits ownlimits,nottheleastofwhichistheopportunityforarbitrage outside theregulatedsector.

Second,whateveritsbluntness,monetarypolicyhastheadvantageof beingableto"getinallthecracks"ofthefinancialsystem,anattributethatisespeciallyusefulifimbalancesarebuildingacrossthefinancialsectorandnotjustinaparticulararea.

Finally,byalteringthecompositionofitsbalancesheet,centralbanksmayhaveasecondpolicyinstrumentinadditiontochangingthetargetedinterestrate.

So,forexample,itispossiblethatacentralbankmightundersomeconditionswanttouseacombinationofthetwo instrumentstorespondtoconcurrentconcernsaboutmacroeconomicsluggishnessandexcessivematuritytransformationbyloweringthetarget(short-term) interestrateandsimultaneouslyflatteningtheyield curvethroughswappingshorterdurationassetsforlonger-termones.

Tobeclear,Idonotthinkthatweareatpresentconfrontedwithasituationthatwouldwarrantthesekindsofmonetarypolicy action.

Butforthatveryreason,itseemsthatnowisagoodtimetodiscusstheseissuesmoreactively,sothatifandwhenwedofacefinancialstabilityconcernsassociatedwithassetbubblesbackedbyexcessiveleverage,wewillhaveawell-consideredviewoftherolemonetarypolicymightplayinmitigatingthoseconcerns.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


P age |18

AdvancingtheInternationalReformAgenda

Letmeturnnowtothewayinwhichourshiftsinpolicyapproachshouldinformtheagendafor internationalcooperationinfinancialregulation.

Forobviousreasons,themonetarypolicyissuesarenotdirectlyrelatedtothisagenda,thoughourunderstandingoftheseissuesmayprofitfromdiscussionswithourcentralbankcolleaguesfromaroundtheworld.

Itisequallyobviousthatthe othertwo setsofpolicychangesarequitecloselyrelated totheinternationalagenda.

Morethaninmostotherareas,thefinancialspheresuffersfromabasiclackofcongruencebetweentheauthority to regulateandtheobjectofregulation.

Thuswehaveasignificantlyinternationalizedfinancialsystem,inwhichshocksarequicklytransmittedacrossborders,butanationally-basedstructureofregulation.

Withincountries,responsibilitiesmaybedividedbetweenprudentialregulatorsandmarketregulators,amongregulatorswithsimilarmandates,orboth.

Centralbanksmayhaveexclusiveprudentialauthority,shareitwithotheragencies,orhavenoneatall.

Internationalarrangementsbothreflect,andtrytocompensatefor,thiswebofdividedandoverlappingdomesticauthority.

Thustherearesectoralstandardssetterslike theBaselCommittee,theInternationalOrganizationofSecuritiesCommissions(IOSCO),andtheInternationalAssociationofInsuranceSupervisors(IAIS)ontheonehand,butalsobroadergroupingssuchastheGroupofTwenty,theFinancialStabilityBoard(FSB),andtheInternationalMonetaryFundontheother.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


P age |19

In addition,undertheumbrellaoftheinternationalhomeofcentralbankers,theBankforInternationalSettlements,numerous othercommitteesworkacrossfieldsalsocoveredbyoneormoreofthegroupsIhavejustmentioned.

Therearesomeobviousweaknesseswithsuchanassortmentofinternationalarrangements,notablythedifficultyofcoordinatinginitiativeswheremorethanonegroupisworkingonanissue.

Thiskindofcoordinationchallenge canbefurthercomplicatedby theparticipationininternationaldiscussionsofvariousnationalofficialswithoutdomesticauthorityinaparticulararea.

Thesheerproliferationofinternationalarrangements,eachwithitsownstaff,has attimesalsoledto aproliferationofstudiesandinitiativesthatbecomeburdensome to thenationalregulatorsandsupervisorswhohavebeenovertaxedathomesincetheonsetofthecrisisandensuingdomesticreformefforts.

Yettherearealsosomestrengthsderivedfromthecrowdedinternationalfieldoforganizationsandcommittees.

Onesuchvirtueisthatissuesnotfallingsquarelywithintheremitofaparticularkindofstandardssettercannonethelessbedealtwithinternationally.

This,in fact, hasbeentheexperiencewiththeongoing internationaleffort to agreeonminimummarginrequirementsforderivativesthatarenotcentrallycleared.

Anotheristhatdifferentperspectivesarefrequentlybroughttobearonasinglesetofproblems.

Atsomepoint,itlikelywillbebeneficialto rationalizesomewhattheoverlapping,sometimescompetingeffortsofthesevariousinternationalarrangements.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


P age |20

Fortheneartomediumterm,though,itisimportanttohavesomeprinciplesfordecidingupontheinternationalagendathatshouldgovern theeffortsofthesearrangementsasawhole.

First, initiativesshouldbeprioritized.

Onepointofemphasisshouldbecompleting,andensuringimplementationof,theinternationallyagreed-uponframeworkforcontainingthetoo-big-to-failrisksassociatedwithsystemicallyimportantfirms.

Anothershouldbedistillingthevariousideasrelatingtoshort-termfundingvulnerabilitiesintoafewthathavepromiseasdiscrete,relativelynear-terminitiatives,whilecontinuingstudyofother,morecomprehensivemeasures.

Asecond,relatedprincipleisthatinitiativesshouldbefocusedand manageable,reflecting notonlythelimitedcapacityofparticipatingnationalauthorities,butalsothedesirabilityofreachingatleastatemporaryequilibriumatwhichfirmscangetonwiththebusinessof planningtheirstrategiesin aclearerregulatoryenvironment,andregulators canbeginto takestockofthecumulativeeffectsandeffectivenessofthechangesthathavetakenplaceinthatenvironment.

Athirdprincipleisthat,inmostinstancesatleast,internationaleffortstodevelopnewregulatorymechanismsorapproachesshouldbuildonexperiencederivedfromnationalpracticein oneormorejurisdictions.

Thechallengesencounteredduringtheinitialeffort to deviseanLCRintheBaselCommittee,withlittleornoprecedentofnationalquantitativeliquidityrequirementsfromwhich to learn,shouldcounselcautionintryingtoconstructnewregulatorymechanismsfromscratchattheinternationallevel.

Therewilldoubtlessbeexceptionstothisgeneralprinciple,suchaswherethetransnationalarbitrage incentivesofaregulatorymeasurearesostrongas tomakenationaleffortsdifficulttoinitiateandsustainwithoutsubstantiallossoffinancialactivityto othercountries.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


P age |21

And,intheimmediateaftermathofthecrisis,therewasaneedtoharnessthebroad-baseddemandsforreformandmoveforwardonsomepriorityreformswithoutbenefitoflearningfromnationalinitiatives.

Ontheotherhand,theremayalsobeareaswhere, notwithstandingtheimportanceofaparticularregulatoryobjectiveforinternationalfinancialstability,itmaybepreferabletomaintainavarietyofapproaches to achievingthatobjective.

Bearing inmindboththeseprinciplesandthekeyareasforpolicychangeatcentralbanks andotherfinancialregulators,letmenowsuggestsomespecificsubjectsfornear-termemphasis.

Astotheframeworkforsystemicallyimportantfinancialinstitutions(SIFIs),Iwouldurgethattwoongoinginitiativesbecompletedoverthenextyearandtwoideasthathavebeeninthediscussionstagebedevelopedintoconcreteproposals.

First,theproposalforacapitalsurchargeforsystemicallyimportantbankingorganizationsisnearingcompletion.

TheBaselCommitteecontinuestorefinethemethodologytobeusedin identifyingthefirmsandcalibratingthesurcharge amount--perhapsabyproductofthefactthatthismethodologyhadtobedevelopedintheBaselCommitteewithoutbenefitofpriorprecedent.

ButIhaveconfidencethatthisworkwillbesuccessfullycompleted.

Thesecondongoing initiative--workondesignatingnon-bankSIFIs--hastodatebeenpursuedmostlyintheIAISandthushasconcentratedoninsurancecompanies.

Itisimportant to takethetime toevaluatecarefullythe actualsystemicriskassociatedwiththesecompanies,and tounderstandtheamountofsuchrisk relativetootherfinancialfirms,beforefixingonalistoffirmsandsurcharges.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


P age |22

Butthisseemstomearealisticgoaloverthenextsixmonths.Third,weshouldbuildontheverygoodanalyticworkintheBasel

Committee,bothonsimplifyingcapitalrequirementsforcreditrisk andonfashioningstandardized capitalrequirementsformarketrisk,toapplystandardizedcreditandmarketriskcapitalmeasurestoallinternationally

activebankingfirms.

AsImentionedearlier,theUnitedStateshas already adoptedsucharequirementforcapitalrequirementsoncreditrisk.

Thesestandardizedmeasuresserveasafloortoguardagainstthepotentialformodels-based capitalmeasurestounderstatecapitalneedsundersomecircumstances.

Theyarealsosubstantiallylessopaquethan,forexample,theadvancedinternalratings-basedapproachofBaselII,andthuswouldprovidemorecomparablemeasuresthatarealsomoreamenabletointernationalmonitoring.

Fourth,Iwouldhope to seearequirementproposedforlargeinternationallyactivefinancialinstitutions tohaveminimumamountsoflong-termunsecureddebt,whichwouldbeavailabletoabsorblossesintheeventofinsolvency.

AsImentionedearlier,workonresolutioncontinues,albeitatdifferentpacesindifferentjurisdictions.

Giventhecomplexitiesarisingfromtheindependent,oftendifferingnationalbankruptcyandinsolvencylaws,thegoalofachievingafullyintegratedresolutionregimeforinternationally activefinancialfirmsmaytakeagooddealoftime.

Butaminimumlong-termdebtrequirementwouldatleastprovidenationalauthoritieswithsufficientequityandlong-termdebtin thesefirmstobearalllossesintheeventofinsolvency,andtherebycounteractthemoralhazardassociatedwithtaxpayerbailoutswithoutriskingdisorderlyfailure.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


P age |23

Thisrequirementwouldnotbreakbrandnewregulatoryground,sinceitwouldreallybeamodificationofexistingTier2gone-concern capitalconcepts,andwouldcomplementtherequirementforminimumequitylevelsincludedinBaselIII.

Asimpliedinmyidentificationofshort-termfundingvulnerabilitiesasapriorityarea,thebestwayforwardhereisconsiderablylesseasytospecify.

Short-terminitiativesonmoneymarketfundsandtripartyrepoareboth possibleanddesirable.

In truth,though,becausemoneymarketfundsarelargelyAmericanand,toasomewhatlesserextent,European,theUnitedStatesandtheEuropeanUniontogetherhavetheability to addresstheglobalrunrisksassociatedwiththeseproducts.

Ithinkwealsohavetheresponsibilitytodoso,butnotnecessarilyinidenticalways.

Accordingly,IwouldhopethatboththeUnitedStatesandtheEuropeanUnionwouldeachtakeeffectiveactiontocountertherunrisk,tailoredasappropriate totheirregulatoryenvironments,andthenexplainthoseactionsatIOSCOandtheFSB,wheretheirefficacy canbereviewed.

Similarly,sincethesettlementprocessfortripartyrepothatremainsofconcerniscenteredattwoinstitutions,bothofwhichareregulatedAmericanbanks,theUnitedStates cantake effectiveactionwithoutneed ofaninternationalagreement

Astobroader initiatives,proposalsto requireminimumhaircutsforallsecuritiesfinancingtransactionshavebeententativelydiscussedintheFSB.

Thisiscertainlyaripesubjectfordiscussion,insofarassecuritiesfinancingtransactionsfacilitateleverage,enablematuritytransformation,andproduce thekindofinterconnectednessthatcan spawnrunsandcontagion.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


P age |24

Atpresent,nosetofgenerallyapplicableprudentialstandardsgovernsthese activities.

Evenwithinregulatedfirms,microprudentialrisk-weightedcapitalstandardshavelittleeffect,sincetheyarecalibratedagainstcreditriskandmostsuchtransactionsareshort-termandfully(orover)collateralized.

Thusrequirementsthatwouldattachtoinstrumentsandtransactions,as opposed to firmsthathappentobeprudentiallyregulatedforotherreasons,haveconsiderableattraction.

Ontheotherhand,universalhaircutrequirementsarethetypeofregulatoryinnovationthatIsuggestedearlierwasbestdevelopedinternationallyfollowingsomeexperiencewithinfinanciallysignificantcountries.

Onemay,forexample,havesignificantconcernaboutsomeoftheunintendedconsequencesthatwouldensue.

My instinct,then,isthattheanalysisofthisidea shouldcontinuewithintheFSBand,onehopes,in othervenuesbothinandoutoftheofficialsector.

Thereshouldalsobeconcertedeffortsinternationally to gatherrelevantdata,someofwhichisatpresentuncollected.

Butwearenotgoingto beinapositiontoestablishaninternationalsecuritiestransactionfinancingregimeinthenearterm.

However,oneproposalalreadyontheinternationalagendamightbereconsidered,soastoaddressmoredirectlytheshort-termfundingproblem.

FollowingcompletionoftheLCRearlierthisyear,theBaselCommitteeisturningitsattentionbacktotheNetStable FundingRatio(NSFR),aproposalthatwasintended to complementtheLCRbyregulatingliquiditylevelsbeyondthe30-dayLCRhorizon.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


P age |25

LiketheLCR,theNSFRproposalraisedmanyquestionseven amongthosefavoringrobustmeasures todealwiththeliabilitysideoffirmbalancesheets.

Thereissomeappealto movingforwardwiththiscomplementarymeasurefairlyquicklybysimplymakingsomeincrementalchanges totheNSFRwhilekeepingitscurrentstructure.

ButIthinkwemaybebetteradvisedtotaketheopportunityofthisreviewtoexaminewhetherthereareapproachesthatmightaddressmoredirectlythevulnerabilitiesforthefinancialsystemcreatedbylarge

non-deposit,short-termfundingdependenceatmajorfinancialinstitutions.

Idonotmean toprejudgetheoutcomeofsuchanexamination,orthedegreetowhichwemightbuildonmeasuresbeingconsideredinvariousjurisdictions to addressthesevulnerabilities.ButIdothinkitworththeeffort.

Conclusion

Responses to whatIhavedescribedasthethreechallengestopre-crisiscentralbankpolicieswillcontinue to evolve.

Sowillthereenergizedinternationalagendaforcooperationin internationalfinancialregulation.

Myaimtonighthasnotbeen to layoutacomprehensiveprogramforeither,buttosuggestthatthesechangingagendasareneithercompletelycorrelatednorcompletelyindependent.

Insuggestingsomeconcretenextsteps,Ihavetriedtodefinesomeusefulandimportantpointsofintersectionbetweenthetwo.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


P age |26

GabrielBernardino,ChairmanofEIOPA

IMD2andSolvencyII–TheroadtobetterpolicyholderprotectionandfinancialstabilityWorkshoporganisedbytheEuropean FederationofInsuranceIntermediaries(BIPAR)Brussels

Goodeveningladiesandgentlemen,

Iwouldlike tostartbythankingBIPARfortheinvitation tospeaktoyoutodayandfortheopportunitytomeetagainwiththerepresentativesofEUintermediaries.

In myspeech,Iwillbringforwardsomepersonalreflectionsaboutthecurrentchallengesinrevisingtheregulatoryframework intheinsurancearea,namelyIMD2andSolvencyIIandwillfinishbypointingoutsomestrategicreflectionsontheway toachievefurtherconsistencyofEUregulationandsupervision.

LetmestartwithIMD2.

ThereviewoftheInsurance MediationDirectiveisveryrelevantforEIOPA,becausethisdirectiveaffectsalmostallourstakeholders.

Intermediariesare,andwillcontinuetobe,akeylink intheretaildistributionchain.

We recognisethatatEIOPA,inthesamewaythatweseeprotectionofconsumersasafundamentalgoalforusandanareawherewearerequiredtotakea“leadingrole”.

Forus,intermediariesareanessentialpartoftheinsurancemarketand playacrucialroleinconsumerprotection.

Therefore,wewelcomethepublicationoftheCommission’sproposaltorecasttheexistingIMD(“IMD2”)in July2012.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


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  • ImustsaythatithascertainlybeenalongtimeinthemakingeversincethereviewofIMD1wasfirstintroducedintotheRecitalsofSolvencyIIby theEuropeanParliamentandthenourpredecessor,CEIOPSsubsequentlyprovidedadvicetotheCommissionontheDirectivein2010with39differentrecommendations.

  • WesupporttheCommission’sobjectivesofmakingretailinsurancemarketsworkbetterandpromotingamorelevelplayingfieldby,forexample,extendingthescopeoftheDirectivetoincludedirectsales.

  • Indeed,preventingregulatoryarbitrageandpromotingequalconditionsofcompetitionarekeyobjectivesforEIOPAtoo.

  • FromEIOPA’sperspective,itisimportantthatthefinallegislativetextcreatesaregulatoryregimeintheretailinsurancemarketthat canbeeffectivelysupervisedbothfromanationalandaEuropeanperspective,bearinginmindthewidevarietyofexistingstructuresatnationallevelforsupervisinginsurancedistribution.

  • IMD2alsoneedsto adoptaproportionateapproachasregardstheobjectivestobe achieved.

  • Thereneeds tobeproperconsiderationofexistingmarketspecificitiessuchasaverydiverserangeof distributionchannelsatnationallevel,fromhighstreetbrokers to multinationals.

  • AsIsay,IwelcometheCommission’sproposal.

  • Nevertheless,thereareanumberofpointswhereIwouldpersonallyrecommendfurtherreflection:

  • Transparencyofremuneration

  • Theproposalintroducesamandatorydisclosureofthefullamountofremunerationforlife insuranceproductsanda5yeartransitionalperiodallowingforan“onrequest”disclosureregimefornon-life products;attheendofthe5yearperiod,mandatorydisclosurewouldapply.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


  • P age |28

  • Furthermore,insuranceundertakingsareonlyrequired to informthecustomeraboutthenatureandthebasisofthecalculationofanyvariableremunerationreceivedbyanyemployeeoftheirsi.e.notdisclosureofthefullamount.

  • Fornon-life insurance,Iconsideran“onrequest”regimeasabetterwaytomovefurtheratanEUlevel,whilemaintainingthepossibilityforMemberStates to imposestricterrequirements.

  • In myview,thiswouldbe thebestpossibleandbalancedsolutiontoimprovethetransparencyofremuneration.

  • Furthermore,bothinsuranceundertakingsandinsuranceintermediariesshouldhavetocomplywiththesamehigh-levelprinciplesasregardsinformationrequirementsandconflictsofinterestprovisions.

  • Ialsobelievethatdisclosureisnotapanaceatomanagingconflictsofinterest.

  • Theintroductionofageneral“dutyofcare”wouldhelpaswouldtheimplementationofproportionateandrobustadministrativeandorganisationalarrangementstohelpsystematicallyidentifyandmanageconflictsofinterest.

  • Scope–ComparisonWebsites

  • ComparisonwebsitesarecaughtundertheRecitals,butnotunderthedefinitionof“insurancemediation”,creatinglegaluncertainty.

  • In myopinion,itisimportantthatnewformsofon-linedistributionsuchascomparisonwebsites,areproperlycaughtunderthescopeoftheDirectivetoensurealevelplayingfield andadequateprotectionforconsumers.

  • SomewouldarguethattheyarealreadycaughtbyIMD1,butweneedmoreclarityonthisissue.

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  • Indeed,wearecurrentlyworkingonaReportonGoodPracticesregardingsupervisorystandardsrelatingtocomparisonwebsiteswhichwehopetopublishbeforethesummer.

  • ItwouldalsobeusefulifEIOPAcouldclarifybymeansofGuidelinestheapplicationoftheDirective to aggregatorsorpricecomparisonwebsites.Advice

  • “Advice”isdefinedundertheproposalas“theprovisionofarecommendation toacustomer,eitherupontheirrequest,orattheinitiativeoftheinsuranceundertakingortheinsuranceintermediary”.

  • Iamsurprisedthatthedefinitionof“advice”wasnotpersonalisedasatpresentitcapturesgenericadviceaswell.

  • Wethinkaclearerdefinitionofadviceisrequiredwhereadviceisprovidedonthebasisofa“personalrecommendation….”

  • Freedomtoprovideservices/Freedom ofestablishment

  • TheproposaldeletestheprovisionprovidingforaEuropeanpassportbasedonasingleregistrationandisnotre-statedinthenewChapterIVregardingfreedomtoprovideservicesandfreedomofestablishment

  • IamsurprisedthattheprovisionwasdeletedasitwasthefoundationofIMD1soastoencouragethecross-borderactivitiesof insuranceintermediaries.

  • In myview,thisneeds tobereinstatedtosendouttherightmessage.

  • Cross-selling

  • Theproposalrecognisesthepracticeandrisksofbundlingproductsandrequirescertaininformationdisclosureonsaleofbundledproducts.

  • TyingisoutlawedTyingandbundlingisanissuethathasregularlycroppedupindiscussionsinEIOPA(withregardtosalesofPPIorlinkinglife insurance to salesofmortgages).

InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


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  • SeveralofourMembershavetakenactionalreadyatnationalleveltocombatthispractice.

  • Isupportactionontyingbutablanketbanonalltyinghasimportantimplications,asthereareanenormousamount oftiedproductsonthemarketintheEU.

  • Weneedalsotoconsiderthatacompletebanmightalsopreventconsumersfromgettingcheaperdeals.

  • Itisimportant tohavethesameapproachin IMD2,MiFIDIIandMortgageCreditDirectivetoensureconsistencyonthisissue.

  • Thisisanarea wehaveforeseenworkundertheJointCommitteeoftheESAs.

  • InsurancePRIPs

  • Theproposalintroducesspecialrequirementsforinsurance PRIPs e.g.requirementtoidentify,prevent,manageanddiscloseconflictsofinterestwhensellinginsuranceinvestmentproducts.

  • IbelievethattheseprovisionsshouldbekeptwithinIMD2andweshouldavoidasimple“cutandpaste”asthedistribution channelsinvolvedareverydiversesoa“onesizefitsall”approachcouldhavemajorimpactonthemarket.

  • Furthermore,IwoulddefinitelyincludeinIMD2,theorganisationalrequirementsneededbydistributorsinordertomanageconflictsofinterest.

  • AtEIOPA,wearefollowingcloselythenegotiationsintheCouncilandParliament.

  • Itisveryinterestingtoseethewiderangeofdifferentopinionscomingtotheforeonthisissue.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


P age |31

ThisisnotsurprisingbecauseIMD2seeks to performaverytricky“balancingact”:enhancingthepossibilitiesforcross-borderretailtrade,butatthesametime,raisingthebarin termsofadequatesafeguardsforconsumers.

Thisbalancingactisevenmoredifficultin theaftermathofthefinancialcrisis.

EIOPAstandsreadyto supporttheEUpolitical institutionsinthenegotiationprocess.

LetmeknowturntoSolvencyII.

TheEUisfacedwithanoutdatedandfragmentedregulatoryregime in insurance.

SolvencyIIhasbeendevelopedduringthelast13yearstoanswer toconcreteneeds.

Itincreasespolicyholderprotectionbyusingthelatestdevelopmentsinrisk-basedsupervision,actuarialscienceandriskmanagement.

WeshouldbeproudthatSolvencyIIisbasedonsoundcoreprinciples.

Obviously,thefinancialcrisishadanumberofconsequencesonSolvencyII.

Somelessonswereincorporatedearlyonin theregime,butotherchallengesarestillcreatinguncertaintiesonthefinaldesignandcalibration.

Thehugemarketvolatilityprovedtobeachallengeina market-consistentregime,especiallyforlong-termguarantees.

Thesovereigncrisisledto questionsontheconceptoftherisk-freerate.

Thechangesinbankingregulationcreatepressureontheroleofinsurersasprovidersoflong-termbankfunding.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


P age |32

Thelowinterestrateenvironmentisthreateningsomeinsurancebusinessmodels,especiallyinlife insurance.

ThisyearwillbeacrucialyearforSolvencyII.So,whatarewedoing?

FollowingtheagreementbytheEUpolitical institutions,EIOPAhavelaunchedthelong-termguaranteeassessmentthataimstotestvariousmeasuresthathavebeendiscussedintheOmnibusIInegotiations.

Weareencouragedbythelevelofparticipationinthedifferentmemberstates,coveringbig,mediumandsmallerplayers.

EIOPAwillpresentitsfinalreportinJune.

ItisessentialforpolicyholderprotectionandfinancialstabilitythatSolvencyIIappropriatelyreflectsthelong-termfinancialpositionandriskexposureofundertakingscarryingoutinsurancebusinessofalong-termnature.

Weneedarobustframeworkthatwouldpricecorrectlyanyoptionsembeddedinthecontracts.

Weneedtorecognisethatguaranteeshaveaprice;thereisno“freelunch”.

Ontopofthelong-termguaranteeassessment,EIOPAseesitasofkeyimportancethattherewillbeaconsistentandconvergentapproachwithrespecttothepreparationofSolvencyII.

Thatiswhy,inDecember2012,weissuedourOpiniononinterimmeasuresregardingSolvencyII.

OurplanistodevelopGuidelinesthatwillensurethatnationalsupervisoryauthoritieswillstartin2014toputinplacecertainimportantaspectsofthenewprospectiveandrisk basedsupervisoryapproach.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


P age |33

TheseGuidelineswillcoverthesystemofgovernance,includingriskmanagementandtheprocessofdevelopinganownriskandsolvencyassessment,pre-applicationof internalmodels,andreportingtosupervisors.

WearenotanticipatingSolvencyII,butpreparingsupervisorsandundertakingsforthenewregimeinaconsistentway.

Theguidelinesareaddressed tonationalsupervisoryauthoritiesandwillbesubject tocomplyorexplainprocedure.

WeareworkinginclosecooperationwiththeEuropeanCommissionandmaintaininganinformaldialoguewithEIOPA’sInsuranceandReinsuranceStakeholderGroupandthedifferentstakeholders.

Weplan to haveapublicconsultationontheGuidelinesinApril/May2013andtheywillbetabled to EIOPABoardofSupervisorsintheautumn.

Goingforward,oneofthemostcriticalchallengesintheEUsupervisorylandscapeistoensureconsistencyofsupervisorypractices.

Ibelievethattheconvergenceofsupervisorypracticesisasimportantasthesinglerulebook.

Byassuringthatday-to-daysupervisoryoversightoffinancialinstitutionsisdonewithinaconsistentframework,wecaneffectivelycontributetoanincreasedlevelofprotectionofpolicyholdersandbeneficiariesintheEuropeanUnion.

ThesinglemarketrequiresitandEIOPAiscommittedtodeliverit.

AfirststepshouldbethedevelopmentofaSupervisoryHandbookthatwouldworkasaguidebookforsupervisioninSolvencyII,settingoutgoodpracticesinalltherelevantareasofsupervision.

Thishandbookwillfostertheimplementationofamoreconsistentframeworkfortheconductofsupervision.

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P age |34

EIOPAisstartingtowork in thisarea.

Ibelievethatitisfundamentaltobuildontheexperienceofwhathasbeen achievedbyEIOPAunderthecurrent Regulationandstartareflectiononthefurthersteps(tasksandpowers)neededtodeliveratrulyconsistentsupervisoryprocessand, inparticular,to assuretheconsistentoversightofcross-borderinsurancegroups.

Furthermore,EIOPAneedstohaveresourcestoplayitschallengingoversightroleaccordingtotheRegulation,byconductinginquiriesintoaparticulartypeoffinancialinstitution,ortypeofproduct,ortypeofconductinordertoassesspotentialthreatstothestabilityofthefinancialsystemandmakeappropriaterecommendationsforaction tothecompetentauthoritiesconcerned.

In ordertoperformthisindependentassessmentinatransparent,efficientandriskbasedway,EIOPAneeds to reinforceitshumanresources,shouldhave accesstotherelevantindividualinformationavailabletothenationalsupervisorsandalsohavedirectaccesstotheindividualinstitutions.

Anotherstrategicchallengeisthelevelofregulatoryconsistencyinthefinancialsector.

Ibelieveitisveryrelevantto achieveanappropriatelevelofconvergenceoftherulesprotectingretailconsumersinthedifferentareasofthefinancialsector.

Nevertheless,proportionalityandgoodsenseshouldprevail.

Bycoveringthedifferentanglesofdisclosureandsellingpracticesintheinsurancemarket,IMD2shouldavoidthe tendencytoapplya

one-size-fits-allapproach.

Insurancebusinessandinsuranceproductshavetheir ownspecificitiesthatneedtobecarefullyconsidered.

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P age |35

Somemayarguethatthesespecificitiesarea sufficientargumenttomaintainthestatusquo.Idon’tbelievethatthisisthe case.

Weneedto recognizethatanevolutionisalsoneededinthewayconsumerprotectionisensuredinthedifferentdistributionchannels.

Weneedtolearnfromthemis-sellingeventsthatoccurredincertainmarketsinvolvingproductslike PPI,unit-linkedproductsandpensions.

Consumer’sattitudesandneedsarechanging,andthatshouldbeviewedpositively.

Theinsurancemarketcannotandwillnotbeoutofthisevolution.

Insuranceintermediariesshouldsupportthistrendandshouldview IMD2asagoodopportunity to improveconsumerprotection,preservetherelevantinsurancespecificitiesandincreaseconsumerconfidence.

Thankyouforyourattention.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


P age |36

SubmittingaSuspiciousActivityReport(SAR)withintheRegulatedSector

ThisisaUnitedKingdomFinancialIntelligenceUnit(UKFIU)communicationsproduct,producedinlinewiththeSeriousOrganisedCrimeAgency's(SOCA)commitmenttosharingperspectivesontheSuspiciousActivityReports(SARs)Regime.

Thisdocumentseeks to provideadviceandrelaybestpracticewhenmakingaSuspiciousActivityReport(SAR),apieceofinformationthatalertsLawEnforcementAgencies(LEAs)that certainclient/customeractivityisinsomewaysuspiciousandmightindicatemoneylaunderingorterroristfinancing.

Personsintheregulatedsectorare requiredunderPart7oftheProceedsofCrimeAct2002(POCA)andthe

TerrorismAct2000(TACT)to submitaSARinrespectofinformationthatcomestotheminthecourseoftheirbusiness,iftheyknow,orsuspectorhavereasonablegroundsforknowingorsuspecting,thatapersonisengagedin,orattempting,moneylaunderingorterrorist

financing.

ASARmustbesubmittedassoonasispracticable.

ThisdocumentseekstocomplementtheMoneyLaunderingRegulationsandHMTreasuryapprovedguidanceinthisregard.

ItisimportantthatwhensubmittingaSARtoSOCAthatreportersrefertothepublishedguidancefromtheirownregulatorybodyandtheir owninternalguidance.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


P age |37

BysubmittingaSARtotheSeriousOrganisedCrimeAgency(SOCA)youwillbeprovidingLEAswithvaluableinformationof potentialcriminalitywhilstensuringappropriatecompliancewithyourlegal obligationstoreportunderPOCAandTACT.

Youareable tosubmitSARsinanyformatincludingbypost,faxorviatheSOCAwebsite(www.soca.gov.uk)throughtheSAROnlinesystem.

OnceyouhavesubmittedyourSARyoushouldrememberyourobligationsnot to makeanydisclosureswhichmightconstituteanoffenceoftippingoffundersection333AofPOCAorsection21DofTACT2000.

SOCAdoesnotprovideorapprovestandardwordingforyou to useinsuchcircumstances.

Itisthereforerecommendedthatyougivecarefulconsideration tohowyouwillhandleyourrelationshipwiththesubjectonceyouhavesubmittedtheSAR,particularlyifthesubjectisaclientorcustomerof yourbusiness.

Youmaywishtodiscusswithyoursupervisororprofessionalbodyifyouareunsure.

SAROnlineisasecurewebbasedsystembywhichyoucansubmitSARstoSOCA.

RegisteringwithSAROnlineisaverysimpleprocessandensuresSARsaredelivereddirectly to SOCA,includinganactivationprocesstocreatetheaccountforthesubmissionofSARs.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


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  • SAROnlineisSOCA'spreferredmeansofSARssubmissionandprovidesastandardisedapproachtostructuringSARsthatreportersmayfind useful.

  • Itisimportanttoprovideasmuchcomprehensivedetailaspossiblewhenregistering.

  • In ordertoregisterforSAROnline,newusersrequireanactiveemailaccountasthisisusedasyouruseridentification.

  • Theregistrationisuniquetotheusersotheemailaddressneedstobedesignatedtotheappropriateperson.

  • ItisrecommendedthattheMoneyLaunderingReportingOfficer(MLRO),NominatedOfficerordesignatedofficerresponsiblefortheAnti-MoneyLaundering(AML)compliancewithintheorganisationistheregistereduser.

  • UseofSAROnlineisrecommendedas:

  • itwillprovideyouwithanautomated acknowledgementofreceipt

  • itwill helpyoustructureyourSARinthemosthelpfulway,therebyimprovingprocessingtimeinSOCA

  • itwillgiveyoutheopportunity to flagtheSARasaconsentissue.

  • ReportersthatsubmitSARsviaSAROnlinewillalsoreceiveanacknowledgementemailcontainingauniquereferenceoncethereporthasbeensubmitted.

  • ThesubmissionofconsentSARsisparticularlyvaluable toensureapromptresponse.

  • Thereisadedicatedsupportteamavailableduringofficehours todealwithanySAROnlineenquiries.TheSAROnlineHelpdeskcan becontactedon02072388282,option3.

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P age |39

FurthersupportisavailableontheSOCAwebsite(www.soca.gov.uk)orthroughyoursupervisororprofessionalbody.

YoushouldnotethatSAROnlinedoesnotretainafilecopyforyourfutureuseandthereforeyoushouldensurethatyouretainyourownrecordofyoursubmission.

SAROnlinehasanautomatictimeoutsessionof20minutesforeachpage.

Youshouldsaveyourworkatregularintervalsto re-setthetimeoutclockbeforethesessionexpires.

HoweverifyouarenotreportingelectronicallypleaseusetheSOCAPreferredFormsformanualreportingwhichcanbedownloadedfromtheSOCAwebsite.

Reasonforsuspicion

Makingaqualityreport,structuredinalogicalformatandincludingallrelevantinformation,willsignificantlyenhanceLEAs'abilities to extractgreatervaluefromsubmittedSARsandspeeduptheprocess.

Oftenaseeminglyminorpieceofinformationtoyou canbecomeavaluablepieceofintelligencetoLEAs.

Itishelpfultowriteabriefsummarytoexplainyoursuspicionandthenalsoprovideachronologicalsequenceofevents.

Ithelpsifyoutrytokeepthecontentclear,conciseandsimple.

Forexample,describetheevents,activitiesortransactionsthatledyoutobesuspicious,how andwhyyoubecamesuspicious,andwhereappropriate,thenatureofthebusinessactivityyouwereengagedin and detailsofdatesofanyactivitiesortransactionsetc.

TheSARGlossaryofTerms (availableontheSOCAwebsitewww.soca.gov.uk)isused to identifyspecificcategoriesofsuspicious

InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


P age |40

activityandiswidelyusedbylawenforcementenablingthemtoidentifySARsinwhichtheyhaveaspecific interest.

TheinclusionoftheappropriateGlossaryTermcanbeusefulinensuringthedistributionoftheSARtoalawenforcementorgovernmentagencywhichmaybebestplacedtoutiliseoractontheinformationprovided.

However,useoftheSARGlossaryofTermsisnotmandatory.

Ifthereportedsubject(forexampleclient/customer)hasbeenthesubjectofapreviousSARsubmittedbyyourorganisation,itisvaluabletoincludethepreviousSARreferencenumber,and,ifappropriatetodoso,theglossarycodeXXS2XX.

However,pleasealsorememberthatunderPOCAandTACT,eachSARyousubmitonthesameindividualmustcontainasuspicionandalltherelevantdetails;evenifyouhaveincludedthereferencenumberforapreviouslysubmittedSAR.

Asabasicguide,whereveryou can,tryto answerthefollowingsixbasicquestions tomaketheSARasusefulaspossible:

Who?What?Where?When?Why? How?

Remembertoincludethedateofactivity,thetypeofproductorservice,andhowtheactivitywilltake placeorhastakenplace,when documentingthereasonforsuspicion.

Ifyouaresuspiciousbecausetheactivitydeviatesfromthenormalactivityforthatcustomer/businesssector,itwouldbehelpfulto brieflyexplainhow theactivitythatgaverisetoyoursuspiciondiffers.

AvoidtheuseofacronymsorjargonwithinSARsastheymaynotbeunderstoodbytherecipientandmaybeopen tomisinterpretation.

Ifyouaredescribingaserviceprovidedoratechnicalaspectofyourwork,itwouldbebeneficialto provideabriefsynopsisinyourSARtoaidthefinancialinvestigator.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


P age |41

WerecommendyoudonotsendattachmentswithyourSAR– alltherelevantinformationshouldbewithintheSAR.

Iffurther informationisavailablewhichyouarewillingto sharewithanLEAthenreferencetothisandwhotocontactmayberecordedintheSAR.

Subjectinformation

Theamountofinformationareporterholdsonthereportedsubjectmaybedependentonthenatureoftherelationshipwiththesubjectwhichmayfrequentlybeaclientorcustomer,butmayalsoforexamplebeaprospectiveclient,someoneconnectedwithortradingwithaclient/customerorothersubjectseenintheordinarycourseofbusiness.

Accordingly,theinformationmaybederivedfromCustomerDueDiligence(CDD)obtainedinlinewithguidancepublishedbyitsfirmandsupervisorybodyorother informationgatheredintheordinarycourseof business.

ItishelpfultothosewhowilluseyourSARtobeascomprehensiveaspossible;howeveryouareonlyrequiredtoprovideinformationobtainedwithintheordinarycourseofyourbusiness.

Whereknown,theinformationlistedbelowshouldbeprovided,andinthecaseofaddresses,whereverpossiblethestatusoftheaddress(e.g.current,business,residentialetc)shouldbeprovidedtogetherwith postcodesorequivalentforoverseasaddresses.

TheinclusionofpostcodeallowstheSARtobeautomaticallyallocatedtolawenforcement.

Pleasenote:IfyouaresubmittingaSARusingSAROnlineyouarerequestedtofillinthesubjectinformationwithinthefixedfieldsprovidedforthepurpose.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


  • P age |42

  • Individuals

  • Pleaseprovideallrelevantdetailsknownabouttheindividualreported.The amountofinformationyouwillhavemaywelldependontherelationshiptothereportedsubject.

  • Pleaseprovideall identifyinginformation.

  • Thisshouldinclude,asfaraspossible:fullname/s,dateof birth,nationalityandaddress.

  • Itisimportantthatthestatusoftheaddress/es canbefullyunderstood

    • current,previous,home,business,and otherknownproperty,ensuringthatpostcodesareincluded.

  • Iffurther informationisheldabouttheindividual– forexample:

    • identificationdocumentdetails(includingrelevantreferenceordocumentnumbers)e.g.passport,drivinglicence,NationalInsurancenumber

    • cardetails(registrationnumber)

    • telephonenumbers(clearlymarkedhome,business,mobileetc)

    • fulldetailsofbankaccountsorotherfinancialdetails(includingaccountnumbersetc)

    • occupation

  • thentheinformationcanbeprovidedincontextwithyoursuspicion.

  • InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


    • P age |43

    • Businesses,trustsandotherentities,incorporatedandunincorporated

    • Incorporated

    • Pleaseprovideallrelevantdetailsknownabouttheincorporatedentity.Theamountofinformationyouwillhavemaydependontherelationshiptothereportedsubject.Pleaseprovideallidentifyinginformationsuchas:

      • fullname

      • designatione.g.Limited,SA,GmbH

      • tradingname

      • registerednumber

      • VATand/ortaxreferencenumber

      • countryofincorporation

      • business/tradingaddress

      • registeredofficeaddress.

    • Additionallyifrelevanttoyoursuspicion,pleaseprovidedetailsoftheindividualsorentitiesthatarethedirectors(orequivalent)anddetailsoftheindividualswhoownorcontrolorexercisecontroloverthemanagementoftheentity.

    • Unincorporated

    • Pleaseprovideallrelevantdetailsknownabouttheunincorporatedentity.

    • Theamountofinformationyouwillhavemaydependontherelationshiptothereportedsubject.

    InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


    • P age |44

    • Pleaseprovideall identifyinginformationsuchas:

    • fullname

    • business/tradingaddress

    • VATand/ortaxreferencenumber.

    • Additionally,ifrelevanttoyoursuspicion,pleaseprovidedetailsofallpartners/principalswhoownorcontrolorexercisecontroloverthemanagementoftheentity.

    • Trusts

    • Pleaseprovideallrelevantdetailsknownaboutthetrust.

    • Theamountofinformationyouwillhavemaydependontherelationshiptothereportedsubject.

    • Pleaseprovideall identifyinginformationsuchas:

      • fullnameofthetrust

      • address

      • natureandtypeofthetrust.

    • Additionally,ifrelevanttoyoursuspicion,pleaseprovidedetailsofalltrustees,settlors,protectorsandknownbeneficiariesasappropriate.

    • Descriptionofcriminalpropertyand itswhereabouts

    • Whenthesuspicionbeingreportedrelatestoafinancialtransaction,thereportshouldincludetherelevantdetailsofthebeneficiary/remitterofthefundsand,ifknown,thedestination/originatingbankdetailse.g.sortcode,correspondentbankdetails.

    InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


    P age |45

    Itisimportant to accuratelyrecordthedateonwhichthetransactionhasoccurredorwilloccur.

    Itisalsousefultounderstandthetypeoftransaction–forexampleonlinepayment/receipt,debitorcreditcard,ATMwithdrawal,cheque,electronictransfer(BACS/CHAPS),orcash.

    Ifthebeneficiary/remitterofthetransactionisbelievedtobecomplicitinthesuspicious activitythenconsiderationshouldbegiventoprovidingtheirdetailsasanassociatesubject.

    Anassociatedsubjectisapersonorentitythatislinked tothemain person/entityinsomedirectwayandisinvolvedin thesuspiciousactivity.

    Iftheactivitydoesnotinvolveafinancialtransactionthenanexplanation ofthesuspiciousactivitythathasoccurredorwilloccurshouldbegiven.

    WhensubmittingaSARusingSAROnlinetherearefieldsfordocumentingspecificfinancialtransactions.

    Equally,transactionsoractivitycanbedocumentedwithinthe‘reasonforsuspicion’fieldprovided.

    Appropriateconsent

    Obtainingconsentprovidesadefenceagainsttheprincipalmoneylaunderingoffences.

    ShouldyouwishtoavailyourselfofthisyoushouldrefertoaseparatedocumentwhichhasalsobeenpublishedontheSOCAwebsite(www.soca.gov.uk)entitled‘ObtainingconsentfromSOCA’.

    Thisprovidesspecificguidanceontheprocesstobefollowedandwhattoexpectifyouwish toapplytoSOCAforaconsentdecision.

    IfyouareusingSAROnlineyouareremindedtoensureyoutick theappropriateConsentBoxwhencompletingyourSAR.

    InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


    P age |46

    In allcasesitisimportanttospecifyclearlytheactivityforwhichconsentisrequired.

    ThresholdRequests

    Section339AofPOCAmakesprovisionforathresholdinthecaseof deposit-takinginstitutionsinoperatinganaccountifitis£250orlesswithouttheneed toseekconsent.

    Iftheproposedactivityexceeds£250,permissiontovary the‘threshold’paymentisrequiredfromSOCAbeforethe activitymaybeconducted.

    Thereportershouldstillmakeadisclosure inrespectoftheinitialopeningofanaccountor,ifdifferent,thetimewhenthedeposit-takingbodyfirstsuspectsthatthepropertyiscriminalproperty.

    IfyouaresubmittingaSARwithaThresholdRequest, pleasesubmittheSARinthenormalwayandspecifythethreshold amountsought,theaccountitrelatesto,anddetailsofthefrequency,natureandvalueoftheactivity to whichthethresholdwillrelate.

    Ifathresholdisalreadyinplaceandyouwishtoseekavariation,thenthereasonsforthevariationwillneed tobesetoutinanadditionalSARandsubmittedtoSOCA.

    Pleasenote:

    Athresholdrequestisnotthesamethingasaconsentrequestandtherearenostatutorytimescalesfordealingwiththem.

    Howevertofacilitatethresholdrequests,SOCAusestheconsentdesk toprogresstheresponsesanditishelpfuliftheconsentboxistickedontheSARtoenablethedesk to identifytherequestsquickly.

    InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


    P age |47

    Courtordersandlawenforcementenquiries

    Insomeinstances,youmaybeservedwithorhavenoticeofacourtordersuchasaproductionorder,madein respectofaparticularindividualorentity.

    Thismayactasacatalystforyoutoreviewtheactivitywhichyouconductorhaveconductedinrelation tothatindividualorentity.

    If,followingsuchareview,youfeelthatthereisanobligationtosubmitaSARorseekconsent,thentheSAR/consentrequestshouldreflectyoursuspicionsinthecontextofyourengagementwiththesubject.

    Acquisitiveorfraudrelatedcrime

    Whenyouhaveknowledgeorsuspicionofan acquisitiveorfraudrelatedcrime,youwillbefacedwithaparalleldecisionmakingprocess.Firstly,youwillhavetodecidewhetherornotyouwishtheoffencetobeinvestigated.

    In casesofallfraud(confirmedfraud,attemptedfraudorwhereinformationrelatingtofraudcanbeprovided),reportsshouldbemadetoActionFraudviawww.actionfraud.police.ukortelephone03001232040.

    SOCAdoesnottakecrimereports.

    Also,regardlessofwhetherornotacrimehasbeenreported,youwillwishtoconsideryourlegalobligationsundertheProceedsofCrimeAct2002(POCA).

    IfyouhaveknowledgeorsuspicionthatamoneylaunderingoffencehastakenplacethenyoumustsubmitaSARtoSOCA.

    SOCA’sadvicefromitspolicepartnersisthatwhereareporterwishesthecontentofaSARtobeformallyrecordedasacrimereporttheyshouldreportthisdirectlytotheirlocalpoliceforce.

    InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


    P age |48

    Wherethereporterhasreportedacrimeand,inaddition,hassubmittedaSAR,itwouldbehelpfulifthecrimereferencenumbercouldbeincludedinthetoplineofthetextintheSARsothatitcanimmediatelybe

    cross-referencedbylawenforcement.

    Alertsandkeywords

    TheAlertsprocessisarecognisedandestablishedwaybywhichSOCAcommunicateswiththeUK'sprivatesector.

    Thesearewrittencommunicationsthatwarnofaspecificrisk,threatorproblem.

    AllAlertscontainakeywordoraglossarycode.

    IfyousubmitaSARasaresultoftheinformationcontainedinanAlertpleaseincludethekeywordwithinthefreetextfield.

    SARconfidentiality

    TheconfidentialityofSARsisthecornerstoneofthereportingregime.SARsareheldonasecurecentraldatabasewithinSOCAandaccesstothedatabasebylawenforcementisstrictlycontrolledbySOCA.

    TheuseofSARsisgovernedbyHomeOfficeCircularNo.53/2005(MoneyLaundering:TheConfidentialityAndSensitivityofSuspiciousActivityReports[SARs]AndTheIdentityOfThoseWhoMake Them).

    AlllawenforcementagenciesusingSARsarerequired to follow theguidanceoutlined

    IfreportershaveconcernsabouttheinappropriateuseofSARsbyLawEnforcementAgencies(LEAs),orbreachesofSARconfidentiality,theyshouldcalltheSARConfidentialityBreachLineonfreephone0800234 6657(9am-5pm,UKtime,Monday to Friday).Thisnumberisforreportingbreachesofconfidentialityonly.

    InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


    P age |49

    ContactingSOCAUKFinancialIntelligenceUnit(UKFIU)

    SARsshouldnotbeusedasacommunication channele.g.asameansofgainingadvice.SARsareonlyforthereportingofsuspiciousactivity toSOCA.

    IfyouneedtoseekgeneralguidancerelatingtomoneylaunderingortheSARsRegimeinparticular,youareadvisedtocontactyourdesignated MoneyLaunderingReportingOfficer(MLRO)oryourregulatorybody.

    ForinformationorassistancewithsubmittingSARs,SAROnlineenquiriesandconsent,pleasevisitwww.soca.gov.ukorcontacttheUKFIUasfollows:

    Tel:02072388282

    Press'2'-GeneralSARenquiriesPress'3'-SAROnlinehelpdeskPress'4'-ConsentSARenquiries

    WhencontactingtheUKFIUpleasehaveavailableyourSARreference numberifapplicable.

    [email protected]uwish tomakeaSARbypostyoushouldaddressyourSARtoUKFIU,POBox8000,London,SE115ENorbyfaxon02072838286.YouareremindedthatpostandfaxareslowerthanSAROnlineandthereforeitwilltakelongerforyourSARtobeprocessed.Youwillnotreceiveanacknowledgementifyouusepostorfax.

    Disclaimer

    Whileeveryeffortismade to ensuretheaccuracyofanyinformationorothermaterialcontainedin orassociatedwiththisdocument,itisprovidedonthebasisthatSOCAanditsstaff,either individuallyorcollectively,acceptnoresponsibilityforanyloss,damage,costorexpenseofwhateverkindarisingdirectlyorindirectlyfromorinconnectionwiththeusebyanyperson, whomsoever,ofanysuchinformationormaterial.

    InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


    P age |50

    Anyusebyyouorbyanythirdpartyofinformationorothermaterialcontainedinorassociatedwiththisdocumentsignifiesagreementbyyouorthemtotheseconditions.

    DialogueTeam

    TheaimoftheDialogueTeamis todrivetheUKFinancialIntelligenceUnit(UKFIU)agendaoninterfacingwithstakeholdersonSuspiciousActivityReports(SARs)activity.

    The teamstrives to improvecommunicationandunderstandingbetweentheSARsregimeparticipants,toincreasethevalueextractedfromtheSARsregime,toprovide,facilitateandcontributetovariousforumstoshareperspectivesontheoperationoftheregimeasawhole.

    In essencetheDialogueTeamseekstoimprovethequalityofSARsintelligence,andpromotethevalueandgreateruseofthisintelligenceinmainstreamlawenforcementactivity.

    InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


    P age |51

    WhatisSOCA?

    “Weworktoputseriouscriminalsbehindbars,andusemanyothertacticstofightcrimeandkeepyousafe.

    In particular,wewanttoensurecrimedoesn’tpayandthatit’shardertocommit.

    Thepower to countercriminalsSOCAofficerscanhavethecombined powersofpolice,customsandimmigrationofficers.

    Wealsohaveasubstantialrangeoftoolsandlegislationtotargetcriminalswith– everythingfromtheability to recoverassetsthrough toSeriousCrimePreventionOrders.

    WeworkwithagenciesandofficialsacrosstheUKandallovertheworldtohelpusdoourjobandtohelpthemdotheirs.

    Newwaysoffightingcrime

    Weusetraditionallawenforcementmethods– investigating,andarrestingcriminals.

    Wealsodrawoninnovativenewapproachestopreventcrimesfromhappening in thefirstplace.

    Herearesomeexamples:

    Firstclassintelligence-weuseallkindsofwaysto gathertheknowledgeweneedtoknowwhere, whenandhow tostriketobesteffect.

    Monitoringseriouscareercriminals-insomecaseswewatchthemforlife,to preventthemfromcontinuingtheircriminalactivitiesinprisonorafterrelease.

    Hittingthemwhereithurts-bytakingcriminals’cashandproperty.Formanyseriouscriminals,thisworriesthemmorethantheprospectofgoingtoprison.

    InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


    P age |52

    Workinginpartnership -seriousorganisedcrimeisamajorproblemthataffectseveryoneeveryday,soweco-operatewithlawenforcement,publicandprivatesectorpartners to counterit.

    Worldwideoperations-wegoanywhereweneedtowhentacklingcriminalactivity.Forinstance,astreetdrugdealerisjustthelastlinkinachainthatprobablystretchestothe othersideoftheworld.Soouractivitiesaren’tlimitedbyborders.

    Makingithardertocommitcrime-forexample,passingondetailsofsuspiciousfinancialactivitiesorforgedidentitiestobanksbeforefraudscan takeplace.”

    InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


    P age |53

    • FinancialStabilityBoardreportstoG20onprogressoffinancialregulatoryreforms

    • TheChairmanofthe FinancialStabilityBoard(FSB)reported to theG20FinanceMinistersandCentralBankGovernorsonprogressinthefinancialregulatoryreformprogramme.

    • In connectionwiththis,theFSBispublishing:

    • aletterbytheFSBChair totheG20,sentaheadoftheirmeeting,reportingonthegoodprogressbeingmadeinfinancialreforms,including in thefollowingpriorityareas:ocreatingcontinuouscoremarketsbycompletingOTCderivativesandrelatedreforms;

    • ostrengtheningtheoversightandregulationofshadowbanking;obuildingresilientfinancialinstitutions;and

    • oending“toobigtofail”.

    • TheletteralsosummarisestheFSB’srecentworkandplanstomonitortheimplementationofreforms.

    • AnassessmentoftheeffectoftheG20financialreformprogrammeontheavailabilityoflong-termfinance.

    • ThisassessmenthasbeencontributedbytheFSBaspartofabroaderdiagnosticreportpreparedbyinternationalorganisationstoassessfactorsaffectinglong-termfinancing.

    • TheFSBassessmentconcludesthat,whiletheremaybeshort-termadjustmenteffects,themostimportantcontributionofthefinancialreformprogrammetolong-terminvestmentfinanceistorebuildconfidenceandresilienceintheglobalfinancialsystem.

    InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


    • P age |54

    • ajointupdatebytheInternationalAccountingStandardsBoard(IASB)andtheFinancialAccountingStandardsBoardonthestatusandtimelineoftheirremainingprojectsonconvergingtheirstandards.

    • Attoday’smeetingtheG20FinanceMinistersandCentralBankGovernorsreaffirmedtheircommitmenttothefull,timelyandconsistentimplementationofinternationallyagreedfinancialsectorreforms,andlookedforward to acomprehensivereportonprogressinimplementingallreformsattheStPetersburgG20SummitinSeptember.

    • G20MinistersandGovernorsalsowelcomedtheestablishmentoftheFSB inJanuaryasalegalentitywithgreaterfinancialautonomyandenhancedcapacitytocoordinatethedevelopmentandimplementationoffinancialregulatorypolicies,whilemaintainingstronglinkswiththeBankforInternationalSettlements.

    • ProgressofFinancialRegulatoryReforms

    • Financialmarketconditionshaveimprovedoverrecentmonths.

    • Nonetheless,medium-termdownsiderisks remain,givenweakgrowthprospectsandhighlevelsofpublicandprivatesectordebtinmanyeconomies.

    • Therecentimprovementinfinancialmarketconditionsowesmuch tocentralbankactions, in particular,the accommodativemonetarypolicyaimedatstimulatingtheeconomicrecovery.

    • Asaconsequence,marketparticipants’appetiteforriskhasincreased,butthishasnotyettranslatedintoarobustrecoveryinrealinvestment.

    • Thebeginningofthereturnofrisk appetitetofinancialmarkets– whileintendedandwelcome– raisesanumberofissues.

    • First,marketparticipantsandauthoritiesneed tobeonguardagainst mispricingofriskandvaluationsofassets.

    InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


    • P age |55

    • Second,theimportanceoftimelycompletionofthereformsto

    • over-the-counter(OTC)derivativesmarketsandtheshadowbankingsystemhasincreased.

    • Third,historicallylowinterestratesinmanycountriesposechallengesforinstitutional investorswithlong-datedliabilitiesandmayleavemarketparticipantsmorevulnerabletounanticipatedmovementsintheyieldcurve.

    • Financialinstitutionsandsupervisorsshouldcontinuetoassesstheresilienceofthefinancialsystemthroughregularstresstesting,notablyofcreditandinterestraterisk,andcompletetheprocessofbalance-sheetrepair.

    • Reportssubmittedforthismeeting

      • Regulatoryfactorsaffectingtheavailabilityoflong-termfinance

    • Aspartofthediagnosticworkyourequestedoftheinternationalorganisations,theFSBhaspreparedanassessmentoftheeffect oftheG20financialreformprogrammeontheavailabilityoflong-terminvestmentfinance.

    • ThereformsincludeBaselIII,OTCderivativesmarketreforms,andchangesaffectingtheregulatoryandaccountingframeworkforinstitutional investors.

    • Thegeneralconclusionisthat,whiletheremaybesomeshort-termadjustmenteffects,themostimportantcontributionofthefinancialreformprogrammetolong-terminvestmentfinanceistorebuildconfidenceandresilienceintheglobalfinancialsystem.

    • Asaresult,thesereformsshouldsubstantiallyenhancethefinancialsystem’scapacity tointermediateinvestmentflowsthroughthecycleat allinvestmenthorizons.

    InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


    P age |56

    Hence,theG20regulatoryreformsareunambiguouslysupportiveoflong-terminvestmentandeconomicgrowth.

    ThesubmissionsofFSBmembersfoundlittleevidencethattheregulatoryreformshavehadanotableimpactonlong-termfinancingtothispoint.

    Thisisnotsurprisinggiventhefactthatthereformprocessisstillatanearlystage.

    Severalfeaturesofthereformsaredesignedto avoidmajorunintendedconsequences:thelongphase-inperiodforreforms;theongoingimplementationmonitoring;and, in certaincases,theflexibility to adjustrulesduringtheobservationperiod.

    Thefinancialreformprogrammeisnotspecific to theregulationoflong-termfinance.

    Nevertheless,thereformswillchangetheincentivesofsomefinancialinstitutionsandthecostsofcertaintransactions,whichmayaffect thecompositionoflong-termfinance.

    In particular,institutionalandotherlong-horizoninvestorsareexpectedtoassumeagreaterrolein fundinglong-termassetsandmoreofthisinvestmentmaybeintermediatedvia capitalmarketsratherthanthebankingsystem.

    Therearethreeareasforspecific follow-upbytheFSB.

    First,thereshouldbeongoingmonitoringtoidentifyanyregulatoryfactorsthatmaydisproportionatelyaffecttheprovisionoflong-termfinancesothattheycan beaddressed.

    Second,theFSBcouldworkwithotherstoexaminewhetherregulatoryfactorsmayconstraintheabilityofnon-bankstoexpandtheirprovisionoflong-termfinance.

    InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


    • P age |57

    • Third,theFSBcancontribute to theworkofotherinternationalorganisationstohelppromotethedevelopmentoflonger-termdomesticsavingsandthe capacityofdomesticfinancialsystemstointermediatethem,particularlyinemergingmarketanddevelopingeconomies(EMDEs).

    • b.Updateonaccountingconvergence

    • TheChairsoftheInternationalAccountingStandardsBoardandtheUSFinancialAccountingStandardsBoardhavewrittenyouontheirworkonconvergenceofaccountingstandards.

    • ThetwoBoardsexpecttomakeprogressonthetwo keyoutstandingissuesofimpairmentofloans,wheretheyexpect to completetheirdeliberationsin2013,andinsurancecontracts,wherebothBoardswillbeholdingpublicconsultationsthisyear.

    • Ofthesetwo outstandingissues,theneedforconvergenceonanewforward-lookingexpectedlossapproach to provisioningisofmostimmediateconcernforend-usersandfromafinancialstabilityperspective.

    • Wenotewithconcernthedelaysinconvergencetodate.

    • WethereforerecommendthattheG20asktheIASBand FASBtopreparebyend-2013aroadmapforconvergingtoacommonapproachforimpairmentandforachievingtheG20objectiveofasinglesetofhigh qualityaccountingstandards.

    • Prioritiesandworkplans

      • Creatingcontinuousmarkets

    • TheFSBremainsfullycommittedtotherapidcompletionoftheG20’sagreedreforms toOTCderivativesmarkets.

    InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


    P age |58

    Asyouareaware,thesecomplexreformsaretakingsomewhatlongerthanoriginallyplanned.

    TheFSBwillsubmitforyourAprilmeetingitslatestprogressreportonimplementation,includingacomprehensivestock-takeofreformsasofend-2012,estimatesoftheextenttowhichtransactionsarebeingcentrallyclearedandreportedto traderepositories,andanoverviewoftheremainingissuestoberesolved.

    Itisimportantthatalljurisdictionspromptlycompletethenecessarychangestolegislativeandregulatoryframeworks toputthesereformsintopractice.

    Tomaintainmomentum,Ihaveasked FSBmemberjurisdictionstoconfirmbeforetheSeptemberSummitthatthelegislationandregulationforreportingto traderepositoriesareinplace,andalsothestepstheyaretakingtocompletetheimplementationofotherOTCderivativesreforms.

    Ministersmaywishtotakeaparticularinterestinprogressintheirjurisdictions to ensuretimelycompliancewiththeseimportantreforms.

    TheFSBhaspreviouslyidentifiedregulatoryuncertaintyasthemostsignificantimpedimenttofullandtimelyimplementationoftheOTC derivativesreforms.

    Toreducethisuncertainty,regulatorsareworkingtogethertoidentifyandaddressconflicts,duplicationandgapsinthecross-borderapplicationofrules.

    TheywillprovideanupdateinAprilontheirprogressandnextsteps,andareporttotheSummitonhow theidentifiedcross-borderissueshavebeenresolved.

    Internationalpoliciesinremainingimportantareaswillalsobepublished bytheSummit.

    Theseincludecapitalrequirementsforexposurestocentral

    counterparties,marginingstandardsfornon-centrallyclearedtransactionsandguidanceonresolutionofcentralcounterparties.

    InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


    P age |59

    Standardsettersareundertakinganassessmentoftheincentivestocentrallycleartransactionsthatthesestandardscreateandwilladjustthemasnecessarytoensurearobustsystem.

    TheFSBwillalsoreportattheSummitthefindingsofanewmacroeconomicimpactassessmentoftheOTCderivativesregulatoryreforms.

    Standardsettersarealsodevelopinginternationalguidanceonauthorities’accesstotraderepositorydata,includinginsuchawaythatitcan beaggregatedacrosstraderepositories.

    Thisguidance,whichwillbeissuedforconsultationshortlyandfinalised bytheSummit,willbeimportantforensuringthatauthorities canuseinformationfromtraderepositoriesintheiroversightofOTCderivativesmarketsandassessmentofsystemicrisk.

    MinistersandGovernorswillwishtoensurethereiseffectivecross-borderaccess to thisinformation,whichisvitaltothemonitoringofemergingfinancialvulnerabilities.

    TheglobalLegalEntityIdentifier(LEI)systemwillenhancetheusabilityofthedata;theRegulatoryOversightCommitteeasthegovernancebodyoftheglobalLEIsystemwasestablishedin January2013.

    EstablishingtheGlobalLEIFoundationisthekeynextsteptolaunchthesysteminMarch2013.

    TheFSBcontinuestoofferstrongsupport to theLEIinitiativeandtheFSBSecretariatwillserveasROCLEISecretariatfortheinitialperiod.

    b.Strengtheningtheoversightandregulationofshadowbanking

    Asyouwillrecall,theFSBdeliveredtoyoulastNovemberaninitialsetofrecommendationstostrengthentheoversightandregulationofshadowbanking.

    InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


    P age |60

    Wehavereceivedusefulfeedbackthroughapublicconsultationontheinitialrecommendations.

    TheFSBisrefiningtherecommendationsrelatingto securitieslendingandrepos,andthoserelatingtothepolicymeasuresforshadow bankingentities otherthanmoneymarketfunds.

    Therecommendationswilladdressbank-like riskstofinancialstabilityemergingfromoutsidetheregularbankingsystemwhilenotinhibitingsustainablenon-bankfinancingmodelsthatdonotposesuchrisks.

    Theapproachisdesignedtobeproportionate to financialstabilityrisksbyfocusingonthoseactivitiesthatarematerialtothesystem,usingasastartingpointthosethatwereasourceofsystemicrisk duringthecrisis.

    Wewill delivercertainrecommendationsto theSt PetersburgSummit.

    Thesemeasuresshouldbeviewedasthestartofabroaderprocesssincetheyaddressthespecificrisksthataroseduringthecrisisandweallrecognisetheabilityoftheshadowbankingsectortoinnovate.

    c.Buildingresilientfinancialinstitutions

    InJanuary,agreementwasreachedbytheGroupofGovernorsandHeadsofSupervisionontheLiquidityCoverageRatio(LCR) to beappliedtobanks.

    Theagreementexpands therangeofhigh-qualityliquidassetsthatcanbeincludedin theLCRandincorporatesevidence-basedassumptionsaboutliquidityoutflowsintimesofstress.

    TheLCRwillbeintroducedin 2015asplanned,withtheminimumrequirementsbeginningat60%andreaching100%by2019toallow theglobalbankingsystemsufficient timetoadjust.

    InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


    P age |61

    d.Ending“too-big-to-fail”

    ProgressisbeingmadebytheIAISindevelopingandtestingamethodologyfor identificationofglobalsystemicallyimportantinsurers(G-SIIs),andindevelopingappropriatepolicymeasures.

    Thisworkshouldbecompletedinthesecondquarterof2013.

    Anidentificationmethodologyfornon-bankG-SIFIswillbeissuedforconsultationinthesecondhalfof2013.

    AlthoughimplementationoftheG-SIFIframeworkhasmuchfarthertogo,wewilldeliveranassessmenttotheSt.PetersburgSummitoftheprogressmadeindevelopingcrediblepoliciesforendingtoo-big-to-fail(TBTF).

    3.ImplementationofreformsBaselIII

    ConsistentimplementationofBaselIIIisfundamentalto strengtheningtheresilienceoftheglobalbankingsystem,maintainingmarketconfidenceintheregulatoryreformsandprovidingalevelplayingfieldforinternationally activebanks.

    The27memberjurisdictionsoftheBaselCommitteeonBankingSupervision(BCBS)continuetomakeprogresstowardimplementation;

    11hadissuedfinalregulationsby12February2013andtheremaining16jurisdictionshavetableddraftregulations.

    TheEuropeanUnionandtheUnitedStatespublisheddraftregulationsin2012andintendtofinalisethemoverthecourseof2013.

    TheFSBandBCBSwillprepareafullupdateoncountries’adoptionofBaselIIIindomesticregulationforyourAprilmeeting.

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    ThecountriesthathavemissedtheJanuary2013startdateareworkingtofinalisetheirregulationsandareexpected to meetthe2019timelineforfullimplementation.

    SeveralmorememberswillundergoaconsistencyassessmentoftheirfinalregulationsbytheBCBSin2013.

    Byend-2013,alljurisdictionsthatare thehomeregulatortoglobalsystemicallyimportantbanks(G-SIBs)willhavebeensubjectto anassessmentoftheirBaselIIIimplementation.

    Otherjurisdictionswillbe subject to regulatoryconsistencyassessmentsshortlythereafter.

    TheBCBShasconcludedaninitialexaminationoftheinternationalconsistencyintheapplicationoftheBaselIIIriskweightingschemefortradingbookassets.

    Asimilarreviewisunderwayregardingthebankingbook.

    Theanalysisforbanks’tradingbooksindicatesthatsupervisorydecisionsandvariationsinbanks’modelscontributetothesubstantialdifferencesinbanks’calculationsofmarketrisk.

    (Theaverageriskweightingoftradingassetsformostbanksin thestudyvariedbetween15%and45%.)

    Thestudyalsoshowsthatbanks’publicdisclosuresareinsufficientfor understandinghowmuchofthesevariationsinbanks’reportedriskweightingsofassetsareowingtodifferinglevelsofactualriskversusthatowingto otherfactors.

    Thissituationisunacceptable,andthestudyhighlightsthreepolicyoptionswhicharebeingaddressedintheBaselCommittee’songoingwork:

    (i)Improvingbanks’publicdisclosures,buildingontherecommendationsoftheEnhancedDisclosureTaskForce;

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    Narrowingdownmodellingchoicesforbanks;and

    Furtherharmonisingsupervisorypracticesoverapprovalofmodels.

    ResolutionregimesandG-SIFI resolutionplans

    Aneffectiveandcredibleresolutionregimefor SIFIs isacriticalcomponentofthepolicy frameworkforendingTBTF.

    Full implementationoftheFSBKeyAttributesofEffectiveResolutionRegimeswillprovideauthoritieswiththepowersand toolsnecessaryforthispurpose.

    WewillshortlyconcludethefirstpeerreviewofFSBmembers’implementationoftheKeyAttributes.

    Theworkunderthereviewconfirmsthatreformsareunderwayin manyjurisdictions to alignnationalstatutoryregimeswiththeFSBKeyAttributes,butthatsignificantworkremains.

    Wearedevelopinganassessmentmethodology to assistcountrieswiththeirimplementation,andtoprovideabasisforfuturepeerreviewsandIMF andWorldBankassessments.

    ThemethodologywillbetestedinpilotassessmentsbytheIMFandWorldBanklaterthisyearandpublished in thesecondhalfof2013.

    TheFSBanditsmemberswillalsothisyearaddress thespecificaspectsofresolutionofinsurersandfinancialmarketinfrastructuresandtheprotectionofclientassetsin resolution.

    ByJune2013,resolutionstrategiesandplansshouldbeinplaceforallG-SIFIs designatedinNovember2011.

    Toassistthisprocess theFSBhaspubliclyconsultedonspecific aspectsofrecoveryandresolutionplanningandisnow finalisingitsguidance.

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    ProgressinendingTBTF iscontingentonthefeasibilityandcredibilityofputtingtheseresolutionplansintooperation.

    Wewilllaunchinthesecondhalfof2013afirstroundofassessmentsundertheG-SIFIResolvabilityAssessmentProcesstoevaluatetheprogressmade.

    ReducingtherelianceonCreditRatingAgency (CRA)ratings

    TheFSBhasrecentlylaunchedathematicpeerreview to assistitsmemberstofulfiltheircommitmentsundertheroadmapforimplementingtheFSBprinciplesforreducingrelianceonCRAratings.

    Thiswill includeastock-takeofreferencestoCRAratingsinnationalauthorities’lawsandregulationsandofactionsbeingtakentoremoveorreplacethesereferences.

    ThefindingswillfeedintotheprogressreportonCRAsfortheSummit,whilethepeerreviewwillbecompletedbyearly2014.

    MonitoringtheimpactofreformsonEMDEs

    TheFSBwillorganiseaworkshopforEMDEsinthefirsthalfof2013 tosharelessonsandexperiencesonimplementingagreedfinancialreformsandonundertakingexanteassessmentsoftheirimpact.

    FSBmemberswithsignificantexperiencein undertakingsuchassessmentswillbeaskedtopresenttheirmethodologies.

    TheFSBwillreportthefindingsoftheworkshopandotherrelevantmonitoringprocessesattheSt.PetersburgSummit.

    4.FSBresources,capacityandgovernance

    Finally,Iampleased to reportthattheFSBhasnowbeenestablishedwithalegalpersonality.

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    Alongsidethis,arollingfive-yearagreementunderwhichtheBISwillhostandprovideresourcesfortheFSBhasbeen activated,andaninstitutionalmechanismfortheFSB’sfinancialandresourcegovernanceestablished.

    TheFSBhasalsoadoptedProceduralGuidelinesforitsoperationalandadministrativeactivitiesandpractices.

    Theseareimportantsteps towardsimplementationoftheG20recommendationsatCannesandLosCabostoplacetheFSBonanenduringorganisationalfooting,withstrengthenedgovernance,greaterautonomyinresourceuseandenhanced capacitytocoordinatethedevelopmentandimplementationoffinancialregulatorypolicies,whilemaintainingstronglinks withtheBIS.

    TheFSBwillnext electnewchairsforthreeofitsStandingCommitteesandbeginareviewofthecompositionoftheirmemberships.

    FollowingtheSt.PetersburgSummit,theFSBwillsetintrainareviewofthestructureofitsrepresentation,whichweenvisagetobecompletedundertheAustralianPresidencyoftheG20.

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    Financialregulatoryfactorsaffectingtheavailabilityoflong-terminvestmentfinance

    ReporttoG20FinanceMinistersandCentralBankGovernors

    ExecutiveSummary

    ThemostimportantcontributionoffinancialregulatoryreformstoLTinvestmentfinanceis to promoteasafer,sounderandthereforemoreresilientfinancialsystem.

    Ifimplementedintimelyandconsistentmanner,thesereformswillhelprebuildconfidenceintheglobalfinancialsystem,whichwillenhanceitsability to intermediatefinancialflowsthroughthecycleandfordifferentinvestmenthorizons.

    Forthisreason,theG20regulatoryreformprogrammeissupportiveofLTinvestmentandeconomicgrowth.

    FSBmembershaveidentifiedanumberofregulatoryreformsthatmay affect LTfinance.

    TheseincludeBaselIII,over-the-counter(OTC)derivativesmarketreforms,andtheregulatoryandaccountingframeworkfordifferenttypesofinstitutionalinvestors.

    Manyofthesereformsarestillin theprocessofpolicydevelopmentoratanearlystageofimplementation.

    Theregulatorycommunityisvigilant toavoidmaterialunintendedconsequencesandtoanalysepotentialimpactspriortofinalisationofthereforms.

    ThereformsdonotspecificallytargetLTfinance.

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    • Forexample,BaselIIIneitherintroduceshigherriskweightsnorrequiresmatchedfundingonbankexposureswithmaturitiesofoveroneyear.

    • However,thereformsdoaltertheincentivesofdifferenttypesoffinancialinstitutions toparticipateinthismarketaswellasthecostsofdifferent typesoftransactions.

    • Asthebalanceofincentiveschanges,institutional investors– whicharethemostnaturalprovidersofLTfinanceinthefinancialsystem– will need to assumeagreaterroleinthismarket.

    • Anecdotalevidencesuggeststhatthisprocessisunderway,butitcantaketimeandisnotuniformacrossdifferentfinancialmarketsegmentsorregions.

    • Animportantissuegoingforwardiswhethertheregulatoryframeworkenablesnon-bankprovidersofLTfinance,particularlyinstitutionalinvestors,tostepuptheir involvementinthismarket.

    • TheFSBcancontributetofutureG20workonLTinvestmentfinanceby:

    • Monitoringtheeffectoffinancialreformsonanon-goingbasistoidentifyanyfactorsthatmaydisproportionallyimpacttheprovisionofLTfinancesothattheycan beaddressed;

    • Workingwithrelevantpartiestoidentifyregulatoryfactorsthatmayimpedetheeffectivenessandefficiencyoffinancialmarketsand

    • non-bankinstitutionsin theprovisionofLTfinance,without

    • compromisingfinancialstability objectives;and

    • Workingwithotherrelevantinternationalorganisationstopromotethedevelopmentofdomesticcontractualsavingsandthecapacityoffinancialsystems to intermediatethem,particularlyin emergingmarketand developingeconomies(EMDEs).

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    1.Introduction

    AtthemeetingoftheG20MinistersandGovernorsinNovember2012,theFSBwasaskedtoundertakediagnosticwork,togetherwithotherrelevantinternationalorganisations(IOs),to assessfactorsaffectinglong-term(LT)investmentfinancinginordertoprovideasoundbasisforanyfutureG20work inthisarea.

    In thedivisionoflabouramongsttheIOs,theFSBisfocusingonfinancialregulatoryfactorsaffectingtheavailability,cost,timehorizonandothertermsofLTfinance;otherIOsare coveringdifferentdimensionsofthistopic.1

    Forthepurposeofthisnoteand tobeconsistentwiththedefinitionusedby otherIOsinvolvedinthisproject,LTfinanceisdefinedasmaturitiesoffinancinginexcessoffiveyears,includingsourcesoffinancingthathavenospecificmaturity(e.g.equities).

    LTinvestmentfinanceiscommonlydefinedasresourcesthatsupportLTinvestmentintheproductive capacityofaneconomy.

    Thisincludes:

    publicandprivateinfrastructure;

    equipmentandsoftware;

    educationandresearchanddevelopment(R&D);

    newhousingandrealestatedevelopment;and

    constructionofoil,gasandenergyfacilities.

    Theseinvestmentstendtobelessliquid,havematuritiesthatextend beyondthebusinesscycle,andaremoreexposed tochangesincreditqualityandinflationexpectationsratherthanshort-termmarketvolatility.

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    TheG20requestis motivatedbyconcernsaboutinadequateresourcesbeingchannelledtogrowth-enhancingLTfinancingprojectsin thepost-crisisenvironment.

    Thedriversoftheseconcernsinclude thestrainsongovernmentbudgetsandtheweakenedbankingsystem,whichmakebothsectorslessabletosupportLTinvestmentfinanceatatimewhen, in thefaceofweakglobaldemand,LTinvestmentislikelytobemorecriticalforsustaininglongtermgrowth.

    Someofthestylizedfactscitedin supportoftheseconcernsarethereducedfiscalspaceavailabletosupportinvestmentprojects;thereductionintheamountandtenorofcorporatelendingbysome(mostlyEuropean)banks;theretreatofsomebanks fromcross-borderlending,includingfromcertainspecializedLTfinancesegments(e.g.aircraft,shippingandenergylending);andtheexistenceoflargecorporate cash surplusesin somejurisdictionsthatarenotbeinginvested.

    However,thispictureisnotuniformastherehavebeenlargevolumesofLTnon-financialcorporatedebtissuanceglobally;theshareofoutstandingLTbankloans to firmsandhouseholdsintheeuroareahasnotdeclinedsince2007;andLTfinancedoesnotseemtohavebeenaffectedin someregionsormarkets.

    ThisnoteisbasedontheinputprovidedbyFSBmembers(includingIOsandstandard-settingbodies), interviewswithmarketparticipants,andthereviewofrecentliterature.

    Thefinancialregulatoryfactorsthatarecoveredincludebothinternationallyagreedreformsandothernational/regionalpolicymeasuresinFSBmemberjurisdictions.

    In mostcases,thereformsareatarelativelyearlyphaseofimplementationandtheirimpactatthisstageisovershadowedbybroaderpost-crisisdevelopmentsaffectingtheprovisionofoverallfinance,sothefindingsandconclusionsin thisnoteare tentative.

    Thenoteisstructuredasfollows.

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    ThesecondsectiondescribestheroleofthefinancialsysteminLTfinanceprovision, includingthewaythatfinancialregulationmayinfluencethisrole.

    Thethirdsectionfocusesonthosereformsidentifiedby FSBmembersaspotentiallyaffectingLTfinance.Thefinalsectionsummarises themainfindingsandsuggestspossiblefutureareasofworktoaddresstheissuesidentifiedinthenote.

    2.RoleofthefinancialsysteminLTfinance

    Thefinancialsystemintermediatessavings to,andfacilitates themanagementofrisksthatarisein,thefinancingofLTinvestment.

    Fundsoriginatefromvariousinternalandexternalsources(domesticandforeignhouseholds,corporations,andgovernments)andfinancialsystemparticipants(banks,institutional investors etc.)help to intermediatesomeofthoseflowstoendusersviaavarietyofinstruments(loans,bonds,equities etc.)andservices(origination,structuring,underwritingetc.).

    Investmentfinance can takeplacebothbyprovidingfundstospecificprojectsandbyprovidinggeneralpurposefinancing.Theothermainroleofthefinancialsystemistoprovideriskmanagementservicesthat,byhedgingspecifictypesofrisk,allow LTinvestments to takeplace.

    Withinthefinancialsystem,bankshavegenerallybeentheprimaryprovidersofLTfinance,withcapitalmarketsbeinganotherimportantintermediationmechanism.

    LTinvestmentsstemfromamixofself-financing(throughcurrentearningsandsavings)and capitalraisedthroughthefinancialsystem.Bankshavetypicallyprovidedasubstantialportionofexternalfinancebydrawingontheir informationaladvantages,expertiseincreditorigination,experienceinmonitoringloansandinvestments,and(atleastbeforethecrisis)low-costaccesstowholesalefunding.

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    Bondandequityfinancingbyinstitutionalandotherinvestors(seebelow)via capitalmarketsis anotherimportantformoffinancialintermediationinmanycountries;debtmarketinstrumentsoftenhavealongertenorthanbankloans.

    Theabilityofthefinancialsysteminagivenjurisdiction toprovideLTfinanceisinfluencedbyavarietyofstructuralfactors.

    Theseincludethemodelofeconomicdevelopmentthathasbeenadopted(state-ledvs.market/private-sectorled),theinstitutionalmixoffinancialmarketparticipants(suchastheexistenceofdedicateddevelopmentfinancialinstitutionsorothertypesofnon-bankfinancialinstitutions),thestateofdevelopmentofdomesticcapitalmarkets etc.

    Otherfactors–suchasmacroeconomicperformance,propertyrightsandtheruleoflaw,theextent to whichthejurisdictioniscommodity-richordomesticsavings-poor,demographicsetc.–arealsoimportantdeterminantsofdomesticandforeigninvestors’willingnessandabilitytoprovideLTfinanceinthatjurisdiction.

    Conjuncturalorcyclicalfactorshaveanimportantbearingonthedemandfor,andsupplyof,LTinvestmentfinance.

    In thecurrentenvironment,strainedfiscalpositionslimitgovernmentfinancingofLT investment,whileuncertaintyassociatedwithweakglobalgrowthandthelongertermmacroeconomicpolicyoutlookisdiscouragingcorporateinvestmentinspiteofsizeablecorporatecash holdingsandthelowinterestrateenvironment.

    In theeuroarea,sovereigndebtandcurrencyconcernshaveadverselyaffectedthe capacityofthefinancialsystem to intermediateLTinvestmentflows,particularlyonacross-borderbasis.

    Meanwhile,theon-goingfinancialsectordeleveragingprocess,theshrinkageofthewholesaledollarfundingmarket,andtheretreatofsomemajorEuropeanbanks fromcertainglobalfinancialmarketsegments,haveimpactedcross-borderbanklending,particularlyinEMDEs.

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    3.FinancialregulatoryfactorsaffectingLTfinance

    Theglobalregulatoryreformprogrammeaimstocreateasafer,sounderandthusmoreresilientfinancialsystem.

    Ifimplementedintimelyandconsistentmanner,thesereformswill helprebuildconfidenceintheglobalfinancialsystem.

    Confidencehasalargebearingonthefinancialsystem’s capacitytointermediatefinancialflowsthroughthecycleandfordifferentinvestmenthorizons.

    Forthisreason,theG20regulatoryreformprogrammeissupportiveofLTinvestmentandeconomicgrowth.

    Financialregulation(anditsreform)influencesboththelevelanddistributionofLTfinanceprovidedbythefinancialsystem.

    Forexample,prudentialregulationseeks to ensurethatthematuritymismatchandleveragerisksthat accumulateonbankbalancesheetsaspartofthefinancialintermediationprocessareadequatelycoveredbycapitalandliquiditybuffers.

    Thebuffersincreasetheresiliencyoftheseinstitutionsandcontributetotheinternalisationoftheriskstheyposetothebroaderfinancialsystem(whichwerenotproperlypricedorregulatedpriortothecrisis),butmay alsoincreasethecostsofintermediationforusersoftheirservices,therebyaffectingthequantityofloansdemanded.

    Ideally,financialregulationshouldnotdistortincentivesinfavourofcertaintypesofmarketparticipantsorsectors,butratherseek to betteralignprovidersandusersoffinanceinaccordancewiththeirrespectiveinvestmenthorizonsandrisk-bearingcapacity.

    FSBmembershaveidentifiedanumberofinternationallyagreedpost-crisisregulatoryreformsandothernationalorregional policymeasuresthatmayaffectLTfinance.

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    Thesecoverabroadrangeoftopicsatdifferentstagesofpolicy developmentandimplementation.

    TheyincludeBaselIII;OTCderivativesmarketreforms;andtheregulatoryand accountingframeworkfordifferenttypesofinstitutionalinvestors.

    Some other internationallyagreedreforms–accountingrulesforbanks,policymeasuresforgloballysystemicallyimportantfinancialinstitutions(G-SIFIs),andpolicyrecommendationstostrengthentheoversightandregulationoftheshadowbankingsystem–havealsobeennotedinthiscontexteventhoughtheyarestillinthepolicydevelopmentstage.

    In consideringtheimpactofthesereformsonLTfinance,itisimportant todistinguishbetweentransitionalandpermanenteffectsaswellasthetypeofmarketorregionthatmaybeaffected.

    In particular,theshort termadjustmentcostsaregenerallyeasiertoidentifybutoftenrelyonastatic,partialequilibriumframeworkthatdoesnottake accountofthedynamicgeneralequilibriumprocessofmarketadjustment.

    In contrast to thesepotentialtransitioncosts,thelong-termbenefitsofreformstend tobeunderstatedbecause,beingdependentonacounterfactual,theyaremoredifficulttoquantify.

    Moreover,theeffectsofreformswilldifferacrossmarketsandregionsgiventhedifferentstartingpositionsaswellasthescopeforsubstitution offinancialprovidersandinstruments.

    Finally,itisimportanttorecognisethatpre-crisismodelsandlevelsoffinancingwereunsustainableandshouldnotbetheappropriatebenchmarkforassessingtheimpactofreformsontheavailabilityandcostofLTfinance.

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    3.1 BaselIII

    BaselIIIisacomprehensivesetofpolicymeasuresdesigned tostrengthentheregulation,supervisionandriskmanagementofthebankingsectorinresponsetothefinancialcrisis.

    Themainobjectiveofthereformsistoimprovethebankingsector’sability to absorbshocksarisingfromfinancialandeconomicstress,thusreducingtherisk ofspilloverfromthefinancialsectortotherealeconomy.

    ThekeyelementsofBaselIIIare:

    thestrengtheningoftheregulatorycapitalframeworkbyraisingthequantityandqualityofthe capital base,enhancingrisk coverage,supplementingtherisk-based capitalrequirementwithaleverageratiobackstop,andpromotingtheconservationofcapitalandreducingprocyclicalityviaadditionalcapitalbuffers;and

    theintroductionoftwo minimumgloballiquiditystandards.

    TheBaselIIIreformpackagedoesnotspecificallytargetlong-termbankfinance,althoughitmayaffectit.

    BaselIIIneither introduceshigherriskweightsnorrequiresmatchedfundingonbankexposureswithmaturitiesofoveroneyear.

    However,thecombinedeffectofthereformswillbetoincreasetheamountofregulatory capitalforsuchtransactionsandtodampenthescaleofmaturitytransformationriskstheycarryontheirbalancesheet(Box1).

    Inresponsetotheseregulatoryrequirements,thecostofLTbanklendingmayincreaseoritssupply(and tenor)maydecrease.

    In addition,ifthebankusesOTCderivativestohedgetherisksassociatedwiththeLTexposure,thenthosetransactionswillbesubject

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    • toadditionalcapitalandpossiblymarginingrequirementsunderBaselIII(seesectionbelow).

    • Theoveralleffect willvarydependingonanumberoffactors,suchasthespecificcharacteristicsandlocationofthetransactionaswellasthepresenceofalternativefundingsourcesindifferentmarketsegments.

    • Box1.ExampleoftheImpactofBaselIIIonaLTCorporateLoan

    • The capitaltreatmentofaLTcorporateloan underpillar1ofBaselIIdependsonanumberofparametersreflectingthecreditriskmeasurementapproachusedbythebank:

    • standardisedapproach–externalcreditratingofborroweranduseofanycreditrisk mitigantsin thetransaction(e.g.developmentbankorexportcreditagencyguarantees);or

    • internalratingsbased(IRB)approach–bankestimatesofriskparameters(i.e.PD,LGD,EAD,effectivematurity)usingdifferentformulae dependingontheassetclass(i.e.standardcorporatevs.SMEvs.so-called“specializedlending”6etc.)

    • Therisk weightsandformulaeunderBaselIIIforthistypeofbankingbooktransactionremainunchanged.

    • However,therewillbeanincreaseinboththequality(definition)andlevelofminimumregulatorycapitalrequirements,whichwillraisetheamountofregulatory capitalthatabankneeds to allocateforloans.

    • Thesetransactionswillalsobesubjecttoaleverageratiothatwillsupplementand actasabackstop totherisk-based capitalrequirements.

    • Thesechangesaffecttherequiredregulatory capitalforalltypesofbanklending,includingLTcorporateloans.

    • In addition,two newminimumfundingliquiditystandardsareintroducedunderBaselIII:

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    • LiquidityCoverageRatio(LCR)–Itsobjectiveistopromoteshort-termresilienceofabank’sliquidityriskprofilebyensuringthatithassufficientunencumberedhighqualityliquidassets(HQLA)tosurvivean acutestressscenarioofcashoutflowslastingforonemonth.

    • In theLCRformula,50%ofallcorporateloansmaturingwithin30calendardaysare includedinthecashinflow,i.e.banks areassumed torollover50%ofthoseloansinastressperiod.

    • NetStableFundingRatio(NSFR)– Itsobjectiveistopromoteresilienceoveraoneyeartimehorizonbycreatingadditionalincentivesforabanktofunditsactivitieswithmorestablesourcesoffundingonanon-goingstructuralbasis.

    • In theNSFRformula,loans(excludingmortgages)withamaturitygreaterthan1yearareassigneda100%requiredstablefundingfactor,implyingthattheyrequirestablefunding(i.e.bankequityandliabilitiessuchasdepositsandwholesaleborrowing)greaterthan1year.

    • ThereisnodirecteffectontheLTcorporateloanfromtheintroductionoftheLCR(unlesstheloan isclose to repayment).

    • However,thebankmaybeincentivizedtoholdothertypesofmoreliquidassetsthataretreatedmorefavourablyunderthe HQLAdefinition(e.g.sovereignbonds)inordertomeettheLCRrequirement.

    • InthecaseoftheNSFR,iftheLTcorporateloanisfundedviashort-termdepositsorotherliabilities (thatareregularlyrolledover),thereisamaturitymismatchthatwillneed tobecoveredbylengtheningthe termoffundingand/orbyreducingthematurityoftheloan.

    • However,theNSFRallowsforconsiderablematuritytransformationsinceaLTloan canbefullyfundedwithbankliabilitiesof1yearorgreater.

    • Atthisstage,itis tooearly to assesstheactualimpactofBaselIIIontheavailabilityofbank-providedLT investmentfinancing;implementationoftheoverall packagehasjustbegunandwill notbecompletedbeforeend-2018.

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    In addition,thecalibrationofsomeoftheelementsofBaselIII– suchastheNSFRandtheleverageratio–hasnotyetbeenfinalised.

    Thelongphase-inperiod,theon-going implementationmonitoringand,incertaincases,theflexibilitytoadjustrulesduringtheobservation periodareintendedtoaddressconcernsaboutmajorunintendedconsequencesfromtheintroductionofBaselIII.

    However,anumberofstudieshaveshownthatthenetlong-termbenefitsofBaselIIIsignificantlyoutweighthecosts.8Themainbenefitsstemfromalowerprobabilityofbankingcrises(andassociatedoutputlosses)andfromareductionintheamplitudeoffluctuationsinoutputduringnon-crisisperiods.

    3.2OTCderivativesmarketreforms

    Hedgingofmajorrisks(commodity,interestrate,exchangerateandcredit)throughOTCderivativescontractsaswellas otherfinancialinstrumentscansupporttheviabilityofLTinvestmentfinance.

    Thisisbecausetheexistenceoftheseinstrumentsallowsthe‘parcelling’ofdifferenttypesofriskto thosepartiesthatarebetterpositioned tomanagethem,therebyfacilitatingtheexecutionofaLTfinancetransactions.

    OTCderivativesreformswilllikelyaffecttheabilityof‘sponsors’orcapitalproviderstohedgethevariouscomponentsofriskassociatedwith providinglong-termloansandinvestments,andthusinfluencethesupply(costandavailability)ofLTfinanceforcommercialend-users.

    G20jurisdictionshavecommittedtoapackageofreformstoOTCderivativesmarketsinordertoimprovetransparency,mitigatesystemicriskandprotectagainstmarketabuse.

    Underthispackage,allstandardisedOTCderivativecontractsshouldbetradedonexchangesorelectronictradingplatforms,whereappropriate,andclearedthroughcentralcounterparties;OTCderivativecontractsshouldbereportedtotraderepositories;andnon-centrallycleared

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    contractsshouldbesubjecttohighercapitalrequirements.9Toassistinmeetingthecentralclearingobjectives,theG20hasalsocalledforthedevelopmentofstandardsonmarginingfornon-centrallyclearedOTC derivatives.

    Toimplementthispackage,international policy recommendationsand nationalmeasuresarebeingdeveloped.

    Thetimingofimplementationvariesacrossjurisdictions.

    Inparticular,somejurisdictionshavealreadybegunimposingmandatoryobligations,whileothersarestillestablishingtheirbroadregulatoryframeworks.

    Reportingto traderepositoriesappliestoallOTCderivativestransactions,whilecentralclearingrequirementsapply,forthemostpart,tofinancialinstitutionsthatareactiveinOTCderivativesmarkets,with non-financialparticipants(atleastbelowacertainsize)generallyexcludedfromcentralclearingobligations.

    Certain aspectsofBaselIIIwillalsodirectlyaffectbanksoperatingin OTCderivativesmarkets.

    In particular,anew‘creditvaluationadjustment’(CVA)capitalchargehasbeenintroducedforbilateralderivativesexposures.

    Thisreflectstheexperienceofthecrisisthatcounterpartyrisks arisingfrombilateralderivativesexposureswerebeingundercapitalised.

    Whilethis capitalchargewillincreasethecosts tobanksofundertakingbilateralderivativestransactions,itisintendedtoensurethatpotentiallossesareappropriatelycapitalised.

    Forcentrallyclearedtransactions,thereisnoCVAcapitalrequirement.

    Thereislikelytobea muchsmallercounterpartycreditriskchargeforexposurestothedefaultofthecentralcounterparty(CCP)thanforabilaterallyclearedtransaction.

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    Reforms to capitalrequirementsthereforestrengthentheincentiveforbanks to centrallyclearOTCderivativestransactions,wherepossible.

    TheeffectsofthesereformsontheprovisionofLTfinancearedifficulttoquantifyatthisstageassomeoftherelevantstandardsarestillunderdevelopment.

    Thereformsimplyadditionalcoststhroughnewcapitalandmarginingrequirements,particularlyfornon-centrallyclearedtransactions,aswellascompliancecosts(Box 2).

    Thesedirectlymeasurablecostsneedtobesetagainstthebroaderreductionsincostsandincreasedrobustnessofmarketsthroughthetargetedimprovementinmarketfunctioning.

    However,thereformshavenotyetbeenfinalised,sotheirfulleffect willtakesometimetobefeltacrossglobalOTCderivativesmarkets.

    Aparticularexampleisinternationalstandardsforbilateralmarginingrequirements:oncethestandardsarefinalisedlaterthisyear,therewillbemoreinformationonthemagnitudeandscopeoftherequirements(includingapotentialthresholdforthesizeofexposuresbeforecollateralisationapplies)fromwhichtoevaluatethepotentialimpactonLTfinance.

    WhilethelargestimpactofthereformswillbeonthefinancialinstitutionsmostactiveinOTCderivativesmarkets,non-financialusersarelikelytobedirectlyandindirectlyaffected.

    Financeproviderswhoarelendersorderivativescounterpartiesto

    end-usersarelikelytobeaffectedbythereformstotheextentthatthey usederivatives tohedgetheir ownexposures,thoughthelikelyeffectofthisontheprovisionofLTfinanceisunclear.

    Whererisksassociatedwithprovidingfundingorhedgingcanbehedgedthroughstandardisedcontractsthatarecentrallycleared,thecapitalandmarginrequirementswillbelowerthanforbilaterallyclearedtransactions.

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    Inaddition,greaterstandardisation,centralclearinganduseoforganisedtradingplatformsshouldhelpimprovethedepth,liquidityandpriceefficiencyofOTCderivativesmarkets.

    Butforportionsofthemarketthatarenotstandardisedandforwhichcentralclearingisnotavailable(whichmaybethecaseforcustomisedlong-termhedgesofinvestmentfinancingtransactions),theadditionalcapitalandmarginrequirementsfacedbyintermediariesarelikelytoraisethecostandmayreducetheavailabilityofderivativescontracts.

    In such cases,intermediariesandend-usersmayinsteadresort to morestandardisedcontractsforhedgingpurposes,whichhavegreaterliquiditybutmaybelessexactandofashorter-duration.

    Somecostsrelatingtoadditionalreportingandothercompliancerequirementsmayalsobepassedthrough to end-users.

    Workiscurrentlytaking placetoanalysetheincentivesforcentralclearingassociatedwithproposedcapitalandmarginingrequirements.

    TheFSBisalsoconsideringabroadermacroeconomicassessmentofthecollectiveimpactofthevariousregulatoryreformsthatdirectlyimpactOTCderivativesmarkets.

    Thisshouldincludeananalysisoftheimpactonend-usersofOTCderivativesforhedgingrisksrelatedtofinancingoftherealeconomy.

    Box2.ExampleoftheImpactoftheReformsonanOTCDerivativesTransaction

    AfirmproposestobuildapowerplantincountryX,receivingrevenuedenominatedinthelocalcurrency.

    Tofinancetheconstruction,thefirmarrangesa10-yearloandenominatedinUSDfromasyndicategroupoflenders.

    Thefirmisexposedtoanumberofrisks,whichitmayhedgeusingderivativesmarkets.

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    • Thefirm’sswapcounterpartiesandlendersmayalsoemployderivativestohedgeassociatedrisks.

    • Thefirmmaybeexposed to long-termfluctuationsintheenergyprice,whichcouldbehedgedthroughalong-termcommodity(electricityprice)derivative.

    • Thefirmisexposedto currencyandinterestraterisk fromtheUSDfundingsource,whichitmayhedgethroughalong-termcross-currencyinterestrateswap.

    • Foreachofthesetransactions,thefirm’sderivativecounterpartiesmaylooktooffsettheresultantexposurebyhedgingwithothercounterparties.

    • Lenderstothefirmmaywishtohedgethecreditrisk oftheloanbyusingcreditderivatives.

    • Ifthefirmissubjectto marginingorcentralclearingrequirements(forinstance,becauseitisaderivativesmarketparticipantonascaleaboveathresholdsetforexemptionofnon-financialfirms),itwillfacetheneedtopostinitialandvariationmargin(forwhichpurposeitmusthaveeligiblecollateralavailable)ortheneedtoarrangedirector indirectparticipationinaCCP.

    • Ifthefirmisexemptfromcentralclearingormarginrequirements,theonlydirectrequirementundertheOTCderivativesreformsmaybeforthederivativestransactionstobereportedtoatraderepository;thiswilllikelybeundertakenbythedealeritusesasitsderivativescounterparty.

    • Therewillbeimpactsonthefirm’sswapcounterpartiesandlendersasaresultofthevariousOTCderivativesreforms,withthepotentialthatsomeoftheadditionalcostsmaybepassedon to thefirm.

    • Ifthefirm’sderivativesarenotcentrallycleared,theswapcounterpartywillfaceahighercapitalcharge(underBaselIII)forthatderivative.

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    • In addition,ifthederivativecounterpartychoosestohedgetheresultingexposurethroughadditionalOTCderivativestransactions,therewilleitherbecentrallyclearedorfaceadditionalcostsforbilateralclearing.

    • TotheextentthatthecombinedeffectofBaselIIIandotherinternationalandnationalderivativesmarketreformsimprovethetransparency,liquidityandresilienceofmarkets,thiswouldlead toreductionsintransactioncostsforhedgingtransactions to offsetthedirecttransactionscostsmentionedabove.

    • 3.3Regulatoryandaccountingframeworkforinstitutionalinvestors

    • Institutional investors– suchasinsurancecompanies,mutualfunds,endowmentsandpensionfunds–aresuitableprovidersofLTinvestmentcapitalandfunding in thefinancialsystem.

    • Theirlong investmenthorizonsallow them totakeadvantageoflong-termriskandilliquiditypremia.

    • Theyarealsoable tobehaveinapatient,counter-cyclicalmanner,makingthemostoflow valuationstoseekattractiveinvestmentopportunities.

    • Theneedfordiversificationandthesearchforyieldgiventhelowinterestrateenvironmenthavedriventheirexpansionintoalternativeinvestmentsinrecentyears,includingcertaintypesofLTfinance.Othertypesofinstitutional investors– suchasprivateequity,sovereignwealthfunds,anddedicatedinfrastructurefunds– havealsoemergedasprovidersofLTcapital(seebelow).

    • Institutional investorsareobligedtomeetavarietyofprudentialregulationsandtocomplywithaccountingstandards.

    • Ontheregulatoryside,investmentchoicesmaybeconstrainedby theneed tomeetprudentiallimits.

    • Forexample,ceilingsoncertaintypesofinvestments(suchasequityornon-liquid/marketabledebt)applytopensionfundsinsomeEuropean

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    countries,andarerelativelycommoninemerginganddevelopingmarketeconomies.

    Solvencyrulesfor insurersandpensionfundsarenotuniformglobally,butrecentreformshavegenerallymovedsuchinvestorstoapplyfair(market)value totheirbalancesheet.

    SomeEuropeancountrieshavemovedtowardsasystemofrisk-basedsolvencyregulation, wherefundingrequirementsarelinkedtotheriskfacedbytheinstitution,whileaccountingrulesforvaluingassetsandliabilitieshavealsoaffectedtheseinvestors(Box 3).

    Whiletheseregulationsstrive to ensurethatinstitutionalinvestorsareable tomeettheirobligations,theymayhaveinfluencedinvestmentbehaviourandconstrainedthelong-termoutlookofthoseinvestors.

    Ontheonehand,themeasureshavebeenassociatedwithinvestorsmatchingassetsandliabilitiesmoreclosely,andmovingto lower-risk,fixed-termassets(e.g.sovereignbonds)thatprovidealong-termreturnthatbettermatchestheexpectedcashflowsoftheinsurancecontractorpensionliability.

    In addition,therehasbeenanon-goingmovementawayfromdefined benefittodefinedcontributionpensionfundsasgreatertransparencyand betterdataonlongevityhaveclarifiedthecostsofprovidingthebenefit.Thesechangeswerealreadyunderwaybefore thefinancialcrisis,andareinsomewaysareactiontobetterunderstandingofrisk andgreatertransparencyofreporting.

    Ontheotherhand,totheextentthattheregulationsuseshorthorizonsforassessingsolvencyorapplydifferentmethodsoffairvaluingtheassetsandliabilities,therebycreatingexcessivevolatilityinfinancialstatements,theymaypromotemyopicbehaviourandimpingeontheabilityofthoseinvestors toparticipateincertainLTassetclasses.

    Thestandard-settersarecontinuingto workonthisissue,bothinthecontextofthedevelopmentofthesestandardsandaspartofthewiderreassessmentoftheconceptualframeworkforfinancialreporting.

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    However,itisimportanttonotethatotherfinancialmarketdevelopments

    – suchastheincreasinguseofshort-termbenchmarksforperformancemeasurement,riskmanagement,reportingandcompensation–mayalsohavecontributed toanexcessivefocusonshort-termreturns.15

    Box3.Examplesofspecificregulationsaffectinginstitutionalinvestors

    Accountingrulesforinsurers

    InsurancecompaniesthatuseIFRSfortheirconsolidatedaccountsare requiredtoapplyIAS39/IFRS9totheirfinancialassetsandIFRS4totheirinsurancecontracts;thelatterisatemporarytransitionalstandardandthefinalversionwillnotcomeintoforceuntil1January2018attheearliest(USGAAPhassimilarstandards).

    Bothstandardswillrequiremarketconsistentvaluationstechniquestobeapplied,whereappropriate,toreachaformoffairvalueor(inthecaseofinsurancecontracts)currentvalue,whichisfelttoprovideabettermeasureoftherisksofthecontractandthefuturecashflowsoftheassetsthanamortisedcost(althoughsomefinancialassetsthathavefixedcashflowsmaystillbeatamortisedcost).

    Thesetechniques,whichareintendedtofosterconsistencyandtransparencyintheaccountingtreatmentofinsurers,mayalsointroducevolatility totheirfinancialstatements(incomestatementand/orbalancesheet)–forexample,duetothedifferingvaluationofassetsandliabilities

    – andmaythereforeinfluenceinvestmentbehaviour.

    Accountingrulesforpensionliabilitiesofcompanies

    PensionfundsperseareoutsidethescopeofIFRS/USGAAP andsoaccountingissuesarenotrelevant.

    However,companiesthatofferdefinedbenefitpensionsschemesareobligedtocalculatethepresentvalueofthefuturepensionobligations(discountedusingtherateofreturnonaAA-ratedcorporatebond)andsubtractitfromthecurrentfairvalueofthescheme’sassetstodeterminea netassetor(moreoften)liabilitythatis recognisedonthecompany’sbalancesheet.

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    Therearetwo relevantissueshere:

    astheliabilitiesarediscountedusingaAA-ratedcorporatebond,thereisatendencytomatchtheriskbyinvestinginbondsratherthanequities;and

    thestandard’srequirementtooffsetcurrentassetvaluesagainst

    long-termliabilityvalues can causevolatilitythatcompaniesmayseektomitigatebyinvesting in lower-risk,lessvolatileassets.

    Thisisnotanewissue–thestandardhasbeeninoperationforabouteightyears–andithas,togetherwithotherfactors(e.g.updatedmortality tables),promptedmanycompaniestomoveawayfromdefinedbenefitschemes.

    SolvencyII

    AttheEuropeanUnion(EU)level,thenewprudentialrulesoftheSolvencyIIDirectivewillrequireinsurers to holdassets to coverthenatureanddurationoftheirliabilities.

    Itsaimis to ensurethefinancialsoundnessofinsuranceundertakings,andinparticulartoensurethatthey cansurvivedifficultperiods.

    SolvencyIIwill introduceaneconomicrisk-basedsolvencystandardunderwhichinsurerswillbechargedwith capitalrequirementsproportionalto thecreditworthinessanddurationmismatchofinstrumentsheldontheirbalancesheet.

    TheEuropeanCommissionhasrequestedtheEuropeanInsuranceandOccupationalPensionsAuthority(EIOPA)toexaminewhetherthedetailed calibrationofcapitalrequirementsforinvestmentsincertainassetsundertheSolvencyIIregime(particularlyfor infrastructurefinancing,projectbondsandSMEfinancing)shouldbeadjustedtoensuretherearenoundueobstacles to long-termfinancing.

    3.4Otherreforms

    Accountingreformsforbanks

    Themostrelevantaccountingreformforbankswillbeontheimpairmentofloansandreceivables.

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    BoththeInternational AccountingStandardsBoard(IASB)andtheUSFinancialAccountingStandardsBoard(FASB)areproposinga

    forward-lookingmodelwherebyexpectedlossesarerecognisedonaloanorotherfinancialassetmeasuredatamortisedcost(asopposedtosolely afteralosseventhasbeenidentified),althoughtheirapproachesdiffer.

    ThetwoBoardswillbeconsultingontheirproposalsduring2013.

    Bothmodelswillgiverisetobankloan lossprovisionsthatarelargerandrecognisedmorequicklythanthecurrentincurredlossmodel,butthisisanintendedeffectthathasbeenrequestedbyG20Leadersandtheregulatorycommunityin response tothecrisis.

    Whilethestandardsarestillunderdevelopment,itislikelythattherewillbehigherlevelsthancurrentlyofso-called“day1”loanlossprovisionsunderbothproposals.

    ThistreatmentisconsistentwiththeApril2009callbytheG20Leadersto“strengthenaccountingrecognitionofloan-lossprovisionsbyincorporatingabroaderrangeofcreditinformation”,anditisexpectedtoincreasethetransparencyandcomparabilityofbanks’financialreportingforstakeholders.

    Theearlierrecognitionoflossesmayincreasetheinterestratechargedforcertaintypesofhigher-riskloans,butitwillreduceincentivesforbankstotakeexcessiverisksandtooverstatethevalueoftheirassets,therebymitigatingprocyclicality.

    PolicymeasuresforG-SIFIs

    PolicymeasuresforG-SIFIs intendtoaddressthe“too-big-to-fail”problem,althoughtheymayaffecttheprovisionofLTfinancebythesefirms.

    TheG20LeadersintheCannesSummitendorsedasetofpolicymeasuresdesigned to addressthesystemicandmoralhazardrisksassociatedwithSIFIs.

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    Thesemeasuresincludeanewinternationalstandardfornationalresolutionregimes,resolutionplanningandhigherlossabsorbencyrequirementsforG-SIFIs,andmoreintensivesupervisionofallSIFIs.

    Therequirementsforgloballysystemicallyimportantbanks(G-SIBs)willbephasedinby2019,whilethepolicyframeworkfornon-bankG-SIFIsisstillunderdevelopment.

    TheeffectofhigherlossabsorbencyrequirementsontheprovisionofLTfinancebyG-SIBs (andpotentiallybygloballysystemicallyimportantinsurers)isqualitativelysimilartoBaselIII.

    MoreeffectiveresolutiontoolstoaddressTBTF,notablythe‘bailing-in’ofdebtholdersoffailingbanksunderenhancednationalresolutionregimes,areexpected to increasethesebanks’costoffundingaspreviouslysocialisedrisk istransferredback to bankcreditors.

    AsinthecaseofBaselIII,theG-SIFIreformsdonotspecificallytargetLTfinance.

    Theirimplementationisexpectedtoaddressincentivedistortionsbyreducingtheimplicitsubsidyonthecostofcapitalandtherebylessentheneedforpublicbail-outs topreventdisorderlyfailureoffirmsthat,becauseoftheirsize,complexityandsystemicinterconnectedness,wouldcausesignificantdisruption to thewiderfinancialsystemandeconomicactivity.

    Shadow banking

    Theshadowbankingsystem canbroadlybedefinedas“creditintermediationinvolvingentitiesand activities(fullyorpartially)outsidetheregularbankingsystem”.

    Itisconductedthrough(forexample)securitisationorsecuritieslendingactivitiesandinvolvesvarioustypesofinstitutions,includinginvestmentandmoneymarketfunds,structuredfinancevehicles,financeandtrustcompaniesetc.

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    TheshadowbankingsystemrepresentsanimportantprovideroffinancinginseveralFSBmemberjurisdictions.

    Suchintermediationwashighlyvolatileinthepastbut,ifappropriatelyconducted,it canprovideavaluablealternativetobankfunding,includingbyfillingsomegapsleftbythepotentialretrenchmentofbanklending in certainregionsorbusinesslines.

    Theon-goingshadowbankingreformsaim topromoteprudentfinancialintermediationandtherebycontributetomoresustainablenon-bankfinancing, includingforLTinvestments.

    In particular,theobjectiveofstrengtheningthe oversightandregulation ofthissectoristoaddress,inaproportionatemanner,bank-like liquidityandmaturitytransformationrisks to financialstability,whilenotinhibitingsustainablenon-bankfinancingmodelsthatdonotposesuchrisks.

    Sincepolicy developmentison-going inthisarea,itistoo early to assesstheeffectsofthesereforms, includingonLTfinancing.

    4.Conclusionandnextsteps

    Itisstillearlydaysintheglobalregulatoryreformprocess.

    Manyofthereformsarein theprocessofpolicydevelopmentoratanearlystageofimplementation.

    However,theregulatorycommunityhasanalysedpotentialimpactspriortofinalisationofthereformsandisvigilanttoavoidmaterialunintendedconsequences.Thelongobservationandimplementationperiodsaredesigned to adjustthepolicy frameworks,ifneeded,inthefaceofmaterialunintendedconsequences.

    ThereislittletangibleevidencetosuggestthatglobalfinancialregulatoryreformshavesignificantlycontributedtocurrentLTfinancingconcerns,althoughon-goingmonitoringisneeded.

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    ItisdifficulttoseparatetheeffectsofregulatoryreformsonLTfinancefrombroaderpost-crisisdevelopmentsaffectingthefinancialsystem,butconjuncturalfactorsotherthanfinancialregulationareparticularlyimportantgiventhecurrentmarketenvironment.

    Theeffectswillalsodiffersignificantlyacross jurisdictionsandmarketsegmentsdependingontheirparticularcharacteristics,suchastheoriginandcircumstancesofthebanksprovidingcross-borderlending.

    Nonetheless,thereisconcernbysomeEMDEsthatthereformsmayexacerbatedeleveragingandincreasethecostsforglobalbanksoperatinginhostjurisdictions,therebyreducingdomesticcredit(includingforLTfinance)andfinancialmarketliquidity;someofthesejurisdictionsmaylackprivatesectoroptionstoreplacethisfinancinggap,atleastintheshortterm.

    Monitoringtheeffectofregulatoryreformsonanon-goingbasiswillfacilitatetheidentificationofanyfactorsthatmaydisproportionallyimpacttheprovisionofLTfinancesothatthey canbeaddressed.

    Whilethereformprocessisstillatan earlystage,thedirectionisunambiguousandintended.

    ThemostimportantcontributionoffinancialreformstoLTinvestmentfinanceistopromoteamoreresilientandstablefinancialsystem.

    Thereformsareintendedtobeproportionatetorisksandarenotdesigned to encourageparticulartypesoffinanceattheexpenseoffinancialstability.

    Manyfinancialinstitutionswereover-leveragedandhadengagedinexcessivematuritymismatchingpriortothecrisis,andarecurrentlyworkingtostrengthentheirbalancesheetsandadjusttheirbusinessmodels.

    Theseareintendedchangesthataimtoreturn tomoreprudentbusinesspracticesandsmooththeprovisionofLTfinanceovereconomicand

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    financialcycles,eveniftheymayresultin,forexample,loweraccesstocreditorhigherloanspreadsduringboomtimes.

    AlthoughthereformsarenotspecificallytargetingLTinvestmentfinance,theydoaltertheincentivesofdifferenttypesoffinancialinstitutions toparticipateinthismarket.

    Aspreviouslymentioned,thereformsintroducestricterprudentialrequirementsforalltypesoflendingandnotsolelyforLTfinance.

    However,to theextentthatnewregulationreducestheincentivesforfundinglong-termassetswithshort-termliabilitiesbybanks,somechange to thestructureandcompositionofsuchfinancingmightbeexpected.

    GreaterrelianceonequityfinancemayalsobeadesirableeffectofthischangeastherehasarguablybeenexcessiveuseofdebttofinanceLTprojectswhosepayoffandrisk characteristicsaremoreequity-like.

    Asthebalanceofincentiveschanges,long-terminstitutionalinvestorswillneed to assumeagreaterrolein fundinglong-termassets.

    Thiswouldbedesirablefromafinancialstabilityperspectiveasthefinancialsystemwouldbecomeinherentlylessfragile.

    Animportantissuegoingforwardiswhethernon-bankprovidersofLTfinance,particularlyinstitutional investors,can stepuptheirinvolvementinthismarket.

    Anecdotalevidencesuggeststhatthisprocessisunderwayinsomemarketsegments(e.g.infrastructurefinance),butit cantaketimeandisnotuniformacrossdifferentsegmentsorregions.

    Asnotedintheprecedingsection,theregulationofthesetypesofinvestorsmayneedcloserstudy to ensuretheireffectivenessandefficiencyinplayingthisroleprudently,withoutcompromisingfinancialstabilityobjectives.

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    TheFSBanditsmemberinstitutionsarealreadycontributingto thiseffortviainteraliaenhancingrisk disclosuresbyfinancialinstitutions,undertakingmeasurestoreduceunduerelianceoncreditratingagencyratings,encouragingtheadoptionofinternationalfinancialstandardsandcontinuingworktoachieveasinglesetofhigh-quality accountingstandards,promotingcross-bordersupervisorycooperation,andsupportingprudentfinancialintermediationbynon-bankfinancialinstitutions.

    However,morecanpotentiallybedonetoassesstheimpactofchangesinfinancialmarketstructuresandtradingpracticesonLTcapitalraising,toovercomeexistinginformationasymmetriesandimprovethecontractualenvironmentforinvestorsin LTtransactions,topromoteLTinvestmenthorizonsbyinstitutional investors,toidentifywaystoexpandaccesstocapitalmarketsfornon-financialfirms,toavoidtheinconsistentimplementationofinternationallyagreedreformsthatmaygiverisetouncertaintybymarketparticipants,andtopromotegreateruseofsoundandsustainablesecuritisationstructuresasatoolforLTfinancing.

    AnFSBworkshop,bringingtogetherrelevantparties(nationalauthorities,standard-setters,IOs,institutional investors),maybeahelpfulfirststeptoidentifyregulatoryinitiativestofosterLTinvestmentfinance.

    Fromalonger-termperspective,promotingthedevelopmentofdomesticcontractualsavingsandthecapacityofdomesticfinancialsystemstointermediatethemwillfostermoreandlessvolatileLTfinance,particularlyinEMDEs.

    Thepresenceofmarketparticipantswithdifferenthorizonsandriskpreferencesisanimportantcontributortofinancialstabilityanditalsohelpspromoteefficientresourceallocationbyreducingover-relianceonthebankingsectororonforeignsourcesoffinanceforthemobilisationofsavingsandfinancialintermediation.

    However,developingdomesticnon-bankfinancialinstitutionsandcapitalmarketsisalong-termprocessthatrequiresproperplanningandcommitmentaswellasappropriateprioritizationandsequencing.

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    Thedevelopmentofcapitalmarketsrequiresanumberofimportantbuildingblocks,suchasstrengtheningthelegalandregulatoryframework;developingshort-termmoneyandgovernmentsecuritiesmarketsandinstrumentstohedgeexchangeraterisk;expandingthedomesticinvestorbase;strengtheningmarketinfrastructure;andpromotinglocalcurrencycorporatebondmarkets.

    TheFSB,workingthroughits RegionalConsultativeGroupsandincollaborationwithrelevantIOs(e.g.IMF,WorldBank,OECD),cancontribute to theon-goingworkonthistopic.

    ThereislittletangibleevidencetosuggestthatglobalfinancialregulatoryreformshavesignificantlycontributedtocurrentLTfinancingconcerns,althoughon-goingmonitoringisneeded.

    ItisdifficulttoseparatetheeffectsofregulatoryreformsonLT

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    Keynote

    JamesR.Doty,Chairman

    FloridaBarAssociation31stAnnualFederalSecurities Institute,MiamiBeach,FL

    Thankyoufor invitingmetothisconference.LetmebeginbysayingthattheviewsIexpressaremyownandshouldnotbeattributedtothePublicCompanyAccountingOversightBoardasawholeorany othermembersorstaff.

    Today,Iwouldlike to talktoyouaboutsomeofthePCAOB'sinitiativestoenhancetherelevance,credibilityandtransparencyoftheaudittopromotehighqualityfinancialreporting.

    Wemeetinthemidstofarobustand

    wide-rangingglobal debateonhow topromoteauditquality.Whatevertheoutcome,itisclearthattheauditisindeedavalued,criticalfeatureoftheU.S.financialsystem,anditenjoysanimportantpositionin theeyesofpeoplearoundtheworld.

    I.High-QualityAudits AreCriticaltoCapitalFormationandEconomicGrowth.

    High-qualityauditsarecriticalto capitalformationandeconomicgrowth.Thishasbeensosincetheearliestdaysofourorganizedsecuritiesmarkets.

    OurcolleagueBernardBlack,onthefacultyatNorthwestern,mayhaveputinvestors'predicamentbest.Heoncewrote—

    [C]reatingstrongpublicsecuritiesmarketsishard.Thatsecuritiesmarketsexistatallismagical, in away.

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    Investorspayenormousamountsofmoneytostrangersforcompletelyintangiblerights,whosevaluedependsentirelyonthequalityofinformationthattheinvestorsreceiveandonthesellers'honesty.

    Itis tothecreditofthesecuritiesbarthatwehavebeenabletofashionasystemofsecuritiesregulationthatgivesmillionsofdisorganizedinvestorsabasistotrusttheinformationtheyreceive,totrustthattheircapitalwillbeapplied to thepurposeintended.

    Oneofthebestfeaturesofoursystemisthatitisnotimmutable.

    Wehavebeenabletoimproveitovertime,aswedevelopnewformsofcapitalaccumulationandallocationtomeetnewneedsofinvestorsand newusesforpublicfunds.

    Throughyourefforts,amongothers,theU.S.hasbecomeaclearinghouseforthefairallocationanduseofcapital.

    Professional,skilledandindependentauditorsarekeytohelpinginvestorsseparatethecrediblemanagersfromthecharlatans.

    Bybuildingabasisforconfidence,auditorsreducefinancingcosts,andcontribute to anefficientallocationofcapitaltofueleconomicgrowth.

    Butconferenceslikethisdonotexisttocongratulateourselves.

    Thebarhasreconvenedeachofthe31yearsin thehistoryofthisconferencetoprepareforandchannelnewdevelopmentsandevolution.

    AswiththeHolmesianviewofthelaw—notlogicbutexperience—so alsowiththeaudit.Welearnandimprovefromexperience.

    Oneprinciplethatcontinuestostand,uponexaminationand

    re-examination,isthat,asBernieBlacksaid,thevalueoftheinvestor'sintangibleright—thevalueoftheshare— dependsentirelyonthequalityofinformationtheinvestorreceivesandontheseller'shonesty.

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    In recognitionofBlack's insight,Ibelieveweareinahighrisk periodthatmeritsmoreattentiontotheaudit, notless.

    Althoughwehaveneverneededitmore,theaudithas, inthemindsofsome,becomeacommoditytobecontainedwithothercompliancecosts.

    Academicresearchconfirmsthattheharmoffraudulentreportingextendsbeyondtheinjurytodirectstakeholdersandreacheswholeindustriesandcompetitors.

    Whentrustin financialreportingislost,themarketsquestioncompetitors'businessstrategies too.

    Unwindingill-conceivedinvestmentsmaybecostlyandimpractical.

    Moreover,confidencein new,validproposalsforcapitalcommittmentcan beaffected.

    Asaformersecuritieslawpractitionerandcounseltoboards,Ibelievetheauditisthemostcost-effectivewaytoavoidbeingsurprisedbyerrorsormalfeasancethathavequietlygrowntoapproachamateriallevel.

    Whilenotfoolproof,theauditconfirmslegitimacy.

    Butanauditthatdoesnotservetheneedsofusersisfalsecomfortand,overtime,losesitsrelevancetomarketparticipants.

    Toberelevant,theauditormustspeaktoandfortheusersofthefinancialstatements.

    Fortheaudittoberelevant,thepublic mustbeconfidentintheauditor'sability to applybothtechnicalexpertiseand skepticismtomanagement'sassertions.

    Fairornot,thatisinquestiontoday.

    AndthisiswherethePCAOB'sinitiativescomein.

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    Iwanttoseeavibrantauditprofessionthatcompetesonqualitymorethanprice.

    Iwanttoseeaprofessionthatisreveredforinsightandclarity,notbox-checking.

    Iwanttoseeaprofessionthatattractsandretainstopgraduateswhoareandremaincommittedtoexcellenceinpublicservice.

    IdoubtIneedtoimpressuponyouthebar'sinterestin thesegoalsaswell.

    Auditregulatorsaroundtheworldareengagedin confrontingthesechallenges.

    ThePCAOBisdeeplyengagedwithitscounterparts,boththroughinspectioncoordinationandmulti-lateralmeetingsinvenuessuchastheInternationalFederationofIndependentAuditRegulators.

    Iwillsharesomeofwhatwearelearningfrom otherregulators.

    II.InternationalAuditOversightCoordinationandResults

    Withthatinmind,letmebrieflydescribeourapproach to coordinatingwithourcounterpartsaroundtheworld.

    Todate,thePCAOBhasconductedinspectionsin40foreignjurisdictions.

    Lastyear,one-fourthofourinspectionstookplaceoutsidetheUnitedStates.

    Overall,therearearound240non-U.S.auditfirmsinover50foreignjurisdictionsthathaveissuedauditopinionsonU.S.issuersandarerequiredtobeinspectedatleasteverythreeyears.

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    A.AuditRegulatorsAround theWorldAreDevelopingaNewParadigmforWorkingTogether.

    Gradually,togetherwithourcounterparts,wearecreatinganetworkofregulatorstomatchthenetworksoffirms.

    Theaimis to workseamlesslytogethertomeetourrespectiveinspection mandates.

    WenowjointlyinspectwithlocalregulatorsinAustralia,Canada,Germany,Korea,theNetherlands,Norway,Singapore,SouthAfrica,Switzerland,ChineseTaipeiandtheUnitedKingdom.

    Two weeksago,thePCAOBenteredprotocolsoncooperationandinformation-sharingwiththeauditregulatorsinFranceandFinland.

    Theseagreementswillallow thePCAOBto beginconductingjointinspectionsofPCAOB-registeredfirmsinFranceandFinlandwiththelocalregulators.

    Ournon-U.S. inspectionsareimportant, notonlybecauseoftheforeign privateissuersthatsellsecuritiesinU.S.markets.

    Manyofthenon-U.S.auditfirmsthathaveregisteredwiththePCAOBalsoperformsignificantauditworkforU.S.companiesthathaveoperationsabroad.

    Thisisthenatureoftheglobalaudit.

    Theprincipalauditor—thatis,theauditorthatsignstheauditreport— refersaportionoftheaudittolocalauditorsin acountryorcountrieswherethecompanyhassubsidiariesorsignificantoperations.

    Thelocalauditormayperformspecifiedproceduresthattheprincipalauditoraskedit toperform.

    Oritmayperformfortheprincipalauditoracompleteaudit,withauditreport,onthelocaloperation.

    InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


    P age |98

    In eithercase,generallyspeaking,theprincipalauditorusestheworkofotherauditfirms to formanopiniononthefinancialstatementsasawhole.

    B.RegulatorsAroundtheWorldHaveExpressedSharedConcernsAboutDisappointingInspectionResults.

    Letmeturn to results.Whatbenefitdoescoordinationyield?Aswedeepenourrelationshipswithfellow independentregulators,wedeepenourunderstandingofauditrisks.

    Wehaveidentifiedsignificantauditfailuresafterissuesidentifiedjointlywith anotherregulator inaninspectionoftheprincipalauditorledustoreviewasubsidiaryauditinathirdcountry.

    OurinspectorshavealsofoundsituationswhereaU.S.firmhasusedtheworkofanotherauditfirmthatturnedout to beunreliable.

    Sometimestheworkrequestedbytheprincipalauditorwasneverperformed.

    Bothinthisjointworkandindependently,regulatorsaroundtheworld haveexpressedconcernsaboutdisappointing inspectionresults.

    In Australia,GregMedcraft,theChairmanoftheAustralianSecuritiesandInvestmentCommissionrecentlycommentedintheAustralianFinancialReviewaboutASIC'sreviewofinspectionsconductedinthe18monthsup to June30,2012.

    He saidit"showedanincreasein auditorsfailingtoobtainreasonableassurance theauditedfinancialstatementwasnotmateriallymisstated."

    In particular,hecalledforimprovementin threekeyareas—thesufficiencyandappropriatenessofauditevidence,auditors'professionalskepticism,andauditors'useofotherauditorsandexperts.

    SimilarresultshavebeenreportedacrossEuropeandinCanada.

    InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


    P age |99

    Accordingto acompilationofinspectionresultsfromCanada,theU.S.,theU.K.andAustralia,preparedbytheCanadianPublicAccountabilityBoard'sChairman,BrianHunt,"InsufficientProfessionalSkepticism...isundoubtedlythemostcommonfinding— thatauditorsaretoooftenacceptingorattemptingtovalidatemanagementevidenceandrepresentationswithoutsufficientchallengeandindependent corroboration."

    Sinceitbeganoperationsin2003,thePCAOBhastackledprogressively moreofthevexingissueswithwhichtheauditprofessionhasstruggledfordecades—suchas thefailuretoapplyprofessionalskepticismin difficultauditareas, includingmanagementestimatesandvaluations.

    ThePCAOBalsoperformsincreasinglyrefinedandsophisticatedriskassessmentstoidentifywhere themostsignificantchallengestoauditqualityexist.Thiscontributes totheincreaseininspectionfindingsovertime.

    Tacklingthesetoughissueshasalsocontributedtoanimprovementinauditquality,Ibelieve.

    Nevertheless,as otherauditregulatorsaroundtheworldhaveconcludedtoo,therateoffailureisunacceptablyhigh.

    III.ThePCAOB'sInitiativesAimtoHelptheProfessionRealizeItsPotentialbyEnhancingtheRelevance,CredibilityandTransparencyoftheAudit.

    ThereisalotgoingonatthePCAOB toexaminetheseissuesandfindwaystoimproveauditorperformance.

    Wehaveanactivestandards-settingagendadevelopedthroughextensiveoutreach,includingwiththePCAOB'sStandingAdvisoryGroupaswellas otherstandard-setters.

    InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


    P age |100

    Inthisoutreach,wehearfromnumerousstakeholders,includingauditorsthemselves,aswellaspreparersandtheirrepresentatives,experienced membersofthebar,investors,and others.

    Wedon'trewritestandardsjustforthesakeofchange.

    Butthroughourconsultationprocessweidentifyareasofauditingthatdeserveimprovementorupdatinginlightofdevelopmentsinpractice.

    Weconsideralternativesto achieveourintendedoutcome.

    Weconsiderpotentialcosts,aswellaspotentialunintendedconsequences.

    Weareaddingresources to involveeconomistsmoredeeplyinourwork.Ouragendaisavailableonourwebsiteandisupdatedperiodically.

    Today,Iwillhighlightahandfulofprojectsthatmaybeofparticular

    interest to thebar.

    A.FacilitatingtheWorkofAuditCommittees.

    Thefirsttwo suchinitiativesfocusonarmingauditcommitteeswithmoreandbetter informationabouttheaudit,aswellasmoreandbetterinformationabouttheauditor'sstrengthsandweaknesses.

    Accordingto aJanuary2013GlobalAuditCommitteeSurvey,releasedbyKPMG'sAuditCommittee Institute,only38%ofauditcommitteesclaimed tohaveaformalandcomprehensiveannualexternalauditorevaluationprocessinplace.

    Auditcommitteescannotmakedecisionsabouthiringandcompensatingauditorsonthebasisofqualitywithouttransparencyandinsightaboutquality.

    Ourauditcommitteeinitiativesaimtohelpauditcommitteesobtainthatinformation.

    InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


    P age |101

    1.AuditingStandardNo.16Improves AuditorCommunicationwithAuditCommittees.

    ThePCAOBhasrecentlyadoptedanewauditingstandard—AuditingStandardNo.16—onwhattheauditorshouldcommunicate to auditcommitteesin ordertoprotectthepublic'sinterestinkeepingauditcommitteesinformedofimportantauditmatters.

    Iknowyou'llhaveapanelontheJumpstartOurBusinessStart-upsActof2012 tomorrow.

    SoitmaybeofinterestthatthisstandardisthefirstpromulgatedaftertheJOBSActwasenacted.

    ConsistentwithSection104oftheJOBSAct,whenthePCAOBsubmittedthefinalstandardforapprovalbytheSEC,weincludedadiscussionofefficiency,competitionand capitalformation.

    TheSECapprovedthestandardonDecember17,2012.ItiseffectiveforauditsoffiscalyearsbeginningonorafterDecember15,2012.

    AS16isintended tofosteramorerobustdiscussionbetweentheauditorandtheauditcommittee.

    Itisintendedtofocustheauditcommitteeontheimportanceofprobingandunderstandingchallengingauditissuesandsignificantauditorjudgments,and championingtheauditor'sindependenceand professionalskepticisminresolvingthoseissuesandmakingthosejudgments.

    Iwouldexpectthebestauditcommitteestodemandthiskindofdialoguealready.

    Yetweseesituationswherethiswasnotthecase.AS16isanattempt tochangethat.

    InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


    P age |102

    2.ThePCAOBHasIssuedGuidanceonWhatAuditCommitteesCanLearnfromPCAOBInspections.

    ThePCAOBhasalsorecentlyissuedguidanceabouthowauditcommittees can learnmorefromtheirauditors abouttheresultsandimplicationsofthePCAOB'sinspectionfindings.

    Descriptioninthepublicportionoftheinspectionreportoffailure toobtainsufficientevidencetosupportthefirm'sopinionmeansthattheinspectionstaffhasdeterminedthatthefirmfailed tofulfillitsfundamentalresponsibilityintheaudit:thefirmfailed to obtain reasonableassurance aboutwhetherthefinancialstatementsarefreeofmaterialmisstatement.

    Firms'characterizationsofinspectionresultscan sometimesdistortthem.

    Howanauditorapproachesinspectionresultscantellanauditcommitteealotaboutthefirm'scommitmenttoexcellence.

    Yourroleascorporatecounselmakesadifference:howanauditcommitteeaddressesinspectionresultscan affectthe toneoftheaudit.

    Anauditcommitteethatisimpatientwiththetechnicalitiesofanaudit,oracceptsweakarguments todismissthefindingsinaninspectionreport,mayinadvertentlysignalto theauditfirmandauditteamthattheauditcommitteeisnotconcernedwithquality.

    Anauditcommitteethat,ontheotherhand,expressesexplicitconcernforhow theauditorhasresolvednoteddeficiencies tellstheauditorthatqualitymatters.

    Andthen,thereisthefallacyofelevatingthefeeabovethequalityoftheauditor.

    Ascounselforcorporateboards,youwillwanttobeattunedtothesenuances.

    InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


    P age |103

    B.ThePCAOBHasProposedNewStandardsonRelatedPartyTransactionsandAuditTransparency.

    ThePCAOBhasalsoproposedtwonewstandards.

    Thefirstwouldenhancethepublic'sunderstandingoftheauditbyrequiringdisclosureaboutparticipatingfirmsaswellasthenameoftheengagementpartnerwho supervisesthem.

    Today,onlytheprincipalauditfirm'snamegoesontheauditreportthatthepublicsees.

    Wearereminded,fromtimetotime,that evensophisticatedbusinesspeopleandgovernmentofficialswhouseauditreportsdonotrealizethatauditsforlargecompaniesareoftenperformedbyconsortiumsofseparateauditfirms.

    Forcompanies,andtheircounsel,concernedabouttheriskofoverrideofcontrolsandmaterialmisstatementsin far-flunglocations,itis theworkoftheseundisclosedsubsidiaryauditors,andtherigoroftheprincipalauditor'soversightoftheirwork,thatprovidesthecompany(andinvestors)withassurancethatthenecessarycontrolsare inplaceandworkingeffectively.

    Dependingonwhereacompany'soperationsandaccountingare,theunderlyingsourceofhalformoreofthisassuranceworkmaybeperformedbyafirmorfirmsotherthanthefirmwhosenameisontheauditreport.

    Buteventhosewhoareawarethatmultiplefirmsmaybeinvolvedinanauditgenerallydon'tknow theextentofworkperformedbyotherauditfirms.

    ThePCAOBhasproposedtoaddressthis.

    Thesecondproposalisanewauditingstandardonrelatedpartytransactions,describesbasictoolsthatgoodauditorshaveusedforyearstoidentifyfinancialreportingrisks.

    InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


    P age |104

    Forexample,itrequiresauditors tounderstandmanagement'scompensationasawaytounderstandmanagement'smotivations.

    Tobeclear, nothingaboutthestandardwouldputtheauditor intheroleofsettingorpassingonmanagementcompensation.

    Somecommentershaveexpressedconcernsinthisregard,butasthestandarditselfmakesclearit'ssimplynotthecase.

    IdoubtIneedtotellyou,though,thatchangesinperformancemetricsprovideimportantinformationaboutmanagement'sincentivesthatmaynototherwisebeunderstood.

    Theyoffertheauditor—andauditcommittee—insightsaboutwheremanagement'sfinancialstorycouldbeweak.

    Wearecurrentlyevaluatingcommentsonboththerelatedpartyproposalandthetransparencyproposal.

    C.ThePCAOBHasIssuedConceptReleasestoCommenceDebateonMoreBroad-RangingTopics.

    ThePCAOBstandards-settingworkalsoincludestworathermore

    broad-rangingprojects,commencednotwithconcreteproposalsbutwithconceptreleases.

    1.TheAuditor'sReportingModel

    Oneinvolvesconsiderationofchangestotheformandcontentofthestandardauditreport.

    Thecurrentmodelisessentiallythreeboilerplateparagraphs.

    Foralongwhile,investorshavecalledformoreinsightsfromtheauditor'swork.

    InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


    P age |105

    Thisprojectisintendedtodevelopabetter,moretransparentreportingmodel,onethatwillimparttheauditors'insightsaboutkeyaspectsofthefinancialstatementsandothermatterstoemphasize.

    Theprojectisnotaboutchangingthenatureorscopeoftheauditor'swork.It'saboutmakingtheresultsofthatworkmorerelevant.

    2.AuditorIndependence

    Thesecondconceptreleasegoestotheissueofauditorindependence,objectivityandprofessionalskepticism.

    In August2011,theBoardissuedaConceptReleaseonAuditorIndependenceandAuditFirmRotation.

    Theconceptreleasenotestheimportanceofauditorindependencetotheviabilityofauditingasaprofession.

    It asked forcommentonways to enhanceauditor independence,objectivityandprofessionalskepticism,includingthroughauditortermlimits,whicharebeingdebatedaroundtheworldtoday.

    Asaconceptrelease,itmadenospecificproposal.

    Rather,thevehicleoftheconceptreleaseisdesignedtoposequestionstosolicitpublicinputbeforeanyproposalisconsideredorformulated.

    Independenceandskepticismarecomplexissuesthatwarrantdeepstudy.

    ThePCAOBhasembarkedonaseriesofpublicmeetingstoengageprominentandthoughtfulcommenterswithvarious,oftenconflicting,viewpoints.

    OneoutgrowthofthemeetingssofarhasbeenaPCAOBstaffauditpracticealertonMaintainingandApplyingProfessionalSkepticisminAuditsissuedinDecember2012.

    InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


    P age |106

    TheAlertremindsauditorsofthecritical importanceofprofessionalskepticismtoeffectiveaudits.

    TheAlertalsodescribesanumberofimpedimentstoprofessionalskepticism—including,forexample,unconscioushumanbiasesandothercircumstancesthat cancauseauditors to gather,evaluate,rationalize,andrecallinformationinawaythatisconsistentwithclientpreferencesratherthantheinterestsofexternalusers.

    Finally,theAlertdescribesstepsthatfirmsandauditors cantaketoenhanceprofessionalskepticisminaudits.

    Wemustalsowatchandevaluatetheimplicationsofinternationaldevelopments.

    TheDutchParliamentrecently adoptedauditfirmrotation.Itappearslikelythatsomecompaniesplantoimplementauditorswitchesaheadofthe2016deadline.

    TheEuropeanCommission,ParliamentandMemberStatesareengagedintheirowninquiry.

    Theirlegislativedeliberationsindicateareallikelihoodthatsomeformoftermlimitscouldbeadoptedthisyear.

    FirmsinEuropehavehadtofactorthepossibilityintotheirstrategicbusinessplanning.

    Thisisnotanewissue:concernsover independenceandtheroleofanticipatedorestablishedauditortenurepredatetheSarbanes-OxleyAct.

    Itisnow,however,abroadinternational debate.

    Peopledisagreeonwhatthebestreformswillbe,howtoimplementthem,andindeedwhetherreformisnecessary.

    Costsandanypotentialunintendedconsequenceswillhavetobeconsidered.

    InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


    P age |107

    Weshouldnotrushtodecision.Idon'thave theviewthatindependenceandskepticismcanonlybeachievedthroughtermlimits.

    ThroughtheresponsestotheAugust2011conceptreleaseandthesubstanceofourpublicmeetings,wehaveelucidatedmanyofthequestions askedbytheconceptrelease.

    OurjobatthePCAOBistobealerttothechangesthatareafoot:tounderstandthem,toanalyzetheireffectsontheaudit,andtoconsiderwhatitallimpliesforthefutureoftheaudit.

    ***

    YouhavebeenagraciousaudienceandIthankyouverymuchforyourinterestinthePCAOB'swork.

    InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


    P age |108

    StrategicGoals2013to2016

    Note:TheSwissFinancialMarket

    SupervisoryAuthorityFINMAisaninstitutionunderpubliclawwithitsownlegalpersonality.

    ItisresponsibleforimplementingtheFinancialMarketSupervisionActandfinancialmarketlegislation.

    Asanindependentsupervisoryauthority,FINMA acts toprotecttheinterestsofcreditors,investorsandinsuredpersons,and to ensuretheproperfunctioningofthefinancialmarkets.

    TheirprotectionliesattheheartofFINMA’smandate.

    Consistent,risk-orientedsupervision

    In itssupervisoryrole,FINMAfocusesontheprudentialsupervisionof banks,insurers,collectiveinvestmentschemesandotherfinancialintermediaries.

    PrudentialsupervisionisanongoingactivityinwhichFINMAscrutinisesthesupervisedinstitutionsandthemarketwithafocusonthefuture.

    Itsaimis tomaintainthefinancialsoundnessoftheseinstitutions,primarilybyensuringthattheyaresolvent,haveadequateriskcontrolsandprovideassuranceofproperbusinessconduct.

    In ordertosettherightprioritiesinprudentialsupervision,FINMAconsistentlypursuesarisk-orientedapproach.

    FINMAcannotprovidefull-spectrummonitoringofallthesupervisedinstitutions.Itmustthereforeconcentrateonthekeyrisksforcreditors,investorsandthesystemasawhole.

    InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


    P age |109

    Supervisionoflarge,interconnectedinstitutionsandsegmentswithgreater inherentriskisnecessarilymoreintensethanforsmallermarketparticipantswithlowerrisk profiles.

    Therisk-orientedapproachisreinforcedbycontinuousmonitoringofthefinancialmarketand,morerecently,targetedspotchecks.

    In linewithinternationaltrends,FINMAhassubstantiallyincreaseditsactivitiestoidentifysystem-wideandsystemicrisksatanearlystage.

    Thefocushereisonlarge,interconnectedfinancialinstitutionsandmarketparticipantsthatperformnon-substitutablefunctions.

    FINMAaimstoensurethatSwitzerland’sfinancialinstitutions

    meetinternationalnormsintermsofcapital,liquidityandresolvability.

    Systemicallyimportantinstitutionsmustexceedtheinternationalnorms.

    In theeventoftheinsolvencyorbankruptcyofasupervisedinstitution,itisFINMA’stasktoprotectfinancialmarketclientsfromtheconsequences.

    Ifaninstitutiongetsintodifficulties,FINMAreactsrapidlyand professionally to takethenecessarymeasures.

    Ifthereisnoprospectofsuccessfulrestructuring,anorderlymarketexitmustbepossible.

    FINMAanalysestheconductoffinancialmarketparticipants.

    However,in ordertoeffectivelyprotectfinancialmarketclientsfromabuses,clearrulesofconductforfinancialservicesproviders

    areimperative,asarebetterproductdocumentationandincreased

    transparency.

    InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


    P age |110

    FINMA’sstrategicgoals

    Prudentialsupervision

    Strengtheningfinancialstabilityandcrisisresistancethroughprudentialsupervision

    Theinterestratesituation,thechangedenvironmentincross-borderbusinessandthepressureonmarginsandpricesarepresenting

    banksandinsurerswithmajorfinancialandorganisationalchallengesin

    theircorebusiness.

    SignificantstructuralchangeintheSwissfinancialcentrecanbeexpectedinthemediumterm.

    Historicallylow interestratesaredepressingtheearningsofalmostallsupervisedinstitutions.

    Banksandinsurers,especiallylife insurers,arebeingforcedtofindinvestmentsthatgeneratehigherreturns.

    Thismeans,however,thattheyarealsotakinggreaterrisks.

    Low interestratesalsoposeadangertosupervisedinstitutionsintheSwissrealestatemarket.

    InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


    P age |111

    Thelegalandreputationalrisksassociatedwithcross-borderfinancialservicescontinuetobeofmajorimportance.

    Thecompaniesinquestionmustrecognisetheneedforstrategicreorientationanddealappropriatelywithlegacyissues.

    Strategicgoal1

    ThestabilityandcrisisresistanceoftheSwissfinancialcentrearestrengthenedthroughinternationallyrecognisedprudentialstandardsandconsistentcompliancewiththem.

    Ifmarketexitstakeplace,theydosoinawaythatisorderlyandquick,andresultintheleastpossibledamage tofinancialmarketclients.

    Businessconduct

    Promotingintegrity,transparencyandclientprotectioninbusinessconduct

    Currentlegislationdoesnotguaranteeadequateclientprotectionasfarasthebusinessconductoffinancialintermediariesisconcerned.

    In thisrespect,Switzerlandlagsbehindinternationalregulatorystandards.

    In thefirstplace,Swissclientsareatadisadvantagecomparedwith

    non-Swissclientsbecausetheyareoftennotadequatelyandtransparentlyinformed.

    Secondly,thereisarisk thattheSwissfinancialcentrecouldattractundesiredmarketparticipants.

    Thirdly,clientprotectionthatisnotfullyequivalentcanhaveanadverseimpactontheabilityofSwissfinancialserviceproviderstogain accesstoothermarkets.

    InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


    P age |112

    Regulationsthatdonotmeetappropriate,internationallyrecognisedminimumstandardsweakenthereputationofaquality-orientedfinancialcentre.

    Thepatchyclientprotectionregulationsatpointofsaleareoneexampleofthis.

    Thesupervisorylegislationprovidesforavarietyofauthorisedinstitutionswithdifferinglicensingrequirements.

    Noteverylicenceleadstoongoingmonitoringbytheauthorities.

    AsfarasthequalityandintensityoflicensingandsupervisionbyFINMAareconcerned,thereisatransparencydeficitforfinancialmarketclients.

    Strategicgoal2

    Inordertoenhancethereputationofthefinancialcentreandpromotefairbusinessconductandintegrityonthepartoffinancialmarketparticipants,FINMAconsistentlyimplementslicensingprocedures,createstransparencyregardingthevaryingdegreesofsupervisoryintensity,andpromotesinternationallyrecognisedregulationsonclientandinvestorprotection.

    Nationalandinternationalcooperation

    Joiningforcesattheinternationallevelandworkingtogetherefficientlyatthenationallevel

    Thescopeandintensityofinternationalactivitieshaveincreasedmarkedly.Thistrendwillpersistintothenearfuture.

    FINMAmustprioritisethedeploymentofitsresourcesoninternationalinitiativeseffectively.

    Againstthisbackdrop,cooperationatthenationallevelwithotherinstitutionsandauthoritiesmustbestreamlinedsothatSwitzerland’sinterests canbemoreeffectivelyrepresentedattheinternationallevel.

    InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


    • P age |113

    • Becauseofthedifferentmandatesoftheauthoritiesinvolved,theirresponsibilitieshaveto beprioritiseddifferentlydependingonthesituation:

    • TheFederalDepartmentofFinancepromotesSwitzerlandasaplacetodobusiness.

    • TheStateSecretariatforInternationalFinancialMattersworks tostrengthentheinternationalpositionofSwitzerlandinthefieldoffinanceandtax.

    • ItrepresentstheinterestsofSwitzerlandvis-à-vis othercountriesin internationalfinanceandtaxmattersandisleadingtheinternationalnegotiationsintheseareas.

    • FINMAfulfilsitsinternationalremitfromthepointofviewofafinancialmarketsupervisor.

    • In thefield offinancialstability,FINMAworkscloselywiththeSwissNationalBank.

    • ResponsibilityforsupervisingtheindividualfinancialinstitutionslieswithFINMA.

    • Itiscruciallyimportantthatthedifferingstatutoryresponsibilitiesand decision-makingpowersarepreserved.

    • Strategicgoal3

    • In itsinternationalactivities,FINMAconcentratesitsresourcesandusesthemtoaddressimportantcoreissues.

    • In thecontextofnationalcooperation,theinformationflow isefficientandthedecision-makingscopeoftheauthoritiesisclear.

    InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


    P age |114

    Regulation

    Engagingexpertiseandregulatinginlightofitssupervisorygoals

    FinancialmarketsupervisorylawdefinesFINMA’scompetences infinancialmarketregulation.

    FINMAgenerallyregulatesbywayofcircularswhichexplainhowfinancialmarketregulationistobeapplied.Italsoregulatesbywayofordinanceswherethisisenshrinedinthelaw.

    Financialmarketlegislation,ontheotherhand,isapoliticalresponsibility.Thelegislaturedefines theregulatoryframeworkbindingonFINMA.

    Thefinancialmarketlawsarethereforetheresultofapolitical processandhencethesubjectofpoliticaldiscussionsandcompromises.

    In accordancewithitssupervisorymandate,FINMAisguidedbyitssupervisorygoals,explainingitspositionearlyandtransparently,butwithouttakingpartinpoliticaldebates.

    Strategicgoal4

    FINMAanalysesexistingregulationsandlegaltrendsfromtheperspectiveoffinancialmarketsupervision,proposesrelevantamendments,usesitsspecialistexpertiseto supporttheproposedregulationsthatareimportantandhighlightsitsownconcernsearlyandtransparently.

    Withinitsarea ofresponsibility,FINMAregulatesonlyinsofarasthisisnecessaryinlightofitssupervisorygoals.

    InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


    P age |115

    ManuelSánchez:Mexico’seconomicoutlookandchallenges

    RemarksbyMrManuelSánchez,DeputyGovernoroftheBankofMexico,attheConference“Regulatoryreform,theglobaleconomicoutlook,andtheimplicationsforMexico’sfinancial

    sector”,organizedbytheInstituteofInternationalFinanceandBanorte,MexicoCity

    ***

    Itisaprivilege tospeakatthecloseofthisconferencedevoted to theimplicationsforMexicoofrecentregulatoryreformsandtheglobaleconomicoutlook.

    Iwouldlike tothanktheorganizersofthisseminar,theInstituteofInternationalFinanceandBanorte,fortheopportunitytosharesomethoughtswithyouonMexico’seconomicconditionsandprospects.

    Iwouldlike first to reviewtherecentdevelopmentsintheMexicaneconomyanditsoutlookintoday’sweakworldeconomicenvironment.

    Then,Iwillanalyzetheimplicationsofcurrentlybenignfinancialconditions.

    Andfinally,Iwilldiscusssomeofthepresentchallengesformonetarypolicy inMexico.

    Asusual,myremarksareentirelymy ownresponsibilityanddonotnecessarilyreflecttheviewsoftheBankofMexicooritsGoverningBoard.

    TheMexicaneconomyinaweakglobalenvironment

    TheperformanceoftheMexican economylastyearcontinuedtobeconstrainedbyaweakglobalenvironment.

    InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


    P age |116

    Theworldeconomyexpandedataslowerpacethantheaverageobservedinthetwodecadesbeforethebigfinancialcrisis.IntheUnitedStates,GDP grewmoderately,andforafifthconsecutiveyear,outputremainedbelowitsseculartrend.

    Signsofimprovementinseveralvariablesin theUnitedStatesareencouraging,includingthosesuggestingthebeginningofaturnaroundinthehousingmarketandthegradualrecoveryofbanklendingto theprivatesector.

    However,thelevelandcharacteristicsofunemploymentaswellasthesluggishnessofprivateinvestmentremainsourcesofconcern.

    Additionally,U.S. industrialproduction,whichexertssubstantialinfluenceonMexico’sproductionandtrade,haslatelyexhibitedadeceleration.

    ThereboundinU.S.outputafterthecrisishasbeendisappointing,especiallyinlightofsignificantstimulusprovidedthroughpreviousfiscalpackagesandtheongoingextraordinarilyexpansionarystanceofmonetarypolicy.

    Subpareconomicperformancemaybepartlyexplainedbyuncertaintyregardingthespeedanddistributionofcostsinthepursuitoffiscalconsolidation.

    RecentfiscalaccordsmayhavereducedtheriskofaGDP contraction.

    Ontheotherhand,during2012,theeuroarea fellintorecessionwithunemploymentratesatrecordhighs.

    Toalargeextent,theproblemsintheregionstemfrominstitutionallimitationsofthedesignofthemonetaryunionthathavecomplicated dealingwiththeaftermathofnationalfinancialcrises.

    ProgressinrevampingtheEMUarchitecture,bailoutprogramsfortroubledeconomiesand,especially,decisivemeasuresundertakenbythe

    InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


    P age |117

    ECBhaveloweredperceivedrisk forsovereignandbankdebt,especiallyintheperipheralcountries.

    Althoughfurthermeaningfulstructuralmeasureswillberequired toattainafulleconomicrecovery,thefinancialstabilization achievedmaysuggestthattheworstofthecrisisisoverintheeuroarea.

    Consistently,themostrecentconsensusestimatesfor2013and2014positagradualrecoveryfortheworldeconomy,moderatedecelerationfollowedbyhighergrowthintheUnitedStates,andaslightcontractionandlateranexpansionintheEurozone.

    In spiteofthischallengingenvironment,lastyearMexicaneconomicactivitycontinuedtoexhibitapositivetrend,withafirmerexpansioninservicesthanin industry.

    In thefourthquarter,annualgrowthwasthesameasinthepreviousquarter,althoughbothfigureswerenotashighasinthefirsthalfoftheyear.

    AnnualGDPgrowthforthefullyearwas3.9percent,virtuallythesameasin2011;thisgrowthisnoteworthy,especiallyinthepresentworldcontext,asitisalmostonepercentagepointhigherthanMexico’saveragegrowthrateduringthetwentyyearspriortothecrisis.

    Onthebackofthisprogress,externaldemand,asreflectedprominentlyinmanufacturingexports,hasshownsomemoderationin growthinthepastseveralmonths,witharecoveryinthemostrecentquarter.

    Byfar,themainsourceofdecelerationcamefromcountriesotherthantheUnitedStates,andinparticularinautomotiveexports.

    ThisslowdownispartlyexplainedbyrestrictionsimposedbyBrazilandArgentinaonautoimportsfromMexico.

    Atthesametime,domesticdemandcontinuedexpanding.

    InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


    P age |118

    Privateconsumption,thelargestcomponentofdomesticspending,maintaineditsmomentum,asindicatedbyavailabledataonretailsalesuptoNovember.

    Thestrengthofconsumptionhasbeensupportedbyasustained increaseinformalemployment,amoderatedeclineinunemployment,andasignificantexpansionin consumerlending.

    Grossfixedinvestmentkeptrising,withmachineryandequipmentshowinghighergrowthratesthanconstruction.

    Additionally,measuresofbusinessconfidenceuptoJanuary2013,

    suchastheManufacturingOrdersIndicator(IPM),revealthatbusinessmanagersforeseethattheeconomywillmaintainitsexpansion.

    GiventheexpectedslowdownintheU.S.economylargelydue to fiscalconsolidation,analystspredictthatMexico’seconomicgrowthin 2013willbeslightlylowerthanthatofthepreviousyear,witharecoveryoccurring in 2014.

    Therearebothdownsideaswellasupsiderisks to thisscenario.

    AfiscaladjustmentintheUnitedStatesappliedinadisorderlywayorlackingcredibility,oracomplicationinpolicy implementationintheEurozonethataugmentsfinancialuncertainty,standoutaspossiblenegativeexternalfactors.

    However,therecoveryintheUnitedStatesmaybefasterthanforecast,andinvestorconfidenceinMexicocouldincreaseasaresultofprogressonstructuralreformsfavoringlong-termgrowth.

    Capitalinflowsandbenignfinancialconditions

    Duringthelastfouryears,theyieldcurvein Mexicohassuccessivelyshifteddownward,aprocessthathascontinuedsofarthisyear,leavingcurrentinterestratesforalltermsclosetoorattheirall-timelows.

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    Asidefromvariationsdue to changesinrisk aversion,themaindrivingforcefortheseshifts has beenalmostsynchronicshiftsintheU.S.yieldcurve,resultingfromthedifferentstagesofmonetaryeasingthere.

    Themaintransmissionmechanismforlowerinterestrateshascomefrompersistentcapital inflows.

    Asin otheremergingeconomies,Mexicohas receivedsubstantialcapitalflowsfromforeigninvestorsseekinghigheryieldsinbothequityand bondmarkets.

    Also,foreigninvestorsmayfeelmoreconfident abouttheMexicaneconomybecauseofitssoundmacroeconomicandfinancialfundamentals,theopennessofits capitalaccount,theflexibilityand depthofitsforeignexchangemarket,andhigherexpectationsforstructuralreforms,amongotherfactors.

    Asaresult,from2009 to 2012,theproportionofnon-equityfinancialassetsheldbyforeignersrelativetothebroadestmonetaryaggregate,M4,increasedfromfivetoseventeenpercent.

    Thereareindicationsthatinflowshavespeededupduringthecurrentyearinmanyemergingeconomies, includingMexico.

    TheabundanceofforeignsavingswassupportiveofMexico’srecenteconomicgrowth.

    However,thepossibilityofachangeintheperceivedconditionsthatgaverise totheinflowsmakesitlikelyforthoseflowsto stopandevenrevert.

    Suchreversalshaveoccurredoninnumerableoccasionsinmanycountries,includingMexico,forreasonsnotnecessarilyrelatedtotherecipientcountry,causingsubstantialfinancialdisturbances.

    Theobvious caseatpresentcouldbetheexpectationthattheFederalReservewillstartunwindingitsexpansionarymonetarypolicy.

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    Beforesuchaneventualityoccurs,forwhateverreason,andaboutwhichonlythetimingandmagnitudeareuncertain,itisabsolutelynecessaryforsaversandborrowersaswellasfinancialintermediaries totake intoaccountthatinterestrateswilleventuallyrise.

    Therealdangeristobelievethatthistimewillbedifferentandthatsomehowpresentfavorableconditionswilllastforever.

    Suchmyopicbehaviorhasoftenled toexcessiverisk-taking,overleveragingandtheformationofbubblesincreditandrealestatemarkets,frequentlytheprelude to financialcrisesandpainfulmassiveredistributionsofwealth.

    Fortunately,Mexico’sbankshavebeenoperatingcautiously,therebymaintainingstrongbalancesheetsandhealthyloanportfolios.

    Also,nolendingbubbleisapparent.

    However,authoritieswillhave to continuemonitoringthreats to stabilityinanypartofthefinancialsystem, in ordertoactinatimelywayiftheyemerge.

    Thechallengestomonetarypolicy

    In 2012annualinflationexhibitedarisingtrendtoamaximumof4.8percentinSeptember.

    Duringsevenmonthsitsurpassedtheupperlimitofthevariabilityintervalofplusorminusonepercentagepointaroundthepermanent targetof3percentestablishedbytheBankofMexico.

    Factorsexertingpressureoninflationincludedtheinternationaldraughtandthedomesticbirdfluepidemicthatresultedinsignificantagriculturalpriceincreases,andsomepass-throughfrompesodepreciation tomerchandiseprices.

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    In December2012andJanuary2013,inflationfellto below 4percent,awelcomedevelopmentinlightofthepreviousconsiderabledeviationfromthetarget.

    Nevertheless,therecentdeclineininflationshouldbeseenwith caution.

    Thisisbecause,first,itisbasedonlyontwo observations,whichcannotyetbeproven tobethebeginningofanewtrend.

    Second,thedropininflationdependedsignificantlyonsharpdeclinesintelecompricesandmoderatingagriculturalpriceincreases.

    IfoneweretoexcludetheeffectoftelecompricesoninflationinDecemberandJanuary,inflationwouldhavebeenaboveandpracticallyontheupperlimitofthevariabilityinterval,respectively.

    Also,asoccurswithnegativedisturbances,positiveshocksliketherecentonessoonerorlaterdieoutandcouldbefollowedintheirownturnbyadverseshocks.

    Third,theproportionofthecomponentsoftheNationalConsumerPriceIndex(INPC)basketwithannualincrementshigherthan4percentisstillsubstantial.

    Fourth,thetwo mostrecentinflationprintsexceedthetargetanddonotevencorrespondtothelowestinflationratesobservedin Mexicoduringrecentyears.

    Thesecaveatsareallthemoreimportantas thetargethasnotbeenachievedinthepast,inthesensethatinflationhasnotbeenfluctuatingaround3percent.

    In fact,sincetheendof2003whenthisobjectivebecameeffective,inflationhasvariedaroundamean of4.3percent.

    Moreover,duringthenineyearsaftertheestablishmentofthetarget,inflationhasnotexhibitedanyclearpathofconvergence towardsit.

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    Thislackofconvergencemaypartiallyexplainwhyinflationexpectationsfortheshortandmediumterms,asreflectedinanalysts’surveys,havelongremainedstubbornlyabovethetarget.

    Theseconsiderationscallforvigilanceinmonetarypolicy.Thetargetistheprincipalguideandhasnotbeenattained.

    Furthermore,negativeshockscouldeasilycomplicateconvergence.

    Risksinclude thefollowing:

    weatherandanimalhealthproblemscouldfuelagriculturalpricerises;newepisodesofheightenedrisk aversioncouldtriggercurrency depreciationwithsomeeffectsoninflation;

    public-sectorpricescouldbehigherthananticipated;and

    finally,someaggregatedemandpressuresmayariseinlightofconventionalmeasuressuggestingthatslackin theeconomyhasdisappeared.

    Concludingremarks

    In spiteofaweakglobalenvironment,Mexico’sGDP keptgrowingatratessurpassinghistoricalrecords.

    Analysts’outlookfortheMexicaneconomypositsaslightdecelerationin2013andarecoverythefollowingyear.

    Therearebothdownsideandupsiderisks to thisscenario,includingonthepositiveside,furtherprogressonstructuralreforms.

    Substantialcapitalinflowsresulting inunusuallyfavorablefinancialconditionsin Mexicohavebeensupportiveofeconomicactivity.

    However,economicagentsshouldremainprudentastheseflows,formanyreasons,couldstopandevenrevert.

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    Finally,theshortperiodofrecentimprovementininflation,theextraordinaryfactorsthatexplainit,andtheabsenceofconvergencetowardtheinflationtarget,requireavigilantmonetarypolicy.

    Convergenceofinflation to thepermanenttargetdemandsmorethanafewmonthsofgoodresults.

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    “TheSECSpeaksin2013”

    CommissionerDanielM.Gallagher

    U.S. SecuritiesandExchangeCommissionWashington,D.C.

    Thankyou,Craig[Lewis],foryourkindintroduction.

    ThisismysecondyearaddressingthisconferenceasaCommissioner.

    Lastyear,IspokeasoneoffiveCommissioners,whilethisyear,asyouwellknow,we’retemporarily downonemember.

    Andso,Iunderstandthattheorganizersareofferinga20%discountwhichyoucancollectaftermyremarks.

    Justkidding.

    Thetruthisthatthey askedallofustogivelongerspeeches,andsinceIamstillthejuniorCommissioner,theothersdumpedtheirextratimeonme.

    So,Ihopeyouarereadyforanhourlongadventure.

    BeforeIbegin,letmeremindyouthatasusual,myremarkstodayaremyownanddonotnecessarilyreflecttheviewsoftheCommissionormyfellow Commissioners.

    OnanumberofoccasionssincereturningtotheSECasaCommissioner,I’vespokenaboutthe Commission’spriorities,bothintermsofwhattheCommissionisdoingandwhatitshouldbedoinginordereffectivelyto

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    carryoutitsmandate to protectinvestors,ensurefairandefficientmarkets,andfacilitate capitalformation.

    Needlesstosay,theCommissiondoesnotoperateinavacuum,andforvariousreasons,it’snotalways easytoexecutethoseprioritiesasweseefit.

    TheconstantstreamofexternalinfluencesontheCommission’swork servesasasignificantimpedimenttoitsabilitytofocusonthecoremission,includingthevital,basic “blockingandtackling”ofsecuritiesregulation.

    Today,therefore,I’dlike to talkaboutthe Commission’soriginandroleasanexpert,independentagency—aswellasthechallenges to thatindependence—inwhathasbecomeinrecentyearsadifficultenvironmentforindependentagencies.

    AsI’msureallofyouknow,CongresscreatedtheSEC intheSecuritiesExchangeActof1934.

    Whatsomeofyoumaynotknow,however,isthattheSecuritiesActof1933originallytaskedtheFederalTradeCommissionwithadministeringthenewfederalsecuritieslaws.

    Indeed,theFTCwas theinitialchoiceofmany,includingPresident FranklinRoosevelt,toadministertheExchangeActaswell.

    Ultimately,however,aconsensusemergedthatthedifficulttask ofadministeringthefederalsecuritieslawsrequiredthecreationofanewindependent, bipartisanagencywithahighleveloftechnicalexpertiseinsecuritiesmattersthatcouldfocusexclusivelyonthenation’s capitalmarkets.

    Forexample,duringconsiderationoftheHouseversionofthelegislationthatwouldultimatelybecometheExchangeAct,RepresentativeCharlesWolvertoncitedthe“highdegreeoftechnicalskillandknowledge,”thatwouldbenecessarytoadministerthenewfederalsecuritieslawsinhis

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    supportforthecreationofafive-member,expertCommissiontotakeovertheadministrationofthosenewlaws.

    Similarly,duringconsiderationofthecorrespondingSenatebill,SenatorDuncanFletcherexplainedthebeliefamong“[m]anypeople,MembersofCongressandothers...thataspecialcommissionoughttobeprovided to administerthemeasurebecausetheprovisionsarelargelytechnical,andweought tohavemenexperiencedinbusinessofthekindinvolved.”

    ThefinalversionoftheExchangeActthatemergedfromCongressinthesummerof1934providedthenewly-establishedCommissionwithabroadmixofregulatoryandquasi-judicialauthoritytocarryoutthelegislativepoliciessetforthin theSecuritiesActandtheExchangeAct.

    Themovementtowardtheestablishmentofexpert,independentagenciesrepresentedamajorshiftintheregulatoryparadigm,anditwasn’tlongbeforethismodelwaschallenged.

    AyearafterCongresscreatedtheSEC,theSupremeCourttookuptheissueofindependentagencies inthecaseofHumphrey’sExecutorv.UnitedStates,whicharosefromPresidentRoosevelt’sattempt to removeWilliamHumphreyfromhispositionasanFTCCommissioner.

    MuchtothechagrinofthePresident,theCourtruledthatas“an administrativebodycreatedbyCongressto carryintoeffectlegislativepolicies,”an independentagencysuchas theFTC“cannotinanypropersensebecharacterizedasanarmoraneyeoftheexecutive.

    Itsdutiesareperformedwithoutexecutiveleaveand, in thecontemplationofthestatute,mustbefreefromexecutivecontrol.”

    Mostrecently,inits2010decisioninFreeEnterpriseFundv.PCAOB,theSupremeCourtimplicitlyreferencedtheCommission’sindependence,proceedingontheunderstandingthatSEC Commissioners“cannotthemselvesberemovedbythePresidentexceptundertheHumphrey’sExecutorstandardofinefficiency,neglectofduty,ormalfeasanceinoffice.”

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    Thisstandsincontrastto,forexample,Cabinetsecretaries,who,whilesubjecttoSenateconfirmation,serveatthepleasureofthePresident.

    HavingestablishedtheSEC asanexpert,independentagencywiththeauthoritytoadministerthefederalsecuritieslaws,CongresshastraditionallyprovidedtheCommissionwithconsiderableflexibility toexercisethatexpertiseandauthority.

    Historically,CongresshasavoidedimposingminutelydetailedmandatesontheCommission.

    Instead,Congresshas, inconjunctionwithpastgrantsofauthority to theSEC,largelyleftittotheCommissiontostudyissuesandformulateruleswhichtheCommissiondeemedinitsdiscretiontobe“inthepublicinterestorfortheprotectionofinvestors,”aphrasethatappearstimeandagainin oursecuritieslaws.

    AsPresidentRoosevelthimselfremarkeduponsigningtheInvestmentCompanyActandInvestmentAdvisersActintolawin 1940,“[E]fficientregulationintechnicalfieldssuchasthisrequiresanadministeringagencywhichhasbeengivenflexiblepowers[.]”

    Fornearlyeightyyears,theCommission,like otherindependentagencies,hasbroughtitsexpertiseandjudgment tobearinfulfillingthelegislativemandatesestablishedbyCongressinthefederalsecuritieslaws.

    Yet,intoday’spost-financialcrisis,post-Dodd-Frankregulatoryenvironment,theCommissionisfacedwithavarietyofchallengesthatcarrywiththemthepotentialtoerodeitsindependence.

    TheCommissionmustremainalerttothesechallengesandmustrespondwhenappropriateinorder topreserveitsability to actindependentlyinfulfillingitscoremission.

    Myconcernsheredonotderivefromideologyoradesire toperpetuateseeminglyage oldagencyturfwars.

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    Instead,thisis abouttheneedtopreservealong-standingregulatorymodelthateschewsaone-size-fits-allapproachin favorofallowingexpert,independentagenciestocraftrulesthat,whennecessary,areappropriatelytailored to thespecificentitiesandproductstheyregulate.

    AndthencameDodd-Frank.

    IworryaboutthelimitsplacedontheCommission’sabilityindependentlytoapplyitsexpertiseandjudgmentundertheparadigmestablishedbytheDodd-FrankAct.

    TheActcontainsapproximately400specificmandatestobeimplementedthroughagencyrulemaking,around100ofwhichapplydirectly totheSEC.

    Manyofthesemandatesarehighlyprescriptive,andinsteadofdirectingtheCommissiontoregulateinanareaafterstudyingtherelevantissues,compilingdata,anddeterminingwhat,ifany,regulatoryactionmaybeappropriate,theyrequire theCommission to issuestrictlyprescribedand oftenhighlytechnicalrulesundershortdeadlines.

    Unfortunately,althoughtheCommissionalwayshassomedegreeof discretionwhenimplementingaCongressionalmandate,thesemoreprescriptiveruleslimittheCommission’sflexibilityintherulemakingprocesswhileoccupyingtimeandresourcesthatcouldbebetterspentfulfillingtheCommission’s otherimportantresponsibilities.

    Ifoneofthedutiesofanindependentagencyis toworkproactivelywithCongresstoensurethatstatutesdonotimposeunnecessaryorinappropriatemandates,thenonthatfronttheCommissionunfortunatelycameupshortwithrespecttomanyDodd-Frankmandates.

    Ideally,whenCongressprovidestheSECwithstatutoryauthoritytodraftandimplementrulesin anewarea,itwillallow theCommissionthetimeandflexibilitynecessaryto studytheissuesinvolvedandformulatesmartregulationthatreflectsacompleteunderstandingoftheunderlyingdata,includingthecostsandbenefitsassociatedwithregulatoryaction.

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    Thisis,afterall,how theCommissionwasintendedtooperatewhenitwasestablishednearlyeightyyearsago.

    In fact,IbelieveitistheCommission’sdutyasanexpert,independentagencytocontinuetoemploythisdata-drivenapproachasbestitcaneveninthefaceofprescriptivemandatesfromCongress.

    AlthoughtheCommissioncontinuestostaredownanoverflowingplateofDodd-Frankmandatesin additiontoits otherresponsibilities,asanexpert,independentagency,theCommissionmustnotallowitselftoassumeasecondaryrolein theregulationofmatterssquarelywithinitsjurisdictionandcorecompetencies.

    This,I’mafraid,isexactlytherolethattheCommissionhastakenthusfarwithrespect to critical initiatives,includingtheVolckerRule.

    Pursuant toSection619ofDodd-Frank,thethreeFederalbankingagencies,theSEC,andtheCFTCmust togetheradoptregulations toimplementtheVolckerRule’stwoprohibitionsonbankingentitiesandtheiraffiliates:itsprohibitiononengaging in proprietarytradinganditsprohibitiononsponsoringorinvestingin“coveredfunds”suchashedgefundsorprivateequityfunds.

    Unfortunately,thereislittledoubtthatnotwithstandingthevalianteffortsoftheSECstaff,theCommissionfortoolonghastakenabackseattothebankingregulatorsinthisrulemakingprocess.

    AsIhavesaidinthepast,despitetheRule’sostensibleapplicationtobankingentities,theRuleisactuallyfocusedontheconductto beregulated, nottheentitiesthatengageinthisactivity.

    Thereisnoquestionthatthespecifictrading,hedging,andinvestingactivitiestoberegulatedundertheRulefallfirmlywithintheCommission’scorecompetencies,astheydealdirectlywithSECregistrantsandregistrationrequirements.

    It makeslittlesense,therefore,fortheCommissiontodefertothebankingregulatorsinthisareawhenfordecadesithasregulated

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    securitiesmarket-making in ordertofacilitateliquidityandpromotetheefficientallocationofcapital.

    TheimplementingrulemakingfortheVolckerRulewasproposedinOctober2011.

    Almostayearandahalf—andover18,000commentletters—later,theVolckerRuleremainsattheproposalstage.

    Indeed,itappearsthattheproposal’sbroaddefinitionsofstatutorytermshavetakenabadsituationandmadeitworse.

    Commissionstaffcontinue to engageindiscussionswiththebankregulatorsandtheCFTCregardingthemanyconcernsraisedinthose18,000-pluscommentletters.

    Forthisruletogetdoneandgetdoneproperly,theSECmusttakealeadershiprole.

    In fact,Ibelieveitisourdutyastheindependentfinancialregulatorwith primaryauthorityover,andexpertisein,theactivitiestoberegulatedtoensurethatthefinalRulemeetstheaimsofCongresswithoutdestroyingcriticallyimportantmarketactivitythattheRuleexplicitlyintendsnot toeliminate.

    Moreover,inaccordancewithitscoremission,itistheCommission’sresponsibility tobalancethebankregulators’focusonsafetyandsoundnessandDodd-Frank’soverarchingfocusonmanagingsystemicriskwithlegitimateconsiderationsofinvestorprotectionandthemaintenanceofvibrantmarkets.

    Thisbringsme totheelephantintheroom:FSOC.

    FSOCwascreated, in part,torespondtotherealizationduringthefinancialcrisisthatregulatorybalkanizationhadresultedinalackofcommunicationandinformation-sharingamongfinancialservicesregulators,whichundoubtedlyled topoorpolicy decisionsduringthecrisis.

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    Noneofuswholivedthroughthecrisisonthegroundfloorwouldargueagainstimprovements totheregulatorystructurethatwouldfacilitatecoordinationandinformation-sharingamongregulators.

    However,withFSOCthethreatstotheCommission’sindependencemovefromthetheoreticaltotheimmediate,foralreadyinitsshortexistence,thisnewbodyhasdirectlychallengedtheCommission’sregulatoryindependence.

    ItisalsowherejustonememberoftheCommission,theChairman,can defendthatindependence.

    Pursuant totheprovisionsofDodd-FrankestablishingFSOC,thegroupiscomposednotofagencies,buttheindividualheadsofagencies,actingexofficio.

    AsIhavesaidinthepast,thestructureofFSOCisparticularlytroublingforanindependentagencyliketheSEC.

    WhiletheSecretaryoftheTreasuryandtheheadsoftheFHFAandtheCFPBmayspeakonbehalfoftheiragencies—nottomentionthePresidentthatappointedthem—thesame cannotbesaidoftheChairmanoftheSEC.

    Topreserveitsindependence,CongresscreatedtheSEC asabipartisan,five-memberCommissionandgaveeachCommissioner—includingtheChairman—onlyonevote.

    ThismeansthattheChairmanhasnostatutoryauthority to representorbindtheCommissionthroughhisorherparticipationonFSOC.

    YetasavotingmemberofFSOC,theChairmanoftheSECdoeshaveasay inauthorizingFSOCtotakecertainactionsthatmayaffect—andindeedhavealreadyaffected—marketsorentitiesthattheCommissionregulates.

    WhileonemightexpectthattheChairmanoftheSECwouldalwaysrepresenttheviewsoftheCommissionasawhole,thereisnoformal

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    oversightmechanismavailable totheCommissiontochecktheChairman’sparticipationonFSOC.

    Moreover,althoughtheCommission’sbipartisanstructureinsulatesitfromunduepoliticalinfluence,FSOC’sstructuredoesnot.

    Onthecontrary,FSOCiscomposedofindividualswhoareheadsoftheiragencies—typicallymakingthemmembersofthePresident’spoliticalparty—andledbyaCabinetofficialwhoisremovablebythePresidentatwill.

    Thesefactors,amongothers,makeFSOCparticularlysusceptible topoliticalinfluencewhich, in turn,canbe— andhasbeen—exertedontheagencies ledbyFSOC’smembers.

    Tofurthercomplicatematters,FSOCoperatesunderadifferentmandatethantheSEC,havingbeenestablishedbyCongresswithabroadmandateto identifysystemicrisksandemergingthreats tothecountry’sfinancialstability.

    PuttingasidethefactthatFSOC’sdesignationofcertainfirmsas“systemicallyimportant”likelyinstitutionalizesthe idea of“toobigtofail,”FSOC’scoremissionistoensurethesafetyandsoundnessofthe

    U.S.financialsystem—notsurprisinggiventhatasignificantpluralityofFSOCiscomposedoftheheadsofbankregulators.

    Whilethismissionisofunquestionableimportance,so,tooisthedistinctmissionoftheSEC.

    Tobesure,properoversightofourcapitalmarketsshouldpositivelyimpactthesafetyandsoundnessofourfinancialsystem.

    Nevertheless,theSEC isnotbystatuteasafetyandsoundnessregulator.

    In fact,themarketsweregulateareinherentlyrisky,andwithgoodreason.

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    Byputtingmoneyatrisk,investorsallocatecapitalinamannerthatspurseconomicgrowthinthehopesofamuchhigherreturnontheirinvestmentsthantheycouldobtainfromlower-risk,lower-returninvestments,suchasbankaccounts.

    TheSECseekstoprotecttheseinvestorsfromfraudandtoensurethatthemarketsinwhichtheyputtheir capitalto workarefairandefficient.

    Ourmissionisnot,andshouldnotbe,tomakethesemarketsrisk-free,norisit topreservetheexistenceofanyparticularfirmorfirms.

    Capitalmarketsregulatorsandbankregulatorshavedrasticallydifferentmissionsandoverseefundamentallydifferentmarketsandmarketparticipants.

    And,importantlyformeandallofthosewhoappreciateandadvocateforfreemarkets,wemustkeepahealthydistancebetweencapitalmarketsregulation,whichrightfullyassumesnotaxpayersafetynets,andbankregulation.

    ItisnotdifficulttoseethepotentialtensionbetweentheSECandFSOCmissionsandtheresultingthreat totheCommission’sability to functionindependently.

    Asthe oldadagegoes:“Noone canservetwomasters.”

    WhentheChairmanoftheSEC faces thistension,whichofthesetwopotentiallycompetingmandatesdoesheorshehonor?

    NorisFSOCmerelyanadvisorybodywithoutteeth.

    Tocarryoutitsmandate,CongressprovidedFSOCwithextraordinarypowersforaninter-agencycouncil.

    Forexample,FSOChastheauthority todesignateanonbankfinancialcompanyas“systemicallyimportant,”andto subjectthesecompanies toprudentialsupervisionby theFed.

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    FSOCmayalsodesignateafinancialmarketutilityorapayment,clearing,orsettlementactivityas“systemicallyimportant,”anddirecttheFed, inconsultationwiththerelevantsupervisoryagenciesandFSOCitself,to prescriberisk managementstandards.

    Totheextentthatthese“systemicallyimportant”utilitiesoractivitiesareconductedbyfirmsforwhichtheSECorCFTCistheprimaryregulator,Dodd-Frankprovides“specialprocedures”pursuanttowhichtheFedmay,ifitdeterminesthattherisk managementstandardssetbytheSECortheCFTCare“insufficient,”imposeits ownstandards.

    Thatauthorityisnotsimplyathreattothe Commission’s independence

    —ifexercised,itwouldbeanoutrightannexation.

    FSOCalsohastheauthority to recommendthataprimaryfinancialregulator,suchastheSEC,applyneworheightenedstandardsandsafeguardsforsystemicallysignificantfinancialactivitiesorpractices.

    In thisregard,FSOChasbeenbusyinrecentmonthsproddingtheCommissiononmoneymarketfundreforms, includingthroughthereleaseofproposedreformrecommendationslastNovember.

    Iwon’trecountthehistorythatledto FSOC’sinvolvementintheregulationofmoneymarketfunds,anareawhichunquestionablyfallswithinthecoreexpertiseandregulatoryjurisdictionoftheSEC.

    ButIwillemphasizethatmycolleaguesandIhavemadeitclearthat,havingnowbeenprovidedwiththerigorousstudyandeconomicanalysisonmoneymarketfundsthatabipartisanmajorityoftheCommissionaskedforfromthestart,wefullyexpecttheCommissiontomoveforwardwitharuleproposalshortly.

    Why,then,isFSOCstillinvolvedintheprocess?

    FSOCwasestablishedinparttopromotecoordination,collaboration,andinformation-sharingamongitsmemberagencies.

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    Itisimmenselytroublingthen to thinkoftheFSOCasaninstitutionalizedmechanismforonesetofregulatorstopressureanotherinthelatteragency’sfield ofexpertise—yetthatisexactlywhatishappening.

    MovingonfromthethreatsposedtotheCommission’sindependencebyCongressionalmandatesandFSOCintervention,thereareother,more mainstream,jurisdictionalincursionstheCommissionmustmonitorand manage.

    Forexample,inDecember2012,theFed,actingpursuanttoDodd-Frankauthority,issuedproposedregulationstoapplyU.S.capital,liquidity,andotherprudentialstandardstotheU.S.operationsofforeignbankorganizationswithtotalglobalconsolidatedassetsofatleast$50billion.

    Theserules,ifadoptedintheircurrentform, wouldrequiresuchorganizationstocreateanintermediateholdingcompanythatwould housealloftheirU.S.bankandnonbanksubsidiaries.

    TheFedproposalwouldaffectSECregistrantsas thenewholdingcompany capitalruleswouldtreatassetsheld bybroker-dealersubsidiariesdifferentlythantheyaretreatedintheSECcapitalrulesbecauseoftheproposedleveragestandardthatwouldapplytoforeign bankorganizations.

    Specifically,aU.S.broker-dealersubsidiaryofaforeignbankorganizationcouldberequiredindirectlytoholdmorecapitalthanwould benecessarytosatisfytheSEC’snetcapitalrule tomaintainthesamepositions.

    Theregulationofbroker-dealersisattheheartoftheExchangeActand,assuch,hasbeenundertheCommission’sregulatorypurviewfornearlyeightdecades.

    Usingtheexpertiseithasdevelopedoverthisperiod,theCommissionhasdesigned capitalrequirementsunderRule15c3-1thataretailoredtotheoperationsofbroker-dealersandtheindustryin whichtheyoperate.

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    Here,itiscrucialtounderstandthedifferingtheoriesthatunderliebroker-dealerandbankcapitalrequirements.

    TheCommission’scapitalrulesaremeanttodealwithfailure,inthattheyaredesigned to ensurethatwhenabroker-dealerfails,ithasnetliquidassetsinexcessofallnon-subordinatedliabilitiessothatthefirm canbeself-liquidatedin anorderlymannerandsatisfyallcreditors,particularlyitscustomers.

    Ontheotherhand,bankcapitalstandardsarenotdesigned to requireabanktomaintainsufficientnetliquidassetstosatisfyallcreditors.

    Instead,bankshaveaccess to federalliquidityfacilitiesthatcan beusedasafundingsourceintheeventthatthebankcannotfindprivatefunding.

    Thesefacilitiesallow thebanktobeliquidatedinamoreorderlymannerinthe caseofafailure.

    And,ifthebankis“toobigtofail,”thefacilities canoperateasataxpayer-fundedlife supportsystem.

    Accordingly,itwillbeveryimportantfortheFedandtheCommissiontocoordinatecarefullyasthisruleproposalisconsidered to ensurethatlegitimategoals canbeadvancedwithoutunderminingSECoversight.

    ThisFedrulemakingcomesontheheelsofthemisguidedrepealinDodd-FrankoftheCommission’sSupervisedInvestmentBankHoldingCompany,orSIBHC,program.

    Thislittle-knownprogram,whichtheCommissionimplementedundertheauthorityofExchangeActSection17(i),shouldhavebeenexpandedinDodd-Franktoallow theSEC to betteroverseenon-systemicallyimportantbroker-dealerholdingcompanies.

    Instead,Dodd-FrankeliminatedExchangeActSection17(i),and replaceditwithanewFedprogram.

    Onafinal note,theCommissionmust alsobemindfuloftheeffectthatinternationalregulatorybodies,eventhoselikeIOSCOandtheFSBin

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    whichtheCommissionisaparticipant,canhaveontheCommission’sprerogativesasanexpert,independentagency.

    Manyoftheseorganizationswereformedin largepart to fostercooperation,information-sharing,andcoordinationamongfinancialregulatorsindifferentjurisdictions.

    However,wenowoftenseefromthesegroupsone-size-fits-all“recommendations,”someofwhichruncontrary to theCommission’sexistingregulationsoraddressthesubstanceofspecific issuespendingbeforetheCommission.

    IbelievethattheCommissionmustremainanactive,productivememberofthesegroups,butwemustensurethatpolicymakingremainsinthehandsofdomesticregulatorsactingwiththerequisiteindependence.

    Thankyouallforcomingtothisyear’sSECSpeaks,andIlookforwardtoseeingyouagainnextFebruary.

    InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


    P age |138

    ContagiousnessandVulnerabilityintheAustrianInterbankMarket

    Claus Puhr,ReinhardtSeliger,MichaelSigmund,Oesterreichische Nationalbank,FinancialMarketsAnalysisandSurveillanceDivision

    Thepurposeofthispaperistoanalyze(hypothetical)contagiousbankdefaults,i.e.defaultsnotcausedbythefundamentalweaknessofagivenbankbuttriggeredbyfailuresinthebankingsystem.

    Asfailingbanksbecomeunable tohonortheircommitmentsontheinterbankmarket,theymaycause otherbanks todefault,whichmayinturnpush evenmorebanksovertheedgein so-calleddefaultcascades.

    In ourpaperwedistinguishbetweencontagiousness(theshareoftotalbankingassetsrepresentedbythosebanks thataspecificbankbringsdownbycontagion)andvulnerability(thenumberofbanks bywhichabankisbroughtdownbycascadingfailures).

    Ouranalysisconsistsofthreesteps:first,weanalyzethestructureoftheAustrianinterbankmarketfromend-2008toend-2011.

    Second,werun(hypothetical)defaultsimulationsbasedonEisenberg andNoe(2001)forthesamesetofbanks.

    Finally,weestimateapaneldatamodeltoexplainthe(hypothetical)defaultsgeneratedbythesesimulationswiththeunderlyingstructureofthenetworkusingnetworkindicatorsthatreflect

    thenetworkasawhole,

    asubnetworkorcluster,and

    thenodelevelbasedonbanks’interbanklendingrelationships.

    InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


    P age |139

    Asaresultwefindstrongcorrelationsbetweenabank’spositionintheAustrianinterbankmarketanditslikelihoodofeithercausingcontagionorbeingaffectedbycontagion.

    Althoughouranalysisisbasedonadatasetconstrained to theinterbankmarketofunconsolidatedAustrianbanks,webelieveourfindingscould beverifiedbyanalyzingotherbankingsystems(albeitwithadifferentmodelcalibration).

    Giventheimportanceofidentifyingsystemicallyimportantbanks fortheformulationofmacroprudential policy,webelievethatouranalysishasthepotentialtoimproveourassessmentwithregardtosecond-roundeffectsanddefaultcascadesintheinterbankmarket.

    1Introduction

    1.1Motivation

    Thefinancialcrisishasrevealedthedangerofsystemicrisk duetocontagioneffectsgiventheinterconnectednessofmodernbankingsystems.

    Identifyingsystemicallyimportantbankshassincebecomeoneofthekeyobjectivesofsystemicrisk assessmentandanecessarypreconditionfortheformulationofmacroprudentialpolicy.

    Systemicallyimportantbanks canbeidentifiedinmanydifferentways.

    Wewouldlike tocontributetothisimportantdiscussionbyapplyingtechniquesfromnetworkeconomics.

    In general,networkanalysisrequirestwoinputarguments.

    First,ittakesanetwork,whichcouldeitherbegivenorderivedthroughanetworkformationprocess.

    Second,eachnetworkanalysisneedsanobjective.

    InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


    P age |140

    In ourpaperweconsidertheinterbanklendingnetworkasgivenandleavethetheoryonnetworkformationaside,sincetheAustrianinterbanklendingrelationshipsaretheverynetworkwesupervise.

    Weviewtheinterbanklendingmarketasanetworkwhereeachparticipatingbankisanodeandeachcreditalink.

    The objectiveofourpaperisanalyzingoneimportantcontagionmechanismwithinthisnetwork,namelycounterpartycreditriskassociatedwithinterbanklending.

    Exanteitisunknownwhetherdifficultiesatevenarelativelysmall(butinterconnected) institutionmighttriggerproblemsatanotherbank.

    In thecontextofmacroprudentialanalysissuchaninstitutioncouldbeconsideredasasystemicallyimportantbank(alsoknownasakeyplayerinnetworkeconomics).

    Specifically,weanalyzetwo variantsof(hypothetical)contagiousdefaultfortheAustriannetworkofinterbanklendingrelationships.

    First,westudyabank’scontagiousnessintermsoftheshareoftotalbankingassetsrepresentedbyotherbanksthatitwillcausetodefaultgivenits owndefault.

    Secondwestudyabank’svulnerabilityintermsofthenumberofbanksbywhichitisbroughtdownifdefaultscascadethroughthebankingsector.

    In theremainderofthepaperwetrytoidentifykeynetworkpropertiesthatinfluenceourtwovariantsofcontagiousdefault.

    Ourmainmotivationisfindingoutwhethersimulatedcontagiousnessandvulnerabilityisdrivenby

    banks’idiosyncraticcharacteristics(i.e.athin capitalbuffer)or

    networkeffects/positions,or(iii)byboth.

    InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


    P age |141

    Tothisendweestimatepaneldatamodelsthatexploitnetworkindicatorstopredictpotentialdefaultcascadesfollowingindividualbankfailureswhilewecontrolfor idiosyncraticvariables(i.e.thetraditionalmeasuresofriskbearingcapacitylike capitalizationratiosetc.).

    Ifsupervisorsareabletoidentifynetworkindicatorsthataddsignificantly totheanalysisofthesemodels,macroprudentialpolicywillbeableto

    analyzethecharacteristics/driversofindividual indicatorsto getabetterunderstandingofdefaultdynamicsand

    potentiallytargetselectedvariablestoaddresscontagiousnessandvulnerabilityintheinterbankmarket“indirectly.”

    Ourresultsshouldthereforeprovidepotentialnovelmeansforpolicymakerstodesignand/orcomplementmacroprudentialtools.

    Ifyouaregoodinmathematics,you canreadit:

    FinancialStabilityReport24athttp://www.oenb.at/en/welcome_to_the_oenb.jsp

    InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


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    Disclaimer

    TheAssociationtries toenhancepublic access toinformationaboutrisk andcompliancemanagement.

    Ourgoalis tokeepthisinformationtimelyandaccurate.Iferrorsarebroughttoourattention, we willtry tocorrectthem.

    Thisinformation:

    -

    isofageneralnatureonlyandisnotintendedtoaddress thespecific

    circumstancesofanyparticularindividualorentity;

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    shouldnotbereliedonintheparticularcontextofenforcementorsimilar

    regulatory action;

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    isnotnecessarilycomprehensive,complete,oruptodate;

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    issometimeslinkedtoexternalsitesoverwhich theAssociationhasnocontrol

    andfor whichtheAssociationassumesnoresponsibility;

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    isnotprofessionalorlegaladvice(ifyouneedspecificadvice,youshould

    alwaysconsultasuitablyqualifiedprofessional);

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    isinnowayconstitutiveofaninterpretativedocument;

    - doesnotprejudgethepositionthattherelevantauthoritiesmightdecide totakeonthesame mattersifdevelopments, includingCourtrulings,were toleadittorevisesomeoftheviewsexpressedhere;

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    doesnotprejudgetheinterpretationthattheCourtsmightplaceonthematters

    atissue.

    Pleasenotethatit cannot beguaranteedthattheseinformationanddocumentsexactlyreproduceofficiallyadoptedtexts.

    Itisourgoaltominimizedisruptioncausedbytechnicalerrors.

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    TheAssociationacceptsnoresponsibilitywithregardtosuchproblemsincurredas aresultofusingthissiteoranylinkedexternalsites.

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    CertifiedRiskandComplianceManagementProfessional (CRCMP)distancelearningandonlinecertificationprogram.

    CompanieslikeIBM, Accentureetc.consider the CRCMPapreferredcertificate.Youmayfindmoreifyousearch(CRCMPpreferred certificate) usinganysearchengine.

    Theall-inclusivecostis $297.Whatisincludedintheprice:

    Theofficialpresentationsweuse

    inourinstructor-ledclasses(3285slides)

    The2309slidesareneeded for theexam,asallthequestionsarebasedon theseslides.Theremaining976slidesareforreference.

    Youcanfindthecoursesynopsisat:

    www.risk-compliance-association.com/Certified_Risk_Compliance_Training.htm

    Upto3OnlineExams

    Youhaveto passoneexam.

    Ifyoufail, youmuststudytheofficial

    presentationsandtryagain,but youdonotneedto spend money.Upto 3examsareincludedintheprice.

    To learnmoreyoumayvisit:

    www.risk-compliance-association.com/Questions_About_The_Certification_And_The_Exams_1.pdf

    www.risk-compliance-association.com/CRCMP_Certification_Steps_1.pdf

    PersonalizedCertificateprintedinfullcolor

    Processing,printing,packingandpostingto yourofficeorhome.

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    D.TheDoddFrankActandthenewRiskManagementStandards(976slides,includedinthe3285slides)

    TheUSDodd-Frank WallStreet Reform andConsumerProtectionAct isthe mostsignificant pieceoflegislation concerning thefinancialservicesindustryinabout80years.

    What doesitmeanforriskandcompliancemanagementprofessionals?Itmeansnewchallenges,newjobs,newcareers,andnewopportunities.

    Thebillestablishesnewrisk managementandcorporategovernance principles,setsupanearly warning

    systemto protect theeconomyfrom futurethreats,andbringsmore

    transparencyandaccountability.

    ItalsoamendsimportantsectionsoftheSarbanesOxley Act.Forexample,itsignificantlyexpandswhistleblowerprotectionsunder the SarbanesOxleyActandcreatesadditionalanti-retaliationrequirements.

    Youwill findmoreinformation at:

    www.risk-compliance-association.com/Distance_Learning_and_Certification.htm

    InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


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