P a
This presentation is the property of its rightful owner.
Sponsored Links
1 / 191

P a g e | 1 PowerPoint PPT Presentation


  • 100 Views
  • Uploaded on
  • Presentation posted in: General

P a g e | 1 Inter n a tio n a l A s s oci a t ion of R isk a nd Compl i a n c e Pro f e s s io n a ls ( I A RCP) 1200 G St re e t NW Su i te 800 W a s h i ng t o n, D C 200 0 5 - 67 0 5 U SA T e l : 202 - 449 - 9750 w w w .ri s k - co m pl i a nce - a s s o c i a tion . co m.

Download Presentation

P a g e | 1

An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -

Presentation Transcript


P a g e 1

P age |1

InternationalAssociationofRiskandCompliance Professionals(IARCP)

1200GStreetNWSuite800Washington, DC20005-6705USATel:202-449-9750www.risk-compliance-association.com

Top10riskandcompliancemanagementrelatednewsstoriesandworldeventsthat(forbetterorforworse)shapedthe week'sagenda,andwhatisnext

DearMember,

NowyoucanpurchasethepresentationsoftheCertifiedRiskandComplianceManagementProfessional(CRCMP)programat$97(instead

of$297,thecostofthefullprogram).Tolearnmore:

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

Whosaid…?

“Icanannouncethatyourhighstreetbankwillhavedifferentbossesfromitsinvestmentbank.

Yourhighstreetbankwillmanageitsownrisks,butnottherisksoftheinvestmentbank.

Andtheinvestmentbankwon’tbeabletouseyoursavingstofundtheirinherentlyriskyinvestments.

Mymessagetothebanksisclear:ifabankfloutstherules,theregulatorandtheTreasurywillhavethepowertobreakitupaltogether–fullseparation,notjustaringfence.”

TheChancelloroftheExchequer,RtHonGeorgeOsborneMP,ontheReformofBankingsaidthat.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |2

Justbeforethat,hesaid:

“ThankyouforwelcomingmetoJPMorganhereinBournemouth. Whenyouthinkaboutwheretogiveaspeechoncultureandethicsand

thefutureofBritishbanking,theofficesofoneoftheworld’slargestAmericaninvestmentbanksmayseemlikeanoddchoiceofvenue.”

Readmoreatnumber9ofourlist.

Whosaid…?

“Ican'trememberatimewhenIhaveseenmoreregulatoryproposalsdraftedthatdifferentiatebetweenbanksbasedonsizeorcomplexity”

ItisGovernorElizabethA.Duke,speakingaboutthefutureofcommunitybankingattheSoutheasternBankManagementandDirectorsConference,UniversityofGeorgia,TerryCollegeofBusiness,Duluth,Georgia.

Shecontinued:

“Infact,mostoftheregulationsrequiredbytheDodd-FrankWallStreetReformandConsumerProtectionAct(theDodd-FrankAct)aredirectedprimarilyatlarger,systemicallyimportantbanks,andmanyoftheAct'sprovisionsspecificallyexemptcommunitybanks.

Forexample,bankswithlessthan$10billionintotalassetswereexemptedfromanumberofthedebitinterchangerestrictions,andearlystudiesindicatethatthoseexemptionsareworking.

Inaddition,formalstresstestingwasrequiredonlyforbankswithtotalassetsof$10billionormore.

Inimplementingtheserequirementsforthelargerbanks,thebankregulatoryagenciesspecificallyindicatedthatcapitalstresstestingwouldnotberequiredforcommunitybanks.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |3

Thisdoesnotmeanthatcommunitybanksareexemptedfromprudentriskmanagement,butratherthatsmallerbanksshouldthinkaboutthenegativeshocksthatcouldaffecttheirbusinessinthefutureandtailortheirrisk-managementprocedurestotherisksandcomplexitiesoftheirindividualbusinessmodels.”

Readmoreatnumber2below.

WelcometotheTop10list.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |4

Regulatoryconsistencyassessmentprogramme(RCAP)-Analysisofrisk-weightedassetsformarketrisk

TheBaselCommitteeonBankingSupervisionhaspublisheditsreportontheregulatoryconsistencyofrisk-weightedassetsformarketrisk.

Thisanalysisofrisk-weightedassetsinthetradingbookispartofthewiderRegulatoryConsistencyAssessmentProgramme(RCAP)initiatedbytheCommitteein2012;asimilaranalysisiscurrentlyunderwayforthebankingbook.

GovernorElizabethA.Duke

AttheSoutheasternBankManagementandDirectorsConference,UniversityofGeorgia,TerryCollegeof Business,Duluth,Georgia

TheFutureofCommunityBanking

SpeechbyPatrickSpens,HeadofMarketMonitoring,theFSA,attheFuturesOptionsAssociationComplianceForum

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |5

QuestionsandAnswers

ImplementationoftheRegulation

onshortsellingandcertainaspectsofcreditdefaultswaps

Regulation(EU)No236/2012oftheEuropeanParliamentandoftheCouncilof14March2012onshortsellingandcertainaspectsofcreditdefaultswaps(“Regulation”)hasalreadyenteredintoforceandwillbefullyapplicableon1November2012.

ItissupplementedbydelegatedregulationsadoptedbytheEuropeanCommissionspecifyingcertaintechnicalelementsoftheRegulation,toensureitsconsistentapplicationandtofacilitateitsenforcement.

FromthePublicResponsestothe2012NovemberConsultativeDocuments

StrengtheningOversightandRegulationofShadowBanking

TheFSBpublishedinNovember2012itsConsultativeDocumentsonStrengtheningOversightandRegulationofShadowBanking,whichprovidedaninitialintegratedsetofpolicyrecommendationstostrengthenoversightandregulationofshadowbanking.

DeutscheBankresponsetoconsultation

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |6

J.P.MorganAssetManagement-ResponsetotheFSBConsultativeDocuments

StrengtheningOversightand RegulationofShadowBanking

[TheFSBpublishedinNovember2012its

ConsultativeDocumentsonStrengtheningOversightandRegulationofShadowBanking,whichprovidedaninitialintegratedsetofpolicyrecommendationstostrengthenoversightandregulationofshadowbanking]

PCAOBEntersIntoCooperativeAgreement withFrenchAuditRegulator

ThePublicCompanyAccountingOversightBoardtodayannouncedthatithasenteredintoacooperativeagreementwiththeFrenchHighCouncilforStatutoryAuditors(H3C)relatingtotheoversightofauditfirmssubjecttotheregulatoryjurisdictionsofbothregulators.

SolvencyII–earlyuseofSolvencyIIworktomeetICASrequirements

Theintentionto***allowfirmstousetheirSolvencyIIworktomeet,asfaraspossible,thecurrentregulatoryrequirements***undertheIndividualCapitalAdequacyStandards(ICAS).

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |7

SpeechbytheChancelloroftheExchequer,RtHonGeorgeOsborneMP,ontheReformofBanking

“WhenyouthinkaboutwheretogiveaspeechoncultureandethicsandthefutureofBritishbanking,theofficesofoneoftheworld’slargestAmericaninvestmentbanksmayseemlikeanoddchoiceofvenue.

Butit’sadeliberateone.”

Designflawsoftheeuro

IntroductoryremarksbyMr.PatrickHonohan,GovernoroftheCentralBankofIreland,forthe

TKWhitakerLecture“Designflawsoftheeuro”by

MrHaroldJames,PrincetonUniversity,Dublin

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |8

Regulatoryconsistencyassessmentprogramme(RCAP)-Analysisofrisk-weightedassetsformarketrisk

TheBaselCommitteeonBankingSupervisionhaspublisheditsreportontheregulatoryconsistencyofrisk-weightedassetsformarketrisk.

Thisanalysisofrisk-weightedassetsinthetradingbookispartofthewiderRegulatoryConsistencyAssessmentProgramme(RCAP)initiatedbytheCommitteein2012;a

similaranalysisiscurrentlyunderwayforthebankingbook.

TheprogrammeaimstoensureconsistentimplementationoftheBaselframework,whichwillhelpstrengthentheresilienceoftheglobalbankingsystem,maintainmarketconfidenceinregulatoryratiosand providealevelplayingfieldforbanksoperatinginternationally.

Thereportbringstogethertwopiecesofanalysis.

Thefirstisbasedonanexaminationofpubliclyavailablebankdataforaselectionoflargebanks.

Italsocontainstheresultsofahypotheticaltestportfolioexercise,inwhich15internationallyactivebanksparticipated.

TheBaselCommitteeplanstoconductafurtherhypotheticaltestportfolioexerciselaterthisyear.

Thiswillincludeother,morecomplex,hypotheticaltestportfolios,withtheaimofhelpingtheCommitteetodeepenitsanalysisofthevariationinriskmeasurementoftradingbooksacrossbanks.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

  • P age |9

  • Introduction

  • ConsistentimplementationoftheBaselframeworkisfundamentaltoraisingtheresilienceoftheglobalbankingsystem,maintainingmarketconfidenceinregulatoryratiosandprovidingalevelplayingfieldforinternationallyoperatingbanks.

  • Againstthisbackground,theBaselCommitteehasinitiatedtheRegulatoryConsistencyAssessmentProgramme(RCAP).

  • Theassessmentprogrammeisconductedonthreelevels:

  • Level1:ensuringthetimelyadoptionofBaselIII;

  • Level2:ensuringregulatoryconsistencywithBaselIII;and

  • Level3:ensuringconsistencyofrisk-weightedasset(RWA)outcomes.ThisreportpresentsthepreliminaryresultsoftheCommittee’sanalysisof

  • RWAoutcomesforbanks’tradingbookassets(Level3);asimilaranalysisisunderwayforthebankingbook.

  • Atthesametime,theCommitteeiscurrentlyworkingonafundamentalreviewofthemarketriskframework.

  • Oneoftheobjectivesofthefundamentalreviewistodeliveraregulatoryframeworkthatcanbeimplementedconsistentlybysupervisorsandwhichachievescomparablelevelsofcapitalacrossjurisdictions.

  • ThefindingsinthisreportwillfeedintothefundamentalreviewandwillinformtheCommitteeaboutpossibledirectionsforfurtherpolicywork.

  • Recently,anumberofprivatesectorstudiesusingpubliclyavailabledatahavecometomixedconclusionsonthevariabilityofriskweightingfortradingassets:someindicatethatvariabilityreflectsgenuinedifferencesinbusinessmodelsandiscommensuratetoactualexposuretorisk,whileotherssuggestthatvariabilityisdrivenbyotherfactors,suchasdifferentmodellingapproaches.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |10

Inordertobetterunderstandthepotentialdriversofthevariabilityinthemeasurementanddisclosureofmarketrisk–measuredbyRWAsbasedonthemarketriskframework(mRWAs)–theCommitteeundertook

Ananalysisofpubliclyavailabledataoflargegloballyactivebankswithsignificanttradingoperationsand

Ahypotheticaltestportfolioexercisetoexaminewhatmethodologychoicesarethegreatestpotentialdriversbehindthevariabilityofinternalmarketriskmodeloutcomes.

Importantly,theobjectiveofthisworkwasnottojudgethecorrectnessofthemodellingchoicesmadebybanksortoassessthecomplianceofsupervisoryapproachestakenindifferentjurisdictions.

Rather,theobjectivewastoobtainapreliminaryestimateofthepotentialforvariationinmRWAsacrossbanksandtohighlightaspectsoftheBaselstandardsthatcontributetothisvariation.

Thereviewofpublicdisclosuresfocusedonasampleof16globalbankswithsignificanttradingactivity.

TheobservationperiodincludesthemostrecentchangesrelatedtoBasel2.5,whichhadtakeneffectinsomejurisdictionsbutnotall.

DespitetheasynchronousadoptionofBasel2.5,valuewasfoundincomparingmRWAsacrosspre-andpost-Basel2.5jurisdictionsbecausemanyoftheissuescarryovertothenewregime,forexampleregardingthecontributiontomRWAsfrominternalmodelsandstandardisedapproaches.

Forsomebanks,thedisclosuresrequiredunderBaselII(Pillar3)factoredintotheanalysisandprovidedachancetoevaluatetheutilityofsuchdisclosuresforthistypeofproject.

ThefocusofthehypotheticaltestportfolioexercisewastodiscoverthedesignelementsofinternalmodelsthathavethegreatestpotentialimpactonthelevelofvariabilityinmRWAs.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |11

Hypotheticaltestportfoliosovercomethelimitationsencounteredwhenattemptingtousepublicandsupervisorydataonrealportfoliostoinvestigatepotentialsourcesofvariationbecausetheycontrolfordifferencesinportfoliocomposition.

However,theyshowonlypotentialandnotrealisedvariationinoutcome.Moreover,inthiscase,theexercisefocusedonaseriesofsimplelongand

shortpositions,designedtorevealtheimpactofmodeldesignfeatures.

Toshedlightontheeffectofdifferentsourcesofvariationonmorerealisticportfolios,theCommitteeplanstoconductafurtherhypotheticaltestportfolioexerciselaterthisyear.

Thiswillincludeother,morecomplex,hypotheticaltestportfolios,withtheaimofhelpingtheCommitteetodeepenitsanalysisofthevariationinriskmeasurementoftradingbooksacrossbanks.

Executivesummary

Keyfindingsoftheanalysis

TheanalysisofpublicreportsonmRWAs,andthehypotheticaltestportfolioexercise,providedaclearpictureofsubstantialvariationinmRWAsacrossbanks.

Basedonpublicreports,theanalysisshowsconsiderablevariationinaveragepublishedmRWAsfortradingassetsandprovidessomeindicationthatdifferencesinthecompositionandsizeoftradingpositionsarecorrelatedwithbanks’averagemRWAs.

However,thequalityofdisclosureswasfoundtobeinsufficienttoallowinvestorsandotherinterestedpartiestoassesshowmuchofthevariationreflectsdifferinglevelsofactualriskandhowmuchisaresultofotherfactors.

Thehypotheticaltestportfolioexerciseindicatedthat,usingahypotheticaldiversifiedportfolioconsistingprimarilyofsimplelongand

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

  • P age |12

  • shortpositions,therecanbeasubstantialdifferencebetweenthebankreportingthelowestmRWAsandthebankreportingthehighest.

  • Thisoutcomeisattributedtoarangeoffactors:

  • Asizeableportionofthevariationisduetosupervisorydecisions

  • appliedeithertoallbanksinajurisdiction,ortoindividualbanks.

  • Anexampleoftheformerwouldbepolicydecisionstorestrictmodelling options(egtodisallowanydiversificationbenefitbetweentypesofrisk).

  • Anexampleofthelatterwouldbetheapplicationofsupervisorymultipliers:aroundone-quarterofthetotalvariationinthehypotheticaldiversifiedportfoliocouldbeattributedtothissinglefactor.

  • ThesesupervisoryactionstypicallyresultinhighercapitalrequirementsthanwouldotherwisebethecasebutcanalsoincreasethevariationinmRWAbetweenbanks,particularlyacrossjurisdictions.

  • Thesesupervisoryactions,particularlyatanindividualbanklevel,areoftennotdisclosed.

  • Anotherimportantsourceofvariationisduetomodellingchoicesmadebybanks.

  • Theexercisefoundthatasmallnumberofkeymodellingchoicesarethemaindriversoftheremainingmodel-drivenvariability.

  • ItisimportantpointingoutthattheBaselstandardsdeliberatelyallowbanksandsupervisorssomeflexibilityinmeasuringrisksinorderto accommodatefordifferencesinriskappetiteandlocalpractices,butwiththegoalofalsoprovidinggreateraccuracy.

  • SomevariationinmRWAshouldthereforebeexpected.

  • Inaddition,fromafinancialstabilityperspective,itisdesirabletohavesomediversityinriskmanagementpracticessoastoavoidthatallbanksactinasimilarway,whichpotentiallycouldcreateadditionalinstability.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |13

Atthesametime,excessivevariationinriskmeasurementisundesirable.Thisstudydidnotseektodeterminewhattheoptimallevelofvariation

shouldbe,butthepreliminaryfindingshighlightpotentialpolicyoptions

thatcanbeconsiderediftheCommitteewishedtonarrowthepotentialforvariationinthefuture.

Thesepolicyoptionscomplementimportantpolicyinitiativesthatarealreadyunderway,includingworkondisclosures–notablyasrecommendedbytheEnhancedDisclosureTaskForce(EDTF)–andthefundamentalreviewofthetradingbook.

Furtherdetailoftheabovefindingsandthepotentialpolicyoptionsaresetoutinthereport.

Analysisofpubliclyavailabledata

TheanalysisofpubliclyavailabledatashowssignificantdifferencesacrossindividualbanksinthesizeofregulatorymRWAsrelativetotradingassets.

Acrossthebanksinthesample,theaverageriskweightingoftradingassetsvariesfromaround10%tonearly80%,withmostbanksbetween15%and45%.

Suchdifferencescouldbejustified,providedthattheyaredrivenbydifferencesinactualrisktakingandbusinessmodels.

Inthisregard,thepublicdataprovidessomeindicationthatdifferencesinthecompositionandsizeoftradingpositionsarecorrelatedwithmRWAs.

Forexample,bankswithagreaterproportionofilliquidtradingassets,includingholdingsofdistresseddebtandilliquidequity,tendtoreportslightlyhigheraverageriskweightingoftheirtradingassets.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |14

However,thiscorrelationdoesnotfullyexplainvariationsacrossbanksandtheobservationsarebasedononlyasmallsubsetofbanks.

So,whilethereissomeevidencethatvariationsinmRWAscanbe explainedbyactualrisktaking,thereareindicationsthataconsiderablepartofthevariationcannotbeexplainedbythatfactor.

Instead,theanalysissuggeststhatotherfactorsmayalsobedrivingtheobservedvariationsacrossbanksandjurisdictions:

Differencesinsupervisoryapproachesandrequirements,contributingtodifferencesinthelevelsofrelianceontheinternalmodelsapproach,aswellasanasynchronousadoptionofBasel2.5.

Forexample,duringtheperiodunderreview,nineoutof16banksinthesampleweresubjecttoBasel2.5.

TheremainingsevenbanksbecamesubjecttoBasel2.5standardson1January2013.

Differencesinmethodologiesandmodellingchoicesformarketriskregulatorycapitalcalculations.

Forexample,thecurrentBaselframeworkallowsbankstochoosedifferenthistoricaldataperiodsforvalue-at-risk(VaR)orusedifferentmethodstoarriveataregulatorycapitalfigure.

Analysingpublicdatarequirestakingintoaccountdifferencesinaccountingregimestoallowforappropriatecomparisonacrossjurisdictions.

Forexample,animportantdifferenceconcernsthenettingofderivatives.

Nettingcanleadtomaterialdifferencesinthewaytradingassetsaremeasuredandaccountingregimesdifferregardingthedegreeofnettingpermitted.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |15

Totheextentpossible,thepublicdatausedinthisreportisadjustedforthedifferencesinnettingacrossaccountingregimes.

Otheraccountingdifferencesthatmayplayarole,suchastherulesforclassifyingassetsintotheaccountingtradingbook,couldnotbecorrectedforandsomeofthevariationinmRWAsrelativetotradingassetsmaystemfromthesedifferences.

Lookingmorecloselyatthefindings,andinparticulardriversofvariation notrelatedtorisk,theanalysisindicatesasignificantdisparityinrelianceoninternalmodels.

TheportionofmRWAsthatiscalculatedwithinternalmodelscanrangefromapproximately10%tonearly80%forthesampleofbanksacrossjurisdictions.

BeforetheimplementationofBasel2.5,thegreateruseofinternalmodelswouldtendtoresultinloweraveragemRWAsduetotherecognitionofdiversificationandnettingbenefits.

However,withtheimplementationofBasel2.5thisrelationshipmaybe reversingasbankswithinternalmodelsarenowrequiredtocapitaliseforsVaR(stressedvalue-at-risk),IRC(incrementalriskcharge)andCRM(comprehensiveriskmeasure)underthenewregime,resultinginhigherobservedlevelsofmodelledcapitalchargesincomparisontopriorperiods.

OtherfactorsthatcouldexplainvariationinmRWAsincluderegulatoryandinternalcapitaladd-onsandtheuseofregulatorymultipliershigherthantheminimumof3,whichareappliedatthediscretionofsupervisorsasageneralincentivetoimprovemodelsandriskmanagementsystems.

Thisinformationis,however,nottransparentinpublicdisclosuresanditsimpactcouldnotbeexaminedusingpubliclyavailabledata.

Instead,thehypotheticaltestportfolioexerciseallowedexaminationoftheimportanceoftheregulatorymultiplierinmoredetail,theresultsofwhicharepresentedinChapter2.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |16

Asasecondstep,theCommitteeconsideredusingsupervisorydata,butitwasfoundthatthestructureandcontentofperiodicsupervisoryfinancialreportsoutliningtheconditionandincomeoffinancialinstitutionsisdisparateacrossjurisdictions.

Thisdisparityresultedindeemingtheutilityofpublicsupervisorydataasrelativelylowwhenattemptingtoperformacross-jurisdictionalcomparisonofmRWAsandtheunderlyingdrivers.

Fromthebeginningoftheanalysis,itwasunderstoodthatpublic disclosureshavehistoricallynotprovidedstakeholderswithenoughinformationtoappropriatelyassessandcomparemRWAsandregulatorycapitalacrossbanksandjurisdictions.

Theobservationsinthisreportcorroboratethatfinding,asthefullscopeofmRWAdispersionacrossbankscouldnotbefullyexplainedbypubliclyavailableinformation.

Whilesomebanksprovidemoredetaileddisclosurethanothers,ingeneralpublicdisclosuresdidnotprovidesufficientlygranularinformationtoestablishconclusivelywhatisdrivingthedifferences.

Hypotheticaltestportfolioexercise

DuetothelimitationsencounteredwhenattemptingtousepublicandsupervisorydatatoinvestigatevariabilityofmRWAs,ahypotheticaltestportfolioexercisewasundertakentoinvestigatethelevelofvariabilityofmRWAsstemmingfrominternalmodels.

Atotalof15internationallyactivebankswithsignificanttradingassetsparticipatedinthisexercise.

Followingthereceiptoftheresults,nineoftheparticipatingbanksreceivedanon-sitevisitbyaninternationalteamofsupervisors.

ThesevisitsallowedtheCommitteetobetterunderstandthemodellingchoicesandotherfactorsthatmightunderlietheobserveddifferencesin

resultsforeachportfolio.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

  • P age |17

  • Themodellingofindividualpositionsexhibitedwidevariationsinsomecases,butthisreducedasportfoliosbecamemorediversified(andmorerealistic).

  • Thissuggeststhewidevariationfornarrowly-focusedportfoliosdidnotcompoundasadditionalpositionswereadded,butratherwasreducedasidiosyncraticissuesbecamelessprominent.

  • Furthermore,fromaregulatorycapitalperspective,theresultfortheaggregateportfolioisthemostimportant,asitisatthethislevelthatregulatorycapitalrequirementsaregenerallydetermined.

  • Thehigh-levelresultsoftheexercisehighlighttwomainsourcesofdifferencesinmRWAs:

  • Differencesinthemodelchoicesmadebybanks,and

  • Differencesinsupervisorypractices,includingtheuseofsupervisorymultipliers.

  • Thesesourcesofdifferenceswerealsoindicatedintheanalysisofpublic data.

  • IntheexerciseforahypotheticaldiversifiedportfoliotherewasasubstantialdifferencebetweenthebankreportingthelowestmRWAsandthatreportingthehighest.

  • Ofthis,aroundone-quarterwasduetosupervisorymultiplieralone:

  • Variationcausedbybanks’modelchoices:Thecurrentmarketriskrequirementsallowflexibilityforbankstomakeavarietyofchoiceswhen developinginternalmodels.

  • Thehypotheticaltestportfolioexercise,andsubsequenton-sitevisits,allowedthegrouptoidentifythemostimportantmodelchoicesthatdrivevariationinmRWAs.

  • OneimportantobservationisthatthereisgenerallymorevariabilityinmRWAsfromthenew,morecomplex,IRCmodelsthanVaRandsVaR

models.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

  • P age |18

  • Supervisorsmayalsoinfluenceoutcomesherebydetermining,withintheirnationalframeworks,theextentofmodellingoptionsavailabletobanks.

  • Variationcausedbydifferencesinsupervisorymultipliers:WhencalculatingmRWAsfromVaRandsVaRmodels,theresultsofmarketriskinternalmodelsareconvertedtoacapitalrequirementbyapplyingamultiplier.

  • Themultiplierisatleast3,butcanbehigheratthesupervisor’sdiscretion.

  • Intheexercise,significantvariationwasobservedinthemultiplierstobeappliedtotheoutputofbanks’modelsandthisvariationhasadirectimpactonvariabilityofreportedmarketriskcapitalrequirements.

  • Themultipliersfortheparticipatingbanksintheexerciseshoweda considerablerange,from3to5.5.

  • Keymodellingchoicesthatdrivevariability

  • Thetestportfolioexerciseprovidedclearevidencethatdifferencesinmodellingchoicescanbeveryimportantdriversofvariabilityacrossbanks.

  • Thegroupwasabletoidentifythemostimportantmodellingchoicesthatdrivevariationinoutcomes:

  • ForVaRandsVaRmodels:

  • Lengthofdataperiodforcalibratingandtheweightingschemeapplied;

  • Aggregationapproachacrossassetclassesandacrossspecificandgeneralrisk;

  • Thechoiceofwhethertoscaleaone-dayriskestimatetoa10-day

measureorestimateriskover10daysdirectly;and

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

  • P age |19

  • 4.Approachtochoosingstressperiod(forsVaR)andtheresultingstressperiodcalibration.

  • ForIRCmodels:

  • Theoverallmodellingapproach(theuseofspread-basedmodelsortransitionmatrix-basedmodels);

  • Calibrationofthetransitionmatrixandtheinitialcreditratingassignedtopositions;and

  • Correlationassumptionsacrossobligors.

  • InadditiontohighlightingthelevelofvariationofmRWAsfrominternalmodels,andthemostimportantmodellingchoicesdrivingthevariability,theexercisehighlightedadirectrelationshipbetweencomplexityofriskmetric/productandtheassociatedvariabilityofthemetricacrossbanks.

  • TherelativelymorecomplexIRCmodelsintheexercisedisplayedmuchmorevariabilitythanVaRandsVaRmodels,andportfolioscontaininglesssimpleproductsalsotypicallyshowedmorevariabilityinresults.

  • ThissuggestsconsideringasecondphaseofanalysistoexplorespecificmethodologicalissuesrelatedtomorecomplexproductsandCRMmodels.

  • Whilsttheexercisehighlightedthatsomemodellingchoicesaremoreconservativethanothers,inmostcasesthisresultisduetothenatureoftheportfoliostested(hypotheticalportfoliosmadeofsimplelongandshortpositions)andeachchoicecouldbeaggressiveorconservativefordifferentportfoliosandmarketconditions.

  • Forexample,ashortdatasetwilltendtoproduceamoreconservativeoutcomeinperiodsofhighvolatility,butalessconservativeoutcomeduringperiodsofverylowvolatility.

  • Theimportantresultisthehighlightingoftheareasofflexibilityinrulesthatdrivevariationratherthanwhichchoiceisthemostprudent.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |20

Potentialpolicyissuesforfutureconsideration

Asnotedabove,theanalysisshowsthereisaconsiderablevariationinaveragemRWAsfortradingassetsandthatonlyapartofthedifferencescanbeexplainedbyvariationinactualrisktakingorbusinessmodels.

WhilesomeamountofvariationinmRWAsisexpectedinanyregime basedoninternalmodelsandviewsmaydifferastowhatisanacceptableamountofvariation–todevelopa“variationbenchmark”wouldrequirefurtheranalysiswhichwasbeyondthescopeofthisreport–thefindingsin thisreportsuggestadirectionforfuturepolicyworkthatcouldnarrowdownthepotentialvariationinoutcomes.

Theanalysishighlightsthreepotentialtypesofpolicyoptionsthatcould beconsideredinthefuture:

ImprovementofpublicdisclosureandregulatorydatacollectiontoaidtheunderstandingofmRWAs;

Narrowingdownthemodellingchoicesforbanks;and

Afurtherharmonisationofsupervisorypracticeswithregardtomodelapprovals(toreducethelevelofvariationinmRWAs).

AsecondphaseofanalysismayresultinexploringfurtherpotentialtypesofpolicyoptionstoaddressspecificmethodologicalissuesrelatedtomorecomplexproductsandCRMmodels.

Atthisstage,thefollowingsuggestionsforpolicyoptionsshouldnotbeseenascomprehensive,noraspre-emptinganyspecificpolicymeasures,butratheraspotentialdirectionsforfutureworktobeconsideredbytherelevantBaselCommitteeworkinggroups.

Furthermore,thepotentialpolicymeasuresshouldnotbeseenasmutuallyexclusive:somecombinationofthethreecouldbeappropriategoingforward.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |21

Itshouldalsobenotedthatthereareimportanttrade-offsbetweenmodel harmonisationandtheusetestrule.

Strictharmonisationofinternalmodelsmaymakeitmoredifficulttoimplementthe“usetest”rule,iearequirementforbankstonotjustdevelopmodelstosatisfyregulators,butalsotousethosemodelsintheirinternalriskmanagement.

Furthermore,modelsharmonisationmayhavepro-cyclicaleffectsstemmingfromahighcorrelationbetweenbanks’capitaladequacyrequirements.

Improvingpublicdisclosure

Regardingpublicdisclosures,thepotentialpolicyoptionsshouldbeseeninthebroadercontextoftheregulatoryandindustryworkonpublic disclosures,notablybytheCommittee’sWorkingGrouponDisclosureandtheEnhancedDisclosureTaskForce(EDTF),whichhasrecentlypublisheditsreportonpublicdisclosurebybanks.

ThefindingsinthisanalysissupporttherecommendationsandproposalsintheEDTFreporttoenhancethepublicdisclosureofregulatoryRWAsformarketriskandpromotefurtherworkonPillar3disclosurerequirementsformarketrisk.

Basedontheresultsofthisanalysis,disclosurescouldbeimprovedbyincludingmoregranularinformationregardingthecomponentsofmRWAs,theVaRandothermarketriskmodelsusedforregulatorycapitalpurposes.

WhenperformingthecrossjurisdictionalcomparisonofmRWAstheCommitteefoundingeneralthatdisclosurescouldbecleareronthedriversofmarketrisk,beoutlinedmoreconsistentlyacrossjurisdictions,beprovidedonamoretimelyandconsistentbasis,andprovidemorerelevantinformationtotheirusersthatisbasedoninformationpresentedtomanagement,riskcommitteesandboardsofdirectorsfordecisionmakingpurposes.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |22

Suggestionsforimprovingthequality,contentandconsistencyofdisclosuresrelatedtomRWAsthatcouldbeconsideredincludethefollowing:

Commonstandardsforthefrequencyofreporting–lessthanhalfofthebanksinthesamplereportedinformationonaquarterlybasis;

CommonstandardsforexplanationsofthedriversofthechangeinmRWAsfromperiodtoperiod;

AmoregranularandconsistentsegmentationofthecomponentsofmRWAstofacilitateadeeperrecognitionofabank’smarketrisks;

Disclosureofkeymodellingchoices,particularlythosehighlightedbythehypotheticaltestportfolioexerciseasdrivingthegreatestvariationintheresultsofmodels;and

Disclosureofkeydifferencesinmodelsusedforinternalriskmanagementandthoseusedforregulatorycapitalcalculations.

Itwasfoundthatbanksseldomdirectlyreportthe10-day99%VaRusedinregulatorycapitalcalculations.

ThesesuggestionsarecloselyinlinewiththeearlierEDTF’srecommendations.

Anotherpotentialareaforfuturepolicyworkconcernsharmonisationand/orconsistencyofthecontentandaccessibilityofsupervisoryandregulatoryreportsacrossjurisdictions.

Narrowingdownbanks’modellingchoices

Futurepolicyworkthatmightconsidernarrowingdownthemodellingchoicesforbanks,andthereforereducevariability,needstoconsiderthebroadercontextofthefundamentalreviewofthetradingbook,whichiscurrentlybeingundertakenbytheBaselCommittee’sTradingBookGroup.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

  • P age |23

  • ThisworkreflectstheCommittee’sincreasedfocusonachievingaregulatoryframeworkthatcanbeimplementedconsistentlybysupervisorsandwhichachievescomparablelevelsofcapitalacrossjurisdictions.

  • Whiletheremaybepracticallimitstonarrowingthemodellingchoicesforbanksunderaninternalmodels-basedapproach,thelistofmodellingchoicesthatwerethestrongestpotentialdriversofvariability,setoutabove,providesareasforconsiderationtodirectlyreducevariability,for example:

  • CloselydefiningthemodellingapproachfortheIRCmodel,includingtheassumptionsusedformigrationanddefaultprobabilitiesandthecorrelationstructure;

  • ReducingtheflexibilityinchoosingthelengthofhistoricaldatatocalibrateVaRmodels;and

  • Definingasinglescalingapproachtoobtaina10-dayVaRandsVaRmeasure.

  • Theseareascanbeconsideredinadditiontopolicyoptionswhichalreadyformpartofthefundamentalreviewofthetradingbook,namely:

  • Strengtheningtherelationshipbetweenstandardisedapproachesandinternalmodelstobeabletobenchmarkinternalmodelresults;

  • MovingfromseparateVaRandsVaRbasedmeasurestoasingleExpectedShortfallbasedmeasure;and

  • Enhancingregulatoryoversightthroughamoregranularapprovalprocessofinternalmodels.

  • Furtherharmonisingsupervisorypractices

  • Another,potentiallycomplementary,approachtoaddressthevariabilityacrossmodeloutcomesindirectlywouldbetodevelopadditionalsupervisoryguidanceforupholdingconsistentmodelstandardsandapprovingtheuseofmodels,includingtheuseofsupervisorymultipliers.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |24

Othermorestructuralchangescouldincludecreatinganinternationalteamthatactivelymonitorsinternationalmodellingstandards.

Inthisregard,increasedsupervisoryscrutinyofmodelscouldaddresssomeofthedriversofvariationthathavebeenidentified.

Atthesametime,itshouldbenotedthattheBaselframeworkincertainareasallowsforsupervisorydiscretiontoappropriatelyreflectdomesticcircumstances.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |25

GovernorElizabethA.Duke

AttheSoutheasternBankManagementandDirectorsConference,UniversityofGeorgia,TerryCollegeofBusiness,

Duluth,Georgia

TheFutureofCommunityBanking

IwouldliketothanktheTerryCollegeof BusinessattheUniversityofGeorgiafortheopportunitytodiscussthefutureofcommunitybankingatthisannualconferenceforbankofficersanddirectors.

Communitybanksplayanimportantroleinournation'sfinancialsystem,andIbelievethatthefutureofcommunitybankingisbright.

Butthatisnottosaythatitwillbeeasy.

Success,asalways,willrequireenergeticandengagedmanagersandboardmemberswhoaresensitivetothefinancialneedsoftheircommunities,vigilanttoeconomicconditions,andadaptivetochangingregulatoryrequirements.

Ihearfromalotofcommunitybankerswhoareconcernedthatthe

communitybankingmodelmightnotsurvive.

Manypaintapicturesobleakthattheyseeonlypersonalretirementorsaleofthebankasviablestrategies.

Icompletelyunderstandhowtiringitistofightafinancialcrisisandsurviveadeeprecessionfollowedbyaweakrecoveryonlytoconfrontwhatseemstobeatsunamiofnewregulations.

Ifeltallofthosesameemotionsin1991.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |26

Iwasacommunitybankerthen.

Wehadsurvivedthesavingsandloancrisiswithsomebruises,butwewerestillstanding.

TheFinancialInstitutionsReform,RecoveryandEnforcementActof1989(FIRREA)hadbeenfollowedbytheFederalDepositInsuranceCorporationImprovementAct(FDICIA)in1991.

IhadmorenewregulationsstackedonmydeskthanIhademployeesin thebank.Mybankhadjustreachedthe$100millionmarkintotalassetsthroughthepurchaseoftwobranchesfromafailingthrift.

Evenmoredauntingformepersonally,wasthesuddendeathofmybank'schiefexecutiveofficer(CEO),leavingmeasthenewCEO.

Frankly,Ididn'tknowhowIwasgoingtotackleallthatlayinfrontofus.Butthosedarkdaysin1991werefollowedby15yearsofexceptionallystrongperformanceforallbanks,includingmyown.

Andthoseexperiences--thegoodandthebad--givemeconfidencein predictingabrightfutureforcommunitybankingtoday.

Justastheseedsofacrisisareoftensowninearlierboomtimes,strengthcanbeforgedduringthetoughtimesthatfollowacrisis.

Aswedidintheearly1990s,bankersandregulatorstodayhavelearnedfromthelessonsofthecrisisandaredeterminednottorepeatthemistakesofthepast.

Creditmetricsarenowimprovinginmostbanksasproblemloanshavebeenaddressedandresolvedandnewcreditunderwritinghasbeenquite restrictiveforanumberofyears.

Depositgrowthhasoutpacedloandemandandrelianceonwholesalefundinghasbeenreduced.Capitalpositionsarestronger.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |27

Theinterestmarginpressurebanksfacetodayispartlyduetolowinterestratesandpartlyduetoweakloandemand,bothofwhichareconsequencesofasluggisheconomy.

Astheeconomicrecoverygainsmomentum,however,bothoftheseconditionsshouldreverseandgivebankerstheopportunitytodeploytheliquidityandcapitaltheyhaveamassedtothebenefitoftheirshareholdersandtheirlocaleconomies.

CommunityBankersAreBeingHeard

Evenastheyanticipateeconomicrecovery,however,communitybankersworrythattheburdenofnewregulationsmayinhibittheirabilitytolendintheircommunitiesorprohibitivelyincreasethecostsofsuchlending.

Wecertainlyunderstandthisconcern.

FederalReserveresearchovertheyearshasconfirmedthattheburdenof regulationsfallsdisproportionatelyonsmallerbanks.

SupervisorsattheFederalReserveBankofMinneapolishaverecentlytriedtoquantifythiseffect.

Todoso,theyusedsurveydatatoestimatetherelativenumberofnew employeesthatbanksofdifferentsizesmightneedtohireinresponsetothesameregulatoryrequirement.

UsingCallReportdatafrom2011,theyestimatedintheirpreliminaryanalysisthathiringoneadditionalemployeewouldreducethereturnonassetsby23basispointsforthemedianbankinthegroupofsmallestbanks,thosewithtotalassetsof$50millionorless.

Toputthisestimateinperspective,suchadeclinecouldcauseabout13percentofthebanksofthatsizetogofromprofitabletounprofitable.

Asacomparison,giventhesameincreaseinregulation,theyassumebanksbetween$500millionand$1billionwouldhirethreeemployeesand

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |28

experienceadeclineofabout4basispointsinreturnonassetsforthemedianbank.

Whilethisisstillasignificanteffect,veryfewbanksinthisgroupwouldgofrombeingprofitabletounprofitableasaresultoftheregulatoryburden.

Regulatoryoverreactiontoacrisisisalwaysarisk.

Butthistime,Ithinkcommunitybankershavebeenmoresuccessfulthantheyrealizeinmakingthecaseagainst"one-size-fits-all"regulation.

Ican'trememberatimewhenIhaveseenmoreregulatoryproposalsdraftedthatdifferentiatebetweenbanksbasedonsizeorcomplexity.

Iurgeyoutocontinuetoidentifytheregulatoryrequirementsthatarethemostoneroustoyourbusinessmodel,andcontinuetosuggestalternativestoachievethoseregulatoryobjectivesinalessintrusiveway.

Infact,mostoftheregulationsrequiredbytheDodd-FrankWallStreetReformandConsumerProtectionAct(theDodd-FrankAct)aredirectedprimarilyatlarger,systemicallyimportantbanks,andmanyoftheAct'sprovisionsspecificallyexemptcommunitybanks.

Forexample,bankswithlessthan$10billionintotalassetswereexemptedfromanumberofthedebitinterchangerestrictions,andearlystudiesindicatethatthoseexemptionsareworking.

Inaddition,formalstresstestingwasrequiredonlyforbankswithtotalassetsof$10billionormore.

Inimplementingtheserequirementsforthelargerbanks,thebankregulatoryagenciesspecificallyindicatedthatcapitalstresstestingwouldnotberequiredforcommunitybanks.

Thisdoesnotmeanthatcommunitybanksareexemptedfromprudentriskmanagement,butratherthatsmallerbanksshouldthinkaboutthenegativeshocksthatcouldaffecttheirbusinessinthefutureandtailor

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |29

theirrisk-managementprocedurestotherisksandcomplexitiesoftheirindividualbusinessmodels.

TheConsumerFinancialProtectionBureau(CFPB)recentlyreleasedfinalrulesdefining"qualifiedmortgages"thatincludesafeharborsformortgagesthatmeetspecificloantermandpricingcriteria,includingcertainballoonloansmadebycommunitybanksinruralorunderservedareas.

Atthesametime,theyissuedanewproposalthatcontainsadditionalcommunitybankexceptions,aswellasaquestionaboutthetreatmentofloanstorefinanceballoonpaymentsonmortgagesthatcommunitybanksmayalreadyhaveontheirbooks.

Notingthatsmallerinstitutionshavealreadydemonstratedthattheygenerallydoagoodjobofservicingtheloanstheyoriginateandthattheinvestmentsnecessarytomeettherequirementswouldbeundulyonerousforinstitutionsthatserviceasmallnumberofloans,theCFPBalsoexemptedmostcommunitybanksfrommanyoftheprovisionsofnewservicingrequirements.

Ithinksuchexceptionsareespeciallyimportantbecause,asIdiscussedinarecentspeechandwilltouchuponlaterinmyremarks,FederalReserveresearchhasshownthat

Communitybanksareimportantlendersinthemortgagemarket,

Thosemortgageloansrepresentasignificantportionofcommunitybanklending,and

Communitybanksarequiteresponsibleintheirpractices.

AttheFederalReserve,wehaveformalizedourprocessforconsideringtheuniquecharacteristicsofcommunitybanksaswecraftregulatoryandsupervisorypolicies.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |30

Afewyearsago,wecreatedasubcommitteeoftheBoard,whichIchair,thatmakesrecommendationsaboutmattersrelatedtocommunitybanksupervisionandregulation.

Thissubcommitteereviewsallregulatoryproposalsandsupervisoryguidancewithaneyetowardthepossibleeffectsoncommunitybanks.

RememberingthedayswhenIhadtofindtimetoreadallthosenewregulationsstackeduponmydesk,Ihaveinsistedthatallnewproposalsandrulesstartwithaclearstatementoftheirapplicabilitytocommunitybankssothatbankerscanspendtheirtimeontherulesandguidancethatapplytothem.

Thisapproachwasputintopracticeinadifferentwaylastyear,whenthebankingagenciesissuedproposalsforcapitalregulationsthatincorporatedrequirementsoftheDodd-FrankActandtheBaselagreement.

Tohelpcommunitybanksidentifytheprovisionsthataffectedthemandsubmittheircommentsmoreeasily,theproposalincludedashortsummaryoftheprovisionsthatweremostlikelytoaffectcommunitybanks.

Wereceivedmorethan2,000comments,manyfromcommunitybanks,andwearereviewingthem.

It'stooearlyintheprocesstoknowhowweandtheotheragenciesaregoingtoaddresstheissuesraised,orwhenfinalrulesmaybereleased.

ButwhatIcanpromiseisthatbeforeweissuefinalcapitalrules,wewilldoeverythingpossibletoaddresstheconcernsthathavebeenexpressed bycommunitybankersandstillachievethegoalofhavingstronglevelsofhigh-qualitycapital--builtupoverareasonableandrealistictransitionalperiod--inbanksofallsizes,includingcommunitybanks.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |31

CommunityBankResearch

Tohelpusbetterunderstandcommunitybankissues,oursubcommitteeestablishedaninformalworkinggroupofeconomistsfromboththe researchandsupervisionfunctionsintheFederalReserveSystem.

Thegroupisfocusedonunderstandingthefactorsthatinfluencetheviabilityandperformanceofcommunitybanksincluding,importantly,theeffectofregulatorychangesandtheirassociatedcostsandbenefits.

MembersofthisworkinggroupareexploringanumberofinterestingtopicsthatIhopewillhelpustobetterunderstandtheissuesthataffectcommunitybanksand,whereappropriate,haveapracticalimpacton howwesupervisethesebanks.

DeterminantsofCommunityBankProfitability

Forexample,arecentstudyundertakenbytwoFederalReserveBoardeconomistsexploresthedeterminantsofcommunitybankprofitabilityfrom1992through2010.

Thefindingsindicatethatanumberofbankcharacteristicsarestronglycorrelatedwithperformance,includingrelativebanksize,portfoliocomposition,andmanagementquality.

Withinthegroupofbankswithlessthan$1billionintotalconsolidatedassetsincludedinthisstudy,largerbanksizeisassociatedwithsignificantlyhigherprofitability.

Communitybankswithhigherportfoliosharesofrealestateloansearnsignificantlylowerprofits,whilethosewithhigherportfoliosharesofconstructionloansearnhigherprofitsthroughmostofthestudyperiod.

But,perhapsnotsurprisingly,thelatterrelationshipdoesnotholdfor2008through2010,whengreaterrelianceonconstructionlendingisassociatedwithlowerprofitability.

Managerialquality,asmeasuredbythemanagementcomponentofthebanks'regulatoryratings,isstronglyrelatedtobankprofitability.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |32

Moreover,thestrengthoftherelationshipincreasesduringandimmediatelyafterthefinancialcrisis,confirmingthatmanagementqualityisparticularlyimportantduringtimesofeconomicstress.

Factorsoutsidethecontrolofbankmanagement,however,arealsoimportantlyrelatedtoprofitability,particularlyoverthepastseveralyears.

Forinstance,itisnotsurprisingthatcommunitybanksoperatinginmarketsexperiencinghighunemploymentrateshavebeenlessprofitablesincethefinancialcrisis.

Perhapslessobviousisthatinurbanmarkets,communitybankprofitabilitytendstodecreaseasthesizeofthemarketincreases.

Onemightsuspectthatthisrelationshipderivesfromamorecompetitivelandscapeinlargerurbanareas;however,norelationshipbetweenmarketconcentrationandprofitsisevidentinurbanmarkets.

Incontrast,inruralareas,highermarketconcentrationisassociatedwithhighercommunitybankprofitabilitythroughoutmostofthestudyperiod.

Inaddition,thestudyfindsthatcommunitybanksoperatinginruralmarketsconsistentlyearnhigheraverageratesofreturnthandocommunitybanksoperatinginurbanmarkets.

Inaseparateanalysisofdepositmarketcompetitionthatmayformthebasisforanewresearchpaper,oneresearcherhasdocumentedthecompetitivestrengthofcommunitybanks,especiallyinruralmarkets.

Althoughthenationwideshareoftotaldepositsheldbybankswithassetslessthan$10billionhasdeclinedoverthepastdecade,inruralmarkets,theirdepositmarketsharehasincreasedslightly.

Moreover,bankswithassetslessthan$10billionretainedtheirshareofruralmarketdepositsthroughouttherecentrecessionandrecovery.

Atamoremicrolevel,bankswithassetslessthan$10billiongainedmarketshareinmorethantwo-thirdsofruralbankingmarketsandin nearlyhalfofurbanmarketsbetween2003and2012.

Expansionofdepositinsuranceduringthecrisislikelyhelpedallbanksretaindepositsandmayhavechangedcompetitionsomewhat.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |33

Depositinsurancehasnowbeenpermanentlyincreasedfrom$100,000to

$250,000perdepositor,buttheunlimiteddepositinsurancefornoninterest-bearingtransactionaccountswasallowedtoexpireattheendof2012.

Wearewatchingdepositmovementcarefully,butsofarhaveseenlittleevidenceofdepositsmovingoutofthebankingsystemor,assomehadfeared,movingfromsmallerbankstolargerbanksperceivedas"toobigtofail."

Myownexpectationisthat,givenalloftheenhancedregulatoryrequirementsthatapplytolargerbanks,thoselargerbankswillfocustheireffortsonlargeurbanmarketsandthatcommunitybankswillbeevenmorecompetitiveandmorevitaltotheeconomicwell-beingofrural,suburban,andsmallurbanmarkets.

CharacteristicsofThrivingCommunityBanks

ResearchersattheFederalReserveBankofSt.Louistookadifferentapproachtomeasuringcommunitybanksuccess.

Studyingbankswithtotalassetslessthan$10billion,theresearchersattemptedtoidentifythedifferencesbetweenbanksthattheyclassifiedas"thriving"andthosethattheyclassifiedas"surviving."

Bankswereidentifiedas"thriving"iftheymaintainedthehighest supervisoryrating,acompositeCAMELS"1,"continuouslyfrom2006throughtheendof2011.

Approximately700banksmetthiscondition.

Theroughly4,500banksinthestudythatdidnotqualifyasthrivinganddidnotfailormergeoutofexistenceduringtheperiodwereclassifiedas"surviving."

Aftercategorizingthebanks,thefirstphaseofanalysislookedatthelocationandsizeofthethrivingbanks.

Thrivingbankswerefoundin40ofthe50statesbutwereconcentratedinstateswithlargereconomiccontributionsfromagricultureandenergy,whichhelduprelativelywellduringthedownturn.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |34

ThefewestthrivingbankswerefoundontheWestCoastandintheSoutheast,whererealestatevaluesfellthemost.

ThispatternisconsistentwithpreviousFederalReservestudies,whichfoundthatbankperformanceisheavilyaffectedbythelocaleconomy,butIthinkitisimportanttonotethateveninstateswithhighunemploymentratesorsharpdeclinesinpropertyvalues,somecommunitybankswereabletothrive.

TheSt.Louisstudydidnotfindthethrivingbankstobeconcentratedinanyparticularsizerange.

Manyhadtotalassetslessthan$50millionasofDecember2011,butothershadtotalassetsbetween$1billionand$10billion.

Andthrivingbanksdidmorethanjustratewellwithsupervisors--thethrivingbanksoutperformedthesurvivingbanksonawiderangeofperformanceindicators,includingreturnonassets,returnonequity,loanlosses,provisionexpense,efficiencyratio,assetgrowth,netinterestmargin,andnetnoninterestmargin.

Lookingatbalancesheetstructure,whentheresearcherscomparedthecharacteristicsofthrivingbankswithsurvivingbanks,theyfoundthatthethrivingbankshadlowerlevelsofloans-to-total-assetsandweremorereliantoncoredeposits.

Thrivingbanksalsohadlowerconcentrationsincommercialrealestate(CRE)lendingandmuchlowerconcentrationsinconstructionandland developmentloans.

Instead,thrivingbankswereslightlymoreconcentratedinone-to

four-familymortgageloansheldinportfolio,aswellasconsumerloans.

Despitetheseoverallbalancesheetfindings,theresearchersalsonotedthewidediversityofbusinessmodelsthattheyfoundamongthethrivingbanks.

Recognizingthatalargepartofgoodperformancecomesfromfactorsthataremoredifficulttomeasurestatistically,theresearchersexaminedasampleofcommentsinexaminationreportsandfoundthatthrivingbanksbenefitedfromastrongandlocalizedcustomerservicefocuswith

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |35

highvisibilityinthecommunity,conservativeunderwriting,andproductsthatwereprofitableandmetcustomerneeds.

Theysupplementedtheirreviewofexaminationreportsbyinterviewingmanagementatsomeofthethrivingbanks.

Thebankerstheyinterviewedattributedtheirsuccesstostrongtiestothecommunity,relationshipbanking,conservativeunderwriting,andafocusonproductsandmarketstheyunderstood.

TheseresultswerestrikinglysimilartotheresultsofinterviewsinseparatestudiesattheFederalReserveBankofKansasCity10andtheFederalReserveBankofRichmond.

Thesestudiesconfirmwhatexperiencehasalreadytaughtme:Communitybanksthathavedeeptiestothecommunity,engagedmanagersanddirectors,conservativeunderwriting,andstrongriskmanagementcannotonlysurvive,butthrive,eveninadverseconditions.

UsingResearchtoShapeSupervisoryGuidanceonLending

WhilemuchofourregulatoryworkrecentlyhasinvolvedimplementingtherequirementsoftheDodd-FrankAct,wearealsocontinuingtoreviewthelessonswelearnedduringthecrisisandtheresultsofourrecentresearch.

Inmostcases,thisworkismorelikelytoresultinsupervisoryguidancethanregulation.

Supervisoryguidanceiscommonlyviewedasameanstorestrictactivitybut,infact,duringthecrisismuchoftheguidanceweissuedactuallydirectedbankersandbankexaminerstotakeabalancedapproach.

Forexample,weissuedguidanceurgingbankstocontinuetomakeloanstoallqualifiedborrowersand,inparticular,tocontinuelendingtocreditworthysmallbusinesses.

Wealsoissueddetailedguidanceaboutcommercialrealestateworkoutstoencourageprudentmodificationsofrealestateloans.

Lendingistheprimarysourceofincomeformostcommunitybanksandalsothegreatestsourceofrisk.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |36

Asyoudevelopyourbusinessplans,someofthemostimportantdecisionsyouwillmakerelatetolending.

Intheplanningprocess,banksshoulddefinetheportionofthelendingportfoliotheyplantoallocatetodifferentloancategories,theinvestmentstheyarewillingtomaketodevelopexpertiseandtomanagecreditandcompliancerisk,andthelevelsofcreditandinterestraterisktheyarewillingtoassume.

SoIthoughtitmightbehelpfultoreviewsomerecentdevelopmentsinloantypesthatareatthecoreofcommunitybanklending.

ResidentialMortgageLending

Residentialmortgagelendingwasattheheartofthefinancialcrisisand hasbeenthetargetofextensivenewregulationandsupervisoryattention,includingtherulesissuedbytheCFPBthatIdiscussedearlier.

Ithinkcommunitybanksareinanespeciallydifficultpositionwithrespecttoresidentialmortgagelending.

Ontheonehand,communitybanksdonotappeartohaveengagedinmanyofthemoreproblematicpracticesthatledtothecrisis.

Andtheirrateofseriouslydelinquentresidentialmortgageloansissignificantlylowerthantheoverallrateofseriousdelinquenciesonsuchloansmadetoprimeborrowers,indicatingthatcommunitybankslargelyhavemanagedtheirexistingportfoliosresponsibly.

Ontheotherhand,residentialmortgageloansmadebycommunitybanksdofrequentlysharesomecharacteristics,suchashigherratesandballoonpayments,withthesubprimelendingthatprovedtobesodisastrous.

Atthesametime,mortgagelending,whichaveragesaboutone-fourthofcommunitybankloanportfolios,isanimportantproductlineforcommunitybanks.

Further,FederalReserveresearchindicatesthattheresidentialmortgageloansmadebycommunitybanksmakeupasmallbutvitalpartofcreditavailabilityinthehousingmarket.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |37

Thechallengeforregulatorsistodesignmortgageregulationstoaddresspracticesthathaveprovedharmfultoconsumersorfinancialstabilitywithoutinhibitinglendingtocreditworthyborrowers.

Thechallengeforcommunitybankersistoreviewthefullbodyofnewregulationscoveringmortgagelendingandtodeveloptheexpertiseandcontrolsystemsnecessarytocomplywiththeseregulationswhileremainingactiveinthisimportantmarket.

IthinkitisunfortunatewhenIhearsomebankerssaythattheywillstopofferingmortgagesiftheycan'tmakethemthesamewaythattheyalwayshave.

WhileIcertainlyunderstandtheirfrustration,Istillbelievethat communitybankerscanrespondwithinthenewenvironmentbycreatingproductsthatareprofitableandmeettheneedsoftheircustomers,whilestillmanagingtheirinterestrateandfundingrisks.

Evenwithsomeregulatoryexceptions,compliancewithnewmortgageregulationslikelywillrequirechangestoprocessingsystemsandextensivestafftraining.

Butitisalsopossiblethatthesystemsandexpertisenecessarytomakequalifiedmortgagesforthebank'sbookscouldalsobeusedtooriginateloansforsale.

Formanycommunitybanks,thiscouldrepresentanewrevenueopportunityandanewalternativetoofferthebank'scustomers.

CommercialRealEstateLending

Forcommunitybanks,itwasCRElending--inparticular,lendingfor constructionandlanddevelopment--thatcausedthemostproblemsduringthecrisis.

Asyoumayknow,in2006thefederalbankingagenciesissuedsupervisoryguidancethatsetforthscreeningcriteriabasedoncertain typesofCREconcentrationsandrapidgrowthofCREportfolios.

TheseguidelinescontainedspecificnumericalthresholdsfortheratiosofconstructionandtotalCRElendingtoaninstitution'stotalcapital,aswellasforidentifyingrapidgrowthofsuchlending.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |38

Thesecriteriawereneverintendedtoresultinhardcaps,butwereinsteadmeanttotriggerconversationsbetweenabankanditssupervisorsabout thebank'sabilitytomanagetherisksarisingfromtheseconcentrations.

Afterourexperienceinthefinancialcrisis,especiallyconsideringthesevereproblemsincommercialrealestatemarkets,wewereinterestedin understandinghowcommunitybankswereaffectedbytheguidanceandwhetherthescreeningcriteriasetforthintheguidancewereeffectiveindicatorsofrisk.

Inthatregard,FederalReservestaffhasworkedwithourcounterpartsattheOfficeoftheComptrolleroftheCurrencytoanalyzehowbanks'holdingsofCREloanshaveevolvedsincetheguidancewasissued.

Wehavelearnedafewinterestingthingsbasedonthefindingsofthisresearch.

Forexample,thenumberofinstitutionsthatexceedatleastoneofthetwoscreeningcriteriahasdeclinedsubstantiallyfrom2006tothepresent.

Whilemuchofthisdeclineseemstohaveresultedfromthecontractionofconstructionportfoliosinthewakeofthecrisis,banksthatexceededthecriteriawhentheguidancewasissuedappeartohaveexperiencedabiggerdeclineintotalCREloansthancanbeexplainedbytheadverseeconomicenvironmentalone.

Thisfindingcouldindicatethatthethresholdsareindeedbeinginterpretedashardcaps.

Moreover,itwasapparentthatbanksthatexceededthecriterionforconstructionandlanddevelopmentwerefarmorelikelytohavefailedovertheperiodfrom2007to2011thanwerethosebanksthatexceededthecriterionforoverallCREexposuresandportfoliogrowth.

Wenowrecognizetheimportanceoftherapidgrowthcriterion,whichmayhavereceivedlessattentionthanthecriteriaforconstructionandoverallCRElendingconcentrations.

WeintendtousethefindingsofthisresearchtohelpclarifyourcommunicationandtrainingforexaminersandbankersaroundCRElendingconcentrations.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |39

SmallBusinessLending

Thereisprobablynoloancategoryinwhichcommunitybankers'localknowledgeanddeeptiestothecommunityaremoreimportantthansmallbusinesslending.

TheFederalReserveSystemhasaprojectunderwaytotrytoimproveourunderstandingofsmallbusinesscreditmarkets,whichwouldofcourseincludecommunitybanks.

Onechallengewehavefacedisthatitisdifficulttomeasurelendingtosmallbusinessesprecisely.

Foronething,smallbusinessownersfrequentlytaptheirpersonalhomeequity,creditcards,orloanssecuredbycommercialrealestatethattheyowntofinancetheirbusinessoperations,whichmeanssuchborrowingisnotreportedassmallbusinesslending.

Butthereisalsonodefinitionofsmallbusinessborrowersforthereportingofsmallbusinesslendingasaloancategory.

However,smallloanstobusinesses--commercialandindustrialloansandCREloanswithoriginalprincipalamountsoflessthan$1million--arereportedseparatelyandcanbeusedasaproxyforsmallbusinesslending.

Usingthismeasure,wecanestimatetheimportanceofsmallbusinesslendingtocommunitybanksandtheimportanceofcommunitybankstosmallbusinesses.

AsofSeptember2012,bankswith$10billionorlessinassetsaccounted formorethan98percentofallcommercialbankinginstitutions,buttheyheldlessthan20percentofbankingindustryassets.

However,theyheldmorethanhalfofoutstandingsmallloanstobusinesses.

Forsuchinstitutions,thesesmallloanstobusinessesrepresentnearly20percentoftheirtotaldomesticlendingandslightlymorethan40percentoftheirtotalcommerciallending.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |40

Smallbusinesslendingislikelyevenmoreimportanttosmallerbanksthanthesestatisticsshowbecausetheseloansareidentifiedbythesizeoftheloanratherthanthesizeoftheborrower.

Ibelieveitisprobablethatmanyofthelargerbusinessloansmadebythesesmallerbankswerealsomadetosmallbusinessborrowers.

Attheotherendofthespectrum,bankingorganizationswithmorethan

$50billioninassetsaccountedforlessthanonepercentofinstitutions,butheld75percentoftheassets.

Holdingalmost40percentofoutstandingsmallloanstobusinesses,theselargebanksareimportantsmallbusinesslenders,butsmallloanstobusinesseswerenotasignificantsegmentoflargebankloanportfolios.

Theyrepresentedlessthanfivepercentofthesebanks'totaldomesticlending.

Thesestatisticsdemonstratetheimportanceofcommunitybankstosmallbusinessandthecorrespondingimportanceofsmallbusinesslendingtothecommunitybankingbusinessmodel.

Indevelopingpoliciesforsmallbusinesslending,Ithinkitiscriticallyimportantforbankboardsofdirectorstoinsistonappropriateriskmanagementthatretainstheflexibilitytousethebankers'knowledgeoftheircustomers'businesstotheirbestadvantage.

Anditisequallycriticalthatsupervisorsdeveloptoolstomeasurethe overalleffectivenessofriskmanagementinsmallbusinesslendingwithoutbeingoverlyprescriptiveforindividualloans.

Conclusion

IwouldliketoendwhereIbegan.Ithinkthefutureforcommunitybankingisbright.

Irecognizethattheregulatorychangesunderwayarenotwithoutcosttocommunitybanks.

ButIalsoknowthatweattheFederalReservearedoingourbesttoavoidaddingtoregulatoryburdenwhereverpossibleaswerespondtotheworst

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |41

excessesofthefinancialcrisisandmaketheU.S.financialsystemmoreresilient.

Researchishelpfulinthiseffortbutitisalsoimportanttomaintainanongoingdialoguewithcommunitybankersandtoactivelysolicitcommentonregulatoryproposals.

SoIurgeyoutocontinuetocommunicateaboutthechallengesthatregulationsposeforcommunitybanks.

Moreimportantly,Iknowthatthenaturaladvantagesfoundincommunitybanks--deepcommunityties,dailyinteractionbetweenseniormanagersofbanksandtheircustomers,andthedexteritytocustomizefinancialsolutions--havenotbeendiminishedinanyway.

Yes,theregulatoryenvironmentischallengingandtheeconomyremainsweakinmanyareas.

Butallourresearchshowsthatwithcreative,engagedbankersandstrong risk-managementprocesses,communitybankscancontinuetonotonlysurvivebuttothrive.

Thankyouverymuchforyourattention,andIwouldbeinterestedin hearingyourthoughts.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |42

SpeechbyPatrickSpens,HeadofMarketMonitoring,theFSA,attheFuturesOptionsAssociationComplianceForum

GoodafternoonanditisapleasuretobeabletospeaktoyouthisafternoonmynameisPatrickSpens.

IamtheHeadofMarketMonitoringwhichwillbecomepartofthefutureFinancialConductAuthorityorFCA.

IwasaskedheretospeakregardingtheFSA’sexpectationsonfirm’sobligationswithrespecttothemonitoringofordersandtransactions,specificallyinresponsetoaletterfromtheFSAandothercompetentauthoritiessenton14December2012.

FirstlyIwishtoprovidesomecontexttobothmyroleandthesoontobeestablishedFCA’sobjectivesandphilosophy.

Mykeyresponsibilitiescanbedefinedasfollows:

pursuingtheFSA’scredibledeterrencestrategythroughmarket

conductenquiriesandinvestigationswhichcanthenleadtotargetedenforcementactions,underbothcivilandcriminalregimes;

educatingmarketparticipantsabouttheirobligationswithrespect

tomarketabuseandtransactionreporting;

enhancingourmarkets’surveillancetoolkitwhichincludes

interrogatingtransactiondatatoassessrisksandidentifytrendsthroughourTransactionReportingdatabase-ZEN;

supervisingthetransactionreportingandmarketabuseregimes;

and

influencingEuropeanpolicyagendasintheseareas.

TheFCA’soverallstrategicobjectiveisto‘makemarketsworkwell’.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

  • P age |43

  • Additionallyitwillhavethreeoperationalobjectivesofensuringconsumerprotection,marketintegrityandcompetitionisintheinterestsofconsumers.

  • ThekeydifferencesastohowtheFCAwillregulateconductwillbethrough;newlegislativepowersandtools,anewapproachtoregulating andsupervisingfirmsandmostimportantlyachangeinculturethatwillenhancealllevelsofconsumerprotection.

  • MovingforwardintotheFCA,ourviewisthatconductriskcanoftenbemoreefficientlyaddressedthroughthematicandeducationalwork.

  • Weintendtoexecuteahigherproportionofourconductpriorities,throughthistypeofworkorcommunication.

  • Ithereforeaddressthereasonformebeingstoodbeforeyou.

  • TheletterwassentundercoordinationfrommultipleEuropean regulators,thoughsomeofyoumayquestionthegenesisoftheletter.

  • ESMAissuedacallforevidencefromanyregulatorswhohadseenevidenceoflayeringorspoofingwithintheirfinancialmarkets.

  • We,astheFSA,responded,andfromthis,theletterthatyoureceivedwasborn.

  • Toaddressthequestionof‘whydidIreceivethisletter’,thiscommunicationwassentto:

  • UKfirmswhicharemembersofUKorcontributorcountriesregulatedmarkets;and

  • noncontributorcountryfirmsorthirdcountryfirmswhicharemembersoftheUKregulatedmarkets(e.g.USfirmsorLuxembourgishfirms)

  • SomemayquestionwhysuchaletterwassentundercoordinationofESMA.

  • AstechnologyinconjunctionwiththeMarketsinFinancialInstrumentsDirective(MiFID)continuestobreakdowngeographicaland

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |44

jurisdictionalbordersIbelievewewillseeevermorecooperationbetweenEuropeanregulators.

Suchcooperationwillspanpolicysetting,supervisoryissuesandregulatoryinvestigations.

Thisletterisademonstrationofsuchanapproach.

TheFSAiswellversedincross-borderinvestigations–jointlyundertakencriminalproceedingsfromtheWestCoastoftheUnitedStates,totheislandofMayotteintheIndianOceanwithFrenchauthoritiesasaresultofourmarketabuseinvestigations.

Weregularlyseekassistancefrom,andprovideassistancetoothercompetentauthoritiesinmarketabuseinvestigationsaroundtheglobe.

TheFCAwillcontinuetoprogressinvestigationsacrossborderstofurtheritscredibledeterrencestrategy.

WhatdoestheFSAexpectoffirms’monitoringprocedures?

Toaddresstheprimaryreasonformebeingstoodbeforeyou–whatmonitoringandcontrolsdoestheFSAexpectfirmstohaveinplace?

ESMAsetoutguidelinesformarketparticipantsinrelationtosystemsandcontrolsinanautomatedtradingenvironment–applicablefortradingplatformsandinvestmentfirmsalikein2012.

OurletterhighlightedsomeoftheprinciplesfromtheseESMAguidelines

-organisationalrequirementstopreventmarketabuse(inparticularmarketmanipulation)inanautomatedtradingenvironment.

Asagroupyouhavediversebusinessmodels,diverseclientbases,andtradediverseassetclasses,forthisreasontherecanbenosinglesurveillancemodelorsystemwhichshouldbefollowedtoensurecompliancewiththeregulation.

MonitoringshouldensurecompliancewithMiFID,andtheCodeofMarketConduct.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |45

Asmemberfirmsofexchangesandplatforms,monitoringshouldalsoensurecompliancewithrulesandregulationsassetoutbyyourplatforms.

TheFSAexpectsthatfirmswillhaveappropriatesystemsinplacetomonitorthatmessagesbeingsentorreceivedarecompliant.

LayeringandSpoofingwashighlightedasaconcernthroughourMarketWatchpublication(IssueNo.33)inAugust2009.

Layeringinvolvesenteringmultipleordersatdifferentpricesononesideoftheorderbookat,orslightlyawayfrom,thetouch.

Thishastheeffectofmovingthesharepriceasthemarketadjuststothefactthattherehasbeenanapparentshiftinthebalanceofsupplyordemand.

Thisisthenfollowedbyatradeortradesontheoppositesideoftheorderbookwhichtakeadvantageof,andprofitfrom,thesharepricemovementengenderedbythemultiplelayeringorders.

Thisisinturnfollowedbythedeletionofthelargelayeringorders,andbyarepetitionofthisbehaviourinreverseontheothersideoftheorderbook.

Whatdoesappropriatemean?

Weexpectfirmstoperformsurveillanceinasclosetorealtimeaspossible.

Monitoringshouldensurethatyoursystemshavesufficienttimegranularitythatyouareabletoidentifyanystrategiesorindividualordersthatarepotentiallyabusive,andretaintheoptiontoblockorlimitordersfromenteringaplatform.

Suchasystemshouldbecapableofhandlingthevolumeofmessagesbeingsent,orreceivedinthecaseofplatforms.

Anysysteminplacewillrequirehumaninterventionandjudgementduringtheprocesstodeterminethelevelofsuspicionandwhetherthiswarrantsadisclosuretotherelevantcompetentauthority.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |46

Staffundertakingmonitoringshouldbesufficientlytrainedtounderstandthestrategiesthatmaybeundertakenandregulationsrelatingtomarketabuse,specificallymarketmanipulation.

Staffundertakingmonitoringshouldhavesufficientauthoritytochallengeandtakenecessaryactionwhenreviewingtradingflows.

Asafirmyoushouldensureyouhaveappropriatesystemsandgovernanceinplacethatreferralsofsuspiciousbehaviouraremadewhereappropriate,andinatimelyfashion.

Aspartofoursupervisoryprocesswemaychoosetoquestionanynearmisses–wheresuspicioustradinghasbeenescalatedbutnotreportedtotheFSA–thathaveresultedfromyourmonitoringandsurveillance.

Wewouldexpectyoutodemonstrateafullaudittrailofdecisiontaking,andtherationaleforthese.

DMAproviders

Iwishtodwellondirectmarketaccess(DMA)providers,andthe responsibilityyouhaveforthetradingofyourclients.

Withoutadequatesystemsandcontrolsinplaceyouleaveyourselvesexposedtorisksoutsideofyourcontrol.

Iwouldurgeyoutoconsiderwhethersystemsandcontrolsinplacearesufficientlyadvancedandrobusttomonitoreffectively.

Youareremindedthatyouremainsolelyresponsibleforallorderssubmittedunderyourtradingcodes.

Whenprovidingdirectmarketaccess,thosestaffundertakingmonitoringshouldunderstandthescaleandcomplexityofaclient’strading,andtheirhistoricaltradingbehaviour.

Limitsshouldexistaroundclientstradingtoensurefairandorderlytrading,withautomaticrejectionofordersthatviolatesuchparameters.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |47

AsDMAprovideryoushouldretainabsolutecontroloveranypre-tradecontrols,clientsofDMAshouldnothavetheabilitytomodifysuchcontrols.

Alltradesshouldpassthroughpre-tradecontrolsbeforebeingsenttoaregulatedmarket–notdoingsoisprohibitedunderMiFID.

Itisprudenttoregularlyreviewclients’duediligence,andassesswhetherlimitsinplaceareadequate.

Atintervalswhichyoudeemappropriateyoushouldconsiderwhetherthetradingpatternsobservedareconsistentwiththeclient’sstatedtradingobjectives.

Anymonitoringsystemsemployedbyfirmsshouldbeabletoseparatelyidentifyordersreceivedfromclientsasopposedtoproprietarytrades,withtheabilitytoimmediatelysuspendorhaltoneclient’saccessifrequired.

Previouslywehavevisitedfirmswhohavepurchasedcomplex

off-the-shelfsystemsinordertogeneratealerts,yetalertswereeithernotreviewed,reviewedinanuntimelymanner,ortherewasafailuretoescalateanyconcerns.

Whateveryoursolution,ithastobeappropriateforyourbusinessandreviewedonaregularbasistomakesureitcontinuestobefitforpurpose.

Education–afocusofMarketMonitoring

In2012ourMarketMonitoringteamreceivedsignificantpresscoveragewhenwereiteratedtofirmstheirobligationsundertheSuspiciousTransactionReport(STR)regime.

TheSTRregimeplacesanobligationonregulatedfirmstonotifytheFSAofanyreasonablesuspicionsofmarketabuse.

WebelievetheSTRregimehasbeenworkingwellandweappreciatethegoodqualitysubmissionofSTRsthatwereceivefrommanyfirms.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

  • P age |48

  • STRshavebecomeacentralpillarofourcredibledeterrenceagendaandwerelyonfirmssubmittinggoodqualitySTRstomaintainconfidencein thefinancialsystem.

  • Notwithstandingthis,Iwrotetoallfirmswhohavethepermission‘arrangingdealsininvestments’toremindthemoftheirobligations.

  • ThepurposeoftheSTRletter,andtheletteronlayeringandspoofing,wasoneandthesame–education.

  • IwillsharewithyounowsomeoftheresponsesreceivedaspartofourSTRwork.

  • Thesehighlightedtheneedforustocontinueaneducationalagenda.

  • Fromafirmofferinglifeinsurance:

  • ‘Forusasuspicioustransactionwouldbeifsomeonetookoutapolicyonsomeoneelseandthenshotthemdead;we’dcertainlyreportthat…’

  • ‘STRs?Shorttradingrules?PleaseadviseandIwillprovidealltheinformationwehaveonthesubject.’

  • ‘Weareastrictagencybrokerdealingmainlywithregulatedinstitutionalfundmanagementgroups,soperhapsthescopeordesiretomanipulatepricesismitigated’–thefirmcallthemselvesa‘boutiqueinvestmentbank’

  • ‘Wedonotdealonthebasisofinsiderinformationorotherwiseknowinglycommitmarketabuse’

  • WithinMarketMonitoringwewishtoattempttoensurethateducationisasimportantaslitigation,andtheprogressionofmarketabuseenquiries.

  • Whilstenforcementoutcomesrelatedtomarketabuseserveasadeterrentandmessagetothemarket,wevieweducationasagreatermitigantofmarketabuse.

  • Mymessagetoyouisthatwearethefinallineofdefence,youarethefrontlineandweareinthistogether.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |49

STRsandtheESMAguidelines

AsIhavesaid,werelyonfirmssubmittinggoodqualitySTRsinordertodeliverourmarketabuseagenda.

Thisisverymuchapartnershipandhencewearekeentoeducatefirmssothatwecanworktowardsthejointobjectiveofmarketintegrity.

STRswillremainacentralpillarofourmarketabuseenquires.

However,aswecontinuallyenhanceourtechnologyyouwillreceivegreaterchallengeonfailuretosubmitSTRs,whichinturnwillbringyourmarketabusesystemsandcontrolsintoquestion.

Iremindyouthatfirmswithsystemsandcontrolsdeemednotsufficientmaybesubjecttoeithersupervisoryorenforcementaction.

Wewillalwaysbeproportionateinourapproachlookingatthefullsuiteofsupervisorytoolsavailable,withenforcementreservedforthemostegregiouscases.

WemayseektovisitanyregulatedfirmtohelpassesstheadequacyofthesystemsandcontrolsinplacetocomplywithboththeESMAguidelinesandUKregulation–aswemovetomorethematic-basedsupervision,visitsofthisnaturewillbecomeacommonfeature.

Whilstwenormallyexpecttogivereasonablenoticeofavisit,onrareoccasionswemayseektoaccesspremiseswithoutnotice.

Theprospectofunannouncedvisitsisintendedtoencouragefirmstocomplywiththerequirementsandstandardsundertheregulatorysystematalltimes.

AsourSTRsupervisoryfocusdevelopswewillquestionnotonlythequantityreceivedrelativetotransactionvolumesbutthequalityandtimelinessofSTRssubmitted.

WhenfirmsaresubmittingSTRsyoushouldclearlyarticulatetherationalefordeemingthetransaction(s)tobesuspicious–whetherbasedonabnormalbehaviourrelativetotradinghistory,orrepetitivebehaviour.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |50

Wherefirmsfailtoprovidesuchinformationwewillendeavourtocontactfirmstounderstandthereasonsforsuspicion.

TheSTRrules,specificallySUP15.10statethatanSTRshouldbesubmitted‘withoutdelay’.

Wewouldexpectfirmstonotifytheregulatoratthepointofhavingreached‘reasonablegroundsforsuspicion’,regardlessofwhetheranyinternalreportintothetradingwascomplete.

ShouldafirmwishtocontinueaninternalinvestigationtheFSAishappytoreceivecopiesoffinalreports,regardlessoftheiroutcome.

Duetoevidentialchallengesposedfromdelayednotificationwewillbelookingtodiscusswithfirmswherewedonotviewtheirsubmissionsastimely.

ApointIfeelworthreiteratingisthattheSTRregimeisnotlimitedtoequityproducts.Perhapsunsurprisingly,thevastmajorityofSTRswereceiveareinrespectofequity-linkedproducts,but,forexample,thebondandcommoditymarketsarejustasimportant,andwewouldencouragethesamelevelofscrutinyfromfirms.

SwiftTrade

IwishtodrawyourattentiontoacasethatwasrecentlyupheldbytheUpperTribunal–SwiftTrade.

WefinedSwiftTrade£8mforknowinglyengaginginmanipulativetrading,inthisinstancelayering.

Thetribunaldescribedtheactivityas‘asseriousacaseofmarketabuseasmightbeimagined’,notingfurtherthat‘thiswasaprolonged,cynicalcourseofmarketabusecommittedbyacompanywhich...exhibitedawholesaledisregardofregulatoryrequirements:itwas,inshort,acompanywhichactedasiftherulesdidnotapplytoit,andmodifieditsbehaviour...onlyinorderthatitmightcarryondoingwhatithadbeendoingbefore,butwithbetterconcealment’.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |51

ForoveroneyearSwiftengagedinsystematicanddeliberatemanipulation–layeringontheLondonStockExchange(LSE).

Thistradingwaswidespreadandrepetitiveinvolvingtensofthousandsofordersbymanyindividualtraders.

Weestimatethatin2007Swiftplaced13mordersontheLSE.

Thistradingledtoafalseormisleadingimpressionofsupplyand demandandanartificialsharepricetothedetrimentofothermarketparticipants.

TheFSA’sviewisthatsuchconduct,ifunchecked,couldunderminemarketconfidence.

SwiftTradeplacedthelargeordersinordertogiveafalseandmisleadingimpressionofsupplyanddemand.

Thelargeorderswerenotintendedtobetraded.

Theywerecarefullyplacedcloseenoughtothetouchprice(i.e.thebestbidandofferprevailinginthemarketatthetime)togiveafalseandmisleadingimpressionofsupplyanddemand,butfarenoughawaytominimisetheriskthattheywouldbetraded.

Theshortlifeoftheselargeorders,togetherwiththeirdistancefromtheprevailingtouch,effectivelyminimisedanyriskthattheywouldbeexecuted.

Thetradingactivitycausedthesharepricetobepositionedatanartificiallevel,fromwhichSwiftTradeprofiteddirectly(theywouldbuy‘low’andsell‘high’andthereforeprofitasaresultofthepricemovementsthattheyhadcreated).

Thetribunalfoundthat‘thetradingwehavedescribedwasdeliberate,manipulative,designedtodeceiveothermarketusers,successfulinthataim,andundertakenformotivesofprofit...andwehavenodoubtitwastheproductofadirectingmind’

SwiftTradearguedthatitstradingwasnotmarketabusebecauseitsorderswerenotinsharesbutinderivatives(CFDs)whichwerehedgedincorrespondingordersinsharesontheLSE.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

  • P age |52

  • TheTribunaldismissedthisargumentascontrarytocommonsenseandmarketpractice,andwassatisfiedthatthederivativeorderswereplacedintheknowledgeandexpectationthattheDMAproviderswouldimmediatelyandautomaticallymatchthemwithhedgingordersinshares

  • Thiscasehighlightedtheobligationonplatforms,DMAprovidersandfirmsthemselvestoensureappropriatechecksandbalancesareinplace.WhilstwedecidednottotakeactionagainsttheDMAproviderinthisinstance,weassesseachcasebasedonitsrelativemerits.

  • IwishtomakeitclearthatshouldDMAprovidersnotcomplywiththeirobligationswewillalwaysconsiderwhetherdisciplinaryactionsareappropriate.

  • Since2010theFSAhasseenincreasesinthenumberoffinalnoticesissuedinrelationtomarketmanipulation.

  • Asdetectionmethodsbecomemoresophisticated,manipulativebehaviourislikelytobecomeevereasiertoidentifybyfirms,platformsandtheFSA.

  • Wehave,since2010,increasedournumberoffinalnoticesinrelationtomarketmanipulation,havingissued14intotalwith11oftheseinthelast twoyears.

  • Conclusion

  • Ihopethatyou’llhaveseenfromwhatI’vesaidtodaythataswemovetowardstheFCAamorepre-emptiveandthematicsupervisoryapproachwillbetaken.

  • TheFCAwilldelivergreaterintensityofconductsupervisionthanthatwhichyouhavebeenusedtopreviously.

  • Youshouldtakeawayfromthistalkthefollowingkeymessages:

  • Managementofconductriskiskeytothenewapproachtofinancialregulation.

  • CulturalchangewillmanifestitselfwithintheFCAandwithinindustry.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

  • P age |53

  • ThesupervisorymodelbeingdevelopedwithintheFCAwilldelivergreaterintensityofconductsupervisionthanthattowhichyouhavebeenusedtopreviously.

  • Education,trainingandgoodsystemsandcontrolscanleadtobetter conduct.

  • Finally,credibledeterrenceisheretostay.

  • Wewilllooktoengagewithindustrywherepractical,issuingeducationalpiecesonbestpracticeandcompliancewithrelevantregulation.

  • MyhopeisthatastheFCAcomesintoexistenceitwillworkcloselywithindustryandconsumersinordertoachievebetteroutcomesforretailconsumersandensuremarketintegrityforwholesalemarketparticipants.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |54

  • QuestionsandAnswers

  • ImplementationoftheRegulationonshortselling andcertainaspectsofcreditdefaultswaps(2ndUPDATE)

  • Background

    • Regulation(EU)No236/2012oftheEuropeanParliamentandoftheCouncilof14March2012onshortsellingandcertainaspectsofcreditdefaultswaps(“Regulation”)hasalreadyenteredintoforceandwillbefullyapplicableon1November2012.

  • ItissupplementedbydelegatedregulationsadoptedbytheEuropeanCommissionspecifyingcertaintechnicalelementsoftheRegulation,toensureitsconsistentapplicationandtofacilitateitsenforcement.

  • TheobjectivesofthisshortsellinglegislativeframeworkaretoincreasetransparencyofshortpositionsheldbyinvestorsincertainEUsecurities,reducesettlementandotherriskslinkedwithuncoveredornakedshortsellingandcreateaharmonisedframeworkforcoordinatedactionatEuropeanlevel.

    • TheshortsellingframeworkismadeupofthefollowingEUlegislation:

      • Regulation(EU)No236/2012oftheEuropeanParliamentandtheCouncilof14March2012onshortsellingandcertainaspectsofCreditDefaultSwaps(“Regulation”).

  • ItissupplementedbyaEuropeandelegatedregulationaswellasregulatoryandimplementingtechnicalstandards.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |55

CommissionDelegatedRegulation(EU)No826/2012of29June2012supplementingRegulation(EU)No236/2012oftheEuropeanParliamentandoftheCouncilwithregardtoregulatorytechnicalstandardsonnotificationanddisclosurerequirementswithregardtonetshortpositions,thedetailsoftheinformationtobeprovidedtotheEuropeanSecuritiesandMarketsAuthorityinrelationtonetshortpositionsandthemethodforcalculatingturnovertodetermineexempted(“RTS1”).

CommissionimplementingRegulation(EU)No827/2012of29June2012layingdownimplementingtechnicalstandardswithregardtothemeansforpublicdisclosureofnetpositioninshares,theformatoftheinformationtobeprovidedtotheEuropeanSecuritiesandMarketsAuthorityinrelationtonetshortpositions,thetypesofagreements,arrangementsandmeasurestoadequatelyensurethatsharesorsovereigndebtinstrumentsareavailableforsettlementandthedatesandperiodforthedeterminationoftheprincipalvenueforashareaccordingtoRegulation(EU)No236/2012oftheEuropeanParliamentandoftheCouncilonshortsellingandcertainaspectsofcreditdefaultswaps(ITS).

CommissionDelegatedRegulation(EU)No918/2012of5July2012supplementingRegulation(EU)No236/2012oftheEuropeanParliamentandoftheCouncilonshortsellingandcertainaspectsof creditdefaultswapswithregardtodefinitions,thecalculationofnetshortpositions,coveredsovereigncreditdefaultswaps,notificationthresholds,liquiditythresholdsforsuspendingrestrictions,significantfallsinthevalueoffinancialinstrumentsandadverseevents(“DR”).

CommissionDelegatedRegulation(EU)No919/2012of5July2012supplementingRegulation(EU)No236/2012oftheEuropeanParliamentandoftheCouncilonshortsellingandcertainaspectsof creditdefaultswapswithregardtoregulatorytechnicalstandardsforthemethodofcalculationofthefallinvalueforliquidsharesandotherfinancialinstruments(“RTS2”).

3.Beyondthelegislation,ESMAplaysanactiveroleinbuildingacommonsupervisoryculturebypromotingcommonsupervisoryapproachesandpractices.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |56

Inthisregard,ESMAhasadoptedthisQ&Aandwillupdateandexpanditasandwhenappropriate.

II.Purpose

ThepurposeofthisdocumentistopromotecommonsupervisoryapproachesandpracticesintheapplicationoftheEuropeanshortsellingregulatoryregime.

Itprovidesresponsestoquestionsposedbythegeneralpublic,marketparticipantsandcompetentauthoritiesinrelationtothepracticalapplicationoftheshortsellingframework.

ThecontentofthisdocumentisaimedatcompetentauthoritiesundertheRegulationtoensurethatintheirsupervisoryactivitiestheiractionsareconvergingalongthelinesoftheresponsesadoptedbyESMA.

Itshouldalsohelpinvestorsandothermarketparticipantsbyprovidingclarityontherequirementsundertheshortsellingframework.

III.Status

TheQ&AmechanismisapracticalconvergencetoolusedtopromotecommonsupervisoryapproachesandpracticesunderArticle29(2)oftheESMARegulation.

Therefore,duetothenatureofQ&As,formalconsultationonthedraftanswersisconsideredunnecessary.

However,eveniftheyarenotformallyconsultedon,ESMAmaycheckthemwithrepresentativesofESMA’sSecuritiesandMarketsStakeholderGroup,therelevantStandingCommittees’ConsultativeWorkingGroupor,wherespecificexpertiseisneeded,withotherexternalparties.

Inthisparticularcase,consideringthedateofapplicationoftheRegulation,ESMAhasnotengagedinsuchconsultations.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |57

8.ESMAwillreviewthesequestionsandanswerstoidentifyif,inacertainarea,thereisaneedtoconvertsomeofthematerialintoESMAguidelinesandrecommendations.Insuchcases,theprocedures

fore-seenunderArticle16oftheESMARegulationwillbefollowed.

IV.Questionsandanswers

Thisdocumentisintendedtobecontinuallyeditedandupdatedasandwhennewquestionsarereceived.Thedateonwhicheachquestionwaslastamendedisincludedaftereachquestionforeaseofreference.

QuestionsonthepracticalapplicationofanyoftheshortsellingrequirementsmaybesenttothefollowingemailaddressatESMA:[email protected]

Question1a:

DotheprovisionsoftheRegulationalsoapplyoutsidetheEUandtonon-EUnaturalorlegalpersons?

Answer1a:

Article1oftheRegulationdefinesthescopeoftheRegulationbylistingthefinancialinstrumenttowhichtheprovisionsoftheRegulationapply.

ForfinancialinstrumentsreferredtoinArticle1(a)oftheRegulation,theonlydecisivecriterionistheadmissionoftheinstrumentinquestiontotradingonatradingvenueintheUnion(exceptwheretheprincipaltradingvenueofthatinstrumentisinathirdcountry),includingwhentheyaretradedoutsideatradingvenue.

FordebtinstrumentsreferredtoinArticle1(c)oftheRegulation,themain definingelementisthatthesefinancialinstrumentsareissuedbyaMemberStateortheUnion.

ThesameappliestosovereignCDSasdefinedunderArticle1(e)oftheRegulation.

Neitherthedomicileorestablishmentofthepersonenteringintotransactiononthesefinancialinstrumentsnortheplacewherethese

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |58

transactionstakeplace,includinginthirdcountries,areofanyrelevanceinthisregard.

Question1b:

DoestheRegulationimpactEUsovereignCDStradesbookedoutsidetheEU(e.g.HeadOfficeinNYorTokyo)butexecutedbytradersintheEU(whereasingleglobalCDSbookisrun)?

Answer1b:

Recital3oftheRegulationstatesthatitisappropriateandnecessaryfortherulestotakethelegislativeformofaregulationinordertoensurethatprovisionsdirectlyimposingobligationsonprivatepartiesareappliedinauniformmannerthroughouttheUnion.

Therefore,thelegislativeacttakingaformofregulationexcludesthepossibilityofanydiscretionbyanationalcompetentauthoritywhenapplyingtherules.

Recital16oftheRegulationspecifiesthatinordertobeeffective,itisimportantthatthetransparencyregimeappliesregardlessofwherethenaturalorlegalpersonislocated,includinginathirdcountry.

WherethatpersonhasasignificantnetshortpositioninacompanythathassharesadmittedtotradingonatradingvenueintheUnionoranetshortpositioninsovereigndebtissuedbyaMemberStateorbytheUnion,theyneedtobereportedwherevertheseareexecutedorbooked.

Itshouldbenotedthat‘regime’istobeunderstoodnotasameresetofrulesforsubmissionofanetshortpositionnotification,butasabroadconceptencompassingaswellrulesapplicabletoenteringintooracquiringanetshortposition.

Question1c:

HowdothenetpositionrequirementsimpactonthirdcountrybrancheswherethereisnotadistinctlegalentityintheEUornorelationshipwithsubsidiariesinotherEUjurisdictionsexcepthavingthesameparent?

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

  • P age |59

  • Answer1c:

  • Article10oftheRegulationspecifiesthatthenotificationanddisclosurerequirementsapplytoanylegalpersonirrespectiveofwherethatpersonisdomiciledorestablished.

  • Therefore,thereisnodistinctiontobedrawnbetweenalegalentityoragroupintheEUorinathirdcountryastohowtheyhavetocalculatetheirnetshortpositioninagivenissuerandreportitwhenanotification/disclosurethresholdisreachedorcrossed.

  • Question1d:

  • DosharesofallcompaniestradedonmarketsintheUnionfallunderthenetshortpositionnotificationanddisclosurerequirementsunderArticles5and6,andtherestrictiononuncoveredshortsalesofArticle12oftheregulation?

  • Answer1d:

  • Whendeterminingwhetherthesharesofanissuerfallundertheregime,twocumulativeconditionshavetobetakenintoaccount:

  • thesharesareadmittedtotrading/tradedonatradingvenue(i.e.regulatedmarketorMTF)intheUnion;

  • theprincipaltradingvenuefortheshareisintheUnion(andnotinathirdcountryincaseofmultipletrading).

  • Forinstance,sharesofacompanydomiciledintheUSAwhichareadmittedtotradingonatradingvenueinGermanybutwhoseprincipaltradingvenueislocatedintheUSAareexemptfromthenotification

  • /disclosurerequirements(Articles5and6oftheRegulation),the restrictionsonuncoveredshortsales(Article12)andfromthebuy-in

  • procedures(Article15oftheRegulation).

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

  • P age |60

  • Question1e:

  • Whatfinancialinstrumentsarecoveredbythenetshortposition notificationanddisclosurerequirements,andtherestrictionsonuncoveredshortsales?Istherealistavailableandwherecanitbefound?

  • Answer1e:Thefinancialinstrumentsconcernedbythenetshortpositionnotificationanddisclosurerequirements,andtherestrictionson uncoveredshortsalesare:

  • sharesadmittedtotradingonaEuropeanregulatedmarketorMTF,providedthat,incasetheyarealsotradedonathirdcountryvenue(outsidetheEU/EEA),theirprincipaltradingvenueisnotlocatedinthat thirdcountry;

  • sovereigndebtissuedbyasovereignissuerasdefinedbytheRegulation;

  • CDSonsovereigndebtofasovereignissuerasdefinedbytheRegulation.

  • Withrespecttoshares,theRegulationonshortsellingandcertainaspectsofCDSrequiresthatalistofexemptedsharesispublishedbyESMAonitswebsiteonthebasisoftheinformationprovidedbynationalcompetentauthorities.

  • Therefore,anysharenotmentionedinthatlistthatisadmittedtotrading onaregulatedmarketintheEEAortradedonaMTFintheEEAis subjecttotherequirementsoftheRegulation.

  • ItshouldbenotedthatESMAhasalreadypublishedalistofsharesadmittedtotradingonanEEAregulatedmarket(http://mifiddatabase.esma.europa.eu/)whichidentifiestherelevantcompetentauthorityforeachshareforthepurposeoftheRegulation.

  • WithrespecttosovereigndebtandCDSonsovereigndebt,ESMAisrequiredtopublishonitswebsitethenetshortpositionnotification

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |61

thresholdsapplicableforeachsovereignissuerfallingunderthescopeofthetransparencyrequirementssetoutbytheRegulation.

Thispubliclyavailablelistwillidentifytherelevantcompetentauthorityforeachsovereignissuer

(http://www.esma.europa.eu/page/Short-selling).

Question1f:

ShouldGlobalDepositoryReceipts(GDR)andAmericanDepositoryReceipts(ADR)beincludedinthedefinitionofsharesforthepurposesofarticle12oftheRegulation?

Answer1f:

No,GDRandADRarenotsharesforthepurposeofArticle12oftheRegulation.

However,forthepurposeofnotificationofnetshortpositionGDRandalsoADRshouldbetakenintoaccountforthecalculation(Articles5and6supplementedbyAnnexIoftheDR)

Question1g:

ShouldETFsbeincludedinthedefinitionofsharesforthepurposesofArticle12oftheRegulation?

Answer1g:

ETFsarenotpersesubjecttoArticle12oftheRegulation,unlikesharesofacompany(onrestrictiononuncoveredshortsales).

However,thepositionheldthroughanETFshouldbetakenintoaccountwhencalculatingthenetshortpositioninanissuerwhichisrepresentedinthatETF(Articles5and6supplementedbyAnnexIandAnnexIIoftheDR).

Question1h:

Howshouldsharespledgedascollateralbeconsideredintermsofownershipandhowshouldgivencollateralbetreatedfortheuncoveredshortsaleprohibitionandpositionreporting?

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |62

Answer1h:

InlinewithArticle3(1)oftheDR,theultimatebeneficialownerofashareisdeemedtobetheinvestorwhoassumestheeconomicrisksofacquiringthesharesinquestionandthebeneficialownerisdefinedbyreferencetotheapplicablenationallaws.

Inthecaseofsharespledgedascollateralorgivenascollateral,therulesrelatingtocollateralvaryacrosstheEU.

BeneficialownershipshouldthenbeconsideredonacasebycasebasistakingintoaccountthenationalrulesandlawsaswellasthespecifictermsofthecollateralcontractstodeterminewhethersuchsharespledgedascollateraloranygivencollateralamountstoownershipforthepurposeoftheshortsaleprohibitionandconsequentlyforthepurposeofpositionreportingthroughtheconnectionbetweenowningandholdingsetoutinArticle4oftheabovementionedDR.

Question1i:

Whatismeantbydebtinstrumentsissuedbyasovereignissuer(Article2(1)(f)oftheRegulation)?

Inparticular,arebankloansorbondsissuedbyacompanywhollyowned byaMemberStateincluded?

Answer1i:

DebtinstrumentsissuedmeanstransferablesecuritiesasdefinedunderDirective2004/39/CE(MiFID)i.e.moneymarketinstrumentsand bondsissuedbytheMemberState,includingthoseissuedbyagovernmentdepartment,anagencyoraSPVoftheMemberStateaswellastheothercasesprovidedforbyArticle2(1)(d)oftheRegulation.

Therefore,bankloansborrowedbyaMemberStateandbondsissuedbycompaniesownedbyaMemberState(exceptSPV)areexcludedfromthedefinition.

Moreover,accordingtoRecital9oftheRegulation,debtinstrumentsissuedbyregionalorlocalbodiesorquasi-publicbodiesinaMemberStateareexcludedaswell.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |63

Thisdefinitionwouldapplytothecalculationoftheoutstandingissuedsovereigndebtaswellastothecalculationofnetshortpositionsand,needlesstosay,totherestrictionsonuncoveredshortsalesinsovereigndebt.

Question2:Transparencyofnetshortpositions Question2a:

Whenandforwhichtradingdaymustthefirstnotificationand/or

publicationpursuanttoArticles5to10oftheregulationbesubmitted?

Answer2a:

TheRegulationshallapplyfrom1November2012.

Thefirstnotificationor,asthecasemaybe,disclosurerelatestoallnetshortpositionsexistingorhavingarisenon1November2012unlessitisnotatradingdayintheMemberStateofthefinancialinstrumentconcerned.

Therefore,inMemberStateswhere1stofNovember2012isatradingday7,netshortpositionsshouldbenotifiednotlaterthanat15:30hon2November2012and,totheextenttheyaresubjecttoapublicationrequirement,alsodisclosedwithinsuchperiod.

InMemberStateswhere1stofNovember2012isnotatradingday,thefirstnetshortpositionstoconsidershouldbetheonesheldattheendof 2ndNovember2012(5NovemberforHungary)and,whererelevant,thesenetshortpositionsshouldbenotifiednotlaterthanat15.30on5November2012(6NovemberforHungary).

Totheextenttheyaresubjecttoapublicationrequirement,theyshouldalsobedisclosedwithinthesametimeperiod.

Question2b:

Whichtradingdaysshouldbeusedforthepurposeofthetimetableformakinganotificationordisclosure?

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |64

Answer2b:

ThetimespecifiedinArticle9(2)oftheRegulationforthenotification

(i.e.notlaterthan15:30hofthefollowingtradingday)istheoneoftheMemberStateoftherelevantcompetentauthority(RCA)forthepurpose

ofnotification.

Byanalogy,itisassumedthatthetradingdayswouldbetheoneoftheMemberStateoftheRCAforthepurposeofthenotification.

Question2c:

InMemberStateswhereanationaltransparencyregimewasalreadyin placebeforetheRegulationapplies,doholdersofexistingshortpositionsalreadynotifiedtotheconcernedcompetentauthorityand/orpubliclydisclosedunderthatregimehavetomakenewnotificationsand(ifapplicable)disclosuresaccordingtoEuropeanregime?

Ifso,howshouldthe“positiondate”fieldintheformbefilledinifthethresholdhasbeencrossedbeforetheentryintoapplicationoftheRegulation?

Answer2c:

Yestheydo.Notifications,andwhererelevant,disclosuresofnetshortpositionsneedtocomplywiththeformatspecifiedintheRegulatoryandImplementingTechnicalStandardsadoptedunderthenewEuropeanregime.

Thisappliestoexistingnotifiableordisclosablepositionsobtainedbefore1November2012aswellasthosecreatedonorafterthatdate.

The“positiondate”fieldintheformtousefornotificationorfordisclosureshouldbefilledinwitheither1stNovember20120r2ndNovember2012,dependingonthetradingcalendaroftheMemberStatefortheconcernedfinancialinstrument.(Seeabove).

Question2d:

Howisanotificationand/ordisclosuretobesubmitted?

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |65

Answer2d:

Regulatoryandimplementingtechnicalstandardshavebeenpublishedspecifyingthedetailsoftheinformationonnetshortpositionstobeprovidedtothecompetentauthoritiesanddisclosedtothepublic.

Thereportingchannel(e.g.viafax,electronicsystems,web-basedsolutions)willbespecifiedbyeachcompetentauthorityonitswebsiteoronawebsiteitsupervises.ESMAwillpublishonitswebsitethelinkstotherelevantwebpage

(http://www.esma.europa.eu/page/Short-selling).

Question2e:

Howwillcompetentauthoritiesmanagecasesoflegalornaturalpersonsnotifyingforthefirsttimeanetshortposition?

Answer2e:

AccordingtotheRegulation,competentauthoritiesortheoperatorofthecentralwebsitesupervisedbythecompetentauthorityneedtoimplementmechanismsforauthenticatingthesourceofnotificationstothem.

Itshouldbeemphasisedthatapositionholderorthenotifyingentityremainsresponsiblefortheinformationthatitreportstotherelevantcompetentauthorityand,whererelevant,thatispubliclydisclosed.

However,inordertoensurethatdisclosuresareonlymadeinrespectofauthenticatedsources,competentauthoritiesortheoperatorofthecentralwebsitesupervisedbythecompetentauthoritycandelay,unlessitisnottechnicallyfeasible,thepublicationofrelevantnetshortpositionsuntiltheauthenticationprocesshasbeencompleted.

CompetentauthoritiesortheoperatorofthecentralwebsitesupervisedbythecompetentauthoritythathavealreadyimplementedastrongandrobustauthenticationprocessundertheirnationaltransparencyregimeinforcepriortotheapplicationoftheRegulationwillbeabletorelyonitforthoselegalornaturalpersonsthathavealreadybeenacceptedunderthisprocess.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |66

Question2f:

Forthepurposeofthereportinganddisclosureofnetshortpositioninshares,whatshouldbetheapproachtoroundinganetshortpositionexpressedinpercentage?

Answer2f:

Thenetshortpositionresultingfromthecalculationtobeperformedbyaninvestorandexpressedinpercentageoftheissuedsharecapitalofaparticularissuershouldbereportedwhenarelevantnotificationthreshold

(e.g.fornetshortpositionsinshares:0.2%,0.3%,0.4%,0.5%,0.6%,etc.)isreached,exceededorcrosseddownwards.

Insuchcase,thepositiontoreportshouldberoundedtothefirsttwodecimalplacesbytruncatingtheotherdecimalplaces.

Forinstance,ifthenetshortpositionis0.3199%,anotificationisrequiredandshouldindicatethe0.31%position.

However,foranetshortpositionofo.1987%oftheissuedsharecapital,nonotificationisrequired.

Question2g:

Whattodowhenanetshortpositionthathasalreadybenotifiedischanging?

Answer2g:

Anotificationisrequiredwherethepositionreaches,exceedsorfallsbelowarelevantnotificationthresholdthatequals0.2%oftheissuedsharecapitaloftheissuerconcernedandeach0.1%abovethat.

Ifthereisachangeofnetshortpositionwhichremainswithintherelevantnotificationthreshold,forwhichanotificationhasalreadybeenmade,thereisnorequirementforafurthernotification,e.g.iffirstanotificationthresholdwasreachedandthenexceeded.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |67

Forexample,ifthefirstnotifiednetshortpositionis0.30%onarounded basisandthenthatnetpositionincreasesbutremainsbelow0.4%(e.g.to0.312%or0.3989%),nofurthernotificationisrequired.

Question3:CalculatingthenetshortpositionQuestion3a:

Dosharesinfundshavetobetakenintoaccountwhencalculatingnet

shortpositions?

Answer3a:

Sharesinfundswhicharemanagedonadiscretionarybasisbyamanagemententityarenotrequiredtobetakenintoaccountsincethe calculationtakesplaceatfundorfundmanagerlevel.

However,sharesinETFsarewithinthescopeandshouldbetakenintoaccountwhencalculatingnetshortpositionstotheextenttowhichtheunderlyingsharesarerepresentedintheETF.

Question3b:

Atwhatlevelisthenetshortpositiontobecalculatedinthecaseofumbrellastructuresandmasterfeederstructures?

Answer3b:

Inthecaseofumbrellastructures,thecalculationofthenetshortpositionmusttakeplaceattheleveloftherespectivesubfunds.Inthecaseof master-feederstructures,ittakesplaceattheleveloftherespectivemasterfund.

Question3c:

Towhatextentareinstrumentswhichgiveclaimstosharesnotyetissued(subscriptionrights,convertiblebonds)takenintoaccountinthecalculationofanetshortposition?

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |68

Answer3c:

Instrumentsthatgiveaclaimtosharesthatarenotissuedyetshouldnotbetakenintoac-countaslongpositionswhencalculatinganetshortposition.

Inparticular,subscriptionrights,convertiblebondsandothercomparableinstrumentsarenotlongpositionswithinthemeaningofArticle3(2)(b)oftheRegulation.

Ifaconvertiblebondconvertsintonewsharesratherthansharesalreadyinissuewherepossibleundernationallaw,theholdingcannotbetreatedasalongpositionindeterminingwhetherthereisanetshortpositionintheshare.

However,ifthebonds(oftenknownasexchangeablebonds)convertintosharesalreadyinissue,itwouldbelegitimatetotaketheequitycomponentofthebondintoaccountinthenetshortpositioncalculation,subjecttotheconditionsetbyArticle3(2)(b)oftheRegulationbeingmetandtothemethodofcalculationsetbyarticle10oftheDR.

Iftheconvertiblebondholderdoesnotknowwhatkindofshares(newsharesorsharesalreadyissued)thebondwillconvertinto,thenthebondshouldnotbetakenintoaccountasalongpositionforthesakeofcalculationofnetshortpositions.

Question3d:

Shoulddividendsintheformofsharesthatmustbereturnedbyaborrowertothelender(asaresultofalendingagreement)betakenintoaccounttocalculateshortpositions?

Answer3d:

No.Thoseshareswhichthelenderisentitledtoreceiveunderthetermsofastocklendingagreementasaresultofasharedividenddistributionandthatmustbereimbursedbytheborrowershallnotbeincludedbythelatterincalculatingtheirnetshortposition.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |69

Themereconclusionofalendingagreementdoesnotconferinitselfanyfinancialadvantageintheeventofadecreaseinpriceoftheshareborrowed.

Question3e:

Dosharesreceivedasaconsequenceofabonusshareissueorsharedividenddistributionfalltobetreatedasalongpositionforthepurposesofcalculatinganetshortposition?

Answer3e:

Yes,asshareholdersreceivesharesthatcanbeusedtooffsetshortpositionstakeninthesameissuerwithotherfinancialinstruments.Thismayhappenwhen,forinstance,anetshortpositionisconstitutedbyhavingalongpositionincashandashortpositioninderivatives.

Question3f:

TheRegulationdefinesthe“issuedsharecapital”as“totalofordinaryandanypreferencesharesissuedbythecompany”.ItiscorrecttosupposethatthescopeofthisRegulationdoesnotincludesharesthatdonotgivetothestockholderanyrighttovote(socalledsavingshares)?

Answer3f:

Allclassesofissuedsharesshouldbeconsideredinthecalculationofthenetshortposition(bothnumeratoranddenominator)irrespectiveoftheircharacteristics(commonstock,preferred,saving,etc.)astheregulationreferstotheissuedsharecapitalofanissuer,inparticularirrespectiveifvotingrightsareincludedornot.

Question3g:

Canashortpositioninsovereigndebtbeoffsetagainstaninterestrate swaptrade?

(Forexample,Sell10yearGermanBundandreceiveFixed(payfloating)10yearinterestrateswapde-nominatedinEuro)

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |70

Answer3g:

No.AninterestrateswapisnotperseaninstrumentrelatedtotheconcernedsovereigndebtinthemeaningofArticle8(2)oftheRegulation unlikederivativeinstrumentsonthesovereigndebtitself.

Question3h:

Article8(3)oftheDRstatesthat“providedalwaysthattheyarehighlycorrelatedinaccordancewithArticle3(5)oftheRegulationandwith paragraphs4and5,allnetholdingsofsovereigndebtofasovereignissuerwhichishighlycorrelatedwiththepricingofthesovereigndebtinanyshortpositionshallbeincludedinthecalculationofthelongposition”.

Doestheuseofthelanguage“shallbe”implythatitisamandatoryrequirementtonetlongpositionsinsovereigndebtofoneMemberStatewhichare“highlycorrelated”withashortpositioninanotherMemberState?

Answer3h:

ESMAconsidersthatthereisnoobligationtoassesssystematicallyalllongpositionsinsovereigndebtwhicharehighlycorrelatedwithanothersovereigndebti.e.forcingtheinvestortocompareallpossiblecorrelation pairs.

However,whendecidingtooffsetthenetlongpositioninasovereignissuerwiththenetshortpositioninanothersovereigntowhichitishighlycorrelated,theinvestorshouldcomplywiththerequirementsoftheDRNo918/2012(AnnexII,Part2,Article11(10)sentence2and3),inparticulartherequirementthatagivenlongpositionshallonlybeusedoncetooffsetashortpositionincaseswheretheinvestormaintainsseveralshortpositionsindifferentsovereignissuers.

Question3i:

UnderArticle3(3)oftheRegulationandAnnexIIPart1.3&2.4oftheDR,firmsneedonlytolook-throughindices,basketsandETFstotheextentthatdoingsoisreasonablehavingregardtopubliclyavailableinformation.Howshouldthisconditionbeunderstood?

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |71

Answer3i:

ESMAunderstands“publiclyavailableinformation”onanindex,basketofsecuritiesorETFcompositionasinformationwhichiseasytoaccessonthemarketoperator’sorissuer’swebsiteandwhichisobtainablefreeofcharge.Suchinformation,notablyonindices,isgenerallyavailablefreeofchargewhenprovidedwithacertaindelay.

ESMAisawarethattheprovisionofarealtimeindex,basketorETF’scompositionislikelytobecharged.However,itshouldberecalledthat thereisnorequirementundertheRegulationtoobtaininformationonthecompositionoftheaboveonarealtimebasis.

ESMAconsidersthatmarketparticipantsshouldstrivetousethemostrecentpubliclyavailableinformationforlook-throughpurposes.

ESMAwouldliketospecifythat“actingreasonably”relatesonlytoobtaininginformationaboutthecompositionandnottohowinvestorsprocessthatinformationforconductingthecalculationofthenetshortposition.

TheRegulationisstraightforwardandrequiresthattheindexweighting,thecompositionofthebasketofsecuritiesandtheinterestsheldinETFsareconsideredandusedinthiscalculationincludingwhensuchinformationcouldnotbeintegratedassuchinthefirm’smonitoringsystem.

Question3j:

Incalculatinganetshortpositioninsovereigndebtforpurposesofnotificationtotherelevantcompetentauthorities,itwouldseemthat"singlesovereignbondfutures"needtobeincluded.

Anumberofsovereigndebtfuturescontractsreferenceanunderlyingbasketofsecurities.

Wouldthesefuturesbeexcludedfromsuchcalculationsoristhereanexpectationthatthereisaneedtolookthroughto,say,the

cheapest-to-deliverbond(seebundfutures,forexample)?

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |72

Answer3j:

Forfuturesonabasketofsovereignbondsofthesamesovereignissuer,thefollowingcalculationshouldbeperformed:Nºoffuturescontractsx nominalofeachcontractxdelta.

Ifthebasketunderlyingthefutureiscomposedofbondsissuedbydifferentsovereignissuers,andprovidedthatthebasketcompositionisfreelyavailable,thenthefuturespositionwillhavetobebrokendownfor eachindividualsovereignissuerfollowingthegeneralrulesforindexlook-through.

Question3k:

CanweincludealongpositioninaUCITSfundinthecalculationofthenetshortposition?AndifthepositionintheUCITSfundhastobeincludedinthecalculation,andtakingintoaccountthatArticle3(3)oftheRegulationspecifiesthat“nopersonshallberequiredtoobtainany

real-timeinformationastosuchcompositionfromanyperson”,istherearequirementtoupdateitscompositiononadailybasis?

Answer3k:

IftheconcernedUCITSfundisanETForsimilarinstrumentincludedinAnnexI,Part1,oftheDR,andifitscompositionispubliclyavailableforlook-throughpurposes,thenitshouldbeincludedinthecalculationofnetshortposition.

Otherwise,itshouldbeexcluded.Inthislastcase,infact,thenetshortpositioncalculationshouldbeconductedatthelevelofthefundmanagemententities.

Ifthepositionhastobeincludedinthecalculationofnetshortposition,thefactthattheRegulationdoesnotrequiretheinvestortoobtainrealtimeinformationshouldnotpreventthemfromcheckingthe

com-positiononadailybasisifthisinformationispubliclyavailableandifitislikelythatthecompositioncanchangeonadailybasis.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |73

AsstatedinQ&Ano.3g,onceinformationonindexcompositionhasbeenobtained,investorshavetoprocessthatinformationforconductingthecalculationofthenetshortposition.

Question3l:

Couldthemeaningofthefollowingstatementsincludedinpoint2ofPartIofAnnexIIoftheDRbeclarified:

"anominalcashshortpositionmaynotbeoffsetbyanequivalentnominallongpositiontakeninderivatives”?

“Delta-adjustedlongpositionsinderivativesmaynotcompensateidenticalnominalshortpositionstakeninotherfinancialinstrumentsduetothedeltaadjustment”?

Answer3l:

InESMA’sview,thetwomentionedstatementsarewaystoillustratethatpersonstakingpositionsthroughderivativesneedtoadjustthenominal/notionalvalueofthesepositionsbytherelevantdeltainordertocalculatenetshortpositionsintheunderlying.

Forexample,ifyouholdalongpositioninanoptionandyouhavecarriedoutashortsaleintheunderlyingshare,youdoneedtotakeintoaccount thedeltaofyourlongpositioninthecalculationofyournetshortposition

Moreover,deltaadjustedlongpositionsinderivativescancompensateshortpositionstakeninotherfinancialinstrumentsonthesameunderlying.

Forexample,adeltaadjustedlongpositioninanoptioncancompensateadeltaadjustedshortpositioninafuture(ESMAassumesthatfutureshavegenerallyadeltaequalto1).

Question4:Durationadjustmentforcalculatingnetshortpositionsinsovereigndebt

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |74

Question4a:

TheDRspecifiesintheAnnexIIpart2para.1thatpositionsshouldbecalculatedin“nominalvaluedurationadjusted”.Whatdurationdefinitionshouldbeusedinthecalculation?

Answer4a:

ThedurationformulatouseistheModifiedDuration.Informationabout theModifiedDurationforaspecificdebtissuebyasovereignissueriseasilyavailablefromdataproviders.ModifiedDurationcanalsobecomputedfromotheravailable“duration”orsensitivityindicatorssuchastheMacaulaydurationorPV01.

Question4b:

Howshouldaninvestorcalculatetheduration-adjustednetshortpositionsonsovereigndebt?

Answer4b:

Foraparticularsovereignissuer,themethodtocalculatethenetshortpositionistomultiplythedurationofeachindividualissueddebt instrumentinwhichtheinvestorhas,attheendoftheday,alongorshortpositionbythenominalvalueofeachofthosepositions,withapositivesignforlongpositionsandanegativeoneforshortpositions,andaddupalltheproducts.

Foreachshortandlongpositionheldonsovereigndebtinstruments(i)andbeingD=ModifiedDurationofeachinstrumentheldandV=Nominalvolume(in€)ofeachpositiondebtinstrumentheld,the“nominalvaluedurationadjusted”(NVDA)wouldbe:

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |75

Forexample,aninvestorwithashortpositionof10million€inabondwithModifiedDuration5anda1million€shortpositioninabondwithModifiedDuration3,5willhaveanetshortpositionequivalentto-53,5million€(-10x5)+(-1x3,5).

Sinceonlynetshortpositionsaretobecommunicated,thenegativesignshallnotbeincludedintheofficialnotification.

Question4c:

HowwillESMAcalculatetheamountofoutstandingsovereigndebtofsovereignissuersonadurationadjustedbasis?

Answer4c:

Everyquarter,therelevantnationalcompetentauthoritieswillprovideESMAwithadurationadjustedfigureoftheoutstandingamountofsovereigndebtfortheirrespectiveMemberStatesorfederatedstates.

ThefiguresforallsovereignissuerswillbepublishedontheESMAwebsitetogetherwiththenotificationthresholdsapplicable.

Oneachreferencedate(endofquarter)forcalculation,themethodtocalculatethisfigurewillbetomulti-plytheModifiedDurationofeachindividualdebtinstrumentissuedbytheconcernedsovereignissuerbyitsoutstandingvolume(i.e.nominalamountissuedandnotredeemed)andaddupalltheseindividualresults.

Foreachinstrument(i)andbeingD=ModifiedDurationofeachissuedinstrumentandV=Outstandingvolume(in€)ofeachissueddebtinstrument,the“nominalvaluedurationadjusted”(NVDA)wouldbe:

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |76

Question4d:

IfIreachorcrossanotificationthresholdjustbecausethedurationofmypositionincreasedordecreased,withouthavingtakenanyinvestmentdecisionandwithoutchangesinthenominalposition,shouldIupdatemynotificationtothecompetentauthority?

Answer4d:

Yes.Thenetshortpositionshouldbecalculatedtakingintoaccountanychangeinthedurationofthepositionheld,andbenotifiedtotherelevantcompetentauthorityifitresultsinthisnetshortpositionreachingathreshold.

Question4e:

Forthepurposeofthecalculatingthenetshortpositioninthesovereign debtofasovereignissuer,isadurationadjustmentrequiredtobeappliedtoderivativepositionsreferencedinthatsovereigndebt?

Answer4e:

Forthepurposeofcalculatingthenetshortpositioninasovereigndebt,ESMAconsidersthatthetextofPart2ofAnnexIIoftheDRonlysuggeststhatthepositionsheldthroughderivativeinstrumentsinthesovereigndebtofasovereignissuer(e.g.options,futures,CDS…)shouldbedeltaadjust-ed.

Question4f:

WouldtheissuanceofaCreditLinkedNotebesubjecttothedurationadjustmentortothedeltaadjustment?

Answer4f:

UnlessacreditLinkedNoteisissueddirectlybyasovereignissuer,itshouldbetreatedasanyotherderivativeonasovereigndebt(seeQ&A4e).

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |77

Question5:Netshortpositionswhendifferententitiesinagroup10havelongorshortpositionsorforfundmanagement activities

Question5a:

Arefunds(orportfoliosundermanagement)managedbythesamemanagemententityexpectedtoreportnetshortpositions?

Answer5a:

No.Atindividualfund(portfolio)level,onlythecalculationofthenetshortpositionforeachparticularissuertakesplace.

Onlythepositionsofthefundsthatarenetshortintheparticularissuer

i.e.pursuingthesameinvestmentstrategy(i.e.beingshort),shouldbe aggregatedtodeterminethenetshortpositionatthemanagemententitylevelandwhetherathresholdisreachedwarrantingthusreportingand,whererelevant,disclosureoftheaggregatednetshortpositioninthatparticularissuer(seeAnnex1).

ForthepurposesoftheRegulation,aninvestmentstrategyiswhetherthefund(portfolio)islongorshortinaparticularissuer.

Question5b:

Howshouldnetshortpositioncalculationandreportingbeconductedwhenthesamesinglelegalentityperformsbothmanagementand non-managementactivities?

Answer5b:

AccordingtoArticle12(5)and12(6),whenasinglelegalentityperformsbothmanagementandnon-managementactivities,itshouldconducttwodifferentandseparatecalculations,oneforeachactivity.

Forthemanagementactivities,thenetshortpositionofeachindividualfundorportfolioundermanagementshouldfirstbecalculatedforeachissuerinwhichapositionisheld.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |78

Thesecondstepconsistsinaggregating,foreachissuer,onlythepositionsofthefundsand/orportfoliosthatarenetshortattheleveloftheentity/division/unit/departmentthatmanagesthesefundsand/orportfolios.

Ifthisaggregatednetshortpositionreachesanotificationthreshold,thentheaggregatednetshortpositionshouldbereported.

Fornon-managementactivities,thelegalentityshouldcalculateitsnetshortpositionineachparticularissuer,excludingthemanagementactivities,andreport(ordisclose)whenarelevantthresholdisreached.

Potentially,onthesameissuer,alegalentitymayreporttwonetshortpositions,oneforthemanagementactivitiesandtheotherforthenon-managementactivities.

(SeeAnnex2)

Question5c:

AccordingtoArticle12(4)oftheDR,themanagemententitylevelreportspecificallyexcludesfromthecalculationthepositionsoffundsand portfoliosthemanagementofwhichisdelegatedtoathirdpartyandincludesthoseoffundsandportfoliosthemanagementofwhichhasbeendelegatedbyathirdparty.

Shouldthesameapproachapplytothesinglelegalentitylevelreportwhenthatentityisperformingbothmanagementactivitiesand

non-managementactivities,eventhoughArticle12(5)ofDRdoesnotexplicitlyrefertoArticle12(4)ondelegationofmanagement?

Anwer5c:

Article12(4)oftheDRclarifiesthemethodsetoutinArticle12(1)to(3).Therefore,ESMAconsidersthattheapproachtodelegationforcalculatingthenetshortposition(excludingmandatesdele-gatedawayandincludingreceivedmandates)appliestothemanagementactivitiesofalegalentityalsoperformingnon-managementactivities.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |79

Question5d:

Beingaglobalfundmanageroffunds,IusederivativeinstrumentsthatmayresultinnetshortpositionsinparticularissuerswhencalculatedasdescribedintheDRthoughthestrategiesbeingimplementeddonot,however,relatetoparticularissuersbutaimatincreasingorreducingexposuretomarketsorsectors.

Anexampleofthetypeofstrategiesthatmaybeemployedis:sellingexposuretoEuropeanbankequitythroughtheEuroStoxxBanksindex(SX7E)usingfuturescontracts.

InlightofthedefinitionofinvestmentstrategyunderArticle12(2)(a)oftheDR11andconsideringthatsuchstrategiesareaimedatreducingmyexposuretosectorsormarketsanddonotrelatetoparticularissuersaretheysubjecttoshortpositionreportingrequirements?

Answer5d:

Yestheyaresubjecttothenetshortpositionreportingrequirement.

AccordingtotheDR,thecalculationofthenetshortpositionshouldbeperformedateachindividualfundlevel.

Foraparticularissuer,itshouldincludenotonlycashpositionsbutalsopositionsheldbytheindividualfundthroughindiceswherethatissuerisrepresentedandinaccordancewithitsweightintheindex.

Theconceptofinvestmentstrategyisusedtodeterminewhetherthefund positionisnetshortornetlong.Intheformer,thenetshortpositionofthatfundshouldbeaggregatedatthelevelofthemanagemententitywiththeotherfundshavinganetshortpositionintheconcernedissuer.

Question5e:

Inagroupconstitutedonlyoflegalentitiesperformingexclusivelymanagementactivities,howshouldcalculationandreportingbeconducted?Whoshouldreport?

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |80

Answer5e:

AsdescribedaboveinQ&A5a,positionsarecalculatedatfundorportfoliolevel.

Thepositionsoffunds(orportfolios)whicharenetshortinaparticularissuerarethenaggregatedatthelevelofthemanagemententitymanagingthesefunds(orportfolios).

Themanagemententityoranotherentityonitsbehalfshouldreportthenetshortpositionwhenathresholdisreached.

Thefundshavingnetlongpositioninthisparticularissuershouldnotbeconsideredintheaggregation.

Noaggregationandnettingoftheshortandlongpositionsoftheseveralmanagemententitiesconstitutingthegroupisrequired.

Question5f:

InlinewithArticle13(2)oftheDR,thegroupshallreport,anddisclosewhererelevant,thenetshortpositioninaparticularissuerwhenitreachesorexceedsarelevantnotificationdisclosurethreshold.

Providedthatagroupisnotalegalentity,whichlegalentitywithinagroupshallsubmitanotification?

Answer5f:

AdefinitionofagroupisprovidedinArticle2(a)oftheDR.

However,theDRdoesnotpro-videforthenecessaryinformationtodeterminewhichlegalentitywithinagroupisempoweredtorepresent thesaidgroupwhenthelatterhastonotifyanetshortpositiontoacompetentauthority.

Article13(3)oftheDRonlyprescribesthatalegalentityshallbedesignatedforthispurpose.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |81

Wherealegalentitywithinagroupisdesignatedtoreportonbehalfofthegroup,ESMAstronglyencouragesthatthesamelegalentityisusedforallsuchreports.

Evenifnofurtherrequirementonthismattercanbeimposed,ESMAneverthelessrecommendsthat,whereagrouphastonotifyanetshortpositiontoacompetentauthority,agoodpracticewouldbetoconsiderthattheheadcompanyofthegroupistherelevantlegalentitytorepresentthegroup.

Indeed,theheadcompanyofagroupgenerallyisthelegalentitythatcontrolsallundertakingswithinthegroup.

Question5g:

Inthecaseofagroup,shouldalegalentitythatisapartofthisgroupalwaysre-port/discloseitspositionwhenitreachesathreshold?

Answer5g:

No,notalways.

Anylegalentitywithinagroupthatreachesorcrossesathresholdwouldonlyhavetoreportitsnetshortpositioninaparticularissuerwhentheaggregatednetshortpositionatthegrouplevel(aggregatingandnettingthenetpositions,longandshort,ofalltheentitieswithinthegroup,withtheexceptionofthenetpositionsresultingfrommanagementactivitiesbyoneormoreofthelegalentities)doesnotsimultaneouslyreachorcrossanotificationthreshold(SeeAnnex4).

Question5h:

Inagroupconstitutedofseverallegalentities,includingmanagemententities,shouldtheshortpositionsofthemanagemententitiesarisingfromtheir‘non-managementactivities’beaggregatedwiththoseofthelegalentitiesnotperformingmanagementactivitiesaspartofthe‘group position’forreporting,orshouldtheybereportedseparately?

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |82

Answer5h:

AccordingtoArticles12(5)and12(6),alegalentitywithinagroupthatperformsbothmanagementactivitiesandnon-managementactivitiesshouldcalculateseparately,andreportwhererelevant,thenetshortpositionresultingfromitsmanagementactivitiesinaparticularissuerfromthenetshortpositionresultingfromitsnon-managementactivities.

Thelattershouldbecalculatedattheconcernedlegalentitylevel.Itshouldbeaggregatedandnettedatgrouplevelwiththenetshortandlongpositionsoftheotherlegalentitiesofthegroupthatdonotperformmanagementactivities.

Question5i:Inthecaseofagroup,

Whatifthegroupandthelegalentitywithinthegroupcrossdifferent thresholds,ortheycrossthesamethresholdindifferentdirections?

Ifthelegalentitywithinthegroupexceedsthe0.5%thresholdand,atthesametime,thegroupexceedsthe0.2%threshold,wouldthelegal entitywithinthegroupstillhavereporting/disclosingobligation?

Answer5i:AccordingtotheconditionslaiddowninArticle13(3)oftheDR,

Inbothsituations,onlythepositionatthegrouplevelshouldbereported.

Thelegalentitywithinthegroupdoesnothavetoreport/discloseitsnetshortposition;onlythenetshortpositionatgrouplevelisreported/disclosed.

Question5j:

Inthecaseofagroup,boththegroupandthelegalentitywithinthegroupacquirepositionsthatexceedthe0.2%thresholdsimultaneously.

Subsequently,onlythegroup’spositionfallsbelowthe0.2%threshold.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |83

Shouldthelegalentitywithinthegroupthenreporteventhoughithasnotcrossedupordownanotherthreshold?

Answer5j:

TheoverallnetshortpositionofagroupshouldbereportedaccordingtoArticle5oftheRegulation.

Inthisregard,itisrecalledthatthegroupisrequiredtoreportitsnetshortpositionwhenitfallsbelow,reachesorexceedsapplicablenotificationthresholds.

AccordingtoArticle13(3)oftheDR,thelegalentitywithinthisgroup doesnothavetoreportasthesaidgrouphasareportablepositiononthatdate.

However,thisarticleprescribesthatanetshortpositionhastobereportedatalegalentitylevelinthecasewherethegroupoverallnetshortpositionisundertheminimumnotificationthreshold(e.g.0.2%forequities).

ItresultsfromtheDRthatifonthetradingdayfollowingthenotification bythegroup,thelegalentitywithinthegroupstillholdsanetshortpositionreachingorexceedinganotificationthreshold,thenthelegal entityshouldnotifyitsnetshortpositioneventhoughsuchpositionwasalreadytakenintoaccountinthenotificationpreviouslysubmittedatgrouplevel.

Insuchacase,thepositiondatethathastobespecifiedinthelegalentity’snotification(dateonwhichthepositionwascreated,changedorceasedtobeheldasprovidedbyRTS112,shouldbethetradingdayonwhichthegroup’slastnotification(i.e.theonecrossingdownthethreshold)wassubmitted.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |84

Example:Day1:

Thegrouphasanoverallnetshortpositionof1.0%.Oneofitslegal entitieshasanetshortpositionof0.5%thatwastakenintoaccountbycalculatingthegroup'soverallnetshortposition.

Thegroup'soverallnetshortpositionhastobenotified/disclosedby15.30hofthenexttradingday(day2).

Day2:

Thegroupnotifies/disclosesitsoverallnetshortpositionof1.0%before15.30h(re-portingdate:day2;positiondate:day1);thereisnofurthernotificationrequirementfortheonelegalentity.

Onthatday2thegroup'soverallnetshortpositionfallsbelowtheapplicablenotificationthresholdsandis0.1%.Oneofthegroup'slegal entitieshasanetshortpositionof0.5%thatwastakenintoaccountbycalculatingthegroup'soverallnetshortpositionforthatday2.

Againthegroup'soverallnetshortpositionhastobenotified/disclosed by15.30hofthenexttradingday(day3).

Day3:

Thegroupnotifies/disclosesitsoverallnetshortpositionof0.1%until15.30h(re-portingdate:day3;positiondate:day2).

Thereisnofurthernotificationrequirementfortheonelegalentity.Onthatday3thegroup'soverallnetshortpositionstaysbelowthe

applicablenotificationthresholdsandisstill0.1%.

Buttheonelegalentityofthatgrouphasanetshortpositionof0.5%(thatwastakenintoaccountbycalculatingthegroup'soverallnetshortpositionforthatday3).

Nowthelegalentitynetshortpositionhastobenotified/disclosedby15.30hofthenexttradingday(day4).

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |85

Butthereisnonotificationrequirementforthegroup'soverallnetshortposition.

Day4:

Thelegalentitynotifies/disclosesitsnetshortpositionof0.5%(reportingdate:day4;positiondate:day3).

Thegrouphasnooverallnetshortpositiontoreport.

Question5k:

Isthereadefinitionoftheterms"positionholder"and"reportingperson",inordertoestablishforinstanceifthepositionholderisthefund,i.e.thelegalentitywhichownstheshortposition,orthediscretionaryinvestmentmanagerwhomakesthedecisiontotaketheshortposition.

Answer5k:

Inprinciplethepositionholderistheperson,naturalorlegalwhichownstheposition.

NeverthelesstheDRdevelopspecificapproachestocalculationandreportingofnetshortpositionsfor,ononehand,managemententitiesofseveralfundsormanagedportfolioandgroupconstitutedofseverallegal entitiesontheotherhand.

WithrespecttomanagementactivitiesasdefinedinArticle12(1)(b)oftheDR,thepositionholderwhenseveralfundspursuethesameinvestmentstrategyisthemanagemententity.

ESMAconsidersthatthepositionholdershouldalsobethemanagementcompanyincaseswhenonlyonefundhasreportablepositions.

Withrespecttogroupoflegalentities,thepositionholdercanbe,dependingonthesituationsetoutinArt13oftheDR,eitheralegalentitywithinthegrouporthegroupitself.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |86

Ingeneral,thepositionholderandthereportingperson(i.e.thelegalornaturalpersonwhomakesthenotificationtothecompetentauthority)shouldbethesameentity.

Howeverinthecaseofagroup,anotherlegalentity(reportingentity)whichispartofthegroupcanbeappointedtoreportthegroup'snetshortpositionwhenaregulatorythresholdiscrossed(seeQ&A5fabove).

Inaddition,thereisinallcasesthepossibilitytoengageormandateanexternalthirdparty,includinganinvestmentfirmonbehalfofitsclients,toreportanddisclosethenetshortpositionofthepositionholderbutthisdoesnotaffectthewaythefield“positionholder”isfilledin.

Question6:Handlingofnotificationanddisclosureofnetshortpositions

Question6a:

Shouldcompetentauthoritiesaccepthandlinglatesubmissionsi.e.notification,modificationorcancellationsubmitteddays,weeksormonthsafterthedateofthecrossedthreshold?

Answer6a:

WithoutprejudicetosanctionsthatcouldbeappliedforbreachingtheRegulation,acompetentauthorityshouldhandlesuchlatesubmissionsrelatingtonetshortpositionsinshares,sovereigndebtandsovereignCDSforsupervisorypurposesincludingensuringconsistencyovertimeoftheinformation.

Whererelevant,forproperinformationofthepublic,thenetshortpositioninsharesshouldalsobepubliclydisclosed.

Toavoidconfusionofthepublicinsuchacase,thepositiondatefieldofthenotificationformmustincludethedateonwhichthepositionwaseffectivelycreated,changedorceasedtobeheld,nomatterhowfarbackinthepast,andnotrefertothedatewhenthenotificationismade.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |87

Question6b:

Howwilllatesubmissionsofdisclosableshortpositionsbedealtwithbycompetentauthorities?Whenwillpublicationofsuchlatedisclosurestakeplace?

Answer6b:

Apersonwithadisclosablenetshortpositionisrequiredtomakethedisclosurebytheofficiallyspecifiedmethodnolaterthan15:30honthetradingdayfollowingthatonwhichthepositionreachedorcrossedtherelevantpublicationthreshold.

Ifthedisclosureismadeafterthattime,thecompetentauthorityoroperatorofthecentralwebsitesupervisedbythecompetentauthoritywill aimtopublishitassoonaspossibleafteritsreceipt,providedthisisduringnormalbusinesshours.

Dependingonthecheckingprocessimplementedbythecompetentauthority,thedisclosuremayoccuronthefollowingtradingday.

Disclosuresreceivedafternormalbusinesshourswillnormallyonlybepublishedthefollowingtradingday.

LatedisclosureswillconstitutebreachesoftheRegulationand,assuch,competentauthoritieswillpursuecasesoflatedisclosuresinlinewiththeirstatedinvestigationandenforcementpolicies.

Question6c:

Whathappensifapersonhasmadeadisclosurebefore15.30but,becauseofregulatorychecksorotherissuesoutsidetheperson'scontrol,thedisclosureisnotpublisheduntilafterthattime?

Answer6c:

ThepersonhasmetitsobligationundertheShortSellingRegulationbymakingthedisclosurebynolaterthan15.30hlocaltimeevenifthenotificationispublishedbythecompetentauthorityortheoperatorofthecentralwebsitesupervisedbythecompetentauthorityatalaterpoint.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |88

Question7:UncoveredshortsalesQuestion7a:

CanalegalpersonwithinagroupenterintoanuncoveredshortsaleprovidedthatanotherlegalentitywithinthesamegrouphasfulfilledoneoftheconditionssetoutinArticle12(1)oftheRegulationwithregardstothesameinstrument?

Answer7a:

No,shortsalescannotbecoveredwithanagreement,pursuanttoArticle12(1)ofSSR,enteredintobyanotherlegalentitywithinthesamegroup.

ThesameentitycarryingouttheshortsalehasindeedtocoveritwithanagreementpursuanttoArticle12(1)ofSSR,includingalocateagreementconcludedwithanotherlegalentitywithinthegroup.

Question7b:

Incaseofashortsaleandasametimecoverthrougharepotransaction,Article5oftheITSrequiresthisbeing“forthedurationoftheshortsale”.

However,inpractise,thedurationoftheshortpositionresultingfromthattheshortsaleisunknownandthatpositioniscoveredbyarepothatisrolledatmaturityaslongastheshortpositionexists.WouldsuchanextensionoftherepobepossibleandcovertherequirementoftheRegulation?

Answer7b:

AccordingtoArticle5(1)(c)oftheITS,theinvestorhastoenterintotherepocontractpriororatthesametimeastheshortsale.Therepurchasedatespecifiedinthatrepohastoensuresthatsettlementoftheshortsalecanbeeffectedwhendue.

Therefore,theexpirydateofthishastobeconsistentwiththesettlementdate.

However,theresultingshortpositionsmayexistwellaftertheshortsalehasbeensettled.Inthisrespect,ESMAconsidersthatnothingintheITS

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |89

precludestherollingoftherepoaftertheshortsaleshavebeenexecutedandsettled.

Question7c:

CantelephonecallregistrationsbeconsideredasadurablemediumforthepurposeofevidencingtheexistenceofanagreementtoborroworotherenforceableclaimunderArticle5oftheITS,orofarrangements,confirmationsandinstructionsunderArticle6and7oftheITS?

Answer7c:

TelephonecallregistrationsareconsideredanadequatedurablemediumunderArticle5,6or7oftheITS.

Question7d:

HowlongshouldthedurablemediumunderArticle5,6and7oftheITS14bestoredasevidenceoftheexistenceoftheagreementtoborroworotherenforceableclaim?

Answer7d:

AlthoughArticles5,6and7oftheITSdonotspecifythelengthoftimeforretainingtherelevantevidence,ESMArecommendsthatthedurablemediumusedshouldallowtheevidencetobekeptunaltered,accessibleandretrievablefor5years.

InsharesQuestion7eb:

Towhatextentareinstrumentswhichgiveclaimstoasyetunissued

shares(subscriptionrights,convertiblebonds)affectedbytherestriction?

Answer7eb:

AccordingtoArticle12(1)oftheRegulation,theprovisionsofthe restrictiononuncoveredshortsalesofsharesrelateonlytosharesadmittedtotradingonatradingvenue.Thatmeansthattransactionsininstrumentssuchassubscriptionrightsandconvertiblebondse.g.performedaspartofacapitalincreasedonotfallwithinthescopeofArticle12(1)oftheRegulation.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |90

Question7fc:

Canclaimstoasyetunissuedshares(subscriptionrights,convertiblebonds)coverashortsale?

Answer7fc:

Claimstoasyetunissuedshares(subscriptionrights,convertiblebonds)mayonlycoverashortsaleiftheavailabilityofthenewsharesforsettlementbythearrangementisensuredwhensettlementisduee.g.theconcernedrightsorconvertiblebondscanbeconvertedintosharesthatwouldbeavailableintimeforensuringthesettlement.

InsovereigndebtQuestion7gd:

AreforeigncurrencybondsofEUMemberStatesalsocoveredbythe

restrictionsonuncoveredshortsalesinsovereigndebts?

Answer7gd:

Yes,theprohibitionprovisioncoverssovereigndebtsecuritiesirrespectiveofthecurrencyinwhichtheyareissued.

Question7he:

Couldashortsaleonsovereigndebtbeconsideredcoveredbyarepocontractexecutedinthedaysfollowingtheshortsalebutwiththesamesettlementdateastheshortsale(e.g.aspotnextrepoforaT+3cashsale)?

Answer7he:

Yes,itispossibletocoverashortsalebyenteringintoarepocontract afterwardsprovidedthat:

1/priortotheshortsale,theshortsellerenteredintooneofthearrangementswithathirdpartyunderArticle13(1)(c)oftheRegulationandArticle7oftheITS(e.g.obtainedan“easytopurchasesovereign debtconfirmation”accordingtoArticle7(5));

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

  • P age |91

  • 2/therepocontracthasanearlierorthesamesettlementdateastheshortsale,sothatthedeliveryoftherelevantsovereigndebtcanbeeffectedwhenitisdue.

  • Question7if:

  • AmarketoperatorwhomanagesaregulatedmarketforsovereigndebtcanbeconsideredathirdpartyinaccordancewithArticle8(1)(f)ofITS?

  • Newanswer7if:

  • Yes,amarketoperatorcanbeconsideredathirdpartyaccordingtoArticle8(1)(f)ofITSif:

  • it“issubjecttotheauthorizationorregistrationrequirementsinaccordancewithUnionlaw”(Article8(1)(f));

  • it“participatesinthemanagementofborrowingorpurchasingof[…]thesovereigndebt”(Article8(2)(a)),forexamplebymanagingarepoplatform(forborrowingthedebt)oracashplat-form(forpurchasingthesovereignsecurities);

  • itisableto“provideevidenceofsuchparticipation”and,“onrequest,toprovideevidenceofitsabilitytodeliverorprocessthedeliveryof[…]sovereigndebtonthedatesitcommitstodosotoitscounterpartiesincludingstatisticalevidence”(Article8(2)(b)-(c))

  • (e.g.withofficialstatisticsofmarketactivity)

  • Suchathirdpartycanprovidean“Easytopurchasesovereigndebtconfirmation”accordingtoArticle7(5)oftheITS(pursuantArticle13(1)(c)oftheRegulation),confirmingthatthesovereigndebtisliquidontheplatformsothatthereisareasonableexpectationthatthesecuritiescanbeborrowedorpurchasedinduetimetoensurethesettlementoftheshortsale.

  • Question7jg:

  • Whenfirmsarecomparingthecorrelationbetweentwosovereignissuers(underArticle3(5)oftheRegulationandArticle8(5)oftheDR)should

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |92

theydothisonanissueperissuebasis,orbycomparingtheyieldcurveofthetwoissuers?

Answer7jg:

Sincenetshortpositionsaretobecalculatedonasovereignissuerbasis,ESMAconsidersthatthecalculationofcorrelationshouldbeundertakenonthebasisoftheissuedsovereigndebt.SoitwouldbeamatterofcomparingtheyieldcurvesofthetwosovereignissuerstodeterminewhetherthetestofhighcorrelationasdefinedintheDRwasmet.

Reminderonthelocaterequirements

Therequirementsforthe“locate”varyaccordingtothefinancialinstrumentconcernedandtothefactthattheshortsalewillbecoveredbysamedaypurchases(i.e.intradayshortselling),asfollow:

forsovereigndebt,atleastoneoftheconditionssetoutinArticle7ofITShastobesatisfied;

forMiFIDliquidsharesandsharesincludedinthemainnationalindex,alltheconditionssetoutinArticle6(4)ofITShavetobesatisfied;alternately,thepersoncanmeettheconditionssetoutinArticle6(3)–incaseofintradayshortselling-orArticle6(2)ofITS;

forothersharesandincaseofintradayshortselling,alltheconditionssetoutinArticle6(3)ofITShavetobesatisfied;alternately,thepersoncanmeettheconditionssetoutinArticle6(2)ofITS;

forothersharesandcases,alltheconditionssetoutinArticle6(2)ofITShavetobesatisfied.

Question7k:

WhatarethemainnationalindicesidentifiedbythecompetentauthoritiesforthepurposeofArticle6(4)oftheITS?

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |93

Answer7k:

Seeinannex5thelistofmainindices.

Question7l:

UnderArticle6oftheITS,iftheintentionistoexecuteashortsaleandcoverintra-day,alocateandeasytoborrowconfirmationissufficientprovidedthatthebrokerisinformedthattheshortsalewillbecoveredbypurchasesduringthesamedayastheshortsaletakesplace.

However,ifaputonholdconfirmationissought(evenifnotstrictlyrequiredforliquidshares),istherestillarequirementtoprovideasame-dayrequestforconfirmationtothethird-partythattheshortsalewillbecoveredbypurchasesduringthesameday?

Answer7l:

Aputonholdconfirmationisnotrequiredforintra-dayshortsalesprovidedthattheconditionsspecifiedinArticle6(3)oftheITSaremet.

However,ifaputonholdconfirmationisneverthelesssoughtforanintra-dayshortsale,ESMAconsidersthatitisnotnecessaryforthepartyintendingtoundertaketheshortsaletoprovideaconfirmationthattheshortsalewillbecoveredbypurchasesduringthesameday.

Itwould,however,benecessarytocomplywithalltheotherapplicablerequirementslaiddownintheimplementingtechnicalstandards,includinginparticularseekingalocateconfirmationfortheshares.

Question7m:

Isitpermitted-inthecontextofArticle12,firstparagraph,(c)oftheRegulation-tomeetthelocaterequirementbysimplyreferringtoanexisting“easy-to-borrowlist”?

Answer7m:

No,thepracticeofreferringtoaneasy-to-borrowlistasalocate arrangementisnotcompliantwiththeRegulation.Areferencetoalistasalocatearrangementisnotidenticaltoaconfirmation,asrequiredby

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |94

Article12,firstparagraph,(c)oftheRegulation.Article6,paragraph4,(b)oftheITSindicatestheexistenceofaspecificconfirmation.

Question8:UncoveredsovereignCDS-ADDED

Datelastupdated:January2013

Moved

Question8a7h:

Dotherestrictionsonuncoveredsovereigncreditdefaultswapsalsoapplytotheprotectionseller?

Answer8a7h:

No,therestrictiononuncoveredsovereigncreditdefaultswapsappliesonlytotheprotectionbuyerofaCDS.

Moved

Question8b7i:

MayasovereignCDSbeusedtohedgetheriskunderanotherCDSreferringtothesamesovereigndebt?

Answer8b7i:

Yes,itwouldbelegitimatetouseasovereignCDSpositiontohedgeariskrelatedtoan-otherCDSpositioninsofarastheconditionsprescribedinChapterV(inparticularArticles18and19)oftheDR(CommissionDelegatedRegulationNo918/2012)arefulfilled.

Question8c:

IsitlegitimateforaninvestortohedgeariskthroughaCDSpositionwhichiseitherlongerorshorterindurationthanthetermoftheasset/liabilitybeinghedged?Asexamples,coulda12yearsovereign bondbehedgedby5yearsovereignCDScontractwhichwasthenrolleduntilthematuritydateforthebondora2yearbondbehedgedwitha5yearsovereignCDScontract?

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |95

Answer8c:

Article19(3)oftheDRstatesthatthedurationofthesovereignCDSpositionisalignedascloselyaspracticablegivenmarketconventionsandliquiditywiththedurationoftheexposuresbeinghedgedortheperiodduringwhichthepersonintendstoholdtheexposure.

ESMArecognisesthatthetermofliquidsovereignCDScontractsmaynotbealignedwiththetermofthehedgedexposure.

Differencesinduration(tobeunderstoodasmeaninglengthoftime)wouldthereforebepermittedsubjecttotheoverridingconditionthattheperson’ssovereignCDSpositionshouldneverbeuncoveredasdefinedin theDR.

Henceitwouldbelegitimatetopurchasea5yearsovereignCDStohedgea12yearsovereignbondand'roll'thecontracteveryquarterwhilethepositionwasheld.Itwouldalsobelegitimatetousea5yearsovereignCDSpositiontohedgeaholdingofa2yearsovereignbondprovidedthat,onmaturityofthebond,itwaseitherreplacedbyanequivalentexposure ortheCDSpositionwasreducedorotherwisedisposedofasrequired.

Question8d:

ShouldtheholdingofasovereignbondbetreatedasastaticordynamichedgeforthepurposesofArticles19and20oftheDR?

Answer8d:Article20(2)oftheDRspecifiesthatdirectexposurestosovereignorpublicsectorbodiesinthesovereignareexamplesofstatic hedging.

Theholdingofasovereignbondshouldthereforebetreatedasastatic hedge.

Question8e:

CanasovereignCDSpositionbeusedtohedgeagainsttherisknotonly ofdefaultinrespectofanexposurebutalsoagainsttheriskofcreditspreadswideninge.g.bymaintainingdifferentdurationsinstaticordynamichedgestohedgeagainstspreadwideningrisk?

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |96

Answer8e:

ESMAconsidersthatthiswouldbepermissibleaslongasthesovereignCDSpositionneverbecameuncovered.Article19(3)oftheDRrecognisesthatthesamesovereignCDSpositioncanbeusedtohedgedifferentrisks

i.e.whenoneriskisliquidatedanotherriskcouldbesubstitutedprovideditmetthetests.

Question8f:

Article15(2)(a)oftheDRprovidesthat“wheretheexposurebeinghedgedrelatestotheUnionortheMemberStateswhichhavetheeuroastheircurrency,itshallbepermissibletohedgeitwithanappropriateEuropeanorEuroareaindexofsovereignbondcreditdefaultswaps”.

Incaseswheresuchindicesareused,isitnecessarytoundertakealookthroughassessmentofcorrelationandproportionalitybetoeachunderlyinglongpositionandreferenceobligationthatunderliestheindex beingused?

Answer8f:

ESMA’sunderstandingisthatwheretherisksbeinghedgedareineachofthe27EUMemberStatesorofthemembersoftheEuroarea,thecorrelationandproportionalitytestswouldneedtobemetineachofthecomponentsofthesovereignCDSindex.Sotherewouldthereforeneedtobeafulllookthrough.

However,iftheassetbeinghedgedwasUniondebtordebtofaEuroareainstitutionsuchastheEFSForESM,thiswouldbetreatedasasingleassetwhichcouldbehedgedbytheappropriatesovereignCDSindex.

Question8g:

AreplacementtradeisapracticeusedincompressionserviceforCDS.

TheyaimspartiallyterminateaCDSandsubsequentlyreplacewithnewswapcorrespondingineconomictermswiththetradestheyreplace.

WithrespecttosovereignCDSconcludedbefore25March2012,arereplacementtradesontheseCDSdeemedtofallunderthetransitional

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |97

measuressetoutinArt46(2)oftheRegulation(sovereignCDSconcluded before25March2012maybehelduntilthematuritydateofthecontractevenifsuchCDSresultinanuncoveredposition)?

OrshouldsuchreplacementtradesbesubjecttoArticle14oftheRegulation(restrictiontoenterintoanuncoveredCDS)?

Answer8g:

ProvidedthatthereplacementtradedoesnotextendthelifeorvalueofthesovereignCDSpositionbeyondwhattheywerewhenoriginallytakenoutbefore25March2012,ESMAconsidersthatitwouldbelegitimatetotreatthetradeasanexistingratherthananewcontractandsonotencompassedbytheRegulation'sprohibitiononenteringintouncoveredsovereignCDStransactions.

Question9:Exemptionformarketmakingactivitiesandforprimarydealersoperations-MOVED

Question:

Inorderforanynon-EEAentitytobeabletousethemarketmakingactivitiesexemptionasdefinedintheRegulation,themarketinitshomejurisdictionshouldbesubjecttoalegalandsupervisoryregimewhichisequivalenttotheMiFID,MADandTransparencydirectiveandshouldbedeclared“equivalent”.

Hassuchadeterminationof“equivalence”alreadytakenplace?

Willnon-EEAentitiesbeabletousetheexemptionfortheirmarketmakingactivitiesundertheRegulationintimefor1November,2012?

Answer:

AccordingtoArticle17(2)oftheRegulation,thelegalandsupervisoryframeworkofathirdcountryisconsideredequivalentwhentheEuropeanCommissionhasadoptedadecisiontothateffect.

TheCommissionhasnotissuedanyequivalencedecision;thus,atthisstage,nothirdcountryentitycanclaimtheuseoftheexemptioninrelationtoathirdcountrymarket.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |98

Question10:Enforcement-MOVED

Datelastupdated:September2012

Question:

HowwillanyviolationsoftheprovisionsoftheRegulationbe sanctioned?

Answer:

PursuanttoArticle41oftheRegulation,rulesonpenaltiesandadministrativemeasuresshallbeestablishedbyMemberStatesand notifiedtoESMA.

Inaddition,ESMAhastopublishalistoftheexistingpenaltiesandadministrativemeasuresapplicableinMemberStatesonitswebsite(http://www.esma.europa.eu/page/Short-selling).

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |99

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |100

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |101

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |102

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |103

  • FromthePublicResponsestothe2012NovemberConsultativeDocuments

  • StrengtheningOversightandRegulationofShadowBanking

  • TheFSBpublishedinNovember2012itsConsultativeDocumentsonStrengtheningOversightandRegulationofShadowBanking,which providedaninitialintegratedsetofpolicyrecommendationstostrengthenoversightandregulationofshadowbanking.

  • TheConsultativeDocumentsinclude:

  • AreportentitledAnintegratedOverviewofPolicyRecommendationswhichsetsouttheFSB'soverallapproachtoshadowbankingissuesandprovidesanoverviewofitsrecommendationsacrossthefivespecificareas;

  • AreportentitledPolicyFrameworkforStrengtheningOversightandRegulationofShadowBankingEntitieswhichsetsoutahigh-levelpolicyframeworktoassessandmitigatebank-likesystemicrisksposedbyshadowbankingentitiesotherthanmoneymarketfunds(MMFs);and

  • AreportentitledPolicyRecommendationstoAddressShadowBankingRisksinSecuritiesLendingandReposthatsetsout13recommendationstoenhancetransparency,strengthenregulationofsecuritiesfinancingtransactions,andimprovemarketstructure.

  • TheFSBindicatedthatitwouldwelcomecommentsontheseConsultativeDocumentsby14January2013.

  • Thesecommentsareavailablebelow.

  • TheFSBwishestothankthosewhohavetakenthetimeandefforttoexpresstheirviews,whichwillserveasaninputtoitsworktofinalisepolicyrecommendationsbySeptember2013.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

  • P age |104

  • DeutscheBank

  • DeutscheBankresponsetoconsultationonStrengtheningOversightandRegulationofShadowBankingPolicy:aFrameworkforAddressingShadowBankingRisksinSecuritiesLendingandRepos

  • DearSir/Madam,

  • DeutscheBankwelcomestheopportunity

  • torespondtotherecommendationsproposedbytheFinancialStabilityBoard(FSB)foraddressingshadowbankingrisksinsecuritieslending andrepurchaseagreements(repos).

  • Thisreport’sfindings,combinedwiththeinterimreportpublishedearlierthisyear,representathoroughandusefulanalysiswithrecommendationsthatstrikeabalancedtonefortheapproachtoregulationofsecuritiesfinancingmarkets.

  • However,intranslatingwhataresoundprinciplesintoconcretemeasures,morethoughtshouldbegiventounintendedconsequencesandinteractionswithotherregulationandregulatoryproposals.

  • Asthereportrecognises,securitiesfinancingmarketsareanessentialcomponentofthefinancialmarketsasawholeand,assuch,regulatoryinterventionsinthisspaceneedtobeadvancedcarefully.

  • TheFSBisthereforerighttostandbyacommitmenttoproportionateregulationandtoidentifygreatertransparencyandunderstandingofthedynamicsandriskswithinthismarketasakeypriority.

  • Inordertoavoidunintendedconsequences,webelieveitisimportant thatfinalrecommendationscapturethefollowingkeypoints:

  • Scope-Indevelopingrecommendationstoaddresspotentialrisksarisingfromsecuritieslendingandrepoactivity,caremustbetakento

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

  • P age |105

  • ensurethatproposedremediesareappropriateforcreditinstitutionswhicharealreadycapturedwithinthescopeoftheBaselIIIregulations.

  • Duplicationorconflictmustbeavoidedandthescopeofapplicationoftheproposedrecommendationsneedstobecarefullytailored.

  • Overlap-SignificantworkhasbeenadvancedinrecentyearsbytheBaselCommitteetostrengthenliquidityandensureprudentbalancesheetriskmanagementwithinbanks.

  • Forinstance,theLiquidityCoverageRatio(LCR)accountsforsecuredlendingandrepotransactionsbyensuringoutflowsrelatedtothesetransactions,duringastressedperiod,areadequatelycoveredbyastockofliquidassets.

  • Theproposaltoimplementmandatoryminimumhaircutscouldleadtosignificantoverlapinthisarea.

  • Furthermore,theBaselIIILeverageRatioplacesalimitonbanks’balancesheets,directlyaffectingtheextenttowhichsecuredborrowingcanbeundertaken.

  • Theserulesshouldnotbeunnecessarilyunderminedorduplicatedbyadditionalmeasuresdesignedtoaddressthenon-banksector.

  • Transparency-Webelievethatabetterunderstandingofexistinginteractionswithinsecuritiesfinancingmarketsisessentialtoinformthemoredetailedworkthatisrequiredtofinaliserecommendationsinthisarea.

  • TheFSBisrighttopointoutthatanumberofglobalreportinginitiativeshavealreadybeenlaunched,andanyfurtherinitiativesinthisspaceshouldtaketheseintoaccount.

  • Consistentimplementation-GlobalimplementationoftheFSB’sfinalrecommendationswillbeessentialiftheyaretobeeffectiveinreducingsystem-widerisks.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |106

ItisthereforecriticalthattheFSBfocusesexplicitlyontheapproachtoimplementationandongoingoversightoftheapplicationofnewrulesat thisstage.

Wealsohaveconcernsthatrulesarebeingdevelopedbasedonthecurrentenvironment,withoutfullydeterminingorunderstandinghowthelandscapewillchangeintwotothreeyears’timeasaresultofotherregulations(i.e.BaselIII,CRDIVandEMIRintheEU,DoddFrankintheUSandforthcomingproposalsinrelationtothecollateralisationofnon-centrallyclearedderivativesforallmarketparticipants)whichwillrelyheavilyonparticipants'abilitytofinancetheirpositionsandsignificantlyaffectcollateralflowsglobally.

Itmaybeprudentthereforetoconsiderimplementationtimeframesand monitorthisareaoffocusbeforeapplyingstrictrules.

Wewouldbeveryhappytodiscussanyofthepointsraisedinthisresponse,ortoprovideadditionalinformationifitwouldbeuseful.

DeutscheBankresponsetotheFinancialStabilityBoard’sconsultationonStrengtheningOversightandRegulationofShadowBankingPolicy:aFrameworkforAddressingShadowBankingRisksinSecuritiesLendingandRepos.

A.Generalremarks

Q1.Doesthisconsultativedocument,takentogetherwiththeearlierinterimreport,adequatelyidentifythefinancialstabilityrisksinthesecuritieslendingandrepomarkets?

ArethereadditionalfinancialstabilityrisksinthesecuritieslendingandrepomarketsthattheFSBshouldhaveaddressed?Ifso,pleaseidentifyanysuchrisks,aswellasanypotentialrecommendation(s)fortheFSB’sconsideration.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |107

Thisconsultation,alongwiththeFSB’sinterimreportonsecuritieslendingandrepo,effectivelyidentifiesthepotentialfinancialstabilityrisksthatcouldarisefromtheseactivities.

However,manyoftheseriskswillbemitigatedbytheimplementationoftheBaselIIIframework.

Forinstance,theintroductionoftheLeverageRatiowillsignificantlycurtailtheextenttowhichbankscanraisefundingagainstassets,whilsttheLiquidityCoverageRatio(LCR)willensurethatbanksholdasufficientquantityofliquidassetsagainstapotentiallossofsecuredfundingduringaseverestressscenario.

ThesearedevelopmentswhichwillhaveaclearbearingontherisksthattheFSBisseekingtotacklethroughthispaperandassuchitisimportant thattheyareproperlyreflectedinthefinalrecommendationsoftheFSB-particularlywithrespecttodeterminingthescopeofapplicationfortheproposals.

Careshouldalsobetakennottocreatedisincentivesforsecuredfundingwiththeintroductionofmandatoryminimumhaircuts.

Thisrecommendation,whencoupledwiththeBaselIIILCRwhichalreadystressesoutflowsonsecuredfundingtransactions,couldremovethebenefitofsecuredfundingandleadtoahigherrelianceonunsecuredmoney.

Finally,theriskthatmaturitytransformationbringsforregulatedentitiesisfullycapturedwithintheLiquidityCoverageRatio(LCR)andwillbestrengthenedbytheNetStableFundingRatio(NSFR)whenitisintroduced.

Thereforeattemptstoimposelimitationsonmaturitymismatch,outsideofthiscontext,wouldriskduplication.

Q2.Dothepolicyrecommendationsinthedocumentadequatelyaddressthefinancialstabilityrisk(s)identified?Aretherealternativeapproachestoriskmitigation(includingexistingregulatory,

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |108

industry,orothermitigants)thattheFSBshouldconsidertoaddresssuchrisksinthesecuritieslendingandrepomarkets?

Ifso,pleasedescribesuchmitigantsandexplainhowtheyaddresstherisks.Aretheylikelytobeadequateundersituationsofextreme financialstress?

WeendorsetheoverallapproachoftheFSBwhichhastriedtomaintainfocusontailoredandproportionateinterventionstoaddressriskswhereappropriate.

Forthemostpartspecificrecommendationsmeetthetestofproportionality;however,wedonotbelievethatthisisthecaseforthoserelatingtomandatoryminimumhaircuts.

Wedonotbelievethatthemeasuresproposedaroundminimumhaircutswouldbeeffectiveinreducingpro-cyclicalityandhaveconcernsthattheycouldhavesignificantunintendedconsequences.

TheywouldalsoduplicatemarketriskmeasuresinBasel2.5andBaselIII,whichcouldinturnleadtoperverseincentivesthatwouldunderminetheoverarchingfinancialstabilityaimsoftheFSBframework.

Inaddition,thecumulativeimpactwhencombinedwithotherregulatoryproposalsshouldbeconsidered.

Inparticular,theBaselCommitteeandIOSCOarecurrentlydevelopingproposalsregardingthecollateralisationofnon-centrallyclearedderivativesandwhetherre-hypothecationofthatcollateralwouldbepossible.

ItisimportantthattheimplicationsoftheseproposalsaretakenintoaccountintheFSB’sfinalrecommendationsforsecuritieslendingandrepo.

Moregenerally,asstatedabove,wealsobelievethatmanyofthekeyrisksidentifiedbytheFSBarealreadycapturedoraddressedundercapital,

liquidityandleveragerulesbeingappliedtobanks.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |109

ThisshouldbetakenintoaccountintheFSB’sfinalrecommendations.

Forexample,restrictionsonleverageforregulatedentitieswillbe capturedundertheBaselIIIinternationalLeverageRatio.

RepoandsecuredlendingarecapturedwithintheexposuremeasurecalculationoftheproposedLeverageRatioandcollateralpricevolatilityiscapturedwithinLCR-prescribedrepohaircuts.

Iftheintentionistofurthercapturesystemleverageratherthaninstitution-specificleverage,theFSBshouldalsotakeintoaccountthatmanyinstitutionswillberequiredtoholdsystemicriskbufferseitherasglobalordomesticSystemicallyImportantFinancialInstitutions,whichisafurtherprotectionanddisincentiveagainstinter-connectedness.

Q3.Pleaseexplainthefeasibilityofimplementingthepolicyrecommendations(oranyalternativethatyoubelievethatwouldmoreadequatelyaddressanyidentifiedfinancialstabilityrisks)inthejurisdiction(s)onwhichyouwouldliketocomment?

Enhancedmonitoringoffinancialstabilityrisks-forallmarketparticipantswhetherprudentiallyregulatedbanksornon-banks-isessentialtoprovideanunderstandingofwhereriskslieandtobeabletodevelopappropriateregulatoryresponsestothem.

GreatertransparencywillinformregulationandshouldbeprioritisedinordertoensuretheFSB’sviewonthepreciseregulatorytoolsthatarerequiredtoaddresstherisksidentifiedareappropriate.

Withoutcurrentdataonthefunctioningofthemarket,effectiveimpactassessmentsforindividualmeasureswillbeimpossibletocomplete.

Manyofthekeydataelementsarealreadyavailabletosupervisoryauthoritiesinanumberofjurisdictions.

AsfaraspossibletheseexistingdatainitiativesshouldformthebasisofproposalsforenhanceddatacollectionandtheFSB’srecommendations

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

  • P age |110

  • shouldfocusonensuringasmuchglobalconsistencyindatarequirementsaspossible.

  • TheregulatoryreformagendathatisalreadybeingdeliveredwilladdressmanyoftherisksidentifiedbytheFSBanalysis(i.e.greatertransparencyviaOTCreformsglobally;UCITSandMiFIDrevisionsintheEU;liquidity,leverageandcapitalrulesandlargeexposurelimitsdesignedtocapturenon-bankingentitiesundertherevisedBaselframework).

  • TheFSB’soverallapproachtoregulationoftherepoandsecuritieslendingsectorhasquiterightlyfocussedontheneedtoensureproportionality.

  • Ensuringtheappropriatescopeofapplicationforrecommendationsshouldbeanessentialelementofthatproportionality.

  • Q4.Pleaseaddressanycostsandbenefits,aswellasunintendedconsequencesfromimplementingthepolicyrecommendationsinthejurisdiction(s)onwhichyouwouldliketocomment?

  • Pleaseprovidequantitativeanswers,totheextentpossiblethatwouldassisttheFSBincarryingoutasubsequentquantitativeimpactassessment.

  • Inourview,theintroductionofnumericalfloorsforhaircutsonsecuritiesagainstcashtransactionswouldhavetheunintendedconsequenceofincentivisingunsecuredfundingand/oruseoflowerqualitycollateral.

  • Specifically,wethink:

  • TheproposalsareoutoflinewithBaselIIILCRhaircutsi.e.4%forlonger-datedsovereigndebtsecuritiesvs0%intheLCR.

  • Imposingfloorswhicharehigherthanthoseusedinnormalmarketpracticecouldintroduceincentivesforlessvigilantcollateralmanagementi.e.twosovereigndebtsecuritiesarebothsubjecttoa

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |111

4%floor;onesecurityisissuedbyamorehighlyratedsovereignthantheother,andthereforereceivesalowhaircutinnormaltimes.

Ifbotharesubjecttoa4%floor,collateralmanagersareinturndis-incentivisedfromutilisingthehigherqualitycollateral.

-WherefloorsconflictwiththoseprescribedintheLCR,therewillbeanetbenefitundertheLCRforholdingthecollateralinsteadofusingit inrepomarkets.

Forexample,ifyouholdanunencumberedlevel1assetyoucancount

100%ofitsvalueintheliquiditybuffer.

Alternatively,ifyourepothatsecurityyouwillonlyreceivethepost-haircutvalueincash.

Hence,forLCRcompliance,itwouldbeadvantageoustofundyourpositionunsecuredifamandatoryhaircutisapplied.

Inthiscontext,wesupporttheFSB’sintentiontocarryoutaQuantitativeImpactStudyontheseproposalswhichwebelievewilldemonstratethatminimumhaircutswouldbecounterproductive.

Whenassessingtheimpactofmandatoryminimumhaircutsontheregulatedbankingsector,theFSBshouldconsiderthecombinedimpactoftheseproposalswiththeBaselIIIrulesonbothleverageandliquidity.

Inaddition,theFSBshouldconsidertheimpactassessmentconducted bytheBaselCommitteeandIOSCOwhendevelopingproposalsforcollateralisationofnon-clearedderivatives.

Thiswillresultinsignificantchangestotheavailabilityanduseof collateralglobally.

Q5.Whatistheappropriatephase-inperiodtoimplementthepolicyrecommendations(oranyalternativethatyoubelievewouldmoreadequately)

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |112

InlightofthepotentialformanyoftherecommendationssetoutbytheFSBtohavesignificantunintendedconsequencesforfinancialmarkets,itisimperativethatanyregulatoryinitiativesareprecededbyathoroughimpactassessmentandsubjecttophase-in-astheFSBsuggests.

Ifrecommendationsaretakenforwardonminimumhaircuts,limitsoncashcollateralreinvestmentandre-hypothecationofclientassets,thenwewouldrecommendtheFSBincorporatesa“monitoringperiod”toassesstheimpacts,similartotheapproachusedinupdatingtheBaselframework.

Suchamonitoringperiodwouldbeallthemoreimportantgiventheinteractionofrecommendationswithotherregulationsstilltocomeintoforce,suchasBaselIIIandBaselCommittee/IOSCOproposalsonmarginfornon-clearedderivatives.

ConsistentglobalimplementationofanyrulesisalsoessentialandassuchwewelcomeFSBleadershipinthisareaandwouldemphasisetheimportanceoftheFSBcontinuingtobecloselyfocusedontheimplementationofanyfinalrecommendationsinthisarea.

B.Transparency

Overallweagreewiththeassessmentthatregulatorsgloballyneedaccesstomoreconsistentandgranulardataonsecuritieslendingandrepos.

WebelievethatasignificantamountofdataisalreadybeingprovidedtoindividualsupervisorsandstronglyendorsetheFSB’srecommendationthatthefirststeptoimprovedtransparencyshouldbetobuildonexistingsourcesofdata.

Wealsowelcometherecognitionthat,tobeuseful,differentlevelsofdata arerequiredfordifferentpurposes.

Itisessentialthatanydatacollectedshouldbedirectlyrelevanttoprovidingsupervisorswithabetterunderstandingofspecificpotentialrisksarisingfromsecuritieslendingandrepoactivity.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |113

Stepstoimprovedatacollectionshouldfocusonimprovingexistingsourcestoallowdetectionofpotentialsystemicriskandrelevantdatagaps.

Ifessential,yetcurrentlyuncollecteddataisidentified,relevantcontractual-leveldatacanthenberequested.

However,itmaybethatinmostinstancesaggregated,orinformationon netpositions,willsuffice.

Theseadditionalitemsshouldberequestedwithadequatetimeforbankstoadjusttheirsystems.

ThispointisparticularlysignificantinlightofEuropeanfirmswhoarecurrentlyimplementingsubstantialnewreportingrequirements(COREPandFINREP).

Asignificantamountofinformationoninstitutions’creditriskexposuresthroughreposandsecuritiesfinancingisalreadyincludedinbanks’Pillar3disclosurereportsunderBaselIII.

TheBaselIIIQuantitativeImpactStudyisanotherimportantsourceofdata,collectinginformationonbanks’maturitytransformation(NetStableFundingRatio)andsecuredlendingactivity(LiquidityCoverageRatio)plusappliedhaircuts.

Inaddition,anumberofnationalregulatoryreportsandmarketsurveysalreadycapturemuchofthedatathattheFSBindicatesmayberequiredtoprovidetherequiredleveloftransparency.

Theconsistencyandcomparabilityofthisinformationshouldbe reviewedalongwithanygapsforthepurposesofdetectingemergingsystemicrisks.

Existingsourcesinclude:theInternationalCapitalMarketsAssociation’sEuropeanRepoCouncil’sbiannualsurvey;theBankofEngland’squarterlymoneymarketsurvey;reportsgeneratedforclientsunderthe

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |114

UKFinancialServicesAuthorityClientAssetssourcebookregime;andtheFSAhedgefundsurvey.

TheFSBconsidersthatthetimelagandgranularityaroundregulatoryreportingandsurveysisadownsidetorelyingsolelyonthesetools.

However,beforeproposingentirelynewframeworksforcollectingdata,thescopeforreducingtimelagsorextractingmoredatafromexistingreportsinacostefficientmannershouldbefullyexplored.

Forexample,inclusionofmonthlydeltachangesalongsideexisting reportswouldidentifyincreasesincollateraltransactionswhichcouldindicateanincreaseinleverage,withoutaneedforsignificantnewdatafieldstobeadded.

Q6.Doyouagreewiththeinformationitemslistedinbox1(seeannex)forenhancingtransparencyinsecuritieslendingandrepomarkets?

Whichoftheinformationitemsarealreadypubliclyavailableforallmarketparticipantsandfromwhichsources?

Wouldcollectingorprovidinganyoftheinformationitemslistedpresentanysignificantpracticalproblems?Ifso,pleaseclarifywhichitems,thepracticalproblems,andpossibleproxiesthatcouldbecollectedorprovidedtoreplacesuchitems

WedonotbelievethatthelistofdataitemsproposedbytheFSBinBox1wouldpresentsignificantpracticalproblemsforDBtodeliver,thoughthisinpartreflectsthefactthatasignificantproportionoftheitemsarealreadyrequiredaspartofexistingregulatoryreportsorsurveys.

TotheextentthatmoregranularorfrequentdataisrequiredbytheFSBorthereisanexplicitneedforadditionaldataitemstobecaptured,thentherewillbeassociatedsystemcostsformarketparticipantstodeliverthem.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |115

Assuch,itwillbeimportanttoensurethatallitemsrequestedarenecessary,asrelevantforthedetectionofemergingsystemicrisk,andarenotalreadybeingcapturedthroughothermeans.

Thebenefitsofincreasedgranularitymustbeweighedagainstthecostsofcollection-notjustformarketparticipants,butalsoforsupervisorswhowillhavetoabsorbandinterpretdataflows.

Whereitisconcludedthatdatafieldsoverandabovethosecurrentlycapturedbyreportingrequirementsorsurveysacrossjurisdictionsareneeded,thentheFSBshouldensurethatappropriatephasingofimplementationisinplacetoavoidanysuddenspikesinsystemscostsandtoallowfirmstomanageimplementationprojectsappropriately.

Thiswouldultimatelyensureagreaterdegreeofaccuracyinthedatacollected.

Q7.DoyouagreeTRswouldlikelybethemosteffectivewaytocollectcomprehensivemarketdataforsecuritieslendingand/orrepos?WhatistheappropriategeographicalandproductscopeofTRsincollectingsuchmarketdata?

WewouldagreethataTradeRepository(ies)(TR)mayultimatelybethemosteffectivewaytocollectcomprehensivemarketdataonseclendingandrepoactivityandoverallwouldbesupportiveofthisapproach,aslongasthereisscopeformarketparticipantstoshapethenumberand natureoftheTRscreated(i.e.thereshouldbeflexibilityforfirmstodeterminethemosteffectivewayofdeliveringandverifyingtheaccuracyoftherequiredtradedata).

ThelogisticalrequirementsofestablishingaTRmustbecarefullythoughtthrough.

Whilenotallregulatorscurrentlyreceivedetailedtransaction-leveldataitisavailableinmanycases.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |116

Asmentionedinresponsetopreviousquestions,theFSBisthereforerighttorecommendthatfurtherstudyandinterimstepsareneededtodeterminefeasibilityandcostbeforeproceedingwithaTR.

Forexample,thegainsfromimprovementsindatacollectiondiscussedaboveshouldbefullyexploredalongsideassessingthecostsandfeasibilityofestablishingTRs.

WeagreewiththeFSB’sassessmentthatglobalTRsforsecuritieslendingarepreferableandbelievethatrepoTRsshouldalsobeconsideredonaregionaloraninternationalbasis.

Inordertobeviable,TRsneedtohaveacriticalmassandinsomecurrenciesrepomarketsmaynotbesufficientlylargetosustainthis.

Assuch,factorssuchasthesizeofthemarket,scopeforco-locationwithcomplementarymarketsandtheopportunitytoexploitexistingplatformsforotherproductsshouldbeconsideredwhendeterminingtheappropriatelevelforarepoTR.

MarketparticipantswillbebestplacedtoanswermanyofthesequestionsaboutoptimalscopeandproductreachforindividualTRsandassuchitisimportantthatfirmsthemselvesarecloselyinvolvedinthedevelopmentofTRs.

Itisalsoimportantthatcommercialsensitivities,confidentialityandinformationsecurityareproperlyrespectedintheestablishmentofaTR.

Whiletherearestrongargumentsforawiderangeofdatatobeavailabletosupervisors,itdoesnotautomaticallyfollowthatitwouldbebeneficialtomakeallofthisinformationpubliclyavailable.

Considerationshouldalsobegiventotheuseofserviceproviderswhoprovideoutsourcingservices(suchasfundmanagementandagencysecuritieslending)tomarketparticipantsandcouldperformreportingon behalfoftheunderlyingentity.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |117

Q8.WhataretheissuesauthoritiesshouldbemindfulofwhenundertakingfeasibilitystudiesfortheestablishmentofTRsforrepoand/orsecuritieslendingmarkets?

Frommarketparticipants’experienceofthemovetocentralTRsforOTCderivatives,severallessonsmustbelearned.

First,TRsshouldbeglobalwherepossibleandorganisedmoreregionally/nationallydependingonthesizeandnatureoftheproductmarket.

Asoutlinedabove,thiswillvarybymarketandwillalsodependonthescopeforco-locationwithothermarketsorexistingplatforms.ThelocationofTRswillalsoaffectimplementationarounddatacollection-astradinghappensgloballyandspansdifferenttime-zones-anddeliverydates.

ThelegalframeworkunderwhichtheTRoperatesshouldalsobeconsidered,assomejurisdictionshaveverystringentrulesaroundoutsourcingusage,datasecurityandprivacyofinformation.Thisshould notimpederegulatoryaccess.

Toensureglobalcomparabilityofdata,fieldsandformatsofdatacollectedshouldbeconsistentwiththeFSBLegalEntityIdentifierinitiative.

Second,thepurposeofcollectingthatdataandwhowouldhaveaccesstoitmustbeclearlydefinedupfront.

Aclearpurposewillhelpdeterminewhatscope,intermsofproductscoveredandinformationprovided,wouldbemostrelevantandappropriatetoreport.

Whileregulatorsshouldbeabletohaveaccesstothatinformation-providingtheyfollowconfidentialityrulesaroundinformationexchange-theFSBrightlyrecognisesthatpublicinformationwouldhavetobeanaggregated(andanonymised)subsetofthatsubmittedandavailableto

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |118

regulators.Itshouldalsobeclarifiedwhatactioncouldbetakenbyaregulatorandunderwhatterms,basedontheinformationcollected.

Inadditiontorespectingconfidentiality,stringentinformationsecurityateverystageofthehandlingprocessisneededandshouldbereflectedinchoiceofprovider,warehousing,technologyusedandprocessformaintainingandreceivinginformation.

Thiswillcarrysignificantcostsbutisessentialgiventhehighlycommerciallysensitivenatureoftheinformation.

Third,thetermsunderwhichtheTRcancollect,useorsharethatdatashouldbemadepublicandshouldbebasedonthepremiseofobjective,non-discriminatoryaccessandpricing.

Serviceproviders,includingfromwithintheTR’sparentcompany,shouldonlyhaveaccesstotheinformationmaintainedbytheTRwhentherelevantcounterpartieshaveprovidedtheirconsent.

Thatsaid,thelegalframeworkapplyingtotheTRshouldbeconsideredwithregardstoconfidentialityanddatasecurity-assomejurisdictionshaveverystringentrulesinplacethatmaypreventlegitimateregulatoryaccessandoutsourcingarrangements.

Fourth,considerationneedstobegiventowhichproductsandwhatdataitisnecessaryandrelevanttoreporttotheTR,thevolumeofinformationtobeprovided(e.g.manyrepotransactionshavematuritiesoflessthanonedayandassuch,couldsignificantlyaddtothevolumeofdatawithoutsignificantlyenhancingitsrelevanceforsystemicriskpurposes)andthetiminginwhichitmustbesupplied.

Forinstance,itwouldnotbepracticaltorequireanydatadeliverypriortoT+1.Theneedfortimelinessmustbebalancedagainsttherequirementfordataaccuracy.

Inaddition,earlythoughtshouldbegiventohowtoensureconsistentformattingandpreventduplicationofreporting.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |119

Inourexperience,ithasprovedcomplicatedtointegrateintoexistinginternalsystemstheabilityto‘replay’orcorrect/amendinformationintheTRandfortheTRtoconfirmthereceiptandaccuracyoftheamendment.

Finally,andmostimportantly,assessmentsofcostandfeasibilityneedtoensurethatexistingplatformsarefullyexploredandanappropriatetimeframeforimplementationisassessedbasedonthefeasibilityofadaptingtheseorsettingupnewplatforms.

InterimimprovementsindatacollectionshouldbepursuedbeforesettingupnewTRs,whichshouldhavealonglead-intimetoallowalltheissuesofimplementationoutlinedabovetobethoroughlyconsidered.

Q9Doyouagreethattheenhanceddisclosureitemslistedabovewouldbeusefulformarketparticipantsandauthorities?

Woulddisclosinganyoftheitemslistedabovepresentanysignificantpracticalproblems?Ifso,pleaseclarifywhichitems,thepracticalproblems,andpossibleproxiesthatcouldbedisclosedinstead.

Globalharmonisationaroundtherulesregardingpublicdisclosurewould bebeneficial.

Publiclyreportedinformationcanbemorerelevantthanjustnotionaltransactiondata,forexample,capitalallocationreportingunderBaselIII.

Inaddition,underPillar3,banksalreadyreporttheircreditriskexposurethroughreposandothersecuritiesfinancingtransactionsinadetailed breakdownbyindustry,country,andmaturity.

Otherfinancialmarketparticipantsshouldbeencouragedtodothesame.Inaddition,therecentlyconcludedworkoftheFSBEnhancedRisk

DisclosureTaskForcegoessomewaytoclosingthedatagapsidentified

inthisreport.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |120

Forexample,itrecommendedthatparticipatingbanksprovidegreaterdetailonsourcesanduseofcollateralandonassetencumbrance,includingcollateralreceivedthatcanbere-hypothecated.

Participatingbankswillimplementtheseenhanceddisclosuresintheir2012financialyearreports.

Publicdisclosuremaynotbeappropriateforsomeofthedataitemslist;carewouldneedtobetakentoensurethatthedefinitionsofitemstobedisclosedwerecleartoavoidanyconfusionorerroneousreporting.

Inparticular,wewouldsuggestthatverycarefulthoughtwouldneedtobeappliedtothedefinitionoftradingonownaccount.

Thismightbedonerelativelysimplybyrequiringdisclosureofaggregatere-hypothecatedassetsagainstaggregateclientindebtednessacrossafirm.

Ifthefirstoftheseislowerthatthelatter,itwillbeclearthatthe

re-hypothecationofcollateralhasonlybeencarriedouttofundclientactivity.

Q10.Doyouagreethatthereportingitemslistedabovewouldbeusefulforinvestors?Wouldreportinganyoftheitemslistedabove presentanysignificantpracticalproblems?

Ifso,pleaseclarifywhichitems,thepracticalproblems,andpossibleproxiesthatcouldbereportedinstead.

Weagreethattheseitemswouldbeusefulforinvestorsandwouldnotforeseesignificantpracticalproblemsreportingthem,thoughwiththesamecaveatabovearoundconsistentdefinitionofitemstobedisclosed.

IntheEU,newdisclosurerequirementshaverecentlybeenintroducedforUCITSandUCITSETFsthatuseefficientportfoliomanagement techniques,whichcovermuchofthisgroundincluding:theintentiontousesuchtechniques;therisksarising;thecounterparties;typeof collateralreceived;revenuesreceivedandoperationalcosts.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |121

Thesewilltakeeffectearlyin2013andexistingfundswillhave12monthstobecomecompliant.

C.Minimumhaircuts

DBdoesnotsupporttheuseofmandatoryminimumhaircutsasatooltolimitthebuildupofexcessiveleverageorreducepro-cyclicalityinthefinancialsystem.

WedonotbelievethatminimumhaircutswillbeeffectiveintacklingthestabilityrisksidentifiedbyFSB,andcanseeclearrisksattachedtotheirintroduction.

First,itisuncleartheextenttowhichhaircutswouldeverbeaneffectivetoolinreducingtheriskofa‘runonrepo’identifiedintherecentfinancialcrisis.

Theseoccurredasaresultofsuddenchangesinmarketsentimentdriven byacomplexrangeoffactorsandwerelimitedtoaspecificassetclassandtheUSmarket.

Therolewhichminimumhaircutswouldplayinpreventingarepeatofsuchascenarioisnotobvious-certainlynotwhenplacedalongsideotherregulatoryinterventionsdesignedtotargetcapital,liquidityandleveragedirectly.

Secondly,theintroductionofminimumhaircutswouldlimitmarketindicatorsofstress.

Ahaircutwideningsignifiesalossofconfidencein:

Acounterparty’sabilitytorepay;and

Theavailabilityofliquiditywithinthemarket.

Installinghardmandatoryminimumswouldbluntorevenremovethisimportantearlywarningindicator,whichisacrucialtoolforfinancial

institutionsandregulatorsalike.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |122

Minimumhaircutswouldalsoincreasethecreditexposureofborrowers,whichcouldaggravatesystemrisksinstresssituations.

Finally,asignificantunintendedconsequenceofthismeasurewouldbethatanytransactionstakingplacebelowthehaircutfloorinboththerepoandsecondarymarketswouldbelost.

Thiswouldhaveadirectlyoppositeeffecttootherregulatoryinitiatives,whichattempttopromoteandsustainthehealthofthesecuredfinancingmarket.

Furthermore,increasingthecostofsecuredfinancinginrelationtothealternative(i.e.unsecuredlendingtransactions)couldhaveperverseeffects.

Q11.Arethefactorsdescribedinsection3.1.2appropriatetocaptureallimportantconsiderationsthatshouldbetakenintoaccountinsettingrisk-basedhaircuts?

Arethereanyotherimportantconsiderationsthatshouldbeincluded?Howaretheaboveconsiderationsalignedwithcurrentmarketpractices?

Althoughweagreewiththesentimentofintroducingconsistencytothecalculationofhaircutswithintheseclendingandrepomarkets,theproposedmethodologyofusingthelong-runmaximumexpecteddeclineinthemarketpriceofthecollateral,calibratedatthe95%confidencelevel,couldbesignificantlyproblematic.

Thehaircutaninstitutionemploysisaproductoftwofactors:pricevolatilityandcounterpartyrisk.

Thoughthesecondpartofsection3.1.2suggeststhatotherrisksshould betakingintoaccountwhererelevant,itisveryunclearastopreciselywhatrisksthismightinclude,orhowtheymightbecapturedalongsidethemethodologyinthefirstpartof3.1.2.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |123

Asdrafted,theproposedhaircutmethodologyappearstoignorethesecondfactorabove-counterpartyrisk.

However,ashistorichaircutswouldclearlyhavetakenintoaccountcounterpartyriskalongsidecollateralpricevolatility,thiscouldsignificantlydistortfuturehaircutlevels.

Applyingextendedhaircutstocredit-worthycounterpartiesonan ongoingbasiscouldresultincostlyimplicationsfortheavailabilityofliquiditytocredit-worthymarketparticipants.

Forexample,inTri-partyRepo(wherealltradesareclearedcentrallyandtheriskofCCPdefaultisextremelylow)applyingthelong-runworstcasescenario,whichmayhavebeenbasedonnon-credit-worthycounterparties,wouldbeunsound.

Furthermore,anyinstitution-specific‘worst-case’modelwhichgoesbeyondthehaircutsprescribedintheBaselIIILiquidityCoverageRatio

(i.e.standardisedhaircutsbasedonpredictedworst-casepricevolatility)couldproducesignificantunintendedconsequences.

Inlightoftheseconcerns,wewouldadvocateasanalternativetotheproposedstandardsthecreationofawell-developedsetofguidelinesonthecalculationofhaircutsformarketparticipants.

Q12.Whatdoyouviewasthemainpotentialbenefits,thelikelyimpactonmarketactivities,andpossibleunintendedconsequencesofintroducingaframeworkofnumericalhaircutfloorsonsecuritiesfinancingtransactionswherethereismaterialpro-cyclicalityrisk?

DothetypesofsecuritiesidentifiedinOptions1and2presentamaterialpro-cyclicalrisk?

Introducingaframeworkofnumericalfloorsforthevaluationofcollateralinsecuritieslendingandrepotransactions,inthecurrentregulatorysetting,mayhaveperverseconsequencesforthefunctioningoffinancialmarkets.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |124

Securedlendingrepresentsalowrisktransaction:

Numericalfloorsorbackstopsonhaircutvalues,setincontrasttoprevailingmarketrates,wouldleadtothesignificantriskthatinstitutionsopttoundertakeunsecuredlendingbecausesecuredlendingandrepoismadetoocostly.

ThisisinstarkcontrasttotheincentivestryingtobecreatedbytheBaselIIIregulatoryframework.

Thehaircutvalueincorporatescounterpartyrisk:

Thehaircutappliedtoasecuredlendingtransactionincorporatesanumberoffactors,includingcounterpartyrisk.

Mandatoryminimumlevelswhichareinexcessofthoseusedwhenlendingtohighlycredit-worthycounterpartieswouldeliminatetheincentivetolendtocredit-worthycustomers,andtherebypotentiallyincreasesystemicrisk.

Severemarketdistortion:

Therewouldbeasignificantriskthatnumericalfloorsbecomeadefactomarketstandardifsetatabackstoplevel.

Incentivisingpoorcollateralriskmanagementpractices:

Imposingnumerichaircutfloorswhicharehigherthanthoseusedinnormalmarketpracticecouldcreateperverseincentivesforfirmstotakeamorerelaxedapproachtocollateralmanagement.

Forexample,oftwosovereigndebtsecurities,ifonesecurityisissuedbyamorehighlyratedsovereignthantheother,thenitwillreceivealowerhaircutinnormaltimes.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |125

Ifbotharesubjecttoa4%floor,collateralmanagerswillbe

dis-incentivisedfromutilisingthehigherqualitycollateral,thusunderminingrisksensitivityinthemarket.

Highriskofregulatoryduplication:

Therisksthattheproposednumericalfloorsorbackstopsintendtoallayarealready,ifnotsoontobe,extensivelymitigatedwithintheregulated bankingsector:

BaselIIIliquiditystandard:

TheLCRaccountsforsecuredlendingandrepotransactionsbyensuring outflowsrelatedtothesetransactionsduringastressedperiodareadequatelycoveredbyastockofliquidassets.

WeretheseproposedfloorstoconflictwiththoseprescribedintheLCR,therewillbeanetbenefitforholdingthecollateralinsteadofusingitintherepomarkets.

Forexample,ifyouholdanunencumberedlevel1assetyoucancount100%ofitsvalueintheliquiditybuffer.

Alternatively,ifyourepothatsecurityyouwillonlyreceivethepost-haircutvalueincash.

Hence,forLCRcompliance,itwouldbeadvantageoustofundyourpositionunsecuredifahaircutisapplied.

Basle2.5andBaselIIIcreditandmarketriskrequirements:

Efficientmanagementshouldalreadybeensuredforcreditinstitutionsthroughthestrengthenedcounterpartycreditriskframework.

BaselIIstandardsupervisoryhaircuts:

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |126

Incentivesarealreadyinplacetopreventpro-cyclicalhaircuts,ascapitalpenaltieswouldapplytocounterpartyriskwherehaircutsarelowerthantheBaselIIstandardsupervisoryhaircuts.

IV.OngoingFundamentalReviewoftheTradingBook:

MarketriskrequirementswillbefurtherstrengthenedfollowingthereviewcurrentlybeingundertakenbytheBaselCommittee.Infact,banksrunverylowmarketriskduetostressedVaRconstraints,withthevastbulkofbankinventorybeinghedged.

This,combinedwithdailymargining,meansthatahaircutsbasedon pricevolatilityarelessrelevantthantheymayhavebeeninthepast.

Q13.Doyouhaveaviewastowhichofthetwoapproachesinsection

3.1.3(option1–highlevel–oroption2–backstop)ismoreeffectiveinreducingpro-cyclicalityandinlimitingthebuild-upofexcessiveleverage,whilepreservingliquidandwell-functioningmarkets?

Wedonotsupporttheintroductionofnumericalfloorsorbackstopstothehaircutvalueplacesonanassetusedinsecuredlendingorrepotransaction.

However,ifconstrained,wewouldhaveaclearpreferenceforthebackstopoption.

Q14.Arethereadditionalfactorsthatshouldbeconsideredinsettingnumericalhaircutfloorsassetoutinsection3.1.3?

TheFSBmustgivedueconsiderationtotheintroductionoftheBaselIIIframeworkandotherpre-existingregulatoryproposalswhichsetouttoachievethesameoutcomeasthisproposal(seeabove).

Inparticular,theFSBshouldcarefullyanalysetheimpactoftheintroductionofthenumericalhaircutfloorscoupledwiththechangestotheregulatedbankingsectorandotherchangestotheregulationof collateralforallmarketparticipantsasaresultofpost-crisisregulation.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |127

Q15.Inyourview,howwouldthenumericalhaircutframeworkinteractwithmodel-basedhaircutpractices?Also,howwouldtheframeworkcomplementtheminimumstandardsforhaircutmethodologiesproposedinsection3.1.2?

WewouldchallengetheproposalthathaircutmethodologiesneedtogobeyondtheBasel2.5VaRrequirementsandBaselIIILCRhaircutsand questionthevalueofusingthelong-runmaximumexpecteddeclineinmarketpriceofcollateralasthebasisofminimumhaircutcalculations.

SuchanapproachignoresthefactthatbankswillalreadyberequiredtorunverylowmarketriskduetostressedVaRconstraints,withthevastbulkofbankinventorybeinghedged.

This,combinedwithdailymargining,meansthathaircutsbasedonpricevolatilityarelessrelevantthantheymayhavebeeninthepast.

Thereisriskwiththisrecommendationthathaircutswouldbesetunnecessarilyhighonthebasisofscenariosthatexistingregulatory reformswillensurecannotberepeated.

Inourview,themosteffectivewaytoaddresstheconcernsraisedinthepaperaroundpro-cyclicalityisthroughensuringproperriskmanagementanddocumentationareinplacewithininstitutions,whereasimposingnumerichaircutfloorswhicharehigherthanthoseusedinnormalmarketpracticecouldincentiviselessrobustcollateralriskmanagementpractices.

Q16.Inyourview,whatistheappropriatescopeofapplicationofaframeworkofnumericalhaircutfloorsby:(i)transactiontype;(ii)counterpartytype;and(iii)collateraltype?

Whichoftheproposedoptionsdescribedabove(oralternativeoptions)doyouthinkaremoreeffectiveinreducingprocyclicalityriskassociatedwithsecuritiesfinancingtransactions,while preservingliquidandwell-functioningmarkets?

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |128

Wedonotsupporttheintroductionofnumericalfloorsorbackstopstothehaircutvalueplacesonanassetusedinsecuredfinancingorrepotransaction.Pleasealsoseeanswersabove.

Q17.Aretherespecifictransactionsorinstrumentsforwhichthe applicationofthenumericalhaircutfloorframeworkmaycausepracticaldifficulties?Ifso,pleaseexplainsuchtransactionsandsuggestpossiblewaystoovercomesuchdifficulties.

Asoutlinedaboveinresponsetoquestion12,weseetheimplicationsofminimumhaircutsasbroadratherthaninstrument-specific.

Adetailedimpactassessmentshouldbeconductedtoensurethatimpactsonspecificinstrumentsarewellunderstoodbeforehaircutsareconsidered.

TheFSBpapermakesclearthatfurtherconsultationisintendedonthedetailofaminimumhaircutapproach.

Wethinkthiswillbeimportant.

Priortoanyfinalrecommendationonminimumhaircuts,impactanalysis shouldbeundertakentoassesstheimpactoncostoffunding,banks’balancesheetsandmarketliquiditytoensuretherearenounintendedconsequences.

ThisshouldalsotakeintoaccounttheimpactofBCBSandIOSCOproposalsonmarginfornon-clearedderivatives.

Thequantitativeimplicationsofaframeworkofminimumhaircutswould needtobefullyunderstoodbeforeitwasintroduced.

Q18.Inyourview,howshouldtheframeworkbeappliedtotransactionsforwhichmarginsaresetattheportfoliobasisratherthananindividualsecuritybasis?

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |129

Themajorityofsecuritieslendingtradesarecurrentlymarginedataportfoliolevelbasis.Inlinewithourresponseabove,wequestionthenecessityofminimumhaircuts.

D.Cashcollateralreinvestment

Q19.Doyouagreewiththeproposedminimumstandardsforthereinvestmentofcashcollateralbysecuritieslenders,giventhepolicyobjectiveoflimitingtheliquidityandleveragerisks?

ArethereanyimportantconsiderationsthattheFSBshouldtakeintoaccount?

Itisimportanttobeclearabouttheintendedscopeofthisrecommendation.

Asappliedtonon-banksecuritieslendersandtheiragents,thenwewouldagreethatthesearesensiblestandardstoproposeandarealignedwithrulesthatarealreadyinplaceinsomejurisdictions(i.e.inEUunderUCITSregulations).

However,weretheserequirementstobeappliedtoregulatedcredit institutions,therewouldbesignificantoverlapwithexistingregulatoryinitiativesinthisspace.

Forexample,therecommendationforaminimumportionofcashcollateraltobekeptinshort-termdepositsorshort-termhighlyliquidassetswouldconflictwiththeLiquidityCoverageRatiosetoutinBaselIII-wherebyaspecificportionofliquidassetsiskepttosafeguardagainstcollateralvaluationchangesandhaircutwideninginastressscenario.

ImposinglimitationsontheWeightedAverageMaturity(WAM)/Lifeoftheportfolioinwhichcashcollateralisreinvestedcouldhaveanumberof repercussions.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

  • P age |130

  • Forinstance,itignoresactualrepomarketpracticewherethebulkofassetsarefundedovernight(particularlyintheUSTreasuryandagenciesrepomarket).

  • TherearealsoanumberoftechnicalcomplicationswhencalculatingWAMonamatchedbookbusiness,including:

  • TheprovisionofnettingreversesagainstreposbeforeapplyingtheWAMlimit.

  • Potentialformanipulationbyemployingoneverylong-datedtradevs.thebulkinovernight.

  • Theneedtotakeintoaccountthegrossandnetrepoflowsinabsolutetermsforeachtenore.g.WAMofonedaybasedonanoutstandingof

  • €100mnvs.WAMof30daysbasedonanoutstandingof€100bn.

  • E.Re-hypothecation

  • Re-hypothecationofcollateralassetsisessentialtotheflowofcollateralthroughthefinancialsystemandunderpinsfinancingandliquidityofsecuritiesmarkets.

  • Byfacilitatingcollateralvelocity,thereisalinkbetweenre-hypothecationandleverageatasystemiclevel,butanyrisksarisingfromthisarebestaddressedbyinterventionstargetingeffectiveliquidityandcounterpartyriskmanagement(asarealreadyinplaceforbanks),asopposedtodirectrestrictions-orevenblocks-onre-hypothecation.

  • Thesecouldhaveverysignificantanddramaticconsequencesformarketliquidity,especiallyifintroducedontopofexistingregulatoryreformswhichwillplacegreaterdemandandrestrictionsoncollateral,suchasmarginingfornon-clearedderivatives.

  • Suchapproacheswouldalsoflyinthefaceofthewiderangeofregulatoryreformswhicharedesignedtoincentivisemuchgreateruseofsecured financinginfinancialmarkets.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |131

Furthermore,therisksassociatedwithcollateralre-hypothecationinsecuredlendingandrepotransactionsonlymaterialisewhereanyorderlywinddownofthere-hypothecationchaincannotbeachieved.

Ratherthanarbitrarilylimitthere-hypothecationofcollateral,whichwouldextensivelycurtailtheavailabilityofsecuredfinancewithinthemarketbyextractingtheavailabilityofassetsforuse,anapproachwhichfocusesexplicitlyoncollateralrecoveryandtransactionwind-downshouldinsteadbeconsidered.

SuchapproachesshouldalsoensureconsistencywiththeBaselIII

regulatoryframeworkandongoingworkonRecoveryandResolution.

WewelcomethefactthattheFSBhasrecognisedtherisksassociatedwithheavy-handedinterventionsandagreethattheprimaryfocusmustbeonensuringeffectivedisclosuretomarketparticipants–whoarealreadymuchmorewaryofcounterpartyandliquidityriskinthewakeofthefinancialcrisis.

Q20.DoyouagreewiththeprinciplessetoutinRecommendation9?

Weagreethatfinancialintermediariesshouldbeobligedtoprovidesufficientinformationtoclientsaboutthere-hypothecationoftheirassetstoensurethatthoseclientshaveareasonableunderstandingoftheirpotentialexposuresineventofafailure.

However,itisimportanttonotethatinmostcases(certainlyinrespectofprimebrokerageactivity)aclient’spotentialexposuretoanintermediarywillbeclearlyestablishedatacontractuallevel.

Whenconsideringanappropriatescopeofapplicationoftheseprinciples,considerationshouldalsobegiventoexistinglimitswhichregulatedinstitutionsarealreadysubjectto.

Forinstance,intheUS,SECrule15c3-3explicitlylimitsre-hypothecationofcollateralto140%oftheclients’netindebtedness.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |132

Inotherjurisdictionswherethereisnohardlimit,commercialnegotiationwilldetermineprecisere-hypothecationlimitsforeachclient,butitwouldberaretoseere-hypothecationlimitsabove140%.

Whateverwaythelimitisdetermined,theimportantpointisthatthereisanupfrontnegotiationwhichwillsetthemaximumexposuretoabroker.

Regularreportingofpreciseexposure/levelofcollateral

re-hypothecationatanygivenpointintimeprovidesfurtherclarityastoexposure.

IntheUK,forexample,disclosuretoclientsofboththeindebtednesscalculationandtheassetsre-hypothecatedtofundsaidindebtednessisalreadyprovidedonadailybasis,inconjunctionwithFSAClientAsset(CASS)rules.

Wherenobeneficialinterestisretainedincollateral,asinrepotransactionswherecollateralistransferredfromonepartytoanotherbyfulltitletransfer,thedisclosureofcollateralre-hypothecationisnotrelevant.

Whilsttheprincipleofrequiringthatclientassetsshouldnotbe

re-hypothecatedforthepurposeoffinancingtheown-accountactivitiesoftheintermediarymaybeattractive,thepracticalapplicationofsucharulewouldbeverydifficulttoachieve.

Asmentionedabove,identifyingaggregatere-hypothecatedassetsagainstaggregateclientindebtednessacrossafirmmightbeoneapproachtoachievingthisaim.

Limitingre-hypothecationtoentitieswhicharesubjecttoregulationofliquidityriskislikelytohavesignificantunintendedconsequencesforavailabilityofcollateralandmarketliquiditymorebroadly.

Wheretherearenotcurrentlyrestrictions(i.e.Europe)suchamovecouldsignificantlythinthemarketandreducetheamountofavailablecollateral.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |133

Acarefulassessmentofimplicationsandpotentialcostsalongsideotherregulatoryproposalsthatwillaffecttheamountofavailablecollateralwouldbeneededbeforeproceeding.

Theissueofclientassetprotectioniscomplicatedandwouldneedtobescrutinisedinavarietyofdifferentcontexts-e.g.prudentialregulation,insolvencylaw,reportingetc.

Anexpertgrouplookingatallofthesedifferentissueswithaviewtoensuringgreaterconsistencywouldbeavaluableenterprise.

Minimumstandardsforcollateralvaluation

Q21.Doyouagreewiththeproposedminimumstandardsforvaluationandmanagementofcollateralsbysecuritieslendingandrepomarketparticipants?ArethereanyadditionalrecommendationstheFSBshouldconsider?

Wewouldstronglyagreewiththeproposedminimumstandardsforvaluationandmanagementofcollateralbymarketparticipants.Inourview,thesestandardsrepresentprudentriskmanagementthatshouldbegeneralmarketpractice.

Whilstitisimportantthatmarketparticipantshaveaclearviewofhowtheywouldmanagethefailureoftheircounterparties,thelevelofdetailandreportingassociatedwithcontingencyplanningshouldbeproportionate(i.e.notoverlyonerousorcostly).

Structuralaspectsofsecuritiesfinancingmarkets

Q22.Doyouagreewiththepolicyrecommendationsonstructuralaspectsofsecuritiesfinancingmarketsasdescribedabove?

Ifthereistradereportingandconsistentassessmentofrisksandvaluationofcollateral,thenitisnotcleartowhatextenttherewouldbeabenefitfromrequiringcentralclearingofrepoandsecuritieslendingtransactions.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |134

Thiswouldbeacostlyexercisewhichwouldfurthertieupcollateral.Benefitswouldbelimitedand,ashasbeenwidelydiscussedinthe

contextofOTCderivativereforms,theconcentrationofriskwithincentralcounterparty(CCP)infrastructurecreatespotentialnewsystemicchallengesforsupervisors.

Assuch,wesupporttheFSB’sscepticismaboutfurtherworkinthisareaatthistime.

OnlyonceotherrecommendationshavebeenfinalisedandeffectivelyimplementedandonlyifthereareclearcontinuingrisksidentifiedwithinthesystemthatcannototherwisebeaddressedshouldaCCPsolutionbeconsidered.

Eventhen,arigorousassessmentofimpactswouldneedtobethestartingpointforanydiscussion.

Whilstwerecognisethechallengesthatwouldbeattendantintryingtodeliverchangestobankruptcylawtreatment,orthedevelopmentofRepoResolutionAuthorities(RRAs),wedonotthinktheyshouldbedismissedasoptionsentirelyatthisstage.

Consistentbankruptcylawtreatmentwouldaddresspersistentconcernsfromsomequartersaroundperceivedrisksofre-hypothecation.

Insofarasthisfocusedonensuringimprovedtransparencyaroundoutcomesintheeventofbankruptcy,toavoidthedramaticmarketconsequencesofinterventionsdesignedtolimitre-hypothecation directly,thenthiswouldbeabetterapproachtotake.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |135

J.P.MorganAssetManagement-ResponsetotheFSBConsultativeDocuments

StrengtheningOversightand RegulationofShadowBanking

[TheFSBpublishedinNovember2012its

ConsultativeDocumentsonStrengtheningOversightandRegulationofShadowBanking,whichprovidedaninitialintegratedsetofpolicy

recommendationstostrengthenoversightandregulationofshadowbanking]

RE:FinancialStabilityBoardConsultationonStrengtheningOversightandRegulationofShadowBanking–WorkStream2:MoneyMarketFunds

DearSir/Madam

ExecutiveSummary

J.P.MorganAssetManagement(“JPMAM”)supportsregulatoryreformsthataddressstructuralvulnerabilitiesanddecreasesystemicriskinmoneymarketfunds(“MMFs”).

ThereformsenactedbytheUSin2010andsubsequentlyreflectedintheInstitutionalMoneyMarketFundsAssociation(“IMMFA”)Code,inconjunctionwiththeguidelinessetdownbytheEuropeanSecuritiesandMarketsAuthority(“ESMA”),wereveryeffectiveinreducingrisktaking,improvingliquidityanddisclosure,andhavebeenimportantinensuringthestabilityoftheshort-termfixedincomemarkets;however,concernsremainaboutthesusceptibilityofMMFstorunrisk,aswellastheimplicitsupportinvestorsbelieveisprovidedbyfundsponsors.

TheFinancialStabilityBoard(“FSB”)hasrequestedfeedbackonaseriesofrecommendationsproposedbytheInternationalOrganizationofSecuritiesCommissions(“IOSCO”)toaddresstheserisks,andJPMAM

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |136

appreciatestheopportunitytoprovideitsperspectiveontheseproposals,presentingaconstructiveassessment.

Therealsoexistsaseriesofotherpolicymeasuresthatregulatorsshouldconsider,includingstandbyliquidityfeesandenhancedtransparencytoinvestors,whichcouldfurtherreduceriskandaidinvestorsin understandingthetruenatureandriskoftheirinvestments.

Todemonstrateourcommitmenttoenhancedtransparency,threeUS-domiciledMMFsadvisedbyJPMAMbegantodisclosetheirmarket-basednetassetvalue(“NAV”)onJanuary14,2013;JPMAM

expectsthatotherMMFsinourglobalrangewillfollowthisprocessinthenearfuture.

Morefrequentavailabilityofmarket-basedvaluationswillallowinvestorstobetterunderstandthenatureofMMFrisksandmakemoreinformeddecisionsregardingtheirinvestmentsinMMFs.

DiscussionofJPMAMintheMMFIndustry

JPMAMappreciatestheopportunitytocommentontheFSB’sConsultativeDocument:StrengtheningOversightandRegulationofShadowBanking.

ThisresponseaddressestheproposalsfromWorkStream2:MoneyMarketFunds.

JPMAMisoneofthelargestMMFmanagersintheworld,withfundassetsundermanagementof$412billion.

InEurope,JPMAMmanagesnineESMA-compliant“short-termmoneymarketfunds”andoneESMA-compliant“moneymarketfund”,totalling

$151billioninassetsundermanagement,includingtheJPMorgan

LiquidityFunds–USDollarLiquidityFund,thelargeststableNAVMMFinEurope,withassetsof$74.3billion.

IntheUnitedStates,itprovidesinvestmentmanagementservicesfor13MMFsregisteredundertheInvestmentCompanyActof1940withassetstotalling$250billion.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |137

RoleandBenefitsofMMFs

Byservingasanintermediarybetweenborrowersseekingshort-termfundingandinvestorssearchingforalowriskcashmanagementsolution,

MMFsperformavitalroleintheprocessofcapitalcreationandtheshort-termfixedincomecapitalmarkets.

Thesefunds,whichserveabroadrangeofinvestorsallwithsimilarobjectives,havethefollowingcharacteristicswhichhavemadethemusefulinvestmentvehicles:

Dailyliquidity.MMFsprovideaconvenientvehicletoinvestincremental,oftenunpredictable,dailycashflows.

Customersalsobenefitfromthecashflowdiversificationachievedbythescalecreatedthroughcomminglingtheiractivitieswithothershareholders.

Administrativeconvenience.Ascurrentlystructured,MMFsprovideadministrativeefficiency.

Taxandfinancialbookkeepingissimplifiedbytheconsolidationofinvestmentsintoasinglevehicle.

Thenumberofcashmanagementtransactionsisgreatlyreducedandtheneedtotrackgainsandlossesseparatelyfromordinaryincomeiseffectivelyeliminatedasaresultofthecurrentabilitytouseamortizedcost(stableNAV)accounting.

Creditriskmanagement.Byregulationandstandardpractice,MMFstransactinabroadlydiversified,lowriskmixofinvestments.

Advisoryfirmsmaintainprofessionalstaffsandduediligenceprocessestomonitor,approve,tradeandconstructportfoliosconsistentwithregulatoryandprofessionalstandards.

Replicatingtheprofessionalstandardsiscostlyevenforthelargestcorporateinvestors.

Competitivereturns.MMFsareabletoachievecompetitiveafter-feereturns,makingthemacosteffectivemeansofmanagingliquidity.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |138

ThescalecreatedbycomminglingofcustomerassetsallowsMMFstomoreeffectivelystructureinvestmenttenors.

5.Soundgovernance.IntheEU,MMFswillgenerallyberegulated pursuanttoECDirective2009/65,andthereforeconformtotheESMAguidelinesonMMFs.

Further,UCITS9fundsaregovernedbyaBoardofDirectorsandtheassetsheldbyanindependent,regulatedcreditinstitution.IntheUS,MMFsareregulatedundertheInvestmentCompanyActof1940andaregovernedbyindependentBoardsofTrusteeschargedtooverseethefund’sactivities.

Crisisof2007-2009,andFinancialReform

WhileinvestorsandpolicymakersappreciatetheusefulnessofMMFs,thereisongoingconcernaboutwhethertherearesystemicrisksarisingfromthismarket.

AsobservedbyIOSCO,althoughMMFsdidnotcausethecrisisof2007-2009,thisperioddidhighlighttheirvulnerabilitytosignificantredemptionsandtheimplicationsthereoftothebroadermarkets.

ThebankruptcyofLehmanBrothersHoldingsInc.andthecollapseoftheReservePrimaryFundwerequicklyfollowedbyarunonriskassets,includingsubstantialredemptionsfromMMFs,andthefreezingofshort-termcreditmarkets.

AssetsinUScreditMMFsdroppedby$466billioninSeptember2008alone,while$122billionflowedoutofIMMFAshort-termmoneymarketfundsinEuropeoverthesameperiod(seeExhibit1).

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |139

Sincethecrisis,therehasbeensignificantdebatewithintheMMFindustryandamongregulatorsonthecentralrolethatMMFsplayintheglobalmarkets,andtherisksthattheypose.

Intheinterveningperiodsincethestartofthecrisis,marketparticipantsandregulatorybodieshaveworkedtogethertoimplementasignificantsetofreformstotheregulatoryframeworkinwhichMMFsoperate.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |140

InEurope,acommondefinitionof“moneymarketfund”wasestablishedbyESMA.TheguidelinespublishedbyESMAcomprisedaseriesofimpactfulrestrictions,includingrestrictionsofweightedaveragematurity(“WAM”),weightedaveragelife(“WAL”)andcreditquality(seeExhibit2).

IntheUS,theSecuritiesandExchangeCommission(SEC)madesubstantialenhancementsin2010toRule2a-7oftheInvestmentCompanyActof1940,whichgovernsthemanagementofUSstableNAVMMFs.

Thechangeshaveresultedinsignificantlyhigherlevelsofliquidity,moreconservativeportfolioswithhigheraveragecreditquality,andamoreconservativematuritystructure,includingrestrictionsonWAMandWAL.

Boardpowerstolimitredemptionsinconnectionwithaliquidation,andenhancedtransparencyandreportingwerealsoadded(seeExhibit3).

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |141

ThereformsintroducedintheEUandtheUShavealreadyimprovedliquidity,reducedrisktaking,improveddisclosure,andhavebeenimportanttoensuringthestabilityoftheshorttermfixedincomemarkets.

AsevidentinExhibit4,theamendmentstoRule2a-7resultedinasharp declineinmarket-basedNAVvolatilityintheUS.

Inparticular,themarketvolatilityassociatedwiththeEuropeansovereigndebtcrisisdidnotmateriallyaffectmarket-basedNAVs.

The2011crisisprecipitatedarunonriskassetsinmultipleassetclassesacrossmultipleEuropeancountries.

Despitethis,Exhibit4showsasmoothingofNAVsandastemmingofflows.

Thisdemonstratesthatthe2010reformsweresubstantialimprovementsthatactedtogreatlyreinforcetheindustry’sabilitytoweatherasignificantcrisis.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |142

Regulatorshaveexpressedconcernaboutcontinuedsystemicrisks resultingfromrunrisks,aswellasthepotentialimplicitbackingofthefundsatafixedeuro/dollarbysponsors.

Inparticular,regulatorshaveidentifiedthepotentialforMMFstohaveadestabilizingeffectonfinancialmarketsiftherewerearunwithsignificantnumbersofinvestorsredeemingshareswithinashortperiodoftime.

AcentralconcernthathasbeenarticulatedisthatMMFsthatoperateaconstantNAV(“CNAVMMFs”)areparticularlysusceptibletorunsbecause:

Investorsareunawareofthemarketrisksassociatedwiththesefundsand

ThestableNAVcreatesafirstmoveradvantageforearlyredeemersinthecontextofamarketcrisis.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |143

Weshareconcernsaboutpotentialsystemicissuesandtheproperdisclosuretoshareholders,aswellasMMFs’susceptibilitytoruns,whichpresentchallengesregardingequitabletreatmentamongshareholders.

Whilethe2010reformsinEuropeandtheUSwereessential,JPMAMbelievesfurtherenhancementscanpreservethemanybeneficialattributesofMMFswhileaddressingtheseconcerns.

BelowwewillprovideourthoughtsontheFSB/IOSCOrecommendationsandsomeadditionalcommentaryonotherrelatedindustrymatters.

AsExhibit5shows,onlycreditfundssufferedrunsontheirassetsand posedasystemicrisktothewidermarketsduringthecrisis.

Governmentandtreasuryfundswereasafehavenforinvestorsleavingcreditfundsduringthe2008crisis,andgovernmentandtreasurydebtenjoyedexcellentliquidityacrossthetermspectrum.

Thesefactorsseparategovernmentfundsfromcreditfunds,andweareunawareofevidencethatgovernmentandtreasuryfundsexperiencedrunsorposedanysystemicrisk.Asaresult,thescopeofanyproposedreformsshouldbelimitedtocreditMMFsatthistime.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |144

CoreComponentsoftheFSBProposal

TheFSBendorsedthefifteenpolicyrecommendationsforMMFspublishedbyIOSCOinOctober2012.

JPMAMissimilarlyinagreementwithmanyoftheserecommendations,withspecificcommentsasexpressedinthisdocument.

Recommendation1:MoneymarketfundsshouldbeexplicitlydefinedinCISregulation

Recommendation2:SpecificlimitationsshouldapplytothetypesofassetsinwhichMMFsmayinvestandtheriskstheymaytake

Recommendation7:Moneymarketfundsshouldholdaminimumamountofliquidassetstostrengthentheirabilitytofaceredemptionsand preventfiresales

ExplicitlydefiningMMFsinEUregulation,andsettingrestrictionson permittedinvestments,WAM,WAL,etc,isalogicaldevelopmentforfundregulationinEurope.

SuchregulationisalreadyinplaceinrespectofUS-domiciledMMFs,underRule2a-7.

InEurope,positivestepshavealreadybeentakeninthisregardwiththedevelopmentoftheESMAguidelines,whichsetoutrestrictionson eligibleinvestments,creditquality,residualmaturity,WAM,WAL,etc,andhaveestablishedarobustframeworkforthecontroloftheprincipalriskstowhichMMFsareexposed(interestraterisk,creditriskandliquidityrisk).

Inparticular,considerationshouldbegiventotheeffectthatnewEuropeanrestrictionsgoverningliquiditymayhaveinreducingthelevel ofriskinMMFs.

TherequirementforMMFstoholdanappropriateproportionoftheirassetsincashorsecuritiesthataresufficientlyliquidtomeetreasonably

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |145

foreseeableshareholderredemptionsisanimportantsafeguardfortheindustryandforthewiderfinancialmarkets.

Liquidityrestrictionseffectivelymitigaterisk.

ThelevelofliquidassetsinaMMFtakesonitsgreatestimportanceduringacrisis,whentheactionsofsomequick-actinginvestorsmayadverselyimpactremainingshareholders.

Duringsuchasituation,anappropriatelevelofliquidityinaMMFcanlimittheimpactofarunonremainingshareholders.

IntheUS,the2010introductionbytheSECoftighterliquiditystandardswashighlyeffectiveinreducingriskinMMFs(asevidencedinExhibit4).SimilarliquidityrequirementsarealreadyreflectedintheIMMFACodeofPractice.

ConsiderationshouldbegiventointroducingsimilarrequirementsexpresslyintoEuropeanregulation.

TakingtheUS/IMMFAstandardsastepfurther,a50%monthlyliquidityrequirementcouldcomplementthedailyandweeklyrequirementsand provideadditionalsafeguardstoMMFs.

TheFSBshouldalsoconsiderfurtherclarificationofrequirementsgoverningdiversification.

TheincreaseddiversificationofunderlyingportfolioassetsincombinationwiththeothermeasuresdescribedabovewouldbeareasonablewaytoreduceriskinEuropeanMMFs.

Enhancementstothecreditrelatedportfolioconstraintscouldacttofurtherminimizethepotentialofadefaultedsecurityhavingamaterialimpactontheoverallvalueoftheseportfolios.

Buildingonthisbyapplyingexposurelimitsbasedonlong-termissuerratingsandtenorscouldbeaneffectivemeasureforreducingtheimpact

crediteventshaveontheperceptionofriskinaMMFportfolio.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |146

TheprudentmanagementofcreditriskisclearlyparamountforaMMF,giventhatacreditevent(ortheperceptionthatoneisimminent)canfacilitatearun.

ImplementingadditionalrequirementsthatassistMMFsfromtakingonexcessivecreditexposurestoasingleentityandcreatingadditionaltransparencyaroundtheseexposureswouldfurtherprotectinvestorsandreducethelikelihoodofaruntriggeredbyacrediteventinaMMFportfolio.

AnyregulationofEUMMFsshouldbeintroducedaspartoftheexistingUCITSregulation,ratherthandevelopingaseparateregulatoryregimespecificallyforMMFs.

TheUCITSbrandrepresentsaglobally-recognisedstandardthat investorstrust,andmanyhaveaccordinglyhard-codedtherequirementforeligibleMMFstobeUCITS-compliantintotheirinternalinvestmentpolicies.

Recommendation4:Moneymarketfundsshouldcomplywiththegeneralprincipleoffairvaluewhenvaluingthesecuritiesheldintheirportfolios. Amortizedcostmethodshouldonlybeusedinlimitedcircumstances.

Recommendation10:MMFsthatofferastableNAVshouldbesubjecttomeasuresdesignedtoreducethespecificrisksassociatedwiththeirstableNAVfeatureandtointernalisethecostsarisingfromtheserisks.

Regulatorsshouldrequire,whereworkable,aconversiontofloating/variableNAV.

Alternatively,safeguardsshouldbeintroducedtoreinforcestableNAVMMFs’resilienceandabilitytofacesignificantredemptions.

TheFSBdrewparticularattentiontoIOSCO’sRecommendation10thatCNAVMMFsshouldbeconvertedintofloatingNAV(“FNAV”)whereworkable.

IntheUS,CNAVMMFscurrentlyhold$2.70trillioninUSinvestors’cashassets,andinEurope,CNAVMMFscomprise€493billion.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |147

Thereareafewimportantfeaturesofthesefunds,includingsamedaysettlementandthe€1.00NAV,whichleadstosimplicityintheaccountingandtaxtreatmentutilizedbyinvestors.

ArequirementforCNAVMMFstofloatNAVswouldfundamentally reshapetheproductanditsabilitytodeliverthesecorebenefitstoinvestors.

FloatingtheNAVhasthebenefitsofprovidingtransparencyofmarketvaluestoinvestorsandreducingthepossibilitiesfortransactionactivitythatresultinnon-equitabletreatmentacrossallshareholders;however,itwilllikelygiverisetoanumberofconsequencesforinvestorsandmarketparticipantsthatshouldbeexaminedrigorouslyandaddressedinordertoarriveataconstructivesolution.

ToimplementafloatingNAVsolutionthatpreservestheutilityofCNAVMMFsforcashmanagers,amovetoFNAVwillneedtocarefullyconsiderandaddressthefollowingconsiderations:

AccountingTreatmentforInvestors

DuetothenatureofCNAVMMFs,theyhavegenerallybeenclassifiedascashequivalents.

TheFinancialAccountingStandardsBoard(“FASB”)’sGenerallyAcceptedAccountingPrinciples(“USGAAP”)codificationdefinescashequivalentsasshort-term,highlyliquidinvestmentsthathavebothofthefollowingcharacteristics:

Readilyconvertibletoknownamountsofcash,and

Soneartheirmaturitythattheypresentinsignificantriskofchangesinvaluebecauseofchangesininterestrates.USGAAPcurrentlyprovidesaspecificexemptionforMMFstoallowthemtobetreatedascashandcashequivalents,providedthattheNAVisstableandnotimpaired.

ThisdefinitionreinforcedtheefficacyofCNAVMMFsasacashinvestmentsolutionforinvestorsandservesasacriticallyimportant

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |148

attributeoftheproductasitenablesthoseinvestorstoincludetheirCNAVMMFassetsinnetleverageratioswhichmayhavematerialimplicationsfortheavailabilityandcostoffinancingaswellascompliancewithanydebtcovenants.

TheintroductionofafloatingNAVregimemaycreateuncertaintyforbusinesses,bothlargeandsmall,andtheiraccountantswithrespecttotheappropriatebalancesheetclassificationforFNAVMMFsgoingforward.

ThetreatmentofFNAVMMFsascashequivalentsiswarrantedforseveralreasons.

Theportfoliosofthesefundsarecomprisedofinstrumentswhichifhelddirectlywouldtypicallybeclassifiedascashequivalents(e.g.T-bills,short-termagencyobligations,commercialpaper,repurchaseagreements).

Overallweightedaveragematurityandlifeoftheunderlyingmoneymarketportfolioissufficientlyshort(ieamaximumof60daysand120daysrespectively)tolimittoademinimisamountthefluctuationintheunderlyingvalueoftheportfolio.

TheclassificationofFNAVMMFsasacashequivalentisessentialtotheinvestorsthatinvestinMMFs.

IfFNAVMMFregulationsareadopted,regulatorsshouldworkwiththeFASB/IASB20toensurethataspecificexemptionisprovidedinUSGAAP/IFRS21toallowinvestors,pursuanttoUCITS,tocontinuetoreceivecashequivalenttreatment.

TaxTreatmentofGainsandLosses

CarefulconsiderationshouldbegiventothediversityoftaxregimesacrossEuropeanmemberstates.

Inparticular,therewillbeoperationalimpactsonfundadministrators

whohavetoproduce,togetherwiththeFNAV,arangeofbespoketax

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

  • P age |149

  • numbersforavarietyofcountriesinEurope(forexample,Germany,theUnitedKingdom,AustriaandSwitzerland).

  • Itmaybethatsystemenhancementsarerequiredtocontinuetosupportsuchtaxreportingafterthischange.

  • Itislikely,forthosecountriesthatdonotapplytaxtransparencyprinciples,thatgainsinaFNAVMMFwillbeconsideredascapitalratherthanincome.

  • Thismayhavedifferenttaximpactsforinvestorsdependinguponifthereisadifferenttaxrateforincomeandcapitalgainsforthatparticularinvestor.

  • TheUKoperatesasimplifiedtaxreportingsystemforCNAVMMFswhichapplyforUKreportingfundstatus–theFNAVMMFwouldnotqualifyforthissimplification.

  • OperationalIssueswillRequireSignificantTransitionTime

  • AmovetoafloatingNAVwillrequireworkflowandoperationalchangestomultipleprocessesinordertoaccuratelypriceandsettlefundshareactivityonadailybasis.

  • ExistingpricingandvaluationinfrastructureisnotsetupforsupportingaFNAVandsamedaysettlement.

  • Inordertomaintainsamedaysettlement,theinfrastructuresupportingMMFs,includingpricingmechanisms,willrequiresignificantenhancementsandpartnershipwithindustryvendors.

  • ManytransferagentscannotcurrentlysupportafloatingNAVwithsamedaysettlement(t+0)andwouldneedtoenhancerecordkeepingsystemstoaccommodatethisnewfundtype.

  • Thecashversusfundshareactivityandotherdailyauditcontrolswillcondensetotheendoftheday,introducingadditionaltime

constraintsandheightenedrisks.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |150

-FinancialintermediariesdistributeMMFsviavariouschannelsincludingasignificantamountthroughsweepsandportals.Eachwillneedenhancements.

ThestableNAVisthemechanismthatfacilitatestheefficientmovementofassetsintoandoutoftheproductsonadailybasis.CertainchannelsmaynolongerbesupportedinthefloatingNAVscenario.

Manyfinancialintermediariesarenotset-upforadailyfloatingNAVforMMFsandhavesaidthatasignificantamountofprogrammingwouldbenecessarytosupportachange.

Considerationshouldbegiventoprovidingasignificantimplementation

/transitiontimesothattheoperationalissuesabovecanbeeffectivelyworkedthroughandsolved.

AlongtransitiontimecouldhelptomitigaterunriskanddisruptionoffundsasinvestorselecttomonitortheimpactofthenewFNAVrequirementsandavoidahigherconcentrationofinvestorstoasmallerlessdiversifieduniverseofMMFs.

IndustryViabilityandOutflow

Investorshaveexpressedstrongconcernsaboutthecomplexityfromanaccounting,taxandoperationalperspectiveassociatedwithFNAVMMFsunderthecurrentregulatoryframework.

RecentmarketsurveysofexistingUScorporatetreasurersfoundthatbetween77%and79%ofrespondentswouldreduceoreliminatetheuseofMMFsiftheirpershareNAVswereforcedtofloat.

Inaddition,accessibilitywouldlikelybemateriallydiminishedforthosethatremainactive:automatedinvestmentsweepsareadominantaccesspointforMMFinvestingactivity,withourowncorporatetreasurysurvey’sfinding52%ofUSinvestorsutilizingthiskindofservicetofacilitateinvestmentsoftheirexcesscash.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |151

AnimplicationofthevariousFNAV-relatedoperationalissuesisthatthenumberofintermediariescapableofmakingsweepstoMMFsavailabletotheirunderlyinginvestorsshouldbeexpectedtoshrinkmaterially,particularlyinthenear-termastheindustryadjustsandmarketparticipantsgaugeoutflowandreallocationactivitiesbyinvestors.

Themarketfeedbacktodateimpliesthatthissortofstructuralchangemayresultinasubstantialreductioninassets,investorsandintermediariesparticipatinginthecreditMMFsegment;however,someofthemarketfeedbackmaybedueinparttothelevelofuncertaintyandcollateraleffectsthataretriggeredbyachangeofthisscale.

Althoughitisdifficulttoquantify,someproportionoftheseinvestorsmaybeencouragedtoremainactiveparticipantsinthecreditfundsiftheindustryandregulatorsestablishacomprehensivesetofproposalsand policies.

Recommendation6:Moneymarketfundsshouldestablishsoundpoliciesandprocedurestoknowtheirclients.

Requirementsthatenablemanagerstohaveabetterunderstandingofthetypeofinvestorsinthefundswillallowmanagerstobettermanageforrisksthatmayarisefromhighshareholderconcentrationandtobettermonitorsubscriptionandredemptioncycles.

Thesewouldbepositivestepsfortheindustry’sabilitytomanagepotentialMMFrisks.

IOSCOiscorrecttoacknowledgethecurrentpracticalimpedimentsinmonitoringinvestorsinomnibusaccounts.

Stepstoencouragedistributors/agentstoprovidebetterinformationtoMMFmanagersontheunderlyinginvestorbasesinomnibusaccounts,in termsofconcentrations,investortypesandtradingpatterns,wouldbeprotectiveforexistingMMFinvestorsandthereforepositivefortheindustry.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |152

Recommendation9:Moneymarketfundsshouldhavetoolsinplacetodealwithexceptionalmarketconditionsandsubstantialredemptionspressures

InEurope,UCITSfundsprovideanumberofsafeguardsinthisrespect.TheUCITSDirectiveprovidesforthetemporarysuspensionof redemptionsinexceptionalcircumstancesandwheresuspensionisjustifiedhavingregardtotheinterestsoftheshareholders.

Thisabilitytosuspendisapowerfultoolforsituationswherethemarketconditionsmaycausea"run"onthefund.

Suspensionwouldallowthefundtostabiliseandreducefirstmover advantage.

InaccordancewithLuxembourglaw,fundprospectusesmustspecifytheconditionsunderwhichtheBoardofDirectorsofthefundshasthepowertosuspendtheissue,redemptionandswitchofsharesinthefunds.

Europeanregulationandpracticealsoallowstheoperationofwhatissometimesreferredtoasa"gate"or“scalingprovision”.

Forexample,ifredemptionsofmorethan10%ofthetotalnumberofsharesinissueofanyfundarereceivedonaparticularday,such redemptionsmaybepostponedtothenextday.

Theseredemptionrequestsarethengivenpriorityoverotherrequestsonsubsequentdays.

Althoughnotfrequentlyutilised,thisformofgatingprovidesreliefforthefundincircumstanceswhereasubstantialnumberofredemptionrequestsarereceived.

This,combinedwiththeabilitytosuspend,providesthefundswithsignificantprotectiontodealwithexceptionalmarketconditionsandsubstantialredemptionpressure.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |153

StandbyLiquidityFee/Gates

Therehavebeennumerousproposalsdiscussedgloballyregardingstandbyliquidityfees(“SLFs”),and“gates”thatsuspendredemptions.

Theseproposalshaveconsiderablemeritandshouldbegivenseriousconsideration;however,itisimportanttorecognizethebenefitsandlimitationsofSLFsandthisformofgating.

Broadlyspeaking,proposalshavefocusedona“triggerpoint”thatactivatesaliquidityfeeandgate.

Forexample,thetriggerpointcouldbetiedtosomecombinationofafund’sliquiditylevelandthemarket-basedNAV,egwhenweeklyliquidityfallsbelow7.5%orthemarket-basedNAVreaches0.9975.

Onceafundhitsatriggerpoint,agateisimposedsuspendingredemptions.

Thefund’sBoardofDirectorsmaythenchoosetore-openthefund,providedshareholderspayanon-refundableliquidityfee,suggestedtobe1%ofredemptionproceedstoredeemtheirshares.

Inparticular,thestandbycharacteroftheseproposalsappropriatelybalancesthegoalofallowingMMFstooperatenormallywhennotunderstress,yetpromotestability,flexibilityandreasonablefairnesswhenstressed.

Ifarunonafundhasbegun,suchagatecanhelptomitigatethatrun.Fundsthatre-openwithaSLFwillrequireinvestorstopayanappropriate

chargefortheliquiditytheyrequire.

Investorswhodonotneedliquiditywillnotbedisadvantagedbyremaininginthefund.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

  • P age |154

  • However,suchgatesandSLFswithobjectivetriggerswillprompt investorsofthosefundstorequirefullandfrequentdisclosureofthoseobjectivetriggers.

  • Anyfundthatisinjeopardyofbreachingatriggerwilllikelyseesignificantredemptionsaheadoftheactualtriggerevent.

  • Therefore,itisimportanttorecognizethelimitationofSLFs:theydonotpreventaninitialrun,buttheydoprovideausefultooltoslowtherunafterithasbegun.

  • Capital

  • Inourexperience,liquidityconcernsarefuelledbycreditevents.

  • Inthepastsponsorcapitalusedatthediscretionofsponsorshasgenerallybeeneffectiveinpreventingidiosyncraticriskinasinglefundleadingtoabroadersystemicissueacrosstheindustryandshortterm fundingmarkets.

  • Thereareanumberofwaysthatcapitalcouldbefunded,iebysponsors,shareholdersorthirdparties,andanumberofwaysitcouldbestructured,iefirstlossreserveusedonlyuponliquidationorabufferthatabsorbsday-to-dayfluctuationsinmarket-basedvalues.

  • Whiletherearesomedistinctbenefitstocapital,therearealsochallengesthatshouldbeaddressed.

  • Benefits

  • Accessingadedicatedamountofsponsorsupportonlyupontheliquidationofafundandprovidingafixedamountofcapitalmakesinvestorsmorecognizantofthelimitsofcapitalprotection.

  • Adedicatedamountofsponsorsupportcouldleadto"rightsizing"theindustry.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

  • P age |155

  • Thosesponsorsmanaginglargercreditfundswouldberequiredtohavetheappropriateaccesstocapital.

  • Adedicatedamountofsponsorsupportcanbemadeavailablemorequicklyandalignstheinterestsofthesponsorwiththeinvestors’interestsofproperrisktakingandcreditoversight.

  • Shareholdercapitalalignsthecostofliquidityandthe€1.00NAVofthefundtotheshareholder.

  • Challenges

  • Totheextentthatsponsorsarerequiredtoprovideadedicatedamountofsponsorsupport,additionalguidancewouldbenecessarytoclarifythatconsolidationoftheMMFisnotrequiredontothefinancialstatementsofthesponsorundertheapplicableaccountingrules.

  • Givenalowrateenvironment(suchasthatcurrentlyexperiencedinmarketsglobally),theamountoftimerequiredtobuildupasufficiently-sizedbufferbywithholdingshareholderincomewouldleaveinvestorsexposedforanextendedperiodoftimeuntilthebuffergrowstosufficientsize.

  • Capitalthatisnotdynamicinfundingcan“lag”asassetsinaMMFgrow,leavingtheactualsupportavailableunderfunded.

  • Capitalrequirementscancreatebarrierstoentry.

  • Withregardtoshareholderfundedbuffers,onceexistingfundshavefullyfundedtheirrequiredbuffers,newfundswouldbechallengedtoattractinvestors.Investorswhodelaytheirsharepurchaseswouldreceiveallthebenefitsofthereservebutincurnoneofitscosts.

  • Withregardtoadedicatedamountofsponsorsupport,sponsorswithoutaccesstocapitalwouldfinditdifficulttoenterorremaininthemarket.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |156

Sizeofthecapitalsupportiskey.JPMAMhasconductedextensiveworkonthistopic,whichwearehappytosharewithregulators.

GiventhehighqualitynatureoftheassetsheldinMMFportfolios,theoptimalcapitallevelmuststrikeanappropriatebalance,addressingMMFriskssuchasminimizingcreditdefaultrisk,withoutbecominguneconomicalforsponsorsorinvestors.

Ourresearchsuggeststheoptimalsizeiswithinarangeofbetween50bpsand100bps.

Additionally,wherecapitalsupportisutilizedasafirstlosspositionuponliquidation,thelevelofcapitalavailablecanbetiedtoaMMF’shighestassetlevels.

Thiscanresultinastructurewhereby,asredemptionsaccelerateandcausetheunrealizedlosspersharetoincreasefurther,theamountof capitalsupportavailablepershareincreasesaccordingly,providingfurthercapitalsupporttotheremainingshareholdersthatdonotredeemtheirshares.

Ultimately,thecapital’ssource–sponsororshareholder–islessimportantthanapplyingconsistentriskmeasuresacrosstheindustryandensuringthecapitaliscallableanduseableunderaproperregulatoryframework.

Thekeyisthatcapitalbefundedupfrontandthatitremainsdynamicinordertobeconsistentlyappropriatelysizedforanyassetgrowth.

Recommendation13:MMFdocumentationshouldincludeaspecificdisclosuredrawinginvestors’attentiontotheabsenceofacapitalguaranteeandthepossibilityofprincipalloss.

Recommendation14:MMFs’disclosuretoinvestorsshouldincludeallnecessaryinformationregardingthefunds’practicesinrelationtovaluationandtheapplicableproceduresintimesofstress.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |157

Astheindustryandregulatorscontinuetoworktowardsaconstructivesolution,JPMAMbelievesthethemeoftransparencyshouldplayacentralrole.

TransparencyanddisclosurearestrongthemesalreadyembeddedinEuropeanregulationviatheUCITSDirective.

UCITSlawprovidesforextensivedisclosureintheprospectus,theKeyInvestorInformationDocument("KIID")andthehalf-yearlyandannualreports.

Thesecontainanoverridingrequirementthattheprospectuscontainstheinformationnecessaryforinvestorstobeabletomakeaninformedjudgementoftheinvestmentproposedtothemandinparticularoftherisksofsuchinvestment.

Aclearandeasilyunderstandableexplanationofthefund'sriskprofilemustalsobeincluded.

Theprospectusmustalsocontaincertainotherdetailedinformationregardingthefund'soperation,forexampledetailsofthetypesandcharacteristicsoftheunits,thetypesofinvestmentsmadebytheUCITSanditsuseoffinancialderivatives.

Thevaluationrulesmustbesetoutintheprospectusandthisincludesanymethodusedintimesofstress.

Thecombinationoftherequirementsfortheprospectus,KIID,and half-yearly/annualreportsprovidesarobustdisclosureregimeforthe

protectionofinvestorsinUCITSfunds,intowhichfurtherenhancements

suchasspecificriskdisclosurescouldbebuilt.

Recognizingthecentralroleoftransparency,onJanuary14,2013,threeUS-domiciledcreditMMFsadvisedbyJPMAMbegandisclosingtheirmarket-basedNAVseachbusinessday.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |158

AllredemptionsandsubscriptionsforthefundswillcontinuetobeprocessedusingthestableNAVdeterminedundertheamortizedcostmethodofaccountingconsistentwiththeprovisionsunderRule2a-7.

(Thefunds’persharemarket-basedNAVshavehistoricallybeencalculatedatleastweekly,andsinceDecember2010,havebeendisclosedmonthlytotheSECandreleasedtothepublicona60daylag.)

ThestepsthatJPMAMistakingwillnotimpacttheoperationofthefundsandwillallowinvestorstocontinuetorelyonthefundsforshort-termliquidityandinvestmentdiversification,whileprovidingan additionallayerofdisclosure.

ThiswillallowinvestorstobetterunderstandthenatureofMMFrisksandmakemoreinformeddecisionsregardingtheirinvestmentsinMMFs.

JPMAMexpectsthatotherMMFsinourglobalrangewillfollowthisprocessinthenearfuture.

Conclusion

JPMAMappreciatestheopportunitytocommentontheFSB’srecommendations.

Weacknowledgeregulators’effortstoresearch,consultanddefineasetofsolutionstoensurethestabilityoftheMMFindustryandthebroaderfinancialsystem,whilepreservingtheviabilityofthisindustryforinvestorsandtheshort-termcapitalmarkets.

Itisevidentthatthereisnosingle“solution”toaddressthesystemicconcernsaroundMMFs;however,acombinationofseveralthoughtfulinitiatives,selectivelyappliedandrigorouslyimplemented,couldhaveasignificantimpactinaddressingtheirstructuralvulnerabilitiesandtheriskstheypresent.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |159

WewouldbepleasedtoprovideanyfurtherinformationorrespondtoanyquestionsthattheFSBmayhave.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |160

PCAOBEntersIntoCooperative AgreementwithFrenchAuditRegulator

ThePublicCompanyAccounting

OversightBoardtodayannouncedthatithasenteredintoacooperativeagreementwiththeFrenchHighCouncilforStatutoryAuditors(H3C)

relatingtotheoversightofauditfirmssubjecttotheregulatoryjurisdictionsofbothregulators.

Theagreementtakeseffectimmediately.

"France,whichishometoanumberofcompaniesthathaveasignificantimpactonU.S.andglobalmarkets,isanimportantpartnerinEurope,"saidPCAOBChairmanJamesR.Doty.

"ThisagreementwiththeH3Cisyetanotherstepforwardinourcontinuousefforttostrengtheninvestorprotectionacrossborders."

ThePCAOBhasreachedsimilaragreementswithfourotherEuropeanUnionmemberstates—theUnitedKingdom,Germany,theNetherlandsandSpain.

Additionally,theBoardhasagreementswithSwitzerlandandNorwayandseveralnon-Europeanregulators.

TheagreementwiththeH3CprovidesaframeworkforjointinspectionsandallowsfortheexchangeofconfidentialinformationinaccordancewiththeprovisionsoftheDodd-FrankWallStreetReformandConsumerProtectionActof2010intheU.S.andapplicableFrenchlaw.

TheprovisionsoftheDodd-FrankActamendedtheSarbanes-OxleyActof2002topermitthePCAOBtoshareconfidentialinformationwithitsnon-U.S.counterpartsundercertaincircumstances.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |161

AnagreementondataprotectionisalsopartofthecooperativearrangementwithFrance.

"TheagreementwehavereachedwiththeH3Cshowstheclearcommitmenttostrongauditoversightthatourorganizationsshare,"saidBruceWilson,PCAOBDirectorofInternationalAffairs.

"ThePCAOBislookingforwardtobuildinguponthecloserelationshipwehavedevelopedwithourFrenchcounterparts."

UndertheSarbanes-OxleyAct,thePCAOBoverseesandinspectsallaccountingfirmsthatregularlyauditpubliccompanieswhosesecuritiestradeinU.S.markets.

Morethan900auditfirmscurrentlyregisteredwiththePCAOBarelocatedoutsideoftheUnitedStatesin87jurisdictions.

Currently,25registeredfirmsarelocatedinFrance.

PCAOBEntersIntoCooperativeAgreementwithFinnishAuditRegulator

ThePublicCompanyAccountingOversightBoardtodayannouncedthatithasenteredintoacooperativeagreementwiththeAuditingBoardoftheCentralChamberofCommerce(AB3C)ofFinlandrelatingtothe oversightofauditfirmssubjecttotheregulatoryjurisdictionsofbothregulators.

Theagreementtakeseffectimmediately.

"ThisagreementwithFinlandistheBoard'ssixthwithaEuropeanUnionmemberstateregulatorandmarksourcontinuedprogressincross-borderauditregulatorycooperation,"saidPCAOBChairmanJamesR.Doty.

"WelookforwardtoworkingcloselywithourFinnishcounterparts,"Dotysaid."Wecanbesignificantlymoreeffectivetogether."

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |162

ThePCAOBhasconcludedsimilaragreementswithintheEuropeanUnionwiththeUnitedKingdom,Germany,theNetherlands,Spainand,mostrecently,France.

Additionally,thePCAOBhasagreementsinSwitzerlandandNorway,andwithseveralnon-EuropeanregulatorsinNorthAmerica,theMiddleEast,Asia,andAustralia.

ThePCAOBcontinuestopursueadditionalagreementswithauditoversightauthoritiesinotherEUmemberstatesandjurisdictionsaroundtheworld.

TheagreementwiththeAB3CprovidesaframeworkforjointinspectionsandallowsfortheexchangeofconfidentialinformationinaccordancewiththeprovisionsoftheDodd-FrankWallStreetReformandConsumerProtectionActof2010.

ThoseprovisionsamendedtheSarbanes-OxleyActof2002topermitthePCAOBtoshareconfidentialinformationwithitsnon-U.S.counterpartsundercertaincircumstances.

AnagreementondataprotectionisalsopartofthecooperativearrangementwithFinland.

"TheAB3CandthePCAOBbotharecommittedtoinvestorprotection andtohavingastrongworkingrelationshipwitheachother,"saidBruceWilson,PCAOBDirectorofInternationalAffairs.

UndertheSarbanes-OxleyAct,thePCAOBoverseesandinspectsallaccountingfirmsthatregularlyauditpubliccompanieswhosesecuritiestradeinU.S.markets.

Morethan900auditfirmscurrentlyregisteredwiththePCAOBarelocatedoutsideoftheUnitedStates,spanning87jurisdictions.

Currently,fiveregisteredfirmsarelocatedinFinland.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |163

SolvencyII–earlyuseofSolvencyIIworktomeetICASrequirements

DearFirm

AtthePRAlauncheventforinsurerson22October2012,IacknowledgedthedelaytotheimplementationofSolvencyIIandsetoutanewplanninghorizonof31December2015.

Ialsosetouttheintentionto***allowfirmstousetheirSolvencyIIworktomeet,asfaraspossible,thecurrentregulatoryrequirements***undertheIndividualCapitalAdequacyStandards(ICAS).

Theextendedplanninghorizonhasledustore-planICASreviewsoverthenext24months,includingformanyfirmsintheinternalmodelapprovalprocess(IMAP).

Indevelopingtheapproach,wehavebenefitedfromindustrytechnicalinputinexpertgroupswehaveconvened;wearegratefultothosefirmswhoparticipatedinthegroups.

Inthespeech,Isetoutatwo-phaseapproachtoallowtheearlyuseofSolvencyIImodels.

Inthefirstphase,weenvisagedthatfirmsintendingtousetheirSolvencyIImodelforICASpurposeswouldadditionallyneedtoprovidea reconciliationbetweenthecalculationsperformedtotakeaccountofthedifferencesinthetworegimes.

InthesecondphasewesaidwewouldallowfirmstousetheirSolvencyIIbalancesheetandmodelforICASpurposeswithoutfurtheron-goingreconciliations.

Webelievethatwehavenowdevelopedanapproach(referredtoas‘ICAS+’asshorthand)thatprovidesapracticalsolution–availabletobothlifeandnon-lifefirms–consistentwithourcurrentregulatory

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |164

approachandwhichallowsfirmstocontinuetomakeprogresstowardsSolvencyII.

WeconsiderICAS+tobemostappropriateforthoseIMAPfirmssubjecttoanICASreviewtotheendof2014,andfirmsshoulddiscusswiththeirsupervisorthetimingandcontentoftheirreviews.

Firmsareremindedthattheyarenotobligedtoenterthetwo-phaseapproach,anditisnotaconditionforIMAPrevieworapproval.

On20December2012,EIOPApublisheditsopiniononinterimmeasuresregardingSolvencyII.

WeareworkingwithEIOPAonthedetailsoftheinterimmeasures,anda consultationisplannedforspring2013onguidancefornationalsupervisoryauthoritiestoensureaharmonisedapproachtoimplementation.

Thekeyelementsofthetwo-phase‘ICAS+’approach

CurrentICASruleswillcontinuetoapply, includingtherequirementtocarryoutanICAandthesettingofindividualcapitalguidance(ICG).ICAS+doesnotrequireSolvencyIItestsandstandardstobemet.

WehavesetouttheinformationneededfromfirmsforanICAS+reviewintheappendix. Thisincludesthereconciliationswewouldneedtounderstandtherelationshipbetweenthefirm’sSolvencyIImodelanditspreviousIndividualCapitalAssessment(ICA)model.

WewillseektouseexistingIMAPmaterialprovidedbythefirmwhereverappropriateinourreviewoftheICAbutfirmswillneedtoconfirmthescopeofmaterialthatshouldformpartoftheICAS+review.

ThescopeoftheICASreviewwillseektoleverageIMAPworkalready conducted. TotheextentthatwereceiveanICAS+submissionofsufficientlyhighquality(seeappendix),wewillseektoprovideasmuch detailedfeedbackonIMAPprogressaspossible.

Thedetailwilldependontiming,qualityofmaterials,policycertainty,thescopeofthereviewandourresourceavailability.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |165

OurstartingassumptionisthatourcurrentICASapproachwillcontinueforgroups(seebelow).

Intheinterestsofefficiency,weintendtocombineICAS+andIMAPprocessesandgovernance. TherearethreemainoutcomesofanICAS+review:i)areviewofthefirm’sICAandsettingICG;ii)feedbacktothefirmonthedevelopmentoftheSolvencyIIinternalmodel;andiii)anupdatedworkplanfortheSolvencyIImodelreview.

Wewillreviewthein-developmentORSAtofacilitatethePRAapproach,forinstanceasawayofbringingtogetherbusinessmodelanalysis,forward-lookingcapitalplanning,assessmentofstressandscenariotesting,evidenceofuseandcapitalriskmanagement.

Firmsshoulddiscusswiththeirsupervisorhowtheirin-developmentORSAmaybeusedtomeetthecurrentINSPRUrequirements.

SolvencyIIreporting.IsaidinmyOctoberspeechthatwewillrequireenhancedinformationtodeliverthePRA’sobjectivesandwewilllooktoseeifweneedtosupplementtheexistingdatawegetfromfirmsinareassuchasstresstestingorsomemarket-widedataaswerefineourworkinareassuchasassessingthesustainabilityandvulnerabilityofinsurers’businessmodels.

AsIsaidinOctober,itisnotourintentiontobringinSolvencyIIreportinganysoonerthanrequiredbyEIOPA.

WeareworkingwithEIOPAonthedetailofitsinterimmeasuresinsettingpolicyforinsurers.

Thecurrentsupervisoryapproachwillcontinueforgroups. WewillfocusonUKsolofirmsandtakeintoaccountgrouprisksinICAS+.

AnumberoffirmshaverequestedagroupICAandwewillconsidersuchrequestsaspartofourreschedulingofreviews,takingintoaccounttheappropriateconsiderationsincludingourownresourceavailability.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |166

Nextsteps

Ourdiscussionswithfirmsindicatethatindustryinterestiscurrentlymainlyforphase1,inpartreflectingthesignificantpolicyuncertainty.

Asnotedabove,weareupdatingourimplementationplanstoreflectthenewplanninghorizonof31December2015,andweareschedulingICAS reviewsoverthenext24months.

SupervisorsarediscussingwithfirmswhethertheywanttointegratetheirICASandIMAPreviews(revisingslotsasneeded)andleveragetheinvestmentinSolvencyIIworkforICASpurposes.

Weareworkingthroughthenextlevelofdetailtoimplementthe

two-phaseapproachandwillprovidemoreinformationonwhatfirmswillneedtoprovideintheirICAS+reviewinQ22013.

PleaseaddressanycommentorfeedbackyoumayhaveontheICAS+approachtoyo[email protected]

Yourssincerely

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

  • P age |167

  • Appendix

  • InputstotheICAS+review

  • ForthepurposeofICAS+,thefirmwillneedtoprovide:

  • detailsofthoseaspectsofitsSolvencyIIinternalmodelthatitwillbeusingtosatisfy(ifonlypartly)INSPRU7;

  • anyadditionalmaterials,includingwhererelevantanin-developmentORSA,thatitwillbeusingtosatisfyINSPRU7;

  • appropriatereconciliationsbetweentheSolvencyIImodel(orthosecomponentsoftheSolvencyIImodelthatthefirmswillbeutilising)andthepreviousICAmodel;and

  • thefirm’sassessmentofitsprogressindevelopingitsSolvencyIIinternalmodelandasummaryofanyadditionalworkrequiredtomeettheSolvencyIItestsandstandards.

  • FirmsnotinthesubmissionphaseofIMAPwillalsobeexpectedtoprovideanyadditionalmaterialswedeemnecessarytoinformourreviewandassessmentofthekeyriskareasoftheSolvencyIImodelagainstthetestsandstandards.

  • Thiswouldinclude,whereappropriate,informationonSolvencyIIgroup models.WeexpectallmaterialssubmittedforanICAS+reviewtohavebeenapprovedbythefirm’sBoard.

  • Whatdoesthereconciliationinvolve?

  • InordertobeabletoperformtheICAS+review,weneedtobeabletounderstandchangesinthefirm’sbusinessandmodelsincethepreviousICAreview,andtherelationshipbetweentheSolvencyIImodelandthepreviousICAmodel.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |168

FirmswishingtotakepartinICAS+willhavetoproducethesereconciliations.

WeunderstandthatsomefirmshavedevelopedtheirexistingmodelsforSolvencyIIpurposeswhilstothershavecreatednewmodelarchitecture.

Tothisend,thereareanumberofpossiblemethodsavailabletofirmstoprovidethereconciliationbetweenthepreviousandnewICA.

FirmswishingtoenterICAS+shoulddiscusswiththeirusualsupervisorycontactthemethodthefirmwishestouseandhowthereconciliationswillneedtobeperformedastheywillbebespoketotheindividualfirm.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |169

SpeechbytheChancelloroftheExchequer,RtHonGeorgeOsborneMP,ontheReformofBanking

ThankyouforwelcomingmetoJPMorganhereinBournemouth.

WhenyouthinkaboutwheretogiveaspeechoncultureandethicsandthefutureofBritishbanking,theofficesofoneoftheworld’slargestAmericaninvestmentbanksmayseemlikeanoddchoiceofvenue.

Butit’sadeliberateone.

Forthefourthousandpeoplewhoworkhereare,eachoneofyou,areminderthatwhenbankingworks,itworksforthefamiliesandcommunitiesofthewholeofBritain.

You,eachoneofyou,areareminderthatwhenweattractinternationalfirmstoourcountry–firmsthatcouldgoanywhereintheworldtodotheirbusiness–thosefirmsbringjobs,andinvestmentandprosperity.

ThatforeveryoneofthepeopleemployedhereatthelargestbusinessinDorset,therearemanymoreemployedinthebusinessesthatsupportthisoffice,intheshopsthattakeyourcustom,andinthelocaleconomythathasgrownstrongeronyourback.

I’mgoingtoseetwoofthosebusinessesafterIspeakhere–acateringcompanyandalandscapingbusinesscalledStewarts.

FouroftheemployeesatthatlandscapingbusinessworkfulltimeonJPMorgansite,jobsthatwouldn’texistwithoutyourpresence.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |170

FromJPMorgan,oneoftheworld’sbiggestcompanies,toStewartslandscaping,BournemouthteachesusthatBritainshouldcontinuetoaspiretobeahometotheworld’sfinancialservices.

AndwhatistrueforBournemouthisalsotrueofBristol,andEdinburgh,Leeds,Cardiff,BirminghamandManchester.

Inallthesecities,financialservicesaresomeofourlargestandmost innovativeemployers.

Andit’strueaboutLondontoo–andtheCityofLondon.

GenerationshavecreatedintheCitysomethingextraordinary–aglobalcentreoffinance.

Theglobalcentreoffinance.

Whetheritsinsuranceandaccountancy,shippingandlegalservices,hedgefunds,privateequity,assetmanagementorinvestmentbanking,whentheworldwantstotransact–itwantstotransactthroughLondon.

Andwewanttokeepitthatwayintheyearsahead.

That’swhyit’sbeengoodtoseeBritainandLondonmaintainitsnumberonespotasthehomeofglobalfinancialservices.

That’swhyit’sbeenexcitingtoseethefirstRenminbibondissuedanywhereintheworldoutsideofChinesesovereignterritoryissuedinLondoninthelasttwelvemonths.

Forthatisnotjustgoodfortheirfuture,it’sgoodforourstoo.It’showwewillwinintheglobalrace.

It’swhatIampersonallydeterminedtoachieve.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |171

AndpartofhavingasuccessfulfinancialservicesindustryishavingsuccessfulBritishbanks,whowanttolendathomeandcompetearoundtheworld.

Thinkofsomeofthemostimportantmomentsinyourlife.

Whenyouboughtyourownhomewithamortgage.Whenyoutooktheplungeandstartedyourownbusiness. Whenyouretiredanddrewonyourpension.

Oneachofthoseoccasions,youreliedonthefinancialsystemandputyourtrustinthem

Thatiswhyit’ssoimportanttohavethattrustreciprocatedandabankingsystemthatworksforyou.

AndthatiswhatI’mworkingnightanddaytodeliverforyou.

LikeallthisGovernment’sreform–towelfare,totheeconomy,toschoolsandtobanking–wewanttobackaspirationandbeonthesideofthosewhowanttoworkhardandgeton.

Ourprinciplesaresimple:ifyoudotherightthing,governmentshouldsupportandhelpyou,andremovethebarriersinyourway.

Ifyoudothewrongthing,youshouldtakeresponsibilityforyouractions.Andsadly,nowherehavethesesimpleprinciplesbeenbrokenmore

clearlyandindefensiblythaninourbankingsystemoverthelastdecade.

Irresponsiblebehaviourwasrewarded,failurewasbailedout,andtheinnocent–peoplewhohavenothingwhatsoevertodowiththebanks–suffered.

Formany,thefinancialcrashwasconfirmationofwhattheyfeltaboutour

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |172

society:thatthosewhoareonlyoutforthemselvesgetawaywithit;andthosewhoworkhardandplaybytherulesgetpunished.

Thatiswhy,fiveyearsonfromthatcrash,peoplearestillsoangry.

Andwhenpeoplediscovermoreaboutwhatwentsowrong:

themis-sellingofinterestrateswapstosmallfirmswhowentbustasaresult;

thegreedandcorruptionontheLIBORtradingfloor.

Theygetangrierstill.

Iunderstandthatanger.Ifeelittoo.

Butangercanbeanegative,destructivethingifitisnotchannelledintochange.

Changeforthegood.

Anybunchofpoliticianscanbashthebanks,chasetheheadlines,courtthepopuliststreak.

Butwhatgoodwouldthatdoourcountry?

Thejobs,theinvestment,thebankingsystemweallneedwouldgowithit.

Let’staketheangerwefeelaboutthebanksandturnitintochangetobuildthebankingsystemthatworksforusall.

Thatispreciselywhatwearedoing.

Andthroughtheworkwe’vedone,theexperthelpwe’veenlisted,wecanmake2013theyearofchangeinourbankingsystem.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |173

2013istheyearwhenwere-setourbankingsystem.

Sothebanksworkfortheircustomers–andnottheotherwayround.

Sothatthosewhoguardoverthebankstokeepoureconomysafearetherightpeoplewiththerightweaponstodothejob.

Andsothatwhenmistakesaremade,it’sthebanksandnotthetaxpayerthatpicksupthebill.

Letmeexplainhow.

Letmetellyouaboutthefourconcretethingsthataregoingtochangethisyear.

First,we’vegotabrandnewwatchdogwithnewpowerstokeepourbankssafesotheydon’tbringdowntheeconomy.

Second,we’vegotanewlawtoseparatethebranchonthehighstreetfromthedealingfloorinthecitytoprotecttaxpayerswhenmistakesaremade.

Third,we’regoingtostart,withtheindustry,changingthewholeculture

andethicsofthebusiness,sotheyworkforyou.

Fourth,we’regoingtogivecustomersthemostpowerfulweaponofall:choice.

Realchoiceaboutwhoyoubankwith–andchoicetochangewhoyoubankwithifyouwantabetterdeal.

Letmetakeeachinturn.

First,protectingoureconomybykeepingourbankssafe.

Thedecisiontakenbythelastgovernmenttodivideresponsibilityforfinancialstabilityfrombankingsupervisionwasoneoftheworsteconomypolicymistakesofthemodernera.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |174

TheBankofEnglandwasstrippedofitsresponsibilityforkeepingthebankingsystemsafe.

TheFinancialServicesAuthoritywasonlyfocussedoncompliance,withamyriadofindividualrules,andmissedthewoodforthetrees.

TheTreasury’sbankingdivisionwasrundown.

No-onesawitastheirjobtomonitorrisksacrossthewholesystem.Sono-onespottedtheincreaseofdebt.

Staggeringly,totaldebtreachedfivetimesthesizeoftheentireeconomy.

ThefirealarmwasringingwhenNorthernRockhandedout120percentmortgages.

ThefirealarmwasringingwhentheRoyalBankofScotlandmadeitsrecklesspurchaseofABNAMRO,afterthecreditmarketshadalreadyseizedup.

Thefirealarmwasringing,butno-onewaslistening.

Andwhenthecrisishit,thefirewasthensogreatthatthewholeeconomywassacrificedtoputitout.

Tenpercentoftheentirewealthofthiscountrywaslost.

Hundredsofthousandsofpeoplelosttheirjobsandtheirlivelihoods.Yes,thoseresponsibleshouldbeheldtoaccount.

ButBritishpeopleneedtoknowthatlessonshavebeenlearnt.Andtheyhave.

ThisApril,theFSAisbeingabolished.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |175

ThisApril,theBankofEnglandwillbeinchargeofkeepingourfinancialsystemsafe.

Withtheauthoritythatcomesfromitshistory,andthenewpowerswehavegivenitforthefuture,theBankofEnglandwillbethesupercopofourfinancialsystem.

TheBankisready.

Thelogisticsareinplace.

Andfromdayone,wewillhaveapowerfulnewwatchdogwithrealteeth.Notjusttointerveneandstopindividualwrongdoing.

Butthepowertomakeajudgementcallaboutthewholesystem-thepowertospotincreasesindebtorwarnofriskypractices.

Thepowertocalltimebeforethepartygetsoutofcontrol.

Butalsothepowertosupporttheeconomyifcreditconditionsgettootight.

TheBankofEnglandwon’tbejustempoweredtoprotectusfromtheexcessesofabankingboom,butalsotohelpthebanksupportusinabust.

Andwe’realsocreatingfromAprilastrongnewconductregulator,theFCA,toensureLondonandtheUKhavethebest,mostopen,andtransparentlypolicedmarketsintheworld.

ThatwillwinbusinessforBritain,attractinvestment.

AndthroughtheFundingforLendingscheme,we’regivingbanksincentivestoboostlendingtofamiliesandbusinesses.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |176

We’vealreadyseentheavailabilityandcostofborrowingcomingdown,butwearemonitoringitcloselytoensurethatratesandavailabilitycontinuetoimprove.

Goodregulation.Watchdogswithrealteeth.

Openmarketswithclearrules,properlypoliced.

Thesesupportinnovation.

Fortheindustrythatsuffersmostwhensomethinggoeswronginfinance

–isfinanceitself.

Second,thisyearwe’regoingtostartseparatingthehighstreetbankingwealldependonfromtheCitytradingfloor.

WhentheRBSfailed,mypredecessorAlistairDarlingfelthehadnooptionbuttobailtheentirethingout.

NotjusttheRBSonBritain’shighstreets,butthetradingpositionsinAsia,themortgagebooksinsub-primeAmerica,thepropertypuntsinDubai.

IwanttomakesurethatthenexttimeaChancellorfacesthatdecisiontheyhaveachoice.

Tokeepthebankbranchesgoing,thecashmachinesoperating,whilelettingtheinvestmentarmfail.

Nomorerewardsforfailure.Nomoretoobigtofail.

Nomoretaxpayersforkingoutforthemistakesofothers.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |177

Thesamerulesforthebankingbusinessasanyotherbusinessinafreemarket.

WhentheGovernmentcameintooffice,therewasnoagreementabouthowthismassivetaskwouldbeachieved.

That’swhywespenttwoandahalfyearspainstakinglybuildinga consensusonthefuturestructureofourbankingindustry,workingwithleadingexpertsandMembersofParliamentandIwanttothankVinceCableforhishelpindoingthatwithme.

TheworkthatSirJohnVickersandhisCommissionhasdonehaswonrespectallaroundtheworld,andhasalreadyinfluencedtheEuropeandebate.

Today,wearepublishedthelegislationthatwillturntheirideasandthisconsensusforchangeintolaw.

Alawforthefirsttimeever,toseparatetheretailandinvestmentarmsofbanks,anderectaringfencearoundtheretailbanksoitsessentialoperationscontinueevenifthewholebankfails.

I’msendingthelegislationtotheHouseofCommonstodayandIexpectthemtobepassedbyParliamentthistimenextyear.

Itwon’tmeanbankswon’tmakemistakes.

Butitdoesmeanthatiftheydo,thosepartsofthebankingsystemthatarevitalforfamiliesandbusinessescancontinuewithoutresorttothetaxpayer.

Today,wewillgofurtherthanpreviouslyannounced,enshrininginlawthesesimpleprinciples.

Icanannouncethatyourhighstreetbankwillhavedifferentbossesfromitsinvestmentbank.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |178

Yourhighstreetbankwillmanageitsownrisks,butnottherisksoftheinvestmentbank.

Andtheinvestmentbankwon’tbeabletouseyoursavingstofundtheirinherentlyriskyinvestments.

Mymessagetothebanksisclear:ifabankfloutstherules,theregulatorandtheTreasurywillhavethepowertobreakitupaltogether–fullseparation,notjustaringfence.

We’renotgoingtorepeatthemistakesofthepast.

InAmericaandelsewhere,banksfoundwaystoundermineandgetaroundtherules.

Greedovercamegoodgovernance.

Wecouldseethatagain–sowearegoingtoarmourselvesinadvance.Inthejargon,wewill“electrifytheringfence”.

IwanttothankAndrewTyrieandthefellowmembersoftheBankingCommissionweestablishedforhelpdevelopingthisimportantnewidea.

Let’sgetonandpassitallintolaw.

Letmeturntothethirdforceforchange–achangeinthecultureandethicsofthebankingindustryitself.

Ihavetosaynowhereisthismorekeenlyappreciatedthaninthe responsiblepartsofthefinancialcommunityitself.

Youhereworkhardinagreatbusiness.Youservicecustomersallovertheworld.

Youdon’twantthenameofyourwholeindustrytobebesmirchedbecauseofthecrimesofafew.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |179

AndnordoI.

That’swhytheLIBORscandalisaboutfarmorethanatoningforthemistakesofthepast.

It’saboutbecomingacatalystforchangeinthefuture.Weknowwhathappened.

From2005,traders,brokersandbankofficialsattemptedmanipulationofoneofthemostimportantreferenceratesinoureconomy–aratewhichaffectsthemortgagepaymentsandloanratesofmillionsoffamiliesand hundredsofthousandsoffirms,largeandsmall.

Deliberatelysubmittingfalseratesfornomotiveotherthangreed.

“Lowballing”theirLiborsubmissionstoconcealhowvulnerabletheirbanksreallywere.

Yearsofmanipulation,intwentybanksonthreecontinents.

Overabillionpoundsoffineshavealreadybeenappliedworldwide.

Andwestillhaven’tseenthefullextentofit–morerevelationswillcome.We’reexpectingreportsintowhathappenedatRBSveryshortly.

Iexpecttherewillbeevenmorepublicanger–ifthat’spossible.

Butangerisnotenough–weneedtochanneltheangerintochange.AndIwanttodotherightthingforthehundredsofthousandsofpeople

inthebankingsector–likeyou–inallpartsofourcountrywhodo

conductthemselveswithprofessionalism–andmakesurethereputation andstandardsoftheindustryarerestored.

LIBORmanipulationhappenedinmanycountries.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |180

Butnocountryhasrespondedasquicklyasdecisivelyaswehavenowdone.

Wherepeoplehavebrokenthelaw,theauthoritieswillhaveallthe resourcestheyneedtomakesuretheyarepunished.

I’vechangedthesystemIinheritedsothatfinespaidbybanksforwrongdoinggottogoodcausesnotbacktotheindustry–Ihavealreadyannouncedthat£35millionpoundsofBarclay’sfineswillgotoBritishArmedForcescharitiestohelpthosewhofightonallourbehalves.

ThefirstmillionhasbeenallocatedtotheFisherHouseProject,whichwillhelpthefamiliesofwoundedsoldiersbeingtreatedattheQueenElizabethHospitalinBirminghamtostaycloseby.

Andwe’renowsteppingintoregulatepreviouslyunregulatedmarketsandwe’remakingitacriminaloffencetomakemisleadingstatementsaboutLIBOR.

Shockinglythatwasnotthecasebefore.

Andasweapproachbonusseasonletmesaythis.

Thiscountrynowhasthetoughestandmosttransparentpayregimeofanymajorfinancialcentreintheworld.

Citybonusesfellbyalmosttwothirdslastyear,andarelessthanaquarteroftheirpeakbeforethecrash.

Everyoneshouldexerciserestraintandresponsibility,butit’simportanttorememberthatthevastmajorityofpeopleinthebankingsector–likethepeopleinthisroom–donotreceivemillionpoundbonuses.

WeallknowthereareLiborinvestigationsongoingintoRBSinboththeUKandtheUS.

AnyUKfinewillbenefitthepublic.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |181

AndwhenitcomestoRBS,IamclearthatthebillforanyUSfinerelatedtothisinvestigationshouldonthisoccasionbepaidforbythebankers,andnotthetaxpayer.

Butthechangetothecultureandethicsofbankinggobeyondbonusesandfines.

Ibelieveweneedproperprofessionalstandardsinthebankingsector–justaswehavefordoctorsandlawyers.

Iwanttoseetheindustrytakeprideinthosestandards,asourmedicalandlegalprofessionsdo.

AndIwanttoseehowwecanstrengthenthesanctionsregimeforseniorbankers–forexample,shouldtherebeapresumptionthatthedirectorsoffailedbanksdonotworkinthesectoragain?

IhaveaskedtheParliamentaryCommissiontolookathowtoimprovetheprofessionalstandardsandcultureofthebankingsector.

Theirworkisunderwayandwillreportinthespring.

IwouldencouragetheCommissiontocomeforwardwithfarreachingproposals.

Thefourthandfinalchangeweneedtobankingismorechoice.

Choiceisthemostpowerfultoolwehavetoimprovemarketsandcustomerservice,rewardgoodcompaniesandpenalisepoorones.

Yes,ournewregulatorcanpickupthepiecesfromtheinterestswapmis-sellingorPPI.

Yes,Ibelievewemustdomuchmoretoexposehiddenchargesandremovetheconflictsofinterestthatplaguetoomuchsocalledindependentfinancialadvice.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |182

ButIalsowanttoseemorebanksonthehighstreet,socustomershavemorechoice.

Oneofthepriceswe’repayingforthefinancialcrisisisthatourbankingsectorisnowdominatedbyafewbigbanks.

Itvergesonanoligopoly.

75%ofallpersonalcurrentaccountsareinthehandsofjustfourcompanies.

Iwantnewfacesonthehighstreet.

Iwantupstartchallengersofferingnewandbetterservicesthatshakeuptheestablishedplayers.

We’vemadeastart:withthesaleofNorthernRocktoVirginMoney,andtheproposedsaleofLloydsbranchestoCo-op.

We’reseeingnewbankslikeMetroBankonourhighstreets–butIwant tomakeiteasiertostartasmallbankandgrowthebusiness.

Thisyear,in2013,we’retakingahugesteptowardsmakingthathappen–bymakingiteasierforcustomerstomovebanksiftheycangetabetterdealelsewhere.

FromSeptemberthisyear,everycustomerofeverybankinBritainwillbeabletoswitchtheirbankaccountfromtheirexistingbanktoanotheroneinsevendays.

Alltheywillhavetodoissignuptoanewbank–andtherestwillfollow.Allthedirectdebits,thestandingorders,everythingwillbeswitchedfor

youwithnohassle.

Thisisarevolutionincustomerchoice.Buttoday,wewillgofurther.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |183

Paymentssystemssitattheheartofthebankingsystem.

Theyarethehiddenfromviewwiringsthatoperateeverytimeyougetwagespaidintoyourbankaccount,depositachequeorwithdrawmoneyfromanATM.

It’showthemoneyflowsaroundthesystem.

Andit’sabitliketheelectricitygrid,everypersonandeverybusinessneedstobepluggedintothemtoenterthebankingmarket.

Atthemoment,anewplayerintheindustryhastogotooneoftheexistingbigbankstousethepaymentsystem.

Askingyourrivaltoprovideyouwiththeessentialservicesyouneedatareasonablepriceisnotarecipeforsuccess.

Anditotherwalksoflife,liketelecoms,wedon’toperatelikethat.

Therearenoincentivesonthebigbankstodelivernewandbetterservicesforusers–likesavingthechequeorcreatingnewserviceslike mobilepayments.

Why,intheageofinstantcommunication,dosmallbusinesseshavetowaitforseveraldaysbeforetheygettheirmoneyfromacreditordebitcardpayment?

Itshouldbemuchquicker.

Whydochequestakesixdaystoclear?

Customersandbusinessesshouldbeabletomovetheirmoneyroundthesystemmuchmorequickly.

Whyisitthatbigbankscanmovetheirmoneyaroundinstantly,butwhenasmallbusinesswantstomakeapaymentittakesdays?

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |184

Thesystemisn’tworkingforcustomers,sowewillchangeit.

IcanannouncetodaythattheGovernmentwillbringforwarddetailedproposalstoopenupthepaymentsystems.

Wewillmakesurethatnewplayersinthemarketcanaccessthesesystemsinafairandtransparentway.

ThelastGovernmentlettheestablishedplayersoffthehookbyfailingtoimplementtheconclusionsofthereviewtheythemselvescommissioned,andallowingthebigexistingbankstoregulatethemselves.

ThisGovernmentwillmakesurepaymentsystemsservetheneedsofconsumers,nottheneedsoftheestablishedbanks.

Bankworkingfortheircustomers,notthemselves.Taxpayers’moneyprotected.

Theguardiansoffinancialstabilitywiththetoolstheyneedtokeepussafe.

Onallthesefronts,wearemakingmajorchanges.

Afinancialindustrythatisstrong,successfulandinspirestheprideofallthosewhoworkforit.

That’swhatGovernmentshouldbeabout–takingthebigtoughdecisionsbecausethey’rerightforthelong-termgoodofourcountry.

Ourcountryhaspaidahigherpricethananyothermajoreconomyforwhatwentsobadlywronginourbankingsystem.

Theangerpeoplefeelisveryreal.

Let’sturnthatangerfromaforceofdestructionintoaforceforchange.Changethatwillgiveusabankingsystemthatwillworkforusall.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |185

In2013,thankstothechangeswearemaking,thatgoalisinsight

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |186

Designflawsoftheeuro

IntroductoryremarksbyMr.PatrickHonohan,GovernoroftheCentralBankofIreland,forthe

TKWhitakerLecture“Designflawsoftheeuro”by

MrHaroldJames,PrincetonUniversity,Dublin

***

Exactly70yearsagotoday,theCentralBankofIrelandopeneditsdoors,withthe“generalfunctionanddutyoftaking…suchstepsastheBoardmayfromtimetotimedeemappropriateandadvisabletowards safeguardingtheintegrityofthecurrencyandensuringthat,inwhatpertainstothecontrolofcredit,theconstantandpredominantaimshallbethewelfareofthepeopleasawhole.”

ObjectivesthesethatresonatewiththeCentralBank’scurrentmissionstatement:SafeguardingStability;ProtectingConsumers.

ThenewBankassumedandexpandedtheroleitsprecursor,theCurrencyCommission,hadperformedfor15yearsbeforethat.

CreationoftheCentralBankpartlyfollowedaglobalfashion.

AsMinisterforFinanceSeánT.ÓCeallaighremarkedinthesecondstagespeechonthelegislationcreatingtheBank,23countrieshadcreatedcentralbanksintheperiod1921–36.

Weknowthatunderlyingthiswaveofcreationhadbeenthedesirebylong-termBankofEnglandGovernorMontaguNormantocreateaninternationalnetworkwithwhichhecoulddealonfinancialissueswithouthavingtoworkthroughGovernments.

ThecentralforumofthisnetworkwastheBankforInternationalSettlements,whoseEconomicAdvisor,PerJacobsson,wasaninfluentialmemberoftheIrishBankingCommission1934–38.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |187

ThisCommissionhasbeensetupbytheFiannaFailgovernmenttoseewhatneededshaking-upinIrishbankinganditdid,albeitwithoutevidententhusiasm,dulyrecommendthatIrelandshouldfollowthenew fashion.

ItseemsthatboththeBankofEngland(withwhomJacobssonstayedintouchduringtheBankingCommission’sdeliberations)andtheIrish banks,especiallytheBankofIreland,hadmisgivingsaboutextendingthewiderpowersofcentralbankingtotheIrishcase,giventheclosetiestoLondon.

“Measaimíd,”arsaSeánT.,“gurciallmharanmhaisedhúinnárgcórasairgeadaisféindochurinoiriúintdoréimanlaeinniu.”

ButmorelikelyitwastheuncertaintyaboutbeingabletorelyinwartimeonthetraditionalsmoothaccesstoliquidityinLondon,asevidencedbytherebuffgiventotheBankofIrelandtherewhenitmadeexploratoryinquiriesinSeptember1939,thatwastheproximatetriggerfortheGovernment(supportedbymanyoppositiondeputies)totaketheplunge.

Andsowascreatedanentitywhich,unlikeitspredecessor,wouldhavethepowerandresourcestoincrease“thecashreserveof…banks[which]willtherebybeinapositiontolendmorefreelyandsosetthewheelsoftradeandindustryinmotionagain.”

Thisexcitingprospectdidnot,however,enthuseWilliamNorton,leaderoftheLabourParty,whoopposedtheCentralBankBillsayingthatit“infact,isreallyeye-wash”and,asTheEconomisthadalreadywritten,“likelytobelittlemorethantheexistingCurrencyCommissionunderanewname.”

Asitturnedout,mostofthenewpowersacquiredbytheBank,suchaslendingtoandtakingdepositsfrombanksandGovernment,didindeed remainlargelyunusedforacoupleofdecades.

Andtheone-for-onesterlingexchangeratelinkremainedfirmlyinprimarylegislationuntil1971.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |188

Itwasnotuntiltheearly1970s–theWhitakeryears–thatitcouldbesaidwithoutfearofcontradictionthattheCentralBankwasnolongeroperatingasamereCurrencyBoard.

Eveninthe1970s,publiccommunicationwassimplerthanitistoday.

Forexample,theGovernorwasabletomusepubliclyonexchangeratepolicywithoutfearofthemessagereachingtheLondonmoneymarketsbythesimpleexpedientofspeakinginIrish:(seeT.K.Whitaker’s1976talk,printedintheBank’s1976AnnualReport:“AnCeangalleSterling:AnCheartéaBhriseadh?”)

ThereafterchangecamerelativelyrapidlyastheCentralBankhadtorespondtoachangingexternalenvironment.

CreationoftheEuropeanMonetarySystemdidbringtheforeshadowedendtothesterlinglinkin1979,butthenewandbrittleexchangerate regimewasassociatedwithacutemonetarymanagementchallengesatatimeofacutedomesticfiscalpressure.

TheEMScrisisof1992–93,whichsawbankshavingtoborrowfromtheCentralBankat100percentinterestrate,culminatedfortheCentralBankinaweekend–exactlytwentyyearsago–thatsawbothacelebratoryconcerttocommemoratetheBank’sgoldenanniversary,andthefinalEMSdevaluationoftheIrishpound.

TheemergenceoftheIFSCinsubsequentyearswasthecatalystforagreatexpansioninfinancialregulation:thisstillplacestheheaviestdemandsontheCentralBankintermsofstaffresourcesassignedtoauthorising,regulatingandsupervisingtheverylargenumberoffirmsandfundsinvolvedinthebusinessofexportingfinancialservices.

AdaptationofthenationalsystemtocomplywiththerequirementsoftheeuroabsorbedmuchoftheBank’sworkinthe1990sandintothenewmillennium,whileanewemphasisonconsumerprotectionrespondedtoacknowledgedweaknessesinthatarea.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |189

Ourcurrencycentrerosetothechallengeofprintingashareoftheneweuronotes,witheverimprovingsecurityfeatures.

Butthedesignoftheeuro,topicoftonight’sT.K.WhitakerlecturetobegivenbyProfessorHaroldJamesofPrincetonUniversity,didnot,asmanyhadassumed,protectmembersfrommacro-financialdistress.

ThepastfewyearshavebeenprobablythebusiesteverfortheBankasithasracedtostemormeetoutflowsandrepairthedamagetothebankingsystemthathassounderminednationalprosperity.

WithindustrypromotionnolongerpartoftheBank’sstatutorymandate,theregulatoryagendahasshiftedintoanunapologeticallyintrusivemode.

Regulationsarebeingenforcedwithsizablepenaltiesimposedforviolations.

Agraduatedbutintensiveandunremittingprogrammeofspecificrequireddeliverablesisbeingimposedonthebankstotrytoensurethattheywilldealeffectivelywiththeadmittedlychallengingtaskofgetting aheadofthestill-growingmortgagearrearsproblem,bothbygettingthosewhocanbackonschedule,andmodifyingloansinthecaseofthosewhocannotdoso.

TheBankiscurrentlyalsoplayingitspartinengagingwithexternalpartnersinseekingtolimitandsmooththeimpactonIrishbalancesheetsoftheindebtednessaccumulatedasaresultoftheoverlyexpansivedecisiontosocialisebankinglosses,tohelpacceleraterecoveryofemploymentonasustainablebasis.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |190

CertifiedRiskandComplianceManagementProfessional (CRCMP)distancelearningandonlinecertificationprogram.

CompanieslikeIBM,Accentureetc.considerthe CRCMPapreferred certificate.Youmayfindmoreifyousearch (CRCMPpreferred certificate) usinganysearchengine.

Theall-inclusivecostis $297.

Whatisincludedintheprice:

Theofficialpresentationsweuse

inourinstructor-ledclasses(3285slides)

The2309slidesareneeded fortheexam,asallthequestionsare basedontheseslides.Theremaining976slidesareforreference.

Youcanfindthecoursesynopsisat:

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

Upto3OnlineExams

Youhaveto passoneexam.

Ifyoufail,youmuststudytheofficial

presentationsandtryagain, butyoudonotneedto spend money.Upto 3examsareincludedintheprice.

Tolearnmoreyoumayvisit:

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,packingandposting toyourofficeorhome.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P a g e 1

P age |191

D.TheDoddFrankActandthenew RiskManagementStandards(976slides,includedinthe3285slides)

TheUSDodd-Frank WallStreetReform andConsumerProtection Actis the mostsignificant pieceoflegislation concerningthefinancialservicesindustryinabout80years.

Whatdoesitmeanforriskandcompliancemanagementprofessionals?Itmeansnewchallenges,newjobs,newcareers,andnew opportunities.

Thebillestablishesnewrisk managementandcorporategovernance principles,setsupanearly warning

system to protecttheeconomyfromfuturethreats,andbringsmore

transparencyandaccountability.

ItalsoamendsimportantsectionsoftheSarbanesOxley Act.Forexample,itsignificantlyexpandswhistleblowerprotectionsunderthe SarbanesOxleyActandcreatesadditionalanti-retaliation requirements.

Youwill findmoreinformation at:

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

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


  • Login