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P a g e | 1 Inter n atio na l A s s oci a t ion of R isk a nd Co mpl i a n c e Pr o f e s s io na l s ( I A RCP) 12 0 0 G St re e t N W Su i t e 8 0 0 W a s h i ng t o n, D C 2 000 5 - 67 0 5 U SA T e l : 2 0 2 - 44 9 - 9750 www .ri s k - c ompl i ance-a ss o c i a tion . c om.

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InternationalAssociationofRiskandComplianceProfessionals(IARCP)

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

Top10riskandcompliancemanagementrelatednewsstoriesandworldeventsthat(forbetterorforworse)shapedthe week'sagenda,andwhatisnext

DearMember,

Whichis thedifferencebetweengood deleveragingandbaddeleveraging?

Accordingto DrAndreasDombret,MemberoftheExecutiveBoardoftheDeutsche

Bundesbank,gooddeleveragingmeansscalingbacktheexposuretootherfinancialintermediaries,whereasbaddeleveragingmeansthatlendingtotherealeconomyisbeingreduced.

DrAndreasDombretisoneofmyfavouritespeakers.InNumber2ofourlistheasksthequestion:

Will2012godowninhistoryasan“annushorribilis”orratherasan

“annusmirabilis”,orneither?

Hestartsfromtheoriginatorofthe“annushorribilis”,QueenElizabeth,thatusedthephrasetodescribeher feelings abouttheyear1992,andhegoesonwiththefireatWindsorCastle.Manypeopleusethemetaphorofalarge-scalefiretoexplaintheeconomictermofa“systemic”event.

Thefirespreadsorapidlydue toacity’snarrowstreetsandthe“interconnectedness”ofhouses.

ThefireinthefinancialmarketswasstoppedbytheECB,bythetwofirewallsEFSF andESMaswellasbythegovernmentsannouncingthat theywouldimprovethefinancialsystem.

Thus2012isan“annusmirabilis”.

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HealsorememberedPeterBernstein,thefinancialhistorianfromtheUS,thatillustratedhispointbycitingtheanecdoteofaMoscoviteprofessorofstatistics,whorefusedtogototheair-raidshelterduringWorldWarIIbombattacks.

Theprofessorargued:“See,Moscowhassevenmillioninhabitants.WhyshouldIexpecttobeonewhowillbehit?”

Hisneighbourswereastonished,whenhe cameback to theshelterthenextnight.

Nowtheprofessor’sargumentationwas:

“Moscowhassevenmillioninhabitantsandoneelephant.Lastnighttheelephantwashit.”

MoreatNumber2ofourlist.

InNumber1thisweek wehavethespeechofRichardW.Fisher,presidentandCEOoftheFederalReserveBankofDallas.

Hespeaksaboutthe“theinjusticeofbeingheldhostagetolargefinancialinstitutionsconsideredtoobigtofail”.

Ienjoyedwhatheremembered:

OneisremindedofthecommentFrenchPrimeMinisterClemenceau made aboutPresidentWilson’s14points:

“Why14?”heasked.“Goddiditin10.”

Werethatweonlyhad14pointsoffinancialregulation tocontendwithtoday.

ReadmoreatNumber1below.Welcome totheTop10list.

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RichardW.Fisher,presidentandCEOoftheFederalReserveBankofDallas.

Ending 'TooBigtoFail':AProposalforReformBeforeIt'sTooLate(WithReferencetoPatrickHenry,ComplexityandReality)

Remarksbefore theCommitteefortheRepublicWashington,D.C.· January16,2013

DrAndreasDombret

MemberoftheExecutiveBoardoftheDeutscheBundesbank

Challengesforfinancialstability–policyand academicaspects

DinnerSpeechattheJointConferenceoftheDeutscheBundesbank,theTechnicalUniversityDresdenandtheJournalofFinancialStability

PreservingthesafetyandsecurityofMalaysia’sbankingsystem

SpeechbyMrEncikAbuHassanAlshariYahaya,AssistantGovernoroftheCentralBankofMalaysia,atthelaunchofthee-BankingFraudAwarenessCampaign,KualaLumpur

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


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Commentsreceivedontheconsultativereport"Recoveryandresolutionoffinancialmarketinfrastructures

SouthAfrica,FinancialServicesBoard(FSB)hasrequestedtheSAFEXClearingCompany(Pty)Limited(SAFCOM)andStrateLimited toprovidefeedback.

OpeningRemarksatInvestorAdvisoryCommitteeMeeting

ByChairmanElisseWalter

U.S. SecuritiesandExchangeCommissionWashington,D.C.January18,2013

Toughercreditratingrules confirmedbyEuropeanParliament'svote

Newrulesonwhenandhow creditratingagenciesmayratestatedebtsandprivatefirms'financialhealthwereapprovedbyParliamentonWednesday.

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


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FSAUK

RisktoCustomersfromFinancialIncentives

Consumertrustandconfidenceinfinancialservicesisessential.

Ensuringthesmoothfunctioningofmoney markets

SpeechbyMrBenoîtCoeuré,MemberoftheExecutiveBoardoftheEuropean CentralBank,atthe17thGlobalSecuritiesFinancingSummit,Luxembourg,16January2013.

MichelBARNIER

TheEuropeanbankingunion,aprecondition tofinancialstabilityandahistoricalstepforwardforEuropeanintegration

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UnderstandingtheEuropeanBankingUnion

InJune2012,EUleadersagreed todeepen

economicandmonetaryunionasoneoftheremediesofthecurrentcrisis.

Atthatmeeting(EuropeanCouncilof28/29June),theleadersdiscussedthereportentitled'TowardsaGenuineEconomicandMonetaryUnion',preparedbythePresidentoftheEuropeanCouncilinclosecollaborationwiththePresidentoftheEuropean Commission,theChairoftheEurogroupandthePresidentoftheEuropeanCentralBank.

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RichardW.Fisher,presidentandCEOoftheFederalReserveBankofDallas.

Ending 'TooBigtoFail':AProposalforReformBeforeIt'sTooLate(WithReferencetoPatrickHenry,ComplexityandReality)

Remarksbefore theCommitteefortheRepublicWashington,D.C.· January16,2013

Itisanhonortobeintroducedbymycollegeclassmate,JohnHenry.Johnisadescendantoftheiconicpatriot,PatrickHenry.

MostofJohn’sancestorswereprominentcolonialVirginiansandmanywereanti-crown.Patrick,however,was themostoutspoken.

AskJohnwhythiswasso,andhewillanswer:“Patrickwaspoor.”

Howeverpoorhemayhavebeen,PatrickHenrywasarichorator.In oneofhisgreatestspeeches,hesaid:

“Differentmenoftenseethesamesubjectindifferentlights;andtherefore,Ihopethatitwillnotbethoughtdisrespectfulto thosegentlemenif,entertainingasIdo,opinionsofacharacterveryoppositetotheirs,Ishallspeakforthmysentimentsfreely,andwithoutreserve.

Thisisnotimeforceremony …[it]isoneofawfulmomenttothiscountry.”

PatrickHenrywasaddressingtherepressionoftheAmericancoloniesby theBritishcrown.

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Tonight,Iwishtospeaktoadifferentkindofrepression—theinjusticeofbeingheldhostagetolargefinancialinstitutionsconsidered“toobigtofail,”orTBTFforshort.

Isubmitthattheseinstitutions,asaresultoftheirprivilegedstatus,exactanunfairtaxupontheAmericanpeople.

Moreover,theyinterferewiththetransmissionofmonetarypolicy andinhibittheadvancementofournation’seconomicprosperity.

Ihavespokenofthisforseveralyears,beginningwithaspeechonthe“PathologyofToo-Big-to-Fail”inJuly2009.

Mycolleague,HarveyRosenblum—ahighlyrespectedeconomistandtheDallasFed’sdirectorofresearch—andIandourstaffhavewrittenaboutitextensively.

Tomorrow,wewillissueaspecialreportthatfurtherelucidatesourproposalfordealingwiththepathologyofTBTF.

Italsoaddressesthesuperiorrelativeperformanceofcommunitybanksduringtherecentcrisisandhow theyarebeingvictimizedbyexcessiveregulationthatstemsfromresponsestothesinsoftheirbehemothcounterparts.

Iurgeallofyoutoread thatreport.

Now,FederalReserveconventionrequiresthatIissueadisclaimerhere:I speakonlyfortheFederalReserveBankofDallas,notforothersassociatedwithourcentralbank.

Thatisusuallyabundantlyclear.

Inmanymatters,mystaffandIentertainopinionsthatareverydifferentfromthoseofmanyofouresteemedcolleagueselsewhereintheFederalReserveSystem.

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Today,I“speakforthmysentimentsfreelyandwithoutreserve”ontheissueofTBTF,whilemeaningnodisrespect to otherswhomayhold differentviews.

TheProblemofTBTF

Everyoneandtheirsisterknowsthatfinancialinstitutionsdeemedtoobigtofailwereattheepicenterofthe2007–09financialcrisis.

Previouslythoughtofasislandsofsafetyinaseaofrisk,theybecametheenablersofafinancialtsunami.

Nowthatthestormhassubsided,wesubmitthattheyareakeyreasonaccommodativemonetarypolicyandgovernmentpolicieshavefailedtoadequatelyaffecttheeconomicrecovery.

HarveyRosenblumandIfirstwrote aboutthisin anarticlepublishedintheWallStreetJournal in September2009,“TheBlobThatAteMonetaryPolicy.”

Putsimply,sickbanksdon’tlend.Sick—seriouslyundercapitalized— megabanksstoppedtheirlendingandcapitalmarketactivitiesduringthecrisisandeconomicrecovery.

Theybroughteconomicgrowthtoastandstillandspreadtheirsicknesstotherestofthebankingsystem.

CongressthoughtitwouldaddresstheissueofTBTF throughtheDodd–FrankWallStreetReformandConsumerProtectionAct.

PreventingTBTFfromeveroccurringagainisintheverypreambleoftheact.

WecontendthatDodd–FrankhasnotdoneenoughtocorralTBTFbanksandthat,onbalance,the acthasmadethingsworse,notbetter.

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Wesubmitthat, in theshortrun,partsofDodd–Frankhaveexacerbatedweakeconomicgrowthbyincreasingregulatoryuncertaintyin keysectorsoftheU.S.economy.

Ithas clearlybenefitedmanylawyersandcreatednewlayersof bureaucracy.

Despiteitsgoodintention,ithasbeencounterproductive,workingagainstsolvingthecoreproblemitseeksto address.

DefiningTBTF

LetmedefinewhatwemeanwhenwespeakofTBTF.

TheDallasFed’sdefinitionisfinancialfirmswhoseowners,managersandcustomersbelievethemselvestobeexemptfromtheprocessesof bankruptcyandcreativedestruction.

Suchfirms capturethefinancialupsideoftheir actionsbutlargelyavoidpayment—bankruptcyandclosure—foractionsgonewrong, in violation ofoneofthebasictenetsofmarketcapitalism(atleastasitissupposedtobepracticedintheUnitedStates).

Suchfirmsenjoysubsidiesrelative totheirnon-TBTF competitors.

Theyarethusmorelikelytotakegreaterrisks insearchofprofits,protectedbythepresumptionthatbankruptcyisahighlyunlikelyoutcome.

ThephenomenonofTBTF istheresultofanimplicitbutwidely

taken-for-grantedgovernment-sanctionedpolicyofcomingtotheaidoftheowners,managersandcreditorsofafinancialinstitutiondeemed tobesolarge,interconnectedand/orcomplexthatitsfailurecouldsubstantiallydamagethefinancialsystem.

ByreducingaTBTFfirm’sexposuretolossesfromexcessiverisktaking,suchpoliciesunderminethedisciplinethatmarketforcesnormallyassertonmanagementdecisionmaking.

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Thereductionofmarketdisciplinehasbeenfurthererodedbyimplicitextensionsofthefederalsafetynetbeyondcommercialbanksto theirnonbankaffiliates.

Moreover,industryconsolidation,fosteredbysubsidizedgrowth(and duringthecrisis,encouragedbythefederalgovernmentintheacquisitionsofMerrillLynch,BearStearns,WashingtonMutualandWachovia), has perpetuatedandenlargedtheweightoffinancialfirmsdeemedTBTF.

Thisreducescompetitioninlending.

Dodd–Frankdoesnotdoenoughtoconstrainthebehemothbanks’advantages.Indeed,givenitscomplexity,itunwittinglyexacerbatesthem.

ComplexityBites

AndrewHaldane,thehighlyrespectedmemberoftheFinancialPolicyCommitteeoftheBankofEngland,addressedthisatlastsummer’sJacksonHole,Wyo.,policymakers’meetinginwittyremarkstitled,“TheDogandtheFrisbee.”

Herearesomechoicepassagesfromthatnoteworthyspeech.

Haldanenotesthatregulators’“…effortsto catchthecrisisFrisbeehavecontinued to escalate.

Casualempiricismrevealsanever-growingnumberofregulators …

Ever-largerlittershavenot,however,obviouslyimprovedthewatchdogs’Frisbee-catchingabilities.

[Afterall,]noregulatorhadtheforesightto predictthefinancialcrisis,althoughsomehavesinceexhibitedsupernaturalpowersof hindsight.

“Sowhatisthesecretofthewatchdogs’failure?

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The answerissimple.

Orrather,itiscomplexity… complexregulation…mightnotjustbecostlyandcumbersomebutsub-optimal.…Infinancialregulation,lessmaybemore.”

OneisremindedofthecommentFrenchPrimeMinisterClemenceau made aboutPresidentWilson’s14points:

“Why14?”heasked.“Goddiditin10.”

Werethatweonlyhad14pointsoffinancialregulation tocontendwithtoday.

HaldanenotesthatDodd–Frankcomesagainstabackgroundofever-greaterescalationoffinancialregulation.

Hepointsoutthatnationallycharteredbanksbegantofiletheantecedentsof“callreports”aftertheformationoftheOfficeoftheComptrolleroftheCurrencyin 1863.

TheFederalReserveActof1913requiredstate-charteredmemberbankstodothesame,havingthemsubmittedtotheFederalReservestartingin1917.

Theywereshortforms; in 1930,Haldanenoted,thesereportsnumbered80entries.

“In1986,[the‘callreports’submittedbybankholdingcompanies]covered547columns inExcel,by1999,1,208columns.

By2011… 2,271columns.”

“Fortunately,”headdswryly,“Excelhadexpandedsufficientlytocapture theincrease.”

Thoughthisgrowinglycomplexreportingfailed to preventdetectionoftheseedsofthedebacleof2007–09,Dodd–Frankhaslayeredoncopious

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amountsofnewcomplexity.Thelegislationhas16titlesandruns848pages.

Itspawnslitteruponlitterofregulations:Morethan8,800pagesofregulationshavealreadybeenproposed,andtheprocessisnotyetdone.

In hisspeech,Haldanenoted—conservatively,inmyview—thatasurvey oftheFederalRegistershowedthatcomplyingwiththesenewruleswouldrequire2,260,631laborhours eachyear.

He added:“Ofcourse,thecostsofthisregulatoryedificewouldbeconsideredsmalliftheydeliveredevenmodestimprovements toregulators’abilitytoavertfuturecrises.”

Hethengoesontoarguethewick isnotworththe candle.

Andheconcludes:“Modernfinanceiscomplex,perhapstoocomplex.Regulationofmodernfinanceiscomplex,almostcertainly toocomplex.

Thatconfigurationspellstrouble.Asyoudonotfightfirewithfire,youdonotfightcomplexitywithcomplexity.

[Thesituation]requiresaregulatoryresponsegroundedinsimplicity,notcomplexity.Deliveringthatwouldrequireanabout-turn.”

TheDallasFed’sProposal:AReasonable‘About-Turn’

TheDallasFed’sproposaloffersan“about-turn”andawaytomendtheflawsinDodd–Frank.Itfightsunnecessarycomplexitywithsimplicitywhereappropriate.

Iteliminatesmuchofthemumbo-jumbo,ineffective,costlycomplexityofDodd–Frank.

Ofnote,itwouldbeespeciallyhelpfultonon-TBTF banksthatdonotposesystemicorbroadrisk totheeconomyorthefinancialsystem.

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OurproposalwouldrelievesmallbanksofsomeunnecessaryburdensarisingfromDodd–Frankthatunfairlypenalizethem.

Ourproposalwouldeffectivelyleveltheplayingfieldforallbankingorganizationsinthecountryandprovidethebestprotectionfortaxpayingcitizens.

In anutshell,werecommendthatTBTFfinancialinstitutionsberestructuredintomultiplebusinessentities.

Onlytheresultingdownsizedcommercialbankingoperations—andnotshadowbankingaffiliatesortheparentcompany—wouldbenefitfromthesafetynetoffederaldepositinsuranceandaccesstotheFederalReserve’sdiscountwindow.

DefiningtheLandscape

Itisimportanttohaveanaccurateviewofthelandscapeofbankingtodayinordertounderstandtheimpactofthisproposal.

Asofthirdquarter2012,therewereapproximately5,600commercialbankingorganizationsintheU.S.

Thebulkofthese—roughly5,500—werecommunitybanks withassetsoflessthan$10billion.

Thesecommunity-focusedorganizationsaccountedfor98.6percentofallbanksbutonly12percentoftotalindustryassets.

Anothergroupnumberingnearly70bankingorganizations—withassetsofbetween$10billionand$250billion—accountedfor1.2percentof banks,whilecontrolling19percentofindustryassets.

Theremaininggroup,themegabanks—withassetsofbetween$250billionand$2.3trillion—wasmadeupofamere12 institutions.

Thesedozenbehemothsaccountedforroughly0.2percentofallbanks,buttheyheld69percentofindustryassets.

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The12institutionsthatpresentlyaccountfor69percentoftotal industryassetsarecandidates to beconsideredTBTF becauseofthethreattheycouldposetothefinancialsystemandtheeconomyshouldoneormoreofthemgetintotrouble.

Bycontrast,shouldanyoftheother99.8percentofbankinginstitutionsgetintotrouble,themattermostlikelywouldbesettledwith

private-sectorownershipchangesandminimalgovernmental

intervention.

Howandwhydoesthisworkfor99.8percentbutnottheother0.2percent?

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Toanswerthisquestion,ithelpstoconsiderthesourcesofregulatoryandmarketdisciplineimposedoneachofthethreegroupsofbanks.

Let’slookattwodimensionsofregulatorydiscipline:Potentialclosureoftheinstitutionandtheeffectivenessofsupervisorypressureonbankmanagementpractices.

Dotheownersandmanagersofabankinginstitutionoperatewiththebeliefthattheir institutionissubjecttoabankruptcyprocessthatworksreasonablyquicklytotransferownershipandcontrolto anotherbankingentityorentities?

Isthereagroupofinterestedandinvolvedshareholdersthatcanexerta restrainingforceonfranchise-threateningrisktakingbythebank’stopmanagementteam?

Canmanagementbereplacedandownershipvaluewipedout?Isthefirmcontrolleddefactobyitsowners,or insteadeffectively

management-controlled?

Inaddition,weask:Towhatextentdouninsuredcreditorsofthebankingentityimposerisk-managementdisciplineonmanagement?

Thisanalyticalframeworkissummarizedinthefollowingslide:

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Lookingacrossline1,itisclearthatcommunitybanks aresubjecttoconsiderableregulatoryandshareholderdiscipline.

They cananddofail.

In thelastfewyears,theFederalDepositInsuranceCorp.(FDIC)hasbuiltareputationforregulatorscarryingoutJosephSchumpeter’sconceptof“creativedestruction”bytakingoversmallbanksonaFridayeveningandreopeningthemonMondaymorningundernewownership.

“InonFriday,outbyMonday”isthemantraofthisprocess.Knowingthepowerofbankingsupervisors to close theinstitution,

ownersandmanagersofcommunitybanks heedsupervisorysuggestions

tolimitrisk.

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Communitybanks oftenhaveafewsignificantshareholderswhohaveaconsiderableportionoftheirwealthtiedtothefateofthebank.

Consequently,theyexertsubstantialcontroloverthebehaviorof managementbecauserisk andpotentialclosuremattertothem.

Sincecommunitybanks derivethebulkoftheirfundingfromfederallyinsureddeposits,theyaresimpleratherthancomplexintheircapitalstructureandrarelyhaveuninsuredandunsecuredcreditors.

“Marketdiscipline”overmanagementpracticesisprimarilyexertedthroughshareholders.

Ofthethreegroups,the70regionalandmoderate-sizedbankingorganizationsdepictedinline2aresubjectto abroaderrangeofmarketdiscipline.

Likecommunitybanks,theseinstitutionsarenotexemptfromthebankruptcyprocess;they can anddofail.

Butgiventheirsize,complexityandgenerallylargergeographicfootprint,thefailureresolutionandownershiptransferprocesses cannotalwaysbeaccomplishedoveraweekend.

In practice,ownersandmanagersofmid-sizedinstitutionsarenonethelessawareofthedownsideconsequencesoftheriskstakenbytheinstitution.

Uninsureddepositorsandunsecuredcreditorsarealsoawareoftheirunprotectedstatusintheeventtheinstitutionexperiencesfinancial difficulties.

Mid-sizedbankinginstitutionsreceiveagooddoseofexternaldisciplinefrombothsupervisorsandmarket-basedsignals.

TBTF megabanks,depictedinline3,receivefartoolittleregulatoryandmarketdiscipline.

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Thisisunfortunatebecausetheirfailure,ifitwereallowed,coulddisruptfinancialmarketsandtheeconomy.Forallintentsandpurposes,webelievethatTBTF bankshavenotbeenallowedto failoutright.

Knowingthis,themanagementofTBTF banks can,toalargeextent,choosetoresisttheadviceandguidanceoftheirbanksupervisors’effortstoimposeregulatorydiscipline.AndforTBTF banks,theforcesofmarketdisciplinefromshareholdersandunsecuredcreditorsarelimited.

Let’sfirstconsiderdisciplinefromshareholders.

Havingmillionsofstockholdershasdilutedshareholders’abilitytopreventthemanagementofTBTF banksfrompursuingcorporatestrategiesthatareprofitableformanagement,thoughnotnecessarilyforshareholders.

Aswelearnedduringthecrisis,adverseinformationonpoorfinancial performanceoftenisavailabletoolateforshareholderreactionorcreditdefaultswap(CDS)spreadstohaveanyimpactonmanagementbehavior.

Forexample,duringthefinancialcrisis,sharesintwo ofthelargestbankholdingcompanies(BHCs)declinedmorethan95percentfromtheirpriorpeakpricesandtheirCDSspreadswenthaywire.

Theratingsagencieseventuallyreacted,inkeepingwiththeirtendencytobereactiveratherthanproactive.

Butthedamagefromexcessiverisktakinghadalreadybeendone.Andafterthecrisis?

JudgingfromthebehaviorofmanyofthelargestBHCs,withlimited exception,effortsbyshareholdersoftheseinstitutions tomeaningfullyinfluencemanagementcompensationpracticeshavebeenslow incoming.

SomuchforshareholderdisciplineasacheckonTBTF banks.

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Unfortunately,TBTF banksalsodonotfacemuchexternaldisciplinefromunsecuredcreditors.

AnimportantfacetofTBTF isthatthefundingsourcesformegabanksextendfarbeyondinsureddeposits,asreferencedbymymentionofCDSspreads.

Thelargestbanks,notjusttheTBTFbanks,fundthemselveswithawiderangeofliabilities.

Theseincludelarge,negotiableCDs,whichoftenexceedtheFDICinsurancelimit;federalfundspurchasedfrom otherbanks,allofwhichareuninsured,andsubordinatednotesandbonds,generallyunsecured.

Itisnotunusualforsuchuninsured/unsecuredliabilities toaccountforwelloverhalftheliabilitiesofTBTF institutions.

IfmarketdisciplineweretobeimposedonTBTFinstitutions,onewouldexpectittocomefromuninsured/unsecureddepositors,creditorsand debtholders.

ButTBTF statusexertsperversemarketdisciplineontherisk-takingactivitiesofthesebanks.

UnsecuredcreditorsrecognizetheimplicitgovernmentguaranteeofTBTFbanks’liabilities.

Asaresult,unsecureddepositorsandcreditorsoffertheirfundsatalowercosttoTBTF banksthan tomid-sizedandregionalbanksthatfacetheriskoffailure.

ThisTBTF subsidyisquitelargeandhasrisenfollowingthefinancialcrisis.

RecentestimatesbytheBankforInternationalSettlements,forexample,suggestthattheimplicitgovernmentguaranteeprovidesthelargestU.S.BHCswithanaveragecreditratingupliftofmorethantwonotches,

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therebyloweringaveragefundingcostsafullpercentagepointrelative totheirsmallercompetitors.

OuraforementionedfriendfromtheBankofEngland,AndrewHaldane,estimatesthecurrentimplicitTBTF globalsubsidytoberoughly$300billionperyearforthe29globalinstitutionsidentifiedbytheFinancialStabilityBoard(2011)as“systemicallyimportant.”

Toputthat$300billionestimatedannualsubsidyinperspective,allthe

U.S.BHCssummedtogetherreported2011earningsof$108billion.

Add to thattheburdensstemmingfromthecomplexityofTBTF banks.

Hereisthebasicorganizationdiagramforatypicalcomplexfinancial holdingcompany:

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Tosimplifyacomplexissue,onemightconsideralltheoperations otherthanthecommercialbankingoperationasshadowbankingaffiliates,includinganyspecialinvestmentvehicles—orSIVs—ofthecommercialbank.

Now,considerthistable.

ItgivesyouasenseofthesizeandscopeofsomeofthefivelargestBHCs,notingtheirnondepositliabilitiesin billionsofdollarsandtheirnumberoftotalsubsidiariesandcountriesofoperation(accordingtotheFinancialStabilityOversightCouncil):

Forperspective,considerthesadcaseofLehmanBrothers.

Morethanfouryearslater,theLehmanbankruptcyisstillnotcompletely resolved.

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Asofits10-Kregulatoryfiling in2007,Lehmanoperatedamere209subsidiariesacrossonly21countriesandhadtotalliabilitiesof$619billion.

Bythesemetrics,LehmanwasasmallplayercomparedwithanyoftheBigFive.

IfLehmanBrotherswastoobigforaprivate-sectorsolutionwhilestillagoingconcern,whatcanweinferabouttheBigFiveinthetable?

CorrectingfortheDrawbacksofDodd–Frank

Dodd–Frankaddressesthisconcern.UndertheOrderlyLiquidationAuthorityprovisionsofDodd–Frank,asystemicallyimportantfinancialinstitutionwouldreceivedebtor-in-possessionfinancingfromtheU.S.

Treasuryovertheperioditsoperationsneededtobestabilized.Thisisquasi-nationalization,justinanew,anduntested,format.

In Dallas,weconsidergovernmentownershipofourfinancialinstitutions,evenona“temporary”basis,tobeacleardistortionofourcapitalistprinciples.

Ofcourse,analternativewouldbetohaveanothersystemicallyimportantfinancialinstitutionacquirethefailing institution.

Wehavebeendownthatroad already.

Allitdoesiscompoundtheproblem,expandingtherisk posedby theevenlargersurvivingbehemothorganizations.

In addition,perpetuatingthepracticeofarrangingshotgunmarriagesbetweengiantsattaxpayerexpenseworsensthefundingdisadvantagefacedbythe99.8percentremaining—smallandregionalbanks.

Merginglargeinstitutionsisaformof discriminationthatfavorstheunwieldyanddangerousTBTF banks overmorefocused,fitand disciplinedbanks.

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TheapproachoftheDallasFedneitherexpandsthereachofgovernmentnorfurtherhandicaps the99.8percentofcommunityandregionalbanks.

Nordoesitfightcomplexitywithcomplexity.

ItcallsforreshapingTBTF bankinginstitutionsintosmaller,less-complexinstitutionsthatare:economicallyviable;profitable;competitivelyabletoattractfinancialcapitalandtalent;andofasize,complexityandscopethatallowsbothregulatoryandmarketdisciplinetorestrainexcessiverisktaking.

Ourproposalissimpleandeasy to understand.It canbeaccomplishedwithminimalstatutorymodificationandimplementedwithaslittlegovernmentinterventionaspossible.

Itcallsfirstforrollingbackthefederalsafetynettoapply only to basic,traditionalcommercialbanking.

Second,itcallsforclarifying,throughsimple,understandabledisclosures,thatthefederalsafetynetappliesonly tothecommercialbankanditscustomersandneverevertothecustomersofanyotheraffiliatedsubsidiaryortheholdingcompany.

Theshadowbankingactivitiesoffinancialinstitutionsmustnotreceivetaxpayersupport.

We recognizethatundoingcustomer inertiaandmanagementhabitsatTBTF bankinginstitutionsmaytakemanyyears.

Duringsuchaperiod,TBTF banks couldpossiblysowtheseedsforanotherfinancialcrisis.Forthesereasons,additionalactionmaybenecessary.

TheTBTF BHCsmayneedtobedownsizedandrestructuredsothatthesafety-net-supportedcommercialbankingpartoftheholdingcompanycan beeffectivelydisciplinedbyregulatorsandmarketforces.

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Andtherewilllikelyhave tobeadditionalrestrictions(orpossiblyprohibitions)ontheability to moveassetsorliabilitiesfromashadowbankingaffiliatetoabankingaffiliatewithintheholdingcompany.

Toillustratehowthefirsttwopointsinourplanwouldwork,Icomebacktothehypotheticalstructureofacomplexfinancialholdingcompany.

Recallthatthistypeofholdingcompanyhasacommercialbanksubsidiaryandseveralsubsidiariesthatarenottraditionalcommercialbanks:insurance,securitiesunderwritingandbrokerage,financecompanyand others,manywithavastgeographicreach.

WheretheGovernmentSafetyNetWouldBeginandEnd

Underourproposal,onlythecommercialbankwouldhave accesstodepositinsuranceprovidedbytheFDICanddiscountwindowloansprovidedbytheFederalReserve.

Thesetwo featuresofthe safetynetwouldexplicitly,bystatute,becomeunavailabletoanyshadowbankingaffiliate,specialinvestmentvehicleofthecommercialbankoranyobligationsoftheparentholdingcompany.

Thisislargelythecurrentcase—butin theory,notinpractice.Andconsistentenforcementisviewedasunlikely.

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ReinforcedbyaNewCovenant

Toreinforcethestatuteanditscredibility,everycustomer,creditorandcounterpartyofeveryshadowbankingaffiliateandoftheseniorholdingcompanywouldberequiredtoagreetoandsignanewcovenant,asimpledisclosurestatementthatacknowledgestheirunprotectedstatus.

Asampledisclosureneedbenomorecomplexthanthis:

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Thistwo-partstepshouldbegin to removetheimplicitTBTF subsidyprovided to BHCsandtheirshadowbankingoperations.

Entitiesotherthancommercialbankshaveinappropriatelybenefitedfromanimplicitsafetynet.

Ourproposalpromotescompetitioninlightofmarketandregulatorydiscipline,replacingthestatusquoofsubsidizedandperverseincentivestotakeexcessiverisk.

Asindicatedearlier,somegovernmentinterventionmaybenecessarytoacceleratetheimpositionofeffectivemarketdiscipline.

Webelievethatmarketforcesshouldberelieduponasmuchaspracticable.

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However,entrenched oligopolyforces,incombinationwithcustomerinertia,willlikelyonlybeovercomethroughgovernment-sanctionedreorganizationandrestructuringoftheTBTF BHCs.

Asubsidyoncegivenisnearlyimpossible to takeaway.

Thus,itappearswemayneedapush,usingaslittlegovernmentinterventionaspossible to realignincentives,reestablishacompetitivelandscapeandleveltheplayingfield.

WhyProtectthe0.2Percent?

MyteamattheDallasFedandIareconfidentthissimpletreatmenttothecomplexproblemandrisksposedbyTBTF institutionswouldbethemosteffectivetreatment.

Thinkaboutitthisway:Atpresent,99.8percentofthebankingorganizationsinAmericaaresubject tosufficientregulatoryorshareholder/marketdisciplinetocontaintheriskofmisbehaviorthatcouldthreatenthestabilityofthefinancialsystem.

Zero-point-two percentarenot.

Theirveryexistencethreatensbotheconomicandfinancialstability.

Furthermore,to containthatrisk,regulatorsandmanysmallbanksaretiedupin regulatoryandlegalknotsatanenormousdirectcosttothemandalargeindirectcosttooureconomy.Zero-point-twopercent.

IftheadministrationandtheCongresscouldagreeasrecentlyastwoweeks agoonlegislationthataffects1percentoftaxpayers,surelyit canprocessasolutionthataffects0.2percentofthenation’sbanksandislesscomplexandfarmoreeffectivethanDodd–Frank.

MakingaTimeof‘AwfulMoment’aTimeofPromise

Thetimehascometo changethedecisionmakingparadigm.

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Thereshouldbemorethanthepresenttwo solutions:bailoutortheend-of-the-economic-world-as-we-have-known-it.

Bothchoicesareunacceptable.

Thenextfinancialcrisiscouldcostmorethantwoyearsofeconomicoutput,borneby millionsofU.S.taxpayers.

Thathorrendouscost mustbeweighedagainstthesupposedbenefitsofmaintainingtheTBTF statusquo.

Tous,theremedyisobvious:endTBTF now.EndTBTF byreintroducingmarketforces insteadofcomplexrules,andinsodoing,leveltheplayingfield forallbankinginstitutions.

IreturntoPatrickHenry.Henotedthat“itisnaturaltomantoindulgeintheillusionsofhope.

Weareapt toshutoureyesagainstapainfultruth,andlistento thesongofthatsirentillshetransformsus.”

WelaborunderthesirensongofDodd–Frankandtherecentrun-upinthepricingofTBTF bankstocksandcredit,indulging intheillusionof hopethatthiscomplexlegislationwillendtoobigtofailandrightthebankingsystem.

WeshutoureyestothepainfultruththatTBTF representsanongoingdangernotjusttofinancialstability,butalsotofaircompetition.

TheDallasFedoffersamodestbut,webelieve,farmoreeffectivefixtoDodd–Frank.Thisplanisnotwithoutitscosts.

Butitislesscostlythanallthealternativesputforwardanditseriouslyreducesthelikelihoodofanotherhorrendousandcostlyfinancialcrisis.

Thisneednotbeatimeof“awfulmoment.”Itshouldinsteadbeatimeofpromise.

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TreatingthepathologyofTBTF now wouldbeabigsteptowardamorestableandprosperouseconomicsystem,onethatreliesonfundamentalprinciplesofcapitalismratherthanregulatorycomplexityandincreasinggovernmentintervention.

Thankyou.

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DrAndreasDombret

MemberoftheExecutiveBoardoftheDeutscheBundesbank

Challengesforfinancialstability– policyandacademicaspects

DinnerSpeechattheJointConferenceoftheDeutscheBundesbank,theTechnicalUniversityDresdenandtheJournalofFinancialStability

2012:An“annushorribilis”oran“annusmirabilis”orneither?

YourMagnificenceProfessorMüller-Steinhagen,

MisterStateMinisterDoctorBeermann,LadiesandGentlemen:

Theturnoftheyeargivesmethechancetorelate mydiscussionofsomeofthefuturechallengesforfinancialstabilityto arésuméofthepreviousyear.

Pleaseallow metodothisfromaEuropeanperspectiveandletmestartwithaseeminglyinnocentquestion:

Will2012godowninhistoryasan“annushorribilis”orratherasan“annusmirabilis”,orneither?

Theanswertothisquestionislesstrivialthanitappearsatfirst.Let’slooktotheoriginsofthewords“annushorribilis”and“annusmirabilis”.

Toseethispleasenotethattheoriginatorofthe“annushorribilis”,QueenElizabeth,usedittodescribeherfeelingsabouttheyear1992.

Atthetime,herMajestywastalkingabout,amongothers,thefireatWindsorCastle,butonemightalsoreaditasacomment aboutwhat

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happenedinthefinancialsectorin1992whenthemarketsforcedtheUKtoleavetheEuropeanExchangeRateMechanism.

Morerecently,theQueen’sremarkssoundasacommentaboutthefinancialandeconomicdevelopmentof2012.

Pleasealsonotethatmanypeopleusethemetaphorofalarge-scalefiretoexplaintheeconomictermofa“systemic”event.

ThusherMajestyisworthquoting inmorelength:“1992isnotayearonwhichIshalllookwithundilutedpleasure.

In thewordsofoneofmymoresympatheticcommentatorsithas turnedtobean“annushorribilis”.

IsuspectthatIamnotaloneinthinkingitso.IndeedIsuspectthatthereareveryfewpeopleor institutionsunaffectedbythelastmonthsofworldwideturmoilanduncertainty.”

Accordingto variousmeasures2012wasayearofconsiderablesystemictensions.

Indeed,theindicatorswereapproaching-butdidnotquitereach-thesadlevelsseeninthesecondhalfof2008andinthefirsthalfof2009-whichwaswithoutdoubtsaverydifficultperiodinthefinancialandeconomichistory.

Therefore,onemightbetemptedtoclassify2012asan“annushorribilis”.Iwishtochallengethisview.

Will2012,withhindsight,possiblygodowninhistoryasan“annusmirabilis”?Absurd,youmaythink.

Butonsecondthoughtthisnotionseemslessabsurdthanitfirstappears.

LetusnotforgetthatthefamouspoemofJohnDrydenentitled“annusmirabilis”wasinspiredfrommajoreventsintheyear1666.

Averydifficultyear,toputit mildly,ayearinwhichtheGreatFiredestroyed80%ofthe cityofLondon.

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Thefirespreadsorapidlyduetothecity’snarrowstreetsandthe“interconnectedness”ofhouses.

Thebattletostopthefirewasconsidered tohavebeenwonbytwofactors:thestrongeastwindsdieddown,andtheTowerofLondongarrisonusedgunpowdertocreateeffectivefirebreakstostopthefirefromspreadingfurthereastwards.

Dryden’sviewwasthatGodhadperformedmiraclesforEngland.TheKingpromisedtoimprovethestreets.

Well,somemaysay,soitisin2012.

ThefireinthefinancialmarketswasstoppedbytheECB,bythetwofirewallsEFSF andESMaswellasbythegovernmentsannouncingthat theywouldimprovethefinancialsystem.

Thus2012isan“annusmirabilis”.

Butasyouknow,miraclesneedtobeacknowledgedeitherbythepopeorbythescientificcommunity.

Soletuscheckwhetheramiraclewasatwork in 1666.

AndwhatIamgoingto saynowabout1666 canbeunderstoodasametaphoricalwarningaboutwhatcouldhappenifwedonotdrawtherightpolicy conclusionfromtheeventsof2012.

Despitenumerousradicalproposals,Londonwasrebuiltusingessentially thesamestreetplanwhichwasinusebeforethefire.

SothemiracleisthatnothingsimilartotheGreatFirehashappenedinthefollowingyears.

Thelessonofthisstoryisquiteclear.

Thefinancialsystemneedsbetterrulesthanintheyearsprecedingthecrisis.

Weneedaresilientfinancialsystem.

Weneedastrongsupervision.Weneedeffectivemacroprudentialinstruments.

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Weneedtoknow howtheseinstrumentswillwork,whichisachallengeforthescientificcommunityaswellasformacroprudentialpolicymakers.

Otherwise,wewouldbeputtingourtrustin amiracle.

Andweneed tounderstandthecomplicatedinteractionsbetweenthefinancialandtherealeconomy,whichisthetopicofyourconference.

LinksbetweentheFinancialSystemandtheRealEconomy

Take,forexample,theLTROswhichprovidedbanks withliquidityforaperiodofthreeyears.

TheseLTROshavemade thelinksbetweenthepublicandthebankingsectorinsomecountriescloser,notwidermeaningthatthesystemisevenmorevulnerable tosystemiccontagionthanbefore.

Anotherexampleistheissueofdeleveragingandforbearance.InEurope,manybanks’balancesheetsaretoolarge.

Mostofyouprobablyagreethatitisnecessaryforthesebanks to shrinktheirbalancesheets.

Atthesametime,somefearthatdeleveragingcutsoffcorporationsfromtheirfinancingsources.

Fromatheoreticalviewpoint, however,adistinctionneedstobemadebetweengoodandbaddeleveraging.

Gooddeleveraging,for instance,meansscalingbacktheexposuretootherfinancialintermediarieswhereasbaddeleveragingmeansthatlendingtotherealeconomyisbeingreduced.

Theproblemwiththisviewisthat,inpractice,thedistinctionisnotatallsoclear-cut.

Theissuebecomesevenmorecomplicated,whenweadditionallyintroducetheconceptofforbearance,i.e.postponingtheactofdeclaringadoubtfulloan tobeadoubtfulloan.

Whatisthebestresponsetothisissue?

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Thefirstansweristransparency.Atthispoint,transparencyismoreeasilysaidthandone.

Butweneedit,particularlyinthecontextofabankingunionandpossiblebankrecapitalisations.

Andtransparencyisespeciallyimportantwithaview to legacyassetsandforbearanceoftheproblembanks.

Howdoweproceedfurther?

Repairingthebanks’balancessheetsandinjectingcapitalisoneanswer.

However,somefearthatrepairingbalancesheetshasprocyclicaleffectsandcoulddamagetheavailabilityofcreditfortherealeconomy.

In myview,however,repairingbalancesheetswillhavealong-termpositiveimpactonpotentialoutputgrowthmorethanoffsettingthepossibleshort-termcyclicaleffects.

TheLimitsofStateInterventions

Ioftenhearthatthebankswereresponsibleforthecrisis.But cangovernmentsdobetter?

Asyouknow,onereasonforthefinancialcrisiswastheuseofriskmodelsbasedonassumptions,whichconcentratedonexpectedvaluesratherthantails.

PeterBernstein,thefinancialhistorianfromtheUS,illustratedthispointbycitingtheanecdoteofaMoscoviteprofessorofstatistics,who refusedtogo to theair-raidshelterduringWorldWarIIbombattacks.

Theprofessorargued:“See,Moscowhassevenmillioninhabitants.WhyshouldIexpecttobeonewhowillbehit?”

Hisneighbourswereastonished,whenhe cameback to theshelterthenextnight.

Nowtheprofessor’sargumentationwas:

“Moscowhassevenmillioninhabitantsandoneelephant.Lastnighttheelephantwashit.”

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Ifregulatorsandbanks essentiallyusethesamemodelsfortheirriskmanagement,whyshouldweexpectabetterfinancialstabilityoutcome?

Ofcourse,onesolutionistoimproveourmodels.ButIdonotthinkthatthisistheendofthestory.

Iratherbelievethatregulators candobetteriftheyacknowledgetheirownlimitations.

Regulatorsshouldemploythemarketmechanismtofindthebestriskmanagementtools.

In anidealworldthemarketisadiscoveryprocess.

First,eachindividualagentknowsbetterwhatisgoodforhim.

Butattheendofthediscoveryprocess–intheory– wewillgetthebestriskmanagement tools,if– andthis“if”isthedecisivewordhere – if bankswithweakriskmanagementprocessesareallowedtofail,havingtoleavethemarket.

Thisisonereasonwhyresolvingthe“too-big-to-fail”-problemneedstobeatoppriorityontheregulatoryagenda.

AsfarasIcanjudge,weareonlybeginningto understandhow

well-establishedinstrumentslike the capitalratioworkandwhateffecttheyhaveonthebanks’behaviour.

Andthereareothernewmacroprudentialinstrumentswhereourknowledgeisevenmorelimited.

Takethecounter-cyclicalbuffer.

Theideaissimpleandcompelling.Whentheregulatorsidentifyabubbledeveloping,thisbufferisactivated,therebyleadingbankstoreducetheirlending.

Ifallworkswell,thisbufferprevents theexuberancesaltogether,oratleastmitigatesit.

However,itisnotclearhowthebuffersshouldbecalibratedinordertoachievebetterfinancialstability.

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Moreover,notmuchisknownaboutpossibletimelags.

In theworstsituation,thesebuffereffectsarenotcounter-butpro-cyclical.

Thingsbecomeevenmorecomplicatedifdifferentinstrumentsareappliedatthesametime.

Asyou caneasilysee,therearemanyquestionswaitingtobeanswered,manyproblemswaitingtoberesolved.

WhenIthinkaboutwhatweknowhowmacroprudentialinstrumentswork,traffic lightscometomymind.

Topreventpedestriansfromcrossingthestreetwhenthetraffic lightisredtheauthoritiesactuallyinstalledbuttonsthatpedestrianscouldpresstoshortentheredphase.

Anditturnedout tobeasuccess:fewerpedestrianscrossedthestreetwhenthelightswerered.

However,whatthepedestriansdidnotknowwasthatpushingthebuttonshadnoeffectonthedurationoftheredphase.

Pleasedonotmisunderstandme:Idonotbelievethatmacroprudentialinstrumentsareuseless.Quitethecontraryistrue.

WhatIwant tohighlightisthatwecannotexpecttopreventallfuturecrisesfromhappening.

Itisanillusion tobelievethatwe canfinetuneour instrumentssuchthattheyhaveexactlytheeffectwewantthemtohave.

Recently,OtmarIssingwroteintheFrankfurterAllgemeineZeitung:“Theattempttopreventeachkindofcrisisisjustashopelessasharmful.

… Theguidingprincipleofthemarketparadigmofactionandliabilityfortheconsequences(oftheseactions)shouldbevalidwithoutexemption.”

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Takingthisintoconsideration,theeffectsandtheinterdependenceofmacroprudentialinstrumentsmayturnouttobeaveryfruitfulresearcharea.

Tosumup,everyinterventioninthemarketneedstobejustifiedbymarketfailures,somethingthat,unfortunately,isnothardtofindinmanyareasofthefinancialsystem.

Thereisnoguarantee,however,thatgovernments candoabetterjob.

Butatleastthestatehas anincentivetaking intoaccountthenegativeexternalitiesofbanks’decisionsandthustominimisetaxpayers’losses.

Whenthestateisawareofits ownlimitationsthereisagood chancethattheoutcomewillbebetterthanoneinwhichthefinancialsystemislefttoits owndevices.

Newton’s“annusmirabilis”

Therewasonefamous scientistforwhom1666wasindeedan“annusmirabilis”.

IsaacNewtonmaderevolutionaryinventionsanddiscoveriesincalculus,motion,opticsandgravitation.

Assuch,1666waslaterreferredtoIsaacNewton's“annusmirabilis”.

ItistheyearwhenIsaacNewtonwassaidtohaveobservedanapplefallingfromatreeandhitupongravitation.

Heaffordedthetime to workonhistheoriesduetotheclosureofCambridgeUniversity.

Inhisownwords:“Allthiswasinthetwoyears1665and1666,forinthosedaysIwasintheprimeofmyageofinvention,andmindedmathematicsandphilosophymorethanatanytimesince.”

Nowadays,Newton’sexperiencemightinspireyoutoinventanddiscovermacroprudentialmechanismswhichpolicy makerscouldputtoappropriateuseinpractice.

Thentheyear2012might, in hindsight,turnout tohavebeenagenuine“annusmirabilis”.

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Iwishyouallaverysuccessfulconference.Thankyouforyourattention.

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


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PreservingthesafetyandsecurityofMalaysia’sbankingsystem

SpeechbyMrEncikAbuHassanAlshariYahaya,AssistantGovernoroftheCentralBankofMalaysia,atthelaunchofthee-BankingFraudAwarenessCampaign,KualaLumpur

Itismypleasureandhonourtobeinvitedto launchthisjointe-Bankingfraudawarenesscampaign.

Iwouldlike tothanktheAssociationofBanks inMalaysiaforthisinvitationandthecoordinatedeffortsinundertakingthisimportantawarenesscampaign.

Asignificantinitiative

This campaignisindeedaveryimportantinitiativeforthebankingindustryinMalaysia.

Thisisthefirsttimethatallbankshavecometogetherinaconcertedeffort to helpcreategreaterawarenessofonlinefraudwiththecooperationofCyberSecurityandthePoliceForce.

Thisistobelaudedasallstakeholdershavearole toplayinpreservingthesafetyandsecurityofthebankingsystem.

Maintainingconfidenceinonlinebankingservices

Onlinetransactionshavebeengrowingatarapidpaceovertheyears.

Overthelastdecade,theuseofelectronicpaymentshasincreasedatanaverageannualgrowthof23.4%.

In 2012,Malaysianhouseholdsandbusinessesperformedmorethan300millionfinancialtransactionswithavalueclosetoRM15trillionvia

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electronicchannelscomprisingmainlyfundstransfers,billpayments,top-upforprepaidcards,purchasesofphonecardsandpaymentsforinvestmentsinthecapitalmarket.

Amongtheelectronicchannels,internetbankingisthemostpopular.

Fundamentaltothegrowthofinternetbankingovertheyearsistheconfidencewhichthepublichasinitsconvenienceandsecurity.

Thisissomethingthatwe cannottakeforgrantedand mustbecontinuouslypreserved.

Advancementintechnologyandinnovationhasresultedin greaterconsumerconvenienceandenhancedefficiency.

However,thesametechnologyandinnovationhavealsocreatednewmethodsofperpetratingfraudthatcouldbeexecutedfasterandwithgreaterreach.

Cybercriminalshavebeenactiveeversincetheadventoftheinternet,andareconstantlyfinding newways todefraudinnocentvictims.

Safetyandsecurityoftransactionsinthebankingsystemisfundamentalinensuringconsumerconfidence.

Hence,animportantfunctionandresponsibilityoftheCentralBankistoensureonlinetransactions canbemadein asafeandefficientmannerintheeconomy,inthepursuitofmonetaryandfinancialstabilityobjectives.

Theneedforconstant vigilance&cooperation

Thisfightthatthebanks arelaunchingtodayissomethingthatrequiresthesupportofallparties.

Weareawareofthecreativewaysinwhichcriminalshaveattempted todeceivecustomersovertheyearsandmeasureswererequiredtobetaken bythebanks toprotectthecustomers.

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Whileitisgoodtoknowthatbanks haveplayedtheirrolesininvestinginrobustsecuritysystems,theymustalsoensurethatcustomersplaytheirpartinprotectingtheir own assetsandsavings.

ThereminderandgreaterawarenessfromtheBanksthroughthiscampaignistimely.

Itwillnotonlyreinforcetheneedforconstantvigilancefromallparties,butalsohelpcreateanenvironmentwhereeveryoneisriskconsciousandresponsibleinprotectingtheinterestsofeachother.

Theseinitiativeswouldnot achievethedesiredoutcomeswithouteffectivecommunication,andthemediahas acriticalrole toplayinconveyingthemessagefromthebanks.

WehavealwaysacknowledgedtheimportanceofthemediaandIwouldlike to recordBankNegaraMalaysia’sappreciationfortheassistancerenderedbythemediaincreatingawarenessofthisissueinthepast.

Wehopethatwiththesupportofthemediaonthisoccasiontoo,thiscampaignwillbeasuccess,andthepublicwillhaveheightenedlevelsof understandingandvigilanceoverthisissue.

OnbehalfofBankNegaraMalaysia,Iwouldlike to thankallthebanksfortakingthisinitiativetoundertakethisjointe-bankingawarenesscampaign.

Ourthanks alsotoCyberSecurityandthe PoliceForceforyourongoingeffortsto collaboratewiththebanking industry.

IwishallofyouthebestandassureyouthatBankNegaraMalaysiawillcontinuouslysupportyouinthisnobleeffort.

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Commentsreceivedontheconsultativereport"Recoveryandresolutionoffinancialmarketinfrastructures

SouthAfrica,FinancialServicesBoard(FSB)hasrequestedthe

SAFEXClearingCompany(Pty)Limited(SAFCOM)andStrateLimited

toprovidefeedback.

Introduction

Onthe31stofJuly2012,aconsultativereportontheRecoveryandResolutionofFinancialMarketInfrastructureswasissuedbytheCommitteeonPaymentandSettlementSystems(CPSS)andtheInternationalOrganizationofSecuritiesCommissions(IOSCO).

SubsequentlytheFinancialServicesBoard(FSB)hasrequestedtheSAFEXClearingCompany(Pty)Limited(SAFCOM)andStrateLimitedtoprovidefeedback andcommentaryonthereport.

ThisreportservesasaconsolidationofStrateLimited’sandSAFCOM’sviewsonthecontentsofthedocument.

Background

StrateLimitedisalicensedCentralSecuritiesDepository(CSD)fortheelectronicsettlementoffinancialinstrumentsinSouthAfrica.

StratehandlesthesettlementofanumberofsecuritiesincludingequitiesandbondsfortheJohannesburgStock Exchange(JSE)aswellasarangeofderivativeproductssuchaswarrants,ExchangeTradedFunds(ETFs),retailnotesandtrackerfunds.

Itisalsoresponsibleforthesettlementofmoneymarketsecuritiestoitsportfolioofservices.ItprovidesservicestoissuersfortheirinvestorsintermsoftheCompaniesActandSecuritiesServicesAct(SSA),2004.

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SAFEXClearingCompany(Pty)LimitedoperatesasaclearinghousefortheJohannesburgStockExchangederivativesmarkets.Itwasincorporatedin1987andisbasedinSouthAfrica.

AsofOctober2008,SAFEXClearingCompany(Pty)LimitedoperatesasasubsidiaryoftheJSE.

GeneralComment

In compilingaresponsetotherequestforcommentbyCPSS-IOSCO,StratehasreviewedtheConsultativeReport,theKeyAttributesofEffectiveResolutionRegimesforFinancialInstitutions(issuedby the FinancialStabilityBoard)aswellasthePrinciplesforFinancialMarketInfrastructureandtheassociatedrecommendationsforRegulators.

StratebelievesthattheConsultativeReporthasbeengenerallywellthoughtoutandrepresentsacomprehensiveassessmentofthelikelyimpactsintheeventofFMIdefaultorfailureaswellasaneffectiveguidelinetoassistindividualFMI’sinthedevelopmentofanappropriateandeffectiveRecoveryandResolutionplan.

ThebroaddifferentiationbetweenthoseFMI’sthatassumecreditriskandthosethatdonotisalsoconsideredmostappropriatetotakeintoaccountthedifferentrolesandresponsibilitiesofindividualFMI’s.

Itis,however,veryclearfromthisexercisethatacomprehensivereviewoftheResolutionRegimescontainedincurrentandproposedfuturelegislationwillneedtobeundertaken toensurethattheidealscontainedinthereferenceddocumentsaresuitablyentrenchedandunderstood.

Specificresponsestoquestionsraised:

ThefollowingresponsesandcommentshavebeenputforwardforeachofthespecificquestionsraisedintheRecoveryand ResolutionofFinancialMarketInfrastructuresreport.

1.Inwhatcircumstances,andforwhattypesofFMI,canastatutorymanagement,administrationorconservatorshipofferanappropriateprocesswithinwhich to ensureacontinuityofcriticalservices?

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Theconsiderationas to whetherstatutorymanagement,administrationorconservatorshipwouldofferthemostappropriateprocesswithinwhichtoensurethecontinuityofcriticalservicesis,in ouropinion,directlylinkedtothespeedwithwhichsuchanarrangementcouldbeeffectivelyimplementedwithintheframeworkprovidedin locallegislationratherthanthetypeofFMI.

Thisdoes,however,alsolinktoquestion2below.

Aretherepowersbeyondthoseofastandardinsolvencypractitionerthatastatutorymanager,administratororconservator wouldrequireinthesecircumstances?

Potentially,yes.

Thisassessmentcan, however,onlybecompletedwithafulllegislativereviewintheparticularjurisdictiontoensurethattheappointedauthorityhasthenecessaryauthoritiesalreadyoutlinedintheConsultativePaper.

Keytothisassessmentwillbetheabilitytoensurethespeedyassumption ofcontrolbytheappointedauthority.

Istear-upanappropriatelossallocationarrangementpriortoresolution ofaCCP?

Ifso,in whatcircumstances?

Unable to comment– notapplicable toStrate

Towhatextentshouldthepossibilityofatear-upin recoverybearticulatedin exanterules?

Unable to comment– notapplicable toStrate.

Shouldtherebealimittothenumberofcontractsthatareeligiblefortear-up?

Unable to comment– notapplicable toStrate.

Howshouldtheappropriatehaircutsbedetermined?Unable to comment– notapplicable toStrate.

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Whatqualitativeorquantitativeindicatorsofnon-viabilityshouldbeusedindeterminingthetriggerforresolutionfordifferenttypesofFMI?

Key to thisdecisionistheroleoftheparticularFMI.Inthecaseof

non-creditriskbearingFMI’stheindicatorswouldtendtobequalitativeratherthanquantitativeoncetheprimarymeasurementofadequatereserveshasbeenaddressed.

In thecaseofStrate,thiswouldincludemanyelementsassessedbyitslead regulatorintermsoftheannuallicencerenewalprocess(includingsuchthingsascompetencies,qualityofservicedelivery,operationalcapacities,robustnessofexistingtechnology etc.).

Whatlossallocationmethodsmustbeavailabletoaresolutionauthority,andforwhichtypesofFMI?

Couldorshouldtheseresolutionpowersincludetear-up,cashcallsoramandatoryreplenishmentofdefaultfundcontributionsbyanFMI’sdirectparticipants?

Doesitmakeadifferenceifthelossesarefromadefaultingmemberoraremadeupofotherlosses(e.g.lossesininvestmentsmadebytheFMI)?

Inwhatcircumstances,andbywhatmethods,shouldlossesbepassedonbeyondthedirectparticipants– e.g.to theclientsorFMIshareholders– inresolution?

TotheextendapplicabletoStrate,lossesininvestmentsmadebytheFMIwouldbeallocateddirectlytoitsshareholdersratherthantoitsparticipantsinanyway.

What,ifany,specialconsiderationsormethodsshouldbeappliedwhenallocatinglosseswhosemaximumvaluecannotbe capped(e.g. whenallocatingpotentiallossesthatmightarisefromopenanduncappedpositionsataCCP)?

Unable to comment– notapplicable toStrate.

How shouldequityin FMIsbetreatedin resolutionscenarios:shoulditbewrittendowninallcircumstances?

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FromaStrateperspective,andgiventhenatureoftherisksbornebytheCSD,noneedfordifferentiationinthetreatmentofequitywrite-downscouldbeidentified.

Aretherecircumstancesinwhichlossallocationin resolutionshouldresultinadifferentdistributionoflosses to lossesborneininsolvency?

Doesitmakeadifferenceifthelossesstemfromadefaultingmemberoraremadeupofotherlosses(e.g.lossesininvestmentsmadebytheFMIorresultingfromoperationalrisks)?

GiventheprofileofStrateitisnotenvisagedthatthereshouldbeanydifferenceinthelossallocationregardlessofwhetherbyresolutionorinsolvency.

ShouldanFMI’srulesforaddressinguncoveredlossesbetakenintoaccountwhencalculatingwhethercreditorsarenoworseoffinresolutionthanin liquidation?

Unable to comment– notapplicable toStrate.

Arethereanycircumstancesinwhichtheabilitytoexerciseterminationrightsasaresultoftheuseofresolutionpowersshouldoutweightheobjectiveofensuringcontinuity?

GiventheprofileofStratethiswouldonlyapplytocontractsforservicesfromthirdpartiesandtotheextentthattheabilitytoexerciseterminationrightsrelatestonon-coreservices,thismayassistinminimizingtheimmediatenegativefinancialimpactsontheFMI.

Itisunlikelythatonewouldwish toinvoke theearly terminationofcoreservicesaspartofaresolutionprocess.

Arethereanycircumstancesinwhichatemporarystayonexercisingterminationrightsshouldapplyforanyeventofdefaultandnotjustwheretriggeredbytheresolutionmeasures?

Aswith13.above,theprofileofStratereducestheneed toexercise,orindeed temporarilystay,terminationrightswhetherasaresultofdefaultorresolution.

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Arethereanycircumstancesinwhichamoratoriumwithasuspension ofpaymentstounsecuredcreditorsmaybeappropriatewhenresolvingan FMI?Shouldthisbelimited to certaintypesofFMIand/orcertaintypesofpayment?

Thebenefitofintroducingasuspensionofpayments tounsecuredcreditorstoassistintheresolutionofanFMIsuchasStratewouldbeminimaland,giventhespecificnatureoftherolethatStrateplaysinthemarket,isunlikelytoaffect (eitherpositivelyornegatively)itsability tocontinuesettlingorprocessingtransactionswhichareprocesseddirectlybetweencounterpartiesthroughtheCentralBankpaymentsystemor,asisthecasewithCorporateEventsprocessing,throughTrustaccountswhichcouldeffectivelybering-fencedfromtheFMIitself.

Ifso,shouldresolutionauthoritiesretainthediscretiontoapplya moratoriumand,ifso,whatrestrictions(ifany)onitsusewouldbeappropriate(e.g.scope,durationorpurpose)?

Giventheresponseto15above,thisisnotconsideredrelevant to StrateotherthantotheextentthattheResolutionAuthoritymaywishtodeferpaymentonnon-coreservicesintermsofexistingpowers.

Nospecialpowersareconsiderednecessary.

Shouldthebail-in toolbeavailabletocollateral,margin(includinginitialmargin)andothersourcesoffundsiftheywouldbearlossesin insolvency?

Unable to comment– notapplicable toStrate.

InwhatcircumstancesandforwhattypesofFMIshouldwiderlossrecoveryarrangementsexistbeyondtheFMI’sownrulesandtheresolutionpowersoftheresolutionauthority?

NotapplicabletoStrateasitdoesnotassumeprincipalrisk inanyofthetransactionsitprocesses.TheCSDRulesalreadycovertheCSDadequatelyinthisrespect.

InconductingaresolvabilityassessmentofanFMI,whatfactorsshouldauthoritiespayparticularattentionto?

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TheassessmentsoutlinedinAnnexureIIoftheKeyAttributesofEffectiveResolutionRegimesforFinancialInstitutionsissuedbytheFinancialStabilityBoardareconsideredsufficientlycomprehensivetoconductaresolvabilityassessment.

20.In addition,isthesummaryoftheapplicationoftheKeyAttributestoFMIsprovidedinthe annexsufficientlydetailedtosupportthedevelopmentofrecoveryandresolutionregimesforFMIs?

Aretherespecificareaswheremoredetailcouldbeprovided?

Ifso,whichareasandwhatadditionaldetailshouldbeprovided?

Areanyofthekeyattributesnotapplicable to aparticulartypeofFMI?Ifso,whichkeyattribute(s)andwhynot?

OtherthanthoseareasalreadyidentifiedintheAnnexasbeing notapplicabletoanFMIlike Strate,noadditionalareascouldbeidentifiedandnoadditionaldetailisconsiderednecessary to assistStrate,inconsultationwithitsLead Regulator,inthedevelopmentofanappropriateResolutionPlan.

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OpeningRemarksatInvestorAdvisoryCommitteeMeeting

ByChairmanElisseWalter

U.S. SecuritiesandExchangeCommissionWashington,D.C.January18,2013

Goodmorning.Itisapleasuretobewithyoutoday,andtomakemyfirstpublicappearanceasSECChairmanwithyou,agroupwhohaschosentodedicateyourselvestolookingatthe

issueswefacethroughtheeyesoftheinvestorswearededicatedtoprotect.

Asyouknow,althoughIamnew to theroleofChairman,IamproudtohaveworkedattheSECbothasastaffmemberandaCommissionerforatotalofmorethantwodecades.

IhavemadetheSECthecornerstone,andtheheart,ofmycareerbecauseIstronglybelievethattheSEC’s missionofinvestorprotectionandmarketstabilityiscriticaltothefunctionofandconfidenceinthefinancialsystemasawhole…andespeciallybecauseIbelievethatinvestorsneedanddeserveaneffectiveadvocatewithintheFederalgovernment.

Today,thanks to ourexceptionalstaffandstrongleadershipteam,Ibelievethatweareexecutingourroleastheinvestor’sadvocateboldlyandeffectively,atatimewhenourrolehasbecomemoreimportantthanever.

ThisisachallengingandexcitingtimefortheCommission.

Commissionersandthestaffareconsideringanumberofcomplexandimportantissuesandworkinghardonrulesthatwillhaveaprofoundand positiveimpactoninvestorsandourmarketsforyearstocome.

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IamcurrentlyworkingwiththeotherCommissionerstoprioritizethemanyagendaitemsbeforeusandtosetarealistictimetableforexecutingonthosepriorities.

Withthesediscussionsstillunderway,Ican’tyetgiveyoutoomanydetails.

Iwillsay,though,thatIamconfidentthatcompletingtheremainingrulemakingsandotherprojectsmandatedbytheDodd-FrankActandtheJOBSActwillbeatthe topofthelist.

Anddespitetheoften-mentioned2-2divide,Ifindthatmyfellowcommissioners— aswellasCommissionstaff—areeagertofindcommongroundandmoveforwardin apracticalandeffectivemanner.

I’malsoonsomethingofalisteningtour--clarifyingmyownthoughtsandkeepinganappropriateperspectivebylisteningto ideas,questionsandcomplaintsfrompeopleinandoutoftheagency.

And,thatiswhyIamheretoday—tolisten to you.

TheInvestorAdvisoryCommitteeistherightidea,andparticularlyatthiscriticaljunctureinthehistoryofourmarkets.

Overthelastdecade,theretailinvestinglandscapehasbecomeincreasinglycomplex,populatedbyproducts,strategies,technologies,opportunities,andrisksthatsimplydidn’texistjustashorttimeago.

And,on topofthechangesthatarisemoreorlessorganicallyfromin themarketplace,importantnewlegislationisreshapingthe terrain,aswell.Just21monthsafterDoddFrank,themostsignificantfinancialreformbillin decades,wasenacted—andcreatedthiscommittee— theJOBSActbroughtanotherseismicshiftinthewaycompanies,particularlysmallandemergingones,raise capitalandhow individual investorsparticipateinthatprocess.

Againstthisbackdrop,thedecisionsconfrontedbyindividualinvestors

—decisionsthatareabsolutelycriticaltothecourseoftheirlivesandthe

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livesoftheirfamilies—andtheinformationandadvicetheyreceivewhentheymakethesedecisions,arebecomingmorecomplexevenas thestakesgrowhigher.

Assomeofyoumayknow,whenIthinkabouttheSEC’s roleatatimelikethis,Iliketothinkofmyverydear—ifcompletelyimaginary—AuntMillie,aretailinvestorwithamodestportfolio,lookingtowardsasecureretirement—hopefullyin thenearterm—andsomefunwithherfamilyduringhergoldenyears.

Now,asdeartomeassheis,AuntMillieisnohedgefundmanager.

Sowhenshesitsdownwithherfinancialprofessional,andthetalkturnstoETFsandtargetdatefunds,crowdfundingorherprofessional’sfees,Iwantthe SEC’spresencetobefeltthereinthatoffice—whetherornotsheevenknowsanythingabouttheSEC(althoughMYAuntMillieis,ofcourse,qvellingatherniece’srecentpromotion),IwanttheSECtobetherelookingoutforher, helpinghermake senseoftheenvironmentinwhichsheisinvestingherfuturesecurity.

AuntMillieandherfellow retailinvestorsareuniqueamongthemajorstakeholdersinthefinancialsystem:theyaren’tmembersofatradeassociation,andtheydon’texactlyspendalotoftime(oranytimeforthatmatter)followingtheFederalRegister,monitoringtheSEC,or— althoughIamtryingtoimprovethis—submittingsubstantivecommentsonproposedrulesandconceptreleases.

Likemostretailinvestors,AuntMillieisunder-informedand underrepresentedintheregulatoryprocess.

Thatiswhy,inthemidstofcontinuingandsignificantchangesinthemarkets,yourworkissoimportant.

Youhelprepresenttheseretailinvestorswithavisibilityandsophisticationthatensuresthattheirneedsandinterestsarecarefullyconsidered.

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Youhelpuskeeptheplayingfield levelforallinvestors, includingandespeciallyinvestorslike AuntMillieandhercompatriots.

YourfirstsetofrecommendationstotheCommission,onproposedrulesthatwouldlifttherestrictionongeneralsolicitationincertainprivateplacements,reflectsyourcommitment tothattask.

Ideeplyappreciatetheeffortandthoughtfulnessthatwentintocraftingtherecommendations.

In addition,yourability to worktogetherandproviderecommendationsthatwereunanimouslysupportedbytheCommitteeishearteningto meandservesasanexampletousall.

In ashorttime,youhaveestablishedyourselvesasaneffectiveorganizationandacriticalcomponentoftheongoingregulatorydialoguethataffectseveryAmericaninvestor.

Ilookforward to ourcontinuingcollaborationasyouaddressothermattersofcriticalimportanceinarelentlesslyevolvingfinancialworld.

ThankyouforwhatyouhaveaccomplishedalreadyandforwhatIknowyouwillcontinue todo.Isaid earlierthatwewerestillsortingoutallofourprioritiesforthedaysahead,butoneofthemiscertainlythis:continuingthecloserelationshipthatIbelievewealreadyhave.

And,sinceI’mhereaspartofmylisteningtourandnotmytalkingtour,it’sprobablytimeforme to stoptalkingandstartlisteningtoanyquestionsandcommentsyoumayhave.

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FulfillingtheCommission’sStatutoryResponsibilitytoRespondtoIAC’sRecommendations

ByCommissioner LuisA.Aguilar,U.S. SecuritiesandExchangeCommission,InvestorAdvisoryCommitteeMeetingWashington,D.C.,January18,2013

IwanttowelcomethemembersoftheInvestorAdvisoryCommitteetotheCommittee’sthirdin-personmeeting.Ialsowant tothankyouforyourcontinuingfocusonthemanyissuesconfrontinginvestors.

YourinputtotheCommissionisvitaltohighlighttheinitiativesthatservetobenefitandprotectinvestors,aswellas to detertheCommissionfromundertakinginitiativesthatundercutordismantleexisting investorprotections.

ItiscriticalthatinitiativesundertakenbytheCommissionfulfillitsmissionofprotectinginvestors.

AstheInvestorAdvisoryCommittee,youaretheCommitteefocusedontheneedsofinvestorsandyourrecommendationsarecriticaltofacilitatingthattheCommissionisoperatingtofulfillitsmission.

CongressclearlyhadthisinmindwhenitcodifiedthisCommitteeinSection911oftheDodd-FrankActandmandatedhowtheCommitteewouldoperate.

ThisCommitteehasalreadydemonstratedthatittakesitsresponsibilitiesseriously.

Forexample,onOctober12,2012,theCommitteesenttheCommissionsevenunanimousrecommendationsregardingtheSECRulemakingtoLifttheBanonGeneralSolicitationandAdvertising in Rule506 Offerings.

Icommendyouforthehardworkthatyouhaveundertaken,asreflectedintherecommendationswereceivedandwhichareavailableontheSEC website.

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ItisnowincumbentontheCommissiontoact.AsrequiredbySection911oftheDodd-FrankAct,theCommissionisrequiredto“reviewthefindingsandrecommendationsoftheCommittee.”

Inparticular,thestatutespecifiesthat,“eachtimetheCommitteesubmitsafindingorrecommendationtotheCommission,”theCommissionisrequiredto

“…promptlyissueapublicstatement –

assessingthefindingorrecommendationoftheCommittee;and

disclosingthe action,ifany,theCommissionintendstotakewithrespecttothefindingorrecommendation.”

TheimportanceofthisobligationisunderscoredbythefactthatthelawrequiresthattheCommissionitselfassesstheCommittee’srecommendationsanddeterminehowbesttorespond tothem.

ThisisaresponsibilityoftheCommission–notonethathasbeen delegatedtothestaff.

Tothatend,IlookforwardtotheCommissionissuingtherequiredresponseassessingyourOctober2012recommendations.

ItisimperativethatthisCommittee’srecommendationsbetreatedwiththeseriousconsiderationthatthelawmandates.

IlookforwardtotheCommittee’son-goingeffortsandtowhattheCommitteehas tosay.

Thankyou.

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ToughercreditratingrulesconfirmedbyEuropeanParliament'svote

Newrulesonwhenandhow creditratingagenciesmayratestatedebtsandprivatefirms'financialhealthwereapprovedbyParliamentonWednesday.

Theywillallow agenciestoissueunsolicitedsovereigndebtratingsonlyonsetdates,andenableprivateinvestors to suethemfornegligence.

Agencies'shareholdingsinratedfirmswillbe capped,toreduceconflictsofinterest.

MEPsalsoensuredthattheratingsareclearerbyrequiringagencies toexplainthekeyfactorsunderlyingthem.

Ratingsmustnotseek to influencestatepolicies,andagenciesthemselvesmustnotadvocateanypolicychanges,addsthetext.

TheruleshavealreadybeenprovisionallyagreedwiththeCouncil.

"Wearetakingsomestepsforwardwiththisnewregulation,fullyin linewithitsbasicspirit,whichistoenablefirms todotheirowninternalratings.

Theseshouldprovideviable,comparableandreliablealternativestothoseoftheratingoligopoly",saidleadMEPLeonardoDomenici(S&D,IT).

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Setdatesforsovereigndebtratings

Unsolicitedsovereignratingscouldbepublishedatleasttwobutnomorethanthreetimesayear,ondatespublishedbytheratingagencyattheend ofthepreviousyear.

Furthermore,theseratingscouldbepublishedonlyaftermarketsintheEUhaveclosedandatleastonehourbeforetheyreopen.

Agenciestobeliableforratings

Investorswhorelyonacreditratingcouldsuetheagencythatissueditfordamagesifitbreachestherulessetoutinthislegislation eitherintentionallyorbygrossnegligence,regardlesswhetherthereisanycontractualrelationshipbetweentheparties.

Suchbreacheswouldinclude,forexample,issuingaratingcompromised byaconflictofinterestsoroutsidethepublishedcalendar.

Reducingover-relianceonratings

Toreduceover-relianceonratings,MEPsurgecreditinstitutionsandinvestmentfirmstodeveloptheirownratingcapacities,toenablethemtopreparetheir ownriskassessments.

TheEuropeanCommissionshouldalsoconsiderdevelopingaEuropeancreditworthinessassessment,addsthetext.

By2020noEUlegislationshoulddirectlyrefertoexternalratings,andfinancialinstitutionsmustnotbeanymoreobligedtoautomaticallysellassetsintheeventofadowngrade.

Cappingshareholdings

Acreditratingagencywillhavetorefrainfromissuingratings,ordisclosethatitsratingsmaybeaffected,ifashareholderormemberholding10%ofthevotingrightsinthatagencyhasinvestedintheratedentity.

Thenewruleswillalsobaranyonefromsimultaneouslyholdingstakesofmorethan5%inmorethanonecreditratingagency,unlesstheagenciesconcernedbelongtothesamegroup.

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TheDomenicireportontheregulationwas adoptedby579votesto58,with60abstentionsandthatonthedirectiveby599votes to 27,with68abstentions.

Article1Subjectmatter

ThisRegulationintroducesacommonregulatoryapproachinordertoenhancetheintegrity,transparency,responsibility,goodgovernanceandindependenceofcreditratingactivities,contributingtothequalityofcreditratingsissued in theUnion,therebycontributingtothesmoothfunctioningoftheinternalmarketwhileachievingahighlevelofconsumerandinvestorprotection.

Itlaysdownconditionsfortheissuingofcreditratingsandrulesontheorganisationandconductofcreditratingagencies,includingtheirshareholdersandmembers,topromotecreditratingagencies'independence,theavoidanceofconflictsofinterestandtheenhancementofconsumerandinvestorprotection.

ThisRegulationalsolaysdownobligationsforissuers,originatorsandsponsorsestablishedin theUnionregardingstructuredfinanceinstruments.

Article5ba

Over-relianceoncreditratingsinUnionlaw

Withoutprejudicetoitsrightofinitiative,theCommissionshallcontinuetoreviewreferencestocreditratingsinUnionlawwhichtriggerorhavethepotentialtotriggersoleormechanisticrelianceoncreditratingsbycompetentauthoritiesorfinancialmarketparticipants,withaviewtoeliminatingallreferences to ratingsinUnionlawby1January2020,providedthatappropriatealternativestocreditriskassessmenthavebeenidentifiedandimplemented.

Article6a

Conflictsofinterestconcerninginvestmentsincreditratingagencies

1.Ashareholderoramemberofacreditratingagencyholdingatleast5%ofthecapitalorthevotingrightsinacreditratingagencyorinacompany

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whichhasthepowertoexercisedominantinfluenceorcontrolovertheregisteredcreditratingagency,shallbeprohibitedfrom:

Theprohibitionreferredto inpoint(a)ofthefirstsubparagraphdoesnotapplytoholdingsindiversifiedcollectiveinvestmentschemes,includingmanagedfundssuchaspensionfundsorlifeinsurance,providedthattheholdingsindiversifiedcollectiveinvestmentschemesdonotputhimorher inapositiontoexercisesignificantinfluenceonthebusinessactivitiesofthoseschemes.

Article-8a

Sovereigndebtratings

Sovereigndebtratingsshallbeissuedinamanner,whichensuresthat theindividualspecificityofaparticularMemberStatehasbeenanalysed.

Astatementannouncingrevisionofagivengroupofcountriesshallbeprohibited,if notaccompaniedbyindividualcountryreports.

Thosereportsshallbemadepubliclyavailable.

Publiccommunications otherthancreditratings,ratingoutlooksoraccompanyingpressreleases,asreferredto inpoint5ofPartIofSectionDofAnnexI,whichrelateto potentialchangesofsovereignratingsshallnotbebasedoninformationstemmingfromthesphereoftheratedentity,wheresuchinformationhasbeenreleasedwithouttheconsentofthe

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ratedentity,unlessitisavailablefromgenerallyaccessiblesourcesorunlesstherearenolegitimatereasonsfortheratedentitynotto giveitsconsent tothereleaseoftheinformation.

Acreditratingagencyshall,takingintoconsiderationtheprovisionsinsecondsubparagraphofArticle8(5),publishonitswebsiteandsend toESMAonanannualbasis,inaccordancewithpoint3ofPartIIIofSectionDofAnnexI,acalendarattheendofthemonthofDecemberforthenext12months,settingamaximumofthreedatesforthepublicationofunsolicitedsovereignratingsandrelatedoutlooksandsettingthedatesforthepublicationofsolicitedsovereignratingsandrelatedoutlooks.SuchdatesshallbesetonaFriday.

Deviationofthepublicationofsovereignratingorrelatedratingoutlooksfromthe calendarshallonlybepossibleinasmuchas thisisnecessaryforthecreditratingagencytocomplywithitsobligationsunderArticle8(2),Article10(1)andArticle11(1)andshallbe accompaniedbyadetailed explanationofthereasonsforthedeviationfromtheannouncedcalendar.

Article8c

Useofmultiplecreditratingagencies

Whereanissuerorarelatedthirdpartyintends tomandateatleasttwocreditratingagenciesforthecreditratingofthesameissuanceorentity,theissuershallconsiderthepossibility tomandateatleastonecreditratingagencywhichdoesnothavemorethan10%ofthetotalmarketshareandwhichcanbeevaluatedbytheissueras capableforratingtherelevantissuanceorentity,providedthat,basedonthelistofESMAmentionedinparagraph2,thereisacreditratingagencyavailableforratingthespecificissuanceorentity.

Wheretheissuerdoesnotmandateatleastonecreditratingagencywhichdoesnothavemorethan10%ofthe totalmarketshare,thisshallberecorded.

Withaviewtofacilitatingtheevaluationbytheissuerunderparagraph1,ESMAshallannuallypublishonitswebsitealistofregisteredcreditratingagencies,indicatingtheir totalmarketshareandthetypesofratingsissued,which canbeusedbytheissuerasastartingpointforits

evaluation.

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3.ForthepurposesofthisArticle,thetotalmarketshareshallbemeasuredbyannualturnovergeneratedfromcreditratingactivitiesandancillaryservices,atgrouplevel.

Article35aCivilliability

1.WhereacreditratingagencyhascommittedintentionallyorwithgrossnegligenceanyoftheinfringementslistedinAnnexIIIhavinganimpactonacreditrating,aninvestororissuermayclaimdamagesfromthatcreditratingagencyfordamagecausedtothemduetothatinfringement.

AninvestormayclaimdamagesunderthisArticlewhereitestablishesthatithasreasonablyrelied, in accordancewithArticle5aorotherwisewithduecare,onacreditratingforadecision to investinto, hold ontoordivestfromafinancialinstrument coveredbythatcreditrating.

AnissuermayclaimdamagesunderthisArticlewhereitestablishesthatitoritsfinancialinstrumentsarecoveredbythatcreditratingandtheinfringementwasnot causedbymisleadingandinaccurateinformation providedbytheissuertothecreditratingagency,directlyorthroughinformationpubliclyavailable.

5.Civilliabilityasreferredtoinparagraph1maybelimitedinadvanceonlywhereallofthefollowingconditionsarecompliedwith:

Wherealimitationofcivilliabilitydoesnotcomplywiththeconditionsreferredtointhefirstsubparagraphitshallhavenolegaleffect.

5a.Theterms“damage”,“intention”,“grossnegligence”,“reasonablyrelied”,“duecare”,“impact”,“reasonable”and“proportionate”whicharereferredto inthisArticlebutarenotdefinedinthisRegulation,shallbeinterpretedandappliedinaccordancewiththeapplicablenationallawasdeterminedbytherelevantrulesofprivateinternationallaw.

MattersconcerningthecivilliabilityofacreditratingagencyandwhicharenotatallcoveredbythisRegulationshallbegovernedbythe

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applicablenationallawasdeterminedbytherelevantrulesofprivateinternationallaw.

Thecompetentcourt to decideonaclaimforcivilliabilitybroughtbyaninvestorshallbedeterminedbytherelevantrulesofprivateinternationallaw.

5b.ThisArticledoesnotexcludefurthercivilliabilityclaimsinaccordancewithnationallaw.

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FSAUK

RisktoCustomersfromFinancialIncentives

Context

Consumertrustandconfidenceinfinancialservicesisessential.

In autumn2011wepublishedareviewof

sales incentivesand asked forfeedbackonourproposedguidance.

Weknowthatthewaysalesstaffarepaidinfluenceshow andwhattheysellto consumers.

Equally,werecognisethatfirmsmaywanttoincentivisetheirstafftosell.

Wedonothaveaproblemwithincentiveschemes,buttheymustneverbeatthecustomer’sexpenseandtherisksneedtobemanagedproperly.

Consumersmustbeconfidenttheyarebeingsoldaproductfortherightreasons.

Ourreviewfoundthatmostincentiveschemeswerelikelytodrivepeopletomis-sellandtheseriskswerenotbeingproperlymanaged.

Wewelcomethesignificantrecentchangesthatanumberoffirmshavemade to reducetherisksintheirincentiveschemes.

Ourreviewanditsfindings–areminder

Wehavecarriedoutareviewconductedacrossavarietyofauthorisedfirms– includingbanks,buildingsocieties,insurancecompaniesandinvestmentfirms.

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  • Wewereconcernedtofindthatincentiveschemeswithhigh-riskfeaturesandthepotentialforsalesstafftoearnsignificantbonuseswerecommon acrossthefirmsweassessed.

  • Mostfirmsdidnothaveeffectivesystemsandcontrolsinplacetoadequatelymanagetheincreasedrisksofmis-sellingarisingfromtheirincentiveschemes.

  • Thereviewuncoveredarangeofseriousfailings,suchas:

  • Firmsfailingtoidentifyhowincentiveschemesmightencouragestafftomis-sell,suggestingtheyhadnotsufficientlythought abouttherisksorhadturnedablindeyetothem.

  • Firmsfailingtounderstandtheirownincentiveschemesbecausetheyweresocomplex,thereforemakingitharderto controlthem.

  • Firmsnothavingenoughinformationabouttheirincentiveschemes tounderstandandmanagetherisks.

  • Firmsrelyingtoomuchonroutinemonitoring,ratherthantakingaccountofthespecificfeaturesoftheirincentiveschemes.

  • Salesmanagerswithclearconflictsofinterestthatwerenotproperlymanaged.

  • Firmshavinglinkstosalesqualitybuiltintotheirincentiveschemesthatwereineffective.

  • Firmsnotdoingenoughtocontroltheriskofmis-sellinginface-to-facesituations.

  • Howdoweexpectfirmstomanageincentiveschemes?

  • Wedonotcurrentlyprescribehowfirmsshould,orshouldnot,incentivisetheirstaff.

However,ourstandardsforfirmsareclear.

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  • Principle3oftheFSA’sPrinciplesforBusinessesstatesthat‘afirmmusttakereasonablecaretoorganiseandcontrolitsaffairsresponsiblyandeffectively,withadequateriskmanagementsystems’.

  • TheSeniorManagementArrangements,SystemsandControlssourcebook(SYSC)oftheHandbooksetsoutorganisationalandsystemsandcontrolsrequirementsforfirms.

  • WeexpectfirmstoapplyPrinciple3andSYSCwhendevelopingincentiveschemesfortheirstaffandtohaveamitigationstrategy inplace tomanageanyriskofmis-sellingto consumersthatmightoccur.

  • TheattachedAnnexgivesexamplesofpreviousenforcementcaseswherefinancialincentiveswereafeature.

  • Whatdoweconsider‘mis-selling’?

  • Weusetheterm‘mis-selling’inthisdocumenttorefertoafailuretodeliverfairoutcomesforconsumers.

  • Theseoutcomesinclude:

  • Customersaretreatedfairly;

  • Customersunderstandthekeyfeaturesoftheproductorserviceandwhethertheyarebeinggivenadviceor information;

  • Customersaregiveninformationthatisclear,fairandnotmisleading–informationthatenablesthemtomakeaninformeddecisionbeforepurchasingaproductorserviceorbeforetrading;and

  • Customersbuyingonanadvisedbasisarerecommendedsuitableproducts.

  • Howfirmshaverespondedtothesefindings?

  • Sincediscussingourfindingswiththefirmsinthereview,wehaveseenthemtakeactioninresponse to ourconcerns.

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  • Thisincludes:

  • changingincentiveschemessothattheyarenotbasedonsalesvolumes;

  • removinghigh-riskincentivefeaturesandconflictsofinterestforsalesmanagers;

  • reducingthevalueofincentiveschemeslinked to sales,orcappingmaximumpayments;

  • introducingmoreeffectivelinksbetweenincentiveschemesandtheresultsofbusinessqualitymonitoring;

  • improvingcontrols,includingadditionalmonitoringforhigherperformingsalesstaff,andadditionalMIandmonitoringaroundthefeaturesofincentiveschemesthatincreasetherisktocustomers;

  • improvingcontrolstoactivelyidentifyinappropriatebehaviourbysalesstaffduringface-to-facesalesconversations;

  • strengtheninggovernancearrangementsaroundthedesignandsign-offofincentiveschemes;and

  • undertakingpastbusinesssamplingtoidentifyifanysystemic

  • mis-sellinghasoccurredbecauseofhigherriskfeaturesinincentiveschemes.

  • Examplesofincentiveschemefeaturesthatsignificantlyincreasetheriskofmis-selling

  • Disproportionaterewardsformarginalsales

  • Reachingacertaintargetoragoalthattriggersanincreaseinearningsmuchhigherthanthenormalrateatwhichincentivesaccrue.

  • Anexampleisa‘retrospective accelerator’wherepassingatargetincreasesthelevelofincentiveearnedforallsalesoveraperiod,ratherthanjustthoseabovethetarget.

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Exampleofaretrospectiveaccelerator–bonusesmultipliedup toeighttimes

Onefirm’ssalesstaffcouldseetheirbonusesmultipliedbyuptoeighttimesforcross-sellingprotectionproducts.

Thisresultedin astrongincentiveforstafftosellprotectionproductstoconsumers,regardlessoftheirneeds,toreachacertainnumberofsalesanddramaticallyincreasetheirbonus,backdatedforthewholemonth.

Thisincentiveschemewaslikelytodrivesalesstafftomis-sell,forexamplemisleadingconsumersbyexaggeratingthebenefitsofaproductwhileplayingdownthelimitations.

Otherexamplesincludeschemeswherehighperformancecantriggersignificantadditionalincentives,bothmonetaryandnon-monetary(suchasforeigntravel).

Exampleofdisproportionaterewards–‘firstpastthepost’competitionbonus

Onefirmoperateda‘SuperBonus’schemecompetitionwhichwasrunona‘firstpastthepost’basisforreachingasalestargetorthreshold.

Thefirst21peopletoreachthistargetearnedupto£10,000.

Thiscreatedastrongmotivationtoreachthe‘SuperBonus’targetassoonaspossible,increasingtherisk ofmis-selling.

Exampleofdisproportionaterewards–enhancingannualbonus

Onefirmhadanincentiveschemewhereadviserswerepaidcommissiononproductssoldoverthecourseoftheyear.

Iftheyreachedaseriesoftargets,theycouldlockinanenhancedcommissionofupto35%forthewholeofthenextyear.

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Thiscreatedaheightenedriskfromaseriesof‘cliffedgepoints’attheendoftheyear,toexceedthetargetandsecureenhancedcommissionforthefollowingyear.

Accelerators(orsteppedpayments)

Ahigherrateofincentiveisearnedwithhighervolumesofsales– wherethehigherrateonlyappliestosalesoveratarget.

Thisformofincentivecreatesincreasedriskasstafftrytomaximisetheirsalesbefore theendoftheincentiveperiod.

Exampleofanaccelerator

Amonthlybonusisbasedonasetpaymentforeachproductsoldup to100%ofatargetandthepaymentperproductisincreasedfortherestofthemonthifthetargetisreachedbeforemonth-end.

Inappropriateincentivebiasbetweenproducts

Thereisaninappropriatelylarger incentiveforoneproductcomparedwith another,whethertheproductsaresubstitutableornot.

Wheretheincentiveisdifferentforsubstitutableproducts,thereisanevenhigherriskthatsalesstaffwillsellthehigherearningproduct.

Exampleofincentivebiasbetweenproducts

Afirmexcessivelyincentivisedoneproducttypeoveranother,wherethatproductwasmoreprofitable.

Thehighdifferenceinvaluemeantthatstaffcouldonlyearnasignificantbonusbysellingthemorehighly incentivisedproducts.

Thefirmclaimedtoofferholisticadvice,buttherewasaclearrisk thatadviserswouldselloneproductoveranotherbecausetherewasnoprospectofearninglargebonusesfromsellingtheotherproductrange.

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Thefirmdidnotseemtohaveconsideredtherisk tocustomers.

Variable‘salaries’

Incentiveschemesmayvarybasicpay(upordown) basedon performanceagainstsalestargetsin asetperiod.

Thiscouldincludeasubstantialreductionifsalesstaffdonotcontinuetomeettheirsalestargets.

Areductioninbasicpaymayhaveasignificantimpactonanindividual’sability to meetfinancialcommitmentsandmayreduce otheremployeebenefitslinked topay.

Exampleofvariablesalaries

Afirmreviewedstaffsalarieseveryquarter,andmovedstaffbetweensalarybandsdependingonhowmuchtheysold.

Thehighestsalarybandearnedmorethanthreetimesthelowersalarybandsotherewasastrongincentive to achievethesalestargetsrequiredtogetthehigherbasicsalary.

Staffmayalsohaveputthemselvesunderpressuretosellenough tostayinthehighersalarybandsoncetheygotthere,increasingtherisk ofmis-sellingfurther.

Staffcouldmovethroughsalarylevelsquickly.

Onetopperformerdescribedcominginatgrade1andrapidlymovingtograde5,whichmeanthisannualsalaryincreasedbymorethan£25,000.

Hethenexceededsalestargetsinthenext18months,addinganother

£20,000tohissalary.

Wewereconcernedthatthevariablesalariessignificantlyincreasedtheriskofmis-sellingatthisfirm.

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In areviewofadviserswho wereclose todroppingasalaryband,severalmadealotofsalesattheendofthequarter,includingtofamilymembers,andthesesalesdidnotalwaysfollow properprocedures.

In particular,oneadvisercutcornerstorushthroughsixsalesin thelastfewdaysofaquartertoavoidhispaybeingreduced.

Inappropriaterequirementstodetermineifincentivesarepaid

Forexample,incentivepaymentsareaccruedbutwillnotbepaidunlessaminimumtargetismetforeachofseveraldifferentproducttypes,which potentiallyleadstosalestomeetquotasratherthanmeetingcustomerneeds.

Exampleofinappropriaterequirements

Fromourthematicworkonpaymentprotectioninsurance(PPI),wesawonefirmwheresalesstaffcouldearnanincentiveofupto100%oftheirbasicsalaryforsalesofloansandPPI.

However,nobonuswouldbepaidunlessstaffsoldPPItoatleast50%ofallcustomers.

Thisincentiveincreasedtherisk ofsalesstaffmis-sellingPPI.

100%variablepay/commissiononly

Wherefirmsremuneratestafforadviserspurelybyvariablepay(suchassalescommissionwithnobasicsalaryoraproportionoftherevenueearnedforthefirm).

Thissignificantlyincreases theriskofmis-sellingbecausestaffneedtomakeaminimumlevelofsaleseachmonth tobeabletomeettheirfinancialcommitments.

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Inappropriatelevelsofincentivesforsalesofadditionalproducts

Wheresalesstaffreceiveaninappropriatelevelofincentivesfor

cross-sellingadditionalproductsorsellingproduct‘add-ons’,comparedtotheincentiveforonlysellingtheprimaryproduct.

Theremaybeagreateropportunity toincreasethesalesofadditionalproductsandadd-onsthroughinappropriatesalesconversationsthanisthecaseforprimaryproductsales.

Forexample,salesstaffmaynotmake itclearto customersthattheadditionalproductisoptionalandaseparateproduct.

Thistypeofmis-sellingoccurredmanytimesinrelationtoPPI.

Otherincentiveschemefeaturesthatincreasetheriskofmis-selling

Thresholds

Oncestaffachieveacertain‘threshold’(aminimumlevelofsales),theygetbonusesoneachsale abovethethreshold.

Thethresholdmightbe50salesamonthor100salesaquarter,forexample.

Thereisariskthatstaffwillwanttosellas muchaspossibleafterthey havemetsuchathresholdandbeforetheendofthemonth/quarter,assalesmaybeworthmorethanthoseinthenextperiod.

Thismaybeexacerbatedwheredeficitsfrompreviousperiodsneed tobemetinaddition tothecurrentthreshold.

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Incentiveslinkedtothelevelortypeofpremium,investmentamountor lengthofterm

Thereistherisk thatsalesstaffseekingtomaximiseincomewillpersuadecustomerstoinvestmorethanisappropriateortakeoutmoreinsurancecoverthantheyneed,orselectaproducttermthatislongerthanrequired.

This canalsoincludedifferencesinincentivelevelswherethereisaproductwithachoicebetweenregularorsinglepremiums.

Competitions/promotions

Campaignsorcompetitionsdesignedtoincreasesalesvolumes,orbasedonsimilarmeasures,wherestaffcan earnadditionalpaymentsorwinprizes.

Thesecanbeproduct-specific orsimplybasedongeneralsalesvolume.

Withproduct-specificpromotions,thereisarisk ofproductbiasleadingtomis-selling.

Incentiveschemefeaturesthatmightreducetheriskofmis-selling

Wehaveidentifiedbelowexamplesofschemefeaturesthatmighthelptoreducetherisksofmis-sellingcreatedbyincentiveschemes.

Thesefeaturesmayreduceriskbutdonoteliminateit,andtheremainingriskwillstillneedtobemanaged.

Wealsoincludeexamplesthatshowthesefeaturesarenotalwaysimplementedeffectively.

Thisisnotanexhaustivelist.

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Emphasisingquality

Bonusandincentiveschemesneedtorewardqualityorgoodcompliance(sellingtherightway)withasufficientdeterrenttopenalisepoorbehaviourormis-selling.

Qualitymeasuresshouldreflectthefairtreatmentofcustomersandnotjustcustomersatisfaction.

Deterrentswillnotworkiftherewardsforhow muchissoldaresetatamuchhigherlevel.

Clawback

Manyfirmshaveclawbackarrangementswhereincentivepaymentsalreadyreceivedbysalesstaffhavetoberepaidoroffsetagainstfutureincentivesif,forexample,productsaresubsequentlycancelled.

Tobereallyeffective,firmsneedtocarefullymonitorthelevelsofclawbackandwhycustomersare cancellingsales.

Unexplainedhighlevelofclawback

Atonefirm,anumberofsalesstaffhadhighlevelsofclawbackinrelationtothebonusesearned,forexample,onepersonearnedabonusof£40,000 afterclawbacktotalling£19,000.

ThefirmwasunabletosatisfytheFSAthatithadaneffectiveapproachtomonitoringthelevelsofclawbackforindividualsalesstaff,in particulartheroot causesoftheunderlyingreasonsforthe cancellationofpolicies.

Cappedordecreasingincentives

Forexample,settingacap orreducingbonuseswhensalesvolumesapproachacertainlevel,sothatsalesstaffarenottempted torushlotsofsalesthroughbeforetheendofatargetperiod.

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Firmsmightalsochoosetolimitvariableincentiveearningstoalowerproportionofbasicsalary.

Deferralofincentivepayments

Firmsmightawardbonusesonamonthlyorquarterlybasis,butdeferpartofthepaymentuntiltheendoftheyearorlonger.

Qualificationforpaymentofthedeferredelementcouldthenbelinkedtoongoingsalesqualityresultsorothermeasures,like cancelationratesorthenumberofcomplaintsreceived.

Rollingtargetthresholds

Whereafirmhasathresholdbasedonaminimumnumberofsalesbeforeincentivepaymentsbegintoaccrue,thismightbebasedona‘rolling’averageofthesalesmade.

Forexample,athresholdinaquarterlybonusschemebasedonaminimumvolumeofsalesaveragedovera12-monthrollingperiod.

Balancedscorecards

Forexample,afirmmighthaveanincentiveschemewhereabonusisnotjustbasedonsalesvolumesbutwillincludeothermeasuresthatdeterminehowmuchbonusisawarded.

Anexampleofthemeasuresinabalancedscorecardapproachmightinclude;salesresultsorfinancialcontribution;salesqualityresults;customersatisfaction;andotherkeyperformanceindicators(suchascancelationrates,upheldcomplaintsandthemixofproductssold).

However,abalanced scorecardapproachwouldbelesseffectiveiftheelementrelatingtosalesresultsorfinancialcontributionwasthemostdominantfactorinhow theincentiveiscalculated.

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  • Theeffectivenesswillalsodependontheimportancegiventoothermeasuresandwhethertheydriveappropriatebehaviours,whichreflect thefairtreatmentofcustomers.

  • Guidanceonmanagingtherisksandgovernanceofincentiveschemes

  • Customers can loseoutiffirmsdonothaveeffectivegovernancearrangementsandcontrolstoidentifyandmanagetheincreasedriskofmis-sellingfromfeaturesoftheirincentiveschemes.

  • Effectivecontrolsandgovernancemayinclude:

  • robustrisk-basedbusinessqualitymonitoringandadequatecontrols tomitigatetherisk of inappropriatebehaviourduringsalesconversations;

  • MItoidentify,andactupon,trendsorpatternsinindividualsalesstaffactivitythatcouldindicateanincreasedrisk ofmis-sellingasaresultoffeaturesintheincentivescheme.UsingthisMItoinformtheapproachtomonitoringsalestaffincentiverisks;

  • propermanagementofsalesmanagers’conflictsofinterest;

  • effectiveoversightofincentiveschemesbyappropriateseniormanagement,includingapprovaloftheincentiveschemes;and

  • aneffectiveriskidentificationandmitigationprocess,includingregularreviewsofincentiveschemesandtheeffectivenessofcontrols,takingintoaccountcustomers’interests.

  • Thefollowingsectionsetsoutwhatcontrolsandgovernancearrangementsweexpectfirmstohaveinplacetoidentifyandmitigatetheincreasedrisk toconsumersfromfeatureswithinincentiveschemes.

  • Managementinformation(MI)

  • Weexpectfirms to collectsufficient informationtobeable toproperly

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  • manageriskswiththeirincentiveschemes.

  • Firmsshouldmakesurethattheyhavetherightinformationto helpmonitorwhatisbeingsoldandidentifyindividualsalesstaffwhoarehigherrisk.

  • Thisinformationmayinclude:

  • whichsalesstaffareachievinghighsalesvolumesandwhatproductstheyareselling;

  • patternsofanindividual’ssalesactivityaroundincentiveschemefeaturesthatindicateincreasedrisk;and

  • theeffectofproductpromotionsorsalescampaigns.

  • Firmsshouldthenactontheresults accordingly,includingtakingareasofincreasedrisk intoaccountinbusinessqualitymonitoring.

  • Businessqualitymonitoring

  • Whereincentiveschemesincreasetheriskofmis-selling,weexpectfirmstotakeaccountoftheseincreasedrisksintheirapproachtomonitoringandwhenidentifyingsalescasesforchecking.

  • Well-designedbusinessqualitymonitoring(includingcallmonitoringfortelephonesales),carriedoutbycompetentstaff,canbeaneffectivecontrol.

  • However,thisisunlikely to besufficientonitsownbecausefirmsarelikelytoneedarangeofcontrolsdependingontheincentiveschemein placeandthetypeofproductordistributionmethod.

  • Staffundertakingbusinessqualitymonitoringshouldbesufficientlyindependentofthesalesfunctiontoavoidinappropriateinfluencebysalesstafformanagers.

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Firmsshouldtake appropriate actionwhereissuesareidentified,forexample,reviewingindividualsales,re-trainingandundertakingfollow-upmonitoringto ensureissuesarenotrecurring.

Firmsshouldalsocheckiftheissuesidentifiedindicatetrendsofmis-selling.

Governancearrangements

Seniormanagementshouldensurethatfirmsidentifyandassessthespecificfeaturesoftheirincentiveschemesthatmightincreasetheriskofmis-sellingandensurecontrolsare inplacetoadequatelymitigatetheincreasedrisks.

Seniormanagementshouldapproveincentiveschemeswithinputfromriskmanagementandcompliancefunctionsintothedesignandreviewofincentivepolicies.

Seniormanagementshouldensuretheyconsiderhow incentiveschemefeatures canlead topoorcustomeroutcomes.

Thereshouldbefrequentandeffectivereviewsofincentiveschemes,withsufficientattentiongiventorisks to thefairtreatmentofcustomers.

Managementinformationshouldbecollectedandusedbyseniormanagementtoassessifrisksarecrystallisingandifcontrolsareeffectiveinmitigatingtherisks.

Conclusionsandnext steps

Thispapermarksthestartofaprogrammeofworkto reducetheriskstoconsumersfrompoorlymanagedincentiveschemes,whichwillbetakenforwardby theFinancialConductAuthority(FCA).

Duringthereviewwefoundthatmostfirmshaveincentiveschemesthatcan drivemis-selling,butdonothaveeffectivesystemsandcontrolstoadequatelymanagetherisks.

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Dependingontheindustryresponse,wearestillopen-minded abouttheneed to changeorstrengthenourrulesinthisarea.

Inthemeantime,wewillcontinuetotakeactionagainstfirmsthatdonotmeetourrequirementsandweplan tostrengthenthewaywesupervisefirms’incentive schemes.

Wewillfollow upwithfirms to assesswhattheyhavedoneinresponse tothiswork.

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Ensuringthesmoothfunctioningofmoneymarkets

SpeechbyMrBenoîtCoeuré,MemberoftheExecutiveBoardoftheEuropean CentralBank,atthe17thGlobalSecuritiesFinancingSummit,Luxembourg,16January2013.

***

LadiesandGentlemen,

Itisapleasuretospeakto you todayatthisannualGlobalSecuritiesFinancingSummitorganisedbyClearstream/DeutscheBörseGroup.

In myremarkstoday,Iwilltalkaboutthesmoothfunctioningofmoneymarketsandtheroleofmarketinfrastructuresinthisrespect.

Thespeechiscomposedoftwoparts.

Iwillstartwithsomecommentsondevelopmentsintheeuroarea(interbank)moneymarkets.

Asyouarewellaware,thefinancialcrisisandthesubsequentsovereigndebtcrisishaveledtoagradualshiftfromtheunsecuredtothesecuredsegmentofthemoneymarkets.

Moreover,thecriseshaveexposedtheweaknessesofcertainfinancialinstitutions,causingtheEuropeaninterbankmoneymarkettofragment.

Fragmentationhasoccurredbetween cash-richand cash-strappedbanksandalsobetweendifferentjurisdictions,leadingto a“renationalisation”ofmoneymarkets.

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Sincemoneymarkets canbeasourceandapropagationchanneloffinancialinstability,itisimportanttoensuretheirproperfunctioningandmitigatethepotentialriskstheypose.

In thesecondpartofmyspeechIwillconsidertheroleofmarketinfrastructuresinensuringwell-functioningmoneymarkets.

Forthispart,IwillreferbacktoworkconductedbytheBaselCommitteeonPaymentandSettlementSystems(CPSS) in 2010whenitexaminedtheextent towhichthemarketinfrastructureforreposaddedtotheuncertaintyorinstabilityevidentinsomerepomarkets.

Iwilltakeuptwo issuesidentifiedintherelatedreportpublishedbytheCPSSandwhichcanbeconsideredrelevantforthesmoothfunctioningofeuromoneymarkets,i.e.theroleofmarketinfrastructuresinprovidingadequateprotectionagainstcounterpartyrisk aswellastheefficientuseofcollateral.

In sodoing,Iwillalsodiscusssometensionswhichhaveemergedrecentlyrelatingto aparticulardevelopmentatmarketinfrastructurelevel,whereitisimportant toquicklyaddresstheunderlyingissuesinorder tomoveforward.

1.Securedandunsecuredmoney markets:developmentsintheeuroarea

Well-functioningmoneymarketsareanessentialcomponentofthefinancialsystem.

Whenmoneymarketsdonotfunction,financialstabilityandthetransmissionofmonetarypolicy areatrisk,withpotentiallysevereadverseconsequencesfortherealeconomy.

Deepandliquidmoneymarketsinsurebanksagainstliquidityrisk,ariskthatarisesnaturallyinbanking,wherematuritymismatchisthenatureofthebusiness.

Unsecuredmoneymarketsexertausefuldisciplinaryeffectonbanks.

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Moneymarketsalsoarethestartingpointfortheredistributionoftheliquidityprovidedbycentralbanks andhencethestartingpointforthetransmissionofmonetarypolicy.

Forexample,theEONIArate–therateofunsecuredovernightlendingbetweensomeofthelargesteuroareabanks–isanimportantfirstlinkinthechainofmonetarypolicytransmission.

EversincethefinancialturmoilstartedinAugust2007– morethanfiveyearsago– andthenbecameaseverecrisiswiththebankruptcyofLehmanBrothersoneyearlaterinSeptember2008,moneymarketshavenotbeenoperatingsmoothly.

Theoutbreakofthefinancialcrisishasbeenwelldocumented,butitisworthwhilerecallingtheextentoftheshocks,whicharestillbeingfelttoday.

WithinafewdaysafterthedemiseofLehmanBrotherson15September2008,theEURIBOR-OISspread,whichhadbeenzeroalittleover12monthsbefore,rosetoastaggering186basispoints(intheUnitedStatesthespreadrose to 365basispoints).

In addition,cash-richbanks wereapparentlynolongerlendingtocash-poorbanks.

Theflow ofliquidityin thefinancialsystem came to asuddenstop.

PriortothebankruptcyofLehmanBrothers,bankshardlyeverdepositedfundsattheECB(wheretheyearnthedepositfacilityrate,whichatthetimewas1%lessthanthepolicyrate).

AftertheLehmanbankruptcy,banks suddenlydepositedanaggregateamountofaround€200billion.

DepositsincreasedsincetheECBrespondedtothetensionsinthemarketby accommodatingtheincreaseinbanks’demandforliquidity.

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Theextentofbanks’useoftheECB’sdepositfacilityisausefulindicatoroftheimpairmentoftheflowofliquiditythroughoutthebankingsystem,especiallywhenthegroupofdepositingbanksisdifferentfromthegroup ofborrowingbanks.

AfurthertroublingindicationofthemalfunctioningofmoneymarketsrightaftertheLehmanbankruptcy camefrom cross-bordertransactions.

Beforethebankruptcy,cross-bordertransactionsaccountedfor60%ofallunsecuredovernightinterbanklending.

Rightafterthebankruptcy,thisproportiondroppedto50%.

Afallinthecross-borderflowofliquidityindicatesafragmentationoftheeuroareamoneymarketalongnationalbordersandthreatenstheimplementationofacommonmonetarypolicythroughouttheeuroarea.

TheECBreactedandsucceededincalmingmarkets,includingmoneymarkets,firstbyconductingtwomonetarypolicyoperationswithathree-yearmaturity,andthen,mostrecently,bycommittingtoremoveredenominationriskin countrieshavingsigned to anESMassistanceprogramme(theso-calledOutrightMonetaryTransactions,OMTsforshort).

Forexample,theshareofthecross-borderovernighttransactionsincreasedgraduallyfrom30%to50%followingthe OMTannouncement.

TheriseandfalloftheEURIBOR-OISspread,oftheuseoftheECB’sdepositfacilityandtheproportionofcross-bordertransactionsallindicatethatbanksaremorerisk-aversethantheywerebeforethefinancialcrisis.

Moneymarkets,especiallyunsecuredones,sufferfromcounterpartyrisk,thatis,thefearofnotbeingrepaid.

Accordingly,drivenbythedesiretoprotectandensurerepayment,transactionsinmoneymarketshavebecomebothmoreshort-termandsecured.

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Thereisnoofficialdataontheoverallsizeoftherepomarketintheeuroarea,althoughsurveysareregularlyconductedbyICMAandtheECB.

Accordingto thelatestICMAsurvey,thetotalvalueofrepocontractsoutstandingonthebooksofthe62participatinginstitutionswas€5.6 trillioninJune2012,downfrom€6.2trillioninDecember2011.

TheECB’sMoneyMarketStudyofDecember2012with172banksparticipatingshowsasimilardevelopment.

TheMoneyMarketStudyalsocomparesthedevelopmentofthesecuredwiththeunsecuredmarket.

Andindeed,whiletheunsecuredmoneymarkethassteadilycontracted since2007,thesecuredmoneymarkethashelditsgroundoverthesameperiod.

Another,morerecentandtroublingdevelopmentinthefunctioningofthemoneymarketsistheon-going investigationsintomanipulationsofkeymoneymarketreferencerates.

TheECBiscloselyfollowingthisdevelopmentandissupportingtheattemptstoreformreferencerates,giventheroletheyplayinthetransmissionofmonetarypolicy.

InourresponsetotheEuropeanCommission’spublicconsultation,whilestressingthatreferenceratesshouldremainprivatemarketinitiatives,wehavecalledforshort-termgovernancereformsto restoreandupholdthecredibilityofthesereferencerates,associatedwithlonger-termmeasuresinvolvingchangesinthecalculationmethodology.

In theshortterm,governancereformsandincreasedsupervisoryandregulatoryscrutinycanhelptorestorethemarket’sconfidencein

theintegrityofthebenchmarksand to ensuretheircontinuousviability.

Anappropriatebalancemustbefoundbetweenasoundproductionprocesswithadequatecontrolsandsafeguardsontheonehand,andcost-efficiencyforcontributingbanks onthe otherhand.

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AlsoitisimportantthatregulationisuniformlyappliedandenforcedwithintheEUtoavoidrisksoffurtherfragmentationinthemoneymarkets,andthatinternationalcoordinationissought.

In thelongerterm,abroaderoverhaulcanbeconceived,involvingchangesinthe calculationmethodologyandpossiblyotherchanges toreflectthestructuralchangesthathavetakenplaceintermsofthefunctioningofthemoneymarketsincetheonsetofthecrisis,suchastheshifttowardssecuredtransactions.

However,thisprocessshouldbeprimarilydrivenbythemarket,basedontheneedsofend-users,whilebeingsupportedbythepublicsector.

In lightofthefundamentalimportanceofmoneymarketreferencerates,wearecloselyfollowingthedevelopmentstaking place asregardstheshrinkingnumberofpanelmembersforestablishingEURIBORandEONIArates.

Giventheauthorities’commitmenttoaddressingtheshortcomingsrevealedintherate-settingprocess,itisintheinterestofmarketsthatbanksremaininthepanelwhiletheregulatoryframeworkisbeingamendedandbehaveasresponsiblemarketparticipants,thuspreventingpotentialdisruptioninthefunctioningofanimportantfinancialmarketsegment.

Relatedtotheshiftofmoneymarkettransactionstothesecuredsegmentistheuseofcentralcounterparties(CCPs).

In2012,CCPrepotransactionsaccountedfor55%ofallrepotransactions(upfrom50%in2010).

InadditiontotheuseofCCPs,tripartyrepohasbecomemoreimportant.

Tripartyrepoaccountedfor11%ofallrepotransactionsin2012(upfrom9%in2010).

IwillcomebacktoCCPsandtripartyrepolateron,butwouldfirstliketosaysomewordsoncollateralandhaircuts.

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Collateralofcourse isintended tohedgedefaultrisk,whilehaircutsareusuallyseenasbeingintendedtohedgetherisk onthatcollateral.

Intimesofmarketstresshowever,largeandsuddenmarginincreasescancreateself-reinforcing,pro-cyclicalspiralsofincreasingweakness,exacerbatemarketswingsandobligemarketdealers toprovidecollateraltosupportsecuredtransactionsjustwhenitismostcostlytodoso.

Two examplescometo mind.

First,whenthesovereigndebtcrisisintensified,haircutsongovernmentbondsunderstressalsowentupbecausetheriseinyieldsreducedtheircollateralvalue.

Forexample,whenthespreadonItalianten-yeargovernmentbondsrelativetocoreissuersrosetoover450basispointsinNovember2011,thehaircutforItaliangovernmentbondswasincreasedby500basispoints,leadingtoapostingofintradaymarginsabout12timesgreaterthaninanyotherprecedingmonthin2011.

Onthedayoftheincreasedhaircutalone,thespreadbetweenItalianandGermangovernmentbondsroseby60basispoints.

In addition,marginincreasesgenerallyreducetheamountthatareposellercanborrow,whichmightincreasetheseller’sprobabilityofdefault.

This cantriggeranegativefeedbackloop:increasesintheprobabilityof defaultmight causerepobuyers to increasethehaircutsimposedontheseller,whichreduces theamountthesellercan borrow (whenitneedstoborrow subsequently),andsoon.

TheECB/Eurosystemhasbeensuccessfulineasingmarkettensionsusingstandardandnon-standardtools.

However,theunderlyingstructuralproblemswhichrelate touncertaintyaboutrisk,whetherintheformofcounterparty,credit,liquidityorredenominationrisk,needtobesolved.

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Whenimplemented,theSingleSupervisoryMechanismwillplayakeyrolein comfortingconfidenceineuroarea banks andre-establishingcross-borderliquidityflowswithintheregion.

Marketre-integrationhasnowstarted.

Itwillsucceedonlyifitissupportedbycontinuedeffortsbygovernmentstobridgefiscalandcompetitivenessimbalances.

Wecanconsiderhow thefurtherdevelopmentofmarketinfrastructurescan beanimportantpartofthisprocess.

2.Theroleofmarketinfrastructures

In thesecondpartofmyremarkstoday,Iwouldlike toconsidertheroleofmarket infrastructures.

Marketinfrastructureshaveprovenveryresilient tothecrisis.

Resilientmarketinfrastructuresalsoplayanimportantroleinhelpingtoaddresssomeoftheissuesthathavebeenidentifiedinthemoneymarkets.

In thisregardwe canusefullybuildontheCPSS’analysisofareasforfurtherdevelopmentandforenhancingmarketinfrastructuresinrepomarkets.

TheCPSShasidentifiedsevenissuesdirectlyorindirectlyrelatedtorepomarketinfrastructurethatmayaffect theresilienceofrepomarkets.

Iwouldlike topick upontwo ofthesesevenissuesnowinthecontextofeuroareamoneymarkets.

Thefirstissueconcerns“effectiveprotectionagainstcounterpartycreditrisk”,whichIbelieve canbeaddressedtosomeextentbytheuseofCCPs,whilethesecondissuerelatesto“theinefficientuseof

(high-quality)collateralduetoconstraintswithinrepoclearingand

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settlementarrangements”,whichisbeingaddressedviacollateraloptimisationinitiatives.

a)Roleofcentralcounterparties(CCPs)

CCPsplayamajorrolein reducingcounterpartyrisk,therebymitigatingthepotentialrisksassociatedwiththedrying-upoffundingsources.

First,asindependentclearingagents,CCPsarewellpositionedtooffereffectiveprotectionagainstcounterpartyrisk throughtheapplicationofconsistentmarginrequirements to awiderangeofcounterpartiesandthroughmultilateralnettingandrisk sharing.

Second,CCPsalsoprovideenhancedtransparencyforthemarketstheyserve,whichinturnfacilitatesappropriateriskmanagementandmayalsohelptoreduceexcessiveleverage.

Third,asaresultofmultilateralnetting,CCPsmayalsofreeupcollateral.

Overall,providedthatitiswell-managedandin linewithapplicableregulatoryandoversightrequirements,aCCPcan beexpected toguaranteetradeexecutionunderawiderangeofmarketconditions,includingextremeorexceptionalscenarios.

Thissupportstradingalsoattimesofdistresswhenuncertaintyandriskaversionmaydisruptactivityandexacerbatevolatilityinmarkets.

Giventhebenefitsofcentralclearingformarketresilienceandfinancialstabilitymorebroadly,theECBwelcomes theoverall increasein theshareoftransactionsthatareclearedthroughCCPs.

ItalsosupportstheexecutionofrepotransactionsviaCCPs.

In Europe,marketincentivesseemsufficientlystrongto favouruseofCCPs,andwewouldnotseeaneedatthecurrentjuncturetoadvocateregulatoryactiontoimposecentralclearingofrepos,ashasbeenthecaseforOTCderivativetransactions.

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Atthesametime,anexpandeduseofCCPsshouldbe accompaniedbyeffectivesupervisionandoversight,whichalwaysneedstobekeptuptodateandin linewithnewmarketdevelopments.

TheglobalPrinciplesforFinancialMarketInfrastructures(PFMIs),developedjointlybyCPSSandtheInternationalOrganisationofSecuritiesCommissions(IOSCO)andpublishedlastApril,areakey pillarinthisregard.

MajorjurisdictionsaroundtheworldarenowupdatingtheirsupervisoryandoversightrequirementsforCCPsin response to thenewPFMIs,therebyleadingto anevenmorerobustset-upforCCPs.

AnothermajorstrandofworkcurrentlyunderwayatbothinternationalandEUlevelconcernsthedevelopmentofrecoveryandresolutionregimesforCCPs.

In theEU,theEuropeanCommissionhasrecentlyconsultedthepubliconapossibleframeworkfortherecoveryandresolutionoffinancialinstitutions otherthanbanks,coveringCCPsand othermarketinfrastructures.

WetrustthattheEuropeanframeworkwillbecloselyalignedwiththerespectiveglobal workoftheCPSSandIOSCO.

BesidesCCPs,anotherkeyinfrastructure to beconsideredinrelation totherepomarketisthetraderepository.

Traderepositoriesprovideacomprehensiveoverviewofthetransactionsinthemarketstheyserve,whichcontributes tobetterriskmanagement,publicsupervisionandoversightaswellasmarketdiscipline.

TheECBactivelysupportsthecurrentworktodevelopsuchacentraldatabasefortheEUrepomarket.

Itcouldbeestablishedinajointeffortbypublic authoritiesandthefinancialindustry.

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b)Collateraloptimization

Letmenowturn tothesecondpointoncollateraloptimisation.

AsrecognisedintheCPSSreport,the“efficientandflexibleuseofcollateralfacilitatesmarketparticipants’collateralmanagementandcancontributetothedevelopmentofliquidityandsmoothlyfunctioningrepomarkets”.

Thiswasconsideredtoholdtrueforrepomarketsinnormaltimesaswellasallowinganenhancementoftheresilienceofrepomarketsin timesofstress.

Theneedforefficientandflexibleuseofcollateralfacilitieshaseven becomegreater inthepastcoupleofyears,takingintoaccountthegenerallyincreasingdemandsfor collateralassetscomingfromvariousquarters.

Effortsarethereforebeingmadetoseekoutcreativeandinnovativewaystomakebetteruseofexistingcollateralin termsofmakingtheseassetsavailable,whenandwheretheyareneeded.

BoththeEurosystemandtheindustryhavetakenanumberofinitiativesinthisrespect.

Attoday’sconference,youwillprobablyhearmoreaboutthemanyinnovativesolutionsthatarecomingfromtheindustryinthisrespect,soIwilllimitmyselftosomekeyinitiativesinwhichtheECB/Eurosystemisdirectlyinvolved,althoughnaturallycooperatingcloselywiththeindustry.

ThefirstinitiativeinthisrespectofcourseisTARGET2Securities–T2S.

ThemainobjectiveofestablishingthissingleEuropeaninfrastructureforsecuritiessettlementis to reduceriskandincreaseefficienciesin thepost-tradeenvironment,especiallyasfaras cross-bordersettlementisconcerned.

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ThisgreatlyenhancedprocessfortransferringcollateralacrossnationalbordersinEuropewillin itselfbeahugebenefit tomarket

participants–bothto covercollateralisedmoneymarkettransactionsaswellascollateralisedcreditoperationswithcentralbanks.

Moreover,T2Sincorporatesseveralfeaturesthataimtohelpbanksoptimisetheircollateralmanagement.

OnceT2Sgoesliveforexample,bankswillnolongerneedtoholdmultiplebuffersofcollateralwhensettling in severalEuropeancountries andcaninsteadusethestate-of-the-artT2Sauto-collateralisationandself-collateralisationfeatures,alsoonacross-borderbasis.

ThesecondinitiativethatIwant tomentionistheimplementationofcross-bordertripartycollateralmanagementserviceswithintheEurosystemcollateralframework.

Tripartyservices,asyouknow,involveatripartyagent actingasafacilitatorbetweenthetwo partiestotherepo.

TripartyservicesarealreadyusedwithinthecurrentoperationalframeworkoftheEurosystem,althoughonlyonadomesticbasisandlimitedtoasmallnumberofeuroareacountries(Germany,Luxembourg,FranceandItaly).

In 2014however,thepossibilityto collateraliseEurosystemcreditoperationsbyusingtripartyservicesonacross-borderbasiswillbeintroduced,therebyallowingforgreaterefficienciesin collateralmobilisationandre-useofcollateralreceivedintripartyrepowiththerespectivecentralbanks oftheEurosystem.

Another initiativewithwhichtheECBisassociatedrelatestotripartysettlementinteroperability.

Whenwerefertothis,we shouldkeepinmindthatanimportantfeatureoftheEuropeanrepomarketset-upisthe(increasing) integration betweentherepoclearing,settlementandcollateralmanagementlayers.

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Whilethereisanincreasingintegrationacrosstheselayershowever,thereremainsinsomecasesacertainfragmentationthatlimitstraders’opportunitiesbasedonthelocationofthecollateral.

WorkinginclosecooperationwiththeEuropeanRepoCouncil(ERC),theinternationalcentralsecuritiesdepositories(ICSDs)havestartedtodevelopatripartysettlementinteroperabilitymodeltosupportsettlementofgeneralcollateraltradingclearedbyCCPs.

WiththeinteroperabilitybetweenthetwoICSDs’collateralmanagementsystems,marketparticipantswouldavoidthefragmentationoftheirliquiditypools.

TheECBisfullybehindthismarket-ledtripartyinteroperabilityinitiativebecauseofitscollateralpoolingbenefitsandefficiencies.

Moreover,itreducesthecostsfortripartyreposrelatedtocollateralmanagement,settlementandlegalcharges,andallowstradingto beexecutedregardlessofthelocationofthecollateral.

Non-discriminatory,risk-basedaccesstoandbymarketinfrastructuresisanimportantelementofthenewinternationalregulatoryframework.

Withmarketparticipantsincreasinglymovingto centralclearing,thebusinesscasefortripartyinteroperabilityisgrowing.

Furthermore,thenewCPSS-IOSCOprinciplesforfinancialmarketinfrastructureswerespecificallystrengthened to facilitateaccessandinteractionbetweensuchinfrastructures.

Someofthekeypartiesinvolvedinthistripartysettlementinteroperabilityinitiativehavestartedtoshowsignsofretreating inpastmonths.

WhiletheECBunderstandsthecomplexityofestablishingatripartyinteroperabilitymodelandthesubstantialeffortsandinparticulartheinvestmentcostsrequired to makeitwork,itwouldlike to stronglyurgeallpartiestocontinue to worktogether.

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Interoperabilitywillbringimportantbenefits– byallowingamoreefficientuseofcollateralbybringingtogetherseparatepoolsofliquidity.

TheECBremainsreadytocontinue to supportthetripartysettlementinteroperabilityinitiativeand tohelpbringtheprojectforward.

Concludingremarks

Letmeconclude.

Theresilienceandproperfunctioningofmarketinfrastructuresisof paramountimportancetoensurewell-functioningmoneymarkets.

Publicauthoritiesandcentralbankshavebothaninterestandanobligationtoensurethatmarketinfrastructureshaveahighlevelofsecurityandoperationalperformance.

Themarketinfrastructuresintheeuroareaareperformingwell

inthisrespectand,aswehaveheard,thereareanumberofinitiativesunderway to furtherenhance this(inparticularasregardsthecollateralisationprocesses).

Iwould,however,urgeindustryrepresentativestofurtherpursuethetripartyinteroperabilityproject,andseektofindways to addresstheissueswhichhaverecentlyappeared.

In particular,wheretheseissuesarenotgoingtobeaddressedbyT2S,Iwouldencouragetheindustrytofindasolutionnow.

Itisofgreatimportancethatcollateralcanflow freely,regardlessofitslocation.

Iamconfidentthatfurtherimprovementswillbemade.Thankyou.

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MichelBARNIER

TheEuropeanbankingunion,apreconditiontofinancialstabilityandahistoricalstepforwardforEuropeanintegration

LadiesandGentlemen,

Firstofall,Iwouldlike to thanktheEuropeanCorporateGovernanceInstitute,

andChairmanJörgenHOLMQUIST,forinvitingme.

Letmealsothank:

theNationalBankofBelgium,thehostofthisconference;

aswellastheUSSecuritiesandExchangeCommissionandColumbiaLawSchool.

LadiesandGentlemen,

Asyouknow,theCouncilofEuropeanFinanceMinistersreachedahistoricagreementlastweek.

MemberStateshaveagreed tohandoverthekeysupervisorytasks overtheirbanks totheEuropean CentralBank.ThisisthefirststeptowardstheBankingUnion.

TheECBwillbeinapositiontodetectriskstotheviabilityofbanks.Andrequirebankstotakethenecessaryactions.

Itwillbecompetenttograntandrevokelicencesforcreditinstitutions.Itwillensurecompliancewith capitalrequirements.

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ThisSingleSupervisoryMechanism(SSM)willbeagreatassetforfinancialstabilityinEurope.

BeforeIwillsayafewwordsonthemodalitiesoftheSSMandthenextstepsoftheBankingUnion,IwouldliketoexplainthekeyrationalefortheSSM.

I–TheSingleSupervisoryMechanismshouldbringthreemajorbenefitstoEurope

First,itisapreconditiontoputanendtothenegative feedbackloopbetweenbanksandsovereigns.

Between2008and2011,EUtaxpayersgrantedbanks€4,5trillioninloansandguarantees.

Thishashadveryconcreteconsequences.In somecountriesithasresultedinsoaringratesatwhichcountriescanfinancethemselvesonthemarketsandaseveredropinmarketconfidence.

Therefore,weneedtomovefromnational backstops to aEuropean backstop.

ThisisthepurposeoftheEuropeanStabilityMechanism.

ButthisnewfundwillonlybeabletorecapitalisebanksdirectlyonceallEuropeanbanks areproperlysupervised.

ThisiswhyanagreementontheSSMwassodeeplyneeded.

Second,we needtheSSMtoreducethefragmentationofthebankingsystem.

Thecurrentcrisishasledto are-nationalisationofbankactivities.

Withlesscross-borderfundingandmanylostopportunitiesforcitizensandbusinesses.

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Thedifferentiatedperceptionofrisksled todisparityofspreadsonsovereignbondsaswellasin theinterbankmarket.

Weallknow theconsequences:similarcompaniesindifferentpartsofEuropeoperatingonthesamemarketsmaybesubject to significantlydifferentcostsofborrowing.

TheSSMwillrestoreconfidenceintheEuropeanbankingsector.ItislikelytohaveapositiveimpactonthespreadsandconsolidatetheSingleMarket.

3.Third,weneedtheSSMtocompletethemonetaryunion.

Monetarypolicyisanimportanttooltodealwitheconomicshocks.Butitdependstoalargeextentonprivatebanks whichtransmitmonetaryimpulses to therealeconomy.

Ifwewantanefficientlyfunctioningmonetarypolicy,weneedasingleEuropeanbankingsystem.

AnditstartswithasingleEuropeansupervisorysystem.

ThereforetheSSMisnotjustawaytorestoreconfidenceanddealwiththecrisisintheshort-term.

Itisalsoawaytoconsolidateoureconomyinthelonger-term.

Forallthesereasons,thelastweek'sagreementisamajormilestoneinthehistoryofEuropean integration.

LetmenowmovetothecontentoftheSSMagreement.

II–HowwillthenewSingleSupervisoryMechanismwork?

Therearefiveimportantpointswhichdeserveattention.

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1.First,thescopeofthenewsupervision

SomeMemberStateswantedthenewsupervision toberestricted to"systemicallyimportant"banks.

Butweknowthatsmallormedium-sizebanks can endangertheentirefinancialsystem.Thefailuresofbanks like NorthernRock,DexiaorBankiaareclearremindersofthat.

Moreover,wecannothavetwo supervisorymechanismsforbanksoperatinginthesamemarket.Itwouldbeinherentlyunstable.

ThereforeIamgladthattheSSMwillcoverall6,000banks intheEuroarea.

TheECBwillsettherulesandbeabletoassumedirectlyallrelevantsupervisorytaskswheneveritconsidersitappropriate.Foreachoneofthese6,000banks.

However,itseemslogicalthattheECBfocusesitsdirectsupervisiononthebanks which cangeneratesignificantprudentialrisks– throughtheirsizeorriskprofile.

MemberStatesdecidedlastweektoclarifythedivisionoflabourbetweentheECBandnationalauthorities.

Withinaunifiedsupervisorysystem,theECBwillhavedirectresponsibilityforaround150bankswithassetsofmorethan30billionEuros,orrepresentingmorethan20%ofaMemberState’snationaloutput.

Otherbankswillstillbelookedafterprimarilybynationalsupervisorswithinthesameunifiedsupervisorysystem.TheECBwillhavethepowertostepindirectlyatanymoment,ifneedbe.

Besides,nationalsupervisorswillalsoremaininchargeoftaskslikeconsumerprotection,moneylaunderingandbranchesofthirdcountrybanks.

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Second,thegovernanceofthenewmechanism

BanksupervisionisanewtaskfortheECB.

Wehadtomakesurethatthistaskisclearlyseparatedfromthemonetarypolicy functionsoftheECB.

ThatiswhyweproposedtocreatewithintheECBaSupervisoryBoardalongsidetheGoverningCouncil.

In addition,toensurethedemocratic accountabilityofthenewsystemtheECBwillreporttotheEuropeanParliamentonitsroleasaSingleSupervisor.

Third,theparticipationofnon-EuroareaMemberStatesintheSSM

TheSSMisopentoallMemberStates,alsothoseoutside theEuroarea.

Thefinaldecision-makingbodyoftheECBistheGoverningCouncil,whichincludesonlyrepresentativesfromEuroarea MemberStates.

Therefore,itwasimportanttoallow non-EuroareaMemberStatestoparticipateintheSSMonanequalfooting.

ThecreationwithintheECBoftheSupervisoryBoardalongsidetheGoverningCouncilsolvesthisissue,withamediationpaneltoresolvedifferences.

Fourth,thecaseofnon-EuroareaMemberStateswhichdonotwishtoparticipateinthenewmechanism

Somecountrieshaveexpressedtheirwishnot to jointheSSMfornow.Inthiscontext,theUK,SwedenandtheCzechRepublichaveexpressedconcernsabouttheECB'snewpowers.

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In particular,theyquestionedtheECB'svotingrightswithintheEuropeanBankingAuthority(EBA).

Iunderstandtheseconcerns.Andlastweek'sagreementdoespreservetheinfluenceofnon-EurozoneMemberStateswithinEBA.

Accordingto thenewvotingmodalities,anyEBAdecisionswillhaveto

beapprovedbyamajorityofcountriesoutsidetheBankingUnion.

EBAwillhavethetaskoffosteringasinglerulebookforall27countriesofthesinglemarket.Itwillalsoworkonenhancingconvergenceofsupervisorypracticesviaasinglesupervisoryhandbook.

5.Finally,thetiming

Letmereiterateonepoint:aneffectiveSSMisaprerequisiteifwewanttoopenthewayfortheEuropeanStabilityMechanismtodirectlyrecapitalisebanks.

And tobreaktheviciouscirclebetweenbanksandsovereigns.Thereforewehadnotimetolose.

Thatsaid,theMemberStatesfoundlastweekthataphasing-inapproachwasnecessary.Thatiswhytheydecidedthatthenewmechanismwillbecomefullyoperational in March2014.

Andbeforethathappens,theECBwillbeabletotakeoversupervisionofailingbanks,attherequestoftheEuropean Stability Mechanism.

III–Finally,letmeconclude byaddingafew wordsonnextsteps.

TheSSMisagreatfirststeptowardsaproperBankingUnion.ButtheBankingUniondoes notstopwiththeSSM.

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First,theBankingUnionwillbuildonasinglerulebook.

Thesinglerulebookwillbeapplicable toall27MemberStates.Itwillincluderulesonkeyissuessuchas:

Capitalrequirements:Our"CRD4"proposaliscrucialforfinancialstability.Itiscurrentlybeing discussedinthesocalled"trilogues"andwehopetoreachanagreementverysoon.

AndourbanksarereadyforitasdemonstratedbystresstestsconductedbytheEuropeanBankingAuthority.

Butourmajorpartnersshouldalsofollow.StartingwiththeUS.Asthetwo largestfinancialmarketsintheworld,webothhaveaduty to settheexampleandshowleadership.Weneedtoensureacoordinatedapproachfortheimplementationoftheseimportantrules.

Depositguaranteeschemesareanotherimportantaspectofthesinglerulebook.WeneedtoensurethateachMemberStatehasafullyfundedschemeinplace.

WealsoneedrulesonBankresolution:OurproposalforacommonEuropeanresolutionframeworkprovidesthatshareholdersandcreditorsshouldbearthecostofresolutionbeforeanyexternalfundingisgranted.Andthatprivatesectorsolutionsshouldbefoundinsteadofusingtaxpayers'money.

Finally,thesinglerulebookcouldincluderulesonthestructureofthebankingsector.TheLiikanenreporthasproposedsolutionstoseparatedeposittakingfrommoreriskyactivities.Ourreflectioninthisfieldisstillon-going.

Secondly-theBankingUnionwillalsoneedasingleresolutionauthority.

TheSSMwillhelpuspreventcrises.Butwealsoneedtoanticipatethecaseswhereacrisiswouldnonethelessoccur.

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WeofcourseneedtoensurethateachMemberStatesetsupnationalfundsforresolutionanddepositguarantees.

Butafully-fledgedBankingUnionwouldrequiregoingevenfurtherandcreatingasingleresolutionauthority.

In caseofcross-borderfailures,itwouldbemoreefficientthananetwork

ofnationalresolutionauthorities.Thisisin particularneededsothatwecan ensurespeedyandcrediblereactions to addressingbankingcrises.

LadiesandGentlemen,

Withlastweek'sagreement,EUcountrieshavefulfilledthecommitment theymadeinJune.

TheSSMnowhastobediscussedintheEuropeanParliament.TherapporteursSvenGIEGOLDandMarianneTHYSSENhavealreadydoneagreatjob.

Iamconfidentthatthefinalagreementwillbereachedsoon.Thiswould begoodnewsforfinancialstability,forpublicfinancesintheEurozoneandfortheworldeconomy,whichwouldgetaboostfromareturnoffullconfidenceintheEurozone.

Iamalsoconfidentthat,infiveyears'time,theSSMwillbeconsideredasthekeysteptoputtingourfinancialhouseinorder.AndamilestoneinanewphaseofEuropean integration,whichshouldleadustoagenuinefinancial,budgetary,economicandpoliticalunion.

Thankyouforyourattention.

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JoséManuelDurãoBarroso,

PresidentoftheEuropeanCommission

StatementbyPresidentBarrosoontheCyprusPresidencyoftheCouncilEuropeanParliamentplenarysession/Strasbourg

Mr.President,PresidentChristofias,Honourablemembers,

IwanttostartbythankingandalsocongratulatingPresidentChristofias,andthroughhimallthepeopleandauthoritiesinvolvedintherunningoftheCyprusPresidency.

Iwanttopaytributetoday to Cyprusthat,asoneofoursmallestmemberstates,withitsparticulargeographicallocationanditselffacingimportantpoliticalandeconomicchallengesthesedays,hasproveditspro-Europeancommitment,professionalismandefficiencyduringitsCouncilPresidency.

Togetherwehavereachedimportantresultsduringthisperiod,andIamconvincedthatCypruswillcontinuetomakeanimportantcontributiontoourUnionbeyondits termofPresidency.

PresidentChristofias,thankyouverymuchforyourkindwordsregardingtheroletheCommissionand myselfhaveplayedin contributingto yourverysuccessfulPresidency.

Honourablemembers,

Ourdebatetodaygivesustheopportunity totakestockofwhathasbeenachievedsofar,andwhatisstillonthetable.

Duringsixmonthsnotallproblemscanbesolved.Notallfiles canbeclosed.Nevertheless,alotofimportantgroundworkhasbeendonein2012which, in thatsense,wasacrucialyear:

Crisis-hitEurozonecountrieshavemadeimportantprogressinbringingtheirbudgetsinorderandintacklingdeep-rootedstructuralproblems.

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Theyhavedonesowithdeterminationandresolve.Ateveryphase,they havebeendrivenforward,advisedandassistedbytheEuropeaninstitutions.Thisprocessneedstocontinue;

Theever-scepticalfinancialmarketshavetakennoteoftheseeffortsand acknowledgedthem;

Privateinvestorsarefindingtheirwayback to Eurozonecountriesinneed;

Competitiveness,notablyoftheleastcompetitivememberstates,isimproving,leadingtothegradualrebalancingtheEurozonesofarhaslacked;

Overallpublicfinancesareimproving,slowlybutsurely.

WehavesafeguardedtheintegrityoftheEurozone.Wehavestoppedtheexistentialthreathangingoverusearlier.

Ofcourse,wemustavoidanykindofcomplacency.Aslongasunemploymentremainsveryhigh,thecrisisiscertainlynotoveryet.And I'vebeenextremelyclearsayingthatwestillhaveacrisisin frontofus,namelyasocialcrisis,verydeepinsomeofourMembersStates.

Butwehaveturnedapageinthecrisis.Nomore,noless.Andwearenowreadytowritethenextchapteroftherecovery.

MrPresident,Honourablemembers,

Thisnextchapterwillbeaboutbuildingconfidencebyfurtherstrengtheningoureconomicgovernance,bycompletingthebankingunionandbyexploitingeverymeanspossibletocreategrowth– sustainablegrowth-andjobsand to addressthemostpressingsocialproblemsinourcountries.

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TheCommissionwillcontinuetotakethelead inthis.ThelinetheCommissionhasbeendefending,andwillcontinuetodefend,isofcourseaboutputtingourpublicfinancesinorder.

Becausewithoutthatthereisnoconfidence,withoutconfidencethereisnoinvestment,withoutinvestmentthereisnogrowth.Butthisisjustpartoftheanswer.

Wehaveatthesametimehighlightedhowimportantitistohavereformsforcompetitivenessandalsoinvestment,becauseinvestmentisindispensableforgrowth.

IwishallgovernmentsofEuropecouldsharethesameprioritytheCommissionisgivingto theneedfor investmentatEuropeanlevel.

Wewillcontinue to firmlydefendtheEuropeaninterest.

Andwewillcontinue to workhandinhandwiththisParliament.

TheEuropeanUnionanditsmemberstateshavetocontinueonthepath ofreform.Wehaveyettoprovethesustainabilityofthisprocess.LookingatthepastyearIfeelencouragedthatwewillbesuccessful.

Infact,thisisthemainlessonIdrawfromwhathappenedandfromwhatdidn'thappenoverthelastfewmonths:thosespeculatingagainsttheEurohaveunderestimatedthepoliticalcapitalthatisinvestedin it.

Letuscontinuetoprovethemwrong,andbewarenottodisinvestatsuchacrucialmoment,justwhenourinvestmentisstarting-andIunderline:startingtopayoff.Alotstill hastobedone.

ThisisalsowhyitiscrucialtocompleteourworkatEuropeanlevel.

DespitetheimportanteffortsdeployedbytheCyprusPresidencyandbymanyofyouintheEuropeanParliament,wehavenotbeenable tofinalisetheTwoPack.AndtheTwoPackisessentialtomakeprogressintheeconomygovernancewithinthecommunitymethod.

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Afteroverayearofnegotiations,withthirteentriloguemeetings,Ibelieveit'stime to concludeandsend,onceagain,thesignalthatEuropeiscapableofdecisiveaction.Thisis thefirstopportunitywehave to keepthereformmomentumgoing.

Likewise,wehavenothadthechancetobreakthedeadlock inthenegotiationsonthemultiannualfinancialframework,somethingbothParliamentandtheCommissionwouldhavewelcomed.

TheCyprusPresidencymade thefirstattempttoreachaconsensus.However,theconditionswerenotyetmet to reachagreement.

Clearly,thesehavebeenthemostdifficultandcomplexbudgetnegotiationsever.

Now,negotiationshavereachedapointwhere,Imustsay,furthercutsriskweakeningtheEuropeanUnionassuch,whileourcommongoalshouldbe to strengthenourUnion.

TheMFF isafundamentalEuropeantoolforgrowth,for investment,forsolidarity -concretesolidarity.TheCommissionwillcontinue to worktowardsanagreementbetweenmemberstatesandalsobetweenourinstitutions.

WehavehighlightedconstantlythattheapprovalofthisParliamentisindispensable.Andweneedthatagreement.

Wehaveseen,intheextremelydifficultnegotiationsontheEuropeanUnion'sbudgetfor2013andtheamendingbudgetfor2012,where,bytheway,theCypruspresidencymadeatremendousandattheendsuccessfuleffort -negativeforuswouldbe,ifwecouldnothave thepredictabilitythatamultiannualbudget cangiveforinvestmentin Europe.

AndIwillalsokeepfightingforthetrulyEuropeanpartsofthepackage,notablythoseaimedatgrowthandjobs.

ButasIsaid,wearenotyetthere.Furthereffortswillbeneededtobring

positionstogether.

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Thiswillbedifficultbutcertainlynotimpossible.

ThatwasalsoclearfromthedebateontheroadtowardsaEuropeanbankingunion.

ThecentrepieceoftheCypriotPresidencywastomakeprogressontheCommission'sproposalsforaSingleSupervisoryMechanism.Andinthis,wehaveachievedasignificantbreakthrough,bothontheCouncilandontheParliamentside.ParliamenthasworkedonthisveryefficientlyandtheThyssenandGiegoldreportsareconstructiveandsupportive,andinverymanypointsrathersimilartotheapproachtakenbytheCouncil.

Ihopemakingthefinalstepforformaladoptionisamatterofweeks,notmonths.

Nextshouldbeaswiftconclusiononthependingproposalsonbankcapitalrules,bankresolutionanddepositguarantees.

FollowingtheadoptionoftheSSMtheCommissionwillmakeaformallegislativeproposalforasingleresolutionmechanisminthebankingsectorbeforethesummer.

Iconsiderthisamatterofutmostpoliticalpriority.

ThisproposalwillbebynomeanslessimportantthantheSSM,andneitherwillitbelesscomplextoframeinlegal,technicalandpoliticalterms.

Atthesametime,wehavenotneglectedto preparethegroundforthemajordebateneededbeforetheEuropeanelections:inpresentingourBlueprintonaDeepandGenuineEMU,theCommissionstuck itsneckout.Thatisourrole.

It'stheonlywayforEuropetokeepitsfocusonthelongroadstillahead,toprovidecoherenceandalso to structuretoourday-to-dayefforts.

Thefocusthatwehad to give tothefinancialsector,thefiscalsituationandtoquestionsofeconomicgovernancedoesnotmeanEuropeislosing

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sightoftherealeconomy.Onthecontrary,realeconomyisandshouldbeourfirstpriority.

Andinthissensethecontribution,inthelastsixmonths,madebytheCypruspresidency,needstobehighlightedhere:

Aftersome30yearsofdebate,andbasedonCommissionproposals,anagreementwasfinallyreachedbetweenmemberstates-evenifnotall-ontheSingleEuropean Patent;

WehaveconcludednegotiationsonaFreeTradeAgreementwithSingapore,andyouhavegiventhefinalconsent totradedealswithCentralAmerica,andwithColombiaandPeru;andwehaveagreed tolaunchnegotiationsforaFreeTradeAgreementwithJapan.

Wetookstock oftheimplementationoftheDigital AgendaforEurope,halfwaythroughits5-yearstrategy,andfoundthatithad achievedmanyofitstargetsandisontracktomeetmostoftheothers;

TheCommissionpresenteditsproposalforaCouncilRecommendationonYouthGuarantees.FirstdiscussionshavetakenplaceintheCouncil.Itiskeythatweprioritiseforjobandtrainingopportunitiesforthosehithardestbythecrisis.

ThisisamatterwhereMemberStates cangiveaconcretedemonstrationthattheyarecommitted to growthandtotackletheveryseriousproblemofunemployment,namelyyouthunemployment;

AverygoodcontributionoftheCyprusPresidencywastheLimassoldeclaration,givinganewimpetustoourintegratedmaritimepolicy.Thisisamatterveryclose to myheart.IwashappytobeinCyprusforthatoccasionandIbelievethiscanbearealcontributiontoboostgrowth;

Finally,andIcouldofcoursequoteothermatters,butamongthemostimportant,progresswasalsomadeontheAsylum Packageandithasbroughtusveryclose to concludingthediscussionsontheCommonEuropeanAsylumSystemandwithyourgroundwork,importantstepshavebeenachievedinnegotiatingwiththisHouseontheSchengen

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Governancepackage,preparingthegroundforanagreementinearly2013.

MrPresident,Honourablemembers,

Itrulybelievethatoverthelastfewmonths,whilemanyimportantand difficultchallengesremain,notablythesocialones,wehaveregainedtrust,wehavereaffirmedcomposureandrecoveredmomentum.

TheCyprusPresidency canthereforelookbackwithsatisfactionatanumberofimportant achievementsineconomicallyandsociallydifficult times.

Duringtheselastsixmonths,CyprushasshownitsEuropeancommitmentinholdingitsfirstCouncilrotatingPresidency.

Itwillbeourjob overthemonths to come,throughseriousefforts,toshowthatEuropeworksanddelivers-eachofuswithhisorherownroletoplay,butneverforgettingourcollectiveresponsibilityasaUnion.

Ithankyouforyourattention.

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


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TheEuropeanBankingUnion

Towardsabankingunion

InJune2012,EUleadersagreedtodeepeneconomicandmonetaryunionasoneoftheremediesofthecurrentcrisis.

Atthatmeeting(EuropeanCouncilof28/29June),theleadersdiscussedthereportentitled'TowardsaGenuineEconomicandMonetaryUnion',preparedbythePresidentoftheEuropeanCouncilinclosecollaborationwiththePresidentoftheEuropean Commission,theChairoftheEurogroupandthePresidentoftheEuropeanCentralBank.

Thisreportsetoutthemainbuildingblockstowardsdeepereconomicandmonetaryintegration,includingbankingunion.

1.Whatdowe wanttoachievewithbankingunion?

1.1Whatisthebankingunionthatwewishtoimplement?

Whenthefinancialcrisisspread toEuropein2008,wehad27differentbankingregulatorysystemsinplace,allbasedonnationalrulesand nationalrescuemeasures.

SomeformofEuropean coordinationexistedbutitwasrelated toexchangesof informationandrather informalcooperationprocedures.

Thiswasnotsufficienttorespond tothefinancialsectorcrisisanditscontagiontosovereigns.

Afully-fledgedbankingunionwillbekey to supportingeconomicandmonetaryintegration.

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  • Pooledmonetaryresponsibilitieshaveindeedspurredclosereconomicandfinancialintegration,andincreasedthepossibilityofcross-bordereffectsintheeventofbankcrises.

  • CommonandmoreintegratedbankingsupervisionfortheEuroareaisoneimportantpillartomakesurethatsupervisionabidesbythehighest standards.

  • ThiswillbuildthenecessarytrustbetweenMemberStateswhichisaconditionforusingcommonbackstops,notablythedirectrecapitalizationbytheESMofbanks.

  • OncecommonsupervisionfortheEuroareaisinplace,theCommission'sintentionis tobuildonexistingproposalsfordepositguaranteeschemesandbankrecoveryandresolution,movingtowardsamoreintegratedapproachalsointheseareas.

    • Whydowewanttoachievethisbankingunion?

      • TobreakthelinkbetweenMemberStatesandtheirbanks:BetweenOctober2008andOctober2011,Europeancountrieshavemobilised€4.5trillioninpublicsupportandguarantees to theirbanks.

  • Thisisnotacceptable.

  • Withitsproposaloncapitalrequirementsforbanks ("CRDIV"),theCommissionwantstoensurethatthe capitalofbanking institutionsissufficientbothinquantityandinqualitytofacefutureshocks.

  • ThefutureEuropeanStabilityMechanism(ESM)couldhavethepossibilitytorecapitalisebanksdirectlyonceasinglesupervisorymechanismisestablishedforbanks intheeuroarea.

  • Thiswillcontributetobreakingtheviciouscirclebetweenbanks andsovereignsastheESMloanswouldnotaddtothedebtburdenofcountriesfacing intensemarketpressure.

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    • Torestorethecredibilityofthefinancialsector:TheproposalsalreadytabledbytheEuropeanCommissiontoimproveregulationofthefinancialsystemrepresentasolidbasistogofurtherintheharmonisationoftherules,whichwillbe madeeasier intheframeworkofabankingunion.

  • TheEuropeansinglesupervisorysystemforbankswillenableafullyrigorousandindependentsupervisionofourbankingsector.

  • Givingto theECBtheultimateresponsibilityforsupervisionofbanks intheeuroareawillcontributetoincreasingconfidencebetweenthebanksandinthiswayincreasefinancialstabilityin theeuroarea.

    • Topreservetaxpayers'money:InearlyJune,therewereproposedEUrulesforbankrecoveryandresolution.

  • Tomakesurethatsupervisoryauthoritieshaveallthetoolstheyneed todealwithbankfailureswithouttaxpayers'money.

  • Thisalsoaimstoprotecttaxpayers'moneyanddeposits.

    • Tomakesurethatbanksservesocietyandtherealeconomy:Withourfinancialregulationagenda,weareimprovingfinancialmarkets'effectiveness,integrityandtransparencyinordertomake surethatthefundsavailablefinancetheeconomy.

  • 2.EUbankingunion:whathavewedonesofar?

  • Foreachofthefourpillarsofthebankingunion(i.e.singlerulebook;supervision;depositguarantees;andbankresolution),theCommission hasalreadytakenactionprovidingasolidbasisfordevelopingthemfurther.

  • 2.1Measurestoallowformoreintegratedbankingsupervision

  • ThreeEuropeansupervisoryauthorities(ESAs)startedworkon1January2011to provideasupervisoryframework:

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      • TheEuropeanBankingAuthority(EBA)whichdealswithbankingsupervision,includingthesupervisionoftherecapitalisationofbanks,aswellasthecoordinationanddisputesettlementofnationalsupervisors.

      • TheEuropeanSecuritiesandMarketsAuthority(ESMA)which dealswiththesupervisionofcapitalmarkets.

      • .c.TheEuropeanInsuranceandOccupationalPensionsAuthority(EIOPA),whichdealswithinsurancesupervision.

  • The27nationalsupervisorsarerepresentedinallthreesupervisoryauthorities.

  • TheirroleistocontributetothedevelopmentofasinglerulebookforfinancialregulationinEurope,solvecross-borderproblems,preventthebuild-upofrisks,andhelprestoreconfidence.

  • In addition,theEuropeanSystemic RiskBoard(ESRB) hasbeentaskedwiththemacro-prudentialoversightofthefinancialsystemwithintheUnion.

  • ThisnewfinancialsupervisionframeworkhasbeeninplacesinceNovember2010.

  • 2.2Towardsasinglerulebookforthebankingsector

  • TheEuropeanCouncilofJune2009unanimouslyrecommendedestablishingasinglerulebookapplicabletoallthefinancialinstitutionsinthesinglemarket.

  • Withitsproposaloncapitalrequirementsforbanks ("CRDIV"),theCommissionlaunchedtheprocessofimplementingfortheEuropeanUnionthenewglobalstandardsonbankcapitalagreedatG20level(mostcommonlyknownastheBaselIIIagreement).

  • Itisrecalledthatbankinginstitutionsenteredthecrisiswithcapitalthatwasinsufficientbothinquantityandinquality,leadingtounprecedentedsupportfromnationalauthorities.

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    Europeisplayingaleadingroleonthismatter,applyingtheserulestomorethan8,000banks,representing53%ofglobalassets.

    TheCommissionproposalsarecurrentlybeingdiscussedbytheCouncilandtheEuropeanParliamentandtheCommissionisdeterminedthatanagreementbereachedshortly.

    WiththislegislationtheCommissionalsowantstosetupagovernanceframeworkgivingbanksupervisorsnewpowers tomonitorbanks morecloselyandtakeactionthroughpossiblesanctionswhentheyspotrisks,forexampletoreducecreditwhenitlookslikeitisgrowingintoabubble.

    Europeansupervisorswouldinterveneinsomecases,forexamplewhen nationalsupervisorsdisagreeincross-bordersituations.

    Further,thecompletionofthefinancialregulationagendaformsintegralpartofthebankingunion.

    2.3Actiontakentooffermoreprotectiontobankdepositors

    ThankstoEUlegislation,bankdepositsinanyMemberStatearealreadyguaranteedupto€100,000perdepositorifabankfails.

    Fromafinancialstabilityperspective,thisguaranteepreventsdepositorsfrommakingpanicwithdrawalsfromtheirbanks,therebypreventingsevereeconomicconsequences.

    In July2010,theCommissionproposed to gofurther,withaharmonisationandsimplificationofprotecteddeposits,fasterpay-outsandimprovedfinancingofschemes,notablythroughex-antefundingof depositguaranteeschemesandamandatorymutualborrowingfacilitybetweenthenationalschemes.

    Theidea behindthisisthatifanationaldepositguaranteeschemefindsitselfdepleted,it canborrowfromanothernationalfund.

    Thiswouldbethefirststeptowardsapan-EUdepositguaranteescheme.

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    In managinganumberofbankcrisesoverrecentyears,nationalauthoritieshaveoftencreatedanewstructureoutofthefailingbankandtransferredsomecriticalfunctionsofthebanktothisstructure,suchassafeguardingdeposits.

    Theseresolutionmechanismsmake surethatdepositorsneverloseaccess to theirsavings(forexampleinthecaseofNorthernRock,thebankwassplitintoagoodbank,whichcontainedthedepositsandgoodmortgageloans,andaso-called"badbank"winding downtheimpairedloans).

    3.Bankingunionandbankrecapitalisation

    TheEUhasalreadytakenactionasregardstherecapitalisationofbanks inseveralways.

    Forinstance,extensivefinancialsectorconditionalityhasbeenincludedinthepolicyrequirementsaddressedtoMemberStatesthathavereceivedinternationalfinancialassistance.

    Withrespect tothebankingsector,therequiredpolicymeasuresconsist,ontheonehand,oftheorderlywinding-downofnon-viableinstitutionsand,onthe otherhand,oftherestructuringofviablebanks.

    Highercapitalrequirements,recapitalisationsofbanks,stresstests,deleveragingtargetsaswellasenhancingtheregulatoryandsupervisoryframeworkshavealsobeenpartofthepolicyinitiatives.

    Whilenotspecifictoprogrammecountries,thesestabilisationmeasuresaremosteasilyimplementedinthecontextofinternationalfinancialassistance.

    TheEuropeanFinancialStabilityFacility(EFSF)canprovideloanstonon-programmeeuroarea MemberStatesforthespecificpurposeofrecapitalisingfinancialinstitutions,withtheappropriateconditionality,institution-specificaswellashorizontal,includingstructuralreformofthedomesticfinancialsector.

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    Asinglesupervisorymechanism

    On12September2012theEuropeanCommissionproposedasinglesupervisorymechanism(SSM)forbanksledbytheEuropeanCentralBank(ECB)inordertostrengthentheEconomicandMonetaryUnion.

    Thesetofproposalsisafirststeptowardsanintegrated“bankingunion”whichincludesfurthercomponentssuchasasinglerulebook,commondepositprotectionandasinglebankresolutionmechanisms.

    Theproposalsconcern:

    AregulationgivingstrongpowersforthesupervisionofallbanksintheeuroareatotheECBandnationalsupervisoryauthoritiesi.e.thecreation ofasinglesupervisorymechanism;

    AregulationwithlimitedandspecificchangestotheregulationsettinguptheEuropeanBankingAuthority(EBA)toensureabalanceinitsdecisionmakingstructuresbetweentheeuroareaandnon-euroareaMemberStates;

    AcommunicationoutliningtheCommission'soverallvisionforrollingoutthebankingunion,coveringthesinglerulebook,commondepositprotectionandasinglebankresolutionmechanism.

    TheEuropeanCommissionproposesnew ECBpowersforbankingsupervisionaspartofabankingunion

    Proposalsforasinglesupervisorymechanism(SSM)forbanksintheeuroareaareanimportantstepinstrengtheningtheEconomicandMonetaryUnion(EMU).

    In thenewsinglemechanism,ultimateresponsibilityforspecificsupervisorytasks relatedtothefinancialstabilityofallEuroareabankswillliewiththeEuropeanCentralBank(ECB).

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


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    Nationalsupervisorswillcontinuetoplayanimportantroleinday-to-daysupervisionandinpreparingandimplementing ECBdecisions.

    TheCommissionisalsoproposingtodaythattheEuropeanBankingAuthority(EBA)developaSingleSupervisoryHandbooktopreservetheintegrityofthesinglemarketandensurecoherenceinbankingsupervisionforall27EUcountries.

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


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    CertifiedRiskandComplianceManagementProfessional (CRCMP)distancelearningandonlinecertificationprogram.

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

    Theall-inclusivecostis $297.Whatisincludedintheprice:

    Theofficialpresentationsweuse

    inourinstructor-ledclasses(3285slides)

    The2309slidesareneeded for theexam,asallthequestionsare basedon theseslides.Theremaining976slidesareforreference.

    Youcanfindthecoursesynopsisat:

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

    Upto3OnlineExams

    Youhaveto passoneexam.

    Ifyoufail, youmuststudytheofficial

    presentationsandtryagain,but youdonotneedto spend money.Upto 3examsareincludedintheprice.

    To learnmoreyoumayvisit:

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

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

    PersonalizedCertificateprintedinfullcolor

    Processing,printing,packingand postingto yourofficeorhome.

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


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    D.TheDoddFrankActandthenewRiskManagementStandards(976slides,includedinthe3285slides)

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

    What doesitmeanforriskandcompliancemanagementprofessionals?Itmeansnewchallenges,newjobs,newcareers,andnewopportunities.

    Thebillestablishesnewrisk managementandcorporategovernance principles,setsupanearly warning

    systemto protect theeconomyfrom futurethreats,andbringsmore

    transparencyandaccountability.

    ItalsoamendsimportantsectionsoftheSarbanesOxley Act. Forexample,itsignificantlyexpandswhistleblowerprotectionsunder the SarbanesOxleyActandcreatesadditionalanti-retaliationrequirements.

    Youwill findmoreinformation at:

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

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


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