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

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P age |1

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

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

Top10riskandcompliancemanagementrelatednewsstoriesandworldeventsthat(forbetterorforworse)shapedthe week'sagenda,andwhatisnext

DearMember,

Doyouknow whatiscontagiousness?

“Wedistinguishbetweencontagiousness(the

shareoftotalbankingassetsrepresentedbythosebanks thataspecificbankbringsdownbycontagion)andvulnerability(thenumberofbanksbywhichabankisbroughtdownbycascadingfailures).”

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

Butthisissuperb!!!Whowrotethat?

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

Areyougoodinmathematics?Iftheanswerisyes,youwillenjoyNumber

10.Istartedmycareerasamathematician,butittookme4hourstoreadthepaper.Itisabsolutelybrilliant.

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

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P age |2

Ihavealongflighttomorrow,andguesswhat…IhaveprinteditandIwilltakeitwithme,toread itagain.

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

Oh,no,hebelievesthatmyproblemiscalledoccupationalpsychosis …heiswrong…

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

Afterthisanalysis,Ihavedecidedwhattoread duringtheflight:Thepaper“ContagiousnessandVulnerabilityin theAustrianInterbankMarket”

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

Yes,Idid,Iremembernow.

ReadmoreatNumber10below.

Welcome totheTop10list.

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

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GovernorDanielK.Tarullo

AttheCornellInternationalLawJournalSymposium:TheChangingPoliticsofCentralBanks,NewYork,NewYork

InternationalCooperationinFinancialRegulation

NextmonthmarksthefifthanniversaryofthefailureofBearStearns--inretrospect,thebeginningofthemost acutephaseofthefinancialcrisis.

GabrielBernardino,ChairmanofEIOPA

IMD2andSolvencyII–Theroadtobetterpolicyholderprotectionandfinancialstability

WorkshoporganisedbytheEuropean FederationofInsuranceIntermediaries(BIPAR)Brussels

SubmittingaSuspiciousActivityReport(SAR)withintheRegulatedSector

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

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

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

FinancialStabilityBoardreportstoG20onprogressoffinancialregulatoryreforms

TheChairmanofthe FinancialStabilityBoard(FSB)reported to theG20FinanceMinistersandCentralBankGovernorsonprogressinthefinancialregulatoryreformprogramme.

Financialregulatoryfactorsaffectingtheavailabilityoflong-terminvestmentfinance

ReporttoG20FinanceMinistersandCentralBankGovernors

ThemostimportantcontributionoffinancialregulatoryreformstoLTinvestmentfinanceis to promoteasafer,sounderandthereforemoreresilientfinancialsystem.

Ifimplementedintimelyandconsistentmanner,thesereformswillhelprebuildconfidenceintheglobalfinancialsystem,whichwillenhanceitsability to intermediatefinancialflowsthroughthecycleandfordifferentinvestmenthorizons.

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

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Keynote

JamesR.Doty,Chairman

FloridaBarAssociation31stAnnualFederalSecuritiesInstitute,MiamiBeach,FL

“Today,Iwouldliketo talktoyouaboutsomeofthePCAOB'sinitiativestoenhancetherelevance,credibilityandtransparencyoftheaudittopromotehighqualityfinancialreporting.

Wemeetinthemidstofarobustand

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

StrategicGoals2013to2016

TheSwissFinancialMarketSupervisory

AuthorityFINMAisaninstitutionunderpubliclawwithitsownlegalpersonality.

ItisresponsibleforimplementingtheFinancialMarketSupervisionActandfinancialmarketlegislation.

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

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

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P age |6

ManuelSánchez:Mexico’seconomicoutlookandchallenges

RemarksbyMrManuelSánchez,DeputyGovernoroftheBankofMexico,attheConference

“Regulatoryreform,theglobaleconomicoutlook,andtheimplications

forMexico’sfinancialsector”,organizedbytheInstituteofInternationalFinanceandBanorte,MexicoCity

“TheSECSpeaksin2013”

CommissionerDanielM.Gallagher

U.S. SecuritiesandExchangeCommissionWashington,D.C.

ContagiousnessandVulnerabilityin theAustrianInterbankMarket

Claus Puhr,ReinhardtSeliger,MichaelSigmund,Oesterreichische Nationalbank,FinancialMarketsAnalysisandSurveillanceDivision

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

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

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

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GovernorDanielK.Tarullo

AttheCornellInternationalLawJournalSymposium:TheChangingPoliticsofCentralBanks,NewYork,NewYork

InternationalCooperationinFinancialRegulation

NextmonthmarksthefifthanniversaryofthefailureofBearStearns--inretrospect,thebeginningofthemostacutephaseofthefinancialcrisis.

Thecross-borderdimensionsofthecrisisitselfandtheglobaleffectsoftheGreatRecessionthatfollowedprovokedamajoreffort tostrengtheninternationalcooperationinfinancialregulation.

Whileagooddealhasalreadybeenaccomplished,this

eveningIwillsuggestthenextstepsthatwouldbemostuseful in

advancingglobalfinancialstability.

Ofcourse,thefashioningofaninternationalagendarequiresaclearunderstandingofthe overallregulatoryaimsofparticipatingnationalauthorities.

Hereiswhereinternationalregulatorycooperationlinkstothesubjectofthisconference--ifnotquitethechangingpoliticsofcentralbanks,thenatleasttheirchanging policy goalsinthewakeofthefinancialcrisis.

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

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Almostbydefinition,systemiccrisesrevealfailuresacrossthefinancialsystem,frombreakdownsin riskmanagementatmanyfinancialfirmstoseriousdeficienciesingovernmentregulationoffinancialinstitutionsandmarkets.

Whiletherecentcrisiswasnoexception,ithaspresentedparticularchallengestothepolicyfoundationsofcentralbanks,especiallythoseliketheFederalReservethatcarryoutregulatorymandatesalongsidetheirmonetarypolicymissions.

SoIbeginwithsomeremarksonthenatureofthosechallenges,beforeturningtoadiscussionofhowchangesinapproachshouldinforminternationalcooperationin financialregulation.

CentralBanks andtheFinancialCrisis

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

So,forexample,regulatorsbecameprone to placetoomuchconfidenceinthe capacityoffirmstomeasureandmanagetheirrisks.

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

Yetthebreadthanddepthofthefinancialbreakdownsuggestthatithasmuchdeeperroots.

In manyrespects,thiscrisiswastheculminationoffundamentalshiftsinboththeorganizationandregulationoffinancialmarketsthatbeganinthe1970s.

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

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

Thisregulatoryapproachfosteredacommercialbankingsystemthatwas, forthebetterpartof40years,quitestableandreasonablyprofitable,thoughnotparticularlyinnovativeinmeetingtheneedsofdepositorsand borrowers.

In the1970s,however,turbulentmacroeconomicdevelopmentscombinedwith technologicalandbusinessinnovations toproduceanincreasinglytightsqueezeonthetraditionalcommercialbankingbusinessmodel.

Thesqueezecamefromboththeliabilitysideofbanks'balancesheets,intheformofmoreattractivesavingsvehiclessuchasmoneymarketfunds,andfromtheassetside,withthegrowthofpublic capitalmarketsandinternationalcompetition.

Thelargecommercialbanking industrythatsawbothitsfundinganditscustomerbasesunderattacksoughtremovalorrelaxationoftheregulationsthatconfinedbankactivities,affiliations,andgeographicreach.

Whilesupervisorsdifferedwithbanksonsomeimportantparticulars, theyweresympathetictothisindustryrequest,inpartbecauseofthepotentialthreattotheviabilityofthetraditionalcommercialbankingsystem.

TheperiodofrelativelegalandindustrystabilitythathadfollowedtheNewDealthusgavewayinthe1970stoanearly30-yearperiodduringwhichmanyprevailingrestrictionsonbanks wererelaxed.

Agoodnumberwereloosenedthroughadministrativeactionbythebankingagencies,butimportantstatutorymeasuresheadedin thesamedirection.

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

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

ButinsweepingawaytheremnantsofonekeyelementoftheNewDealregulatorysystem,neitherGramm-Leach-Blileynorfinancialregulatorssubstitutednewregulatorymechanismstomatchthewholesalechangesinthestructureofthefinancialservicesindustryandthedramaticgrowth ofnovelfinancialinstruments.

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

MicroprudentialRegulation

Thefirstchallengeposedbythecrisiswas totraditional,microprudentialregulation,whichfocusesonthesafetyandsoundnessofeach prudentiallyregulatedfirm.

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

Buttheshortcomingsofpre-crisisregulatoryregimeshavebeenofconcerntoallcentralbanks.

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

Risk-weightsweretoolow forcertaintradedassetsthathadproliferatedascreditand capitalmarketsintegratedmorethoroughly.

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

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In somecases,thearbitrageopportunitiespresentedbyexistingcapitalrequirementswereanincentiveforsecuritizationand othercapitalmarketsactivities.

Theexposurescreatedbyoff-balance-sheetactivitiessuchasstructuredinvestmentvehicles(SIVs)werebadlyunderweighted.

Minimumcapitalratioswerenothighenoughand,inmeetingeventhoseinadequaterequirements,firmswereallowedtocountliabilitiesthatdidnotreallyprovidetheability to absorblossesandstillmaintainthefirmsasviable,functioningintermediaries.

Therehasalreadybeenasubstantialresponsetothischallenge.

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

Thecommitteealsohascreatedacapitalconservationbufferandintroducedaninternationalleverageratio.

TheseBasel2.5andBaselIIIreforms eitherhavebeen,orsoonwillbe,implementedintheUnitedStatesandmostothercountriesthatarehometointernationally activebankingfirms.

Also,theBaselCommitteehasjustrecently adoptedtheLiquidityCoverageRatio(LCR),afirststepinaddressingliquidityproblems.

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

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

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AndtheprovisionoftheDodd-FrankActpopularlyknownas theCollinsAmendmentensuresthatbankingorganizations cannotuse

models-basedapproaches to reducetheirminimum capitalbelowgenerallyapplicable,morestandardizedrisk-basedratios.

MacroprudentialRegulation

Asecondchallengeforcentralbanksisthatthecrisisrevealedtheneedforamuchmoreactiveset ofmacroprudentialmonitoringandregulatorypolicies--thatis,areorientationtowardsafeguardingfinancialstability throughthecontainmentofsystemicrisk.

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

Onthecontrary,systemicriskhadalsocometoseemmoretheoreticalthanrealtomanyacademicsandfinancialmarketparticipants.

Evenmostofthoseinsideandoutsidetheofficialsectorwhoarguedforstrongercapitalorotherprudentialstandardsdidnotappreciatethedegreetowhichthesecondarymortgagemarkethadturnedintoahouseofcards.

Still,regardlessofformalmandates,centralbanks arebetterpositionedthanmostothergovernmentagenciestoseeandevaluatetheemergenceofassetbubbles,excessiveleverage,andothersignsofpotentialsystemicvulnerability.

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

Similarly,systemicrisksandtoo-big-to-failproblemscanincreaseiflarge,highlyleveragedfirmsmayoperateoutsidetheperimeterof

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

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statutorymicroprudentialoversight,aswasthecasepriorto2008withthelarge,free-standinginvestmentbanksintheUnitedStates.

Andmarketdisciplinewillbebadlycompromisediffinancialmarketparticipantsbelievethataninsolventcounterparty cannotberesolvedinanorderlyfashionandthusislikelytoreceivegovernmentassistanceunderstress.

Hereagain,domesticandinternationaleffortshavealreadyproducedsignificantreformprograms,thoughimplementationofsomeoftheseprogramsislessadvancedthanBasel2.5andBaselIII.

Domestically,theFederalReserve'sannualstresstestsexaminetheeffectsofunexpectedmacroeconomicshocksonassetclassesheldwithinallmajorregulatedfirms.

TheDodd-FrankActgavetheFinancialStabilityOversightCouncil(FSOC)authoritytobringsystemicallyimportantfirmsthatarenotalreadybankholdingcompanieswithintheperimeterofFederalReserveregulationandsupervision.

TheFSOCis activelyconsideringseveralfirmsforpossibledesignation.

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

Internationally,theBaselCommitteehasagreedtoaregimeofcapitalsurchargesforlargebanksbasedontheirsystemicimportance.

Thereisalsoaninitiative toparallelU.S.efforts to identifynon-banksystemicallyimportantfirms.

TheBaselCommitteeandtheFinancialStabilityBoardhavedevelopedinternationalprinciplesforresolutionauthority,thoughmostoftherestoftheworldisbehindtheUnitedStatesinactuallyimplementingthoseprinciples.

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

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Butmeetingthemacroprudentialchallengewillrequiremeasuresbeyondamorecomprehensive,cross-firmapproachtomicroprudentialregulation.

Muchacademicandpolicy workofthepastseveralyearshasrevivedandelaboratedthepreviouslysomewhatheterodoxviewthatfinancialinstabilityisendogenous tothefinancialsystem,oratleastthekindoffinancialsystemwenowhave.

Consider,forexample,how theintertwiningoftraditionallendingandcapitalmarketsgaveriseto whathasbecomeknownastheshadowbankingsystem.

Shadowbanking,whichreferstocreditintermediationpartlyor whollyoutsidethelimitsofthetraditionalbankingsystem,involvesnotonlysizeablecommercialandinvestmentbanks,butmanyfirmsofvaryingsizesacross arangeofmarkets.

Whilesomeofthemorenotoriouspre-crisiscomponentsoftheshadowbankingsystemareprobablygoneforever,currentexamplesincludemoneymarketfunds,thetripartyrepomarket,andsecuritieslending.

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

Foravarietyofreasons,demandforsuchassetshasgrownsteadilyinrecentyears,andisnotlikelytoreversedirectionintheforeseeablefuture.

Yetthesearetheassetswhosefundingismostlikelytoruninperiodsofstress,asinvestorsrealizethattheirresemblancetocashorinsureddepositsinnormaltimeshasdisappearedinthefaceofuncertaintyabout theirunderlyingvalue.

And,aswasgraphicallyillustratedduringthecrisis,theresultingforcedsalesofassetswhosevaluesarealreadyunderpressurecanacceleratean adversefeedbackloop, in whichallfirmswithsimilarassetssuffer

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

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

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Thiskindofcontagionlayattheheartofthefinancialstressesof2007and2008.

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

Whilesomeofthesereformsremainunfinished,andsomeadditionalmeasuresareneeded,therehasbeenconsiderableprogress.

Unfortunately,thesame cannotbesaidwithrespect to shadow bankingand,moregenerally,thevulnerabilitiesassociatedwithwholesale

short-termfunding.

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

ExceptfortheliquidityrequirementsagreedtointheBaselCommittee,however,theliabilitysideofthebalancesheetsoffinancialfirmshasbarelybeenaddressedinthereformagenda.

Yethereiswherethesystemicproblemsofinterconnectednessandcontagionaremostapparent.

And,asevidencedbythefundingstressesexperiencedbyanumberofEuropeanbankspriortothestabilizingmeasurestakenbytheEuropeanCentralBank,theseproblemsarestillvery muchwithus.

WithintheUnitedStates,reformeffortsareunderwayinsomediscrete,butimportant,areas.

TheprovisionsofDodd-Frankrequiringmorecentralclearingof derivativesandminimummarginsforthosethatremainunclearedaredesignedtoprovidemoresystemicstability.

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

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Astoshadowbankingitself,theFSOCrecentlyproposedoptions toaddressthestructuralvulnerabilitiesinmoneymarketmutualfunds,withaneyetowardrecommendingactionbytheSecuritiesandExchangeCommission.

AndtheFederalReservehasbegunusingitssupervisoryauthority topressforareductionin intradaycreditrisk inthetripartyrepomarket.

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

MonetaryPolicy

Whilethefirsttwo policy challengesareshared amongregulatoryandfinancialagencies,thethirdliessolelywithcentralbanks.

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

Thedramaticriseinhousingprices,andtheassociatedhighamountsofleveragetakenonbybothhouseholdsandinvestors,occurredduringanextendedperiodoflow inflation.

Somehavesuggestedthat,bynotraisingratesbecauseinflationremainedsubdued,monetarypolicy intheUnitedStatesandelsewheremayhavecontributed to themagnitudeofthehousingbubble.

Whateverthemeritsofthatmuch-contestedpoint,itseemswisetoaddressthisissueaswefacewhatcouldwellbeanotherextendedperiod oflow inflationandlow interestrates.

Itisimportanttonotethatincorporatingfinancialstabilityconsiderationsintomonetarypolicydecisionsneednotimplythecreation ofanadditionalmandateformonetarypolicy.

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

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Thepotentiallyhugeeffectonpricestabilityandemploymentassociatedwithboutsofseriousfinancialinstabilitygivesamplejustification.

HereIwanttomentionsomecommentsbymycolleagueJeremySteinacoupleof weeksago.

Afterreviewingthetraditionalargumentsagainstusingmonetarypolicy inresponsetofinancialstabilityconcernsandrelyinginsteadonsupervisorypolicies,GovernorSteinofferedseveralreasonsforkeepingamoreopenmindonthesubject.

First,regulationhasits ownlimits,nottheleastofwhichistheopportunityforarbitrage outside theregulatedsector.

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

Finally,byalteringthecompositionofitsbalancesheet,centralbanksmayhaveasecondpolicyinstrumentinadditiontochangingthetargetedinterestrate.

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

Tobeclear,Idonotthinkthatweareatpresentconfrontedwithasituationthatwouldwarrantthesekindsofmonetarypolicy action.

Butforthatveryreason,itseemsthatnowisagoodtimetodiscusstheseissuesmoreactively,sothatifandwhenwedofacefinancialstabilityconcernsassociatedwithassetbubblesbackedbyexcessiveleverage,wewillhaveawell-consideredviewoftherolemonetarypolicymightplayinmitigatingthoseconcerns.

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

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AdvancingtheInternationalReformAgenda

Letmeturnnowtothewayinwhichourshiftsinpolicyapproachshouldinformtheagendafor internationalcooperationinfinancialregulation.

Forobviousreasons,themonetarypolicyissuesarenotdirectlyrelatedtothisagenda,thoughourunderstandingoftheseissuesmayprofitfromdiscussionswithourcentralbankcolleaguesfromaroundtheworld.

Itisequallyobviousthatthe othertwo setsofpolicychangesarequitecloselyrelated totheinternationalagenda.

Morethaninmostotherareas,thefinancialspheresuffersfromabasiclackofcongruencebetweentheauthority to regulateandtheobjectofregulation.

Thuswehaveasignificantlyinternationalizedfinancialsystem,inwhichshocksarequicklytransmittedacrossborders,butanationally-basedstructureofregulation.

Withincountries,responsibilitiesmaybedividedbetweenprudentialregulatorsandmarketregulators,amongregulatorswithsimilarmandates,orboth.

Centralbanksmayhaveexclusiveprudentialauthority,shareitwithotheragencies,orhavenoneatall.

Internationalarrangementsbothreflect,andtrytocompensatefor,thiswebofdividedandoverlappingdomesticauthority.

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

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

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In addition,undertheumbrellaoftheinternationalhomeofcentralbankers,theBankforInternationalSettlements,numerous othercommitteesworkacrossfieldsalsocoveredbyoneormoreofthegroupsIhavejustmentioned.

Therearesomeobviousweaknesseswithsuchanassortmentofinternationalarrangements,notablythedifficultyofcoordinatinginitiativeswheremorethanonegroupisworkingonanissue.

Thiskindofcoordinationchallenge canbefurthercomplicatedby theparticipationininternationaldiscussionsofvariousnationalofficialswithoutdomesticauthorityinaparticulararea.

Thesheerproliferationofinternationalarrangements,eachwithitsownstaff,has attimesalsoledto aproliferationofstudiesandinitiativesthatbecomeburdensome to thenationalregulatorsandsupervisorswhohavebeenovertaxedathomesincetheonsetofthecrisisandensuingdomesticreformefforts.

Yettherearealsosomestrengthsderivedfromthecrowdedinternationalfieldoforganizationsandcommittees.

Onesuchvirtueisthatissuesnotfallingsquarelywithintheremitofaparticularkindofstandardssettercannonethelessbedealtwithinternationally.

This,in fact, hasbeentheexperiencewiththeongoing internationaleffort to agreeonminimummarginrequirementsforderivativesthatarenotcentrallycleared.

Anotheristhatdifferentperspectivesarefrequentlybroughttobearonasinglesetofproblems.

Atsomepoint,itlikelywillbebeneficialto rationalizesomewhattheoverlapping,sometimescompetingeffortsofthesevariousinternationalarrangements.

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

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Fortheneartomediumterm,though,itisimportanttohavesomeprinciplesfordecidingupontheinternationalagendathatshouldgovern theeffortsofthesearrangementsasawhole.

First, initiativesshouldbeprioritized.

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

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

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

Athirdprincipleisthat,inmostinstancesatleast,internationaleffortstodevelopnewregulatorymechanismsorapproachesshouldbuildonexperiencederivedfromnationalpracticein oneormorejurisdictions.

Thechallengesencounteredduringtheinitialeffort to deviseanLCRintheBaselCommittee,withlittleornoprecedentofnationalquantitativeliquidityrequirementsfromwhich to learn,shouldcounselcautionintryingtoconstructnewregulatorymechanismsfromscratchattheinternationallevel.

Therewilldoubtlessbeexceptionstothisgeneralprinciple,suchaswherethetransnationalarbitrage incentivesofaregulatorymeasurearesostrongas tomakenationaleffortsdifficulttoinitiateandsustainwithoutsubstantiallossoffinancialactivityto othercountries.

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

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And,intheimmediateaftermathofthecrisis,therewasaneedtoharnessthebroad-baseddemandsforreformandmoveforwardonsomepriorityreformswithoutbenefitoflearningfromnationalinitiatives.

Ontheotherhand,theremayalsobeareaswhere, notwithstandingtheimportanceofaparticularregulatoryobjectiveforinternationalfinancialstability,itmaybepreferabletomaintainavarietyofapproaches to achievingthatobjective.

Bearing inmindboththeseprinciplesandthekeyareasforpolicychangeatcentralbanks andotherfinancialregulators,letmenowsuggestsomespecificsubjectsfornear-termemphasis.

Astotheframeworkforsystemicallyimportantfinancialinstitutions(SIFIs),Iwouldurgethattwoongoinginitiativesbecompletedoverthenextyearandtwoideasthathavebeeninthediscussionstagebedevelopedintoconcreteproposals.

First,theproposalforacapitalsurchargeforsystemicallyimportantbankingorganizationsisnearingcompletion.

TheBaselCommitteecontinuestorefinethemethodologytobeusedin identifyingthefirmsandcalibratingthesurcharge amount--perhapsabyproductofthefactthatthismethodologyhadtobedevelopedintheBaselCommitteewithoutbenefitofpriorprecedent.

ButIhaveconfidencethatthisworkwillbesuccessfullycompleted.

Thesecondongoing initiative--workondesignatingnon-bankSIFIs--hastodatebeenpursuedmostlyintheIAISandthushasconcentratedoninsurancecompanies.

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

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

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Butthisseemstomearealisticgoaloverthenextsixmonths.Third,weshouldbuildontheverygoodanalyticworkintheBasel

Committee,bothonsimplifyingcapitalrequirementsforcreditrisk andonfashioningstandardized capitalrequirementsformarketrisk,toapplystandardizedcreditandmarketriskcapitalmeasurestoallinternationally

activebankingfirms.

AsImentionedearlier,theUnitedStateshas already adoptedsucharequirementforcapitalrequirementsoncreditrisk.

Thesestandardizedmeasuresserveasafloortoguardagainstthepotentialformodels-based capitalmeasurestounderstatecapitalneedsundersomecircumstances.

Theyarealsosubstantiallylessopaquethan,forexample,theadvancedinternalratings-basedapproachofBaselII,andthuswouldprovidemorecomparablemeasuresthatarealsomoreamenabletointernationalmonitoring.

Fourth,Iwouldhope to seearequirementproposedforlargeinternationallyactivefinancialinstitutions tohaveminimumamountsoflong-termunsecureddebt,whichwouldbeavailabletoabsorblossesintheeventofinsolvency.

AsImentionedearlier,workonresolutioncontinues,albeitatdifferentpacesindifferentjurisdictions.

Giventhecomplexitiesarisingfromtheindependent,oftendifferingnationalbankruptcyandinsolvencylaws,thegoalofachievingafullyintegratedresolutionregimeforinternationally activefinancialfirmsmaytakeagooddealoftime.

Butaminimumlong-termdebtrequirementwouldatleastprovidenationalauthoritieswithsufficientequityandlong-termdebtin thesefirmstobearalllossesintheeventofinsolvency,andtherebycounteractthemoralhazardassociatedwithtaxpayerbailoutswithoutriskingdisorderlyfailure.

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

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Thisrequirementwouldnotbreakbrandnewregulatoryground,sinceitwouldreallybeamodificationofexistingTier2gone-concern capitalconcepts,andwouldcomplementtherequirementforminimumequitylevelsincludedinBaselIII.

Asimpliedinmyidentificationofshort-termfundingvulnerabilitiesasapriorityarea,thebestwayforwardhereisconsiderablylesseasytospecify.

Short-terminitiativesonmoneymarketfundsandtripartyrepoareboth possibleanddesirable.

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

Ithinkwealsohavetheresponsibilitytodoso,butnotnecessarilyinidenticalways.

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

Similarly,sincethesettlementprocessfortripartyrepothatremainsofconcerniscenteredattwoinstitutions,bothofwhichareregulatedAmericanbanks,theUnitedStates cantake effectiveactionwithoutneed ofaninternationalagreement

Astobroader initiatives,proposalsto requireminimumhaircutsforallsecuritiesfinancingtransactionshavebeententativelydiscussedintheFSB.

Thisiscertainlyaripesubjectfordiscussion,insofarassecuritiesfinancingtransactionsfacilitateleverage,enablematuritytransformation,andproduce thekindofinterconnectednessthatcan spawnrunsandcontagion.

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

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Atpresent,nosetofgenerallyapplicableprudentialstandardsgovernsthese activities.

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

Thusrequirementsthatwouldattachtoinstrumentsandtransactions,as opposed to firmsthathappentobeprudentiallyregulatedforotherreasons,haveconsiderableattraction.

Ontheotherhand,universalhaircutrequirementsarethetypeofregulatoryinnovationthatIsuggestedearlierwasbestdevelopedinternationallyfollowingsomeexperiencewithinfinanciallysignificantcountries.

Onemay,forexample,havesignificantconcernaboutsomeoftheunintendedconsequencesthatwouldensue.

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

Thereshouldalsobeconcertedeffortsinternationally to gatherrelevantdata,someofwhichisatpresentuncollected.

Butwearenotgoingto beinapositiontoestablishaninternationalsecuritiestransactionfinancingregimeinthenearterm.

However,oneproposalalreadyontheinternationalagendamightbereconsidered,soastoaddressmoredirectlytheshort-termfundingproblem.

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

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

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LiketheLCR,theNSFRproposalraisedmanyquestionseven amongthosefavoringrobustmeasures todealwiththeliabilitysideoffirmbalancesheets.

Thereissomeappealto movingforwardwiththiscomplementarymeasurefairlyquicklybysimplymakingsomeincrementalchanges totheNSFRwhilekeepingitscurrentstructure.

ButIthinkwemaybebetteradvisedtotaketheopportunityofthisreviewtoexaminewhetherthereareapproachesthatmightaddressmoredirectlythevulnerabilitiesforthefinancialsystemcreatedbylarge

non-deposit,short-termfundingdependenceatmajorfinancialinstitutions.

Idonotmean toprejudgetheoutcomeofsuchanexamination,orthedegreetowhichwemightbuildonmeasuresbeingconsideredinvariousjurisdictions to addressthesevulnerabilities.ButIdothinkitworththeeffort.

Conclusion

Responses to whatIhavedescribedasthethreechallengestopre-crisiscentralbankpolicieswillcontinue to evolve.

Sowillthereenergizedinternationalagendaforcooperationin internationalfinancialregulation.

Myaimtonighthasnotbeen to layoutacomprehensiveprogramforeither,buttosuggestthatthesechangingagendasareneithercompletelycorrelatednorcompletelyindependent.

Insuggestingsomeconcretenextsteps,Ihavetriedtodefinesomeusefulandimportantpointsofintersectionbetweenthetwo.

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

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GabrielBernardino,ChairmanofEIOPA

IMD2andSolvencyII–TheroadtobetterpolicyholderprotectionandfinancialstabilityWorkshoporganisedbytheEuropean FederationofInsuranceIntermediaries(BIPAR)Brussels

Goodeveningladiesandgentlemen,

Iwouldlike tostartbythankingBIPARfortheinvitation tospeaktoyoutodayandfortheopportunitytomeetagainwiththerepresentativesofEUintermediaries.

In myspeech,Iwillbringforwardsomepersonalreflectionsaboutthecurrentchallengesinrevisingtheregulatoryframework intheinsurancearea,namelyIMD2andSolvencyIIandwillfinishbypointingoutsomestrategicreflectionsontheway toachievefurtherconsistencyofEUregulationandsupervision.

LetmestartwithIMD2.

ThereviewoftheInsurance MediationDirectiveisveryrelevantforEIOPA,becausethisdirectiveaffectsalmostallourstakeholders.

Intermediariesare,andwillcontinuetobe,akeylink intheretaildistributionchain.

We recognisethatatEIOPA,inthesamewaythatweseeprotectionofconsumersasafundamentalgoalforusandanareawherewearerequiredtotakea“leadingrole”.

Forus,intermediariesareanessentialpartoftheinsurancemarketand playacrucialroleinconsumerprotection.

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

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

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  • ImustsaythatithascertainlybeenalongtimeinthemakingeversincethereviewofIMD1wasfirstintroducedintotheRecitalsofSolvencyIIby theEuropeanParliamentandthenourpredecessor,CEIOPSsubsequentlyprovidedadvicetotheCommissionontheDirectivein2010with39differentrecommendations.
  • WesupporttheCommission’sobjectivesofmakingretailinsurancemarketsworkbetterandpromotingamorelevelplayingfieldby,forexample,extendingthescopeoftheDirectivetoincludedirectsales.
  • Indeed,preventingregulatoryarbitrageandpromotingequalconditionsofcompetitionarekeyobjectivesforEIOPAtoo.
  • FromEIOPA’sperspective,itisimportantthatthefinallegislativetextcreatesaregulatoryregimeintheretailinsurancemarketthat canbeeffectivelysupervisedbothfromanationalandaEuropeanperspective,bearinginmindthewidevarietyofexistingstructuresatnationallevelforsupervisinginsurancedistribution.
  • IMD2alsoneedsto adoptaproportionateapproachasregardstheobjectivestobe achieved.
  • Thereneeds tobeproperconsiderationofexistingmarketspecificitiessuchasaverydiverserangeof distributionchannelsatnationallevel,fromhighstreetbrokers to multinationals.
  • AsIsay,IwelcometheCommission’sproposal.
  • Nevertheless,thereareanumberofpointswhereIwouldpersonallyrecommendfurtherreflection:
  • Transparencyofremuneration
  • Theproposalintroducesamandatorydisclosureofthefullamountofremunerationforlife insuranceproductsanda5yeartransitionalperiodallowingforan“onrequest”disclosureregimefornon-life products;attheendofthe5yearperiod,mandatorydisclosurewouldapply.

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

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  • Furthermore,insuranceundertakingsareonlyrequired to informthecustomeraboutthenatureandthebasisofthecalculationofanyvariableremunerationreceivedbyanyemployeeoftheirsi.e.notdisclosureofthefullamount.
  • Fornon-life insurance,Iconsideran“onrequest”regimeasabetterwaytomovefurtheratanEUlevel,whilemaintainingthepossibilityforMemberStates to imposestricterrequirements.
  • In myview,thiswouldbe thebestpossibleandbalancedsolutiontoimprovethetransparencyofremuneration.
  • Furthermore,bothinsuranceundertakingsandinsuranceintermediariesshouldhavetocomplywiththesamehigh-levelprinciplesasregardsinformationrequirementsandconflictsofinterestprovisions.
  • Ialsobelievethatdisclosureisnotapanaceatomanagingconflictsofinterest.
  • Theintroductionofageneral“dutyofcare”wouldhelpaswouldtheimplementationofproportionateandrobustadministrativeandorganisationalarrangementstohelpsystematicallyidentifyandmanageconflictsofinterest.
  • Scope–ComparisonWebsites
  • ComparisonwebsitesarecaughtundertheRecitals,butnotunderthedefinitionof“insurancemediation”,creatinglegaluncertainty.
  • In myopinion,itisimportantthatnewformsofon-linedistributionsuchascomparisonwebsites,areproperlycaughtunderthescopeoftheDirectivetoensurealevelplayingfield andadequateprotectionforconsumers.
  • SomewouldarguethattheyarealreadycaughtbyIMD1,butweneedmoreclarityonthisissue.

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

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  • Indeed,wearecurrentlyworkingonaReportonGoodPracticesregardingsupervisorystandardsrelatingtocomparisonwebsiteswhichwehopetopublishbeforethesummer.
  • ItwouldalsobeusefulifEIOPAcouldclarifybymeansofGuidelinestheapplicationoftheDirective to aggregatorsorpricecomparisonwebsites.Advice
  • “Advice”isdefinedundertheproposalas“theprovisionofarecommendation toacustomer,eitherupontheirrequest,orattheinitiativeoftheinsuranceundertakingortheinsuranceintermediary”.
  • Iamsurprisedthatthedefinitionof“advice”wasnotpersonalisedasatpresentitcapturesgenericadviceaswell.
  • Wethinkaclearerdefinitionofadviceisrequiredwhereadviceisprovidedonthebasisofa“personalrecommendation….”
  • Freedomtoprovideservices/Freedom ofestablishment
  • TheproposaldeletestheprovisionprovidingforaEuropeanpassportbasedonasingleregistrationandisnotre-statedinthenewChapterIVregardingfreedomtoprovideservicesandfreedomofestablishment
  • IamsurprisedthattheprovisionwasdeletedasitwasthefoundationofIMD1soastoencouragethecross-borderactivitiesof insuranceintermediaries.
  • In myview,thisneeds tobereinstatedtosendouttherightmessage.
  • Cross-selling
  • Theproposalrecognisesthepracticeandrisksofbundlingproductsandrequirescertaininformationdisclosureonsaleofbundledproducts.
  • TyingisoutlawedTyingandbundlingisanissuethathasregularlycroppedupindiscussionsinEIOPA(withregardtosalesofPPIorlinkinglife insurance to salesofmortgages).

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

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  • SeveralofourMembershavetakenactionalreadyatnationalleveltocombatthispractice.
  • Isupportactionontyingbutablanketbanonalltyinghasimportantimplications,asthereareanenormousamount oftiedproductsonthemarketintheEU.
  • Weneedalsotoconsiderthatacompletebanmightalsopreventconsumersfromgettingcheaperdeals.
  • Itisimportant tohavethesameapproachin IMD2,MiFIDIIandMortgageCreditDirectivetoensureconsistencyonthisissue.
  • Thisisanarea wehaveforeseenworkundertheJointCommitteeoftheESAs.
  • InsurancePRIPs
  • Theproposalintroducesspecialrequirementsforinsurance PRIPs e.g.requirementtoidentify,prevent,manageanddiscloseconflictsofinterestwhensellinginsuranceinvestmentproducts.
  • IbelievethattheseprovisionsshouldbekeptwithinIMD2andweshouldavoidasimple“cutandpaste”asthedistribution channelsinvolvedareverydiversesoa“onesizefitsall”approachcouldhavemajorimpactonthemarket.
  • Furthermore,IwoulddefinitelyincludeinIMD2,theorganisationalrequirementsneededbydistributorsinordertomanageconflictsofinterest.
  • AtEIOPA,wearefollowingcloselythenegotiationsintheCouncilandParliament.
  • Itisveryinterestingtoseethewiderangeofdifferentopinionscomingtotheforeonthisissue.

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

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

Thisbalancingactisevenmoredifficultin theaftermathofthefinancialcrisis.

EIOPAstandsreadyto supporttheEUpolitical institutionsinthenegotiationprocess.

LetmeknowturntoSolvencyII.

TheEUisfacedwithanoutdatedandfragmentedregulatoryregime in insurance.

SolvencyIIhasbeendevelopedduringthelast13yearstoanswer toconcreteneeds.

Itincreasespolicyholderprotectionbyusingthelatestdevelopmentsinrisk-basedsupervision,actuarialscienceandriskmanagement.

WeshouldbeproudthatSolvencyIIisbasedonsoundcoreprinciples.

Obviously,thefinancialcrisishadanumberofconsequencesonSolvencyII.

Somelessonswereincorporatedearlyonin theregime,butotherchallengesarestillcreatinguncertaintiesonthefinaldesignandcalibration.

Thehugemarketvolatilityprovedtobeachallengeina market-consistentregime,especiallyforlong-termguarantees.

Thesovereigncrisisledto questionsontheconceptoftherisk-freerate.

Thechangesinbankingregulationcreatepressureontheroleofinsurersasprovidersoflong-termbankfunding.

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

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Thelowinterestrateenvironmentisthreateningsomeinsurancebusinessmodels,especiallyinlife insurance.

ThisyearwillbeacrucialyearforSolvencyII.So,whatarewedoing?

FollowingtheagreementbytheEUpolitical institutions,EIOPAhavelaunchedthelong-termguaranteeassessmentthataimstotestvariousmeasuresthathavebeendiscussedintheOmnibusIInegotiations.

Weareencouragedbythelevelofparticipationinthedifferentmemberstates,coveringbig,mediumandsmallerplayers.

EIOPAwillpresentitsfinalreportinJune.

ItisessentialforpolicyholderprotectionandfinancialstabilitythatSolvencyIIappropriatelyreflectsthelong-termfinancialpositionandriskexposureofundertakingscarryingoutinsurancebusinessofalong-termnature.

Weneedarobustframeworkthatwouldpricecorrectlyanyoptionsembeddedinthecontracts.

Weneedtorecognisethatguaranteeshaveaprice;thereisno“freelunch”.

Ontopofthelong-termguaranteeassessment,EIOPAseesitasofkeyimportancethattherewillbeaconsistentandconvergentapproachwithrespecttothepreparationofSolvencyII.

Thatiswhy,inDecember2012,weissuedourOpiniononinterimmeasuresregardingSolvencyII.

OurplanistodevelopGuidelinesthatwillensurethatnationalsupervisoryauthoritieswillstartin2014toputinplacecertainimportantaspectsofthenewprospectiveandrisk basedsupervisoryapproach.

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

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TheseGuidelineswillcoverthesystemofgovernance,includingriskmanagementandtheprocessofdevelopinganownriskandsolvencyassessment,pre-applicationof internalmodels,andreportingtosupervisors.

WearenotanticipatingSolvencyII,butpreparingsupervisorsandundertakingsforthenewregimeinaconsistentway.

Theguidelinesareaddressed tonationalsupervisoryauthoritiesandwillbesubject tocomplyorexplainprocedure.

WeareworkinginclosecooperationwiththeEuropeanCommissionandmaintaininganinformaldialoguewithEIOPA’sInsuranceandReinsuranceStakeholderGroupandthedifferentstakeholders.

Weplan to haveapublicconsultationontheGuidelinesinApril/May2013andtheywillbetabled to EIOPABoardofSupervisorsintheautumn.

Goingforward,oneofthemostcriticalchallengesintheEUsupervisorylandscapeistoensureconsistencyofsupervisorypractices.

Ibelievethattheconvergenceofsupervisorypracticesisasimportantasthesinglerulebook.

Byassuringthatday-to-daysupervisoryoversightoffinancialinstitutionsisdonewithinaconsistentframework,wecaneffectivelycontributetoanincreasedlevelofprotectionofpolicyholdersandbeneficiariesintheEuropeanUnion.

ThesinglemarketrequiresitandEIOPAiscommittedtodeliverit.

AfirststepshouldbethedevelopmentofaSupervisoryHandbookthatwouldworkasaguidebookforsupervisioninSolvencyII,settingoutgoodpracticesinalltherelevantareasofsupervision.

Thishandbookwillfostertheimplementationofamoreconsistentframeworkfortheconductofsupervision.

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

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EIOPAisstartingtowork in thisarea.

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

Furthermore,EIOPAneedstohaveresourcestoplayitschallengingoversightroleaccordingtotheRegulation,byconductinginquiriesintoaparticulartypeoffinancialinstitution,ortypeofproduct,ortypeofconductinordertoassesspotentialthreatstothestabilityofthefinancialsystemandmakeappropriaterecommendationsforaction tothecompetentauthoritiesconcerned.

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

Anotherstrategicchallengeisthelevelofregulatoryconsistencyinthefinancialsector.

Ibelieveitisveryrelevantto achieveanappropriatelevelofconvergenceoftherulesprotectingretailconsumersinthedifferentareasofthefinancialsector.

Nevertheless,proportionalityandgoodsenseshouldprevail.

Bycoveringthedifferentanglesofdisclosureandsellingpracticesintheinsurancemarket,IMD2shouldavoidthe tendencytoapplya

one-size-fits-allapproach.

Insurancebusinessandinsuranceproductshavetheir ownspecificitiesthatneedtobecarefullyconsidered.

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

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Somemayarguethatthesespecificitiesarea sufficientargumenttomaintainthestatusquo.Idon’tbelievethatthisisthe case.

Weneedto recognizethatanevolutionisalsoneededinthewayconsumerprotectionisensuredinthedifferentdistributionchannels.

Weneedtolearnfromthemis-sellingeventsthatoccurredincertainmarketsinvolvingproductslike PPI,unit-linkedproductsandpensions.

Consumer’sattitudesandneedsarechanging,andthatshouldbeviewedpositively.

Theinsurancemarketcannotandwillnotbeoutofthisevolution.

Insuranceintermediariesshouldsupportthistrendandshouldview IMD2asagoodopportunity to improveconsumerprotection,preservetherelevantinsurancespecificitiesandincreaseconsumerconfidence.

Thankyouforyourattention.

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

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SubmittingaSuspiciousActivityReport(SAR)withintheRegulatedSector

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

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

Personsintheregulatedsectorare requiredunderPart7oftheProceedsofCrimeAct2002(POCA)andthe

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

financing.

ASARmustbesubmittedassoonasispracticable.

ThisdocumentseekstocomplementtheMoneyLaunderingRegulationsandHMTreasuryapprovedguidanceinthisregard.

ItisimportantthatwhensubmittingaSARtoSOCAthatreportersrefertothepublishedguidancefromtheirownregulatorybodyandtheir owninternalguidance.

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

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BysubmittingaSARtotheSeriousOrganisedCrimeAgency(SOCA)youwillbeprovidingLEAswithvaluableinformationof potentialcriminalitywhilstensuringappropriatecompliancewithyourlegal obligationstoreportunderPOCAandTACT.

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

OnceyouhavesubmittedyourSARyoushouldrememberyourobligationsnot to makeanydisclosureswhichmightconstituteanoffenceoftippingoffundersection333AofPOCAorsection21DofTACT2000.

SOCAdoesnotprovideorapprovestandardwordingforyou to useinsuchcircumstances.

Itisthereforerecommendedthatyougivecarefulconsideration tohowyouwillhandleyourrelationshipwiththesubjectonceyouhavesubmittedtheSAR,particularlyifthesubjectisaclientorcustomerof yourbusiness.

Youmaywishtodiscusswithyoursupervisororprofessionalbodyifyouareunsure.

SAROnlineisasecurewebbasedsystembywhichyoucansubmitSARstoSOCA.

RegisteringwithSAROnlineisaverysimpleprocessandensuresSARsaredelivereddirectly to SOCA,includinganactivationprocesstocreatetheaccountforthesubmissionofSARs.

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

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  • SAROnlineisSOCA'spreferredmeansofSARssubmissionandprovidesastandardisedapproachtostructuringSARsthatreportersmayfind useful.
  • Itisimportanttoprovideasmuchcomprehensivedetailaspossiblewhenregistering.
  • In ordertoregisterforSAROnline,newusersrequireanactiveemailaccountasthisisusedasyouruseridentification.
  • Theregistrationisuniquetotheusersotheemailaddressneedstobedesignatedtotheappropriateperson.
  • ItisrecommendedthattheMoneyLaunderingReportingOfficer(MLRO),NominatedOfficerordesignatedofficerresponsiblefortheAnti-MoneyLaundering(AML)compliancewithintheorganisationistheregistereduser.
  • UseofSAROnlineisrecommendedas:
  • itwillprovideyouwithanautomated acknowledgementofreceipt
  • itwill helpyoustructureyourSARinthemosthelpfulway,therebyimprovingprocessingtimeinSOCA
  • itwillgiveyoutheopportunity to flagtheSARasaconsentissue.
  • ReportersthatsubmitSARsviaSAROnlinewillalsoreceiveanacknowledgementemailcontainingauniquereferenceoncethereporthasbeensubmitted.
  • ThesubmissionofconsentSARsisparticularlyvaluable toensureapromptresponse.
  • Thereisadedicatedsupportteamavailableduringofficehours todealwithanySAROnlineenquiries.TheSAROnlineHelpdeskcan becontactedon02072388282,option3.

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

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

YoushouldnotethatSAROnlinedoesnotretainafilecopyforyourfutureuseandthereforeyoushouldensurethatyouretainyourownrecordofyoursubmission.

SAROnlinehasanautomatictimeoutsessionof20minutesforeachpage.

Youshouldsaveyourworkatregularintervalsto re-setthetimeoutclockbeforethesessionexpires.

HoweverifyouarenotreportingelectronicallypleaseusetheSOCAPreferredFormsformanualreportingwhichcanbedownloadedfromtheSOCAwebsite.

Reasonforsuspicion

Makingaqualityreport,structuredinalogicalformatandincludingallrelevantinformation,willsignificantlyenhanceLEAs'abilities to extractgreatervaluefromsubmittedSARsandspeeduptheprocess.

Oftenaseeminglyminorpieceofinformationtoyou canbecomeavaluablepieceofintelligencetoLEAs.

Itishelpfultowriteabriefsummarytoexplainyoursuspicionandthenalsoprovideachronologicalsequenceofevents.

Ithelpsifyoutrytokeepthecontentclear,conciseandsimple.

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

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

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activityandiswidelyusedbylawenforcementenablingthemtoidentifySARsinwhichtheyhaveaspecific interest.

TheinclusionoftheappropriateGlossaryTermcanbeusefulinensuringthedistributionoftheSARtoalawenforcementorgovernmentagencywhichmaybebestplacedtoutiliseoractontheinformationprovided.

However,useoftheSARGlossaryofTermsisnotmandatory.

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

However,pleasealsorememberthatunderPOCAandTACT,eachSARyousubmitonthesameindividualmustcontainasuspicionandalltherelevantdetails;evenifyouhaveincludedthereferencenumberforapreviouslysubmittedSAR.

Asabasicguide,whereveryou can,tryto answerthefollowingsixbasicquestions tomaketheSARasusefulaspossible:

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

Remembertoincludethedateofactivity,thetypeofproductorservice,andhowtheactivitywilltake placeorhastakenplace,when documentingthereasonforsuspicion.

Ifyouaresuspiciousbecausetheactivitydeviatesfromthenormalactivityforthatcustomer/businesssector,itwouldbehelpfulto brieflyexplainhow theactivitythatgaverisetoyoursuspiciondiffers.

AvoidtheuseofacronymsorjargonwithinSARsastheymaynotbeunderstoodbytherecipientandmaybeopen tomisinterpretation.

Ifyouaredescribingaserviceprovidedoratechnicalaspectofyourwork,itwouldbebeneficialto provideabriefsynopsisinyourSARtoaidthefinancialinvestigator.

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

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WerecommendyoudonotsendattachmentswithyourSAR– alltherelevantinformationshouldbewithintheSAR.

Iffurther informationisavailablewhichyouarewillingto sharewithanLEAthenreferencetothisandwhotocontactmayberecordedintheSAR.

Subjectinformation

Theamountofinformationareporterholdsonthereportedsubjectmaybedependentonthenatureoftherelationshipwiththesubjectwhichmayfrequentlybeaclientorcustomer,butmayalsoforexamplebeaprospectiveclient,someoneconnectedwithortradingwithaclient/customerorothersubjectseenintheordinarycourseofbusiness.

Accordingly,theinformationmaybederivedfromCustomerDueDiligence(CDD)obtainedinlinewithguidancepublishedbyitsfirmandsupervisorybodyorother informationgatheredintheordinarycourseof business.

ItishelpfultothosewhowilluseyourSARtobeascomprehensiveaspossible;howeveryouareonlyrequiredtoprovideinformationobtainedwithintheordinarycourseofyourbusiness.

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

TheinclusionofpostcodeallowstheSARtobeautomaticallyallocatedtolawenforcement.

Pleasenote:IfyouaresubmittingaSARusingSAROnlineyouarerequestedtofillinthesubjectinformationwithinthefixedfieldsprovidedforthepurpose.

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

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  • Individuals
  • Pleaseprovideallrelevantdetailsknownabouttheindividualreported.The amountofinformationyouwillhavemaywelldependontherelationshiptothereportedsubject.
  • Pleaseprovideall identifyinginformation.
  • Thisshouldinclude,asfaraspossible:fullname/s,dateof birth,nationalityandaddress.
  • Itisimportantthatthestatusoftheaddress/es canbefullyunderstood
    • current,previous,home,business,and otherknownproperty,ensuringthatpostcodesareincluded.
  • Iffurther informationisheldabouttheindividual– forexample:
      • identificationdocumentdetails(includingrelevantreferenceordocumentnumbers)e.g.passport,drivinglicence,NationalInsurancenumber
      • cardetails(registrationnumber)
      • telephonenumbers(clearlymarkedhome,business,mobileetc)
      • fulldetailsofbankaccountsorotherfinancialdetails(includingaccountnumbersetc)
      • occupation
  • thentheinformationcanbeprovidedincontextwithyoursuspicion.

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

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  • Businesses,trustsandotherentities,incorporatedandunincorporated
  • Incorporated
  • Pleaseprovideallrelevantdetailsknownabouttheincorporatedentity.Theamountofinformationyouwillhavemaydependontherelationshiptothereportedsubject.Pleaseprovideallidentifyinginformationsuchas:
    • fullname
    • designatione.g.Limited,SA,GmbH
    • tradingname
    • registerednumber
    • VATand/ortaxreferencenumber
    • countryofincorporation
    • business/tradingaddress
    • registeredofficeaddress.
  • Additionallyifrelevanttoyoursuspicion,pleaseprovidedetailsoftheindividualsorentitiesthatarethedirectors(orequivalent)anddetailsoftheindividualswhoownorcontrolorexercisecontroloverthemanagementoftheentity.
  • Unincorporated
  • Pleaseprovideallrelevantdetailsknownabouttheunincorporatedentity.
  • Theamountofinformationyouwillhavemaydependontherelationshiptothereportedsubject.

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  • Pleaseprovideall identifyinginformationsuchas:
  • fullname
  • business/tradingaddress
  • VATand/ortaxreferencenumber.
  • Additionally,ifrelevanttoyoursuspicion,pleaseprovidedetailsofallpartners/principalswhoownorcontrolorexercisecontroloverthemanagementoftheentity.
  • Trusts
  • Pleaseprovideallrelevantdetailsknownaboutthetrust.
  • Theamountofinformationyouwillhavemaydependontherelationshiptothereportedsubject.
  • Pleaseprovideall identifyinginformationsuchas:
    • fullnameofthetrust
    • address
    • natureandtypeofthetrust.
  • Additionally,ifrelevanttoyoursuspicion,pleaseprovidedetailsofalltrustees,settlors,protectorsandknownbeneficiariesasappropriate.
  • Descriptionofcriminalpropertyand itswhereabouts
  • Whenthesuspicionbeingreportedrelatestoafinancialtransaction,thereportshouldincludetherelevantdetailsofthebeneficiary/remitterofthefundsand,ifknown,thedestination/originatingbankdetailse.g.sortcode,correspondentbankdetails.

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Itisimportant to accuratelyrecordthedateonwhichthetransactionhasoccurredorwilloccur.

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

Ifthebeneficiary/remitterofthetransactionisbelievedtobecomplicitinthesuspicious activitythenconsiderationshouldbegiventoprovidingtheirdetailsasanassociatesubject.

Anassociatedsubjectisapersonorentitythatislinked tothemain person/entityinsomedirectwayandisinvolvedin thesuspiciousactivity.

Iftheactivitydoesnotinvolveafinancialtransactionthenanexplanation ofthesuspiciousactivitythathasoccurredorwilloccurshouldbegiven.

WhensubmittingaSARusingSAROnlinetherearefieldsfordocumentingspecificfinancialtransactions.

Equally,transactionsoractivitycanbedocumentedwithinthe‘reasonforsuspicion’fieldprovided.

Appropriateconsent

Obtainingconsentprovidesadefenceagainsttheprincipalmoneylaunderingoffences.

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

Thisprovidesspecificguidanceontheprocesstobefollowedandwhattoexpectifyouwish toapplytoSOCAforaconsentdecision.

IfyouareusingSAROnlineyouareremindedtoensureyoutick theappropriateConsentBoxwhencompletingyourSAR.

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

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In allcasesitisimportanttospecifyclearlytheactivityforwhichconsentisrequired.

ThresholdRequests

Section339AofPOCAmakesprovisionforathresholdinthecaseof deposit-takinginstitutionsinoperatinganaccountifitis£250orlesswithouttheneed toseekconsent.

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

Thereportershouldstillmakeadisclosure inrespectoftheinitialopeningofanaccountor,ifdifferent,thetimewhenthedeposit-takingbodyfirstsuspectsthatthepropertyiscriminalproperty.

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

Ifathresholdisalreadyinplaceandyouwishtoseekavariation,thenthereasonsforthevariationwillneed tobesetoutinanadditionalSARandsubmittedtoSOCA.

Pleasenote:

Athresholdrequestisnotthesamethingasaconsentrequestandtherearenostatutorytimescalesfordealingwiththem.

Howevertofacilitatethresholdrequests,SOCAusestheconsentdesk toprogresstheresponsesanditishelpfuliftheconsentboxistickedontheSARtoenablethedesk to identifytherequestsquickly.

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

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Courtordersandlawenforcementenquiries

Insomeinstances,youmaybeservedwithorhavenoticeofacourtordersuchasaproductionorder,madein respectofaparticularindividualorentity.

Thismayactasacatalystforyoutoreviewtheactivitywhichyouconductorhaveconductedinrelation tothatindividualorentity.

If,followingsuchareview,youfeelthatthereisanobligationtosubmitaSARorseekconsent,thentheSAR/consentrequestshouldreflectyoursuspicionsinthecontextofyourengagementwiththesubject.

Acquisitiveorfraudrelatedcrime

Whenyouhaveknowledgeorsuspicionofan acquisitiveorfraudrelatedcrime,youwillbefacedwithaparalleldecisionmakingprocess.Firstly,youwillhavetodecidewhetherornotyouwishtheoffencetobeinvestigated.

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

SOCAdoesnottakecrimereports.

Also,regardlessofwhetherornotacrimehasbeenreported,youwillwishtoconsideryourlegalobligationsundertheProceedsofCrimeAct2002(POCA).

IfyouhaveknowledgeorsuspicionthatamoneylaunderingoffencehastakenplacethenyoumustsubmitaSARtoSOCA.

SOCA’sadvicefromitspolicepartnersisthatwhereareporterwishesthecontentofaSARtobeformallyrecordedasacrimereporttheyshouldreportthisdirectlytotheirlocalpoliceforce.

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

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Wherethereporterhasreportedacrimeand,inaddition,hassubmittedaSAR,itwouldbehelpfulifthecrimereferencenumbercouldbeincludedinthetoplineofthetextintheSARsothatitcanimmediatelybe

cross-referencedbylawenforcement.

Alertsandkeywords

TheAlertsprocessisarecognisedandestablishedwaybywhichSOCAcommunicateswiththeUK'sprivatesector.

Thesearewrittencommunicationsthatwarnofaspecificrisk,threatorproblem.

AllAlertscontainakeywordoraglossarycode.

IfyousubmitaSARasaresultoftheinformationcontainedinanAlertpleaseincludethekeywordwithinthefreetextfield.

SARconfidentiality

TheconfidentialityofSARsisthecornerstoneofthereportingregime.SARsareheldonasecurecentraldatabasewithinSOCAandaccesstothedatabasebylawenforcementisstrictlycontrolledbySOCA.

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

AlllawenforcementagenciesusingSARsarerequired to follow theguidanceoutlined

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

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

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ContactingSOCAUKFinancialIntelligenceUnit(UKFIU)

SARsshouldnotbeusedasacommunication channele.g.asameansofgainingadvice.SARsareonlyforthereportingofsuspiciousactivity toSOCA.

IfyouneedtoseekgeneralguidancerelatingtomoneylaunderingortheSARsRegimeinparticular,youareadvisedtocontactyourdesignated MoneyLaunderingReportingOfficer(MLRO)oryourregulatorybody.

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

Tel:02072388282

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

WhencontactingtheUKFIUpleasehaveavailableyourSARreference numberifapplicable.

GeneralUKFIUmattersmaybeemailedtoukfiusars@soca.x.gsi.gov.ukIfyouwish tomakeaSARbypostyoushouldaddressyourSARtoUKFIU,POBox8000,London,SE115ENorbyfaxon02072838286.YouareremindedthatpostandfaxareslowerthanSAROnlineandthereforeitwilltakelongerforyourSARtobeprocessed.Youwillnotreceiveanacknowledgementifyouusepostorfax.

Disclaimer

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

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Anyusebyyouorbyanythirdpartyofinformationorothermaterialcontainedinorassociatedwiththisdocumentsignifiesagreementbyyouorthemtotheseconditions.

DialogueTeam

TheaimoftheDialogueTeamis todrivetheUKFinancialIntelligenceUnit(UKFIU)agendaoninterfacingwithstakeholdersonSuspiciousActivityReports(SARs)activity.

The teamstrives to improvecommunicationandunderstandingbetweentheSARsregimeparticipants,toincreasethevalueextractedfromtheSARsregime,toprovide,facilitateandcontributetovariousforumstoshareperspectivesontheoperationoftheregimeasawhole.

In essencetheDialogueTeamseekstoimprovethequalityofSARsintelligence,andpromotethevalueandgreateruseofthisintelligenceinmainstreamlawenforcementactivity.

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

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WhatisSOCA?

“Weworktoputseriouscriminalsbehindbars,andusemanyothertacticstofightcrimeandkeepyousafe.

In particular,wewanttoensurecrimedoesn’tpayandthatit’shardertocommit.

Thepower to countercriminalsSOCAofficerscanhavethecombined powersofpolice,customsandimmigrationofficers.

Wealsohaveasubstantialrangeoftoolsandlegislationtotargetcriminalswith– everythingfromtheability to recoverassetsthrough toSeriousCrimePreventionOrders.

WeworkwithagenciesandofficialsacrosstheUKandallovertheworldtohelpusdoourjobandtohelpthemdotheirs.

Newwaysoffightingcrime

Weusetraditionallawenforcementmethods– investigating,andarrestingcriminals.

Wealsodrawoninnovativenewapproachestopreventcrimesfromhappening in thefirstplace.

Herearesomeexamples:

Firstclassintelligence-weuseallkindsofwaysto gathertheknowledgeweneedtoknowwhere, whenandhow tostriketobesteffect.

Monitoringseriouscareercriminals-insomecaseswewatchthemforlife,to preventthemfromcontinuingtheircriminalactivitiesinprisonorafterrelease.

Hittingthemwhereithurts-bytakingcriminals’cashandproperty.Formanyseriouscriminals,thisworriesthemmorethantheprospectofgoingtoprison.

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

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

Makingithardertocommitcrime-forexample,passingondetailsofsuspiciousfinancialactivitiesorforgedidentitiestobanksbeforefraudscan takeplace.”

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

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  • FinancialStabilityBoardreportstoG20onprogressoffinancialregulatoryreforms
  • TheChairmanofthe FinancialStabilityBoard(FSB)reported to theG20FinanceMinistersandCentralBankGovernorsonprogressinthefinancialregulatoryreformprogramme.
  • In connectionwiththis,theFSBispublishing:
  • aletterbytheFSBChair totheG20,sentaheadoftheirmeeting,reportingonthegoodprogressbeingmadeinfinancialreforms,including in thefollowingpriorityareas:ocreatingcontinuouscoremarketsbycompletingOTCderivativesandrelatedreforms;
  • ostrengtheningtheoversightandregulationofshadowbanking;obuildingresilientfinancialinstitutions;and
  • oending“toobigtofail”.
  • TheletteralsosummarisestheFSB’srecentworkandplanstomonitortheimplementationofreforms.
  • AnassessmentoftheeffectoftheG20financialreformprogrammeontheavailabilityoflong-termfinance.
  • ThisassessmenthasbeencontributedbytheFSBaspartofabroaderdiagnosticreportpreparedbyinternationalorganisationstoassessfactorsaffectinglong-termfinancing.
  • TheFSBassessmentconcludesthat,whiletheremaybeshort-termadjustmenteffects,themostimportantcontributionofthefinancialreformprogrammetolong-terminvestmentfinanceistorebuildconfidenceandresilienceintheglobalfinancialsystem.

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  • ajointupdatebytheInternationalAccountingStandardsBoard(IASB)andtheFinancialAccountingStandardsBoardonthestatusandtimelineoftheirremainingprojectsonconvergingtheirstandards.
  • Attoday’smeetingtheG20FinanceMinistersandCentralBankGovernorsreaffirmedtheircommitmenttothefull,timelyandconsistentimplementationofinternationallyagreedfinancialsectorreforms,andlookedforward to acomprehensivereportonprogressinimplementingallreformsattheStPetersburgG20SummitinSeptember.
  • G20MinistersandGovernorsalsowelcomedtheestablishmentoftheFSB inJanuaryasalegalentitywithgreaterfinancialautonomyandenhancedcapacitytocoordinatethedevelopmentandimplementationoffinancialregulatorypolicies,whilemaintainingstronglinkswiththeBankforInternationalSettlements.
  • ProgressofFinancialRegulatoryReforms
  • Financialmarketconditionshaveimprovedoverrecentmonths.
  • Nonetheless,medium-termdownsiderisks remain,givenweakgrowthprospectsandhighlevelsofpublicandprivatesectordebtinmanyeconomies.
  • Therecentimprovementinfinancialmarketconditionsowesmuch tocentralbankactions, in particular,the accommodativemonetarypolicyaimedatstimulatingtheeconomicrecovery.
  • Asaconsequence,marketparticipants’appetiteforriskhasincreased,butthishasnotyettranslatedintoarobustrecoveryinrealinvestment.
  • Thebeginningofthereturnofrisk appetitetofinancialmarkets– whileintendedandwelcome– raisesanumberofissues.
  • First,marketparticipantsandauthoritiesneed tobeonguardagainst mispricingofriskandvaluationsofassets.

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  • Second,theimportanceoftimelycompletionofthereformsto
  • over-the-counter(OTC)derivativesmarketsandtheshadowbankingsystemhasincreased.
  • Third,historicallylowinterestratesinmanycountriesposechallengesforinstitutional investorswithlong-datedliabilitiesandmayleavemarketparticipantsmorevulnerabletounanticipatedmovementsintheyieldcurve.
  • Financialinstitutionsandsupervisorsshouldcontinuetoassesstheresilienceofthefinancialsystemthroughregularstresstesting,notablyofcreditandinterestraterisk,andcompletetheprocessofbalance-sheetrepair.
  • Reportssubmittedforthismeeting
    • Regulatoryfactorsaffectingtheavailabilityoflong-termfinance
  • Aspartofthediagnosticworkyourequestedoftheinternationalorganisations,theFSBhaspreparedanassessmentoftheeffect oftheG20financialreformprogrammeontheavailabilityoflong-terminvestmentfinance.
  • ThereformsincludeBaselIII,OTCderivativesmarketreforms,andchangesaffectingtheregulatoryandaccountingframeworkforinstitutional investors.
  • Thegeneralconclusionisthat,whiletheremaybesomeshort-termadjustmenteffects,themostimportantcontributionofthefinancialreformprogrammetolong-terminvestmentfinanceistorebuildconfidenceandresilienceintheglobalfinancialsystem.
  • Asaresult,thesereformsshouldsubstantiallyenhancethefinancialsystem’scapacity tointermediateinvestmentflowsthroughthecycleat allinvestmenthorizons.

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Hence,theG20regulatoryreformsareunambiguouslysupportiveoflong-terminvestmentandeconomicgrowth.

ThesubmissionsofFSBmembersfoundlittleevidencethattheregulatoryreformshavehadanotableimpactonlong-termfinancingtothispoint.

Thisisnotsurprisinggiventhefactthatthereformprocessisstillatanearlystage.

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

Thefinancialreformprogrammeisnotspecific to theregulationoflong-termfinance.

Nevertheless,thereformswillchangetheincentivesofsomefinancialinstitutionsandthecostsofcertaintransactions,whichmayaffect thecompositionoflong-termfinance.

In particular,institutionalandotherlong-horizoninvestorsareexpectedtoassumeagreaterrolein fundinglong-termassetsandmoreofthisinvestmentmaybeintermediatedvia capitalmarketsratherthanthebankingsystem.

Therearethreeareasforspecific follow-upbytheFSB.

First,thereshouldbeongoingmonitoringtoidentifyanyregulatoryfactorsthatmaydisproportionatelyaffecttheprovisionoflong-termfinancesothattheycan beaddressed.

Second,theFSBcouldworkwithotherstoexaminewhetherregulatoryfactorsmayconstraintheabilityofnon-bankstoexpandtheirprovisionoflong-termfinance.

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  • Third,theFSBcancontribute to theworkofotherinternationalorganisationstohelppromotethedevelopmentoflonger-termdomesticsavingsandthe capacityofdomesticfinancialsystemstointermediatethem,particularlyinemergingmarketanddevelopingeconomies(EMDEs).
  • b.Updateonaccountingconvergence
  • TheChairsoftheInternationalAccountingStandardsBoardandtheUSFinancialAccountingStandardsBoardhavewrittenyouontheirworkonconvergenceofaccountingstandards.
  • ThetwoBoardsexpecttomakeprogressonthetwo keyoutstandingissuesofimpairmentofloans,wheretheyexpect to completetheirdeliberationsin2013,andinsurancecontracts,wherebothBoardswillbeholdingpublicconsultationsthisyear.
  • Ofthesetwo outstandingissues,theneedforconvergenceonanewforward-lookingexpectedlossapproach to provisioningisofmostimmediateconcernforend-usersandfromafinancialstabilityperspective.
  • Wenotewithconcernthedelaysinconvergencetodate.
  • WethereforerecommendthattheG20asktheIASBand FASBtopreparebyend-2013aroadmapforconvergingtoacommonapproachforimpairmentandforachievingtheG20objectiveofasinglesetofhigh qualityaccountingstandards.
  • Prioritiesandworkplans
    • Creatingcontinuousmarkets
  • TheFSBremainsfullycommittedtotherapidcompletionoftheG20’sagreedreforms toOTCderivativesmarkets.

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

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Asyouareaware,thesecomplexreformsaretakingsomewhatlongerthanoriginallyplanned.

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

Itisimportantthatalljurisdictionspromptlycompletethenecessarychangestolegislativeandregulatoryframeworks toputthesereformsintopractice.

Tomaintainmomentum,Ihaveasked FSBmemberjurisdictionstoconfirmbeforetheSeptemberSummitthatthelegislationandregulationforreportingto traderepositoriesareinplace,andalsothestepstheyaretakingtocompletetheimplementationofotherOTCderivativesreforms.

Ministersmaywishtotakeaparticularinterestinprogressintheirjurisdictions to ensuretimelycompliancewiththeseimportantreforms.

TheFSBhaspreviouslyidentifiedregulatoryuncertaintyasthemostsignificantimpedimenttofullandtimelyimplementationoftheOTC derivativesreforms.

Toreducethisuncertainty,regulatorsareworkingtogethertoidentifyandaddressconflicts,duplicationandgapsinthecross-borderapplicationofrules.

TheywillprovideanupdateinAprilontheirprogressandnextsteps,andareporttotheSummitonhow theidentifiedcross-borderissueshavebeenresolved.

Internationalpoliciesinremainingimportantareaswillalsobepublished bytheSummit.

Theseincludecapitalrequirementsforexposurestocentral

counterparties,marginingstandardsfornon-centrallyclearedtransactionsandguidanceonresolutionofcentralcounterparties.

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

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Standardsettersareundertakinganassessmentoftheincentivestocentrallycleartransactionsthatthesestandardscreateandwilladjustthemasnecessarytoensurearobustsystem.

TheFSBwillalsoreportattheSummitthefindingsofanewmacroeconomicimpactassessmentoftheOTCderivativesregulatoryreforms.

Standardsettersarealsodevelopinginternationalguidanceonauthorities’accesstotraderepositorydata,includinginsuchawaythatitcan beaggregatedacrosstraderepositories.

Thisguidance,whichwillbeissuedforconsultationshortlyandfinalised bytheSummit,willbeimportantforensuringthatauthorities canuseinformationfromtraderepositoriesintheiroversightofOTCderivativesmarketsandassessmentofsystemicrisk.

MinistersandGovernorswillwishtoensurethereiseffectivecross-borderaccess to thisinformation,whichisvitaltothemonitoringofemergingfinancialvulnerabilities.

TheglobalLegalEntityIdentifier(LEI)systemwillenhancetheusabilityofthedata;theRegulatoryOversightCommitteeasthegovernancebodyoftheglobalLEIsystemwasestablishedin January2013.

EstablishingtheGlobalLEIFoundationisthekeynextsteptolaunchthesysteminMarch2013.

TheFSBcontinuestoofferstrongsupport to theLEIinitiativeandtheFSBSecretariatwillserveasROCLEISecretariatfortheinitialperiod.

b.Strengtheningtheoversightandregulationofshadowbanking

Asyouwillrecall,theFSBdeliveredtoyoulastNovemberaninitialsetofrecommendationstostrengthentheoversightandregulationofshadowbanking.

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Wehavereceivedusefulfeedbackthroughapublicconsultationontheinitialrecommendations.

TheFSBisrefiningtherecommendationsrelatingto securitieslendingandrepos,andthoserelatingtothepolicymeasuresforshadow bankingentities otherthanmoneymarketfunds.

Therecommendationswilladdressbank-like riskstofinancialstabilityemergingfromoutsidetheregularbankingsystemwhilenotinhibitingsustainablenon-bankfinancingmodelsthatdonotposesuchrisks.

Theapproachisdesignedtobeproportionate to financialstabilityrisksbyfocusingonthoseactivitiesthatarematerialtothesystem,usingasastartingpointthosethatwereasourceofsystemicrisk duringthecrisis.

Wewill delivercertainrecommendationsto theSt PetersburgSummit.

Thesemeasuresshouldbeviewedasthestartofabroaderprocesssincetheyaddressthespecificrisksthataroseduringthecrisisandweallrecognisetheabilityoftheshadowbankingsectortoinnovate.

c.Buildingresilientfinancialinstitutions

InJanuary,agreementwasreachedbytheGroupofGovernorsandHeadsofSupervisionontheLiquidityCoverageRatio(LCR) to beappliedtobanks.

Theagreementexpands therangeofhigh-qualityliquidassetsthatcanbeincludedin theLCRandincorporatesevidence-basedassumptionsaboutliquidityoutflowsintimesofstress.

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

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d.Ending“too-big-to-fail”

ProgressisbeingmadebytheIAISindevelopingandtestingamethodologyfor identificationofglobalsystemicallyimportantinsurers(G-SIIs),andindevelopingappropriatepolicymeasures.

Thisworkshouldbecompletedinthesecondquarterof2013.

Anidentificationmethodologyfornon-bankG-SIFIswillbeissuedforconsultationinthesecondhalfof2013.

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

3.ImplementationofreformsBaselIII

ConsistentimplementationofBaselIIIisfundamentalto strengtheningtheresilienceoftheglobalbankingsystem,maintainingmarketconfidenceintheregulatoryreformsandprovidingalevelplayingfieldforinternationally activebanks.

The27memberjurisdictionsoftheBaselCommitteeonBankingSupervision(BCBS)continuetomakeprogresstowardimplementation;

11hadissuedfinalregulationsby12February2013andtheremaining16jurisdictionshavetableddraftregulations.

TheEuropeanUnionandtheUnitedStatespublisheddraftregulationsin2012andintendtofinalisethemoverthecourseof2013.

TheFSBandBCBSwillprepareafullupdateoncountries’adoptionofBaselIIIindomesticregulationforyourAprilmeeting.

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ThecountriesthathavemissedtheJanuary2013startdateareworkingtofinalisetheirregulationsandareexpected to meetthe2019timelineforfullimplementation.

SeveralmorememberswillundergoaconsistencyassessmentoftheirfinalregulationsbytheBCBSin2013.

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

Otherjurisdictionswillbe subject to regulatoryconsistencyassessmentsshortlythereafter.

TheBCBShasconcludedaninitialexaminationoftheinternationalconsistencyintheapplicationoftheBaselIIIriskweightingschemefortradingbookassets.

Asimilarreviewisunderwayregardingthebankingbook.

Theanalysisforbanks’tradingbooksindicatesthatsupervisorydecisionsandvariationsinbanks’modelscontributetothesubstantialdifferencesinbanks’calculationsofmarketrisk.

(Theaverageriskweightingoftradingassetsformostbanksin thestudyvariedbetween15%and45%.)

Thestudyalsoshowsthatbanks’publicdisclosuresareinsufficientfor understandinghowmuchofthesevariationsinbanks’reportedriskweightingsofassetsareowingtodifferinglevelsofactualriskversusthatowingto otherfactors.

Thissituationisunacceptable,andthestudyhighlightsthreepolicyoptionswhicharebeingaddressedintheBaselCommittee’songoingwork:

(i)Improvingbanks’publicdisclosures,buildingontherecommendationsoftheEnhancedDisclosureTaskForce;

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Narrowingdownmodellingchoicesforbanks;and

Furtherharmonisingsupervisorypracticesoverapprovalofmodels.

ResolutionregimesandG-SIFI resolutionplans

Aneffectiveandcredibleresolutionregimefor SIFIs isacriticalcomponentofthepolicy frameworkforendingTBTF.

Full implementationoftheFSBKeyAttributesofEffectiveResolutionRegimeswillprovideauthoritieswiththepowersand toolsnecessaryforthispurpose.

WewillshortlyconcludethefirstpeerreviewofFSBmembers’implementationoftheKeyAttributes.

Theworkunderthereviewconfirmsthatreformsareunderwayin manyjurisdictions to alignnationalstatutoryregimeswiththeFSBKeyAttributes,butthatsignificantworkremains.

Wearedevelopinganassessmentmethodology to assistcountrieswiththeirimplementation,andtoprovideabasisforfuturepeerreviewsandIMF andWorldBankassessments.

ThemethodologywillbetestedinpilotassessmentsbytheIMFandWorldBanklaterthisyearandpublished in thesecondhalfof2013.

TheFSBanditsmemberswillalsothisyearaddress thespecificaspectsofresolutionofinsurersandfinancialmarketinfrastructuresandtheprotectionofclientassetsin resolution.

ByJune2013,resolutionstrategiesandplansshouldbeinplaceforallG-SIFIs designatedinNovember2011.

Toassistthisprocess theFSBhaspubliclyconsultedonspecific aspectsofrecoveryandresolutionplanningandisnow finalisingitsguidance.

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ProgressinendingTBTF iscontingentonthefeasibilityandcredibilityofputtingtheseresolutionplansintooperation.

Wewilllaunchinthesecondhalfof2013afirstroundofassessmentsundertheG-SIFIResolvabilityAssessmentProcesstoevaluatetheprogressmade.

ReducingtherelianceonCreditRatingAgency (CRA)ratings

TheFSBhasrecentlylaunchedathematicpeerreview to assistitsmemberstofulfiltheircommitmentsundertheroadmapforimplementingtheFSBprinciplesforreducingrelianceonCRAratings.

Thiswill includeastock-takeofreferencestoCRAratingsinnationalauthorities’lawsandregulationsandofactionsbeingtakentoremoveorreplacethesereferences.

ThefindingswillfeedintotheprogressreportonCRAsfortheSummit,whilethepeerreviewwillbecompletedbyearly2014.

MonitoringtheimpactofreformsonEMDEs

TheFSBwillorganiseaworkshopforEMDEsinthefirsthalfof2013 tosharelessonsandexperiencesonimplementingagreedfinancialreformsandonundertakingexanteassessmentsoftheirimpact.

FSBmemberswithsignificantexperiencein undertakingsuchassessmentswillbeaskedtopresenttheirmethodologies.

TheFSBwillreportthefindingsoftheworkshopandotherrelevantmonitoringprocessesattheSt.PetersburgSummit.

4.FSBresources,capacityandgovernance

Finally,Iampleased to reportthattheFSBhasnowbeenestablishedwithalegalpersonality.

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Alongsidethis,arollingfive-yearagreementunderwhichtheBISwillhostandprovideresourcesfortheFSBhasbeen activated,andaninstitutionalmechanismfortheFSB’sfinancialandresourcegovernanceestablished.

TheFSBhasalsoadoptedProceduralGuidelinesforitsoperationalandadministrativeactivitiesandpractices.

Theseareimportantsteps towardsimplementationoftheG20recommendationsatCannesandLosCabostoplacetheFSBonanenduringorganisationalfooting,withstrengthenedgovernance,greaterautonomyinresourceuseandenhanced capacitytocoordinatethedevelopmentandimplementationoffinancialregulatorypolicies,whilemaintainingstronglinks withtheBIS.

TheFSBwillnext electnewchairsforthreeofitsStandingCommitteesandbeginareviewofthecompositionoftheirmemberships.

FollowingtheSt.PetersburgSummit,theFSBwillsetintrainareviewofthestructureofitsrepresentation,whichweenvisagetobecompletedundertheAustralianPresidencyoftheG20.

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Financialregulatoryfactorsaffectingtheavailabilityoflong-terminvestmentfinance

ReporttoG20FinanceMinistersandCentralBankGovernors

ExecutiveSummary

ThemostimportantcontributionoffinancialregulatoryreformstoLTinvestmentfinanceis to promoteasafer,sounderandthereforemoreresilientfinancialsystem.

Ifimplementedintimelyandconsistentmanner,thesereformswillhelprebuildconfidenceintheglobalfinancialsystem,whichwillenhanceitsability to intermediatefinancialflowsthroughthecycleandfordifferentinvestmenthorizons.

Forthisreason,theG20regulatoryreformprogrammeissupportiveofLTinvestmentandeconomicgrowth.

FSBmembershaveidentifiedanumberofregulatoryreformsthatmay affect LTfinance.

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

Manyofthesereformsarestillin theprocessofpolicydevelopmentoratanearlystageofimplementation.

Theregulatorycommunityisvigilant toavoidmaterialunintendedconsequencesandtoanalysepotentialimpactspriortofinalisationofthereforms.

ThereformsdonotspecificallytargetLTfinance.

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  • Forexample,BaselIIIneitherintroduceshigherriskweightsnorrequiresmatchedfundingonbankexposureswithmaturitiesofoveroneyear.
  • However,thereformsdoaltertheincentivesofdifferenttypesoffinancialinstitutions toparticipateinthismarketaswellasthecostsofdifferent typesoftransactions.
  • Asthebalanceofincentiveschanges,institutional investors– whicharethemostnaturalprovidersofLTfinanceinthefinancialsystem– will need to assumeagreaterroleinthismarket.
  • Anecdotalevidencesuggeststhatthisprocessisunderway,butitcantaketimeandisnotuniformacrossdifferentfinancialmarketsegmentsorregions.
  • Animportantissuegoingforwardiswhethertheregulatoryframeworkenablesnon-bankprovidersofLTfinance,particularlyinstitutionalinvestors,tostepuptheir involvementinthismarket.
  • TheFSBcancontributetofutureG20workonLTinvestmentfinanceby:
  • Monitoringtheeffectoffinancialreformsonanon-goingbasistoidentifyanyfactorsthatmaydisproportionallyimpacttheprovisionofLTfinancesothattheycan beaddressed;
  • Workingwithrelevantpartiestoidentifyregulatoryfactorsthatmayimpedetheeffectivenessandefficiencyoffinancialmarketsand
  • non-bankinstitutionsin theprovisionofLTfinance,without
  • compromisingfinancialstability objectives;and
  • Workingwithotherrelevantinternationalorganisationstopromotethedevelopmentofdomesticcontractualsavingsandthecapacityoffinancialsystems to intermediatethem,particularlyin emergingmarketand developingeconomies(EMDEs).

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1.Introduction

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

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

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

LTinvestmentfinanceiscommonlydefinedasresourcesthatsupportLTinvestmentintheproductive capacityofaneconomy.

Thisincludes:

publicandprivateinfrastructure;

equipmentandsoftware;

educationandresearchanddevelopment(R&D);

newhousingandrealestatedevelopment;and

constructionofoil,gasandenergyfacilities.

Theseinvestmentstendtobelessliquid,havematuritiesthatextend beyondthebusinesscycle,andaremoreexposed tochangesincreditqualityandinflationexpectationsratherthanshort-termmarketvolatility.

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TheG20requestis motivatedbyconcernsaboutinadequateresourcesbeingchannelledtogrowth-enhancingLTfinancingprojectsin thepost-crisisenvironment.

Thedriversoftheseconcernsinclude thestrainsongovernmentbudgetsandtheweakenedbankingsystem,whichmakebothsectorslessabletosupportLTinvestmentfinanceatatimewhen, in thefaceofweakglobaldemand,LTinvestmentislikelytobemorecriticalforsustaininglongtermgrowth.

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

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

ThisnoteisbasedontheinputprovidedbyFSBmembers(includingIOsandstandard-settingbodies), interviewswithmarketparticipants,andthereviewofrecentliterature.

Thefinancialregulatoryfactorsthatarecoveredincludebothinternationallyagreedreformsandothernational/regionalpolicymeasuresinFSBmemberjurisdictions.

In mostcases,thereformsareatarelativelyearlyphaseofimplementationandtheirimpactatthisstageisovershadowedbybroaderpost-crisisdevelopmentsaffectingtheprovisionofoverallfinance,sothefindingsandconclusionsin thisnoteare tentative.

Thenoteisstructuredasfollows.

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ThesecondsectiondescribestheroleofthefinancialsysteminLTfinanceprovision, includingthewaythatfinancialregulationmayinfluencethisrole.

Thethirdsectionfocusesonthosereformsidentifiedby FSBmembersaspotentiallyaffectingLTfinance.Thefinalsectionsummarises themainfindingsandsuggestspossiblefutureareasofworktoaddresstheissuesidentifiedinthenote.

2.RoleofthefinancialsysteminLTfinance

Thefinancialsystemintermediatessavings to,andfacilitates themanagementofrisksthatarisein,thefinancingofLTinvestment.

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

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

Withinthefinancialsystem,bankshavegenerallybeentheprimaryprovidersofLTfinance,withcapitalmarketsbeinganotherimportantintermediationmechanism.

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

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Bondandequityfinancingbyinstitutionalandotherinvestors(seebelow)via capitalmarketsis anotherimportantformoffinancialintermediationinmanycountries;debtmarketinstrumentsoftenhavealongertenorthanbankloans.

Theabilityofthefinancialsysteminagivenjurisdiction toprovideLTfinanceisinfluencedbyavarietyofstructuralfactors.

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

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

Conjuncturalorcyclicalfactorshaveanimportantbearingonthedemandfor,andsupplyof,LTinvestmentfinance.

In thecurrentenvironment,strainedfiscalpositionslimitgovernmentfinancingofLT investment,whileuncertaintyassociatedwithweakglobalgrowthandthelongertermmacroeconomicpolicyoutlookisdiscouragingcorporateinvestmentinspiteofsizeablecorporatecash holdingsandthelowinterestrateenvironment.

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

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

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3.FinancialregulatoryfactorsaffectingLTfinance

Theglobalregulatoryreformprogrammeaimstocreateasafer,sounderandthusmoreresilientfinancialsystem.

Ifimplementedintimelyandconsistentmanner,thesereformswill helprebuildconfidenceintheglobalfinancialsystem.

Confidencehasalargebearingonthefinancialsystem’s capacitytointermediatefinancialflowsthroughthecycleandfordifferentinvestmenthorizons.

Forthisreason,theG20regulatoryreformprogrammeissupportiveofLTinvestmentandeconomicgrowth.

Financialregulation(anditsreform)influencesboththelevelanddistributionofLTfinanceprovidedbythefinancialsystem.

Forexample,prudentialregulationseeks to ensurethatthematuritymismatchandleveragerisksthat accumulateonbankbalancesheetsaspartofthefinancialintermediationprocessareadequatelycoveredbycapitalandliquiditybuffers.

Thebuffersincreasetheresiliencyoftheseinstitutionsandcontributetotheinternalisationoftheriskstheyposetothebroaderfinancialsystem(whichwerenotproperlypricedorregulatedpriortothecrisis),butmay alsoincreasethecostsofintermediationforusersoftheirservices,therebyaffectingthequantityofloansdemanded.

Ideally,financialregulationshouldnotdistortincentivesinfavourofcertaintypesofmarketparticipantsorsectors,butratherseek to betteralignprovidersandusersoffinanceinaccordancewiththeirrespectiveinvestmenthorizonsandrisk-bearingcapacity.

FSBmembershaveidentifiedanumberofinternationallyagreedpost-crisisregulatoryreformsandothernationalorregional policymeasuresthatmayaffectLTfinance.

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Thesecoverabroadrangeoftopicsatdifferentstagesofpolicy developmentandimplementation.

TheyincludeBaselIII;OTCderivativesmarketreforms;andtheregulatoryand accountingframeworkfordifferenttypesofinstitutionalinvestors.

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

In consideringtheimpactofthesereformsonLTfinance,itisimportant todistinguishbetweentransitionalandpermanenteffectsaswellasthetypeofmarketorregionthatmaybeaffected.

In particular,theshort termadjustmentcostsaregenerallyeasiertoidentifybutoftenrelyonastatic,partialequilibriumframeworkthatdoesnottake accountofthedynamicgeneralequilibriumprocessofmarketadjustment.

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

Moreover,theeffectsofreformswilldifferacrossmarketsandregionsgiventhedifferentstartingpositionsaswellasthescopeforsubstitution offinancialprovidersandinstruments.

Finally,itisimportanttorecognisethatpre-crisismodelsandlevelsoffinancingwereunsustainableandshouldnotbetheappropriatebenchmarkforassessingtheimpactofreformsontheavailabilityandcostofLTfinance.

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3.1 BaselIII

BaselIIIisacomprehensivesetofpolicymeasuresdesigned tostrengthentheregulation,supervisionandriskmanagementofthebankingsectorinresponsetothefinancialcrisis.

Themainobjectiveofthereformsistoimprovethebankingsector’sability to absorbshocksarisingfromfinancialandeconomicstress,thusreducingtherisk ofspilloverfromthefinancialsectortotherealeconomy.

ThekeyelementsofBaselIIIare:

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

theintroductionoftwo minimumgloballiquiditystandards.

TheBaselIIIreformpackagedoesnotspecificallytargetlong-termbankfinance,althoughitmayaffectit.

BaselIIIneither introduceshigherriskweightsnorrequiresmatchedfundingonbankexposureswithmaturitiesofoveroneyear.

However,thecombinedeffectofthereformswillbetoincreasetheamountofregulatory capitalforsuchtransactionsandtodampenthescaleofmaturitytransformationriskstheycarryontheirbalancesheet(Box1).

Inresponsetotheseregulatoryrequirements,thecostofLTbanklendingmayincreaseoritssupply(and tenor)maydecrease.

In addition,ifthebankusesOTCderivativestohedgetherisksassociatedwiththeLTexposure,thenthosetransactionswillbesubject

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  • toadditionalcapitalandpossiblymarginingrequirementsunderBaselIII(seesectionbelow).
  • Theoveralleffect willvarydependingonanumberoffactors,suchasthespecificcharacteristicsandlocationofthetransactionaswellasthepresenceofalternativefundingsourcesindifferentmarketsegments.
  • Box1.ExampleoftheImpactofBaselIIIonaLTCorporateLoan
  • The capitaltreatmentofaLTcorporateloan underpillar1ofBaselIIdependsonanumberofparametersreflectingthecreditriskmeasurementapproachusedbythebank:
  • standardisedapproach–externalcreditratingofborroweranduseofanycreditrisk mitigantsin thetransaction(e.g.developmentbankorexportcreditagencyguarantees);or
  • internalratingsbased(IRB)approach–bankestimatesofriskparameters(i.e.PD,LGD,EAD,effectivematurity)usingdifferentformulae dependingontheassetclass(i.e.standardcorporatevs.SMEvs.so-called“specializedlending”6etc.)
  • Therisk weightsandformulaeunderBaselIIIforthistypeofbankingbooktransactionremainunchanged.
  • However,therewillbeanincreaseinboththequality(definition)andlevelofminimumregulatorycapitalrequirements,whichwillraisetheamountofregulatory capitalthatabankneeds to allocateforloans.
  • Thesetransactionswillalsobesubjecttoaleverageratiothatwillsupplementand actasabackstop totherisk-based capitalrequirements.
  • Thesechangesaffecttherequiredregulatory capitalforalltypesofbanklending,includingLTcorporateloans.
  • In addition,two newminimumfundingliquiditystandardsareintroducedunderBaselIII:

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  • LiquidityCoverageRatio(LCR)–Itsobjectiveistopromoteshort-termresilienceofabank’sliquidityriskprofilebyensuringthatithassufficientunencumberedhighqualityliquidassets(HQLA)tosurvivean acutestressscenarioofcashoutflowslastingforonemonth.
  • In theLCRformula,50%ofallcorporateloansmaturingwithin30calendardaysare includedinthecashinflow,i.e.banks areassumed torollover50%ofthoseloansinastressperiod.
  • NetStableFundingRatio(NSFR)– Itsobjectiveistopromoteresilienceoveraoneyeartimehorizonbycreatingadditionalincentivesforabanktofunditsactivitieswithmorestablesourcesoffundingonanon-goingstructuralbasis.
  • In theNSFRformula,loans(excludingmortgages)withamaturitygreaterthan1yearareassigneda100%requiredstablefundingfactor,implyingthattheyrequirestablefunding(i.e.bankequityandliabilitiessuchasdepositsandwholesaleborrowing)greaterthan1year.
  • ThereisnodirecteffectontheLTcorporateloanfromtheintroductionoftheLCR(unlesstheloan isclose to repayment).
  • However,thebankmaybeincentivizedtoholdothertypesofmoreliquidassetsthataretreatedmorefavourablyunderthe HQLAdefinition(e.g.sovereignbonds)inordertomeettheLCRrequirement.
  • InthecaseoftheNSFR,iftheLTcorporateloanisfundedviashort-termdepositsorotherliabilities (thatareregularlyrolledover),thereisamaturitymismatchthatwillneed tobecoveredbylengtheningthe termoffundingand/orbyreducingthematurityoftheloan.
  • However,theNSFRallowsforconsiderablematuritytransformationsinceaLTloan canbefullyfundedwithbankliabilitiesof1yearorgreater.
  • Atthisstage,itis tooearly to assesstheactualimpactofBaselIIIontheavailabilityofbank-providedLT investmentfinancing;implementationoftheoverall packagehasjustbegunandwill notbecompletedbeforeend-2018.

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In addition,thecalibrationofsomeoftheelementsofBaselIII– suchastheNSFRandtheleverageratio–hasnotyetbeenfinalised.

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

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

3.2OTCderivativesmarketreforms

Hedgingofmajorrisks(commodity,interestrate,exchangerateandcredit)throughOTCderivativescontractsaswellas otherfinancialinstrumentscansupporttheviabilityofLTinvestmentfinance.

Thisisbecausetheexistenceoftheseinstrumentsallowsthe‘parcelling’ofdifferenttypesofriskto thosepartiesthatarebetterpositioned tomanagethem,therebyfacilitatingtheexecutionofaLTfinancetransactions.

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

G20jurisdictionshavecommittedtoapackageofreformstoOTCderivativesmarketsinordertoimprovetransparency,mitigatesystemicriskandprotectagainstmarketabuse.

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

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contractsshouldbesubjecttohighercapitalrequirements.9Toassistinmeetingthecentralclearingobjectives,theG20hasalsocalledforthedevelopmentofstandardsonmarginingfornon-centrallyclearedOTC derivatives.

Toimplementthispackage,international policy recommendationsand nationalmeasuresarebeingdeveloped.

Thetimingofimplementationvariesacrossjurisdictions.

Inparticular,somejurisdictionshavealreadybegunimposingmandatoryobligations,whileothersarestillestablishingtheirbroadregulatoryframeworks.

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

Certain aspectsofBaselIIIwillalsodirectlyaffectbanksoperatingin OTCderivativesmarkets.

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

Thisreflectstheexperienceofthecrisisthatcounterpartyrisks arisingfrombilateralderivativesexposureswerebeingundercapitalised.

Whilethis capitalchargewillincreasethecosts tobanksofundertakingbilateralderivativestransactions,itisintendedtoensurethatpotentiallossesareappropriatelycapitalised.

Forcentrallyclearedtransactions,thereisnoCVAcapitalrequirement.

Thereislikelytobea muchsmallercounterpartycreditriskchargeforexposurestothedefaultofthecentralcounterparty(CCP)thanforabilaterallyclearedtransaction.

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Reforms to capitalrequirementsthereforestrengthentheincentiveforbanks to centrallyclearOTCderivativestransactions,wherepossible.

TheeffectsofthesereformsontheprovisionofLTfinancearedifficulttoquantifyatthisstageassomeoftherelevantstandardsarestillunderdevelopment.

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

Thesedirectlymeasurablecostsneedtobesetagainstthebroaderreductionsincostsandincreasedrobustnessofmarketsthroughthetargetedimprovementinmarketfunctioning.

However,thereformshavenotyetbeenfinalised,sotheirfulleffect willtakesometimetobefeltacrossglobalOTCderivativesmarkets.

Aparticularexampleisinternationalstandardsforbilateralmarginingrequirements:oncethestandardsarefinalisedlaterthisyear,therewillbemoreinformationonthemagnitudeandscopeoftherequirements(includingapotentialthresholdforthesizeofexposuresbeforecollateralisationapplies)fromwhichtoevaluatethepotentialimpactonLTfinance.

WhilethelargestimpactofthereformswillbeonthefinancialinstitutionsmostactiveinOTCderivativesmarkets,non-financialusersarelikelytobedirectlyandindirectlyaffected.

Financeproviderswhoarelendersorderivativescounterpartiesto

end-usersarelikelytobeaffectedbythereformstotheextentthatthey usederivatives tohedgetheir ownexposures,thoughthelikelyeffectofthisontheprovisionofLTfinanceisunclear.

Whererisksassociatedwithprovidingfundingorhedgingcanbehedgedthroughstandardisedcontractsthatarecentrallycleared,thecapitalandmarginrequirementswillbelowerthanforbilaterallyclearedtransactions.

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Inaddition,greaterstandardisation,centralclearinganduseoforganisedtradingplatformsshouldhelpimprovethedepth,liquidityandpriceefficiencyofOTCderivativesmarkets.

Butforportionsofthemarketthatarenotstandardisedandforwhichcentralclearingisnotavailable(whichmaybethecaseforcustomisedlong-termhedgesofinvestmentfinancingtransactions),theadditionalcapitalandmarginrequirementsfacedbyintermediariesarelikelytoraisethecostandmayreducetheavailabilityofderivativescontracts.

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

Somecostsrelatingtoadditionalreportingandothercompliancerequirementsmayalsobepassedthrough to end-users.

Workiscurrentlytaking placetoanalysetheincentivesforcentralclearingassociatedwithproposedcapitalandmarginingrequirements.

TheFSBisalsoconsideringabroadermacroeconomicassessmentofthecollectiveimpactofthevariousregulatoryreformsthatdirectlyimpactOTCderivativesmarkets.

Thisshouldincludeananalysisoftheimpactonend-usersofOTCderivativesforhedgingrisksrelatedtofinancingoftherealeconomy.

Box2.ExampleoftheImpactoftheReformsonanOTCDerivativesTransaction

AfirmproposestobuildapowerplantincountryX,receivingrevenuedenominatedinthelocalcurrency.

Tofinancetheconstruction,thefirmarrangesa10-yearloandenominatedinUSDfromasyndicategroupoflenders.

Thefirmisexposedtoanumberofrisks,whichitmayhedgeusingderivativesmarkets.

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  • Thefirm’sswapcounterpartiesandlendersmayalsoemployderivativestohedgeassociatedrisks.
  • Thefirmmaybeexposed to long-termfluctuationsintheenergyprice,whichcouldbehedgedthroughalong-termcommodity(electricityprice)derivative.
  • Thefirmisexposedto currencyandinterestraterisk fromtheUSDfundingsource,whichitmayhedgethroughalong-termcross-currencyinterestrateswap.
  • Foreachofthesetransactions,thefirm’sderivativecounterpartiesmaylooktooffsettheresultantexposurebyhedgingwithothercounterparties.
  • Lenderstothefirmmaywishtohedgethecreditrisk oftheloanbyusingcreditderivatives.
  • Ifthefirmissubjectto marginingorcentralclearingrequirements(forinstance,becauseitisaderivativesmarketparticipantonascaleaboveathresholdsetforexemptionofnon-financialfirms),itwillfacetheneedtopostinitialandvariationmargin(forwhichpurposeitmusthaveeligiblecollateralavailable)ortheneedtoarrangedirector indirectparticipationinaCCP.
  • Ifthefirmisexemptfromcentralclearingormarginrequirements,theonlydirectrequirementundertheOTCderivativesreformsmaybeforthederivativestransactionstobereportedtoatraderepository;thiswilllikelybeundertakenbythedealeritusesasitsderivativescounterparty.
  • Therewillbeimpactsonthefirm’sswapcounterpartiesandlendersasaresultofthevariousOTCderivativesreforms,withthepotentialthatsomeoftheadditionalcostsmaybepassedon to thefirm.
  • Ifthefirm’sderivativesarenotcentrallycleared,theswapcounterpartywillfaceahighercapitalcharge(underBaselIII)forthatderivative.

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  • In addition,ifthederivativecounterpartychoosestohedgetheresultingexposurethroughadditionalOTCderivativestransactions,therewilleitherbecentrallyclearedorfaceadditionalcostsforbilateralclearing.
  • TotheextentthatthecombinedeffectofBaselIIIandotherinternationalandnationalderivativesmarketreformsimprovethetransparency,liquidityandresilienceofmarkets,thiswouldlead toreductionsintransactioncostsforhedgingtransactions to offsetthedirecttransactionscostsmentionedabove.
  • 3.3Regulatoryandaccountingframeworkforinstitutionalinvestors
  • Institutional investors– suchasinsurancecompanies,mutualfunds,endowmentsandpensionfunds–aresuitableprovidersofLTinvestmentcapitalandfunding in thefinancialsystem.
  • Theirlong investmenthorizonsallow them totakeadvantageoflong-termriskandilliquiditypremia.
  • Theyarealsoable tobehaveinapatient,counter-cyclicalmanner,makingthemostoflow valuationstoseekattractiveinvestmentopportunities.
  • Theneedfordiversificationandthesearchforyieldgiventhelowinterestrateenvironmenthavedriventheirexpansionintoalternativeinvestmentsinrecentyears,includingcertaintypesofLTfinance.Othertypesofinstitutional investors– suchasprivateequity,sovereignwealthfunds,anddedicatedinfrastructurefunds– havealsoemergedasprovidersofLTcapital(seebelow).
  • Institutional investorsareobligedtomeetavarietyofprudentialregulationsandtocomplywithaccountingstandards.
  • Ontheregulatoryside,investmentchoicesmaybeconstrainedby theneed tomeetprudentiallimits.
  • Forexample,ceilingsoncertaintypesofinvestments(suchasequityornon-liquid/marketabledebt)applytopensionfundsinsomeEuropean

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countries,andarerelativelycommoninemerginganddevelopingmarketeconomies.

Solvencyrulesfor insurersandpensionfundsarenotuniformglobally,butrecentreformshavegenerallymovedsuchinvestorstoapplyfair(market)value totheirbalancesheet.

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

Whiletheseregulationsstrive to ensurethatinstitutionalinvestorsareable tomeettheirobligations,theymayhaveinfluencedinvestmentbehaviourandconstrainedthelong-termoutlookofthoseinvestors.

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

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

Ontheotherhand,totheextentthattheregulationsuseshorthorizonsforassessingsolvencyorapplydifferentmethodsoffairvaluingtheassetsandliabilities,therebycreatingexcessivevolatilityinfinancialstatements,theymaypromotemyopicbehaviourandimpingeontheabilityofthoseinvestors toparticipateincertainLTassetclasses.

Thestandard-settersarecontinuingto workonthisissue,bothinthecontextofthedevelopmentofthesestandardsandaspartofthewiderreassessmentoftheconceptualframeworkforfinancialreporting.

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However,itisimportanttonotethatotherfinancialmarketdevelopments

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

Box3.Examplesofspecificregulationsaffectinginstitutionalinvestors

Accountingrulesforinsurers

InsurancecompaniesthatuseIFRSfortheirconsolidatedaccountsare requiredtoapplyIAS39/IFRS9totheirfinancialassetsandIFRS4totheirinsurancecontracts;thelatterisatemporarytransitionalstandardandthefinalversionwillnotcomeintoforceuntil1January2018attheearliest(USGAAPhassimilarstandards).

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

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

– andmaythereforeinfluenceinvestmentbehaviour.

Accountingrulesforpensionliabilitiesofcompanies

PensionfundsperseareoutsidethescopeofIFRS/USGAAP andsoaccountingissuesarenotrelevant.

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

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Therearetwo relevantissueshere:

astheliabilitiesarediscountedusingaAA-ratedcorporatebond,thereisatendencytomatchtheriskbyinvestinginbondsratherthanequities;and

thestandard’srequirementtooffsetcurrentassetvaluesagainst

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

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

SolvencyII

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

Itsaimis to ensurethefinancialsoundnessofinsuranceundertakings,andinparticulartoensurethatthey cansurvivedifficultperiods.

SolvencyIIwill introduceaneconomicrisk-basedsolvencystandardunderwhichinsurerswillbechargedwith capitalrequirementsproportionalto thecreditworthinessanddurationmismatchofinstrumentsheldontheirbalancesheet.

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

3.4Otherreforms

Accountingreformsforbanks

Themostrelevantaccountingreformforbankswillbeontheimpairmentofloansandreceivables.

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BoththeInternational AccountingStandardsBoard(IASB)andtheUSFinancialAccountingStandardsBoard(FASB)areproposinga

forward-lookingmodelwherebyexpectedlossesarerecognisedonaloanorotherfinancialassetmeasuredatamortisedcost(asopposedtosolely afteralosseventhasbeenidentified),althoughtheirapproachesdiffer.

ThetwoBoardswillbeconsultingontheirproposalsduring2013.

Bothmodelswillgiverisetobankloan lossprovisionsthatarelargerandrecognisedmorequicklythanthecurrentincurredlossmodel,butthisisanintendedeffectthathasbeenrequestedbyG20Leadersandtheregulatorycommunityin response tothecrisis.

Whilethestandardsarestillunderdevelopment,itislikelythattherewillbehigherlevelsthancurrentlyofso-called“day1”loanlossprovisionsunderbothproposals.

ThistreatmentisconsistentwiththeApril2009callbytheG20Leadersto“strengthenaccountingrecognitionofloan-lossprovisionsbyincorporatingabroaderrangeofcreditinformation”,anditisexpectedtoincreasethetransparencyandcomparabilityofbanks’financialreportingforstakeholders.

Theearlierrecognitionoflossesmayincreasetheinterestratechargedforcertaintypesofhigher-riskloans,butitwillreduceincentivesforbankstotakeexcessiverisksandtooverstatethevalueoftheirassets,therebymitigatingprocyclicality.

PolicymeasuresforG-SIFIs

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

TheG20LeadersintheCannesSummitendorsedasetofpolicymeasuresdesigned to addressthesystemicandmoralhazardrisksassociatedwithSIFIs.

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Thesemeasuresincludeanewinternationalstandardfornationalresolutionregimes,resolutionplanningandhigherlossabsorbencyrequirementsforG-SIFIs,andmoreintensivesupervisionofallSIFIs.

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

TheeffectofhigherlossabsorbencyrequirementsontheprovisionofLTfinancebyG-SIBs (andpotentiallybygloballysystemicallyimportantinsurers)isqualitativelysimilartoBaselIII.

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

AsinthecaseofBaselIII,theG-SIFIreformsdonotspecificallytargetLTfinance.

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

Shadow banking

Theshadowbankingsystem canbroadlybedefinedas“creditintermediationinvolvingentitiesand activities(fullyorpartially)outsidetheregularbankingsystem”.

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

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TheshadowbankingsystemrepresentsanimportantprovideroffinancinginseveralFSBmemberjurisdictions.

Suchintermediationwashighlyvolatileinthepastbut,ifappropriatelyconducted,it canprovideavaluablealternativetobankfunding,includingbyfillingsomegapsleftbythepotentialretrenchmentofbanklending in certainregionsorbusinesslines.

Theon-goingshadowbankingreformsaim topromoteprudentfinancialintermediationandtherebycontributetomoresustainablenon-bankfinancing, includingforLTinvestments.

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

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

4.Conclusionandnextsteps

Itisstillearlydaysintheglobalregulatoryreformprocess.

Manyofthereformsarein theprocessofpolicydevelopmentoratanearlystageofimplementation.

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

ThereislittletangibleevidencetosuggestthatglobalfinancialregulatoryreformshavesignificantlycontributedtocurrentLTfinancingconcerns,althoughon-goingmonitoringisneeded.

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ItisdifficulttoseparatetheeffectsofregulatoryreformsonLTfinancefrombroaderpost-crisisdevelopmentsaffectingthefinancialsystem,butconjuncturalfactorsotherthanfinancialregulationareparticularlyimportantgiventhecurrentmarketenvironment.

Theeffectswillalsodiffersignificantlyacross jurisdictionsandmarketsegmentsdependingontheirparticularcharacteristics,suchastheoriginandcircumstancesofthebanksprovidingcross-borderlending.

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

Monitoringtheeffectofregulatoryreformsonanon-goingbasiswillfacilitatetheidentificationofanyfactorsthatmaydisproportionallyimpacttheprovisionofLTfinancesothatthey canbeaddressed.

Whilethereformprocessisstillatan earlystage,thedirectionisunambiguousandintended.

ThemostimportantcontributionoffinancialreformstoLTinvestmentfinanceistopromoteamoreresilientandstablefinancialsystem.

Thereformsareintendedtobeproportionatetorisksandarenotdesigned to encourageparticulartypesoffinanceattheexpenseoffinancialstability.

Manyfinancialinstitutionswereover-leveragedandhadengagedinexcessivematuritymismatchingpriortothecrisis,andarecurrentlyworkingtostrengthentheirbalancesheetsandadjusttheirbusinessmodels.

Theseareintendedchangesthataimtoreturn tomoreprudentbusinesspracticesandsmooththeprovisionofLTfinanceovereconomicand

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financialcycles,eveniftheymayresultin,forexample,loweraccesstocreditorhigherloanspreadsduringboomtimes.

AlthoughthereformsarenotspecificallytargetingLTinvestmentfinance,theydoaltertheincentivesofdifferenttypesoffinancialinstitutions toparticipateinthismarket.

Aspreviouslymentioned,thereformsintroducestricterprudentialrequirementsforalltypesoflendingandnotsolelyforLTfinance.

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

GreaterrelianceonequityfinancemayalsobeadesirableeffectofthischangeastherehasarguablybeenexcessiveuseofdebttofinanceLTprojectswhosepayoffandrisk characteristicsaremoreequity-like.

Asthebalanceofincentiveschanges,long-terminstitutionalinvestorswillneed to assumeagreaterrolein fundinglong-termassets.

Thiswouldbedesirablefromafinancialstabilityperspectiveasthefinancialsystemwouldbecomeinherentlylessfragile.

Animportantissuegoingforwardiswhethernon-bankprovidersofLTfinance,particularlyinstitutional investors,can stepuptheirinvolvementinthismarket.

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

Asnotedintheprecedingsection,theregulationofthesetypesofinvestorsmayneedcloserstudy to ensuretheireffectivenessandefficiencyinplayingthisroleprudently,withoutcompromisingfinancialstabilityobjectives.

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

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

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

Fromalonger-termperspective,promotingthedevelopmentofdomesticcontractualsavingsandthecapacityofdomesticfinancialsystemstointermediatethemwillfostermoreandlessvolatileLTfinance,particularlyinEMDEs.

Thepresenceofmarketparticipantswithdifferenthorizonsandriskpreferencesisanimportantcontributortofinancialstabilityanditalsohelpspromoteefficientresourceallocationbyreducingover-relianceonthebankingsectororonforeignsourcesoffinanceforthemobilisationofsavingsandfinancialintermediation.

However,developingdomesticnon-bankfinancialinstitutionsandcapitalmarketsisalong-termprocessthatrequiresproperplanningandcommitmentaswellasappropriateprioritizationandsequencing.

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

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

ThereislittletangibleevidencetosuggestthatglobalfinancialregulatoryreformshavesignificantlycontributedtocurrentLTfinancingconcerns,althoughon-goingmonitoringisneeded.

ItisdifficulttoseparatetheeffectsofregulatoryreformsonLT

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Keynote

JamesR.Doty,Chairman

FloridaBarAssociation31stAnnualFederalSecurities Institute,MiamiBeach,FL

Thankyoufor invitingmetothisconference.LetmebeginbysayingthattheviewsIexpressaremyownandshouldnotbeattributedtothePublicCompanyAccountingOversightBoardasawholeorany othermembersorstaff.

Today,Iwouldlike to talktoyouaboutsomeofthePCAOB'sinitiativestoenhancetherelevance,credibilityandtransparencyoftheaudittopromotehighqualityfinancialreporting.

Wemeetinthemidstofarobustand

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

I.High-QualityAudits AreCriticaltoCapitalFormationandEconomicGrowth.

High-qualityauditsarecriticalto capitalformationandeconomicgrowth.Thishasbeensosincetheearliestdaysofourorganizedsecuritiesmarkets.

OurcolleagueBernardBlack,onthefacultyatNorthwestern,mayhaveputinvestors'predicamentbest.Heoncewrote—

[C]reatingstrongpublicsecuritiesmarketsishard.Thatsecuritiesmarketsexistatallismagical, in away.

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Investorspayenormousamountsofmoneytostrangersforcompletelyintangiblerights,whosevaluedependsentirelyonthequalityofinformationthattheinvestorsreceiveandonthesellers'honesty.

Itis tothecreditofthesecuritiesbarthatwehavebeenabletofashionasystemofsecuritiesregulationthatgivesmillionsofdisorganizedinvestorsabasistotrusttheinformationtheyreceive,totrustthattheircapitalwillbeapplied to thepurposeintended.

Oneofthebestfeaturesofoursystemisthatitisnotimmutable.

Wehavebeenabletoimproveitovertime,aswedevelopnewformsofcapitalaccumulationandallocationtomeetnewneedsofinvestorsand newusesforpublicfunds.

Throughyourefforts,amongothers,theU.S.hasbecomeaclearinghouseforthefairallocationanduseofcapital.

Professional,skilledandindependentauditorsarekeytohelpinginvestorsseparatethecrediblemanagersfromthecharlatans.

Bybuildingabasisforconfidence,auditorsreducefinancingcosts,andcontribute to anefficientallocationofcapitaltofueleconomicgrowth.

Butconferenceslikethisdonotexisttocongratulateourselves.

Thebarhasreconvenedeachofthe31yearsin thehistoryofthisconferencetoprepareforandchannelnewdevelopmentsandevolution.

AswiththeHolmesianviewofthelaw—notlogicbutexperience—so alsowiththeaudit.Welearnandimprovefromexperience.

Oneprinciplethatcontinuestostand,uponexaminationand

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

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In recognitionofBlack's insight,Ibelieveweareinahighrisk periodthatmeritsmoreattentiontotheaudit, notless.

Althoughwehaveneverneededitmore,theaudithas, inthemindsofsome,becomeacommoditytobecontainedwithothercompliancecosts.

Academicresearchconfirmsthattheharmoffraudulentreportingextendsbeyondtheinjurytodirectstakeholdersandreacheswholeindustriesandcompetitors.

Whentrustin financialreportingislost,themarketsquestioncompetitors'businessstrategies too.

Unwindingill-conceivedinvestmentsmaybecostlyandimpractical.

Moreover,confidencein new,validproposalsforcapitalcommittmentcan beaffected.

Asaformersecuritieslawpractitionerandcounseltoboards,Ibelievetheauditisthemostcost-effectivewaytoavoidbeingsurprisedbyerrorsormalfeasancethathavequietlygrowntoapproachamateriallevel.

Whilenotfoolproof,theauditconfirmslegitimacy.

Butanauditthatdoesnotservetheneedsofusersisfalsecomfortand,overtime,losesitsrelevancetomarketparticipants.

Toberelevant,theauditormustspeaktoandfortheusersofthefinancialstatements.

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

Fairornot,thatisinquestiontoday.

AndthisiswherethePCAOB'sinitiativescomein.

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Iwanttoseeavibrantauditprofessionthatcompetesonqualitymorethanprice.

Iwanttoseeaprofessionthatisreveredforinsightandclarity,notbox-checking.

Iwanttoseeaprofessionthatattractsandretainstopgraduateswhoareandremaincommittedtoexcellenceinpublicservice.

IdoubtIneedtoimpressuponyouthebar'sinterestin thesegoalsaswell.

Auditregulatorsaroundtheworldareengagedin confrontingthesechallenges.

ThePCAOBisdeeplyengagedwithitscounterparts,boththroughinspectioncoordinationandmulti-lateralmeetingsinvenuessuchastheInternationalFederationofIndependentAuditRegulators.

Iwillsharesomeofwhatwearelearningfrom otherregulators.

II.InternationalAuditOversightCoordinationandResults

Withthatinmind,letmebrieflydescribeourapproach to coordinatingwithourcounterpartsaroundtheworld.

Todate,thePCAOBhasconductedinspectionsin40foreignjurisdictions.

Lastyear,one-fourthofourinspectionstookplaceoutsidetheUnitedStates.

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

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A.AuditRegulatorsAround theWorldAreDevelopingaNewParadigmforWorkingTogether.

Gradually,togetherwithourcounterparts,wearecreatinganetworkofregulatorstomatchthenetworksoffirms.

Theaimis to workseamlesslytogethertomeetourrespectiveinspection mandates.

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

Two weeksago,thePCAOBenteredprotocolsoncooperationandinformation-sharingwiththeauditregulatorsinFranceandFinland.

Theseagreementswillallow thePCAOBto beginconductingjointinspectionsofPCAOB-registeredfirmsinFranceandFinlandwiththelocalregulators.

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

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

Thisisthenatureoftheglobalaudit.

Theprincipalauditor—thatis,theauditorthatsignstheauditreport— refersaportionoftheaudittolocalauditorsin acountryorcountrieswherethecompanyhassubsidiariesorsignificantoperations.

Thelocalauditormayperformspecifiedproceduresthattheprincipalauditoraskedit toperform.

Oritmayperformfortheprincipalauditoracompleteaudit,withauditreport,onthelocaloperation.

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In eithercase,generallyspeaking,theprincipalauditorusestheworkofotherauditfirms to formanopiniononthefinancialstatementsasawhole.

B.RegulatorsAroundtheWorldHaveExpressedSharedConcernsAboutDisappointingInspectionResults.

Letmeturn to results.Whatbenefitdoescoordinationyield?Aswedeepenourrelationshipswithfellow independentregulators,wedeepenourunderstandingofauditrisks.

Wehaveidentifiedsignificantauditfailuresafterissuesidentifiedjointlywith anotherregulator inaninspectionoftheprincipalauditorledustoreviewasubsidiaryauditinathirdcountry.

OurinspectorshavealsofoundsituationswhereaU.S.firmhasusedtheworkofanotherauditfirmthatturnedout to beunreliable.

Sometimestheworkrequestedbytheprincipalauditorwasneverperformed.

Bothinthisjointworkandindependently,regulatorsaroundtheworld haveexpressedconcernsaboutdisappointing inspectionresults.

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

He saidit"showedanincreasein auditorsfailingtoobtainreasonableassurance theauditedfinancialstatementwasnotmateriallymisstated."

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

SimilarresultshavebeenreportedacrossEuropeandinCanada.

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

Sinceitbeganoperationsin2003,thePCAOBhastackledprogressively moreofthevexingissueswithwhichtheauditprofessionhasstruggledfordecades—suchas thefailuretoapplyprofessionalskepticismin difficultauditareas, includingmanagementestimatesandvaluations.

ThePCAOBalsoperformsincreasinglyrefinedandsophisticatedriskassessmentstoidentifywhere themostsignificantchallengestoauditqualityexist.Thiscontributes totheincreaseininspectionfindingsovertime.

Tacklingthesetoughissueshasalsocontributedtoanimprovementinauditquality,Ibelieve.

Nevertheless,as otherauditregulatorsaroundtheworldhaveconcludedtoo,therateoffailureisunacceptablyhigh.

III.ThePCAOB'sInitiativesAimtoHelptheProfessionRealizeItsPotentialbyEnhancingtheRelevance,CredibilityandTransparencyoftheAudit.

ThereisalotgoingonatthePCAOB toexaminetheseissuesandfindwaystoimproveauditorperformance.

Wehaveanactivestandards-settingagendadevelopedthroughextensiveoutreach,includingwiththePCAOB'sStandingAdvisoryGroupaswellas otherstandard-setters.

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

Wedon'trewritestandardsjustforthesakeofchange.

Butthroughourconsultationprocessweidentifyareasofauditingthatdeserveimprovementorupdatinginlightofdevelopmentsinpractice.

Weconsideralternativesto achieveourintendedoutcome.

Weconsiderpotentialcosts,aswellaspotentialunintendedconsequences.

Weareaddingresources to involveeconomistsmoredeeplyinourwork.Ouragendaisavailableonourwebsiteandisupdatedperiodically.

Today,Iwillhighlightahandfulofprojectsthatmaybeofparticular

interest to thebar.

A.FacilitatingtheWorkofAuditCommittees.

Thefirsttwo suchinitiativesfocusonarmingauditcommitteeswithmoreandbetter informationabouttheaudit,aswellasmoreandbetterinformationabouttheauditor'sstrengthsandweaknesses.

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

Auditcommitteescannotmakedecisionsabouthiringandcompensatingauditorsonthebasisofqualitywithouttransparencyandinsightaboutquality.

Ourauditcommitteeinitiativesaimtohelpauditcommitteesobtainthatinformation.

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

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1.AuditingStandardNo.16Improves AuditorCommunicationwithAuditCommittees.

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

Iknowyou'llhaveapanelontheJumpstartOurBusinessStart-upsActof2012 tomorrow.

SoitmaybeofinterestthatthisstandardisthefirstpromulgatedaftertheJOBSActwasenacted.

ConsistentwithSection104oftheJOBSAct,whenthePCAOBsubmittedthefinalstandardforapprovalbytheSEC,weincludedadiscussionofefficiency,competitionand capitalformation.

TheSECapprovedthestandardonDecember17,2012.ItiseffectiveforauditsoffiscalyearsbeginningonorafterDecember15,2012.

AS16isintended tofosteramorerobustdiscussionbetweentheauditorandtheauditcommittee.

Itisintendedtofocustheauditcommitteeontheimportanceofprobingandunderstandingchallengingauditissuesandsignificantauditorjudgments,and championingtheauditor'sindependenceand professionalskepticisminresolvingthoseissuesandmakingthosejudgments.

Iwouldexpectthebestauditcommitteestodemandthiskindofdialoguealready.

Yetweseesituationswherethiswasnotthecase.AS16isanattempt tochangethat.

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2.ThePCAOBHasIssuedGuidanceonWhatAuditCommitteesCanLearnfromPCAOBInspections.

ThePCAOBhasalsorecentlyissuedguidanceabouthowauditcommittees can learnmorefromtheirauditors abouttheresultsandimplicationsofthePCAOB'sinspectionfindings.

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

Firms'characterizationsofinspectionresultscan sometimesdistortthem.

Howanauditorapproachesinspectionresultscantellanauditcommitteealotaboutthefirm'scommitmenttoexcellence.

Yourroleascorporatecounselmakesadifference:howanauditcommitteeaddressesinspectionresultscan affectthe toneoftheaudit.

Anauditcommitteethatisimpatientwiththetechnicalitiesofanaudit,oracceptsweakarguments todismissthefindingsinaninspectionreport,mayinadvertentlysignalto theauditfirmandauditteamthattheauditcommitteeisnotconcernedwithquality.

Anauditcommitteethat,ontheotherhand,expressesexplicitconcernforhow theauditorhasresolvednoteddeficiencies tellstheauditorthatqualitymatters.

Andthen,thereisthefallacyofelevatingthefeeabovethequalityoftheauditor.

Ascounselforcorporateboards,youwillwanttobeattunedtothesenuances.

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B.ThePCAOBHasProposedNewStandardsonRelatedPartyTransactionsandAuditTransparency.

ThePCAOBhasalsoproposedtwonewstandards.

Thefirstwouldenhancethepublic'sunderstandingoftheauditbyrequiringdisclosureaboutparticipatingfirmsaswellasthenameoftheengagementpartnerwho supervisesthem.

Today,onlytheprincipalauditfirm'snamegoesontheauditreportthatthepublicsees.

Wearereminded,fromtimetotime,that evensophisticatedbusinesspeopleandgovernmentofficialswhouseauditreportsdonotrealizethatauditsforlargecompaniesareoftenperformedbyconsortiumsofseparateauditfirms.

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

Dependingonwhereacompany'soperationsandaccountingare,theunderlyingsourceofhalformoreofthisassuranceworkmaybeperformedbyafirmorfirmsotherthanthefirmwhosenameisontheauditreport.

Buteventhosewhoareawarethatmultiplefirmsmaybeinvolvedinanauditgenerallydon'tknow theextentofworkperformedbyotherauditfirms.

ThePCAOBhasproposedtoaddressthis.

Thesecondproposalisanewauditingstandardonrelatedpartytransactions,describesbasictoolsthatgoodauditorshaveusedforyearstoidentifyfinancialreportingrisks.

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Forexample,itrequiresauditors tounderstandmanagement'scompensationasawaytounderstandmanagement'smotivations.

Tobeclear, nothingaboutthestandardwouldputtheauditor intheroleofsettingorpassingonmanagementcompensation.

Somecommentershaveexpressedconcernsinthisregard,butasthestandarditselfmakesclearit'ssimplynotthecase.

IdoubtIneedtotellyou,though,thatchangesinperformancemetricsprovideimportantinformationaboutmanagement'sincentivesthatmaynototherwisebeunderstood.

Theyoffertheauditor—andauditcommittee—insightsaboutwheremanagement'sfinancialstorycouldbeweak.

Wearecurrentlyevaluatingcommentsonboththerelatedpartyproposalandthetransparencyproposal.

C.ThePCAOBHasIssuedConceptReleasestoCommenceDebateonMoreBroad-RangingTopics.

ThePCAOBstandards-settingworkalsoincludestworathermore

broad-rangingprojects,commencednotwithconcreteproposalsbutwithconceptreleases.

1.TheAuditor'sReportingModel

Oneinvolvesconsiderationofchangestotheformandcontentofthestandardauditreport.

Thecurrentmodelisessentiallythreeboilerplateparagraphs.

Foralongwhile,investorshavecalledformoreinsightsfromtheauditor'swork.

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Thisprojectisintendedtodevelopabetter,moretransparentreportingmodel,onethatwillimparttheauditors'insightsaboutkeyaspectsofthefinancialstatementsandothermatterstoemphasize.

Theprojectisnotaboutchangingthenatureorscopeoftheauditor'swork.It'saboutmakingtheresultsofthatworkmorerelevant.

2.AuditorIndependence

Thesecondconceptreleasegoestotheissueofauditorindependence,objectivityandprofessionalskepticism.

In August2011,theBoardissuedaConceptReleaseonAuditorIndependenceandAuditFirmRotation.

Theconceptreleasenotestheimportanceofauditorindependencetotheviabilityofauditingasaprofession.

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

Asaconceptrelease,itmadenospecificproposal.

Rather,thevehicleoftheconceptreleaseisdesignedtoposequestionstosolicitpublicinputbeforeanyproposalisconsideredorformulated.

Independenceandskepticismarecomplexissuesthatwarrantdeepstudy.

ThePCAOBhasembarkedonaseriesofpublicmeetingstoengageprominentandthoughtfulcommenterswithvarious,oftenconflicting,viewpoints.

OneoutgrowthofthemeetingssofarhasbeenaPCAOBstaffauditpracticealertonMaintainingandApplyingProfessionalSkepticisminAuditsissuedinDecember2012.

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TheAlertremindsauditorsofthecritical importanceofprofessionalskepticismtoeffectiveaudits.

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

Finally,theAlertdescribesstepsthatfirmsandauditors cantaketoenhanceprofessionalskepticisminaudits.

Wemustalsowatchandevaluatetheimplicationsofinternationaldevelopments.

TheDutchParliamentrecently adoptedauditfirmrotation.Itappearslikelythatsomecompaniesplantoimplementauditorswitchesaheadofthe2016deadline.

TheEuropeanCommission,ParliamentandMemberStatesareengagedintheirowninquiry.

Theirlegislativedeliberationsindicateareallikelihoodthatsomeformoftermlimitscouldbeadoptedthisyear.

FirmsinEuropehavehadtofactorthepossibilityintotheirstrategicbusinessplanning.

Thisisnotanewissue:concernsover independenceandtheroleofanticipatedorestablishedauditortenurepredatetheSarbanes-OxleyAct.

Itisnow,however,abroadinternational debate.

Peopledisagreeonwhatthebestreformswillbe,howtoimplementthem,andindeedwhetherreformisnecessary.

Costsandanypotentialunintendedconsequenceswillhavetobeconsidered.

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Weshouldnotrushtodecision.Idon'thave theviewthatindependenceandskepticismcanonlybeachievedthroughtermlimits.

ThroughtheresponsestotheAugust2011conceptreleaseandthesubstanceofourpublicmeetings,wehaveelucidatedmanyofthequestions askedbytheconceptrelease.

OurjobatthePCAOBistobealerttothechangesthatareafoot:tounderstandthem,toanalyzetheireffectsontheaudit,andtoconsiderwhatitallimpliesforthefutureoftheaudit.

***

YouhavebeenagraciousaudienceandIthankyouverymuchforyourinterestinthePCAOB'swork.

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

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StrategicGoals2013to2016

Note:TheSwissFinancialMarket

SupervisoryAuthorityFINMAisaninstitutionunderpubliclawwithitsownlegalpersonality.

ItisresponsibleforimplementingtheFinancialMarketSupervisionActandfinancialmarketlegislation.

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

TheirprotectionliesattheheartofFINMA’smandate.

Consistent,risk-orientedsupervision

In itssupervisoryrole,FINMAfocusesontheprudentialsupervisionof banks,insurers,collectiveinvestmentschemesandotherfinancialintermediaries.

PrudentialsupervisionisanongoingactivityinwhichFINMAscrutinisesthesupervisedinstitutionsandthemarketwithafocusonthefuture.

Itsaimis tomaintainthefinancialsoundnessoftheseinstitutions,primarilybyensuringthattheyaresolvent,haveadequateriskcontrolsandprovideassuranceofproperbusinessconduct.

In ordertosettherightprioritiesinprudentialsupervision,FINMAconsistentlypursuesarisk-orientedapproach.

FINMAcannotprovidefull-spectrummonitoringofallthesupervisedinstitutions.Itmustthereforeconcentrateonthekeyrisksforcreditors,investorsandthesystemasawhole.

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Supervisionoflarge,interconnectedinstitutionsandsegmentswithgreater inherentriskisnecessarilymoreintensethanforsmallermarketparticipantswithlowerrisk profiles.

Therisk-orientedapproachisreinforcedbycontinuousmonitoringofthefinancialmarketand,morerecently,targetedspotchecks.

In linewithinternationaltrends,FINMAhassubstantiallyincreaseditsactivitiestoidentifysystem-wideandsystemicrisksatanearlystage.

Thefocushereisonlarge,interconnectedfinancialinstitutionsandmarketparticipantsthatperformnon-substitutablefunctions.

FINMAaimstoensurethatSwitzerland’sfinancialinstitutions

meetinternationalnormsintermsofcapital,liquidityandresolvability.

Systemicallyimportantinstitutionsmustexceedtheinternationalnorms.

In theeventoftheinsolvencyorbankruptcyofasupervisedinstitution,itisFINMA’stasktoprotectfinancialmarketclientsfromtheconsequences.

Ifaninstitutiongetsintodifficulties,FINMAreactsrapidlyand professionally to takethenecessarymeasures.

Ifthereisnoprospectofsuccessfulrestructuring,anorderlymarketexitmustbepossible.

FINMAanalysestheconductoffinancialmarketparticipants.

However,in ordertoeffectivelyprotectfinancialmarketclientsfromabuses,clearrulesofconductforfinancialservicesproviders

areimperative,asarebetterproductdocumentationandincreased

transparency.

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

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FINMA’sstrategicgoals

Prudentialsupervision

Strengtheningfinancialstabilityandcrisisresistancethroughprudentialsupervision

Theinterestratesituation,thechangedenvironmentincross-borderbusinessandthepressureonmarginsandpricesarepresenting

banksandinsurerswithmajorfinancialandorganisationalchallengesin

theircorebusiness.

SignificantstructuralchangeintheSwissfinancialcentrecanbeexpectedinthemediumterm.

Historicallylow interestratesaredepressingtheearningsofalmostallsupervisedinstitutions.

Banksandinsurers,especiallylife insurers,arebeingforcedtofindinvestmentsthatgeneratehigherreturns.

Thismeans,however,thattheyarealsotakinggreaterrisks.

Low interestratesalsoposeadangertosupervisedinstitutionsintheSwissrealestatemarket.

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

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Thelegalandreputationalrisksassociatedwithcross-borderfinancialservicescontinuetobeofmajorimportance.

Thecompaniesinquestionmustrecognisetheneedforstrategicreorientationanddealappropriatelywithlegacyissues.

Strategicgoal1

ThestabilityandcrisisresistanceoftheSwissfinancialcentrearestrengthenedthroughinternationallyrecognisedprudentialstandardsandconsistentcompliancewiththem.

Ifmarketexitstakeplace,theydosoinawaythatisorderlyandquick,andresultintheleastpossibledamage tofinancialmarketclients.

Businessconduct

Promotingintegrity,transparencyandclientprotectioninbusinessconduct

Currentlegislationdoesnotguaranteeadequateclientprotectionasfarasthebusinessconductoffinancialintermediariesisconcerned.

In thisrespect,Switzerlandlagsbehindinternationalregulatorystandards.

In thefirstplace,Swissclientsareatadisadvantagecomparedwith

non-Swissclientsbecausetheyareoftennotadequatelyandtransparentlyinformed.

Secondly,thereisarisk thattheSwissfinancialcentrecouldattractundesiredmarketparticipants.

Thirdly,clientprotectionthatisnotfullyequivalentcanhaveanadverseimpactontheabilityofSwissfinancialserviceproviderstogain accesstoothermarkets.

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Regulationsthatdonotmeetappropriate,internationallyrecognisedminimumstandardsweakenthereputationofaquality-orientedfinancialcentre.

Thepatchyclientprotectionregulationsatpointofsaleareoneexampleofthis.

Thesupervisorylegislationprovidesforavarietyofauthorisedinstitutionswithdifferinglicensingrequirements.

Noteverylicenceleadstoongoingmonitoringbytheauthorities.

AsfarasthequalityandintensityoflicensingandsupervisionbyFINMAareconcerned,thereisatransparencydeficitforfinancialmarketclients.

Strategicgoal2

Inordertoenhancethereputationofthefinancialcentreandpromotefairbusinessconductandintegrityonthepartoffinancialmarketparticipants,FINMAconsistentlyimplementslicensingprocedures,createstransparencyregardingthevaryingdegreesofsupervisoryintensity,andpromotesinternationallyrecognisedregulationsonclientandinvestorprotection.

Nationalandinternationalcooperation

Joiningforcesattheinternationallevelandworkingtogetherefficientlyatthenationallevel

Thescopeandintensityofinternationalactivitieshaveincreasedmarkedly.Thistrendwillpersistintothenearfuture.

FINMAmustprioritisethedeploymentofitsresourcesoninternationalinitiativeseffectively.

Againstthisbackdrop,cooperationatthenationallevelwithotherinstitutionsandauthoritiesmustbestreamlinedsothatSwitzerland’sinterests canbemoreeffectivelyrepresentedattheinternationallevel.

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  • Becauseofthedifferentmandatesoftheauthoritiesinvolved,theirresponsibilitieshaveto beprioritiseddifferentlydependingonthesituation:
  • TheFederalDepartmentofFinancepromotesSwitzerlandasaplacetodobusiness.
  • TheStateSecretariatforInternationalFinancialMattersworks tostrengthentheinternationalpositionofSwitzerlandinthefieldoffinanceandtax.
  • ItrepresentstheinterestsofSwitzerlandvis-à-vis othercountriesin internationalfinanceandtaxmattersandisleadingtheinternationalnegotiationsintheseareas.
  • FINMAfulfilsitsinternationalremitfromthepointofviewofafinancialmarketsupervisor.
  • In thefield offinancialstability,FINMAworkscloselywiththeSwissNationalBank.
  • ResponsibilityforsupervisingtheindividualfinancialinstitutionslieswithFINMA.
  • Itiscruciallyimportantthatthedifferingstatutoryresponsibilitiesand decision-makingpowersarepreserved.
  • Strategicgoal3
  • In itsinternationalactivities,FINMAconcentratesitsresourcesandusesthemtoaddressimportantcoreissues.
  • In thecontextofnationalcooperation,theinformationflow isefficientandthedecision-makingscopeoftheauthoritiesisclear.

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

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Regulation

Engagingexpertiseandregulatinginlightofitssupervisorygoals

FinancialmarketsupervisorylawdefinesFINMA’scompetences infinancialmarketregulation.

FINMAgenerallyregulatesbywayofcircularswhichexplainhowfinancialmarketregulationistobeapplied.Italsoregulatesbywayofordinanceswherethisisenshrinedinthelaw.

Financialmarketlegislation,ontheotherhand,isapoliticalresponsibility.Thelegislaturedefines theregulatoryframeworkbindingonFINMA.

Thefinancialmarketlawsarethereforetheresultofapolitical processandhencethesubjectofpoliticaldiscussionsandcompromises.

In accordancewithitssupervisorymandate,FINMAisguidedbyitssupervisorygoals,explainingitspositionearlyandtransparently,butwithouttakingpartinpoliticaldebates.

Strategicgoal4

FINMAanalysesexistingregulationsandlegaltrendsfromtheperspectiveoffinancialmarketsupervision,proposesrelevantamendments,usesitsspecialistexpertiseto supporttheproposedregulationsthatareimportantandhighlightsitsownconcernsearlyandtransparently.

Withinitsarea ofresponsibility,FINMAregulatesonlyinsofarasthisisnecessaryinlightofitssupervisorygoals.

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

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ManuelSánchez:Mexico’seconomicoutlookandchallenges

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

sector”,organizedbytheInstituteofInternationalFinanceandBanorte,MexicoCity

***

Itisaprivilege tospeakatthecloseofthisconferencedevoted to theimplicationsforMexicoofrecentregulatoryreformsandtheglobaleconomicoutlook.

Iwouldlike tothanktheorganizersofthisseminar,theInstituteofInternationalFinanceandBanorte,fortheopportunitytosharesomethoughtswithyouonMexico’seconomicconditionsandprospects.

Iwouldlike first to reviewtherecentdevelopmentsintheMexicaneconomyanditsoutlookintoday’sweakworldeconomicenvironment.

Then,Iwillanalyzetheimplicationsofcurrentlybenignfinancialconditions.

Andfinally,Iwilldiscusssomeofthepresentchallengesformonetarypolicy inMexico.

Asusual,myremarksareentirelymy ownresponsibilityanddonotnecessarilyreflecttheviewsoftheBankofMexicooritsGoverningBoard.

TheMexicaneconomyinaweakglobalenvironment

TheperformanceoftheMexican economylastyearcontinuedtobeconstrainedbyaweakglobalenvironment.

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

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Theworldeconomyexpandedataslowerpacethantheaverageobservedinthetwodecadesbeforethebigfinancialcrisis.IntheUnitedStates,GDP grewmoderately,andforafifthconsecutiveyear,outputremainedbelowitsseculartrend.

Signsofimprovementinseveralvariablesin theUnitedStatesareencouraging,includingthosesuggestingthebeginningofaturnaroundinthehousingmarketandthegradualrecoveryofbanklendingto theprivatesector.

However,thelevelandcharacteristicsofunemploymentaswellasthesluggishnessofprivateinvestmentremainsourcesofconcern.

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

ThereboundinU.S.outputafterthecrisishasbeendisappointing,especiallyinlightofsignificantstimulusprovidedthroughpreviousfiscalpackagesandtheongoingextraordinarilyexpansionarystanceofmonetarypolicy.

Subpareconomicperformancemaybepartlyexplainedbyuncertaintyregardingthespeedanddistributionofcostsinthepursuitoffiscalconsolidation.

RecentfiscalaccordsmayhavereducedtheriskofaGDP contraction.

Ontheotherhand,during2012,theeuroarea fellintorecessionwithunemploymentratesatrecordhighs.

Toalargeextent,theproblemsintheregionstemfrominstitutionallimitationsofthedesignofthemonetaryunionthathavecomplicated dealingwiththeaftermathofnationalfinancialcrises.

ProgressinrevampingtheEMUarchitecture,bailoutprogramsfortroubledeconomiesand,especially,decisivemeasuresundertakenbythe

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ECBhaveloweredperceivedrisk forsovereignandbankdebt,especiallyintheperipheralcountries.

Althoughfurthermeaningfulstructuralmeasureswillberequired toattainafulleconomicrecovery,thefinancialstabilization achievedmaysuggestthattheworstofthecrisisisoverintheeuroarea.

Consistently,themostrecentconsensusestimatesfor2013and2014positagradualrecoveryfortheworldeconomy,moderatedecelerationfollowedbyhighergrowthintheUnitedStates,andaslightcontractionandlateranexpansionintheEurozone.

In spiteofthischallengingenvironment,lastyearMexicaneconomicactivitycontinuedtoexhibitapositivetrend,withafirmerexpansioninservicesthanin industry.

In thefourthquarter,annualgrowthwasthesameasinthepreviousquarter,althoughbothfigureswerenotashighasinthefirsthalfoftheyear.

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

Onthebackofthisprogress,externaldemand,asreflectedprominentlyinmanufacturingexports,hasshownsomemoderationin growthinthepastseveralmonths,witharecoveryinthemostrecentquarter.

Byfar,themainsourceofdecelerationcamefromcountriesotherthantheUnitedStates,andinparticularinautomotiveexports.

ThisslowdownispartlyexplainedbyrestrictionsimposedbyBrazilandArgentinaonautoimportsfromMexico.

Atthesametime,domesticdemandcontinuedexpanding.

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

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Privateconsumption,thelargestcomponentofdomesticspending,maintaineditsmomentum,asindicatedbyavailabledataonretailsalesuptoNovember.

Thestrengthofconsumptionhasbeensupportedbyasustained increaseinformalemployment,amoderatedeclineinunemployment,andasignificantexpansionin consumerlending.

Grossfixedinvestmentkeptrising,withmachineryandequipmentshowinghighergrowthratesthanconstruction.

Additionally,measuresofbusinessconfidenceuptoJanuary2013,

suchastheManufacturingOrdersIndicator(IPM),revealthatbusinessmanagersforeseethattheeconomywillmaintainitsexpansion.

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

Therearebothdownsideaswellasupsiderisks to thisscenario.

AfiscaladjustmentintheUnitedStatesappliedinadisorderlywayorlackingcredibility,oracomplicationinpolicy implementationintheEurozonethataugmentsfinancialuncertainty,standoutaspossiblenegativeexternalfactors.

However,therecoveryintheUnitedStatesmaybefasterthanforecast,andinvestorconfidenceinMexicocouldincreaseasaresultofprogressonstructuralreformsfavoringlong-termgrowth.

Capitalinflowsandbenignfinancialconditions

Duringthelastfouryears,theyieldcurvein Mexicohassuccessivelyshifteddownward,aprocessthathascontinuedsofarthisyear,leavingcurrentinterestratesforalltermsclosetoorattheirall-timelows.

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

Themaintransmissionmechanismforlowerinterestrateshascomefrompersistentcapital inflows.

Asin otheremergingeconomies,Mexicohas receivedsubstantialcapitalflowsfromforeigninvestorsseekinghigheryieldsinbothequityand bondmarkets.

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

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

Thereareindicationsthatinflowshavespeededupduringthecurrentyearinmanyemergingeconomies, includingMexico.

TheabundanceofforeignsavingswassupportiveofMexico’srecenteconomicgrowth.

However,thepossibilityofachangeintheperceivedconditionsthatgaverise totheinflowsmakesitlikelyforthoseflowsto stopandevenrevert.

Suchreversalshaveoccurredoninnumerableoccasionsinmanycountries,includingMexico,forreasonsnotnecessarilyrelatedtotherecipientcountry,causingsubstantialfinancialdisturbances.

Theobvious caseatpresentcouldbetheexpectationthattheFederalReservewillstartunwindingitsexpansionarymonetarypolicy.

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Beforesuchaneventualityoccurs,forwhateverreason,andaboutwhichonlythetimingandmagnitudeareuncertain,itisabsolutelynecessaryforsaversandborrowersaswellasfinancialintermediaries totake intoaccountthatinterestrateswilleventuallyrise.

Therealdangeristobelievethatthistimewillbedifferentandthatsomehowpresentfavorableconditionswilllastforever.

Suchmyopicbehaviorhasoftenled toexcessiverisk-taking,overleveragingandtheformationofbubblesincreditandrealestatemarkets,frequentlytheprelude to financialcrisesandpainfulmassiveredistributionsofwealth.

Fortunately,Mexico’sbankshavebeenoperatingcautiously,therebymaintainingstrongbalancesheetsandhealthyloanportfolios.

Also,nolendingbubbleisapparent.

However,authoritieswillhave to continuemonitoringthreats to stabilityinanypartofthefinancialsystem, in ordertoactinatimelywayiftheyemerge.

Thechallengestomonetarypolicy

In 2012annualinflationexhibitedarisingtrendtoamaximumof4.8percentinSeptember.

Duringsevenmonthsitsurpassedtheupperlimitofthevariabilityintervalofplusorminusonepercentagepointaroundthepermanent targetof3percentestablishedbytheBankofMexico.

Factorsexertingpressureoninflationincludedtheinternationaldraughtandthedomesticbirdfluepidemicthatresultedinsignificantagriculturalpriceincreases,andsomepass-throughfrompesodepreciation tomerchandiseprices.

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In December2012andJanuary2013,inflationfellto below 4percent,awelcomedevelopmentinlightofthepreviousconsiderabledeviationfromthetarget.

Nevertheless,therecentdeclineininflationshouldbeseenwith caution.

Thisisbecause,first,itisbasedonlyontwo observations,whichcannotyetbeproven tobethebeginningofanewtrend.

Second,thedropininflationdependedsignificantlyonsharpdeclinesintelecompricesandmoderatingagriculturalpriceincreases.

IfoneweretoexcludetheeffectoftelecompricesoninflationinDecemberandJanuary,inflationwouldhavebeenaboveandpracticallyontheupperlimitofthevariabilityinterval,respectively.

Also,asoccurswithnegativedisturbances,positiveshocksliketherecentonessoonerorlaterdieoutandcouldbefollowedintheirownturnbyadverseshocks.

Third,theproportionofthecomponentsoftheNationalConsumerPriceIndex(INPC)basketwithannualincrementshigherthan4percentisstillsubstantial.

Fourth,thetwo mostrecentinflationprintsexceedthetargetanddonotevencorrespondtothelowestinflationratesobservedin Mexicoduringrecentyears.

Thesecaveatsareallthemoreimportantas thetargethasnotbeenachievedinthepast,inthesensethatinflationhasnotbeenfluctuatingaround3percent.

In fact,sincetheendof2003whenthisobjectivebecameeffective,inflationhasvariedaroundamean of4.3percent.

Moreover,duringthenineyearsaftertheestablishmentofthetarget,inflationhasnotexhibitedanyclearpathofconvergence towardsit.

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Thislackofconvergencemaypartiallyexplainwhyinflationexpectationsfortheshortandmediumterms,asreflectedinanalysts’surveys,havelongremainedstubbornlyabovethetarget.

Theseconsiderationscallforvigilanceinmonetarypolicy.Thetargetistheprincipalguideandhasnotbeenattained.

Furthermore,negativeshockscouldeasilycomplicateconvergence.

Risksinclude thefollowing:

weatherandanimalhealthproblemscouldfuelagriculturalpricerises;newepisodesofheightenedrisk aversioncouldtriggercurrency depreciationwithsomeeffectsoninflation;

public-sectorpricescouldbehigherthananticipated;and

finally,someaggregatedemandpressuresmayariseinlightofconventionalmeasuressuggestingthatslackin theeconomyhasdisappeared.

Concludingremarks

In spiteofaweakglobalenvironment,Mexico’sGDP keptgrowingatratessurpassinghistoricalrecords.

Analysts’outlookfortheMexicaneconomypositsaslightdecelerationin2013andarecoverythefollowingyear.

Therearebothdownsideandupsiderisks to thisscenario,includingonthepositiveside,furtherprogressonstructuralreforms.

Substantialcapitalinflowsresulting inunusuallyfavorablefinancialconditionsin Mexicohavebeensupportiveofeconomicactivity.

However,economicagentsshouldremainprudentastheseflows,formanyreasons,couldstopandevenrevert.

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Finally,theshortperiodofrecentimprovementininflation,theextraordinaryfactorsthatexplainit,andtheabsenceofconvergencetowardtheinflationtarget,requireavigilantmonetarypolicy.

Convergenceofinflation to thepermanenttargetdemandsmorethanafewmonthsofgoodresults.

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

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“TheSECSpeaksin2013”

CommissionerDanielM.Gallagher

U.S. SecuritiesandExchangeCommissionWashington,D.C.

Thankyou,Craig[Lewis],foryourkindintroduction.

ThisismysecondyearaddressingthisconferenceasaCommissioner.

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

Andso,Iunderstandthattheorganizersareofferinga20%discountwhichyoucancollectaftermyremarks.

Justkidding.

Thetruthisthatthey askedallofustogivelongerspeeches,andsinceIamstillthejuniorCommissioner,theothersdumpedtheirextratimeonme.

So,Ihopeyouarereadyforanhourlongadventure.

BeforeIbegin,letmeremindyouthatasusual,myremarkstodayaremyownanddonotnecessarilyreflecttheviewsoftheCommissionormyfellow Commissioners.

OnanumberofoccasionssincereturningtotheSECasaCommissioner,I’vespokenaboutthe Commission’spriorities,bothintermsofwhattheCommissionisdoingandwhatitshouldbedoinginordereffectivelyto

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carryoutitsmandate to protectinvestors,ensurefairandefficientmarkets,andfacilitate capitalformation.

Needlesstosay,theCommissiondoesnotoperateinavacuum,andforvariousreasons,it’snotalways easytoexecutethoseprioritiesasweseefit.

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

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

AsI’msureallofyouknow,CongresscreatedtheSEC intheSecuritiesExchangeActof1934.

Whatsomeofyoumaynotknow,however,isthattheSecuritiesActof1933originallytaskedtheFederalTradeCommissionwithadministeringthenewfederalsecuritieslaws.

Indeed,theFTCwas theinitialchoiceofmany,includingPresident FranklinRoosevelt,toadministertheExchangeActaswell.

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

Forexample,duringconsiderationoftheHouseversionofthelegislationthatwouldultimatelybecometheExchangeAct,RepresentativeCharlesWolvertoncitedthe“highdegreeoftechnicalskillandknowledge,”thatwouldbenecessarytoadministerthenewfederalsecuritieslawsinhis

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supportforthecreationofafive-member,expertCommissiontotakeovertheadministrationofthosenewlaws.

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

ThefinalversionoftheExchangeActthatemergedfromCongressinthesummerof1934providedthenewly-establishedCommissionwithabroadmixofregulatoryandquasi-judicialauthoritytocarryoutthelegislativepoliciessetforthin theSecuritiesActandtheExchangeAct.

Themovementtowardtheestablishmentofexpert,independentagenciesrepresentedamajorshiftintheregulatoryparadigm,anditwasn’tlongbeforethismodelwaschallenged.

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

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

Itsdutiesareperformedwithoutexecutiveleaveand, in thecontemplationofthestatute,mustbefreefromexecutivecontrol.”

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

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

HavingestablishedtheSEC asanexpert,independentagencywiththeauthoritytoadministerthefederalsecuritieslaws,CongresshastraditionallyprovidedtheCommissionwithconsiderableflexibility toexercisethatexpertiseandauthority.

Historically,CongresshasavoidedimposingminutelydetailedmandatesontheCommission.

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

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

Fornearlyeightyyears,theCommission,like otherindependentagencies,hasbroughtitsexpertiseandjudgment tobearinfulfillingthelegislativemandatesestablishedbyCongressinthefederalsecuritieslaws.

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

TheCommissionmustremainalerttothesechallengesandmustrespondwhenappropriateinorder topreserveitsability to actindependentlyinfulfillingitscoremission.

Myconcernsheredonotderivefromideologyoradesire toperpetuateseeminglyage oldagencyturfwars.

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

AndthencameDodd-Frank.

IworryaboutthelimitsplacedontheCommission’sabilityindependentlytoapplyitsexpertiseandjudgmentundertheparadigmestablishedbytheDodd-FrankAct.

TheActcontainsapproximately400specificmandatestobeimplementedthroughagencyrulemaking,around100ofwhichapplydirectly totheSEC.

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

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

Ifoneofthedutiesofanindependentagencyis toworkproactivelywithCongresstoensurethatstatutesdonotimposeunnecessaryorinappropriatemandates,thenonthatfronttheCommissionunfortunatelycameupshortwithrespecttomanyDodd-Frankmandates.

Ideally,whenCongressprovidestheSECwithstatutoryauthoritytodraftandimplementrulesin anewarea,itwillallow theCommissionthetimeandflexibilitynecessaryto studytheissuesinvolvedandformulatesmartregulationthatreflectsacompleteunderstandingoftheunderlyingdata,includingthecostsandbenefitsassociatedwithregulatoryaction.

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Thisis,afterall,how theCommissionwasintendedtooperatewhenitwasestablishednearlyeightyyearsago.

In fact,IbelieveitistheCommission’sdutyasanexpert,independentagencytocontinuetoemploythisdata-drivenapproachasbestitcaneveninthefaceofprescriptivemandatesfromCongress.

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

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

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

Unfortunately,thereislittledoubtthatnotwithstandingthevalianteffortsoftheSECstaff,theCommissionfortoolonghastakenabackseattothebankingregulatorsinthisrulemakingprocess.

AsIhavesaidinthepast,despitetheRule’sostensibleapplicationtobankingentities,theRuleisactuallyfocusedontheconductto beregulated, nottheentitiesthatengageinthisactivity.

Thereisnoquestionthatthespecifictrading,hedging,andinvestingactivitiestoberegulatedundertheRulefallfirmlywithintheCommission’scorecompetencies,astheydealdirectlywithSECregistrantsandregistrationrequirements.

It makeslittlesense,therefore,fortheCommissiontodefertothebankingregulatorsinthisareawhenfordecadesithasregulated

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securitiesmarket-making in ordertofacilitateliquidityandpromotetheefficientallocationofcapital.

TheimplementingrulemakingfortheVolckerRulewasproposedinOctober2011.

Almostayearandahalf—andover18,000commentletters—later,theVolckerRuleremainsattheproposalstage.

Indeed,itappearsthattheproposal’sbroaddefinitionsofstatutorytermshavetakenabadsituationandmadeitworse.

Commissionstaffcontinue to engageindiscussionswiththebankregulatorsandtheCFTCregardingthemanyconcernsraisedinthose18,000-pluscommentletters.

Forthisruletogetdoneandgetdoneproperly,theSECmusttakealeadershiprole.

In fact,Ibelieveitisourdutyastheindependentfinancialregulatorwith primaryauthorityover,andexpertisein,theactivitiestoberegulatedtoensurethatthefinalRulemeetstheaimsofCongresswithoutdestroyingcriticallyimportantmarketactivitythattheRuleexplicitlyintendsnot toeliminate.

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

Thisbringsme totheelephantintheroom:FSOC.

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

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Noneofuswholivedthroughthecrisisonthegroundfloorwouldargueagainstimprovements totheregulatorystructurethatwouldfacilitatecoordinationandinformation-sharingamongregulators.

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

ItisalsowherejustonememberoftheCommission,theChairman,can defendthatindependence.

Pursuant totheprovisionsofDodd-FrankestablishingFSOC,thegroupiscomposednotofagencies,buttheindividualheadsofagencies,actingexofficio.

AsIhavesaidinthepast,thestructureofFSOCisparticularlytroublingforanindependentagencyliketheSEC.

WhiletheSecretaryoftheTreasuryandtheheadsoftheFHFAandtheCFPBmayspeakonbehalfoftheiragencies—nottomentionthePresidentthatappointedthem—thesame cannotbesaidoftheChairmanoftheSEC.

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

ThismeansthattheChairmanhasnostatutoryauthority to representorbindtheCommissionthroughhisorherparticipationonFSOC.

YetasavotingmemberofFSOC,theChairmanoftheSECdoeshaveasay inauthorizingFSOCtotakecertainactionsthatmayaffect—andindeedhavealreadyaffected—marketsorentitiesthattheCommissionregulates.

WhileonemightexpectthattheChairmanoftheSECwouldalwaysrepresenttheviewsoftheCommissionasawhole,thereisnoformal

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oversightmechanismavailable totheCommissiontochecktheChairman’sparticipationonFSOC.

Moreover,althoughtheCommission’sbipartisanstructureinsulatesitfromunduepoliticalinfluence,FSOC’sstructuredoesnot.

Onthecontrary,FSOCiscomposedofindividualswhoareheadsoftheiragencies—typicallymakingthemmembersofthePresident’spoliticalparty—andledbyaCabinetofficialwhoisremovablebythePresidentatwill.

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

Tofurthercomplicatematters,FSOCoperatesunderadifferentmandatethantheSEC,havingbeenestablishedbyCongresswithabroadmandateto identifysystemicrisksandemergingthreats tothecountry’sfinancialstability.

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

U.S.financialsystem—notsurprisinggiventhatasignificantpluralityofFSOCiscomposedoftheheadsofbankregulators.

Whilethismissionisofunquestionableimportance,so,tooisthedistinctmissionoftheSEC.

Tobesure,properoversightofourcapitalmarketsshouldpositivelyimpactthesafetyandsoundnessofourfinancialsystem.

Nevertheless,theSEC isnotbystatuteasafetyandsoundnessregulator.

In fact,themarketsweregulateareinherentlyrisky,andwithgoodreason.

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

TheSECseekstoprotecttheseinvestorsfromfraudandtoensurethatthemarketsinwhichtheyputtheir capitalto workarefairandefficient.

Ourmissionisnot,andshouldnotbe,tomakethesemarketsrisk-free,norisit topreservetheexistenceofanyparticularfirmorfirms.

Capitalmarketsregulatorsandbankregulatorshavedrasticallydifferentmissionsandoverseefundamentallydifferentmarketsandmarketparticipants.

And,importantlyformeandallofthosewhoappreciateandadvocateforfreemarkets,wemustkeepahealthydistancebetweencapitalmarketsregulation,whichrightfullyassumesnotaxpayersafetynets,andbankregulation.

ItisnotdifficulttoseethepotentialtensionbetweentheSECandFSOCmissionsandtheresultingthreat totheCommission’sability to functionindependently.

Asthe oldadagegoes:“Noone canservetwomasters.”

WhentheChairmanoftheSEC faces thistension,whichofthesetwopotentiallycompetingmandatesdoesheorshehonor?

NorisFSOCmerelyanadvisorybodywithoutteeth.

Tocarryoutitsmandate,CongressprovidedFSOCwithextraordinarypowersforaninter-agencycouncil.

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

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

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

Thatauthorityisnotsimplyathreattothe Commission’s independence

—ifexercised,itwouldbeanoutrightannexation.

FSOCalsohastheauthority to recommendthataprimaryfinancialregulator,suchastheSEC,applyneworheightenedstandardsandsafeguardsforsystemicallysignificantfinancialactivitiesorpractices.

In thisregard,FSOChasbeenbusyinrecentmonthsproddingtheCommissiononmoneymarketfundreforms, includingthroughthereleaseofproposedreformrecommendationslastNovember.

Iwon’trecountthehistorythatledto FSOC’sinvolvementintheregulationofmoneymarketfunds,anareawhichunquestionablyfallswithinthecoreexpertiseandregulatoryjurisdictionoftheSEC.

ButIwillemphasizethatmycolleaguesandIhavemadeitclearthat,havingnowbeenprovidedwiththerigorousstudyandeconomicanalysisonmoneymarketfundsthatabipartisanmajorityoftheCommissionaskedforfromthestart,wefullyexpecttheCommissiontomoveforwardwitharuleproposalshortly.

Why,then,isFSOCstillinvolvedintheprocess?

FSOCwasestablishedinparttopromotecoordination,collaboration,andinformation-sharingamongitsmemberagencies.

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Itisimmenselytroublingthen to thinkoftheFSOCasaninstitutionalizedmechanismforonesetofregulatorstopressureanotherinthelatteragency’sfield ofexpertise—yetthatisexactlywhatishappening.

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

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

Theserules,ifadoptedintheircurrentform, wouldrequiresuchorganizationstocreateanintermediateholdingcompanythatwould housealloftheirU.S.bankandnonbanksubsidiaries.

TheFedproposalwouldaffectSECregistrantsas thenewholdingcompany capitalruleswouldtreatassetsheld bybroker-dealersubsidiariesdifferentlythantheyaretreatedintheSECcapitalrulesbecauseoftheproposedleveragestandardthatwouldapplytoforeign bankorganizations.

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

Theregulationofbroker-dealersisattheheartoftheExchangeActand,assuch,hasbeenundertheCommission’sregulatorypurviewfornearlyeightdecades.

Usingtheexpertiseithasdevelopedoverthisperiod,theCommissionhasdesigned capitalrequirementsunderRule15c3-1thataretailoredtotheoperationsofbroker-dealersandtheindustryin whichtheyoperate.

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Here,itiscrucialtounderstandthedifferingtheoriesthatunderliebroker-dealerandbankcapitalrequirements.

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

Ontheotherhand,bankcapitalstandardsarenotdesigned to requireabanktomaintainsufficientnetliquidassetstosatisfyallcreditors.

Instead,bankshaveaccess to federalliquidityfacilitiesthatcan beusedasafundingsourceintheeventthatthebankcannotfindprivatefunding.

Thesefacilitiesallow thebanktobeliquidatedinamoreorderlymannerinthe caseofafailure.

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

Accordingly,itwillbeveryimportantfortheFedandtheCommissiontocoordinatecarefullyasthisruleproposalisconsidered to ensurethatlegitimategoals canbeadvancedwithoutunderminingSECoversight.

ThisFedrulemakingcomesontheheelsofthemisguidedrepealinDodd-FrankoftheCommission’sSupervisedInvestmentBankHoldingCompany,orSIBHC,program.

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

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

Onafinal note,theCommissionmust alsobemindfuloftheeffectthatinternationalregulatorybodies,eventhoselikeIOSCOandtheFSBin

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whichtheCommissionisaparticipant,canhaveontheCommission’sprerogativesasanexpert,independentagency.

Manyoftheseorganizationswereformedin largepart to fostercooperation,information-sharing,andcoordinationamongfinancialregulatorsindifferentjurisdictions.

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

IbelievethattheCommissionmustremainanactive,productivememberofthesegroups,butwemustensurethatpolicymakingremainsinthehandsofdomesticregulatorsactingwiththerequisiteindependence.

Thankyouallforcomingtothisyear’sSECSpeaks,andIlookforwardtoseeingyouagainnextFebruary.

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

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ContagiousnessandVulnerabilityintheAustrianInterbankMarket

Claus Puhr,ReinhardtSeliger,MichaelSigmund,Oesterreichische Nationalbank,FinancialMarketsAnalysisandSurveillanceDivision

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

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

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

Ouranalysisconsistsofthreesteps:first,weanalyzethestructureoftheAustrianinterbankmarketfromend-2008toend-2011.

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

Finally,weestimateapaneldatamodeltoexplainthe(hypothetical)defaultsgeneratedbythesesimulationswiththeunderlyingstructureofthenetworkusingnetworkindicatorsthatreflect

thenetworkasawhole,

asubnetworkorcluster,and

thenodelevelbasedonbanks’interbanklendingrelationships.

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Asaresultwefindstrongcorrelationsbetweenabank’spositionintheAustrianinterbankmarketanditslikelihoodofeithercausingcontagionorbeingaffectedbycontagion.

Althoughouranalysisisbasedonadatasetconstrained to theinterbankmarketofunconsolidatedAustrianbanks,webelieveourfindingscould beverifiedbyanalyzingotherbankingsystems(albeitwithadifferentmodelcalibration).

Giventheimportanceofidentifyingsystemicallyimportantbanks fortheformulationofmacroprudential policy,webelievethatouranalysishasthepotentialtoimproveourassessmentwithregardtosecond-roundeffectsanddefaultcascadesintheinterbankmarket.

1Introduction

1.1Motivation

Thefinancialcrisishasrevealedthedangerofsystemicrisk duetocontagioneffectsgiventheinterconnectednessofmodernbankingsystems.

Identifyingsystemicallyimportantbankshassincebecomeoneofthekeyobjectivesofsystemicrisk assessmentandanecessarypreconditionfortheformulationofmacroprudentialpolicy.

Systemicallyimportantbanks canbeidentifiedinmanydifferentways.

Wewouldlike tocontributetothisimportantdiscussionbyapplyingtechniquesfromnetworkeconomics.

In general,networkanalysisrequirestwoinputarguments.

First,ittakesanetwork,whichcouldeitherbegivenorderivedthroughanetworkformationprocess.

Second,eachnetworkanalysisneedsanobjective.

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In ourpaperweconsidertheinterbanklendingnetworkasgivenandleavethetheoryonnetworkformationaside,sincetheAustrianinterbanklendingrelationshipsaretheverynetworkwesupervise.

Weviewtheinterbanklendingmarketasanetworkwhereeachparticipatingbankisanodeandeachcreditalink.

The objectiveofourpaperisanalyzingoneimportantcontagionmechanismwithinthisnetwork,namelycounterpartycreditriskassociatedwithinterbanklending.

Exanteitisunknownwhetherdifficultiesatevenarelativelysmall(butinterconnected) institutionmighttriggerproblemsatanotherbank.

In thecontextofmacroprudentialanalysissuchaninstitutioncouldbeconsideredasasystemicallyimportantbank(alsoknownasakeyplayerinnetworkeconomics).

Specifically,weanalyzetwo variantsof(hypothetical)contagiousdefaultfortheAustriannetworkofinterbanklendingrelationships.

First,westudyabank’scontagiousnessintermsoftheshareoftotalbankingassetsrepresentedbyotherbanksthatitwillcausetodefaultgivenits owndefault.

Secondwestudyabank’svulnerabilityintermsofthenumberofbanksbywhichitisbroughtdownifdefaultscascadethroughthebankingsector.

In theremainderofthepaperwetrytoidentifykeynetworkpropertiesthatinfluenceourtwovariantsofcontagiousdefault.

Ourmainmotivationisfindingoutwhethersimulatedcontagiousnessandvulnerabilityisdrivenby

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

networkeffects/positions,or(iii)byboth.

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

Ifsupervisorsareabletoidentifynetworkindicatorsthataddsignificantly totheanalysisofthesemodels,macroprudentialpolicywillbeableto

analyzethecharacteristics/driversofindividual indicatorsto getabetterunderstandingofdefaultdynamicsand

potentiallytargetselectedvariablestoaddresscontagiousnessandvulnerabilityintheinterbankmarket“indirectly.”

Ourresultsshouldthereforeprovidepotentialnovelmeansforpolicymakerstodesignand/orcomplementmacroprudentialtools.

Ifyouaregoodinmathematics,you canreadit:

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

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Disclaimer

TheAssociationtries toenhancepublic access toinformationaboutrisk andcompliancemanagement.

Ourgoalis tokeepthisinformationtimelyandaccurate.Iferrorsarebroughttoourattention, we willtry tocorrectthem.

Thisinformation:

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isofageneralnatureonlyandisnotintendedtoaddress thespecific

circumstancesofanyparticularindividualorentity;

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shouldnotbereliedonintheparticularcontextofenforcementorsimilar

regulatory action;

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isnotnecessarilycomprehensive,complete,oruptodate;

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issometimeslinkedtoexternalsitesoverwhich theAssociationhasnocontrol

andfor whichtheAssociationassumesnoresponsibility;

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isnotprofessionalorlegaladvice(ifyouneedspecificadvice,youshould

alwaysconsultasuitablyqualifiedprofessional);

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isinnowayconstitutiveofaninterpretativedocument;

- doesnotprejudgethepositionthattherelevantauthoritiesmightdecide totakeonthesame mattersifdevelopments, includingCourtrulings,were toleadittorevisesomeoftheviewsexpressedhere;

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doesnotprejudgetheinterpretationthattheCourtsmightplaceonthematters

atissue.

Pleasenotethatit cannot beguaranteedthattheseinformationanddocumentsexactlyreproduceofficiallyadoptedtexts.

Itisourgoaltominimizedisruptioncausedbytechnicalerrors.

Howeversomedataorinformationmayhavebeencreatedorstructuredinfilesorformatsthatarenoterror-freeand we cannotguaranteethatourservicewillnotbeinterruptedorotherwiseaffectedbysuchproblems.

TheAssociationacceptsnoresponsibilitywithregardtosuchproblemsincurredas aresultofusingthissiteoranylinkedexternalsites.

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CertifiedRiskandComplianceManagementProfessional (CRCMP)distancelearningandonlinecertificationprogram.

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

Theall-inclusivecostis $297.Whatisincludedintheprice:

Theofficialpresentationsweuse

inourinstructor-ledclasses(3285slides)

The2309slidesareneeded for theexam,asallthequestionsarebasedon theseslides.Theremaining976slidesareforreference.

Youcanfindthecoursesynopsisat:

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

Upto3OnlineExams

Youhaveto passoneexam.

Ifyoufail, youmuststudytheofficial

presentationsandtryagain,but youdonotneedto spend money.Upto 3examsareincludedintheprice.

To learnmoreyoumayvisit:

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

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

PersonalizedCertificateprintedinfullcolor

Processing,printing,packingandpostingto yourofficeorhome.

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D.TheDoddFrankActandthenewRiskManagementStandards(976slides,includedinthe3285slides)

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

What doesitmeanforriskandcompliancemanagementprofessionals?Itmeansnewchallenges,newjobs,newcareers,andnewopportunities.

Thebillestablishesnewrisk managementandcorporategovernance principles,setsupanearly warning

systemto protect theeconomyfrom futurethreats,andbringsmore

transparencyandaccountability.

ItalsoamendsimportantsectionsoftheSarbanesOxley Act.Forexample,itsignificantlyexpandswhistleblowerprotectionsunder the SarbanesOxleyActandcreatesadditionalanti-retaliationrequirements.

Youwill findmoreinformation at:

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

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