Page |1        International Association of Risk and Compliance                      Professionals (IARCP)      1200 G Str...
Page |2Number 1 (Page 4)The Basel Committee published the results of its BaselIII monitoring exercise. The study is based ...
Page |3Number 6 (Page 105)BIS - Peer review of supervisory authoritiesimplementation of stress testing principles.Stress t...
Page |4NUMBER 1Quantitative impact study results published by the BaselCommittee, 12 April 2012The Basel Committee publish...
Page |5€38.8 billion CET1 would be required.The overall shortfall increases to €485.6 billion to achieve a CET1 targetleve...
Page |6the NSFR standard, which will reflect any revisions following eachstandards observation period.As noted in a Januar...
Page |7metrics using data collected by national supervisors on a representativesample of institutions in each jurisdiction...
Page |8- The international leverage ratio; and- Two international liquidity standards – the liquidity coverage ratio  (LCR...
Page |9As a point of reference, the sum of profits after tax prior to distributionsacross the same sample of Group 1 banks...
P a g e | 10Securitisation exposures, principally those risk-weighted at 1250% underthe Basel III framework (which were pr...
P a g e | 11The weighted average LCR for Group 1 banks is 90% while the weightedaverage LCR for Group 2 banks is 83%.The a...
P a g e | 12of risk-weighted assets (RWA), the calculation of a leverage ratio, andcomponents of the liquidity metrics. Th...
P a g e | 13Table 1 shows the distribution of participation by jurisdiction.For Group 1 banks members’ coverage of their b...
P a g e | 14Not all banks provided data relating to all parts of the Basel IIIframework.__________________________________...
P a g e | 15Accordingly, a small number of banks are excluded from individualsections of the Basel III monitoring analysis...
P a g e | 16To estimate the impact of implementing the Basel III framework oncapital, comparisons are made between those e...
P a g e | 17initial list of G-SIBs announced by the Financial Stability Board inNovember 2011.One member country, Switzerl...
P a g e | 18The treatment of deductions and non-qualifying capital instruments alsoaffects figures reported in the leverag...
P a g e | 19As compared to current CET1, the average CET1 capital ratio of Group 1banks would have fallen by nearly one-th...
P a g e | 20Banks engaged heavily in trading or counterparty credit activities tend toshow the largest denominator effects...
P a g e | 21For CET1, the highest form of loss absorbing capital, the minimumrequirement will be raised to 4.5% and will b...
P a g e | 22For a CET1 target of 7.0% (ie the 4.5% CET1 minimum plus the 2.5%capital conservation buffer, plus any capital...
P a g e | 23As indicated above, no assumptions have been made about bank profitsor behavioural responses, such as changes ...
P a g e | 24These deductions reduce Group 1 bank gross CET1 by 15.4%, 4.9%, and3.6%, respectively.The category described a...
P a g e | 25Changes in risk-weighted assetsOverall resultsReductions in capital ratios under the Basel III framework are a...
P a g e | 26The column heading “50/50” measures the increase in risk-weightedassets applied to securitisation exposures cu...
P a g e | 27The predominant driver behind this figure is capital charges forcounterparty credit risk as the higher asset v...
P a g e | 28Impact of the revisions to the Basel II market risk frameworkTable 5 shows further detail on the impact of the...
P a g e | 291.7%, and 1.4%.Less significant contributors to the increase in overall risk-weightedassets are capital charge...
P a g e | 30Findings regarding the leverage ratioThe results regarding the leverage ratio are provided using two alternati...
P a g e | 31The weighted average current Tier 1 leverage ratio for all banks is 4.5%.For Group 1 banks, it is somewhat low...
P a g e | 32Under the current Tier 1 leverage ratio, 17 banks would not meet the 3%Tier 1 leverage ratio level, including ...
P a g e | 33exceed the minimum LCR requirement and 60% have LCRs that are at orabove 75%.For the banks in the sample, Base...
P a g e | 34Group 1 banks show a notably larger percentage of total outflows, whencompared to balance sheet liabilities, t...
P a g e | 35Of the banks impacted by the cap on inflows, 18 have inflows from otherfinancial institutions that are in exce...
P a g e | 3634 banks currently reported assets excluded, of which 24 (11% of the totalsample) had LCRs below 100%.Chart 7 ...
P a g e | 37Net stable funding ratioThe second standard is the net stable funding ratio (NSFR), alonger-term structural ra...
P a g e | 38The results show that banks in the sample had a shortfall of stablefunding of €2.78 trillion at the end of Jun...
P a g e | 39_____________________________________________________________International Association of Risk and Compliance ...
P a g e | 40NUMBER 2Study on the Cross-Border Scope of thePrivate Right of Action Under Section10(b) of the Securities Exc...
P a g e | 41Finding no affirmative indication of an extraterritorial reach, the SupremeCourt adopted a new transactional t...
P a g e | 42BackgroundConduct and Effects Tests. Prior to the Supreme Court’s Morrisondecision, the lower federal courts h...
P a g e | 43(2) Securities traded on a U.S. exchange or otherwise issued by a U.S.entity; or(3) U.S. domestic markets, at ...
P a g e | 44(3) without the cross-border application of Section 10(b) afforded by theconduct and effects tests, there gene...
P a g e | 45and remedies afforded by foreign nations, the Solicitor General opposed atransactional test that would permit ...
P a g e | 46Post-Morrison Legal DevelopmentsFollowing the Morrison decision, the lower federal courts have addresseda numb...
P a g e | 47if the transaction for which the investor suffered a loss occurred on aforeign exchange or otherwise outside t...
P a g e | 48Of these, 44 supported enactment of the conduct and effects tests or somemodified version of the tests, while ...
P a g e | 49the entity may have an extensive U.S. presence justifying application ofU.S. securities laws.Further, comment ...
P a g e | 50Comment letters supporting this alternative argued that it would beconsistent with investors’ expectations, be...
P a g e | 51Such an approach could limit the potential conflict between U.S. andforeign law, while still potentially furth...
P a g e | 52NUMBER 3Survey on the implementation of the CEBS Guidelines onRemuneration Policies and Practices12 April 2012...
P a g e | 53With regard to the identification of risk takers, the survey has highlightedinconsistencies across institution...
P a g e | 54- more importantly, how the requirements of the Guidelines have been  supervised in practice, what progress ha...
P a g e | 55A benchmark exercise based on remuneration data collected inaccordance with the criteria for disclosure establ...
P a g e | 56The CRD III combination of articles and annexes, with the Guidelines ontop of these, is often mirrored in the ...
P a g e | 57Proportionality regimes, sometimes based on predetermined fixedcriteria, other times based on an open case-by-...
P a g e | 58In order to be able to align with the risk profile of institutions, a balanceshould be found between clarity a...
P a g e | 59Net profits and to a certain extent also risk-adjusted performanceparameters are now more in use for setting b...
P a g e | 60time span between end of accrual and vesting of deferred amount) showsome minor variance or divergence from th...
Monday April 16 2012 - Top 10 risk and compliance management related news stories and world events
Monday April 16 2012 - Top 10 risk and compliance management related news stories and world events
Monday April 16 2012 - Top 10 risk and compliance management related news stories and world events
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Monday April 16 2012 - Top 10 risk and compliance management related news stories and world events

  1. 1. Page |1 International Association of Risk and Compliance Professionals (IARCP) 1200 G Street NW Suite 800 Washington, DC 20005-6705 USA Tel: 202-449-9750 www.risk-compliance-association.com Monday, April 16, 2012 - Top 10 risk and compliance management related news stories and world events that (forbetter or for worse) shaped the weeks agenda, and what is next George Lekatis President of the IARCPDear Member,Crying is not a sign of weakness. You may let out your tears!Assuming full implementation of the Basel III requirements as of 30 June2011, including changes to the definition of capital and risk-weightedassets, and ignoring phase-in arrangements, Group 1 banks would havean overall shortfall of €38.8 billion for the CET1 minimum capitalrequirement of 4.5%, which rises to €485.6 billion for a CET1 target levelof 7.0% (ie including the capital conservation buffer); the latter shortfallalready includes the G-SIB surcharge where applicable.As a point of reference, the sum of profits after tax prior to distributionsacross the same sample of Group 1 banks in the second half of 2010 andthe first half of 2011 was €356.6 billion.Under the same assumptions, the capital shortfall for Group 2 banksincluded in the Basel III monitoring sample is estimated at €8.6 billion forthe CET1 minimum of 4.5% and €32.4 billion for a CET1 target level of7.0%.The sum of Group 2 bank profits after tax prior to distributions in thesecond half of 2010 and the first half of 2011 was €35.6 billion.Welcome to the Top 10 list._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  2. 2. Page |2Number 1 (Page 4)The Basel Committee published the results of its BaselIII monitoring exercise. The study is based on rigorousreporting processes set up by the Committee toperiodically review the implications of the Basel IIIstandards for financial markets.Number 2 (Page 40)Study on the Cross-Border Scope of the Private Right ofAction Under Section 10(b) of the Securities ExchangeAct of 1934 As Required by Section 929Y of theDodd-Frank Wall Street Reform and ConsumerProtection ActNumber 3 (Page 52)12 April 2012 - The European BankingAuthority (EBA) publishes today the resultsof the survey on the implementation of CEBSGuidelines on remuneration policies andpractices.Number 4 (Page 96)Jumpstart Our Business Startups Act: Frequently AskedQuestions.The Jumpstart Our Business Startups Act (the “JOBSAct”) was enacted on April 5, 2012.Number 5 (Page 101)EBA, ESMA and EIOPA publishtwo reports on Money Laundering.The Joint Committee of the three European Supervisory Authorities(EBA, ESMA and EIOPA) has published two reports on theimplementation of the third Money Laundering Directive [2005/60/EC](3MLD)._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  3. 3. Page |3Number 6 (Page 105)BIS - Peer review of supervisory authoritiesimplementation of stress testing principles.Stress testing is an important tool used by banksto identify the potential for unexpected adverseoutcomes across a range of risks and scenarios.Number 7 (Page 136)The Hong Kong Monetary Authority(HKMA) announced (Thursday) thatinvestigation of over 99% of a total of 21,851 Lehman-Brothers-relatedcomplaint cases received has been completed.Number 8 (Page 138)DARPA seeks robot enthusiastsHardware, software, modeling and gaming developerssought to link with emergency response and sciencecommunities to design robots capable of supervisedautonomous response to simulated disasterNumber 9 (Page 141)The Securities and Exchange Commission announcedthe formation of a new Investor Advisory Committeerequired by the Dodd-Frank Wall Street Reform andConsumer Protection Act.Number 10 (Page 144)EIOPA - Report on Good Practices for Disclosure and Sellingof Variable AnnuitiesThis Report summarises the findings of an Expert Group, setup in May 2011 under the auspices of EIOPA’s Committee onConsumer Protection and Financial Innovation (CCPFI) withthe aim of establishing good disclosure and selling practicesfor variable annuities (VA)._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  4. 4. Page |4NUMBER 1Quantitative impact study results published by the BaselCommittee, 12 April 2012The Basel Committee published the results ofits Basel III monitoring exercise.The study is based on rigorous reportingprocesses set up by the Committee toperiodically review the implications of theBasel III standards for financial markets.A total of 212 banks participated in the study,including 103 Group 1 banks (ie those that haveTier 1 capital in excess of €3 billion and areinternationally active) and 109 Group 2 banks(ie all other banks). While the Basel III framework sets out transitional arrangements toimplement the new standards, the monitoring exercise results assume fullimplementation of the final Basel III package based on data as of 30 June2011 (ie they do not take account of the transitional arrangements such asthe phase in of deductions).No assumptions were made about bank profitability or behaviouralresponses, such as changes in bank capital or balance sheet composition.For that reason the results of the study are not comparable to industryestimates. Based on data as of 30 June 2011 and applying the changes to thedefinition of capital and risk-weighted assets, the average common equityTier 1 capital ratio (CET1) of Group 1 banks was 7.1%, as compared withthe Basel III minimum requirement of 4.5%.In order for all Group 1 banks to reach the 4.5% minimum, an increase of_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  5. 5. Page |5€38.8 billion CET1 would be required.The overall shortfall increases to €485.6 billion to achieve a CET1 targetlevel of 7.0% (ie including the capital conservation buffer); this amountincludes the surcharge for global systemically important banks whereapplicable.As a point of reference, the sum of profits after tax and prior todistributions across the same sample of Group 1 banks in the second halfof 2010 and the first half of 2011 was €356.6 billion.For Group 2 banks, the average CET1 ratio stood at 8.3%.In order for all Group 2 banks in the sample to meet the new 4.5% CET1ratio, the additional capital needed is estimated to be €8.6 billion.They would have required an additional €32.4 billion to reach a CET1target 7.0%; the sum of these banks profits after tax and prior todistributions in the second half of 2010 and the first half of 2011 was €35.6billion.The Committee also assessed the estimated impact of the liquiditystandards.Assuming banks were to make no changes to their liquidity risk profile orfunding structure, as of June 2011, the weighted average LiquidityCoverage Ratio (LCR) for Group 1 banks would have been 90% while theweighted average LCR for Group 2 banks was 83%.The aggregate LCR shortfall is €1.76 trillion which representsapproximately 3% of the €58.5 trillion total assets of the aggregate sample.The weighted average Net Stable Funding Ratio (NSFR) is 94% for bothGroup 1 and Group 2 banks.The aggregate shortfall of required stable funding is €2.78 trillion. Banks have until 2015 to meet the LCR standard and until 2018 to meet_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  6. 6. Page |6the NSFR standard, which will reflect any revisions following eachstandards observation period.As noted in a January 2012 press statement issued by the Group ofGovernors and Heads of Supervision, the Basel Committees oversightbody, modifications to a few key aspects of the LCR are currently underinvestigation but will not materially change the frameworks underlyingapproach.The Committee will finalise and subsequently publish itsrecommendations in these areas by the end of 2012.Banks that are below the 100% required minimum thresholds can meetthese standards by, for example, lengthening the term of their funding orrestructuring business models which are most vulnerable to liquidity riskin periods of stress.It should be noted that the shortfalls in the LCR and the NSFR are notadditive, as reducing the shortfall in one standard may also reduce theshortfall in the other standard.Results of the Basel III monitoring exercise as of 30 June 2011April 2012Executive summaryIn 2010, the Basel Committee on Banking Supervision conducted acomprehensive quantitative impact study (C-QIS) using data as of 31December 2009 to ascertain the impact on banks of the Basel IIIframework, published in December 2010.The Committee intends to continue monitoring the impact of the BaselIII framework in order to gather full evidence on its dynamics.To serve this purpose, a semi-annual monitoring framework has been setup on the risk-based capital ratio, the leverage ratio and the liquidity_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  7. 7. Page |7metrics using data collected by national supervisors on a representativesample of institutions in each jurisdiction.This report summarises the aggregate results of the latest Basel IIImonitoring exercise, using data as of 30 June 2011.The Committee believes that the information contained in the report willprovide the relevant stakeholders with a useful benchmark for analysis.Information for this report was submitted by individual banks to theirnational supervisors on a voluntary and confidential basis.A total of 212 banks participated in the study, including 103 Group 1 banksand 109 Group 2 banks.Members’ coverage of their banking sector is very high for Group 1 banks,reaching 100% coverage for some jurisdictions, while coverage iscomparatively lower for Group 2 banks and varied across jurisdictions.The Committee appreciates the significant efforts contributed by bothbanks and national supervisors to this ongoing data collection exercise.The report focuses on the following items:- Changes to bank capital ratios under the new requirements, and estimates of any capital deficiencies relative to fully phased-in minimum and target capital requirements (to include capital charges for global systemically important banks – G-SIBs);- Changes to the definition of capital that result from the new capital standard, referred to as common equity Tier 1 (CET1), including a reallocation of deductions to CET1, and changes to the eligibility criteria for Additional Tier 1 and Tier 2 capital;- Increases in risk-weighted assets resulting from changes to the definition of capital, securitisation, trading book and counterparty credit risk requirements;_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  8. 8. Page |8- The international leverage ratio; and- Two international liquidity standards – the liquidity coverage ratio (LCR) and the net stable funding ratio (NSFR).With the exception of the transitional arrangements for non-correlationtrading securitisation positions in the trading book, this report does nottake into account any transitional arrangements such as phase-in ofdeductions and grandfathering arrangements.Rather, the estimates presented assume full implementation of the finalBasel III requirements based on data as of 30 June 2011.No assumptions have been made about banks’ profitability orbehavioural responses, such as changes in bank capital or balance sheetcomposition, since this date or in the future.For this reason the results are not comparable to current industryestimates, which tend to be based on forecasts and consider managementactions to mitigate the impact, and incorporate estimates whereinformation is not publicly available.The results presented in this report are also not comparable to the priorC-QIS, which evaluated the impact of policy questions that differ incertain key respects from the finalised Basel III framework.As one example, the C-QIS did not consider the impact of capitalsurcharges for global systemically important banks.Capital shortfallsAssuming full implementation of the Basel III requirements as of 30 June2011, including changes to the definition of capital and risk-weightedassets, and ignoring phase-in arrangements, Group 1 banks would havean overall shortfall of €38.8 billion for the CET1 minimum capitalrequirement of 4.5%, which rises to €485.6 billion for a CET1 target levelof 7.0% (ie including the capital conservation buffer); the latter shortfallalready includes the G-SIB surcharge where applicable._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  9. 9. Page |9As a point of reference, the sum of profits after tax prior to distributionsacross the same sample of Group 1 banks in the second half of 2010 andthe first half of 2011 was €356.6 billion.Under the same assumptions, the capital shortfall for Group 2 banksincluded in the Basel III monitoring sample is estimated at €8.6 billion forthe CET1 minimum of 4.5% and €32.4 billion for a CET1 target level of7.0%.The sum of Group 2 bank profits after tax prior to distributions in thesecond half of 2010 and the first half of 2011 was €35.6 billion.Further details on additional capital needs to meet the Basel IIIrequirements are included in Section 2.Capital ratiosThe average CET1 ratio under the Basel III framework would declinefrom 10.2% to 7.1% for Group 1 banks and from 10.1% to 8.3% for Group 2banks.The Tier 1 capital ratios of Group 1 banks would decline, on average from11.5% to 7.4% and total capital ratios would decline from 14.2% to 8.6%.As with the CET1 ratios, the decline in other capital ratios iscomparatively less pronounced for Group 2 banks; Tier 1 capital ratioswould decline on average from 10.9% to 8.6% and total capital ratioswould decline on average from 14.3% to 10.6%.Changes in risk-weighted assetsAs compared to current risk-weighted assets, total risk-weighted assetsincrease on average by 19.4% for Group 1 banks under the Basel IIIframework.This increase is driven largely by charges against counterparty credit riskand trading book exposures._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  10. 10. P a g e | 10Securitisation exposures, principally those risk-weighted at 1250% underthe Basel III framework (which were previously 50/50 deductions underBasel II), are also a significant contributor to the increase.Banks that have significant exposures in these areas influence the averageincrease in risk-weighted assets heavily.As Group 2 banks are less affected by the revised counterparty credit riskand trading book rules, these banks experience a comparatively smallerincrease in risk-weighted assets of only 6.3%.Even within this sample, higher risk-weighted assets are attributedlargely to Group 2 banks with counterparty and securitisation exposures(ie those subject to a 1250% risk weighting).Leverage ratioThe weighted average current Tier 1 leverage ratio for all banks is 4.5%.For Group 1 banks, it is somewhat lower at 4.4% while it is 5.0% for Group2 banks.The average Basel III Tier 1 leverage ratio for all banks is 3.5%. The BaselIII average for Group 1 banks is 3.4%, and the average for Group 2 banksis 4.2%.Liquidity standardsBoth liquidity standards are currently subject to an observation periodwhich includes a review clause to address any unintended consequencesprior to their respective implementation dates of 1 January 2015 for theLCR and 1 January 2018 for the NSFR.Basel III monitoring results for the end-June 2011 reporting period give anindication of the impact of the calibration of the standards and highlightseveral key observations:A total of 103 Group 1 and 102 Group 2 banks participated in the liquiditymonitoring exercise for the end-June 2011 reference period._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  11. 11. P a g e | 11The weighted average LCR for Group 1 banks is 90% while the weightedaverage LCR for Group 2 banks is 83%.The aggregate LCR shortfall is €1.76 trillion which representsapproximately 3% of the €58.5 trillion total assets of the aggregate sample.The weighted average NSFR is 94% for both Group 1 and Group 2 banks.The aggregate shortfall of required stable funding is €2.78 trillion.General remarksAt its 12 September 2010 meeting, the Group of Governors and Heads ofSupervision (GHOS), the Committee’s oversight body, announced asubstantial strengthening of existing capital requirements and fullyendorsed the agreements it reached on 26 July 2010.These capital reforms together with the introduction of two internationalliquidity standards, delivered on the core of the global financial reformagenda presented to the Seoul G20 Leaders summit in November 2010.Subsequent to the initial comprehensive quantitative impact studypublished in December 2010, the Committee continues to monitor andevaluate the impact of these capital and liquidity requirements(collectively referred to as “Basel III”) on a semi-annual basis.This report summarises results of the latest Basel III monitoring exerciseusing 30 June 2011 data.Scope of the impact studyAll but one of the 27 Committee member jurisdictions participated inBasel III monitoring exercise as of 30 June 2011.The estimates presented are based on data submitted by the participatingbanks to national supervisors in reporting questionnaires in accordancewith the instructions prepared by the Committee in September 2011.The questionnaire covered components of eligible capital, the calculation_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  12. 12. P a g e | 12of risk-weighted assets (RWA), the calculation of a leverage ratio, andcomponents of the liquidity metrics. The results were initially submittedto the Secretariat of the Committee in October 2011.The purpose of the exercise is to provide the Committee with an ongoingassessment of the impact on participating banks of the capital andliquidity proposals set out in the following documents:- Revisions to the Basel II market risk framework and Guidelines for computing capital for incremental risk in the trading book;- Enhancements to the Basel II framework which include the revised risk weights for re-securitisations held in the banking book;- Basel III: A global framework for more resilient banks and the banking system as well as the Committee’s 13 January 2011 press release on loss absorbency at the point of non-viability;- International framework for liquidity risk measurement, standards and monitoring; and- Global systemically important banks: Assessment methodology and the additional loss absorbency requirement.Sample of participating banksA total of 212 banks participated in the study, including 103 Group 1 banksand 109 Group 2 banks. Group 1 banks are those that have Tier 1 capital inexcess of €3 billion and are internationally active.All other banks are considered Group 2 banks.Banks were asked to provide data as of 30 June 2011 at the consolidatedlevel.Subsidiaries of other banks are not included in the analyses to avoiddouble counting._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  13. 13. P a g e | 13Table 1 shows the distribution of participation by jurisdiction.For Group 1 banks members’ coverage of their banking sector was veryhigh reaching 100% coverage for some jurisdictions.Coverage for Group 2 banks was comparatively lower and varied acrossjurisdictions._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  14. 14. P a g e | 14Not all banks provided data relating to all parts of the Basel IIIframework._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  15. 15. P a g e | 15Accordingly, a small number of banks are excluded from individualsections of the Basel III monitoring analysis due to incomplete data.MethodologyThe impact assessment was carried out by comparing banks’ capitalpositions under Basel III to the current regulatory frameworkimplemented by the national supervisor.With the exception of transitional arrangements for non-correlationtrading securitisation positions in the trading book, Basel III results arecalculated without considering transitional arrangements pertaining tothe phase-in of deductions and grandfathering arrangements.Reported average amounts in this document have been calculated bycreating a composite bank at a total sample level, which effectively meansthat the total sample averages are weighted.For example, the average common equity Tier 1 capital ratio is the sum ofall banks’ common equity Tier 1 capital for the total sample divided by thesum of all banks’ risk-weighted assets for the total sample.To maintain confidentiality, many of the results shown in this report arepresented using box plots charts.These charts show the distribution of results as described by the medianvalues (the thin red horizontal line) and the 75th and 25th percentilevalues (defined by the blue box).The upper and lower end points of the thin blue vertical lines show thevalues which are 1.5 times the range between the 25th and the 75thpercentile above the 75th percentile or below the 25th percentile,respectively.This would correspond to approximately 99.3% coverage if the data werenormally distributed.The red crosses indicate outliers._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  16. 16. P a g e | 16To estimate the impact of implementing the Basel III framework oncapital, comparisons are made between those elements of Tier 1 capitalwhich are not subject to a limit under the national implementation ofBasel I or Basel II, and CET1 under Basel III.Data qualityFor this monitoring exercise, participating banks submittedcomprehensive and detailed non-public data on a voluntary andbest-efforts basis.As with the C-QIS, national supervisors worked extensively with banks toensure data quality, completeness and consistency with the publishedreporting instructions.Banks are included in the various analyses that follow only to the extentthey were able to provide sufficient quality data to complete the analyses.For the liquidity elements, data quality has improved significantlythroughout the iterations of the Basel III monitoring exercise, although itis still the case that some differences in banks’ reported liquidity riskpositions could be attributed to differing interpretations of the rules,rather than underlying differences in risk.Most notably individual banks appear to be using differentmethodologies to identify operational wholesale deposits and exclusionsof liquid assets due to failure to meet the operational requirements.Interpretation of resultsThe following caveats apply to the interpretation of results shown in thisreport:These results are not comparable to those shown in the C-QIS, whichevaluated the impact of policy questions that differ in certain key respectsfrom the finalised Basel III framework. As one example, the C-QIS didnot consider the impact of capital surcharges for G-SIBs based on the_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  17. 17. P a g e | 17initial list of G-SIBs announced by the Financial Stability Board inNovember 2011.One member country, Switzerland, has already implemented certainelements of the Basel III framework pertaining to new rules for marketrisk and enhancements to the treatment of securitisations held in thebanking book (often referred to collectively as “Basel 2.5”).For banks in this country, the results included in this report reflect theimpact of adopting the Basel III requirements relative to the Basel II andBasel 2.5 frameworks already in place.The new rules for counterparty credit risk are not fully accounted for inthe report, as data for capital charges for exposures to centralcounterparties (CCPs) and stressed effective expected positive exposure(EEPE) could not be collected.The actual impact of the new requirements will likely be lower thanshown in this report given the phased-in implementation of the rules andinterim adjustments made by the banking sector to changing economicconditions and the regulatory environment.For example, the results do not consider bank profitability, changes incapital or portfolio composition, or other management responses to thepolicy changes since 30 June 2011 or in the future.For this reason, the results are not comparable to industry estimates,which tend to be based on forecasts and consider management actions tomitigate the impact, as well as incorporate estimates where information isnot publicly available.The Basel III capital amounts shown in this report assume that allcommon equity deductions are fully phased in and all non-qualifyingcapital instruments are fully phased out.As such, these amounts underestimate the amount of Tier 1 capital andTier 2 capital held by a bank as they do not give any recognition fornon-qualifying instruments that are actually phased out over nine years._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  18. 18. P a g e | 18The treatment of deductions and non-qualifying capital instruments alsoaffects figures reported in the leverage ratio section.The underestimation of Tier 1 capital will become less of an issue as theimplementation date of the leverage ratio nears.In particular, in 2013, the capital amounts based on the capitalrequirements in place on the Basel III monitoring reporting date willreflect the amount of non-qualifying capital instruments included incapital at that time.These amounts will therefore be more representative of the capital heldby banks at the implementation date of the leverage ratio.Capital shortfalls and overall changes in regulatory capital ratiosTable 2 shows the aggregate capital ratios under the current and Basel IIIframeworks and the capital shortfalls if Basel III were fully implemented,both for the definition of capital and the calculation of risk-weightedassets as of 30 June 2011._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  19. 19. P a g e | 19As compared to current CET1, the average CET1 capital ratio of Group 1banks would have fallen by nearly one-third from 10.2% to 7.1% (a declineof 3.1 percentage points) when Basel III deductions and risk-weightedassets are taken into account.The reduction in the CET1 capital ratio of Group 2 banks is smaller (from10.1% to 8.3%), which indicates that the new framework has greaterimpact on larger banks.Results show significant variation across banks as shown in Chart 1.The reduction in CET1 ratios is driven by the new definition of eligiblecapital, by deductions that were not previously applied at the commonequity level of Tier 1 capital in most jurisdictions (numerator) and byincreases in risk-weighted assets (denominator)._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  20. 20. P a g e | 20Banks engaged heavily in trading or counterparty credit activities tend toshow the largest denominator effects as these activities attractsubstantively higher capital charges under the new framework.Tier 1 capital ratios of Group 1 banks would on average decline 4.1percentage points from 11.5% to 7.4%, and total capital ratios of this samegroup would decline on average by 5.6 percentage points from 14.2% to8.6%.As with CET1, Group 2 banks show a more moderate decline in Tier 1capital ratios from 10.9% to 8.6%, and a decline in total capital ratios from14.3% to 10.6%.The Basel III framework includes the following phase-in provisions forcapital ratios:_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  21. 21. P a g e | 21For CET1, the highest form of loss absorbing capital, the minimumrequirement will be raised to 4.5% and will be phased-in by 1 January2015;For Tier 1 capital, the minimum requirement will be raised to 6.0% andwill be phased-in by 1 January 2015;For total capital, the minimum requirement remains at 8.0%;Regulatory adjustments (ie possibly stricter sets of deductions that applyunder Basel III) will be fully phased-in by 1 January 2018;An additional 2.5% capital conservation buffer above the regulatoryminimum capital ratios, which must be met with CET1, will be phased-inby 1 January 2019; andThe additional loss absorbency requirement for G-SIBs, which rangesfrom 1.0% to 2.5%, will be phased in by 1 January 2019.It will be applied as the extension of the capital conservation buffer andmust be met with CET1.The Annex includes a detailed overview of all relevant phase-inarrangements.Chart 2 and Table 2 provide estimates of the amount of capital that Group1 and Group 2 banks would need between 30 June 2011 and 1 January 2019in addition to the capital they already held at the reporting date, in orderto meet the target CET1, Tier 1, and total capital ratios under Basel IIIassuming fully phased-in target requirements and deductions as of 30June 2011.Under these assumptions, the CET1 capital shortfall for Group 1 bankswith respect to the 4.5% CET1 minimum requirement is €38.8 billion.The CET1 shortfall with respect to the 4.5% requirement for Group 2banks, where coverage of the sector is considerably smaller, is estimatedat €8.6 billion._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  22. 22. P a g e | 22For a CET1 target of 7.0% (ie the 4.5% CET1 minimum plus the 2.5%capital conservation buffer, plus any capital surcharge for G-SIBs asapplicable), Group 1 banks’ shortfall is €485.6 billion and Group 2 banks’shortfall is €32.4 billion.The surcharges for G-SIBs are a binding constraint on 24 of the 28 G-SIBsincluded in this Basel III monitoring exercise.As a point of reference, the aggregate sum of after-tax profits prior todistributions for Group 1 and Group 2 banks in the same sample was€356.6 billion and €35.6 billion, respectively in the second half of 2010 andthe first half of 2011.Assuming the 4.5% CET1 minimum capital requirements were fully met(ie, there were no CET1 shortfall), Group 1 banks would need anadditional €66.6 billion to meet the minimum Tier 1 capital ratiorequirement of 6.0%.Assuming banks already hold 7.0% CET1 capital, Group 1 banks wouldneed and an additional €221.4 billion to meet the Tier 1 capital target ratioof 8.5% (ie the 6.0% Tier 1 minimum plus the 2.5% CET1 capitalconservation buffer), respectively.Group 2 banks would need an additional €7.3 billion and an additional€16.6 billion to meet these respective Tier 1 capital minimum and targetratio requirements.Assuming CET1 and Tier 1 capital requirements were fully met (ie, therewere no shortfalls in either CET1 or Tier 1 capital), Group 1 banks wouldneed an additional €119.3 billion to meet the minimum total capital ratiorequirement of 8.0% and an additional €223.2 billion to meet the totalcapital target ratio of 10.5% (ie the 8.0% Tier 1 minimum plus the 2.5%CET1 capital conservation buffer), respectively.Group 2 banks would need an additional €5.5 billion and an additional€11.6 billion to meet these respective total capital minimum and targetratio requirements._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  23. 23. P a g e | 23As indicated above, no assumptions have been made about bank profitsor behavioural responses, such as changes balance sheet composition,that will serve to ameliorate the impact of capital shortfalls over time.Impact of the definition of capital on Common Equity Tier 1capitalAs noted above, reductions in capital ratios under the Basel IIIframework are attributed in part to capital deductions not previouslyapplied at the common equity level of Tier 1 capital in most jurisdictions.Table 3 shows the impact of various deduction categories on the grossCET1 capital (ie, CET1 before deductions) of Group 1 and Group 2 banks.In the aggregate, deductions reduce the gross CET1 of Group 1 banksunder the Basel III framework by 32.0%.The largest driver of Group 1 bank deductions is goodwill, followed bycombined deferred tax assets (DTAs) deductions, and intangibles otherthan mortgage servicing rights._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  24. 24. P a g e | 24These deductions reduce Group 1 bank gross CET1 by 15.4%, 4.9%, and3.6%, respectively.The category described as other deductions reduces Group 1 bank grossCET1 by 3.0% and pertain mainly to deductions for provision shortfallsrelative to expected credit losses and deductions related to defined benefitpension fund schemes.Holdings of capital of other financial companies reduce the CET1 ofGroup 1 banks by 2.9%.The category “Excess above 15%” refers to the deduction of the amountby which the aggregate of the three items subject to the 10% limit forinclusion in CET1 capital exceeds 15% of a bank’s CET1, calculated afterall deductions from CET1.These 15% threshold bucket deductions reduce Group 1 bank gross CET1by 2.1%. Deductions for MSRs exceeding the 10% limit have a minorimpact on Group 1 CET1.Deductions reduce the CET1 of Group 2 banks by 26.9%. Goodwill is thelargest driver of deductions for Group 2 banks, followed by holdings ofthe capital of other financial companies, and combined DTAsdeductions.These deductions reduce Group 2 bank CET1 by 10.5%, 4.4%, and 4.3%,respectively.Other deductions, which are driven significantly by deductions forprovision shortfalls relative to expected credit losses, result in a 3.5%reduction in Group 2 bank gross CET1.Deductions for intangibles other than mortgage servicing rights anddeductions for items in excess of the aggregate 15% threshold basketreduce Group 2 bank gross CET1 by 2.5% and 1.8%, respectively.Deductions for mortgage servicing rights above the 10% limit have noimpact on Group 2 banks._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  25. 25. P a g e | 25Changes in risk-weighted assetsOverall resultsReductions in capital ratios under the Basel III framework are alsoattributed to increases in risk-weighted assets.Table 4 provides additional detail on the contributors to these increases,to include the following categories:Definition of capital:These columns measure the change in risk-weighted assets as a result ofproposed changes to the definition of capital.The column heading “other” includes the effects of lower risk-weightedassets for exposures that are currently included in risk-weighted assetsbut receive a deduction treatment under Basel III._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  26. 26. P a g e | 26The column heading “50/50” measures the increase in risk-weightedassets applied to securitisation exposures currently deducted under theBasel II framework that are risk-weighted at 1250% under Basel III.The column heading “threshold” measures the increase in risk-weightedassets for exposures that fall below the 10% and 15% limits for CET1deduction;Counterparty credit risk (CCR):This column measures the increased capital charge for counterpartycredit risk and the higher capital charge that results from applying ahigher asset value correlation parameter against exposures to financialinstitutions under the IRB approaches to credit risk.Not included in CCR are risk-weighted asset effects of capital charges forexposures to central counterparties (CCPs) or any impact ofincorporating stressed parameters for effective expected positiveexposure (EEPE);Securitisation in the banking book:This column measures the increase in the capital charges for certain typesof securitisations (eg, resecuritisations) in the banking book; andTrading book:This column measures the increased capital charges for exposures held inthe trading book to include capital requirements against stressedvalue-at-risk, incremental default risk, and securitisation exposures in thetrading book.Risk-weighted assets for Group 1 banks increase overall by 19.4% forGroup 1 banks.This increase is to a large extent attributed to higher risk-weighted assetsfor counterparty credit risk exposures, which result in an overall increasein total Group 1 bank risk-weighted assets of 6.6%._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  27. 27. P a g e | 27The predominant driver behind this figure is capital charges forcounterparty credit risk as the higher asset value correlation parameterresults in an increase in overall risk-weighted assets of only 1.0%.Trading book exposures and securitisation exposures currently subject todeduction under Basel II, also contribute significantly to higherrisk-weighted assets at Group 1 banks at 5.2% for each category.Securitisation exposures currently subject to deduction, counterpartycredit risk exposures, and exposures that fall below the 10% and 15%CET1 eligibility limits are significant contributors to changes inrisk-weighted assets for Group 2 banks.Changes in risk-weighted assets show significant variation across banksas shown in Chart 3.Again, these differences are explained in large part by the extent of banks’counterparty credit risk and trading book exposures, which attractsignificantly higher capital charges under Basel III as compared tocurrent rules._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  28. 28. P a g e | 28Impact of the revisions to the Basel II market risk frameworkTable 5 shows further detail on the impact of the revised trading bookcapital charges on overall risk-weighted assets for Group 1 banks.The sample analysed here is smaller than the one in Table 4 as not all theGroup 1 banks provided data on market risk exposures.For this reduced sample of banks, trading book exposures resulted in a6.1% increase in total risk-weighted assets.The main contributors to this increase are stressed value-at-risk (stressedVaR), non-correlation trading securitisation exposures subject thestandardised measurement method (column heading “SMM non-CTP”),and the incremental risk capital charge (IRC), which contribute 2.2%,_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  29. 29. P a g e | 291.7%, and 1.4%.Less significant contributors to the increase in overall risk-weightedassets are capital charges for correlation trading exposures.Increases in risk-weighted assets are partially offset by effects related toprevious capital charges24 and changes to the standardised measurementmethod (SMM).Impact of the rules on counterparty credit risk (CVA only)Credit valuation adjustment (CVA) risk capital charges lead to a 7.3%increase in total RWA for the subsample of 77 banks which provided therelevant data (6.6% on the full Group 1 sample).A larger fraction of the total effect is attributable to the application of thestandardised method than to the advanced method.The impacts on Group 2 banks are smaller but still significant, adding upto an overall 2.9% increase in RWA over a subsample of 63 banks (2.2%for the full Group 2 sample), totally attributable to the standardisedmethod. Further detailed are provided in Table 6._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  30. 30. P a g e | 30Findings regarding the leverage ratioThe results regarding the leverage ratio are provided using two alternativemeasures of Tier 1 capital in the numerator:Basel III Tier 1, which is the fully phased-in Basel III definition of Tier 1capital, and Current Tier 1, which is Tier 1 capital eligible under the BaselII agreement (the phase-in period of Basel III begins in 2013).Total exposures of Group 1 banks according to the definition of thedenominator of the leverage ratio were €59.2 trillion while total exposuresfor Group 2 banks were €5.6 trillion.One important element in understanding the results of the leverage ratiosection is the terminology used to describe a bank’s leverage.Generally, when a bank is referred to as having more leverage, or beingmore leveraged, this refers to a multiple (eg 33 times) as opposed to aratio (eg 3%).Therefore, a bank with a high level of leverage will have a low leverageratio.Chart 4 presents leverage ratios based on Basel III Tier 1 and current Tier1 capital.The chart provides this information for all banks, Group 1 banks andGroup 2 banks._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  31. 31. P a g e | 31The weighted average current Tier 1 leverage ratio for all banks is 4.5%.For Group 1 banks, it is somewhat lower at 4.4% while it is 5.0% for Group2 banks.The average Basel III Tier 1 leverage ratio for all banks is 3.5%. The BaselIII average for Group 1 banks is 3.4%, and the average for Group 2 banksis 4.2%.The analysis shows that Group 2 banks are generally less leveraged thanGroup 1 banks, and this difference increases under Basel III when therequirements are fully phased in.It is likely that a portion of this effect is due to the changes in thedefinition of capital, which, as seen in Section 2, are likely to affect Group1 banks to a greater extent than Group 2 banks._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  32. 32. P a g e | 32Under the current Tier 1 leverage ratio, 17 banks would not meet the 3%Tier 1 leverage ratio level, including six Group 1 banks and 11 Group 2banks.Under the Basel III Tier 1 leverage ratio, 63 banks would not meet the 3%Tier 1 leverage ratio level, including 36 Group 1 banks and 27 Group 2banks.LiquidityLiquidity coverage ratioOne of the two standards introduced by the Committee is a 30-dayliquidity coverage ratio (LCR) which is intended to promote short-termresilience to potential liquidity disruptions.The LCR has been designed to require global banks to have sufficienthigh-quality liquid assets to withstand a stressed 30-day funding scenariospecified by supervisors.The LCR numerator consists of a stock of unencumbered, high qualityliquid assets that must be available to cover any net outflow, while thedenominator is comprised of cash outflows less cash inflows (subject to acap at 75% of outflows) that are expected to occur in a severe stressscenario.103 Group 1 and 102 Group 2 banks provided sufficient data in the 30 June2011 Basel III monitoring exercise to calculate the LCR according to theBasel III liquidity framework.The weighted average LCR was 90% for Group 1 banks and 83% forGroup 2 banks. These aggregate numbers do not speak to the range ofresults across the banks.Chart 5 below gives an indication of the distribution of bank results; thethick red line indicates the 100% minimum requirement, the thin redhorizontal lines indicate the median for the respective bank group.45% of the banks in the Basel III monitoring sample already meet or_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  33. 33. P a g e | 33exceed the minimum LCR requirement and 60% have LCRs that are at orabove 75%.For the banks in the sample, Basel III monitoring results show a shortfallof liquid assets of €1.76 trillion (which represents approximately 3% of the€58.5 trillion total assets of the aggregate sample) as of 30 June 2011, ifbanks were to make no changes whatsoever to their liquidity risk profile.This number is only reflective of the aggregate shortfall for banks that arebelow the 100% requirement and does not reflect surplus liquid assets atbanks above the 100% requirement.Banks that are below the 100% required minimum have until 2015 to meetthe standard by scaling back business activities which are mostvulnerable to a significant short-term liquidity shock or by lengtheningthe term of their funding beyond 30 days.Banks may also increase their holdings of liquid assets.The key components of outflows and inflows are shown in Table 7._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  34. 34. P a g e | 34Group 1 banks show a notably larger percentage of total outflows, whencompared to balance sheet liabilities, than Group 2 banks.This can be explained by the relatively greater contribution of wholesalefunding activities and commitments within the Group 1 sample, whereas,for Group 2 banks, retail activities, which attract much lower stress factors,comprise a greater share of funding activities.Cap on inflowsNo Group 1 and 19 Group 2 banks reported inflows that exceeded the cap.Of these, six fail to meet the LCR, so the cap is binding on them._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  35. 35. P a g e | 35Of the banks impacted by the cap on inflows, 18 have inflows from otherfinancial institutions that are in excess of the excluded portion of inflows.The composition of high quality assets currently held at banks is depictedin Chart 6.The majority of Group 1 and Group 2 banks’ holdings, in aggregate, arecomprised of Level 1 assets; however the sample, on whole, showsdiversity in their holdings of eligible liquid assets.Within Level 1 assets, 0% risk-weighted securities issued or guaranteedby sovereigns, central banks and PSEs, and cash and central bankreserves comprising significant portions of the qualifying pool.Comparatively, within the Level 2 asset class, the majority of holdings iscomprised of 20% risk-weighted securities issued or guaranteed bysovereigns, central banks or PSEs, and qualifying covered bonds.Cap on Level 2 assets€121 billion of Level 2 liquid assets were excluded because reported Level2 assets were in excess of the 40% cap as currently operationalised._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  36. 36. P a g e | 3634 banks currently reported assets excluded, of which 24 (11% of the totalsample) had LCRs below 100%.Chart 7 combines the above LCR components by comparing liquidityresources (buffer assets and inflows) to outflows.Note that the €800 billion difference between the amount of liquid assetsand inflows and the amount of outflows and impact of the cap displayedin the chart is smaller than the €1.76 trillion gross shortfall noted above asit is assumed here that surpluses at one bank can offset shortfalls at otherbanks.In practice the aggregate shortfall in the industry is likely to liesomewhere between these two numbers depending on how efficientlybanks redistribute liquidity around the system._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  37. 37. P a g e | 37Net stable funding ratioThe second standard is the net stable funding ratio (NSFR), alonger-term structural ratio to address liquidity mismatches and provideincentives for banks to use stable sources to fund their activities.103 Group 1 and 102 Group 2 banks provided sufficient data in the 30 June2011 Basel III monitoring exercise to calculate the NSFR according to theBasel III liquidity framework.46% of these banks already meet or exceed the minimum NSFRrequirement, with three-quarters at an NSFR of 85% or higher.The weighted average NSFR for each of the Group 1 bank and Group 2samples is 94%.Chart 8 shows the distribution of results for Group 1 and Group 2 banks;the thick red line indicates the 100% minimum requirement, the thin redhorizontal lines indicate the median for the respective bank group._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  38. 38. P a g e | 38The results show that banks in the sample had a shortfall of stablefunding of €2.78 trillion at the end of June 2011, if banks were to make nochanges whatsoever to their funding structure.This number is only reflective of the aggregate shortfall for banks that arebelow the 100% NSFR requirement and does not reflect any surplus stablefunding at banks above the 100% requirement.Banks that are below the 100% required minimum have until 2018 to meetthe standard and can take a number of measures to do so, including bylengthening the term of their funding or reducing maturity mismatch.It should be noted that the shortfalls in the LCR and the NSFR are notnecessarily additive, as decreasing the shortfall in one standard may resultin a similar decrease in the shortfall of the other standard, depending onthe steps taken to decrease the shortfall._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  39. 39. P a g e | 39_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  40. 40. P a g e | 40NUMBER 2Study on the Cross-Border Scope of thePrivate Right of Action Under Section10(b) of the Securities Exchange Act of1934 As Required by Section 929Y of theDodd-Frank Wall Street Reform andConsumer Protection ActApril 2012This study has been prepared by the Staff of the U.S. Securities andExchange Commission. The Commission has expressed no viewregarding the analysis, findings, or conclusions contained herein.Executive SummaryThis study stems from two significant legal developments in the Summerof 2010 regarding the application of Section 10(b) of the SecuritiesExchange Act of 1934 (“Exchange Act”) to transnational securitiesfrauds.Section 10(b) is an antifraud provision designed to combat a wide varietyof manipulative and deceptive activities that can occur in connection withthe purchase or sale of a security.The Securities and Exchange Commission (“Commission”) has civilenforcement authority under Section 10(b) and the Department of Justice(“DOJ”) has criminal enforcement authority.Further, injured investors can pursue a private right of action underSection 10(b); meritorious private actions have long been recognized asan important supplement to civil and criminal law-enforcement actions.On June 24, 2010, the Supreme Court in Morrison v. National AustraliaBank concluded that there is no “affirmative indication” in the ExchangeAct that Section 10(b) applies extraterritorially._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  41. 41. P a g e | 41Finding no affirmative indication of an extraterritorial reach, the SupremeCourt adopted a new transactional test under which:Section 10(b) reaches the use of a manipulative or deceptive device orcontrivance only in connection with the purchase or sale of a securitylisted on an American stock exchange, and the purchase or sale of anyother security in the United States.Congress promptly responded to the Morrison decision by adding Section929P(b)(2) of Title IX of the Dodd-Frank Wall Street Reform andConsumer Protection Act of 2010 (“Dodd-Frank Act”).Section 929P(b)(2) provided the necessary affirmative indication ofextraterritoriality for Section 10(b) actions involving transnationalsecurities frauds brought by the Commission and DOJ.Specifically, Section 929P(b)(2) provides the district courts of the UnitedStates with jurisdiction over Commission and DOJ enforcement actions ifthe fraud involves:(1) conduct within the United States that constitutes a significant step infurtherance of the violation, even if the securities transaction occursoutside the United States and involves only foreign investors; or(2) conduct occurring outside the United States that has a foreseeablesubstantial effect within the United States.With respect to private actions under Section 10(b), Section 929Y of theDodd-Frank Act directed the Commission to solicit public comment andthen conduct a study to consider the extension of the cross-border scopeof private actions in a similar fashion, or in some narrower manner.Additionally, Section 929Y provided that the study shall consider andanalyze the potential implications on international comity and thepotential economic costs and benefits of extending the cross-borderscope of private actions._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  42. 42. P a g e | 42BackgroundConduct and Effects Tests. Prior to the Supreme Court’s Morrisondecision, the lower federal courts had applied two tests to determine thecross-border reach of Section 10(b): the conduct test and the effects test.Under the conduct test, Section 10(b) applied if a sufficient level ofconduct comprising the transnational fraud occurred in the United States,even if the victims or the purchases and sales were overseas.Although the courts had adopted a range of approaches to defining whenthe level of domestic conduct was sufficient, courts generally found theconduct test satisfied where:(1) the mastermind of the fraud operated from the United States in ascheme to sell shares in a foreign entity to overseas investors;(2) much of the important efforts such as the underwriting, drafting ofprospectuses, and accounting work that led to the fraudulent offering of aU.S. issuer’s securities to overseas investors occurred in the United States;or(3) the United States was used as a base of operations for meetings, phonecalls, and bank accounts to receive overseas investors’ funds.Under the effects test, Section 10(b) applied to transnational securitiesfrauds when conduct occurring in foreign countries caused foreseeableand substantial harm to U.S. interests.Among other situations, the effects test applied where either overseasfraudulent conduct or a predominantly foreign transaction resulted in adirect injury to:(1) Investors resident in the United States (even if the U.S. investors arerelatively small in number);_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  43. 43. P a g e | 43(2) Securities traded on a U.S. exchange or otherwise issued by a U.S.entity; or(3) U.S. domestic markets, at least where a reasonably particularizedharm occurred.Morrison Litigation. Morrison involved a so-called “foreign-cubed” classaction – a class action on behalf of foreign investors who had acquired thecommon stock of a foreign corporation through purchases effected onforeign securities exchanges.The plaintiffs alleged that the foreign corporation made false andmisleading statements outside the United States to the plaintiff-investorsthat were based on false financial figures that had been generated in theUnited States by a wholly-owned U.S. subsidiary.The federal district court dismissed the case, holding that the conducttest had not been satisfied. The court of appeals affirmed the dismissal.At the Supreme Court, many of the arguments raised by the parties andthe various amici curiae (i.e., non-parties who voluntarily submitted theirviews and analysis to assist the Court) centered on policy argumentssupporting or opposing the conduct and effects tests in comparison to abright-line test that would restrict the cross-border reach of Section 10(b).The plaintiffs and their supporting amici argued, among other things,that:(1) there is an inherent U.S. interest in ensuring that even foreignpurchasers of globally traded securities are not defrauded, because theprices that they pay for their securities will ultimately impact the prices atwhich the securities are sold in the United States;(2) foreign issuers that cross-list in the United States benefit from theprestige and increased investor confidence that results from a U.S. listing,and thus it is reasonable to hold these foreign issuers to the full force ofthe U.S. securities laws regardless of where the particular transactionoccurs; _____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  44. 44. P a g e | 44(3) without the cross-border application of Section 10(b) afforded by theconduct and effects tests, there generally would be no legal options forredress open to the foreign victims of frauds committed by personsresiding in the United States; and(4) eliminating the conduct and effects tests could be a significant factorweighing against further or continued foreign investment in the UnitedStates.The defendants and their supporting amici (excluding foreigngovernments) argued, among other things, that:(1) the uncertainty and lack of predictability resulting from the conductand effects tests discourage investment in the United States and capitalraising in the United States, which would not occur with a bright-line testlimiting Section 10(b) only to transactions within the United States;(2) application of Section 10(b) private liability to frauds resulting intransactions on foreign exchanges would result in wasteful and abusivelitigation, cause the United States to become a leading venue for globalsecurities class actions, and subject foreign issuers to the burdens anduncertainty of extensive U.S. discovery, pre-trial litigation, and perhapstrial before plaintiffs’ claims can be dismissed under the conduct andeffects tests; and(3) different nations have reached different conclusions about whatconstitutes fraud, how to deter it, and when to prosecute it, and thecross-border application of U.S. securities law would interfere with thosesovereign policy choices.The U.S. Solicitor General, joined by the Commission, recommended tothe Supreme Court a standard that would permit a private plaintiff whosuffered a loss overseas as part of a transnational securities fraud topursue redress under Section 10(b) if the U.S. component of the frauddirectly caused the plaintiff’s injury.Although the Solicitor General acknowledged the potential for privatesecurities actions brought under U.S. law to conflict with the procedures_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  45. 45. P a g e | 45and remedies afforded by foreign nations, the Solicitor General opposed atransactional test that would permit a Section 10(b) private action only ifthe securities transaction occurred in the United States.A transactional test, the Solicitor General explained, would producearbitrary outcomes, including denying a Section 10(b) private action evenwhen the fraud was hatched and executed entirely in the United Statesand the injured investors were in the United States if the transactionsinduced by the fraud were executed abroad.The British, French, and Australian Governments opposed to varyingdegrees the cross-border scope of private rights of action under Section10(b).Each argued that it had made different policy choices about theprevention of fraud and enforcement of antifraud rules based on its ownsovereign interests, and asserted that each choice deserved respect.The British and French Governments expressly supported a bright-linetest.Morrison Decision. As noted above, the Supreme Court adopted a newtransactional test under which Section 10(b) applies only to frauds inconnection with the “the purchase or sale of a security listed on anAmerican stock exchange, and the purchase or sale of any other securityin the United States.”In rejecting the conduct and effects tests, the Court expressly identifiedthe potential threat of regulatory conflict and international discord thatprivate securities class actions can pose in the context of transnationalsecurities frauds.Justice Stevens filed a concurrence in which he argued in favor of theconduct and effects tests, and criticized the transactional test as undulyexcluding from private redress under Section 10(b) frauds that transpire inthe United States or directly target U.S. citizens._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  46. 46. P a g e | 46Post-Morrison Legal DevelopmentsFollowing the Morrison decision, the lower federal courts have addresseda number of questions regarding the interpretation and application of thetransactional test.To date, the courts have issued decisions holding that:1) Although the Supreme Court stated in Morrison that Section 10(b)applies to the “purchase or sale of a security listed on an American stockexchange,” an investor in a U.S. and foreign cross-listed security cannotmaintain a Section 10(b) private action if he or she acquired the securityon the foreign stock exchange.2) An investor who acquires an exchange-traded American depositaryreceipt (ADR), which is a type of security that represents an ownershipinterest in a specified amount of a foreign security, can maintain a Section10(b) private action.3) The purchase or sale of a security on a foreign exchange by a U.S.investor is not within the reach of Section 10(b) even if the transaction wasinitiated in the United States (e.g., the purchase or sale order was placedwith a U.S. broker-dealer by a U.S. investor).4) A Section 10(b) private action is not available for a U.S. counter-party toa security-based swap that references a foreign security, at least to theextent that the counter-party is suing a third party (i.e., a non-party to theswap) for fraudulent conduct related to the foreign-referenced security.5) Section 10(b) applies where a defendant engages in insider tradingoverseas with respect to a U.S. exchange-traded corporation by acquiringcontracts for difference, which are a type of security in which thepurchaser acquires the future movement of the underlying company’scommon stock without taking formal ownership of the company’s shares.6) A Section 10(b) private action is not available against a securitiesintermediary such as a broker-dealer, investment adviser, or underwriter_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  47. 47. P a g e | 47if the transaction for which the investor suffered a loss occurred on aforeign exchange or otherwise outside the United States, even if(i) the intermediary resided in the United States and primarily engaged inthe fraudulent conduct here, or(ii) the intermediary traveled to the United States frequently to meet withthe U.S. investor-client.7) Investors who purchase shares of an off-shore feeder fund that holdsitself out as investing exclusively or predominantly in a U.S. fund cannotmaintain a Section 10(b) private action unless the purchase of the feederfund’s shares occurred in the United States.Courts are divided on the issue of how to determine whether a purchaseor sale of securities not listed on a U.S. or foreign exchange takes place inthe United States, setting forth a number of competing approaches thatinclude looking to:(a) whether either the offer or the acceptance of the off-exchangetransaction occurred in the United States;(b) whether the event resulting in “irrevocable liability” occurred in theUnited States; or(c) whether the issuance of the securities occurred in the United States.Responses to Request for Public CommentIn response to the Commission’s request for public comments, as ofJanuary 1, 2012 the Commission received 72 comment letters (excludingduplicate and follow-up letters) – 30 from institutional investors; 19 fromlaw firms and accounting firms; 8 from foreign governments; 7 frompublic companies and associations representing them; 7 from academics;and 1 from an individual investor._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  48. 48. P a g e | 48Of these, 44 supported enactment of the conduct and effects tests or somemodified version of the tests, while 23 supported retention of theMorrison transactional test.Arguments in Favor of the Transactional Test. The comment letters insupport of the transactional test asserted that cross-border extension ofSection 10(b) private actions would create significant conflicts with othernations’ laws, interfere with the important and legitimate policy choicesthat these nations have made, and result in wasteful and abusive litigationinvolving transactions that occur on foreign securities exchanges.Those comment letters argue that, by contrast, retention of thetransactional test would foster market growth because the test provides abright-line standard for issuers to reasonably predict their liabilityexposure in private Section 10(b) actions.Arguments Against the Transactional Test. The comment letters opposedto the transactional test argued, among other things, that: whether anexchange-traded securities transaction executed through a broker-dealeroccurs in the United States or overseas may not be either apparent to U.S.investors or within their control; the transactional test impairs the abilityof U.S. investment funds to achieve a diversified portfolio that includesforeign securities because the funds will have to either trade in the lessliquid and potentially more costly ADR market in the United States or,alternatively, forgo Section 10(b) private remedies to trade overseas orpursue foreign litigation; and the transactional test fails to provide aprivate action in situations where U.S. investors are induced within theUnited States to purchase securities overseas.Arguments in Favor of the Conducts and Effects Tests. The commentletters supporting enactment of the conduct and effects tests argued thatdoing so would promote investor protection because private actionswould be available to supplement Commission enforcement actionsinvolving transnational securities frauds.These comment letters also argued that the conduct and effects testsreflect the economic reality that although a company’s shares may tradeon a foreign exchange and the company may be incorporated overseas,_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  49. 49. P a g e | 49the entity may have an extensive U.S. presence justifying application ofU.S. securities laws.Further, comment letters also argued that the conduct and effects testsensure that fraudsters operating in the United States or targetinginvestors in the United States cannot easily avoid the reach of Section10(b) private liability, and facilitates international comity by balancing theinterests of the United States and foreign jurisdictions.Arguments Against the Conduct and Effects Tests. The argumentsagainst the conduct and effects tests largely mirrored those set forthabove in favor of the transactional test.In addition, these comment letters argued that: investor protection anddeterrence of fraud are sufficiently achieved in the context oftransnational securities fraud by Congress having enacted the conductand effects tests for cases brought by the Commission and DOJ; smallU.S. investors do not need the heightened protection of the conduct andeffects tests because they generally do not directly invest overseas; theconduct and effects tests’ fact-specific analysis bears little relationship toinvestors’ expectations about whether they are protected by U.S.securities laws; and foreign legal regimes already provide sufficientremedies for investors who engage in transactions abroad.Alternative Approaches that Commenters Proposed. Several commentletters argued in support of conduct and effects tests limited to U.S.resident investors.According to these comment letters, such an approach would minimizemany of the international comity concerns associated with the conductand effects tests because foreign nations recognize that the United Stateshas a strong interest in protecting its own citizens.Another option that the comment letters suggested was afraud-in-the-inducement standard under which an investor couldmaintain a Section 10(b) private action if the investor was induced topurchase or sell the security in reliance on materially false or misleadingmaterial provided to the investor in the United States. _____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  50. 50. P a g e | 50Comment letters supporting this alternative argued that it would beconsistent with investors’ expectations, because investors generallybelieve that they will be protected by the legal regime that applies in thelocations where they are subjected to fraudulent information or conduct.Options Regarding the Cross-Border Reach of Section 10(b)Private ActionsThe Staff advances the following options for consideration:Options Regarding the Conduct and Effects Tests.Enactment of conduct and effects tests for Section 10(b) private actionssimilar to the test enacted for Commission and DOJ enforcement actionsis one potential option.Consideration might also be given to alternative approaches focusing onnarrowing the conduct test’s scope to ameliorate those concerns that havebeen voiced about the negative consequences of a broad conduct test.One such approach (which the Solicitor General and the Commissionrecommended in the Morrison litigation) would be to require the plaintiffto demonstrate that the plaintiff’s injury resulted directly from conductwithin the United States.Among other things, requiring private plaintiffs to establish that theirlosses were a direct result of conduct in the United States could mitigatethe risk of potential conflict with foreign nations’ laws by limiting theavailability of a Section 10(b) private remedy to situations in which thedomestic conduct is closely linked to the overseas injury.The Commission has not altered its view in support of this standard.Another option is to enact conduct and effects tests only for U.S. residentinvestors._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  51. 51. P a g e | 51Such an approach could limit the potential conflict between U.S. andforeign law, while still potentially furthering two of the principalregulatory interests of the U.S. securities laws – i.e., protection of U.S.investors and U.S. markets.Options to Supplement and Clarify the Transactional Test. In addition topossible enactment of some form of conduct and effects tests, the Studysets forth four options for consideration to supplement and clarify thetransactional test.One option is to permit investors to pursue a Section 10(b) private actionfor the purchase or sale of any security that is of the same class ofsecurities registered in the United States, irrespective of the actuallocation of the transaction.A second option, which is not exclusive of other options, is to authorizeSection 10(b) private actions against securities intermediaries such asbroker-dealers and investment advisers that engage in securities fraudwhile purchasing or selling securities overseas for U.S. investors orproviding other services related to overseas securities transactions to U.S.investors.A third option is to permit investors to pursue a Section 10(b) privateaction if they can demonstrate that they were fraudulently induced whilein the United States to engage in the transaction, irrespective of where theactual transaction takes place.A final option is to clarify that an off-exchange transaction takes place inthe United States if either party made the offer to sell or purchase, oraccepted the offer to sell or purchase, while in the United States_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  52. 52. P a g e | 52NUMBER 3Survey on the implementation of the CEBS Guidelines onRemuneration Policies and Practices12 April 2012 - The European Banking Authority (EBA) publishes todaythe results of the survey on the implementation of CEBS Guidelines onremuneration policies and practices.The survey findings indicate that in most countries the Guidelines cameinto force on 1 January 2011 and that supervisors have actively assessedremuneration policies requiring, where needed, interventions in theremuneration structures and payouts of the variable component.While considerable progress has been reported with respect to thegovernance of remuneration, some areas of concern remain.Further supervisory guidance is needed in setting up the criteria foridentifying risk takers as well as in the application of the proportionalityprinciple and of the risk alignment practices.The findings of the survey have showed a satisfactory implementation ofthe Guidelines into the respective legal and supervisory frameworks andgood progress by the industry has been reported namely as to thepractices in the governance of remuneration.However, the scope of the Guidelines is one of the areas for concern asconsiderable variations exist in the extent to which the remunerationrequirements are applied beyond the scope of the CRD._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  53. 53. P a g e | 53With regard to the identification of risk takers, the survey has highlightedinconsistencies across institutions in the criteria used to identify staff thathave a material impact on the firm’s risk profile.Furthermore, such criteria have not always proved to sufficiently graspthe risk impact aspect of the exercise.Inconsistencies have also emerged in the application of theproportionality principle with practices varying from predetermined fixedcriteria to open case-by-case approaches to determine if the set of specificremuneration rules should be applied to identified staff.Finally, the survey has showed that risk alignment practices across theindustry remain underdeveloped namely with regard to the interaction ofparameters used for risk management and the structure of bonus pools.In light of the shortcomings identified by the survey, it is welcomed thatthe Danish Presidency, in its January compromise text on the CRD IVpackage, has proposed to widen the scope of the mandate for the EBA toelaborate criteria to identify categories of staff whose professionalactivities have a material impact on the institution’s risk profile.CONTEXT FOR THE SURVEYThis report presents the results of an EBA survey on the implementationof the CEBS Guidelines on Remuneration Policies and Practices(hereafter: the Guidelines) amongst European banking supervisors,conducted in Q 4 2011.The Guidelines were published on 10 December 2010.The aim of the survey was twofold i.e. to get an overview of- how legislators and supervisors have implemented the Guidelines in their legislative frameworks and/or their supervisory policies, focusing on possible differences between these implementations and the Guidelines;_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  54. 54. P a g e | 54- more importantly, how the requirements of the Guidelines have been supervised in practice, what progress has been made by institutions and which areas need further development.This aim is set off against a level playing field concern that was raisedwhen adopting the Guidelines, both by the sector and betweensupervisors.Although the Guidelines provide an extensive supporting framework tointerpret the CRD III requirements on remuneration, they includenumerous open aspects where judgment by institutions and bysupervisors is required.The concern was that this judgment would lead to differentimplementations within the EU, further intensified by the fact thatprudential supervision over remuneration policies has been since thecrisis a completely new field of supervisory competence in most EUcountries.Through this report the EBA wants to encourage greater regulatoryconsistency across the EU jurisdictions.The survey benchmarks progress and further work to be done against theGuidelines, and consequently has a European context, with no direct linkto level playing field concerns between Europe and other members of theFSB.In this respect, the FSB published in October 2011 a Thematic Review onCompensation that included this kind of level playing concerns, amongstother implementation survey work on the FSB Principles andImplementation Standards.As a follow-up, the FSB has launched a detailed ongoing monitoringprogram.In the European Union, this survey is not the only tool through whichEBA monitors remuneration practices and levels in institutions across theMember States._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  55. 55. P a g e | 55A benchmark exercise based on remuneration data collected inaccordance with the criteria for disclosure established in point 15(f) ofpart 2 Annex XII of CRD III, will be launched by EBA.Twenty-one supervisors have participated in the survey; questions in thesurvey were mainly open and qualitative of nature, but for some aspects,numerical information was asked for a sample of institutions thatrepresents 60 % of total assets in the banking sector or at least the 20largest institutions in a particular Member State.Answers about practices in institutions relate mainly to the 2010remuneration cycle (i.e. for performances in 2010), the first year ofapplication of the CRD III requirements.The intention of this implementation report is not to repeat therequirements of the Guidelines.Where necessary, references will be made to the numbers of the relevantparagraphs of the Guidelines in footnotes.Words or expressions used in this report which are also used in theGuidelines shall have the meaning in this report as in the Guidelines.Executive SummaryThe CRD III remuneration requirements sought to develop risk-basedremuneration policies and practices, aligned with the long term interestsof the institution and avoiding short-term incentives that could lead toexcessive risk-taking.This was seen as a key contributory reform in restoring overall financialstability after the 2007-2008 financial crisis.In most countries, the Guidelines came into force on 1 January 2011, withsome countries suffering from delays in the legislative process._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  56. 56. P a g e | 56The CRD III combination of articles and annexes, with the Guidelines ontop of these, is often mirrored in the countries as a combination oflegislative acts, regulation, circulars and/or explanatory memoranda.The balance between legally prescriptive and supervisory regulatoryapproaches differs between the respondents.Supervisors have actively assessed remuneration policies, imposing -where needed - amendments to the policy and consequently interveningin the remuneration structures and actual payouts of variableremuneration.In all countries, the Guidelines are part of the supervisory review overinstitutions.The scope of the Guidelines is an area of significant concern.Regarding the scope of institutions, there are effectively no substantiveexemptions at national level to the application of the remunerationrequirements to institutions covered by CRD III.Considerable variations exist in the extent to which the remunerationrequirements are applied beyond the scope of CRD III e.g. in somecountries this extends to the financial sector as a whole.While these findings are reassuring or at least not problematic at firstsight, they need further nuancing when put in the context of groups orwhen taken together with the proportionality CRD III allows.Groups with non-EEA entities or groups with non-regulated subsidiariesor regulated subsidiaries that are not subject to CRD III do not alwaysobtain the standard of group-wide application of the remuneration policy.Differences in how the Guidelines apply beyond the EEA borders oftenhave their origin in different implementation of the FSB Principles andImplementing Standards by third countries._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  57. 57. P a g e | 57Proportionality regimes, sometimes based on predetermined fixedcriteria, other times based on an open case-by-case approach, can lead tosignificant variation in the net degree by which institutions are subject tothe CRD III requirements.Regarding staff under scope of the specific risk alignment requirements,CRD III requires that institutions identify the categories of staff that havea material impact on the risk profile of the institution (hereafter: theIdentified Staff).Institutions use a large variety of criteria for this internal exercise butthese are not always sufficient to grasp the risk impact aspect of thisexercise or to take into account less quantifiable risks such asreputational risk.The numbers of Identified Staff differ considerably between MemberStates, but there is a clear tendency of institutions to select very lownumbers.This affects the core of the CRD III requirements and undermines theeffectiveness of EU supervisory reforms on remuneration.The process to determine the Identified Staff in a group can be applieddifferently between parent undertaking and subsidiaries.There is a genuine concern on supervisory differences regarding theidentification process, within and outside the EEA.These differences can lead to regulatory arbitrage and competitivedisadvantages.Many supervisors express the need for clear criteria and a process toidentify risk takers in a single entity and within groups.More guidance is also needed on the application of the proportionalityprinciple and the neutralization of requirements. Further harmonisationof the identification process is essential for a level playing field._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  58. 58. P a g e | 58In order to be able to align with the risk profile of institutions, a balanceshould be found between clarity and flexibility.The governance of remuneration has shown considerableprogress.This may be explained by the fact that remuneration governance is part ofbroader governance reforms after the financial crisis.There is a widespread good implementation of the Guidelines with regardto the general principles on corporate governance, the role of themanagement body in its supervisory and management function and thesetting up of a Remuneration Committee (hereafter: Rem Co).If weaknesses occur, those mainly stem from the group governancecontext: differences in the implementation of the Guidelines acrossjurisdictions often have their origin in different corporate laws andpractices; another source may be the difficult balance between thecoherent application of the group policy and the local responsibilities,based on local risks profiles and regulatory environment, that subsidiariesmay have in the field of remuneration.The risk alignment of remuneration policies and practicesremain underdeveloped.In the first cycle of application of CRD III, it appears that too manysupervisory resources often have been spent to discussions withinstitutions regarding the numbers of Identified Staff rather than focusingmore on risk alignment principles.Hardly any supervisory guidance, additional to the Guidelines, has beendeveloped at national level.Changes are perceptible in risk alignment during performancemeasurement of employees and in the parameters used ex ante for settingbonus pools._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  59. 59. P a g e | 59Net profits and to a certain extent also risk-adjusted performanceparameters are now more in use for setting bonus pools, but much moreexperience needs to be gained here on the credibility of the parametersand on their simultaneous internal use for risk management purposesoutside remuneration so that they can really become embedded in theorganisations risk management framework.The interaction of such risk-adjusted parameters and discretionaryjudgment needs more transparency and the level at which the ex anteadjustment is applied is still restricted too much to the highest levels ofthe organisation.Also it is particularly important to ensure that the level of variableremuneration is consistent with the need to maintain, strengthen andrestore a sound capital base.Regarding ex post risk alignment, more improvements seem to bedesirable with a view to establishing sufficiently sensitive malus criteriawhich trigger forfeiture of deferred, i. e. unvested, variable remuneration.The malus criteria used do not always reflect the back testing character,which is inherent in the idea of a malus, with regard to the initiallymeasured performance.In light of the underdevelopment of risk adjustment techniques, the ratiosof variable to fixed that institutions have set in their remuneration policiesand that were used in this first CRD III cycle do not appear to signal abreach with practices from the past and tend to be high.The criteria by which institutions decide on the ratios in practice are notalways clear.Progress can however be observed in setting up multi-year frameworks,with deferral periods now being widespread.National requirements on the different elements of the multi-yearframework (e.g. proportion being deferred, time horizon, vesting process,_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  60. 60. P a g e | 60time span between end of accrual and vesting of deferred amount) showsome minor variance or divergence from the Guidelines.The use of instruments as part of variable remuneration suffersfrom a feasibility gap.CRD III introduced a requirement to pay at least 50% of the variablecomponent of remuneration in instruments.Because the wording used for this requirement includes an "appropriatebalance" of different types of instruments, there was some room forinstitutions to tailor this requirement to their own needs and possibilities.In some countries, there is delay in complying with this CRD IIIrequirement because banks have difficulties in finding suitableinstruments.Listed institutions in several jurisdictions do not use common shares dueto practical and dilution problems, even though based on the CRD IIItext there were expectations that such shares would be used by listedinstitutions.So-called "phantom shares plans" (equivalent non cash instruments) aremore frequently used by both listed and non-listed institutions, althoughtheir development is still subject to many open issues.The main open issue concerns the valuation of these plans: by whomshould the value be determined and what kind of method should be usedto that end?Further practical experience is needed in this respect, especially todevelop these instruments for non-listed companies.Still, some strong practices are emerging which may help to shape furtherpolicy.Hybrid tier 1 instruments, part of the "appropriate balance" that CRD IIIenvisaged, are so far in practice not used._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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