Monday April 23 2012 - Top 10 risk and compliance management related news stories and world events

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Monday April 23 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 Top 10 risk and compliance management related news storiesand world events that (for better or for worse) shaped the weeks agenda, and what is next George Lekatis President of the IARCPDear Member,We will start with a “Guess who said it” game.Who said it (and for whom)?“In our audit of fiscal years 2011 and 2010 financial statements, weidentified four significant deficiencies in internal control as of September30, 2011.These significant internal control deficiencies represent continuingdeficiencies concerning controls over (1) information systems, (2)financial reporting and accounting processes … ”And later:“We start with a from a Significant Deficiency over Information Security”“… despite this progress, we identified new weaknesses in informationsecurity controls regarding(1) incomplete implementation of your information security program and(2) inadequate review of service auditors’ reports that jeopardized the_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  2. 2. Page |2confidentiality and integrity of your financial information”Looks like a Sarbanes Oxley report?Yes, but it is not something like it.Well, who wrote it?The U.S. Government Accountability Office (GAO) – that is anindependent, nonpartisan agency that works for Congress.Often called the congressional watchdog,GAO investigates how the federalgovernment spends taxpayer dollars.The head of GAO, the Comptroller General of the United States, isappointed to a 15-year term by the President from a slate of candidatesCongress proposes.Gene L. Dodaro became the eighth Comptroller General of the UnitedStates and head of the U.S. Government Accountability Office (GAO) onDecember 22, 2010, when he was confirmed by the United States Senate.He was nominated by President Obama in September of 2010 and hadbeen serving as Acting Comptroller General since March of 2008.Ok, for whom the GAO said the above?For the boss of the PCAOB, that has a critical role for the implementationof the Sarbanes Oxley Act… You guessed it! For the U.S. Securities andExchange Commission!The moral of the story: Nobody is perfect.Welcome to the Top 10 list._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  3. 3. Page |3Improvements Needed in SEC’s Internal Controls and AccountingProceduresSpeech, Chairman Ben S. BernankeAt the Russell Sage Foundation and The CenturyFoundation Conference on "Rethinking Finance" NewYorkSome Reflections on the Crisis and the Policy ResponseUBS launches education initiative to mark its 150thanniversarySpeech by the Chancellor of the Exchequer, Rt HonGeorge Osborne MP, at the City of London RMBlaunch event_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  4. 4. Page |4Board of Governors of theFederal Reserve System,Commodity Futures TradingCommission, Federal DepositInsurance Corporation,Office of the Comptroller ofthe Currency, Securities andExchange CommissionVolcker Rule ConformancePeriod ClarifiedThe White HouseApril 17, 2012Remarks by the President onIncreasing Oversight onManipulation in Oil MarketsEBA, Consultation on draftguidelines on the assessment ofthe suitability of members of themanagement body and keyfunction holders_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  5. 5. Page |5Office of Minority and Women Inclusion AnnualReportAs Required by Section 342(e) of theDodd-Frank Wall Street Reform and ConsumerProtection Act of 2010This is a report prepared by the Staff of the Office of Minority and WomenInclusion of the U.S. Securities and Exchange Commission.Committee on Payment andSettlement SystemsTechnical Committee of theInternational Organization ofSecurities CommissionsPrinciples for financial market infrastructuresSupervisory policies and bankdeleveraging: a European perspectiveAndrea Enria, Chairperson EuropeanBanking Authority21st Annual Hyman P. MinskyConference on the State of the U.S. andWorld EconomiesDebt, Deficits and Financial Instability_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  6. 6. Page |6The Honorable Mary L. SchapiroChairman, U.S. Securities and Exchange CommissionSubject: Management Report: Improvements Needed in SEC’sInternal Controls and Accounting ProceduresDear Ms. Schapiro:On November 15, 2011, we issued our opinion on the U.S. Securities andExchange Commission’s (SEC) and its Investor Protection Fund’s (IPF)fiscal years 2011 and 2010 financial statements.We also issued our opinion on the effectiveness of SEC’s internal controlsover financial reporting as of September 30, 2011, and our evaluation ofSEC’s compliance with selected provisions of laws and regulations duringfiscal year 2011.2In that report, we identified significant deficiencies in SEC’s internalcontrol over financial reporting.The purpose of this report is to(1) Present new recommendations related to the significant deficiencieswe identified in our November 2011 report;(2) Communicate less significant internal control issues we identifiedduring our fiscal year 2011 audit of SEC’s internal controls and accountingprocedures, along with our related recommended corrective actions; and_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  7. 7. Page |7(3) Summarize information on the status of the recommendationsreported as open in our March 29, 2011, management report.Results in BriefIn our audit of SEC’s fiscal years 2011 and 2010 financial statements, weidentified four significant deficiencies in internal control as of September30, 2011.These significant internal control deficiencies represent continuingdeficiencies concerning controls over(1) Information systems,(2) Financial reporting and accounting processes,(3) Budgetary resources, and(4) Registrant deposits and filing fees.These significant control deficiencies may adversely affect the accuracyand completeness of information used and reported by SEC’smanagement.We are making a total of 10 new recommendations to address thesecontinuing significant internal control deficiencies.A control deficiency exists when the design or operation of a control doesnot allow management or employees in the normal course of performingtheir assigned functions to prevent or detect and correct misstatementson a timely basis.[Note from George Lekatis: Sorry, I cannot resist. The definition of acontrol deficiency - a nightmare for all Sarbanes Oxley experts – can befound at the SOX standards endorsed by the SEC, and now the GAOexplains to the SEC what a control deficiency is]_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  8. 8. Page |8A significant deficiency is a deficiency, or a combination of deficiencies,in internal control that is less severe than a material weakness, yetimportant enough to merit attention by those charged with governance.In contrast, a material weakness is a deficiency, or combination ofdeficiencies, in internal control such that there is a reasonable possibilitythat a material misstatement of the entity’s financial statements will notbe prevented or detected and corrected on a timely basis.We also identified other internal control issues that although notconsidered material weaknesses or significant control deficiencies,nonetheless warrant SEC management’s attention.These issues concern SEC’s controls over: • payroll monitoring, • implementation of post-judgment interest accounting procedures, • accounting for disgorgement and penalty transactions, and • the government purchase card program.We are making a total of 9 new recommendations related to these otherinternal control deficiencies.We are also providing summary information on the status of SEC’sactions to address the recommendations from our prior audits as of theconclusion of our fiscal year 2011 audit.By the end of our fiscal year 2011 audit, we found that SEC took action tofully address 38 of the 66 recommendations from our prior audits,subsequent to our March 29, 2011, management report.Lastly, we found that SEC took action to address and resolve all fourweaknesses in information systems controls that we identified in publicand “Limited Official Use Only” reports issued in 2008 through 2009 thatwere reported as open at the time of our March 29, 2011, managementreport._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  9. 9. Page |9In providing written comments on a draft of this report, the SECChairman stated that continued improvement in the agencys internalcontrol structure, particularly in the areas of information security,financial reporting and accounting processes, budgetary resources, andregistrant deposits and filing fees, is a top priority.The Chairman stated that the center piece of SEC’s effort to strengthenfinancial controls is to migrate SEC’s core financial system andtransaction processing to a federal shared service provider.We will evaluate SEC’s actions, strategies, and plans as part of our fiscalyear 2012 audit.SEC’s written comments are reprinted in enclosure II. SEC alsoprovided technical comments, which we considered and incorporated asappropriate.Scope and MethodologyAs part of our audit of SEC’s fiscal years 2011 and 2010 financialstatements, we evaluated SEC’s internal controls over financial reportingand tested its compliance with selected provisions of laws andregulations.We designed our audit procedures to test relevant controls over financialreporting, including those designed to provide reasonable assurance thattransactions are properly recorded, processed, and summarized to permitthe preparation of financial statements in conformity with U.S. generallyaccepted accounting principles, and that assets are safeguarded againstloss from unauthorized acquisition, use, or disposition.As part of our audit, we considered and evaluated the work performed andconclusions reached by SEC management in its internal controlassessment.Further details on our scope and methodology are included in ourNovember 2011 report on our audit of SEC’s fiscal years 2011 and 2010financial statements and are summarized in enclosure III._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  10. 10. P a g e | 10We conducted our audit of SEC’s fiscal years 2011 and 2010 financialstatements in accordance with U.S. generally accepted governmentauditing standards. We believe our audit provided a reasonable basis forour conclusions in this report.Significant Deficiency over Information SecurityAs we reported in our report on our audit of SEC’s fiscal years 2011 and2010 financial statements, SEC has made progress in strengtheninginternal control over its financial information systems.However, despite this progress, we identified new weaknesses ininformation security controls regarding(1) Incomplete implementation of SEC’s information security programand(2) Inadequate review of service auditors’ reports that jeopardized theconfidentiality and integrity of SEC’s financial information, as discussedbelow.During our audit, we identified new deficiencies that limited theeffectiveness of information security controls protecting theconfidentiality and integrity of key financial systems and databases thatsupport financial reporting.Specifically, SEC had not consistently or fully implemented controls foridentifying and authenticating users, authorizing access to resources,ensuring that sensitive data are encrypted, or auditing actions taken on itssystems.In addition, SEC had not installed patch updates on its software,exposing it to known vulnerabilities, which could jeopardize dataintegrity and confidentiality.To read more: http://www.gao.gov/assets/600/590114.pdf_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  11. 11. P a g e | 11Speech, Chairman Ben S. BernankeAt the Russell Sage Foundation and The CenturyFoundation Conference on "Rethinking Finance" NewYorkSome Reflections on the Crisis and the PolicyResponseI would like to thank the conference organizers for the opportunity tooffer a few remarks on the causes of the 2007-09 financial crisis as well ason the Federal Reserves policy response.The topic is a large one, and today I will be able only to lay out some basicthemes.In doing so, I will draw from talks and testimonies that I gave during thecrisis and its aftermath, particularly my testimony to the Financial CrisisInquiry Commission in September 2010.Given the time available, I will focus narrowly on the financial crisis andthe Federal Reserves response in its capacity as liquidity provider of lastresort, leaving discussions of monetary policy and the aftermath of thecrisis to another occasion.Triggers and VulnerabilitiesIn its analysis of the crisis, my testimony before the Financial CrisisInquiry Commission drew the distinction between triggers andvulnerabilities.The triggers of the crisis were the particular events or factors that touchedoff the events of 2007-09--the proximate causes, if you will.Developments in the market for subprime mortgages were a prominentexample of a trigger of the crisis._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  12. 12. P a g e | 12In contrast, the vulnerabilities were the structural, and more fundamental,weaknesses in the financial system and in regulation and supervision thatserved to propagate and amplify the initial shocks.In the private sector, some key vulnerabilities included high levels ofleverage; excessive dependence on unstable short-term funding;deficiencies in risk management in major financial firms; and the use ofexotic and nontransparent financial instruments that obscuredconcentrations of risk.In the public sector, my list of vulnerabilities would include gaps in theregulatory structure that allowed systemically important firms andmarkets to escape comprehensive supervision; failures of supervisors toeffectively apply some existing authorities; and insufficient attention tothreats to the stability of the system as a whole (that is, the lack of amacroprudential focus in regulation and supervision).The distinction between triggers and vulnerabilities is helpful in that itallows us to better understand why the factors that are often cited astouching off the crisis seem disproportionate to the magnitude of thefinancial and economic reaction.Consider subprime mortgages, on which many popular accounts of thecrisis focus.Contemporaneous data indicated that the total quantity of subprimemortgages outstanding in 2007 was well less than $1 trillion; somemore-recent accounts place the figure somewhat higher.In absolute terms, of course, the potential for losses on these loans waslarge--on the order of hundreds of billions of dollars.However, judged in relation to the size of global financial markets,aggregate exposures to subprime mortgages were quite modest.By way of comparison, it is not especially uncommon for one days paperlosses in global stock markets to exceed the losses on subprimemortgages suffered during the entire crisis, without obvious ill effect on _____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  13. 13. P a g e | 13market functioning or on the economy.Thus, losses on subprime mortgages can plausibly account for themassive reaction seen during the crisis only insofar as they interactedwith other factors--more fundamental vulnerabilities--that served toamplify their effects. On the surface, the puzzle of disproportionate cause and effect seemssomewhat less stark if one takes the boom and bust in the U.S. housingmarket as the trigger of the crisis, as the paper gains and losses associatedwith the swing in house prices were many times the losses associateddirectly with subprime loans.Indeed, the 30 percent or so aggregate decline in house prices since theirpeak has by now eliminated nearly $7 trillion in paper wealth.However, on closer examination, it is not clear that even the largemovements in house prices, in the absence of the underlying weaknessesin our financial system, can account for the magnitude of the crisis.First, much of the decline in house prices has occurred since the mostintense phase of the crisis; the decline in prices since September 2008 isprobably better viewed as largely the result of, rather than a cause of, thecrisis and ensuing recession.More fundamentally, however, any theory of the crisis that ties itsmagnitude to the size of the housing bust must also explain why the fall ofdot-com stock prices just a few years earlier, which destroyed as much ormore paper wealth--more than $8 trillion--resulted in a relatively short andmild recession and no major financial instability.Once again, the explanation of the differences between the two episodesmust be that the problems in housing and mortgage markets interactedwith deeper vulnerabilities in the financial system in ways that thedot-com bust did not.So let me turn, then, to a discussion of those vulnerabilities and how theyamplified the effects of triggers like the collapse of the subprime_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  14. 14. P a g e | 14mortgage market. A number of the vulnerabilities I listed a few moments ago wereassociated with the increased importance of the so-called shadowbanking system.Shadow banking, as usually defined, comprises a diverse set ofinstitutions and markets that, collectively, carry out traditional bankingfunctions--but do so outside, or in ways only loosely linked to, thetraditional system of regulated depository institutions.Examples of important components of the shadow banking systeminclude securitization vehicles, asset-backed commercial paper (ABCP)conduits, money market mutual funds, markets for repurchaseagreements (repos), investment banks, and mortgage companies.Before the crisis, the shadow banking system had come to play a majorrole in global finance.Economically speaking, as I noted, shadow banking bears strongfunctional similarities to the traditional banking sector.Like traditional banking, the shadow banking sector facilitates maturitytransformation (that is, it is used to fund longer-term, less-liquid assetswith short-term, more-liquid liabilities), and it channels savings intospecific investments, mostly debt-like instruments.In part, the rapid growth of shadow banking reflected various types ofregulatory arbitrage--for example, the minimization of capitalrequirements.However, instruments that fund the shadow banking system, such asmoney market mutual funds and repos, also met a rapidly growingdemand among investors, generally large institutions and corporations,seeking cash-like assets for use in managing their liquidity.Commercial banks were limited in their ability to meet this growingdemand by prohibitions on the payment of interest on business checking_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  15. 15. P a g e | 15accounts and by relatively low limits on the size of deposit accounts thatcan be insured by the Federal Deposit Insurance Corporation (FDIC).As became apparent during the crisis, a key vulnerability of the systemwas the heavy reliance of the shadow banking sector, as well as some ofthe largest global banks, on various forms of short-term wholesalefunding, including commercial paper, repos, securities lendingtransactions, and interbank loans.The ease, flexibility, and low perceived cost of short-term funding alsosupported a broader trend toward higher leverage and greater maturitymismatch in individual shadow banking institutions and in the sector as awhole.While banks also rely on short-term funding and leverage, they benefitfrom a government-provided safety net, including deposit insurance andbackstop liquidity provision by the central bank.Shadow banking activities do not have these safeguards, so they employalternative mechanisms to gain investor confidence.Among these mechanisms are the collateralization of many shadowbanking liabilities; regulatory or contractual restrictions placed onportfolio holdings, such as the liquidity and credit quality requirementsapplicable to money market mutual funds; and the imprimaturs of creditrating agencies.Indeed, the very foundation of shadow banking and its rapid growthbefore the crisis was the widely held view (among both investors andregulators) that these safeguards would protect shadow banking activitiesagainst runs and panics, similar to the protection given to commercialbanking by the government safety net.Unfortunately, this view turned out to be wrong.When it became clear to investors that these alternative protections mightnot be adequate to protect against losses, widespread flight from theshadow banking system occurred, with pernicious dynamics reminiscent_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  16. 16. P a g e | 16of the banking panics of an earlier era.Although the vulnerabilities associated with short-term wholesalefunding and excessive leverage can be seen as structural weaknesses ofthe global financial system, they can also be viewed as a consequence ofpoor risk management by financial institutions and investors, which Iwould count as another major vulnerability of the system before the crisis.Unfortunately, the crisis revealed a number of significant defects inprivate-sector risk management and risk controls, importantly includinginsufficient capacity by many large firms to track firm wide risk exposures,such as off-balance-sheet exposures.This lack of capacity by major financial institutions to track firm wide riskexposures led in turn to inadequate risk diversification, so thatlosses--rather than being dispersed broadly--proved in some cases to beheavily concentrated among relatively few, highly leveraged companies.Here, I think, is the principal explanation of why the busts in dot-comstock prices and in the housing and mortgage markets had such markedlydifferent effects.In the case of dot-com stocks, losses were spread relatively widely acrossmany types of investors.In contrast, following the housing and mortgage bust, losses were feltdisproportionately at key nodes of the financial system, notably highlyleveraged banks, broker-dealers, and securitization vehicles.Some of these entities were forced to engage in rapid asset sales atfire-sale prices, which undermined confidence in counterparties exposedto these assets, led to sharp withdrawals of funding, and disruptedfinancial intermediation, with severe consequences for the economy.Private-sector risk management also failed to keep up with financialinnovation in many cases.An important example is the extension of the traditional_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  17. 17. P a g e | 17originate-to-distribute business model to encompass increasinglycomplex securitized credit products, with wholesale market fundingplaying a key role.In general, the originate-to-distribute model breaks down the process ofcredit extension into components or stages--from origination to financingand to the post financing monitoring of the borrowers ability to repay--ina manner reminiscent of how manufacturers distribute the stages ofproduction across firms and locations.This general approach has been used in various forms for many years andcan produce significant benefits, including lower credit costs andincreased access of consumers and small and medium-sized businessesto capital markets.However, the expanded use of this model to finance subprime mortgagesthrough securitization was mismanaged at several points, including theinitial underwriting, which deteriorated markedly, in part because ofincentive schemes that effectively rewarded originators for the quantityrather than the quality of the mortgages extended.Loans were then packaged into securities that proved complex, opaque,and unwieldy; for example, when defaults became widespread, the legalagreements underlying the securitizations made reasonablemodifications of troubled mortgages difficult.Rating agencies ratings of asset-backed securities were revealed to besubject to conflicts of interest and faulty models.At the end of the chain were investors who often relied mainly on ratingsand did not make distinctions among AAA-rated securities.Even if the ultimate investors wanted to do their own credit analysis, theinformation needed to do so was often difficult or impossible to obtain.Dependence on short-term funding, high leverage, and inadequate riskmanagement were critical vulnerabilities of the private sector prior to thecrisis._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  18. 18. P a g e | 18Derivative transactions further increased risk concentrations and thevulnerability of the system, notably by shifting the location and apparentnature of exposures in ways that were not transparent to many marketparticipants.But even as private-sector activities increased systemic risk, the publicsector also failed to appreciate or sufficiently respond to the buildingvulnerabilities in the financial system--both because the statutoryframework of financial regulation was not well suited to addressing somekey vulnerabilities and because some of the authorities that did exist werenot used effectively.In retrospect, it is clear that the statutory framework of financialregulation in place before the crisis contained serious gaps.Critically, shadow banking activities were, for the most part, not subjectto consistent and effective regulatory oversight.Much shadow banking lacked meaningful prudential regulation,including various special purpose vehicles, ABCP conduits, and manynonbank mortgage-origination companies.No regulatory body restricted the leverage and liquidity policies of theseentities, and few if any regulatory standards were imposed on the qualityof their risk management or the prudence of their risk-taking.Market discipline, imposed by creditors and counterparties, helped onsome dimensions but did not effectively limit the systemic risks theseentities posed. Other shadow banking activities were potentially subject to someprudential oversight, but weaknesses in the statutory and regulatoryframework meant that in practice they were inadequately regulated andsupervised.For example, the Securities and Exchange Commission supervised thelargest broker-dealer holding companies but only through an opt-inarrangement that lacked the force of a statutory regulatory regime. _____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  19. 19. P a g e | 19Large broker-dealer holding companies faced serious losses and fundingproblems during the crisis, and the instability of such firms as BearStearns and Lehman Brothers severely damaged the financial system.Similarly, the insurance operations of American International Group, Inc.(AIG), were supervised and regulated by various state and internationalinsurance regulators, and the Office of Thrift Supervision had authority tosupervise AIG as a thrift holding company.However, oversight of AIG Financial Products, which housed thederivatives activities that imposed major losses on the firm, was extremelylimited in practice.The gaps in statutory authority had the additional effect of limiting theinformation available to regulators and, consequently, may have made itmore difficult to recognize the underlying vulnerabilities and complexlinkages in the overall financial system.Shadow banking institutions that were unregulated or lightly regulatedwere typically not required to report data that would have adequatelyrevealed their risk positions or practices.Moreover, the lack of preexisting reporting and supervisory relationshipshindered systematic gathering of information that might have helpedpolicymakers in the early days of the crisis. A broader failing was that regulatory agencies and supervisory practiceswere focused on the safety and soundness of individual financialinstitutions or markets--what we now refer to as microprudentialsupervision.In the United States and most other advanced economies, nogovernmental entity had either a mandate or sufficient authority--nowoften called macroprudential authority--to take actions to limit systemicrisks that could result from the collective behavior of financial institutionsand markets. Gaps in the statutory framework were an important reason for the_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  20. 20. P a g e | 20buildup of risk in certain parts of the system and for the inadequateresponse of the public sector to that buildup.But even when the relevant statutory authorities did exist, they were notalways used forcefully or effectively enough by regulators and supervisors,including the Federal Reserve.Notably, bank regulators did not do enough to force large financialinstitutions to strengthen their internal risk-management systems or tocurtail risky practices.The Federal Reserves Supervisory Capital Assessment Program,undertaken in the spring of 2009 and popularly known as the "stresstests," played a critical role in restoring confidence in the U.S. bankingsystem, but it also demonstrated that many institutions informationsystems could not provide timely, accurate information about bankexposures to counterparties or complete information about the aggregaterisks posed by different positions and portfolios.Regulators had recognized these problems in some cases but did notpress firms vigorously enough to fix them.Even without a macroprudential mandate, regulators could also havedone more to try to mitigate risks to the broader financial system.In retrospect, stronger bank capital standards--notably those relating tothe quality of capital and the amount of capital required for bankstrading book assets--and more attention to the liquidity risks faced by thelargest, most interconnected firms would have made the financial systemas a whole more resilient.The Crisis as a Classic Financial Panic Having laid out some of the triggers and vulnerabilities that set the stagefor the crisis, I can briefly sketch the evolution of the crisis itself. As I havenoted, developments in housing and mortgage markets played animportant role as triggers._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  21. 21. P a g e | 21Beginning in 2007, declining house prices and rising rates of foreclosureraised serious concerns about the values of mortgage-related assets andconsiderable uncertainty about where those losses would fall.The economy officially fell into recession in December 2007, followingseveral months of financial stress.However, the most severe economic consequences followed the extrememarket movements in the fall of 2008.To a significant extent, the crisis is best understood as a classic financialpanic--differing in details but fundamentally similar to the panicsdescribed by Bagehot and many others.The most familiar type of panic that has occurred historically, involvingruns on banks by retail depositors, had been made largely obsolete bydeposit insurance, central bank backstop liquidity facilities, and theassociated government supervision of banks.But a panic is possible in any situation in which longer-term, illiquidassets are financed by short-term, liquid liabilities and in which providersof short-term funding either lose confidence in the borrower or becomeworried that other short-term lenders may lose confidence.The combination of dependence on wholesale, short-term financing;excessive leverage; generally poor risk management; and the gaps andweaknesses in regulatory oversight created an environment in which apowerful, self-reinforcing panic could begin.Indeed, panic-like phenomena arose in multiple contexts and in multipleways during the crisis.The repo market, a major source of short-term credit for many financialinstitutions, notably including the independent investment banks, was animportant example.In repo agreements, loans are collateralized by financial assets, and themaximum amount of the loan is the current assessed value of the_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  22. 22. P a g e | 22collateral less a safety margin, or haircut.The secured nature of repo agreements gave firms and regulatorsconfidence that runs were unlikely.But this confidence was misplaced.Once the crisis began, repo lenders became increasingly concerned aboutthe possibility that they would be forced to receive collateral instead ofcash, collateral that would then have to be disposed of in falling andilliquid markets.In some contexts, lenders responded by imposing increasingly higherhaircuts, cutting the effective amount of funding available to borrowers.In other contexts, lenders simply pulled away, as in a deposit run; in thesecases, some borrowers lost access to repo entirely, and some securitiesbecame unfundable in the repo market.In either case, absent sufficient funding, borrowers were frequently leftwith no option but to sell assets into illiquid markets.These forced sales drove down asset prices, increased volatility, andweakened the financial positions of all holders of similar assets.Volatile asset prices and weaker borrower balance sheets in turnheightened the risks borne by repo lenders, further boosting theincentives to demand higher haircuts or withdraw funding entirely.This unstable dynamic was operating in full force around the time of thenear failure of Bear Stearns in March 2008, and again during theworsening of the crisis in mid-September of that year.Classic panic-type phenomena occurred in other contexts as well. Early inthe crisis, structured investment vehicles and many other asset-backedprograms were unable to roll over their commercial paper as investorspulled back, and the programs were forced to draw on liquidity lines frombanks or to sell assets. _____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  23. 23. P a g e | 23The resulting pressure on the bank liquidity providers, evident especiallyin the market for dollar-denominated loans in short-term funding markets,impeded the functioning of the financial system throughout the crisis.Following the Lehman collapse and the "breaking of the buck" by amoney market mutual fund that held commercial paper issued byLehman, both money market mutual funds and the commercial papermarket were also subject to runs.More generally, during the crisis, runs of short-term uninsured creditorscreated severe funding problems for a number of financial firms,including several large broker-dealers and also some bank holdingcompanies.In some cases, withdrawals of funds by creditors were augmented by"runs" in other guises--for example, by prime brokerage customers ofinvestment banks concerned about the safety of cash and securities heldat those firms or by derivatives counterparties demanding additionalmargin.Overall, the emergence of run-like phenomena in a variety of contextshelps explain the remarkably sharp and sudden intensification of thefinancial crisis, its rapid global spread, and the fact that standard marketindicators largely failed to forecast the abrupt deterioration in financialconditions.The multiple instances of run-like behavior during the crisis, togetherwith the associated sharp increases in liquidity premiums anddysfunction in many markets, motivated much of the Federal Reservespolicy response.Bagehot advised central banks--the only institutions that have the powerto increase the aggregate liquidity in the system--to respond to panics bylending freely against sound collateral.Following that advice, from the beginning of the crisis, the Fed, like othermajor central banks, provided large amounts of short-term liquidity tofinancial institutions, including primary dealers as well as banks, on a _____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  24. 24. P a g e | 24broad range of collateral.Reflecting the contemporary institutional environment, it also providedbackstop liquidity support for components of the shadow banking system,including money market mutual funds, the commercial paper market,and the asset-backed securities markets.To be sure, the provision of liquidity alone can by no means solve theproblems of credit risk and credit losses, but it can reduce liquiditypremiums, help restore the confidence of investors, and thus promotestability.It can also reduce panic-driven credit problems in cases in which suchproblems result from price declines during liquidity-driven fire sales ofassets.The pricing of the liquidity facilities was an important part of the FederalReserves strategy.Rates could not be too high; to have a positive effect, and to minimize thestigma of borrowing, the facilities had to be attractive relative to ratesavailable (or nominally available) in illiquid, dysfunctional markets.At the same time, pricing had to be sufficiently unattractive thatborrowers would voluntarily withdraw from these facilities as marketconditions normalized.This desired outcome in fact occurred: By early 2010, emergency lendinghad been drastically reduced, along with the demand for such lending. The Federal Reserves responses to the failure or near failure of a numberof systemically critical firms reflected the best of bad options, given theabsence of a legal framework for winding down such firms in an orderlyway in the midst of a crisis--a framework that we now have.However, those actions were, again, consistent with the Bagehotapproach of lending against collateral to illiquid but solvent firms._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  25. 25. P a g e | 25The acquisition of Bear Stearns by JPMorgan Chase was facilitated by aFederal Reserve loan against a designated set of assets, and the provisionof liquidity to AIG was collateralized by the assets of the largest insurancecompany in the United States.In both cases the Federal Reserve determined that the loans wereadequately secured, and in both cases the Federal Reserve has either beenrepaid with interest or holds assets whose assessed values comfortablycover remaining loans.To say that the crisis was purely a liquidity-based panic would be tooverstate the case.Certainly, an important part of the resolution of the crisis involvedassuring markets and counterparties of the solvency of key financialinstitutions, and that assurance was provided in significant part by theinjection of capital, including public capital, and the issuance ofguarantees--measures not available to the Federal Reserve.In these respects, the Treasury-managed Troubled Asset Relief Programand the FDICs Temporary Liquidity Guarantee Program played criticalroles. As I have noted, the Federal Reserve did help restore confidence inthe solvency of the banking system by leading the stress tests of the 19largest U.S. bank holding companies in the spring of 2009.These stress tests, which were both rigorous and transparent, helpedmake it possible for the tested banks to raise $120 billion in private capitalin the ensuing months.The response to the panic also involved an extraordinary amount ofinternational consultation and coordination.Following a key meeting of the Group of Seven finance ministers andcentral bank governors in Washington on October 10, 2008, thegovernments of other industrial countries took strong measures tostabilize key financial institutions and markets.Central banks collaborated closely throughout the crisis; in particular, the_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  26. 26. P a g e | 26Federal Reserve undertook swap agreements with 14 other central banksto help ensure adequate dollar liquidity in global markets and thus keepcredit flowing to U.S. households and businesses.ConclusionThe financial crisis of 2007-09 was difficult to anticipate for two reasons:First, financial panics, being to a significant extent self-fulfilling crises ofconfidence, are inherently difficult to foresee.Second, although the crisis bore some resemblance at a conceptual levelto the panics known to Bagehot, it occurred in a rather differentinstitutional context and was propagated and amplified by a number ofvulnerabilities that had developed outside the traditional banking sector.Once identified, however, the panic could be addressed to a significantextent using classic tools, including backstop liquidity provision bycentral banks, both here and abroad.To avoid or at least mitigate future panics, the vulnerabilities thatunderlay the recent crisis must be fully addressed.As you know, this process is well under way at both the national andinternational levels.I will have to leave to another time a discussion of the extensive changesin regulatory frameworks, as well as the changes in the Federal Reservesown organization and practices, that have been or are being put in place.Instead, I will close by noting that the events of the past few years haveforcibly reminded us of the damage that severe financial crises can cause.Going forward, for the Federal Reserve as well as other central banks, thepromotion of financial stability must be on an equal footing with themanagement of monetary policy as the most critical policy priorities._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  27. 27. P a g e | 27Notes- See Ben S. Bernanke (2010), "Causes of the Recent Financial and Economic Crisis," statement before the Financial Crisis Inquiry Commission, Washington, September 2- According to the Federal Reserves statistical release "Flow of Funds Accounts of the United States," the value of real estate held by households fell from $22.7 trillion in the first quarter of 2006 to $20.9 trillion in the fourth quarter of 2007 (down 8.1 percent from the first quarter of 2006). It then declined to $18.5 trillion in the third quarter of 2008 (down 18.6 percent from the first quarter of 2006) and to $16.0 trillion in the fourth quarter of 2011 (down 29.7 percent from the first quarter of 2006). The stock market wealth of U.S. households peaked at $18.1 trillion in the first quarter of 2000 and fell $6.2 trillion to $11.9 trillion through the third quarter of 2001. After a short-lived recovery, stock market wealth bottomed at $9.9 trillion in the third quarter of 2002. Overall, stock market wealth fell $8.3 trillion (or 46 percent) between its peak in the first quarter of 2000 and its trough in the third quarter of 2002.- See Walter Bagehot ([1873] 1897), Lombard Street: A Description of the Money Market (New York: Charles Scribners Sons). The classic theoretical analysis of "pure" banking panics is in Douglas W. Diamond and Philip H. Dybvig (1983), "Bank Runs, Deposit Insurance, and Liquidity," Journal of Political Economy, vol. 91 (3), pp. 401-19). Note that the term "panic" does not necessarily imply irrational behavior on the part of depositors or investors; it is perfectly rational_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  28. 28. P a g e | 28 to participate in a run if one fears that the bank will be forced to close. However, the collective action of many depositors or investors can lead to outcomes that are undesirable from the point of view of the economy as a whole. Return to text- For an analysis of the determinants of runs on money market mutual funds during the crisis, see Patrick McCabe (2010), "The Cross Section of Money Market Fund Risks and Financial Crises," Finance and Economics Discussion Series 2010-51 (Washington: Board of Governors of the Federal Reserve System, September).- Prime brokers provide a variety of services for hedge funds and other sophisticated institutional investors. Their services include clearing of trades, financing of long securities positions, and borrowing of securities to facilitate the establishment of short positions. Return to text_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  29. 29. P a g e | 29UBS launches education initiative to mark its150th anniversaryUBS is marking its 150th anniversary with the launch of a broad-basedinternational education initiative.Its main focus will be the establishment of the UBS International Centerof Economics in Society at the University of Zurich.Five additional fields of education will be supported through the fundingof projects for different age groups with the goal of strengtheningSwitzerlands reputation as a location for education and business.Switzerlands economic success is due in large part to its attractiveoperating environment and its outstanding education system.Education will continue to be Switzerlands most important resource.UBS has decided to mark its 150th anniversary by launching abroad-based international education initiative.This will be made up of six distinct elements and is aimed at primary andhigh school students, university students, academics, entrepreneurs andpeople over 50.For UBS, this represents a sustainable, long-term investment in the futureof Switzerland as an education and business location.Collaboration with the University of Zurich enables top-flight researchThe core of the UBS education initiative will be the creation of the UBSInternational Center of Economics in Society at the University of Zurich,which will be led by Professor Ernst Fehr.UBS will support the establishment of up to five chairs, the first of which_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  30. 30. P a g e | 30will be endowed in 2012, at the Department of Economics of theUniversity of Zurich.These chairs will facilitate cutting-edge research into issues related toeconomics and financial markets, covering a wide range of subjects andpromoting interdisciplinary research.The UBS International Center will emphasize the practical application ofknowledge by combining world-class research and entrepreneurialthinking.Kaspar Villiger, Chairman of UBSs Board of Directors, commented,"The UBS International Center of Economics in Society is a uniqueeducational project within Switzerland that will have outstandinginternational reach.We are particularly proud to be working in partnership with ProfessorErnst Fehr, one of the most renowned economists of our time, on thisproject.Under his leadership and guidance, the Department of Economics at theUniversity of Zurich has long been regarded as one of the top Europeaninstitutions in the field of economics."Wide range of education projectsIn addition to the partnership with the University of Zurich, the educationinitiative includes projects for the following stages of education:Primary and high schoolEnhanced support for Explore-it, a platform that enables up to 20,000primary school students to develop a greater interest in various scientifictopics.The funds provided by UBS will be used to extend the project nationwideand develop innovative teaching and learning materials._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  31. 31. P a g e | 31With this expanded support, UBS will become the main sponsor ofExplore-it.Extension of UBSs current partnership with the Young EnterpriseSwitzerland (YES) organization, which organizes educational projects foryoung people jointly with businesses, schools and the government.This initiative is designed to teach young people to apply collaborativethinking, demonstrate entrepreneurialism and present themselves asconfident and persuasive.With this extended commitment under the education initiative, UBS willbecome the new main sponsor of YES.ApprenticeshipsCreation of 150 additional apprenticeship positions within Switzerlandover the next five years.The annual number of apprentices will increase by about 10%.UBS today employs approximately 900 apprentices making it one of thelargest private employers of apprentices in Switzerland.InternshipsCreation of 150 additional internship positions around the world forstudents over the next three years as part of a special anniversaryprogram.This program targets students at the beginning of their academic career.EntrepreneursSupport for Genilem, an independent association that supports innovativebusinesses during their start-up phase._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  32. 32. P a g e | 32Genilem analyzes the business plans of start-up companies and alsoprovides a network of mentors and partners, specialized training forbudding entrepreneurs and professional long-term coaching which willlast for a three-year period.UBS will also provide its own expert mentors and coaches for thisinitiative.Support for the non-profit foundation KMU Next, which provides SMEsand micro-enterprises with the tools they need for the successful transferor acquisition of companies.UBS will become a member of the foundation and a special advisor onsuccession management topics, an area of particular expertise.People over 50Support for the Passerelle 50plus project run by Switzerlands Speranzafoundation.The project supports jobseekers over the age of 50 in finding suitableemployment in the open job market.UBS has been a donor to the Speranza foundation for some years now.Additional funds from the UBS education initiative will be used tosupport and promote the activities of Passerelle 50plus acrossSwitzerland.Support for Zeitmaschine.TV, a project for encouraginginter-generational dialog.The UBS education initiative will provide support to expand thisshowcase project and make it available to a larger number of schoolstudents.UBS will provide information on these specific educational projects at_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  33. 33. P a g e | 33regular intervals and an inaugural symposium will be held at the UBSInternational Center of Economics in Society this autumn.Lukas Gähwiler, CEO UBS Switzerland, and Markus Diethelm, GroupGeneral Counsel, will act as ambassadors for this major commitment,developing the initiative and driving it forward.For Group CEO Sergio P. Ermotti, the education initiative represents aunique opportunity: "Education will become Switzerlands greatestresource as it competes in the global arena, and this is especially true inthe service sector.Thats why it was important to us to include a wide range of projects inthe UBS education initiative which will benefit different age groups aswell as showing UBSs commitment to Switzerland to our clients andemployees and the general public."For further information on the UBS Education Initiative, visitwww.ubs.com/learn_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  34. 34. P a g e | 34_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  35. 35. P a g e | 3518 April 2012Speech by the Chancellor of the Exchequer,Rt Hon George Osborne MP, at the City ofLondon RMB launch eventI am delighted to be here today to celebrate Londonas a centre for international Renminbi (RMB)business.This is a significant moment.This morning, we saw the launch of the first RMBbond outside of Chinese sovereign territories.And it happened here in London.This builds on the progress London has alreadymade toward becoming the western hub for RMB. By the end of last year, the volume of RMB deposits in London hadalready reached 109bn RMB – equivalent to around 11bn pounds, of which35bn RMB – around 3.5bn pounds - are customer deposits.The annual trading volume in offshore RMB bonds had reached 28billion RMB – around 3 billion pounds. And London already represents 26% of the global offshore RMB spotforex market – the majority is based in Hong Kong.This is a market which grew by over 80% last year. Let me be clear – London is not in competition with Hong Kong, it is acomplement – providing a Western hub for RMB business.These developments are the culmination of a team effort by global banks_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  36. 36. P a g e | 36with operations in London and Hong Kong, strongly supported by theUK, mainland Chinese and Hong Kong Authorities. A year ago, when Vice Premier Wang Qishan met with me and my teamhere in London for the Economic and Financial Dialogue, the British andChinese Governments set out a joint communiqué welcoming privatesector interest in developing the offshore RMB market in London. The Hong Kong Authorities’ announced at the end of the year theirintention to extend the operating hours of the Hong Kong RMBpayments system, making it easier for RMB transactions to be settled inLondon. I want to commend the Hong Kong authorities on their pioneering workin developing the international RMB market. In January, at the Asia Financial Forum, Norman Chan, the ChiefExecutive of the Hong Kong Monetary Authority, and I announced thelaunch of the London-Hong Kong private-sector forum, to be facilitatedby HM Treasury and the Hong Kong Monetary Authority. The growth of its exciting new RMB business is a natural developmentfor this great city of London. London has a long history of global financial inventiveness - fromfounding the first organised market for insurance for trading around theworld hundreds of years ago, to the development of the Eurodollarmarkets through the 1960s, 70s and 80s, and global foreign equitiestrading in more recent times.RMB trading is the next step along a 400 year road.And it is natural that when Chinese banks look westwards, they chooseLondon as the hub for RMB in the West, given London’s pre-eminence asa financial centre, and its expertise in areas such as foreign exchange andbond issuance. It’s an important reminder to us in the UK that – while, of course, there_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  37. 37. P a g e | 37are vital questions we need to answer about how we protect taxpayersfrom banks that are too big to fail, and that we need to ensure the Britisheconomy has other strings to its bow as well as financial services – weshould have the confidence to look not only at the problems, but alsocelebrate our successes.London is the world’s pre-eminent financial centre, and it’s actuallybecoming more successful.Only last month, London retained its position at top of the GlobalFinancial Centres competitiveness Index. In fact, we were the only one of the top five financial centres which hadincreased its competitiveness since the previous year. Here in London, we are currently undertaking Europe’s largestinfrastructure project – Crossrail – which will provide even bettertransport links to the City. We’ve taken the difficult but right decision to make our tax system morecompetitive – cutting corporation tax rates to 24% from this month toamong the lowest in the developed world. And we’re taking the controversial but necessary decision to reduce thetop rate of income tax from next year.Today’s event emphasises that we are not prepared to let anyone steal amarch on us in terms of new products and new markets.We are the natural home in the West for those who want to invest in theChinese economic success story. The increasing international use of RMB is an important developmentfor China and for the World Economy. The growth of the Chinese economy has been quite remarkable.We all know the statistics._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  38. 38. P a g e | 38China has experienced growth of around 10% a year for the last 30 years. In a generation, China’s middle class is forecast to be over three timesthe size of that of the whole of Western Europe combined. And it is the strength of Asia’s economy which means that despiteturbulent times for the world economy, global growth in this decade andthe next will be higher than the past 30 years. But this growth has so far not been matched by the increase in theinternational use of its currency, so it is clear that the substantialexpansion of RMB will be one of the major developments in globalmarkets in the coming decades. Extension of the market to the Western time zone is a crucial part of itsexpansion. It is the ambition of the British Government to make London a Westernhub for the sector – with all the benefits that this will bring to our owneconomy.And what’s so special about today is that not only does it mark the launchof the first RMB bond outside of outside mainland China and HongKong.Today, we also mark the official launch of the City of London initiativeon London as a centre for RMB business. I want to thank Stuart Fraser, and the City of London CorporationSteering Committee and Expert Advisory Group for their hard work andleadership in getting to this point today.The involvement of companies like Bank of China, Barclays, DeutscheBank, HSBC and Standard Chartered will provide the depth of experienceon technical, infrastructure and regulatory issues that are needed todevelop the market. Its first output – the Bourse Consult’s report into London’s capabilities_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  39. 39. P a g e | 39as an offshore RMB centre - is a demonstration of this expertise,providing a clear direction for the market’s future development.It’s taken a lot of hard work from people in this room.But today is not the end of the process; it’s the beginning. I hope that other major European banks and corporate will follow today’slead, and that we will see Chinese institutions and corporations issuingRMB bonds in the London market in the very near future.In the coming decades, it is China that will act as one of the greatpowerhouses of the world economy.By acting as a bridge between East and West, we can secure London’sposition as the leading financial centre in the years to come – securinggrowth and prosperity for Britain.Note for (really new) membersWhat is the City of London?The City of London provides local government and policing services forthe financial and commercial heart of Britain, the Square Mile.It is committed to supporting and promoting The City as the worldleader in international finance and business services through the policiesit pursues and the high standard of services it provides.Its responsibilities extend far beyond the City boundaries in that it alsoprovides a host of additional facilities for the benefit of the nation.These range from open spaces such as Epping Forest and HampsteadHeath to the famous Barbican Arts Centre.The City of London combines its ancient traditions and ceremonialfunctions with the role of a modern and efficient local authority, lookingafter the needs of its residents, businesses and over 320,000 people who_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  40. 40. P a g e | 40come to work in the Square Mile every day.Among local authorities the City of London is unique; not only is it theoldest in the country but it operates on a non-party political basis throughits Lord Mayor, Aldermen and members of the Court of CommonCouncil.The Lord Mayor in particular plays an importantdiplomatic role with his overseas visits andfunctions at the historic Guildhall and MansionHouse for visiting heads of State.In addition to the usual services provided by a localauthority such as housing, refuse collection, education, social services,environmental health and town planning, the City of London performs anumber of very special functions.It runs its own police force and the nations Central Criminal Court, theOld Bailey.It provides five Thames bridges, runs the quarantine station at HeathrowAirport and is the Port Health Authority for the whole of the Thames tidalestuary.Three premier wholesale food markets (Billingsgate, Spitalfields andSmithfield) which supply London and the South East with fresh producealso belong to the City of London.Many of these services are funded from the City of Londons owninvestments at no cost to the public.The City of London is committed to an extensive programme of activitiesdesigned to assist its neighbours to combat social deprivation so that theycan benefit from the wealth the Square Mile generates.Staff and members of the City of London have, through centuries ofcareful stewardship, ensured that the Square Mile has continued tothrive. _____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  41. 41. P a g e | 41Todays City of London, through its philosophy of sustainabledevelopment, aims to share these benefits with future generations ofresidents, businesses and workers._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  42. 42. P a g e | 42Joint Press Release Board of Governors of the Federal Reserve System Commodity Futures Trading Commission Federal Deposit Insurance Corporation Office of the Comptroller of the Currency Securities and Exchange CommissionApril 19, 2012Volcker Rule Conformance Period ClarifiedThe Federal Reserve Boardannounced its approval of astatement clarifying that anentity covered by section 619of the Dodd-Frank WallStreet Reform and ConsumerProtection Act, or theso-called Volcker Rule, hasthe full two-year periodprovided by the statute tofully conform its activitiesand investments, unless theBoard extends theconformance period.Section 619 generally requires banking entities to conform their activitiesand investments to the prohibitions and restrictions included in thestatute on proprietary trading activities and on hedge fund and privateequity fund activities and investments.Section 619 required the Board to adopt rules governing the conformanceperiods for activities and investments restricted by that section, which theBoard did on February 9, 2011._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  43. 43. P a g e | 43Subsequently, the Board received a number of requests for clarification ofthe manner in which this conformance period would apply and how theprohibitions will be enforced.The Board is issuing this statement to address this question.The Board’s conformance rule provides entities covered by section 619 ofthe Dodd-Frank Act a period of two years after the statutory effective date,which would be until July 21, 2014, to fully conform their activities andinvestments to the requirements of section 619 of the Dodd-Frank Act andany implementing rules adopted in final under that section, unless thatperiod is extended by the Board.The Board, the Office of the Comptroller of the Currency, the FederalDeposit Insurance Corporation, the Securities and ExchangeCommission, and the Commodity Futures Trading Commission (theagencies) plan to administer their oversight of banking entities undertheir respective jurisdictions in accordance with the Board’s conformancerule and the attached statement.The agencies have invited public comment on a proposal to implementthe Volcker rule, but have not adopted a final rule.The statement is included in the attached Federal Register notice,publication of which is expected shortly._______________________________________________________Statement of Policy Regarding the Conformance Period forEntities Engaged in Prohibited Proprietary Trading or PrivateEquity Fund or Hedge Fund ActivitiesOn February 9, 2011, the Board issued its final rule to implement theprovisions of section 619 of the Dodd-Frank Wall Street Reform andConsumer Protection Act (“Dodd-Frank Act”) that grant banking entitiesand nonbank financial companies supervised by the Board a period oftime to conform their activities and investments with the prohibitions andrestrictions imposed by that section on proprietary trading activities andon hedge fund and private equity funds activities._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  44. 44. P a g e | 44Subsequently, the Board received a number of requests for clarification ofthe manner in which this conformance period would apply to variousactivities and investments covered by the requirements of section619 of the Dodd-Frank Act.The Board is issuing this interpretation to address this question.As more fully explained in this statement, the Board confirms thatbanking entities by statute have two years from July 21, 2012, to conformall of their activities and investments to section 619, unless that period isextended by the Board.During the conformance period, banking entities should engage ingood-faith planning efforts, appropriate for their activities andinvestments, to enable them to conform their activities and investments tothe requirements of section 619 and final implementing rules by no laterthan the end of the conformance period.This may include complying with reporting or recordkeepingrequirements if such elements are included in the final rulesimplementing section 619 and the agencies determine such actions arerequired during the conformance period.BackgroundSection 619 of the Dodd-Frank Act added a new section 13 to the BankHolding Company Act (“BHC Act”) that imposes certain prohibitionsand requirements on a banking entity and a nonbank financial companysupervised by the Board that engages in proprietary trading and hascertain interests in, or relationships with, a hedge fund or private equityfund (each a “covered fund”).As required by section 13(b)(2) of the BHC Act, the Board, the Office ofthe Comptroller of the Currency (“OCC”), Federal Deposit InsuranceCorporation (“FDIC”), and Securities and Exchange Commission(“SEC”) in October 2011 invited the public to comment on proposed rulesimplementing that section’s prohibitions and requirements._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  45. 45. P a g e | 45The period for filing public comments on this proposal was extended foran additional 30 days, until February 13, 2012.On January 11, 2012, the CFTC requested comment on a substantiallysimilar proposed rule to implement section 13 of the BHC Act and invitedpublic comment through April 16, 2012.Section 13(c)(6) of the BHC Act required the Board, acting alone, to adoptrules regarding the conformance periods for activities and investmentsrestricted by section 13.The Board issued its final conformance rule (“Conformance Rule”) onFebruary 9, 2011.Board GuidanceAfter adoption by the Board of the Conformance Rule, a number ofcommenters on the interagency proposed rules to implement section 13requested advice regarding the period of time a banking entity wouldhave to conform its activities and investments to the requirements ofsection 13 and the implementing rules and whether certain activitieswould be prohibited prior to the expiration of the conformance period.In particular, commenters sought confirmation that the ConformanceRule would allow a banking entity the full period permitted by statute toconform all of its investments and activities to section 13 and the finalimplementing rules.In addition, commenters sought confirmation that activities conductedand investments made during the conformance period would not besubjected to the requirements of the implementing rules during theconformance period.Section 13 of the BHC Act generally provides that, unless the period forconformance is extended by the Board, a banking entity must conform itsactivities and investments to the prohibitions and requirements of that_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  46. 46. P a g e | 46section and any final implementing rules no later than 2 years after thestatutory effective date of section 13.The effective date of section 13 is July 21, 2012.As noted in the issuing release for the Conformance Rule and thelegislative history of section 13, the conformance period for bankingentities is intended to give markets and firms an opportunity to adjust tothe prohibitions and requirements of that section and any implementingrules adopted by the agencies.Consistent with this purpose and the statute, the Conformance Ruleprovides each banking entity with a period of 2 years after the effectivedate of section 13 (i.e., until July 21, 2014) in which to fully conform itsactivities and investments to the prohibitions and requirements of section13 and the final implementing rules, unless that period is extended by theBoard (the “conformance period”).The Conformance Rule also provides a nonbank financial companysupervised by the Board with 2 years after the date the company becomesa nonbank financial company supervised by the Board to comply with anyapplicable requirements of section 13 of the BHC Act, including anyapplicable capital requirements or quantitative limitations adoptedthereunder, unless that period is extended by the Board.Under the Conformance Rule, all proprietary trading activity conductedby each banking entity must conform to the prohibitions andrequirements of section 13 of the BHC Act and any final implementingrules by no later than the end of the conformance period.Similarly, all activities, investments and transactions with or involving acovered fund, including a covered fund organized and offered orsponsored by the banking entity, must conform to section 13 of the BHCAct and final implementing rules by no later than the end of the relevantconformance period.During the conformance period, every banking entity that engages in anactivity or holds an investment covered by section 13 is expected to_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  47. 47. P a g e | 47engage in good-faith efforts, appropriate for its activities and investments,that will result in the conformance of all of its activities and investmentsto the requirements of section 13 of the BHC Act by no later than the endof the conformance period.This includes evaluating the extent to which the banking entity isengaged in activities and investments that are covered by section 13 of theBHC Act, as well as developing and implementing a conformance planthat is as specific as possible about how the banking entity will fullyconform all of its covered activities and investments with section 13 of theBHC Act and any final implementing rules by July 21, 2014, unless thatperiod is extended by the Board.These good-faith efforts should take account of the statutory provisions insection 13 of the BHC Act as they will apply to the activities andinvestments of the banking entity at the end of the conformance period aswell as any applicable implementing rules adopted in final by the primaryfinancial regulatory agency for the banking entity.Good-faith conformance efforts may also include complying withreporting or recordkeeping requirements if such elements are included inthe final rules implementing section 13 of the BHC Act and the agenciesdetermine such actions are required during the conformance period.Nothing in this guidance restricts in any way the authority of any agencyto use its supervisory or other authority to limit any activity the agencydetermines to be unsafe or unsound or otherwise in violation of law._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  48. 48. P a g e | 48The White HouseApril 17, 2012Remarks by thePresident on IncreasingOversight onManipulation in OilMarketsGood morning, everybody.Lately, I’ve been speaking a lot about our need for an all-of-the-abovestrategy for American energy -- a strategy that produces more oil and gashere at home, but also produces more biofuels and fuel-efficient cars,more solar power and wind power and other sources of clean, renewableenergy.This strategy is not just the right thing to do for our long-term economicgrowth; it’s also the right way for us to reduce our dependence on foreignoil right now.It’s the right way for us to put people to work right now.And ultimately, it’s the right way to stop spikes in gas prices that we’veput up [with] every single year -- the same kind of increase that we’veseen over the past couple of months.Obviously rising gas prices means a rough ride for a lot of families.Whether you’re trying to get to school, trying to get to work, do somegrocery shopping, you have to be able to fill up that gas tank.And there are families in certain parts of the country that have no choicebut to drive 50 or 60 miles to get to the job. So when gas prices go up, it’slike an additional tax that comes right out of your pocket._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  49. 49. P a g e | 49That’s one of the reasons we passed a payroll tax cut at the beginning ofthis year and made sure it extended all the way through this year, so thatthe average American is getting that extra $40 in every paycheck rightnow.But I think everybody understands that there are no quick fixes to thisproblem.There are politicians who say that if we just drilled more then gas priceswould come down right away.What they don’t say is that we have been drilling more.Under my administration, America is producing more oil than at any timein the last eight years.We’ve opened up new areas for exploration.Weve quadrupled the number of operating rigs to a record high.Weve added enough new oil and gas pipeline to circle the Earth and thensome.But as Ive said repeatedly, the problem is we use more than 20 percent ofthe world’s oil and we only have 2 percent of the world’s proven oilreserves.Even if we drilled every square inch of this country right now, we’d stillhave to rely disproportionately on other countries for their oil.That means we pay more at the pump every time there’s instability in theMiddle East, or growing demand in countries like China and India.That’s what’s happening right now.It’s those global trends that are affecting gas prices._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  50. 50. P a g e | 50So even as were tackling issues of supply and demand, even as werelooking at the long-term in terms of how we can structurally makeourselves less reliant on foreign oil, we still need to work extra hard toprotect consumers from factors that should not affect the price of a barrelof oil.That includes doing everything we can to ensure that an irresponsible fewaren’t able to hurt consumers by illegally manipulating or rigging theenergy markets for their own gain.We cant afford a situation where speculators artificially manipulatemarkets by buying up oil, creating the perception of a shortage, anddriving prices higher -- only to flip the oil for a quick profit.We can’t afford a situation where some speculators can reap millions,while millions of American families get the short end of the stick.That’s not the way the market should work.And for anyone who thinks this cannot happen, just think back to howEnron traders manipulated the price of electricity to reap huge profits ateverybody else’s expense.Now, the good news is my administration has already taken severalactions to step up oversight of oil markets and close dangerous loopholesthat were allowing some traders to operate in the shadows.We closed the so-called Enron loophole that let traders evade oversight byusing electronic or overseas trading platforms.In the Wall Street reform law, we said for the first time that federalregulators will make sure no single trader can buy such a large position inoil that they could easily manipulate the market on their own.So I’d point out that anybody who’s pledging to roll back Wall Streetreform -- Dodd-Frank -- would also roll back this vital consumerprotection along with it._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  51. 51. P a g e | 51I’ve asked Attorney General Holder to work with Chairman Leibowitz ofthe Federal Trade Commission, Chairman Gensler of the CommodityFutures Trading Commission, and other enforcement agencies to makesure that acts of manipulation, fraud or other illegal activity are notbehind increases in the price that consumers pay at the pump.So today, we’re announcing new steps to strengthen oversight of energymarkets. Things that we can do administratively, we are doing.And I call on Congress to pass a package of measures to crack down onillegal activity and hold accountable those who manipulate the market forprivate gain at the expense of millions of working families.And be specific.First, Congress should provide immediate funding to put more cops onthe beat to monitor activity in energy markets.This funding would also upgrade technology so that our surveillance andenforcement officers aren’t hamstrung by older and less sophisticatedtools than the ones that traders are using.We should strengthen protections for American consumers, not gutthem.And these markets have expanded significantly.Chairman Gensler actually had a good analogy.He said, imagine if the NFL quadrupled the number of teams but didn’tincrease the number of refs.You’d end up having havoc on the field, and it would diminish thegame. It wouldn’t be fair.That’s part of what’s going on in a lot of these markets. So we have toproperly resource enforcement._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  52. 52. P a g e | 52Second, Congress should increase the civil and criminal penalties forillegal energy market manipulation and other illegal activities.So my plan would toughen key financial penalties tenfold, and imposethese penalties not just per violation, but for every day a violation occurs.Third, Congress should give the agency responsible for overseeing oilmarkets new authority to protect against volatility and excess speculationby making sure that traders can post appropriate margins, which simplymeans that they actually have the money to make good on their trades.Congress should do all of this right away.A few weeks ago, Congress had a chance to stand up for families alreadypaying an extra premium at the pump; congressional Republicans votedto keep spending billions of Americans hard-earned tax dollars on moreunnecessary subsidies for big oil companies.So heres a chance to make amends, a chance to actually do somethingthat will protect consumers by increasing oversight of energy markets.That should be something that everybody, no matter their party, shouldagree with. And I hope Americans will ask their members of Congress tostep up.In the meantime, my administration will take new executive actions tobetter analyze and investigate trading activities in energy markets andmore quickly implement the tough consumer protections under WallStreet reform.Let me close by saying none of these steps by themselves will bring gasprices down overnight.But it will prevent market manipulation and make sure were looking outfor American consumers._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  53. 53. P a g e | 53And in the meantime were going to keep pursuing an all-of-the-abovestrategy for American energy to break the cycle of price spikes year afteryear.We are going to keep producing more biofuels; were going to keepproducing more fuel-efficient cars; we are going to keep tapping intoevery source of American-made energy.And these steps have already helped put America on a path to greaterenergy independence.Our foreign -- our dependence on foreign oil has actually decreased eachyear Ive been in office -- even as the economy has grown. America nowimports less than half of the oil we use for the first time in more than adecade.So we are less vulnerable than we were, but were still too vulnerable.Weve got to continue the hard, sustained work on this issue.And as long as Im President were going to keep placing our bets onAmericas future -- Americas workers, Americas technology, Americasingenuity, and American-made energy.Thats how were going to solve this problem once and for all.Thank you very much, everybody._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  54. 54. P a g e | 54Consultation on draft guidelines on the assessment of thesuitability of members of the management body and keyfunction holders18 April 2012The European Banking Authority (EBA) launches a consultation on thedraft guidelines on the assessment of the suitability of members of themanagement body and key function holders.The proposed Guidelines set out the process, criteria and minimumrequirements for assessing the suitability of those persons.Once implemented, the Guidelines will help to ensure the quality of theassessments made.The consultation is open for responses until 18th July and a publichearing will be held on 1st June 2012. The draft Guidelines contain provisions to be followed by both creditinstitutions and competent authorities when assessing the suitability ofpersons.They set out the criteria for the assessment and documentationrequirements for institutions.They also contain a notification requirement and provide that in cases_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  55. 55. P a g e | 55where a member of the management body is not suitable, the creditinstitution and, if necessary, the competent authority shall takeappropriate action.In order to ensure robust governance arrangements and appropriateoversight, the scope of these Guidelines is not limited to members of themanagement body but extends to the members of the supervisoryfunction and to key function holders.Moreover, as financial and mixed financial holding companies havesignificant influence on their credit institutions, they are also included inthe Guidelines.BackgroundWeak governance arrangements - namely inadequate oversight by andchallenge from the supervisory function of the management body - arewidely acknowledged to have been underlying causes of the financialcrisis. For this reason, article 11 of the Directive 2006/48/EC (CRD) asksthe EBA to develop guidelines for the assessment of the suitability of thepersons who effectively direct the business of a credit institution.Consultation processThe EBA invites comments on all matters in this paper.All contributions received will be published following the close of theconsultation, unless you request otherwise. A public hearing will take place at the EBA premises on 1st June from9.30 to 12.30._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  56. 56. P a g e | 56OFFICE OF MINORITY AND WOMENINCLUSION ANNUAL REPORTAs Required by Section 342(e) of theDodd-Frank Wall Street Reform and ConsumerProtection Act of 2010This is a report prepared by the Staff of the Officeof Minority and Women Inclusion of the U.S.Securities and Exchange Commission.The Commission has expressed no view regarding the analysis, findings,or conclusions contained herein.IntroductionThe Office of Minority and Women Inclusion (“OMWI”) of the U.S.Securities and Exchange Commission (the “SEC” or the “Commission”)submits this report pursuant to Section 342(e) of the Dodd-Frank WallStreet Reform and Consumer Protection Act of 2010 (the “Dodd-FrankAct”).Section 342(e) mandates the submission by OMWI to Congress of anannual report that includes the following:1. A statement of the total amounts paid to contractors during thereporting period;2. The percentage of the amounts paid to contractors that were paid tominority-owned and women-owned businesses;3. The successes achieved and challenges faced by the agency inoperating minority and women outreach programs;_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  57. 57. P a g e | 574. The challenges the agency may face in hiring qualified minority andwomen employees and contracting with qualified minority-owned andwomen-owned businesses; and,5. Any other information, findings, conclusions, and recommendationsfor legislative or agency action, as the OMWI Director determinesappropriate.Unless otherwise noted, this report covers Section 342-related activities atthe SEC from the establishment of OMWI in July 2011 through the fiscalyear ended September 30, 2011.ESTABLISHMENT OF OMWI AT THE SECSection 342 of the Dodd-Frank Act (“Section 342”) requires the SEC toestablish an Office of Minority and Women Inclusion to be responsiblefor “all matters of the agency relating to diversity in management,employment, and business activities.”Among many duties, the OMWI Director is responsible for developingstandards for equal employment opportunity and diversity of theworkforce and senior management of the SEC, the increasedparticipation of minority-owned and women-owned businesses in theSEC’s programs and contracts, and assessing the diversity policies andpractices of entities regulated by the SEC.The OMWI Director also is required to advise the Chairman of theCommission on the impact of the SEC’s policies and regulations onminority-owned and women-owned businesses.IMPLEMENTATION OF SECTIONA. Contracting With Minority-Owned and Women-OwnedBusinessesSection 342(e)(1) and (2) requires the SEC to report the total amount paidto contractors during the reporting period, as well as the amounts and_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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