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Monday June 11 2012 - Top 10 Risk Compliance News Events (114 pages)
 

Monday June 11 2012 - Top 10 Risk Compliance News Events (114 pages)

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Monday June 11 2012 - Top 10 Risk Compliance News Events (114 pages)

Monday June 11 2012 - Top 10 Risk Compliance News Events (114 pages)

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    Monday June 11 2012 - Top 10 Risk Compliance News Events (114 pages) Monday June 11 2012 - Top 10 Risk Compliance News Events (114 pages) Document Transcript

    • 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 have 3 really important papers that have to do with theimplementation of the Basel iii framework in the USA.The three notices of proposed rulemaking (NPRs), taken together, willrestructure the Board’s current regulatory capital rules into a harmonized,comprehensive framework, and will revise the capital requirements tomake them consistent with the Basel III capital standards established bythe Basel Committee on Banking Supervision (BCBS) and certainprovisions of the Dodd-Frank Wall Street Reform and ConsumerProtection Act (Dodd-Frank Act).The proposals are published in separate NPRs to reflect the distinctobjectives of each proposal, to allow interested parties to betterunderstand the various aspects of the overall capital framework, includingwhich aspects of the rule would apply to which banking organizations,and to help interested parties better focus their comments on areas ofparticular interest.The problem is we did not learn more about the quantitative liquidityrequirements and the capital surcharge for global systemically importantbanks (these are not part of this rulemaking). I hope we will have moredetails soon.Welcome to the Top 10 list. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • Page |2TheNUMBER 1Basel III in the USAProposed Rulemakings for anIntegrated Regulatory CapitalFramework, Questions and AnswersJune 7, 2012Chairman Ben S. BernankeEconomic Outlook and PolicyBefore the Joint Economic Committee,U.S. Congress, Washington, D.C. June 7, 2012Chairman Casey, Vice Chairman Brady, and othermembers of the Committee, I appreciate thisopportunity to discuss the economic outlook andeconomic policy.Consultation paper on DraftImplementing TechnicalStandards on supervisoryreporting requirements forliquidity coverage and stable funding07 June 2012The European Banking Authority (EBA) launched today a consultationon Draft Implementing Technical Standards (ITS) on supervisoryreporting requirements for liquidity coverage and stable funding. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • Page |3Auditing in the Small Business EnvironmentDATE: June 7, 2012SPEAKER: Jeanette M. Franzel, Board MemberEVENT: PCAOB Forum on Auditing in the Small BusinessEnvironmentLOCATION: Minneapolis, MNAuditing the FutureDATE June 7, 2012SPEAKER(S): Jay D. Hanson, Board MemberEVENT: Fair Value Measurements and Reporting ConferenceLOCATION: National Harbor, MDFASB Board DecisionsSummary of Board decisions are provided for the information andconvenience of constituents who want to follow the Board’s deliberations.Call for evidence on Transaction ReportingFrom The British Bankers’ Association (BBA) tothe European Securities and Markets Authority(ESMA) _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • Page |4The Next Phase in Islamic FinanceRavi MenonManaging Director, Monetary Authority ofSingaporeOpening Address at the 3rd Annual World IslamicBanking Conference: Asia Summit, Grant HyattSingapore, 5 June 2012Governor Daniel K. TarulloDodd-Frank Act ImplementationBefore the Committee on Banking, Housing, andUrban Affairs, U.S. Senate, Washington, D.C. June 6,2012Mortgage financing: FINMArecognises new minimum standardsThe Swiss Financial Market SupervisoryAuthority FINMA has approved the newminimum re-quirements for mortgage financing drawn up by the SwissBankers Association (SBA) as a minimum regulatory standard. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • Page |5NUMBER 1Basel III in the USA _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • Page |6 _____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • Page |7Basel III in the USA, Board of Governors of the Federal Reserve3:30 PM, Thursday, June 7, 2012 - Marriner S. Eccles Federal ReserveBoard Building, 20th Street entrance between Constitution Avenue andC Streets, N.W., Washington, D.C.Matters to be Considered:Discussion Agenda:1. Proposed interagency rulemakings: strengthening andharmonizing the regulatory capital framework for banking organizations,including proposed rules for implementing Basel III for bankingorganizations and proposed consolidated capital requirements forsavings and loan holding companies.2. Final interagency rulemaking: market risk capital rule. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • Page |8Proposed Rulemakings for an Integrated Regulatory CapitalFramework, Questions and AnswersJune 7, 2012Question 1: What does the package of proposed rulemakingscontain and why is it divided into three parts?The package contains three notices of proposed rulemaking (NPRs) that,taken together, would restructure the Board’s current regulatory capitalrules into a harmonized, comprehensive framework, and would revise thecapital requirements to make them consistent with the Basel III capitalstandards established by the Basel Committee on Banking Supervision(BCBS) and certain provisions of the Dodd-Frank Wall Street Reform andConsumer Protection Act (Dodd-Frank Act).The proposals are published in separate NPRs to reflect the distinctobjectives of each proposal, to allow interested parties to betterunderstand the various aspects of the overall capital framework, includingwhich aspects of the rule would apply to which banking organizations,and to help interested parties better focus their comments on areas ofparticular interest.The BCBS quantitative liquidity requirements and the BCBS capitalsurcharge for global systemically important banks are not part of thisrulemaking.First Paper: The Basel III NPR1. The first NPR, Regulatory Capital Rules: Regulatory Capital,Implementation of Basel III, Minimum Regulatory Capital Ratios,Capital Adequacy, Transition Provisions, and Prompt Corrective Action(Basel III NPR), is primarily focused on proposed reforms that wouldimprove the overall quality and quantity of banking organizations’capital.The NPR would revise the Board’s risk-based and leverage capitalrequirements, consistent with the Dodd-Frank Act and with agreementsreached by the BCBS in Basel III: A Global Regulatory Framework forMore Resilient Banks and Banking Systems (Basel III). _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • Page |9The proposal includes transition provisions designed to provide sufficienttime for banking organizations to meet the new capital standards whilesupporting lending to the economy.Second Paper: The Standardized Approach NPR2. The second NPR, Regulatory Capital Rules: Standardized Approachfor Risk-weighted Assets; Market Discipline and DisclosureRequirements (Standardized Approach NPR), would revise andharmonize the Board’s rules for calculating risk-weighted assets toenhance their risk sensitivity and address weaknesses identified overrecent years.It would incorporate aspects of the BCBS’s Basel II standardizedframework in the International Convergence of Capital Measurement andCapital Standards: A Revised Framework (Basel II), Basel III, andalternatives to credit ratings for the treatment of certain exposures,consistent with the Dodd-Frank Act.Third Paper: The Advanced Approaches and Market Risk NPR3. The third NPR, Regulatory Capital Rules: Advanced ApproachesRisk-based Capital Rule; Market Risk Capital Rule (AdvancedApproaches and Market Risk NPR), would revise the advancedapproaches risk-based capital rule (in a manner consistent with theDodd-Frank Act) and incorporate certain aspects of Basel III that theBoard would apply only to advanced approaches banking organizations(generally, the largest, most complex banking organizations).This NPR would also codify the Board’s market risk capital rule and, incombination with the other components described above, would applyconsolidated capital requirements to savings and loan holding companies(SLHCs).Question 2: Which banking organizations are covered by theproposed rulemakings?The Basel III NPR and the Standardized Approach NPR would apply tostate member banks, bank holding companies domiciled in the UnitedStates not subject to the Board’s Small Bank Holding Company Policy _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 10Statement (generally, bank holding companies with less than $500 millionin consolidated assets), and SLHCs domiciled in the United States.Consistent with Section 171 of the Dodd- Frank Act, the proposedrulemakings would apply to all SLHCs regardless of asset size.The Advanced Approaches and Market Risk NPR would generally applyto banking organizations meeting specified thresholds.In general, the advanced approaches risk based capital rule applies tothose banking organizations with consolidated total assets of at least $250billion or consolidated total on-balance sheet foreign exposures of at least$10 billion (excluding insurance underwriting assets) and their depositoryinstitution subsidiaries.The market risk capital rule generally applies to those bankingorganizations with aggregate trading assets and trading liabilities equalto at least 10 percent of quarter-end total assets or $1 billion.Question 3: How are these proposed rulemakings related to theDodd-Frank Act?The NPRs are consistent with statutory requirements in the Dodd-FrankAct.For example, pursuant to section 171 of the Act, the NPRs would establishminimum riskbased and leverage capital requirements for SLHCs, phaseout certain capital instruments over a three-year period, and establish newminimum generally applicable capital requirements.In addition, pursuant to section 939A of the act, the NPRs removereferences to, or requirements of reliance on, credit ratings in the Board’scapital rules and replace them with alternative standards ofcreditworthiness.Question 4: What are the main changes to the minimum capitalrequirements?The proposal includes a new common equity tier 1 minimum capitalrequirement of 4.5 percent of risk-weighted assets and a common equitytier 1 capital conservation buffer of 2.5 percent of risk-weighted assets. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 11The proposal also increases the minimum tier 1 capital requirement from4 to 6 percent of risk-weighted assets.The minimum total riskbased capital requirement would remainunchanged at 8 percent.The proposal introduces a supplementary leverage ratio that incorporatesa broader set of exposures in the denominator measure of the ratio forbanking organizations subject to the advanced approaches capital rule.This supplementary leverage ratio is based on the international leverageratio in Basel III.Question 5: What are the main changes related to the definitionof capital being proposed?Capital instruments issued by banking organizations would be subject toa set of strict eligibility criteria that would prohibit, for example, theinclusion in tier 1 capital of instruments that are not perpetual or thatpermit the accumulation of unpaid dividends or interest.Trust preferred securities, for example, would be excluded from tier 1capital, consistent with both Basel III and the Dodd-Frank Act.Under the Basel III NPR, banking organizations would be subject togenerally stricter regulatory capital deductions (the majority of whichwould be taken from common equity tier 1 capital).For example, deductions related to mortgage servicing assets, deferredtax assets, and certain investments in the capital of unconsolidatedfinancial institutions would generally be more stringent than those underthe current rules.Question 6: What is the capital conservation buffer and howwould it work?In order to avoid limitations on capital distributions (including dividendpayments, discretionary payments on tier 1 instruments, and sharebuybacks) and certain discretionary bonus payments, under the proposalbanking organizations would need to hold a specific amount of commonequity tier 1 capital in excess of their minimum risk based capital ratios. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 12The fully phased-in buffer amount would be equal to 2.5 percent ofrisk-weighted assets.Question 7: Will the new capital requirements and capitalconservation buffer be imposed immediately or will there be atransition period?The Basel III NPR contains transition provisions designed to give ampletime to adjust to the new capital requirements, consistent with theagreement in Basel.The new minimum regulatory capital ratios and changes to thecalculation of risk weighted assets would be fully implemented January 1,2015.The capital conservation buffer framework would phase-in between 2016and 2018, with full implementation January 1, 2019.Question 8: What is common equity tier 1 capital and why areyou proposing a new common equity tier 1 requirement?Common equity tier 1 capital is a new regulatory capital component thatis predominantly made up of retained earnings and common stockinstruments (that comply with a series of strict eligibility criteria), net oftreasury stock, and net of a series of regulatory capital deductions andadjustments.Common equity tier 1 capital may also include limited amounts ofcommon stock issued by consolidated subsidiaries to third parties(minority interest). Common equity tier 1 capital is the highest qualityform of regulatory capital because of its superior ability to absorb lossesin times of market and economic stress.Question 9: What are the main elements of the StandardizedApproach NPR?It would increase the risk sensitivity of the Board’s general risk-basedcapital requirements for determining risk-weighted assets (that is, thecalculation of the denominator of a banking organization’s risk-based _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 13capital ratios) by proposing revised methodologies for determiningrisk-weighted assets for:- Residential mortgage exposures by applying a more risk-sensitive treatment that would risk-weight an exposure based on certain loan characteristics and its loan-tovalue ratio;- Certain commercial real estate credit facilities that finance the acquisition, development, or construction of real property by assigning a higher risk weight;- Exposures that are more than 90 days past due or on nonaccrual (excluding sovereign and residential mortgage exposures) by assigning a higher risk weight; and- Exposures to foreign sovereigns, foreign banks, and foreign public sector entities by basing the risk weight for each exposure type on the country risk classification of the sovereign entity.The NPR would also replace the use of credit ratings for securitizationexposures with a formula-based approach.Additionally, the NPR would provide greater recognition of collateral andguarantees.However, for most exposures, no changes are being proposed in theNPR.More specifically, the treatment of exposures to the U.S. government,government-sponsored entities, U.S. states and municipalities, mostcorporations, and most consumer loans would remain unchanged.It would introduce disclosure requirements that would apply to bankingorganizations domiciled in the United States with $50 billion or more intotal assets, including disclosures related to regulatory capital.The changes in the Standardized Approach NPR are proposed to takeeffect January 1, 2015.Banking organizations may choose to comply with the proposedrequirements prior to that date. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 14Question 10: What are the primary objectives of the AdvancedApproaches and Market Risk NPR?It would revise the advanced approaches risk-based capital rule in amanner consistent with the Dodd-Frank Act by removing references tocredit ratings from the securitization framework, requiring an enhancedset of quantitative and qualitative disclosures (especially in regard todefinition of capital and securitization exposures), implement a highercounterparty credit risk capital requirement to account for creditvaluation adjustments, and propose capital requirements for clearedtransactions with central counterparties.The NPR would incorporate the market risk capital rules into theintegrated regulatory capital framework and propose its application tosavings and loan holding companies that meet the trading thresholds.Question 11: How will the Prompt Corrective Action (PCA)framework change as a result of the proposed rulemakings?Under the proposal, the capital thresholds for the different PCAcategories would be updated to reflect the proposed changes to thedefinition of capital and the regulatory capital minimum ratios.Likewise, the proposal would augment the PCA capital categories byincorporating a common equity tier 1 capital measure.In addition, the proposal would include in the PCA framework theproposed supplementary leverage ratio for advanced approaches bankingorganizations.Note that the new PCA framework would take effect starting on January 1,2015, consistent with the full transition of the minimum capitalrequirements and the Standardized Approach for the calculation of riskweighted assets. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 15NUMBER 2Chairman Ben S. BernankeEconomic Outlook and PolicyBefore the Joint Economic Committee,U.S. Congress, Washington, D.C. June 7, 2012Chairman Casey, Vice Chairman Brady, and othermembers of the Committee, I appreciate thisopportunity to discuss the economic outlook andeconomic policy.Economic growth has continued at a moderate rate so far this year.Real gross domestic product (GDP) rose at an annual rate of about 2percent in the first quarter after increasing at a 3 percent pace in thefourth quarter of 2011.Growth last quarter was supported by further gains in private domesticdemand, which more than offset a drag from a decline in governmentspending.Labor market conditions improved in the latter part of 2011 and earlierthis year.The unemployment rate has fallen about 1 percentage point since lastAugust; and payroll employment increased 225,000 per month, onaverage, during the first three months of this year, up from about 150,000jobs added per month in 2011.In April and May, however, the reported pace of job gains slowed to anaverage of 75,000 per month, and the unemployment rate ticked up to 8.2percent.This apparent slowing in the labor market may have been exaggerated byissues related to seasonal adjustment and the unusually warm weatherthis past winter.But it may also be the case that the larger gains seen late last year andearly this year were associated with some catch-up in hiring on the part of _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 16employers who had pared their workforces aggressively during and justafter the recession.If so, the deceleration in employment in recent months may indicate thatthis catch-up has largely been completed, and, consequently, thatmore-rapid gains in economic activity will be required to achievesignificant further improvement in labor market conditions.Economic growth appears poised to continue at a moderate pace overcoming quarters, supported in part by accommodative monetary policy.In particular, increases in household spending have been relatively wellsustained.Income growth has remained quite modest, but the recent declines inenergy prices should provide some offsetting lift to real purchasingpower.While the most recent readings have been mixed, consumer sentiment isnonetheless up noticeably from its levels late last year.And, despite economic difficulties in Europe, the demand for U.S.exports has held up well.The U.S. business sector is profitable and has become more competitivein international markets.However, some of the factors that have restrained the recovery persist.Notably, households and businesses still appear quite cautious about theeconomy.For example, according to surveys, households continue to rate theirincome prospects as relatively poor and do not expect economicconditions to improve significantly.Similarly, concerns about developments in Europe, U.S. fiscal policy, andthe strength and sustainability of the recovery have left some firmshesitant to expand capacity.The depressed housing market has also been an important drag on therecovery. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 17Despite historically low mortgage rates and high levels of affordability,many prospective homebuyers cannot obtain mortgages, as lendingstandards have tightened and the creditworthiness of many potentialborrowers has been impaired.At the same time, a large stock of vacant houses continues to limitincentives for the construction of new homes, and a substantial backlog offoreclosures will likely add further to the supply of vacant homes.However, a few encouraging signs in housing have appeared recently,including some pickup in sales and construction, improvements inhomebuilder sentiment, and the apparent stabilization of home prices insome areas.Banking and financial conditions in the United States have improvedsignificantly since the depths of the crisis.Notably, recent stress tests conducted by the Federal Reserve of thebalance sheets of the 19 largest U.S. bank holding companies showed thatthose firms have added about $300 billion to their capital since 2009; thetests also showed that, even in an extremely adverse hypotheticaleconomic scenario, most of those firms would remain able to providecredit to U.S. households and businesses.Lending terms and standards have generally become less restrictive inrecent quarters, although some borrowers, such as small businesses and(as already noted) potential homebuyers with less-than-perfect credit, stillreport difficulties in obtaining loans.Concerns about sovereign debt and the health of banks in a number ofeuro-area countries continue to create strains in global financial markets.The crisis in Europe has affected the U.S. economy by acting as a drag onour exports, weighing on business and consumer confidence, andpressuring U.S. financial markets and institutions.European policymakers have taken a number of actions to address thecrisis, but more will likely be needed to stabilize euro-area banks, calmmarket fears about sovereign finances, achieve a workable fiscalframework for the euro area, and lay the foundations for long-termeconomic growth. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 18U.S. banks have greatly improved their financial strength in recent years,as I noted earlier.Nevertheless, the situation in Europe poses significant risks to the U.S.financial system and economy and must be monitored closely.As always, the Federal Reserve remains prepared to take action as neededto protect the U.S. financial system and economy in the event thatfinancial stresses escalate.Another factor likely to weigh on the U.S. recovery is the drag beingexerted by fiscal policy.Reflecting ongoing budgetary pressures, real spending by state and localgovernments has continued to decline.Real federal government spending has also declined, on net, since thethird quarter of last year, and the future course of federal fiscal policiesremains quite uncertain, as I will discuss shortly.With regard to inflation, large increases in energy prices earlier this yearcaused the price index for personal consumption expenditures to rise atan annual rate of about 3 percent over the first three months of this year.However, oil prices and retail gasoline prices have since retraced thoseearlier increases.In any case, increases in the prices of oil or other commodities areunlikely to result in persistent increases in overall inflation so long ashousehold and business expectations of future price changes remainstable.Longer-term inflation expectations have, indeed, been quite wellanchored, according to surveys of households and economic forecastersand as derived from financial market information.For example, the five-year-forward measure of inflation compensationderived from yields on nominal and inflation-protected Treasurysecurities suggests that inflation expectations among investors havechanged little, on net, since last fall and are lower than a year ago. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 19Meanwhile, the substantial resource slack in U.S. labor and productmarkets should continue to restrain inflationary pressures.Given these conditions, inflation is expected to remain at or slightly belowthe 2 percent rate that the Federal Open Market Committee (FOMC)judges consistent with our statutory mandate to foster maximumemployment and stable prices.With unemployment still quite high and the outlook for inflationsubdued, and in the presence of significant downside risks to the outlookposed by strains in global financial markets, the FOMC has continued tomaintain a highly accommodative stance of monetary policy.The target range for the federal funds rate remains at 0 to 1/4 percent, andthe Committee has indicated in its recent statements that it anticipatesthat economic conditions are likely to warrant exceptionally low levels ofthe federal funds rate at least through late 2014.In addition, the Federal Reserve has been conducting a program,announced last September, to lengthen the average maturity of itssecurities holdings by purchasing $400 billion of longer-term Treasurysecurities and selling an equal amount of shorter-term Treasurysecurities.The Committee also continues to reinvest principal received from itsholdings of agency debt and agency mortgage-backed securities (MBS)in agency MBS and to roll over its maturing Treasury holdings at auction.These policies have supported the economic recovery by puttingdownward pressure on longer-term interest rates, including mortgagerates, and by making broader financial conditions more accommodative.The Committee reviews the size and composition of its securitiesholdings regularly and is prepared to adjust those holdings as appropriateto promote a stronger economic recovery in a context of price stability.The economys performance over the medium and longer term also willdepend importantly on the course of fiscal policy.Fiscal policymakers confront daunting challenges. As they do so, theyshould keep three objectives in mind. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 20First, to promote economic growth and stability, the federal budget mustbe put on a sustainable long-run path.The federal budget deficit, which averaged about 9 percent of GDPduring the past three fiscal years, is likely to narrow in coming years asthe economic recovery leads to higher tax revenues and lower incomesupport payments.Nevertheless, the Congressional Budget Office (CBO) projects that, ifcurrent policies continue, the budget deficit would be close to 5 percent ofGDP in 2017 when the economy is expected to be near full employment.Moreover, under current policies and reasonable economic assumptions,the CBO projects that the structural budget gap and the ratio of federaldebt to GDP will trend upward thereafter, in large part reflecting rapidlyescalating health expenditures and the aging of the population.This dynamic is clearly unsustainable.At best, rapidly rising levels of debt will lead to reduced rates of capitalformation, slower economic growth, and increased foreign indebtedness.At worst, they will provoke a fiscal crisis that could have severeconsequences for the economy.To avoid such outcomes, fiscal policy must be placed on a sustainablepath that eventually results in a stable or declining ratio of federal debt toGDP.Even as fiscal policymakers address the urgent issue of fiscalsustainability, a second objective should be to avoid unnecessarilyimpeding the current economic recovery.Indeed, a severe tightening of fiscal policy at the beginning of next yearthat is built into current law--the so-called fiscal cliff--would, if allowed tooccur, pose a significant threat to the recovery.Moreover, uncertainty about the resolution of these fiscal issues coulditself undermine business and household confidence.Fortunately, avoiding the fiscal cliff and achieving long-term fiscalsustainability are fully compatible and mutually reinforcing objectives. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 21Preventing a sudden and severe contraction in fiscal policy will supportthe transition back to full employment, which should aid long-term fiscalsustainability.At the same time, a credible fiscal plan to put the federal budget on alonger-run sustainable path could help keep longer-term interest rateslow and improve household and business confidence, thereby supportingimproved economic performance today.A third objective for fiscal policy is to promote a stronger economy in themedium and long term through the careful design of tax policies andspending programs.To the fullest extent possible, federal tax and spending policies shouldincrease incentives to work and save, encourage investments in workforceskills, stimulate private capital formation, promote research anddevelopment, and provide necessary public infrastructure.Although we cannot expect our economy to grow its way out of federalbudget imbalances without significant adjustment in fiscal policies, amore productive economy will ease the tradeoffs faced by fiscalpolicymakers.Thank you. I would be glad to take your questions. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 22NUMBER 3Consultation paper on Draft Implementing Technical Standardson supervisory reporting requirements for liquidity coverage andstable funding07 June 2012The European Banking Authority (EBA) launched today a consultationon Draft Implementing Technical Standards (ITS) on supervisoryreporting requirements for liquidity coverage and stable funding.These ITS, which will be part of the EU single rulebook, intend to specifythe main features (formats, frequencies, IT solutions) of prudentialreporting to be applied by financial institutions in Europe.The consultation runs until 27 August 2012.These ITS will become part of the general supervisory reportingframework.In this respect, they are an addition to the draft ITS text proposed in theConsultation Paper on supervisory reporting for institutions (CP50)published on 20 December 2011 and need to be read in conjunction withthem.Main features of the ITSThese ITS aim at providing national authorities with harmonizedinformation on their liquid assets, inflows and outflows and their stable _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 23sources of funding using uniform reporting formats developed by theEBA.Against this background, this consultation paper puts forward proposalsregarding the reporting requirements for both liquidity coverage andstable funding.The purpose of this monitoring is two-fold:(i) To inform the economic impact assessment of the liquidityrequirements the EBA is asked to perform during the monitoring period,and(ii) To enable competent authorities to monitor institutions’ compliancewith the liquidity requirements once they have been introduced asbinding minimum standards.The scope and level of application of these ITS are in line with the CapitalRequirements Regulation (CRR) text.The latter provides for the liquidity coverage reporting to be done at leastmonthly and the stable funding reporting at least quarterly.These ITS have been developed on the basis of the templates for liquidityreporting used by the EBA in compiling the Basel III monitoring exerciseas well as on the COREP and FINREP guidelines.They also build on voluntary reporting exercises conductedpredominantly by larger institutions.Next stepsThese draft ITS have been developed on the basis of the EuropeanCommission’s legislative proposals for the CRR/CRD IV.Following the end of the consultation period, and to the extent that thefinal text of the CRR changes before the adoption of the ITS, the EBA willadapt its draft ITS accordingly to reflect any developments.The CRR also mandates the EBA to develop additional liquiditymonitoring metrics to provide competent authorities with acomprehensive view of institutions’ liquidity risk profiles. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 24The EBA is currently working on these metrics and will launch a publicconsultation in due course, depending on the timeline that will beadopted in the CRR.As stated above, the information collected under these ITS will be used toinform the EBA’s impact assessment on the introduction of the liquidityrequirements.The EBA will disclose the methodology it intends to use for thisassessment later this year.A separate consultation on a data point model containing all the relevanttechnical specifications necessary for developing an IT reporting formatwill be published in the second half of 2012.Based on the CRR proposals and these ITS, institutions are required tocomply with the new reporting requirements as of 1 January 2013.In the current timeline for the implementation of the CRR/CRD IV, thefirst regular reporting period is expected to be January 2013.Notes to editors 1. The CRR/CRD IV package (the so-called Capital Requirements Regulation - ‘CRR’- and the so-called Capital Requirements Directive – ‘CRD’) sets out prudential requirements which are expected to be applicable as of 1 January 2013. The package translates in European law international standards on bank capital agreed at the G20 level (most commonly known as the Basel III agreement). One of the major achievements will be the creation of a Single Rule Book - a set of rules directly applicable in all EU member states - that will improve both transparency and enforcement in the EU banking sector. 2. Draft ITS are produced in accordance with Article 15 of EBA regulation which provides for their adoption by means of regulations or decisions. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 25 According to EU law, EU regulations are binding in their entirety and directly applicable in all Member States. This means that, on the date of their entry into force, they become part of the national law of the Member States and that their implementation into national law is not only unnecessary but also prohibited by EU law, except in so far as this is expressly required by them.EBA Consultation Paper on Draft Implementing TechnicalStandards on Supervisory reporting requirements for liquiditycoverage and stable funding, London, 07 June 2012I. Responding to this ConsultationEBA invites comments on all matters in this paperComments are most helpful if they:- respond to the question stated;- indicate the specific question to which the comments relates;- contain a clear rationale;- provide evidence to support the views expressed /rationale proposed; and- describe any alternative regulatory choices EBA should considerPlease send your comments to the EBA by 27 August 2012Publication of responsesAll contributions received will be published following the close of theconsultation, unless you request otherwise. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 26Please indicate clearly and prominently in your submission any part youdo not wish to be publically disclosed.A standard confidentiality statement in an e-mail message will not betreated as a request for non-disclosure.A confidential response may be requested from us in accordance with theEBA’s rules on public access to documents.We may consult you if we receive such a request. Any decision we makenot to disclose the response is reviewable by the EBA’s Board of Appealand the European Ombudsman.II Executive SummaryThe CRD IV proposals which are expected to be applicable as of 1.1.2013,set out prudential requirements for EEA institutions.The CRR contains, in a number of Articles, specific mandates whichrequire the EBA to develop draft Implementing Technical Standards(henceforth ITS) related to supervisory reporting requirements (Articles95, 96, 383, 403 and 417 of CRR).These ITS will be part of the single rulebook enhancing regulatoryharmonisation in Europe with the particular aim of specifying uniformformats, frequencies and dates of prudential reporting as well as ITsolutions to be applied by institutions and, as the case may be, investmentfirms in Europe.The draft ITS are intended to be put forward as one integrated draftRegulation and this consultation paper consequently supplements EBAConsultation Paper CP50 on supervisory reporting for institutions,published on 20 December 20112.The draft ITS text proposed in the present document is an addition to thedraft ITS text proposed in that CP and needs to be read in conjunctionwith it. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 27The rationale behind a single draft Regulation is that it is beneficial thatreporting requirements are grouped together in one legal act to facilitate acomprehensive view, improved understanding and compact access tothem by legal or natural persons subject to the obligations laid downherein.In the case of monitoring the implementation of new standards, thebenefits of standardised data collection and IT solutions will reduce theburden on institutions and allow a more accurate examination of theimpact of such standards.This consultation paper puts forward proposals regarding the reportingrequirements according to the mandate of the EBA provided in Article481 of the CRR to monitor and evaluate the liquidity reportingrequirements made in accordance with Article 403(1).This CP is not consulting on a number of items not specified in the CRR.Such matters include, but are not limited to, the calibration of theliquidity standards, the definition of liquid assets, the scope of applicationand frequency of reporting.Please note that the EBA has developed the present draft ITS based onthe European Commission’s legislative proposals for the CRR/CRD IV.Following the end of the consultation period, and to the extent that thefinal text of the CRR changes before the adoption of the ITS, the EBA willadapt its draft ITS accordingly to reflect any developments.Following the close of the consultation on dd.mm, the EBA will assessthe responses received, along with any relevant changes in the final CRRlegislative text.Main features of this ITSThe CRR specifies a new liquidity coverage requirement that would beapplicable to all credit institutions no earlier than 1.1.2015, following adelegated act by the EC. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 28Article 481 requires the EBA to, amongst other things, monitor andevaluate the reports submitted in accordance with this ITS and to reportto the EC whether a specification of the general liquidity requirementwould “have a material detrimental impact on the business and riskprofile of Union institutions or on financial markets or the economy andbank lending....”.With regard to a stable funding requirement, the article requires the EBAto submit a report to the EC on whether and how a stable fundingrequirement would be appropriate, together with a similar assessment onthe impact on Union institutions, financial markets and bank lending.The ITS has been developed on the basis of templates for liquidityreporting used by the EBA in compiling its “Report on the Basel IIImonitoring exercise” which were in turn based on those in theQuantitative Impact Study (QIS) carried out by the Basel Committee onBanking Supervision (BCBS), adapted for the purposes of therequirements put forward by the CRR.The template consequently builds on the experience gained in a numberof Member States with voluntary reporting predominantly by largerinstitutions.In addition the EBA has conducted a small number of voluntary reportingexercises for a broader range of institutions to increase familiarity withthe liquidity coverage requirement and to improve data quality.The ITS has been developed, as much as possible, on the basis of theCOREP and FINREP guidelines, given that these have beenimplemented already in various Members States and have been proved inpractice to improve convergence in the field of supervisory reporting.However, there is a very limited overlap of data requirements withexisting data collected, as is commonly the case with liquidity reporting.The scope and level of application of this ITS follows the scope and levelof application of the CRR. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 29As mentioned above, the EBA is mandated to follow the legislative text.The reporting frequency will be not less than monthly for the liquiditycoverage reporting and not less than quarterly for the reporting of thestable funding as required by the CRR.Timing of ITS development and application dateBased on the EC proposals and this ITS, institutions are required tocomply with new reporting requirements according to Titles II and III asof 1 January 2013.From this date onwards competent authorities will have to checkinstitutions‟ compliance with the afore-mentioned regular reportingrequirements and reporting instructions belonging to the reportingtemplates.The first regular reporting period for the liquidity reporting according toTitle II is expected to be January 2013, with the first reporting referencedate being end January 2013The reporting of the stable funding according to Title III is expected tocommence in the quarter of 2013 with the first reporting reference datebeing end-March 2013 2012.Q1: Are the proposed dates for first remittance of data, i.e. end ofJanuary and end of March 2013, feasible?The EBA intends to finalise the draft ITS and endorse it for submission tothe EC by November 2012.The proposed submission dates assume that a final CRR will be availablebeforehand.While this is a very short period of time before reporting is legally required,in the case of many large institutions, they will have been reporting on avoluntary basis for an extended period of time, and other institutions can _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 30plan on the basis of final legislative text which should be available at amuch earlier date.It is important to keep in mind that timelines contained in the CRR mightchange which may impact the above dates related to the ITS.In any case, EBA will adapt its draft ITS according to the final version ofthe CRR text before submitting it to the EC for adoption.III. Background and rationaleDraft ITS on Liquidity reportingOn July 20th 2011, the EC published legislative proposals on a revision ofthe CRD which seeks to apply the Basel III framework in the EU.These proposals have recast the contents of the CRD into a revised CRDand a new CRR - which are colloquially referred to as the CRR proposals.These are currently being finalised by EU legislators (Council andEuropean Parliament) in the framework of the co-decision procedure.In anticipation of the finalisation of the legislative texts for the CRR, theEBA has developed the draft ITS in accordance with the mandatecontained in Article 403.1 (a) of the draft CRR endorsed by the EC in July2011.This approach, to draft the ITS on the basis of the EC’s endorsed text wasdeemed a more efficient way forward, as it will allow banks to startevaluating the potential challenges of the new liquidity reportingframework (introduced as a legal requirement for the first time in theCRR proposals) pending finalisation of the co-decision process.In any case, the EBA will adapt its draft ITS according to the final versionof the CRR text before submitting them to the EC for adoption.The final ITS on liquidity reporting and reporting on stable funding willbe included in the ITS on supervisory reporting requirements forinstitutions. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 31The nature of ITS under EU lawThese draft ITS are produced in accordance with Article 15 of EBAregulation.According to Article 15(4) of EBA regulation, they shall be adopted bymeans of regulations.According to EU law, EU regulations are binding in their entirety anddirectly applicable in all Member States.This means that, on the date of their entry into force, they become part ofthe national law of the Member States and that their implementation intonational law is not only unnecessary but also prohibited by EU law,except in so far as this is expressly required by them.Shaping these rules in the form of a Regulation would ensure alevel-playing field by preventing diverging national requirements andwould ease the cross-border provision of services.Background and regulatory approach followed in the draft ITSIn the context of domestic-based liquidity regimes within the EuropeanUnion, liquidity risk regulatory and reporting frameworks currently in usein the variousMember States are heterogeneous. This led to inefficient outcomes andincreased costs for cross-border institutions and national supervisoryauthorities, especially during the events of the 2007-2008.To tackle such regulatory shortcomings which emerged during the crisisand taking account of the new liquidity regulatory framework proposedby the BCBS in December 20106, the EC’s proposed CRR envisagesintroducing a liquidity coverage requirement from 1.1.2015 following anobservation and a review period.Such a requirement aims to improve short term resilience of the liquidityrisk profile of institutions. According to the proposed CRR, the _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 32Commission will also consider introducing a stable funding requirementin 2018 following an observation and review period, to address fundingproblems arising from maturity mismatches.To this aim, institutions are requested to report to national authorities theelements needed to monitor their liquid assets, inflows and outflows andtheir stable sources of funding according to Title II (Liquidity Reporting),Annex III (Items subject to supplementary reporting of liquid assets) andTitle III (Reporting on stable funding) of the CRR, using uniformreporting formats developed by EBA.With that in mind, the present ITS has been developed to provide nationalauthorities with harmonised information on institution’s liquidity riskprofile, taking into account the nature, scale and complexity ofinstitutions activities.As the ITS on liquidity reporting will become part of the generalsupervisory reporting framework requirements, following theintroduction of liquidity requirements, formats have been developed withthe aim to ensure consistency where allowed by the CRR proposed text.Under the proposed CRR text, EBA is also requested to monitor andevaluate the reports made by institutions and, after consulting the ESRB,to report annually and for the first time by 31 December 2013 to theCommission on the following issues:(a) Whether the general liquidity coverage requirement in Article 401 CRRis likely to have a detrimental impact on the business and risk profile ofUnion institutions or on financial markets or then economy and banklending (Article 481(1) CRR);(b) Appropriate uniform definitions of high and extremely high liquid andcredit quality of transferable assets for the purposes of Article 404 CRR.By 31 December 2015, EBA is also requested to report to the Commissionwhether and how it would be appropriate to ensure that institutions usestable sources of funding, including an assessment of impact on thebusiness and risk profile of Union institutions or on financial markets or _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 33the economy and bank lending (Art. 481(3) CRR).Therefore, information included in the ITS on liquidity reporting will alsobe useful to EBA in reporting on the impact of the general liquiditycoverage requirement and the appropriateness of a stable fundingrequirement.However, this draft ITS will not help the EBA determine whether certaintransferable assets are of high or extremely high liquidity and creditquality, as this an assessment independent of whether individualinstitutions are holding such assets.Level of application and frequency of liquidity coveragereporting and the reporting on stable fundingThe scope and level of application of the ITS follows the scope and levelof application of the CRR, i.e. it applies- on a consolidated basis (Article 10(3) CRR): to EU parent creditinstitutions and investment firms and to credit institutions andinvestment firms controlled by an EU parent financial holding companyor by an EU parent mixed financial holding company;- on an individual basis (Article 5(4)) : to all credit institutions andinvestment firms that are authorised to provide the investment serviceslisted in points 3 and 6 of section A of Annex I to Directive 2004/39/EC.However, according to Article 7 of the proposed CRR text, competentauthorities will be allowed to waive in full or in part the application ofArticle 401 (Liquidity Coverage Requirement) to a parent institution andto all or some of its subsidiaries, if they fulfil a set a predefined conditions,including if the parent institution complies on a consolidated basis withthe obligation set forth in Article 401 and 403 (Article 7(1) (a)).The frequency of the reporting requirements are aligned with thoseenvisaged in the draft CRR text: not less than monthly for the liquidityreporting and not less than quarterly for the reporting on stable funding. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 34Both the frequency and the scope of application of the ITS will be revisedto be aligned to final text of the CRR, especially regarding the applicationof liquidity requirements to investment firms (Article 480(2) of CRR).IV. Draft Implementing Technical Standards on Supervisoryreporting requirements for liquidity coverage reporting andreporting on stable fundingIn between the text of the draft ITS that follows, further explanations onspecific aspects of the proposed text are occasionally provided, whicheither offer examples or provide the rationale behind a provision, and/orset out specific questions for the consultation process.Where this is the case, this explanatory text appears in a framed text box.Structure of the draft ITSCHAPTER 1 Subject matter, Scope and DefinitionsCHAPTER 2 Reporting reference and remittance datesCHAPTER 3 Format and frequency of reporting on liquidity and onstable fundingSection 1 Format and frequency of reporting on liquiditySection 2 Format and frequency of reporting on stable fundingCHAPTER 4 IT solutions for the submission of data from institutions tocompetent authoritiesCHAPTER 5 Final provisionsAnnex I Liquidity coverage reporting templateAnnex II Stable funding reporting templateAnnex III Instructions liquid assets _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 35Annex IV Instructions inflowsAnnex V Instructions outflowsAnnex VI Instructions Stable fundingDraft Commission Implementing Regulation (EU) No XX/2012of XX Month 2012 laying down implementing technical standards withregard to supervisory reporting of institutions according to the (proposalfor a ) European Parliament and Council Regulation (EU) No [xx] of[date] on prudential requirements for credit institutions and investmentfirms.CHAPTER 1Subject matter, Scope and DefinitionsArticle 1Subject matter and scope1. This Regulation lays down uniform requirements that all institutionssubject to the Regulation of the European Parliament and of the Councilon prudential requirements for credit institutions and investment firms(hereinafter “CRR”) must meet relating to the submission of supervisorydata to competent authorities for the following areas:a) liquidity reporting requirements as defined in Part III, Title II ofRegulation xx/xx ;b) supplementary reporting of liquid assets as defined in Annex III ofRegulation xx/xx ;c) stable funding reporting requirements as defined in Part III, Title III ofRegulation xx/xx ;d) additional liquidity monitoring metrics as defined in Part III, Title IIof Regulation xx/xx ;e) IT solutions as defined in Part III, Title II of Regulation xx/xx . _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 36Explanatory text for consultation purposesThe draft CRR also requires the EBA to develop a draft ITS to coveradditional monitoring metrics by Jan 1, 2013.The EBA intends to launch a separate consultation on this matter inautumn 2012.The data point model will be published for consultation in the thirdquarter of 2012.2. The liquidity reporting requirements and the supplementary reportingof liquid assets specified in this regulation apply until the delegated actfor a liquidity coverage requirement as referred to in Article 444 ofRegulation xx/xx has entered in force.Some supplementary information is asked in the template to increasedata coverage.At certain times the EBA may propose to change, amend or alter thereporting specified in this Regulation in order to inform the reportrequired by Article 481.This does not prejudge the future calibration of the ratio.3. The stable funding reporting requirements specified in this regulationapply until a legislative proposal for a stable funding requirement asreferred to in Article 481 (3) of Regulation xx/xx would enter in force.4. The reporting shall be done on an individual basis (Article 5) and on aconsolidated basis (Article 10) as defined in Regulation xx/xx.Individual reporting may only be waived according to the proceduresoutlined in Articles 7 and 19.These Articles make clear the respective roles of the EBA and the relevantcompetent authorities in granting any such waivers. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 37Article 2Definitions1. For the purpose of this Regulation, the definitions provided byRegulation xx/xx shall apply, in particular those included in Article 4 and400 of the CRR shall apply.2. For the purpose of this Regulation, the scope and level of applicationaccording to Part 1, Title II of Regulation xx/xx shall apply.Explanatory text for consultation purposesIn addition, according to Article 403.2, institutions are required to reportitems separately if they are indexed to a currency where the institution hassignificant liquidity risk or such currency is the lawful currency of ajurisdiction where they have a significant branch.For the purposes of harmonising the definition of a currency where aninstitution has significant liquidity risk the EBA proposes that this shouldbe limited to those currencies which comprise more than 5% of aninstitution’s liabilities.Q2: Do respondents agree with this proposal for definingsignificant currency?The reporting for investment firms should be done following therequirements of Part 1, Title II until the eventual implementation of anylegislative proposal referred to in Article 480(2) of CRR.CHAPTER 2Reporting reference and remittance datesArticle 31. The reporting reference dates shall be:- Monthly reporting: on the last day of each month; _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 38- Quarterly reporting: 31 March, 30 June, 30 September and 31 December.Article 4Reports shall be submitted by institutions to competent authorities byclose of business on the 15th calendar day after the reporting referencedate specified in Article 3.1. If the remittance day is a public holiday, Saturday or Sunday, reportingrequirement shall be transmitted on the following working day.2. The above remittance dates concern the submission of unauditedfigures which are figures that have not been assessed by external auditors.Where applicable, audited figures implying changes in already reporteddata shall be submitted as soon as available.In addition, any errors in the submitted reports shall be corrected by thereporting institution by submitting the necessary revisions to the relevantcompetent authority as soon as possible.Explanatory text for consultation purposesThe proposed remittance period is 15 days for the monthly reporting and15 days for the quarterly reporting.Q3: Is the proposed remittance period of 15 days feasible?CHAPTER 3Format and frequency of reporting on liquidity and on stablefundingSection 1Format and frequency of reporting on liquidity coveragerequirementArticle 5 _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 391. Information submitted pursuant to the templates set out in Annex I(liquidity coverage reporting template) and according to the instructionsin Annex III, IV and V shall be reported on a monthly basis.2. Institutions shall have the operational capacity to increase thefrequency to weekly or even daily in stressed situations at the discretion ofthe competent authorities.The items listed for reporting in the template include all the necessaryitems specified in Articles 400 to 415 of the CRR. Certain additional itemsare included to help institutions and supervisors check data quality and toinform other relevant policy options, such as intra-group treatments.Q4: Are there additional sub-categories of inflows and outflowsthat are consistent with the specification of the liquiditycoverage requirement in the CRR and would inform policyoptions that should be included in the template and accordinglyreported?With respect to the reporting of liquid assets according to Annex III andArticle 404, in the absence of a harmonised definition, institutions arepermitted to use internal definitions for the purposes of liquidityreporting.The CRR also permits competent authorities to give guidanceinstitutions shall follow in identifying assets of high and extremely highliquidity and credit quality.It is not practical in the context of a harmonized reporting framework forinstitutions to have complete freedom to define such assets, both from thepoint of view of having common IT solutions and data comparabilityacross submissions.Therefore the EBA is using this consultation to ask institutions whatadditional data on asset class holdings should be collected. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 40The most significant amendments to the CRR in respect of liquidityreporting proposed by the co-decision bodies are to include equities, goldand high-quality residential mortgage-backed securities orstate-guaranteed bank debt.It should be noted that collecting data on additional assets does increasethe complexity of the template given that the inflow and outflow rates onrepo and reverse repo transactions are varied according to the liquiditycategory which each asset belongs to in accordance with Articles 410 and413.The responses to the following question will be taken into accounttogether with any mandated inclusions or exclusions of assets in the finalversion of the CRR for the purposes of giving the guidance to institutionspermitted in Article 404.Q5: Fur the purposes of providing guidance as to transferrablesecurities of high and extremely high credit and liquidity quality,what additional assets, if any, should the ITS collect?Section 2Format and frequency of reporting on stable fundingArticle 5Format and frequency of reporting on stable funding1. Information submitted pursuant to the template set out in Annex II(Stable funding reporting requirement) and according to the instructionsin Annex VI shall be reported on a quarterly basis.Explanatory text for consultation purposesThe scope, definitions, reporting reference and remittance dates as setout in Chapters X and X apply.2. The information to be reported are the following: _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 41a) information on items providing stable funding according to Article414(1) of Regulation xx/xx ;b) information on items requiring stable funding according to Article415(1) of Regulation xx/xx .Explanatory text for consultation purposesThe information gathered will help to compile the report to theCommission on whether and how it would be appropriate to ensure thatinstitutions use stable sources of funding according to the Article 481§3 ofthe CRR in order to promote more medium and long-term funding of theassets and activities of banking organisations.The amount of stable funding required of a specific institution should bea function of the liquidity characteristics of various types of assets held,off-balance sheet contingent exposures incurred and/or activitiespursued by the institution.Q6: Do respondents agree that the template captures therequirement of the draft CRR on reporting of stable funding?Where applicable, the information required on stable funding will have tobe presented in five buckets (within 3 months, between 3 and 6 months,between 6 and 9 months, between 9 and 12 months and after 12 months).V. Accompanying documentsa. Draft Impact AssessmentIntroductionArticle 403(3)(a) of the CRR requires the EBA to develop draftImplementing Technical Standards (ITS) relating to the reporting onliquidity coverage and stable funding.As per Article 15(1) second subparagraph of the EBA Regulation(Regulation (EU) No 1093/2010of the European Parliament and of theCouncil), any draft technical standards developed by the EBA will have tobe accompanied by a separate note on Impact Assessment (IA) which _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 42analyses the „the potential related costs and benefits (unless suchanalyses are disproportionate in relation to the scope and impact of thedraft ITS concerned or in relation to the particular urgency of the matter).This IA aims to provide the reader with an overview of findings as regardsthe problems and options identified and their potential impact.This IA deals with the incremental impact of the EBA’s draft ITS todetermine the uniform templates, the instructions on how to use thistemplate, the frequencies and remittance days for reporting.Throughout the project the EBA has closely followed the work ofinternational organisations dealing with related topics, in particular theBasel Committee on Banking Supervision in charge of monitoring BaselIII requirements.Problem definitionArticle 403(3)(a) CRR mandates the EBA to develop draft implementingtechnical standards to specify uniform formats with associatedinstructions, frequencies, dates and delays for reporting of the liquiditycoverage and stable funding requirements.These reports will enable authorities to monitor institutions compliancewith the two requirements once they have become binding.During the monitoring period, the collected information will inform theeconomic impact assessment the EBA is mandated to perform underArticle 481(1), as well as the report on appropriate uniform definitions ofliquid assets according to Article 481(2).Article 403 CRR requires institutions to report items for the purpose ofmonitoring compliance with the liquidity requirements and alsostipulates that the reporting frequency shall not be less than monthly forthe liquidity coverage requirement and quarterly for reporting on stablefunding. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 43On the contrary, the CRR gives discretion for the EBA to propose optionson(i) whether to integrate liquidity reporting in the common reportingframework (COREP),(ii) the level of detail for some of the reporting items,(iii) remittance dates and(iv) reporting of significant currencies.Timing of ITS development and application dateInstitutions are expected to comply with the new CRR Requirementsfrom January 2013.Sufficient time for implementing ITS requirements is essential to ensuredata availability and quality in order for competent authorities to performtheir tasks.The CRR applies to institutions regardless of their size, risk profile, etc.The appropriate balance between the required level of detail of thesubmitted information and the nature, scale and complexity ofinstitutions activities is imperative in the consideration of reportingformats and frequencies.Objectives of the technical standardsThe objective of the draft ITS is to determine uniform templates andinstructions on how to use this template, the frequencies and dates ofreporting as well as IT solutions for the purposes of liquidity reportingrequirements.This draft ITS will assist institutions in fulfilling their reportingrequirements under Article 403(1) CRR. Additional liquidity monitoring _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 44metrics according to Article 403(3)(b) CRR will be consulted at a laterstage.It is important that the relevant data is available for the review of theappropriateness of the liquidity coverage and stable fundingrequirements in 2015 and 2018, respectively.Policy proposalsGiven that the uniform liquidity reporting requirements are beingintroduced for the first time in the EU, an appropriate reporting templateneeds to be developed.I. Including the ITS as an Annex to the COREP reporting standardAt this stage reporting is for the observation period for the liquiditystandards, rather than a final standard. In this light, two alternatives havebeen considered:(i) Following an approach chosen for the QIS based on a stand-aloneExcel template, or(ii) including liquidity risk reporting in the common reportingframework.Option IAdvantages:- Keeping full flexibility for future adaptions after the ratios have beenfinally calibrated.Disadvantages:-No established reporting infrastructure,-No link to bank identifiers and other data which would be useful for theeconomic impact assessment to be performed under Article 481 (1).Option 2 _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 45Advantages:- Harmonised methodology to collect the data,- the ability to cross-reference to other metrics,- stablished infrastructure to analyse and manipulate the data.Disadvantages:-Any changes to the template as a result of the observation period wouldneed to take place within the COREP timetable.Based on the above reasoning it is concluded that option 2 is morebeneficial and hence integration into COREP is proposed.II. Submission timeThe time between reporting date and submission is not specified in CRR.The CP proposes as a baseline that reporting dates should be at monthend for LCR and quarter end for NSFR, and that the submission timeshould be 15 calendar days.This would take into consideration that the LCR incorporates a 30 daysforward looking stress scenario, i.e. ideally remittance should occurbefore this period ends.EBA encourages stakeholders to comment on the feasibility of theproposed submission time.III. Level of detail for certain reporting items for the liquiditycoverage requirementIn the absence of an adopted CRR there has been no finalized list ofliquid assets to be reported yet.Moreover, according to positions of both the ECOFIN and the EuropeanParliament, the EBA shall collect information on certain assets for the _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 46purpose of its economic impact assessment even in cases where theywould not meet certain criteria, e.g. central bank eligibility.For the purposes of this consultation, the EBA proposes the following:The template includes those assets that were specifically listed in theCommission proposal.Respondents are explicitly asked to suggest additional asset classes to beincluded in the reporting for the purpose of the economic impactassessment, and without prejudice to their eligibility after final calibrationof the LCR.IV. Reporting in significant currenciesArticle 405(g) CRR on the operational requirements for holdings of liquidassets requires that „the denomination of the liquid assets is consistentwith the distribution by currency of liquidity outflows after the deductionof capped inflows.Without collecting information on collecting the liquidity coveragerequirement by currency, the EBA could not measure the impact of thisproposal.Likely economic impactsIt is recognised that the reporting of liquidity requirements will incuroperational and compliance costs for institutions and competentauthorities.It is not envisaged that these costs would be over and above thoseincurred if the liquidity reporting requirements were constructed in analternative manner.In fact, if it was proposed to require reporting outside the scope ofCOREP, presumably this would increase operational costs in thelong-term. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 47The proposal to rely on the COREP reporting framework is aimed atminimising the incremental economic impact of the liquidity reportingrequirements for institutions and competent authorities.b. Overview of questions for public consultationQ1: Are the proposed dates for first remittance of data, i.e. end of Januaryand end of March2013 feasible?Q2: Do respondents agree with this proposal for defining significantcurrency?Q3: Is the proposed remittance period of 15 days feasible?Q4: Are there additional sub-categories of inflows and outflows that areconsistent with the specification of the liquidity coverage requirement inthe CRR and would inform policy options that should be reported?Q5: Fur the purposes of providing guidance as to transferrable securitiesof high and extremely high credit and liquidity quality, what additionalassets, if any, should the ITS collect?Q6: Do respondents agree that the template captures the requirement ofthe draft CRR on reporting of stable funding? _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 48NUMBER 4Opening RemarksDATE: June 7, 2012SPEAKER: Jeanette M. Franzel, Board MemberEVENT: PCAOB Forum on Auditing in the Small BusinessEnvironmentLOCATION: Minneapolis, MNWelcome to the PCAOB Forum on Auditing in the Small BusinessEnvironment.I am Jeanette Franzel, Board Member at the Public Company AccountingOversight Board.I will be the host and moderator today. Before I go further, I must tell youthat the views I express today are my personal views and do notnecessarily reflect the views of the Board, any other Board member, or thestaff of the PCAOB.This is our eighth year of holding forums in cities across the United Stateson auditing in the small business environment.During 2011, the Board held seven of these forums across the U.S.,reaching more than 750 participants.The goal of these meetings is to create an opportunity for discussion anddialogue between PCAOB and auditors in smaller firms by providingopportunities for auditors to learn about the PCAOBs work, and toprovide feedback and ask questions about PCAOB activities-- includinginspections, auditing standards and guidance, and current projects andpriorities of the Board.So please participate. We welcome your input and questions. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 49The statutory mission of the PCAOB is to oversee audits of publiccompanies in order to protect the interests of investors and further thepublic interest in the preparation of informative, accurate, andindependent audit reports.The PCAOB is also charged with overseeing the audits of broker-dealercompliance reports under federal securities laws to promote investorprotection.We fulfill our mission through our inspections, our authority to setauditing standards, and our enforcement efforts.We are going to be talking today about those programs throughpresentations and case studies, with special emphasis on some of theissues facing smaller firms.Today, we will cover a number of updates on the auditing environment,audit standard-setting activities, related SEC activities, and a review ofcommon financial reporting issues facing smaller issuers.In addition, we will spend a considerable amount of time discussingpractical aspects of auditing through our case studies involving the topten inspection findings and the relevant auditing standards.Finally, we will cover the process for remediation of deficiencies detectedduring PCAOB inspections.In 2011, there were 476 domestic firms that issued audit opinions on thefinancial statements of 100 or fewer issuers, making them subject toPCAOB inspections every three years, which is why we sometimes referto these firms as "triennial firms."Of those firms, 287, or 60 percent, issued audit opinions on between 1 and5 issuers.The triennial firms include a broad range of firm size, structure, andpractice, including sole proprietorships with small staffs to large networkfirms with dozens of partners and multiple offices.These firms audit public companies of all types and sizes, including shellcompanies, small manufacturing and financial services companies, andnew startups, with market caps in the tens of millions of dollars, and _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 50larger companies that encompass multiple industries with market caps inthe billions of dollars.In the aggregate, triennial firms audit the financial statements of issuersthat represent $110 billion to $120 billion in U.S. market capitalization(based on data as of December 31, 2011).Ensuring that these firms consistently perform high quality audits isimportant to the Board as well as the investing public.Auditors have been given an important and trusted role in the capitalmarkets, and, from time to time, that role has been re-examined by thegovernment and the profession itself.Such examination is appropriate, given the auditors role of providingassurance to investors, lenders and others that an audited companysfinancial statements and related disclosures fairly present the institutionsfinancial results in conformity with applicable accounting and disclosurestandards and rules.Clearly, reliable financial statements with auditor assurance are importantto your clients, their investors, and the broader financial markets.A strong, high quality audit function is essential to the effectivefunctioning of the capital markets, which in turn, affects the well-being ofAmerican families.More than half of American households invest their savings in securitiesto provide for retirement, education, and other goals.It is encouraging that we have heard from many stakeholders who believethat audit quality has improved since the passage of the Sarbanes-OxleyAct and the establishment of the PCAOB.But there is still more that needs to be done.The Board is concerned by the number of serious deficiencies found inour 2010and 2011 inspections.Our inspection findings spiked in the 2010 inspections for the annuallyand triennially inspected firms. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 51Those inspections generally looked at audits of 2009 financial statements.Inspection findings have remained at a relatively high level for the 2011inspections.Later this morning, we will discuss our "Top 10 Common InspectionFindings."It is interesting to note that there is a high degree of overlap with the top10 accounting matters identified by the SEC.These include matters that are relatively basic as well as issues that arevery complex.Our case studies today will specifically focus on several of these areas.Also, in our inspections, we have noted that the following situations tendto increase the likelihood that findings will be identified:- a significant increase in a firms issuer audit practice and/or expansion into new industries;- a recently executed firm merger or acquisition; and- a significant increase in the number of issuers audited per partner.Our inspections staff devote considerable attention and time during theinspection process to encourage firms to evaluate possible root causes fordeficiencies within the firms structure, operations, processes or otherareas that detract from audit quality.Today we will discuss the inspection procedures relating to firmsremediation plans and actions.In general, firms have taken appropriate steps to remediate identifiedquality control findings. Remediation remains an area of strong focus ofthe Board and staff.***Clearly, audit quality requires constant attention and work.Auditing is difficult and filled with competing tensions, and we can andshould continue to learn from years of experience. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 52I hope that you find todays program useful and that you will activelyparticipate in todays discussions and take this information back to yourfirms.We also welcome your input and feedback throughout the program. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 53NUMBER 5Auditing the FutureDATE June 7, 2012SPEAKER(S): Jay D. Hanson, Board MemberEVENT: Fair Value Measurements and Reporting ConferenceLOCATION: National Harbor, MDGood Morning,I am very honored to be here this morning to address the Fair ValueMeasurements and Reporting Conference.I was a presenter at the first AICPA Fair Value conference in 2009 when Iwas a partner at McGladrey & Pullen LLP.Since then, I have moved on to my new role as a Board member of thePublic Company Accounting Oversight Board, where I am dealing withmany of the same issues I encountered during my years as a publicaccountant, but from a different perspective.I am encouraged that you have all joined this event to explore issuesrelated to fair value measurements.I am going to discuss today some of the Boards activities that may be ofconsequence to your work and will share with you some of my views frommy new perspective as an audit regulator and standard setter.Before I go further, however, I must tell you that the views I express todayare my personal views and do not necessarily reflect the views of theBoard, any other Board member, or the staff of the PCAOB. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 54Introduction – Creation of the PCAOB and its ActivitiesHistorically, basic accounting concepts have not changed often orquickly.The past decade, however, has been a period of unprecedented changesin the areas of accounting and auditing.The collapse of Enron, the bankruptcy of WorldCom and the subsequentpassage of the Sarbanes-Oxley Act of 2002, as well as the increasing use offair value measurements and the financial crisis, all contributed to anenvironment that drove these changes."SOX," as so many affectionately call the landmark legislation, was theresult of investor losses from financial reporting and auditing deficienciesearly in this century at some of the largest public companies in the UnitedStates: Enron, Global Crossing, Adelphia, Tyco, Qwest Communications,Xerox and WorldCom.The events involving these companies shook the confidence in theintegrity and reliability of public company financial reporting anddemonstrated a need for enhancements in internal controls over financialreporting and corporate governance.Ten years ago next month, Congress passed the Sarbanes-Oxley Actalmost unanimously, resulting in the most significant legislation relatingto the federal securities laws since 1934.The Sarbanes-Oxley Act created the PCAOB, which commencedoperations in 2003.The Boards mission – as set forth in the Act – is "to protect the interestsof investors and further the public interest in the preparation ofinformative, accurate and independent audit reports."As you may know, the PCAOB has four main responsibilities under theAct:1. Registration of public accounting firms that audit public companies orbroker-dealers;2. Standard Setting; _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 553. Inspections of registered public accounting firms; and4. Investigations and disciplinary proceedings in cases where auditorsmay have violated certain provisions of the securities laws or applicablestandards or rules.Currently, over 2400 firms, including over 900 foreign firms from 88jurisdictions, are registered with the PCAOB.The PCAOB has built an inspection program comprising over 440inspection staff members.Of all registered firms, 9 currently are subject to annual inspectionbecause they issue over 100 audit reports each year, while approximately850 are subject to inspection at least every three years because they issue100 or fewer audit reports each year.Our Office of the Chief Auditor is responsible for leading the Boardsstandard setting activities.When it commenced operations, the Board adopted as its interimauditing standards those standards promulgated by the AICPAsAuditing Standards Board before April 16, 2003.Since then, the Board has issued 15 of its own auditing standards —including, for example, on audit documentation, internal controls, auditplanning, engagement quality review, and risk assessment — and hassubstantially amended a number of interim standards.More recently, the Board issued concept releases or proposals to triggerwide-ranging discussions about potential changes to certain fundamentalaspects of auditing, including the contents of the auditors report,transparency relating to participants in the audit, audit committeecommunications, and auditor independence, objectivity, and skepticism.Since it began operations, the PCAOB has conducted over 1800inspections, including inspections in 38 jurisdictions outside the UnitedStates.Our enforcement program has sanctioned 39 firms and 52 individuals todate, including imposing censures, temporary and permanent practice _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 56bars, revocations of firm registrations, and civil money penalties up to $2Million.In pursuing its mission during the last nine years, the Board has evolvedfrom a start-up institution focused on establishing a comprehensive,consistent oversight system to a maturing regulatory organization withthe experience and resources to adapt to changing times and newchallenges.Changes in the Accounting and Auditing Professions and theIncrease in Fair Value MeasurementsThe accounting and auditing professions as a whole are facing difficultquestions as a result of the increasing complexity of business transactionsand cutting edge financial instruments which are appearing morefrequently not only in the financial statements of financial institutions butmany other types of companies as well.Thirty years ago, financial statements were dominated by tangible assetsand historical cost accounting.Today, after rapid advances in technology and the development ofinnovative business models, the balance sheets of an increasing numberof companies are dominated by valuation estimates, rather than "solidnumbers," and it is much more difficult for accountants, auditors andinvestors to understand the transactions and products that must becaptured in financial statements.Management and their accountants increasingly must tackle fair valuemeasurements and management estimates, consistent with newaccounting standards in connection with derivatives, securitizations,consolidations, debt/equity issues, revenue recognition, leases and otherissues.As a result, the valuation process used by management, and the auditorsreview thereof, have had to evolve during the last several decades.What may have begun as a calculation on a scrap piece of paper – perhapsa simple multiple of EBITDA – evolved into management memosdocumenting valuation processes; auditors becoming aware of potentialpitfalls and increasing their review of managements valuations and _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 57estimates; and management ultimately relying increasingly on outsidevaluation specialists, requiring auditors to gain a better understanding ofthe assumptions and methodologies employed by these specialists.And while the sophistication of preparers and auditors dealing with fairvalue measurements has increased, the recent financial crisis alsobrought unprecedented attention on the difficulties associated with thevaluation of certain types of assets, subjecting the work of accountants toincreased scrutiny by regulators and investors.PCAOB Inspection FindingsSo where does the PCAOB come in?In order to maximize our effectiveness and most efficiently utilize ourresources, the Board conducts risk-based inspections.This means that our inspectors choose to review those audit engagementsthat they believe, based on extensive research, present the highest level ofaudit risk.Within each audit engagement selected, inspectors choose the mostchallenging and high risk audit areas to review, in order to test the firmsability to address those challenges and risks.With this approach, it will not come as a surprise that we look extensivelyat the auditing of fair value measurements and other managementestimates.Common inspection findings reported by the Board included instanceswhere auditors appear not to have complied with PCAOB auditingstandards in certain audit areas, including, among others, fair valuemeasurements of financial instruments, impairment of goodwill,indefinite-lived intangible assets, and other long-lived assets.Financial InstrumentsOften fair values of financial instruments are determined using variousmodeling techniques.Hard-to-value financial instruments include among others, private debtsecurities, auction-rate securities, asset-backed securities, collateralized _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 58debt obligations, collateralized mortgage obligations, and othermortgage-backed securities.Both issuers and auditors frequently obtain pricing information for thesefinancial instruments from outside pricing services, which often usemodeling techniques due to limited trading information.These models often use assumptions such as prepayment speeds,discount rates, and default rates.PCAOB inspectors have identified instances where the auditor failed todetermine whether these prepayment speeds, discount rates, and defaultrates were supportable and reasonable.In other situations, auditors did not appropriately consider the weight ofboth positive and contradictory evidence.For example, auditors in some cases did not evaluate the implications ofsignificant differences in fair value measurements from different pricingsources for the same financial instruments and relied on the price closestto the issuers recorded price without evaluating the significance of thedifference with the other pricing sources.In these situations, auditors did not evaluate how the prices weredetermined and did not determine whether the assumptions used by onepricing service were more reflective of the market than assumptions thatwere used by the issuers pricing service.We have also seen instances where auditors have neglected toappropriately respond to valuation risk.In those cases, auditors focused their testing of the fair value of financialinstruments on easier-to-value securities and excluded or included onlycursory testing of hard-to-value securities.Finally, we have seen several instances where auditors have notperformed sufficient procedures to assess the adequacy of the financialstatement disclosures for hard-to-value financial instruments.For example, there have been instances where auditors did not determinewhether the assumptions used to calculate the fair values, such asprepayment speeds and default rates were observable or unobservable. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 59Whether or not the assumptions are observable dictates whether afinancial instrument would be classified as a level 2 or level 3 fair valuemeasurement.Non-Financial measurementsPCAOB inspection findings related to valuations and fair value issues ingeneral are not limited to financial instruments, however.Inspectors have also found deficiencies in connection with the valuationsinherent in recording a business combination and performing a goodwillimpairment test.For example, inspectors have identified deficiencies that includedauditors failures to evaluate, or evaluate sufficiently, the reasonablenessof significant assumptions used by issuers to estimate the fair value ofreporting units in their goodwill impairment assessments or in measuringfair value for other intangible assets and other long-lived assets acquiredin business combinations.Inspectors identified instances in which auditors did not test, or testedonly through inquiry of management, issuers significant assumptions,such as forecasted revenue growth rates, operating margins, discountrates, implied control premiums, and weighted average cost of capitalmeasures.In some of these instances, inspectors observed that auditors did notevaluate the effect of contradictory evidence when concluding on thereasonableness of certain significant assumptions.For example, inspectors identified some instances in which auditorsaccepted, without a sufficient basis, issuers assumptions that revenue oroperating profit would increase in the near future despite recent declinesin revenue or historical operating losses.Inspectors also found instances in which auditors did not evaluate, orevaluate sufficiently, the reasonableness of significant assumptions usedby issuers in measuring fair value for other intangible assets and otherlong-lived assets acquired in business combinations. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 60Specifically, some auditors failed to test, or tested only through inquiry ofmanagement, issuers significant assumptions, such as future revenuegrowth rates, customer attrition levels, and estimated useful lives.Finally, firms sometimes neglected to challenge issuers conclusions thatgoodwill did not need to be tested for impairment more frequently thanannually despite the existence of impairment indicators, such as recentdeclines in issuers stock prices or reduced estimates of future revenue insituations where such declines or reductions appeared to be potentiallysignificant to issuers most recent impairment analyses.What Auditors and others can doSo what can preparers, valuation specialists and auditors do to avoid auditfailures that can lead to the erosion of investor confidence?Although specific auditing standards apply to each of these areas – I willdiscuss some of these standards in more detail later during this session –broadly speaking, management, working with their valuation specialists,should take full ownership of all valuation related assumptions andshould gather robust support and documentation for the valuationsreflected in their financial statements.Auditors are required to understand and evaluate managementsassumptions and processes in establishing valuations or estimates, and totest managements valuations and disclosures.The auditor also must evaluate any contradictory information that comesto light, and do so objectively and skeptically.Because auditing management valuations of financial instruments is sucha challenging area, the PCAOB convened a Pricing Sources Task Forcelast year to assist the Boards Office of the Chief Auditor to gain insightinto issues related to auditing the fair value of financial instruments.This group of investors, financial statement preparers, auditors andrepresentatives of pricing services and brokers met three times in 2011 todiscuss the valuation of financial instruments that are not actively tradedand the use of third-party pricing sources to value such instruments. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 61Also, in November 2011, the Securities and Exchange Commission hostedits first Financial Reporting Series Roundtable on the topic,"Measurement Uncertainty in Financial Reporting."PCAOB Chairman Doty and I participated in this event, as did MarcSiegel from the Financial Accounting Standards Board.We heard from investors, preparers, academics and auditors.It was clear from the discussion that investors goals for transparency,objectivity and consistency in financial reporting are shared by all.One of the more significant discussions, in my view, was one thataddressed the challenges of reporting historical facts clearly, but in a waythat differentiates those facts from information based on predictions ofthe future and analysis of the company.Speaking from personal experience, I believe that auditors skills lieprimarily in auditing the past, and not so much in predicting the future!The Board will consider information provided at these events, along withour experiences in conducting inspections, in determining whether anyadditional guidance or standard setting activity is warranted in this area.In the meantime, I would encourage the financial statement preparersamong you to think about what you can do to "get behind the numbers"in connection with your disclosures related to fair value measurementsand management estimates.This will allow you to provide to your auditors sufficient information tocomply with important auditing requirements.In that context, I commend to you a speech given by SEC ProfessionalAccounting Fellow Jason Plourde in December of last year at the AICPANational Conference on Current SEC and PCAOB Developments.Mr. Plourde discussed management responsibilities in connection withthe use of pricing service data in informing fair value measurements anddisclosure.Among other things, he proposed a series of questions for management toask itself when it uses third party pricing services: _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 62- Do we have sufficient information about the values provided by pricing services to know that were complying with GAAP?- Have we adequately considered the judgments that have been made by third parties in order to be comfortable with our responsibility for the reasonableness of such judgments?- Do we have a sufficient understanding of the sources of information and the processes used to develop it to identify risks to reliable financial reporting?- Have we identified, documented, and tested controls to adequately address the risks to reliable financial reporting?I also encourage preparers to spend some time with your auditors tounderstand what our standards require.First, you may want to read your firms PCAOB inspection reports tounderstand where engagement teams have fallen short in auditing fairvalue measurements and other estimates.This also would be a good place to direct your audit committee.Discuss with your engagement team what information they will needfrom you. Educate yourself about your internal valuation processes andassumptions, and think about the ranges and the reasonableness of yourchoices within those ranges.Finally, step back, take a look at your disclosures, and consider whetherthe story presented in your financial statements and disclosures clearlyand concisely conveys the uncertainty and potential risks inherent in yourmeasurement estimates.One of the analyst participants in the Financial Reporting Seriesroundtable I just discussed remarked, "if we dont understand it, weassume it is bad."Good disclosure, complemented by thorough auditing, may go a longway toward enhancing investor confidence in the financial reportingprocess. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 63For those of you who are valuation specialists providing services tofinancial statement preparers and/or auditors, consider how you can helpincrease the understanding of preparers and auditors into what you doand how you do it.Proprietary valuation models aside, think about how you can explain theassumptions you are using, the sources of information on which you rely,and the judgments that are inherent in your valuation results.All of the important work that you do will mean very little if investorsdecide that they cannot trust the process by which important valuationsare established and audited.Finally, I would encourage all of you to stay tuned to regulatorydevelopments in this important area.The PCAOB will issue this summer a series of reports discussing ouroverall inspection findings in a variety of contexts, including fair valuemeasurements and management estimates.Our Office of the Chief Auditor also plans to issue later this year someguidance or proposed amendments to the auditing standards related tofair value measurements.We are always eager for real time input from experts working in the fieldto inform our standard setting process, so I urge you to review anyproposals that are issued and to send us your comments. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 64NUMBER 6FASB Board DecisionsSummary of Board decisions are provided for the information andconvenience of constituents who want to follow the Board’s deliberations.All of the conclusions reported are tentative and may be changed at futureBoard meetings.Decisions are included in an Exposure Draft for formal comment onlyafter a formal written ballot.Decisions in an Exposure Draft may be (and often are) changed inredeliberations based on information provided to the Board in commentletters, at public roundtable discussions, and through othercommunication channels.Decisions become final only after a formal written ballot to issue anAccounting Standards Update.June 6, 2012 FASB Board MeetingImpairment of indefinite-lived intangible assets.The Board discussed comment letters and other feedback received on theExposure Draft, Intangibles—Goodwill and Other (Topic 350): TestingIndefinite-Lived Intangible Assets for Impairment, and discussed thestaff’s analysis of the Exposure Draft’s proposals in light of that input.The Board affirmed its proposal to provide entities with the option to usea qualitative approach to assess the impairment of an indefinite-livedintangible asset.Under that approach, an entity would qualitatively assess whetherexisting events or circumstances indicate that it is more likely than notthat an indefinite-lived intangible asset is impaired (the more – likely –than - not threshold refers to a likelihood that is more than 50 percent). _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 65An entity would not be required to perform a quantitative impairment test(comparing the fair value of the asset with its carrying value) if, afterassessing the totality of relevant events and circumstances, managementdetermines that it is not more likely than not that the indefinite-livedintangible asset is impaired.The Board also affirmed that additional disclosure requirements wouldnot be necessary relating to the use of the optional qualitative assessment.The Board decided that the impairment guidance would be moreunderstandable if it included examples of the types of events andcircumstances to be considered in performing the qualitative assessment,rather than a cross reference to the examples in the goodwill impairmenttest guidance (paragraph 350-20-35-3C(a) through (e)).The Board also decided not to include the sustained decrease in shareprice as an example of events and circumstances to be considered inperforming the qualitative assessment.The Board affirmed that a nonpublic entity would not be required toprovide quantitative disclosures about significant unobservable inputsused in a Level 3 fair value measurement of an indefinite-lived intangibleasset after its initial recognition.The Board also affirmed that a public entity would continue to berequired to provide those disclosures.The Board affirmed that it acknowledges that the more time that elapsessince an entity last calculated the fair value of an indefinite-livedintangible asset, the more difficult it may be to make a conclusion basedsolely on the qualitative assessment of relevant events and circumstances.The Board decided to retain such acknowledgement in the basis forconclusions to enhance the consistency of impairment testing guidancebetween indefinite-lived intangible assets and goodwill.The Board decided not to include additional implementation guidance inthe final Accounting Standards Update. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 66The Board decided to clarify that the more likely than not threshold usedin the qualitative impairment assessment would apply for performing animpairment assessment in interim periods.Current guidance in paragraph 350-30-35-18 states that an interim testmust be performed “if events or changes in circumstances indicate thatthe asset might be impaired.”This clarification would align the threshold for interim test with theannual impairment test of indefinite-lived intangible assets as well as withthe guidance for goodwill impairment.The Board directed the staff to draft a final Accounting Standards Updatefor vote by written ballot.The Board decided that the final amendments would be appliedprospectively for annual and interim impairment tests performed for fiscalperiods beginning after September 15, 2012. Early adoption would bepermitted.Not-for-profit financial reporting: financial statements.The Board discussed the staff’s proposed project plan, which reflectsfeedback received from project resource group members.Board members expressed support for the proposal, directing the staff toproceed as planned.Definition of a nonpublic entity.The Board decided that a company that otherwise meets thecharacteristics of a private company as defined in this project would bedeemed a private company for financial reporting purposes if:1. It is a consolidated subsidiary of an entity that is a public company, or2. One of its controlled and consolidated subsidiaries is a publiccompany.The Board also decided that an employee benefit plan would not bedeemed a private company for financial reporting purposes. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 67Revenue recognitionThe FASB considered a summary of the feedback received from outreachactivities with nonpublic entity stakeholders undertaken betweenSeptember 2011 and May 2012 and nonpublic entity stakeholder commentletters on the revised Exposure Draft, Revenue from Contracts withCustomers.This summary will be posted on the revenue recognition project page onthe FASB’s website. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 68NUMBER 7Call for evidence on Transaction ReportingFrom The British Bankers’ Association (BBA) to the European Securitiesand Markets Authority (ESMA)ToEuropean Securities and Markets Authority103, Rue de Grenelle75007 ParisFrance1 June 2012Dear Sir or MadamCall for evidence on Transaction ReportingThe British Bankers’ Association (BBA) thanks the European Securitiesand Markets Authority (ESMA) for the opportunity to comment on its callfor evidence on what elements ESMA should consider in its work onguidelines on harmonised transaction reporting together with what areasof the OTC derivatives guidelines need to be updated.The BBA is the leading association for UK banking and financial servicessector, speaking for over 230 banking members from 60 countries on thefull range of the UK and international banking issues.As such our membership has a broad view of transaction reportingobligations and the requirements as applied by the various competentauthorities across Europe, and we recognise that divergent _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 69interpretations of reporting requirements will create difficulties forcompetent authorities when analysing TREM data for potential marketabuse.We would like to preface our detailed responses to the specific questionsasked by ESMA by providing some general comments.General CommentsWe welcome that ESMA acknowledges the legislative initiatives onMiFID/R and EMIR and that the work on transaction reportingguidelines will be carried out taking into account the progress of thenegotiations.We are fully supportive of the intention to harmonise the approach totransaction reporting across Europe.We would respectfully suggest that ESMA adopt the following threeguiding principles when proposing revised transaction reportingguidance:  Simplification  Harmonisation  StandardisationSimplificationThe transaction reporting regime supports a complex array of financialinstruments and transaction booking methodologies.We are strongly of the opinion that major drivers of data quality arereporting requirements that are simple, clear and unambiguous.Simplification without question reduces the risk of error in interpretationand application of the reporting requirements.The first step must be the introduction of key principles used to assesswhen and where the execution of a transaction has taken place and by _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 70whom and how executions are distinct from the receipt and transmissionof orders.HarmonisationWe firmly believe that data definitions for data fields need to be consistentacross jurisdictions and reporting regimes.The time of trade for example is required on both Transaction and Tradereports.To that end a unified approach to trade time reporting is needed.Secondly, consistency between reporting requirements across competentauthorities is highly desirable.StandardisationWe believe, where available, common data standards should beestablished using where possible existing international data standards.QuestionsQ1. What transaction schemes should ESMA consider in itswork on harmonised transaction reporting guidelines? Pleaseexplain and justify.We welcome the opportunity to contribute to identifying commontransaction reporting schemas which ESMA should consider in its workon guidelines on harmonised transaction reporting.In Annex 1 we have illustrated how the current mandatory fields asstipulated by MiFID allow firms to successfully support the transactionreporting of a wide range of scenarios typically used by BBA memberswith the reports clearly identifying the client and the reporting Firmfacilitating the transaction. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 71We have used the scenarios as identified in the call for evidence and haveadded several examples used for the reporting of Listed Derivativetransactions.We have not shown in the examples each and every transaction report thatwould be made.For example in some cases the client / counterparty might also have anobligation to report and we have not in all cases shown both investmentfirms reports.Q2. What updates and clarifications need to be introduced tothe OTC derivatives reporting guidelines?We agree with ESMA that a consistent interpretation of requirements fordata fields common across jurisdictions and reporting regimes isessential.It is therefore necessary that ESMA’s harmonised OTC derivativestransaction reporting guidelines must be consistent with the TechnicalStandards that are being produced as a result of EMIR.Compatibility between the two will allow firms to report once and onceonly to a Trade Repository as specified in MiFID2Any divergence of technical standards may mean that firms develop to aset of standards for Transaction Reporting, a set of standards forRepository reporting and a further set of standards when MiFID 2 allowsreporting once to fulfil reporting obligations.It is therefore important for ESMA to update reporting guidelines after adetailed gap analysis between the two reporting requirements underEMIR and MiFID has been conducted.We are mindful of the complexities of merging a repository reportingregime with a transaction reporting regime and respectfully suggestfurther research and consultation may be required. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 72The MiFID reportable fields should be a subset of fields required byEMIR.However, as it currently stands, there are differences between what isbeing asked to be reported.For example the data field for “Derivative Type” is required fortransaction reporting but is not required under EMIR.Further, EMIR does not consider all potentially reportable events (forexample exercise, termination, novation).EMIR references the Dodd Frank Act and MiFID 2 but there is noreference to CESR guidance of 2010.We have identified examples of where key data fields in the CESRguidance and EMIR either converge or diverge.Examples of convergenceThe following key data fields appear in both the CESR guidance andEMIR technical standards:- Buy / Sell indicators, Unit Price, Price Notation, Quantity, Venue identification, Underlying identification, Put / Call indicator, Price Multiplier, Expiration date.These examples show EMIR referencing MiFID in terms of referencedata attributes and their descriptions.However, we believe a more detailed analysis may show gaps.Examples of divergenceThe following key data fields do not appear in EMIR technical standardsfor Trade Repositories.- Derivative Instrument type i.e. Complex K, Instrument description and open question about strike price. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 73 - The CESR guidance identifies transactions that are reportable, however the EMIR technical advice does not reference these transaction types 1It is evident that the EMIR technical standards do not take into accountthe CESR guidance.This means that firms have to comply with competing requirements thatmake the stated aim of reporting once unachievable.It is necessary for ESMA to identify the differences across the CESRguidance, EMIR technical standards and MiFID 2 and then to provideconsistency and compatibility of data fields to ensure harmonisationbetween trade repositories and transaction reporting requirements.It is also apparent from changes to the OTC market, i.e. the increased useof centralised clearing such that bi lateral trades need to be transactionreported for market abuse detection yet the trades are novated to face theclearing house.Further guidance to cater for these circumstances is required.Further we encourage the use of common data standards as follows: - Standardised reportable events during the lifecycle of a transaction - Standardised Product Classification - Standadised Economic CalculationsWe understand that ISDA have completed an ISDA Taxonomy forproducts that is awaiting final approval from the CFTC at which point afinal ratified version will be published.These standards could be considered for the purposes of transactionreporting.There are also inconsistencies over the use of identifiers, for bothproducts and counterparties between authorities.1 CESR/10-661 How to Report on OTC Derivative instruments; 08/10/2012 page 9 _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 74Guidance should be sought on which identifier should be used for theproduct underlying OTC Derivatives, when there is no ISIN available.If there is no identifier available, what it the correct course of action - tonot report until an ISIN becomes available?The approach that requires the storing - or parking -of unreported tradesuntil such time as an identifier becomes available leads to significantoperational support issues.In this situation, updated guidelines on market data identifiers other thanISINs that can be used should be provided.Q3. What other aspects of transaction reporting should ESMAconsider in its work on harmonised guidelines? Please explainand justify.Use of the Venue ID field:There is a divergent approach to requirements for this field.In the UK, this field reflects whether exchange rules are applicable to atrade and this is consistent with Exchange requirements for tradereporting.This means that the field reflects the legal agreements that are in placebetween the trading parties and this can change dependent on the natureof the trade.For example, share buy back schemes are typically agreed to be under therules of the exchange of the primary listing Such as the LSE.As such the client side transaction report includes XLON as the venueeven when the stock has been sourced from a different venue or through ahouse fill.We believe however, for simplicity, the venue of where the trade wasexecuted should be included for market side trades and XOFF for allclient side transaction reports. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 75Adoption of the Legal Entity Identifier code (LEI):As you will be aware, the LEI is being developed as an additionalidentifier which may replace the BIC code and this identifier is planned tobe an acceptable identifier under EMIR.We would recommend that the use of the LEI is permitted once availableas an alternative identifier and the timing of its introduction is before oraligned with the implementation of EMIR.Branch reporting:The interim solution provided by CESR as to what is meant by executionand thus whether a reporting obligation arises has been helpful, however,there is still no one clear view of what constitutes “execution” thatclarifies what transactions should be reported and to which competentauthority.This means that, currently, firms who have established branches may berequired to transaction report to multiple Competent Authorities,determined by the varying interpretations of member states of the terms“execute” and “receipt and transmission of orders”.Further, each competent authority has its own data standards andreporting requirements.This increases not just the cost, but also the complexity of its reportingprocesses, and increases operational risk.The move towards harmonisation of transaction reporting standards asenvisaged by MiFIR and as referred to in this letter should remove theneed to transaction report in different formats to various regulators.In addition, it should result in more efficient information exchangebetween competent authorities, which will hopefully result in a reductionin the requests from multiple competent authorities for furtherinformation on the reports that have been made. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 76As an industry we will be discussing this issue in greater detail andwelcome the opportunity to discuss potential solutions with ESMA.Over-reporting of transactions:In the absence of a single list of reporting instruments, and we wouldfurther encourage the existence of such a list firms must continue to bepermitted to report transactions in instruments that are not admitted totrading on an EEA regulated market (i.e. non MiFID instruments).Central Counterparty:When trading on exchange the obligation is currently to report the centralcounterparty.Markets are typically anonymous and therefore the actual counterparty isunknown.Firms should have the option of reporting their preferred CCP underinteroperability arrangements.This is on the basis that the back office systems need to capture thedetails of the CCP against which the firm must settle.We continue to favour the use of Counterparty 1 to identify thecounterparty as CCP and the Venue field to identify the venue ofexecution.Principal crosses:Within the UK reporting regime Principal crosses are regularly utilised.These allow firms to report both a buy and sell to separate counterpartiesin the same transaction report where they are executed at the same timeand price.Such transactions greatly reduce the volume of transaction reports madeand therefore reduces the burden placed on firms in that they have fewertransaction reports to manage. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 77Notwithstanding this, the vast majority of investment firms within the UKutilise the principal cross in several systems.As such should principal crosses not be available going forward thiswould have very significant cost implications for UK investment firms.Testing:We regard to how data is made available by authorities for the purpose offirms front to back testing of their transaction reporting, we wouldrequest ESMA to ensure that this information be provided through anautomated service, such as FTP (File Transfer Protocol).At present data is collated in large files, which are then sent by email.Automation would allow for firms being able to access every day of amonths data, rather than requesting data for specific dates.Given automated systems such as FTP are becoming more of a globalstandard for institutions to run assurance testing programmes on theirtransaction reporting, we believe this should be considered as part of aEU standardisation / harmonisation drive.We appreciate the opportunity to address and comment on the issuesraised by this call for evidence.We look forward to continuing an open dialogue with you on theseimportant issues to achieve harmonised transaction reporting and wouldwelcome a meeting in person to discuss in more detail. Please do nothesitate to contact Sally Springer (+44 20 7216 8841) should any questionsarise.Yours faithfullySally SpringerSenior Policy Director _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 781. Investment Firm vs. Investor (Principal) Single Venue Sell Buy London Stock Client A Investment Firm ExchangeTransaction Reports Client Side Report Market Side Report Data Field Name Content of Report Data Field Name Content of Report Reporting Firm Investment Firm Reporting Firm Investment Firm Trading Capacity P Trading Capacity P Buy/Sell Indicator S Buy/Sell Indicator B Quantity 1 Quantity 1 Counterparty 1 Client A Counterparty 1 Clearing House Counterparty 2 Blank Counterparty 2 Blank Venue of execution XOFF Venue of execution XLONThe Buy/Sell Indicator is from the perspective of the Investment Firm2. Investment Firm vs. Investment Firm (Principal) Sell Buy London Stock Investment Firm B Investment Firm A ExchangeTransaction Reports Counterparty Report Market Side Report Data Field Name Content of Report Data Field Name Content of Report Reporting Firm Investment Firm A Reporting Firm Investment Firm A Trading Capacity P Trading Capacity P Buy/Sell Indicator S Buy/Sell Indicator B Quantity 1 Quantity 1 Counterparty 1 Investment Firm B Counterparty 1 Clearing House Counterparty 2 Blank Counterparty 2 Blank Venue of execution XOFF Venue of execution XLONThe Buy/Sell Indicator is from the perspective of the Investment Firm _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 793a. Investment Firm vs. Investment Firm (Agent) London Stock Investment Firm B Investment Firm A Exchange BuyTransaction Reports Counterparty Side Report Market Side Report Data Field Name Content of Report Data Field Name Content of Report Reporting Firm Investment Firm A Reporting Firm Investment Firm A Trading Capacity A Trading Capacity A Buy/Sell Indicator B Buy/Sell Indicator B Quantity 1 Quantity 1 Counterparty 1 Internal Counterparty 1 Clearing House Counterparty 2 Investment Firm B Counterparty 2 Internal Venue of execution XOFF Venue of execution XLONThe Buy/Sell Indicator is from the perspective of the Investment Firm B3b. Investment Firm vs. Investment Firm (Agent) London Stock Investment Firm B Investment Firm A Exchange BuyTransaction Reports Data Field Name Content of Report Reporting Firm Investment Firm A Trading Capacity A Buy/Sell Indicator B Quantity 1 Counterparty 1 Clearing House Counterparty 2 Investment Firm B Venue of execution XLONThe Buy/Sell Indicator is from the perspective of the Investment Firm B _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 804. Investment Firm matches 2 client orders Sell Buy Client A Investment Firm Client BTransaction Reports Client Side Report Client Side Report Data Field Name Content of Report Data Field Name Content of Report Reporting Firm Investment Firm Reporting Firm Investment Firm Trading Capacity P Trading Capacity P Buy/Sell Indicator S Buy/Sell Indicator B Quantity 1 Quantity 1 Counterparty 1 Client A Counterparty 1 Client B Counterparty 2 Blank Counterparty 2 Blank Venue of execution XOFF Venue of execution XOFFThe Buy/Sell Indicator is from the perspective of the Investment Firm6. Systematic Internalisers – MiFID Security only Sell Client A Investment FirmTransaction Reports Client Side Report Data Field Name Content of Report Reporting Firm Investment Firm Trading Capacity P Buy/Sell Indicator S Quantity 1 Counterparty 1 Client A Counterparty 2 Blank Venue of execution Systematic Internaliser BICThe Buy/Sell Indicator is from the perspective of the Investment Firm _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 817. On exchange execution of a client order Sell Buy London Stock Client A Investment Firm ExchangeTransaction Reports Client Side Report Market Side Report Data Field Name Content of Report Data Field Name Content of Report Reporting Firm Investment Firm Reporting Firm Investment Firm Trading Capacity P Trading Capacity P Buy/Sell Indicator S Buy/Sell Indicator B Quantity 1 Quantity 1 Counterparty 1 Client A Counterparty 1 Clearing House Counterparty 2 Blank Counterparty 2 Blank Venue of execution XOFF Venue of execution XLONThe Buy/Sell Indicator is from the perspective of the Investment Firm8. Firm executing a transaction vs. EEA Investment Firm Sell Buy London Stock Investment Firm B Investment Firm A ExchangeTransaction Reports Counterparty Report Market Side Report Data Field Name Content of Report Data Field Name Content of Report Reporting Firm Investment Firm A Reporting Firm Investment Firm A Trading Capacity P Trading Capacity P Buy/Sell Indicator S Buy/Sell Indicator B Quantity 1 Quantity 1 Counterparty 1 Investment Firm B Counterparty 1 Clearing House Counterparty 2 Blank Counterparty 2 Blank Venue of execution XOFF Venue of execution XLONThe Buy/Sell Indicator is from the perspective of the Investment Firm _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 829. Two investment firms executing a proprietary transaction Sell London Stock Sell Investment Firm A Investment Firm B ExchangeTransaction Reports Market Side Report Market Side Report Data Field Name Content of Report Data Field Name Content of Report Reporting Firm Investment Firm A Reporting Firm Investment Firm B Trading Capacity P Trading Capacity P Buy/Sell Indicator B Buy/Sell Indicator S Quantity 1 Quantity 1 Counterparty 1 Clearing House Counterparty 1 Clearing House Counterparty 2 Blank Counterparty 2 Blank Venue of execution XLON Venue of execution XLONThe Buy/Sell Indicator is from the perspective of the Investment Firm10. Client Order through a chain of Investment Firms Sell Buy Client A Investment Firm Broker Euronext Paris Sell BuyTransaction Reports Client Side Report Investment Firm Market side Report Broker Market Side ReportData Field Name Content of Report Data Field Name Content of Report Data Field Name Content of ReportReporting Firm Investment Firm Reporting Firm Investment Firm Reporting Firm BrokerTrading Capacity Principal Trading Capacity Principal Trading Capacity Principal CrossBuy/Sell Indicator S Buy/Sell Indicator B Buy/Sell Indicator SQuantity 1 Quantity 1 Quantity 1Counterparty 1 Client A Counterparty 1 Broker Counterparty 1 Clearing HouseCounterparty 2 Blank Counterparty 2 Blank Counterparty 2 Investment FirmVenue of execution XOFF Venue of execution XOFF Venue of execution XPARThe Buy/Sell Indicator is from the perspective of the Investment Firm or Executing Broker as appropriate _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 8311. Execution of client order through a UK branch Sell UK Branch of Buy London Stock Client A Investment Firm ExchangeTransaction Reports Client Side Report Market Side Report Data Field Name Content of Report Data Field Name Content of Report Reporting Firm UK Branch Reporting Firm UK Branch Investment Firm Investment Firm Trading Capacity P Trading Capacity P Buy/Sell Indicator S Buy/Sell Indicator B Quantity 1 Quantity 1 Counterparty 1 Client A Counterparty 1 Clearing House Counterparty 2 Blank Counterparty 2 Blank Venue of execution XOFF Venue of execution XLONThe Buy/Sell Indicator is from the perspective of the Investment Firm12. Investment Firm vs. Investor (Principal) Multiple Venues Buy CHI-X Sell Client A Investment Firm Buy BATS EuropeTransaction Reports Client Side Report Market Side ReportsData Field Name Content of Report Data Field Name Content of Report Data Field Name Content of ReportReporting Firm Investment Firm Reporting Firm Investment Firm Reporting Firm Investment FirmTrading Capacity P Trading Capacity P Trading Capacity PBuy/Sell Indicator S Buy/Sell Indicator B Buy/Sell Indicator BQuantity 2 Quantity 1 Quantity 1Counterparty 1 Client A Counterparty 1 Clearing House Counterparty 1 Clearing HouseCounterparty 2 Blank Counterparty 2 Blank Counterparty 2 BlankVenue of execution XOFF Venue of execution CHIX Venue of execution BATEThe Buy/Sell Indicator is from the perspective of the Investment Firm _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 8413. Grouping of orders Client A Sell Buy London Stock Investment Firm Exchange Sell Client BTransaction Reports Client Side Reports Market Side ReportData Field Name Content of Report Data Field Name Content of Report Data Field Name Content of ReportReporting Firm Investment Firm Reporting Firm Investment Firm Reporting Firm Investment FirmTrading Capacity P Trading Capacity P Trading Capacity PBuy/Sell Indicator S Buy/Sell Indicator S Buy/Sell Indicator BQuantity 1 Quantity 1 Quantity 2Counterparty 1 Client A Counterparty 1 Client B Counterparty 1 Clearing HouseCounterparty 2 Blank Counterparty 2 Blank Counterparty 2 BlankVenue of execution XOFF Venue of execution XOFF Venue of execution XLONThe Buy/Sell Indicator is from the perspective of the Investment Firm14. Direct Electronic Access Order via DEA provided by Investment Firm Sell Buy London Stock Client A Investment Firm ExchangeTransaction Reports Client Side Report Market Side Report Data Field Name Content of Report Data Field Name Content of Report Reporting Firm Investment Firm Reporting Firm Investment Firm Trading Capacity P Trading Capacity P Buy/Sell Indicator S Buy/Sell Indicator B Quantity 1 Quantity 1 Counterparty 1 Client A Counterparty 1 Clearing House Counterparty 2 Blank Counterparty 2 Blank Venue of execution XOFF Venue of execution XLONThe Buy/Sell Indicator is from the perspective of the Investment Firm _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 85 15. Give up to hedgeClient A enters into a derivative contract with Swap Broker, Investment Firm executes the underlying security transaction.Client A’s investment decision is to enter the derivative contract. Sell Buy London Stock Client A Investment Firm Exchange Sell Swap Broker Transaction Reports Swap Broker Report Investment Firm Report Data Field Name Content of Report Data Field Name Content of Report Reporting Firm Swap Broker Reporting Firm Investment Firm Trading Capacity P Trading Capacity P Buy/Sell Indicator B Buy/Sell Indicator B Quantity 1 Quantity 1 Counterparty 1 Client A Counterparty 1 Clearing House Counterparty 2 Blank Counterparty 2 Blank Venue of execution XXXX Venue of execution XLON The Buy/Sell Indicator is from the perspective of the Investment Firm or Swap Broker as appropriate 16. Smart Order Routing Smart Order Routing to identify best price Buy CHI-X Sell Client A Investment Firm Buy BATS Europe Transaction Reports Client Side Report Market Side Reports Data Field Name Content of Report Data Field Name Content of Report Data Field Name Content of Report Reporting Firm Investment Firm Reporting Firm Investment Firm Reporting Firm Investment Firm Trading Capacity P Trading Capacity P Trading Capacity P Buy/Sell Indicator S Buy/Sell Indicator B Buy/Sell Indicator B Quantity 2 Quantity 1 Quantity 1 Counterparty 1 Client A Counterparty 1 Clearing House Counterparty 1 Clearing House Counterparty 2 Blank Counterparty 2 Blank Counterparty 2 Blank Venue of execution XOFF Venue of execution CHIX Venue of execution BATE The Buy/Sell Indicator is from the perspective of the Investment Firm _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 8617. ETD Client Trade (Aii/ISIN) Sell Buy Client A Investment Firm Euronext LCH Clearnet Transaction Reports Data Field Name Content of Report Reporting Firm Investment Firm Trading Capacity Principal Cross Buy/Sell Indicator B Quantity 1 Counterparty 1 LCH Clearnet SA Counterparty 2 Client A Venue of execution XEUE The Buy/Sell Indicator is from the perspective of the Investment Firm18. ETD Client Trade – Order passed for executionExternal Client A buys 1 contract on a principal basis. Investment firm passes the order to an executingbroker for execution. No client details are passed to the Executing Broker Sell Buy Client A Investment Firm Executing Broker Euronext CCP Transaction Reports Data Field Name Content of Report Data Field Name Content of Report Reporting Firm Investment Firm Reporting Firm Executing Broker Trading Capacity Principal Cross Trading Capacity Principal Cross Buy/Sell Indicator B Buy/Sell Indicator B Quantity 1 Quantity 1 Counterparty 1 Executing Firm Counterparty 1 LCH Clearnet SA Counterparty 2 Client A Counterparty 2 Investment Firm Venue of execution XOFF Venue of execution XEUE The Buy/Sell Indicator is from the perspective of the Investment Firm or Executing Broker as appropriate _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 87 19. ETD Client Trade – Order passed for executionExternal Client A buys 1 contract on a principal basis. Investment firm passes the order to an executingbroker for execution. Client details are passed to the Executing Broker Sell Buy Client A Investment Firm Executing Broker Euronext CCP Transaction Reports As the client details have been passed to the Executing Broker then Data Field Name Content of Report the Investment Firm has no reporting obligation Reporting Firm Executing Broker Trading Capacity Principal Cross Buy/Sell Indicator B Quantity 1 Counterparty 1 LCH Clearnet SA Counterparty 2 Client A Venue of execution XEUE The Buy/Sell Indicator is from the perspective of the Executing Broker 20. ETD House Trade (Aii/ISIN)Investment Firm A buys 1 contract on a principal basis Buy Investment Firm Euronext LCH Clearnet Transaction Reports Data Field Name Content of Report Reporting Firm Investment Firm Trading Capacity Principal Buy/Sell Indicator B Quantity 1 Counterparty 1 LCH Clearnet SA Counterparty 2 Blank Venue of execution XEUE The Buy/Sell Indicator is from the perspective of the Investment Firm _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 88NUMBER 8The Next Phase in Islamic FinanceRavi MenonManaging Director, Monetary Authority of SingaporeOpening Address at the 3rd Annual World Islamic Banking Conference:Asia Summit, Grant Hyatt Singapore, 5 June 2012Dr Ahmad Mohamed Ali Al-Madani, President, Islamic DevelopmentBank, Your Excellencies, distinguished guests, ladies and gentlemen,good morning.And to all our foreign guests, a warm welcome to Singapore.An Increasingly Difficult ConjunctureWe are meeting here for the 3rd Annual World Islamic BankingConference Asia Summit, at a time of increasing stress in the globaleconomy and financial system.  The effects of monetary stimulus, which had helped to support the economy and prevent a full-blown financial crisis, are now levelling off in both the Eurozone and the US.  The labour market remains a significant drag on growth in the advanced economies. Unemployment has hit new highs in the Eurozone while employment and production numbers in the US are showing signs of weakness. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 89  The story of a two-speed global economy is coming under strain, with demand weakening across emerging Asia. The moderation in China’s economic growth appears to be somewhat sharper than expected. India is undergoing an even more pronounced and broad-based slowdown.But the key risk that has increased in recent months and poses the biggestthreat to global economic prospects is the situation in Europe.- Greece is preparing for a historic election that may well decide its future in the Eurozone.- Spain is experiencing severe strains in its banking system against a backdrop of a sharp reduction in GDP, high unemployment, and a deteriorating real estate sector.- Italy and Spain are facing higher sovereign borrowing costs that threaten fiscal sustainability.To be fair, Eurozone governments have been taking extraordinarymeasures to help stabilise the situation, reduce fiscal deficits, and restoregrowth.But they have reached a turning point where bolder, decisive actions willbe needed to reverse the tide.The next few weeks and months will be critical.Islamic Finance: Challenges to OvercomeLet me turn now to the subject of our conference.Islamic finance has shown remarkable resilience during the last five years– perhaps the most challenging economic environment in the post-warera.The industry has grown by an estimated 20% annually in the last fiveyears to reach US$1.3 trillion in total assets in 2011.Islamic banks have grown both in number and in scope. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 90But the sustained growth of Islamic finance is in no way guaranteed.For Islamic finance to continue thriving, the industry has to overcome afew key challenges.But in every challenge, there is also opportunity. Let me highlight threeof them this morning.Islamic Finance in the Era of DeleveragingThe clear and present danger to all financial activity, including Islamicfinance, is the risk of contagion from an escalation of the Eurozone crisis.Islamic finance is closely intertwined with underlying economic activityand will be affected by the impact of slower global growth.Contagion from the Eurozone has already curtailed economic growth andcapital inflows to many emerging economies where Islamic finance hastaken root.Potential spillovers from an escalation of the Eurozone crisis could loweroutput in the Middle East and North Africa region by about 3¼ percentrelative to baseline, the largest spillover effect for any region outsideEurope.But Islamic finance has a window of opportunity in the current climate ofdeleveraging in the global financial system.With its strict prohibition on excessive leverage, Islamic finance has beenspared the worst of the financial crisis.Islamic banks are well positioned to reach out to new customers who arein need of financing as many global institutions pull back on their lendingdue to the need to repair their balance sheets.Islamic finance should diversify into growth areas such as trade andinfrastructure financing, where demand is still strong, especially inemerging economies.With a focus on supporting real productive activities, Islamic finance isnaturally compatible with trade and infrastructure development. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 91Tapping these sectors also brings about greater diversification benefits,especially for Islamic institutions which have been hurt by theirsignificant lending exposure to the real estate sector.Islamic Finance and Global Regulatory ReformsA second factor that Islamic finance will have to contend with is theongoing global regulatory reforms.The scale and scope of these reforms are probably unmatched in recenthistory.Islamic financial institutions will have to devote considerable resources tomeet the new international standards.But there are certain inherent characteristics of Islamic finance that willstand it in good stead in the emerging regulatory environment.Take for example, banking, where the emphasis of regulatory reform is onmore capital and more liquidity.Islamic banks have consistently held higher levels of capitalisationvis-à-vis conventional banks, by some 2.5 percentage points on aggregate,according to research from the World Bank.Islamic banks also start off with a higher level of liquid assets comparedto their conventional counterparts.Islamic finance is also well placed to meet the increased“return-to-basics” investor demand.Following the global financial crisis, investors have become more averseto the unknown risks embedded in complex financial instruments.Islamic finance, with its stronger emphasis on transparency, pricecertainty and risk-sharing, can benefit from this renewed demand formore basic investments, from Muslim and non-Muslim investors alike.Integrating Islamic Finance with Global FinanceThe third, and perhaps most important, challenge that Islamic financemust overcome is its present fragmented state. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 92Islamic finance currently suffers from low economies of scale.The overall size of Islamic assets is still less than 1% of the globalfinancial system.Being smaller and relatively young, Islamic finance currently offers fewerproduct choices for consumers and less comprehensive risk managementoptions for institutions.Cross-border investment flows are also constrained by differinginterpretations of permissible transactions under Shariah principles.The isolated pools of Islamic liquidity in each market restrictopportunities for more efficient allocation of capital across consumers,industries, and jurisdictions.Islamic finance must become more integrated with the global financialsystem.The industry must expand beyond its traditional markets to include awider range of financial institutions, investors and consumers.This means Islamic finance must strike roots in the key internationalfinancial centres of the world.These centres can contribute to Islamic finance in several ways.First, market liquidity.The broad and deep investor pools in international financial centres offeran opportunity to channel non-traditional sources of funds into Islamicfinance.In Singapore, for instance, several local and foreign issuers havesuccessfully tapped the capital markets using Islamic instruments.The demand comes from not just Singapore but a diverse group ofinternational investors across Asia and Europe.Many of them are conventional investors, attracted by the credit qualityand yields.Second, capabilities in global financial markets. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 93Islamic finance should leverage on the capabilities and strengths offeredby conventional financial markets in international centres, to augment therange of Shariah-compliant products.Take for example the market for Real Estate Investment Trusts, orREITs. Singapore has grown over the past decade to become the largestREIT market in Asia outside of Japan.Building on this strength, players in Singapore have established theworld’s largest Shariah-compliant REIT, which draws in conventionaland Islamic investors around the world.Third, opportunities for interaction and collaboration.As Islamic finance gains prominence, conventional financial institutionsincreasingly want to be involved to tap these opportunities.Financial centres like Singapore serve as intersecting nodes whereIslamic financial institutions collaborate with their conventional partnersto jointly grow the industry.By applying the same regulatory framework to both conventional andIslamic financial institutions, Singapore aims to encourage financialinstitutions here to grow their suite of products and services for theIslamic finance industry.ConclusionLet me conclude. Islamic finance has come a long way.As it embarks on its next phase of growth, the industry must overcomethe challenges posed by slower growth and global deleveraging, and buildscale and reach critical mass.This requires financial institutions, regulators, and international standardsetting agencies to work closely together. Forums like these are idealplatforms. I wish you fruitful discussions. Thank you. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 94NUMBER 9Governor Daniel K. TarulloDodd-Frank Act ImplementationBefore the Committee on Banking, Housing, andUrban Affairs, U.S. Senate, Washington, D.C. June 6,2012Chairman Johnson, Ranking Member Shelby, andother members of the committee, thank you for theopportunity to testify on the Federal Reserves implementation of theDodd-Frank Wall Street Reform and Consumer Protection Act of 2010(Dodd-Frank Act).As we approach the second anniversary of the Dodd-Frank Act,implementation of the financial reforms enacted by the Congress remainsa formidable task.At the Federal Reserve, staff teams with a wide range of expertisecontinue to contribute to Dodd-Frank Act projects, many as part of jointrule-making efforts with other federal agencies.We have been working to put final Dodd-Frank Act rules in place and tonegotiate and implement international reforms compatible with variousDodd-Frank Act provisions; these include enhanced capital requirementsfor systemically important banks, liquidity requirements, resolutionmechanisms, and margining requirements for over-the-counterderivatives.As we continue rule implementation and the related internationalinitiatives, we are trying to provide as much clarity as possible to financialmarkets and the public about the post-crisis financial regulatorylandscape, and are also taking the time to consider comments andalternatives carefully.In addition, the Federal Reserve continues to work cooperatively withother supervisors to ensure that prudential supervision is conducted in amanner that supports these important reforms.As a final introductory point, it bears noting that both the Dodd-FrankAct reforms and the international regulatory reforms share an important _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 95feature--a strong focus on the largest, most complex, and mostinterconnected financial firms and the systemic risks posed by thosefirms.This effort reflects the provenance of both the Dodd-Frank Act andinternational reform initiatives, which were motivated largely by thefailure or near failure of a number of major financial firms and thesignificant public policy problems created by the market perception thatsuch firms are "too big to fail."As the Federal Reserve implements reforms, we have maintained this corefocus on the largest firms by proposing rules that try to mitigate thesystemic risks posed by those firms and minimize the burden on smallerentities, particularly community banks.Similarly, we seek to implement reforms in a manner that is faithful tostatutory requirements and that maximizes financial stability and othereconomic benefits at the least cost to credit availability and economicgrowth.This morning I will briefly describe the Federal Reserves progress onseveral important Dodd-Frank Act rules and recent reforms to theinternational bank regulatory framework.I will also describe briefly the Federal Reserves role in supervising andexamining the largest financial firms in cooperation with other federaland state supervisors.Enhanced Capital Standards While robust bank capital requirements alone cannot ensure the safetyand soundness of our financial system, they are central to good financialregulation precisely because capital is available to absorb all kinds ofpotential losses--unanticipated as well as anticipated.Indeed, the best way to safeguard against taxpayer-funded bailouts in thefuture is for our large financial institutions to have capital bufferscommensurate with their own risk profiles and the damage that would bedone to the financial system if such institutions were to fail. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 96Recent events serve to remind us that the presence of substantial amountsof high-quality capital is the best way to ensure that significant losses atindividual firms are borne by their shareholders, and not by depositors ortaxpayers.Ensuring the capital adequacy of financial firms requires bothimprovement of the traditional, firm-based approach to capital regulationand the creation of a more systemic, or macroprudential, component ofcapital regulation.With respect to improving the traditional approach to capital regulation,the Federal Reserves work has principally involved the development ofstronger regulatory capital standards in cooperation with othersupervisors in the Basel Committee on Banking Supervision.This work includes the so-called Basel 2.5 reforms that strengthened themarket-risk capital requirements of Basel II.This work also includes the Basel III reforms, which improve the qualityof regulatory capital, increase the quantity of required minimumregulatory capital, require banks to maintain a capital conservation bufferand, for the first time internationally, introduce a minimum leverage ratio.The Federal Reserve and other U.S. banking agencies are moving tofinalize regulations to implement Basel 2.5 in the United States and soonwill be proposing regulations to implement Basel III.These significant changes to the international regulatory capitalframework have been supplemented by an important element of theDodd-Frank Act known as the "Collins Amendment."The Collins Amendment provides a safeguard against declines inminimum capital requirements in the Basel II capital regime based onbank internal modeling.The Federal Reserve and other U.S. banking agencies issued final rules toimplement this provision in June 2011.Capital Surcharges for Systemically Important Financial FirmsThe recent financial crisis also made clear that the existing internationalregulatory capital framework was not sufficiently responsive to _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 97macroprudential concerns, such as the threat to financial stability posedby systemically important financial institutions.Accordingly, in Basel Committee deliberations, the Federal Reserveadvocated for capital surcharges on the worlds largest, mostinterconnected banking organizations based on their global systemicimportance.Last year, an international agreement was reached on a framework forsuch surcharges, to be implemented during the same 2016-2019 transitionperiod for the capital conservation buffers in Basel III.This initiative is consistent with the Federal Reserves obligation undersection 165 of the Dodd-Frank Act to impose more stringent capitalstandards on systemically important financial institutions, including therequirement that these additional standards be graduated based on thesystemic footprint of the institution.Both the Dodd-Frank Act provision and the Basel framework aremotivated by the fact that the failure of a systemically important firmwould have dramatically greater negative consequences on the financialsystem and the economy than the failure of other firms.Stricter capital requirements on systemically important firms should alsohelp offset any funding advantage these firms derive from any remainingperceived status as too-big-to-fail and provide an incentive for such firmsto reduce their systemic footprint.The Federal Reserves aim has been to fashion the enhanced capitalrequirements of section 165 and work toward an associated internationalframework in a simultaneous and congruent manner.Stress Testing and Capital Planning Recent improvements to the regulatory capital framework haveimportant supervisory complements in the Federal Reservesdevelopment of firm-specific stress testing and capital planningrequirements.These supervisory tools serve two related functions. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 98First, they make capital regulation more forward-looking by testingwhether firms would have enough capital to remain viable financialintermediaries if they sustained hypothetical losses in asset values andearnings in an adverse macroeconomic scenario.Second, they contribute to the macroprudential dimension of supervisionby enabling simultaneous examination of the risks faced by all largefinancial institutions in a hypothetical adverse economic scenario.The Dodd-Frank Act creates two forms of stress-testing requirements.These requirements mirror the Supervisory Capital Assessment Programmodel, a 2009 effort led by the Federal Reserve that helped restoreconfidence in the viability of the banking system during the financialcrisis.First, the act mandates that the Federal Reserve conduct annual stresstests on all bank holding companies with $50 billion or more in assets todetermine whether they have the capital needed to absorb losses inhypothetical baseline, adverse, and severely adverse economicconditions.Second, the act requires both these companies and certain otherregulated financial firms with assets between $10 billion and $50 billion toconduct internal stress tests.The Federal Reserve must publish a summary of results of the supervisorystress tests and issue regulations requiring firms to publish a summary ofthe company-run stress tests.Regular and rigorous stress testing provides regulators with knowledgethat can be applied to both microprudential and macroprudentialsupervision efforts.Disclosure of the general methodology and firm-specific results of ourstress testing has additional regulatory benefits.First, the release of certain details about assumptions, methods, andconclusions exposes the supervisory approach to greater external scrutinyand discussion. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 99Such discussions will almost surely help us improve our assumptions andmethodology over time.Second, because bank portfolios are difficult to value without a great dealof detailed information, the stress test results should be very useful toinvestors in and counterparties of the largest banking firms.Further, I believe the demands of supervisors for well-specified data andprojections from firms have improved risk management at these firms.The stress testing that the Federal Reserve has instituted during the pastfew years has become an important part of our horizontal,interdisciplinary approach to supervising the largest bank holdingcompanies.Firm-specific capital planning has also become an important supervisorytool.In November 2011, the Federal Reserve issued a new regulation requiringlarge banking organizations to submit an annual capital plan.This tool serves multiple purposes.First, it provides a regular, structured, and comparative way to promoteand assess the capacity of large bank holding companies to understandand manage their capital positions.Second, it provides supervisors with an opportunity to evaluate anycapital distribution plans against the backdrop of the firms overall capitalposition, a matter of considerable importance given the significantdistributions that some firms made in 2007 even as the financial crisisgathered momentum.Third, at least for the next few years, it will provide a regular assessmentof whether large bank holding companies will readily meet the Basel 2.5and Basel III capital requirements as they take effect in the United States.A stress test is a critical part of the annual capital plan review.But, as these three different purposes indicate, the capital plan review isabout more than using a stress test to determine whether a firms capital _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 100distribution plans are consistent with remaining a viable financialintermediary in adverse economic conditions.As indicated during our capital plan reviews in both 2011 and 2012, theFederal Reserve may object to a capital plan because of significantdeficiencies in a firms capital planning process, as well as because one ormore relevant capital ratios would fall below required levels under theassumptions of stress and planned capital distributions.Likewise, the stress test is relevant not only for its role in the capitalplanning process.As noted earlier, it also serves other important purposes, not least ofwhich is increased transparency of both bank holding company balancesheets and the supervisory process of the Federal Reserve.Enhanced Liquidity Standards As with capital, the financial crisis also brought attention to defects in theliquidity risk-management practices of large financial firms.As seen during the crisis, a financial firm--particularly one withsignificant amounts of short-term funding--can become illiquid before itbecomes insolvent, as creditors run in the face of uncertainty about thefirms viability.While higher levels and quality of capital can mitigate some of this risk, itwas widely agreed that quantitative liquidity requirements should bedeveloped.The Basel Committee generated two liquidity standards: one, a LiquidityCoverage Ratio (LCR) with a 30-day time horizon; the other, a Net StableFunding Ratio (NSFR) with a one-year time horizon.However, insofar as this was the first-ever effort to specify suchrequirements, the Governors and Heads of Supervision of the countriesrepresented on the Basel Committee determined that implementation ofboth frameworks should be delayed while they are subject to furtherexamination and possible revision.As is the case with enhanced capital standards for the largest bankingfirms, the Basel Committees liquidity initiatives are consistent with the _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 101Federal Reserves obligation under section 165 of the Dodd-Frank Act toimpose more stringent liquidity standards on the largest bank holdingcompanies as well as other systemically important nonbank financialfirms.The LCR has been actively reconsidered within the Basel Committee overthe last year or so. As this work proceeds, four types of changes appearparticularly ripe for consideration.First, the LCRs definition of high-quality liquid assets should bebroadened.In this regard, we support efforts to move away from the current creditrisk-based approach and toward a quantitative liquidity-based approach.Second, some of the assumptions embedded in the LCR about run ratesof liabilities and the liquidity of assets might be grounded more firmly inactual experience during the crisis, as the LCR may overstate in particularthe liquidity risks of commercial banking activities.Third, additional consideration needs to be given to the liquidity risksinherent in trading activities that rely upon large amounts of short-termwholesale funding.Fourth, the LCR could be better adapted to ensure usability of thehigh-quality liquid asset buffer in appropriate circumstances: forexample, by making credibly clear that ordinary minimum liquidity levelsneed not be maintained in the midst of a crisis.As currently constituted, the LCR may have the unintended effect ofexacerbating a period of stress by forcing liquidity hoarding.The Basel Committee will likely suggest a set of changes to the LCR laterthis year, with a goal of introducing the LCR in 2015.Work on the NSFR is on a considerably slower track; the current plan isfor implementation in 2018.Enhanced Prudential Standards for the Largest Financial Firms Sections 165 and 166 of the Dodd-Frank Act require the Federal Reserveto establish a broad set of enhanced prudential standards, both for bank _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 102holding companies with total consolidated assets of $50 billion or moreand for nonbank financial companies designated by the FinancialStability Oversight Council (Council).In addition to enhanced risk-based capital and liquidity requirements andstress testing, the required standards also include single-counterpartycredit limits, an early remediation regime, and risk-management andresolution-planning requirements.Sections 165 and 166 also require that these prudential standards becomemore stringent as the systemic footprint of a firm increases.In December, the Federal Reserve issued a package of proposed rules toimplement sections 165 and 166 of the Dodd-Frank Act.The Federal Reserves proposed rules would apply the same set ofenhanced prudential standards to covered companies that are bankholding companies and to covered companies that are nonbank financialcompanies designated by the Council.As we made clear in the proposal, however, the Federal Reserve expectsto tailor the application of the enhanced standards to different companiesindividually or by category, taking into consideration each companyscapital structure, riskiness, complexity, financial activities, size, and anyother risk-related factors that the Federal Reserve deems appropriate.The comment period for our enhanced prudential standards proposalclosed on April 30. Nearly 100 comment letters were received.The Federal Reserve is currently reviewing those comments carefully aswe work to develop final rules.The Volcker Rule Section 619 of the Dodd-Frank Act, commonly known as the "VolckerRule," generally prohibits banking entities from engaging in proprietarytrading or acquiring an ownership interest in, sponsoring, or havingcertain relationships with a hedge fund or private equity fund.In October, the Federal Reserve joined the Office of the Comptroller ofthe Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 103and the Securities and Exchange Commission in seeking publiccomment on a proposal to implement the Volcker Rule.The Commodities Futures Trading Commission issued its substantiallysimilar proposal for comment shortly thereafter.Because of the importance and complexity of the issues raised by thestatutory provisions that make up the Volcker Rule, the Federal Reserveand other agencies provided the public with a 120-day opportunity tosubmit comments.The comment period is now closed, and nearly 19,000 public commentswere received.The agencies are now working together to review and consider thesecomments and put final implementing rules in place as soon aspracticable.In April, after consultation with the other agencies, the Federal Reserveissued guidance on a Volcker Rule conformance period that was intendedto help limit any confusion about when banking entities will need tocomply with the final rules once issued.The Federal Reserves statement clarified that a banking entity has thefull two-year period provided by the statute (i.e., until July 21, 2014),unless that period is extended by the Board, to fully conform its activitiesand investments to the requirements of the Volcker Rule, including anyfinal implementing rules adopted by the agencies.Prudential Supervision of Large Financial FirmsIn the wake of the Dodd-Frank Act, the prudential supervision of thelargest, most complex financial firms remains a cooperative effort.As before, the law mandates that a variety of federal and state supervisorsexecute particular supervisory and examination responsibilities forcertain parts of a firm.This allocation of supervisory oversight among different agencies reflects,among other factors, the historical development of various types offinancial intermediaries in the United States and a series of legislativedecisions about regulatory and supervisory structure. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 104As the regulator and supervisor of bank holding companies, the FederalReserves role in this statutory arrangement is typically that ofconsolidated regulator and supervisor of the parent holding company.Accordingly, our supervisory program for such firms generally takes abroad view of the activities, risks, and management of the consolidatedfirm, with a particular focus on the capital adequacy, governance, andrisk-management practices and competencies of the firm as a whole.Many of the principal business activities of the largest financial firms areconducted through the functionally regulated subsidiaries of those firms,such as insured depository institutions, broker-dealers, and insurancecompanies.As required by section 5 of the Bank Holding Company Act, the FederalReserve generally relies to the fullest extent possible on the examinationand supervision of those subsidiaries by the functional regulators.Together, the Federal Reserve and other functional regulators work todischarge the supervisory and examination responsibility given to eachagency for particular parts of a large financial firm in a way thatmaximizes the expertise and resources of each agency and best ensuresthe safety and soundness of the consolidated firm and each of itsconstituent parts.Just as the financial crisis revealed the need for change in the prudentialstandards applicable to financial firms and activities, so too did it makeclear that important changes in supervisory practices were needed toimprove both the microprudential and macroprudential oversight ofbanks and bank holding companies.To that end, even before passage of the Dodd-Frank Act, the FederalReserve began to reorient its supervisory structure and strengthen itssupervision of the largest, most complex financial firms.The most important change has been creation of the Large InstitutionSupervision Coordinating Committee (LISCC).The LISCC is founded on several principles: that large institutionsupervision should be more centralized; that it should conduct regular, _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 105simultaneous, horizontal (cross-firm) supervisory exercises; and that itshould be more interdisciplinary than it has been in the past.Thus, the LISCC includes senior Federal Reserve staff from research,legal and other divisions at the Board, from the markets and paymentssystems groups at the Federal Reserve Bank of New York, and seniorbank supervisors from the Board and relevant reserve banks.Relative to previous practices, this approach to supervision relies more onquantitative methods for evaluating the performance and vulnerabilitiesof firms.To date, the LISCC has developed and administered various horizontalsupervisory exercises, notably the capital stress tests and the relatedcomprehensive capital reviews of the nations largest bank holdingcompanies, and is now extending its activities to coordinate othersupervisory processes more effectively.It also has focused its attention on potential implications for financialstability in the United States from stresses arising in Europe.Review of JPMorgan Chase & Co. Trading Loss In response to the significant trading losses that were recentlyannounced by JPMorgan Chase & Co. (JPMorgan) as a result of tradingoperations at the London branch of its national bank, the FederalReserve--in its capacity as consolidated supervisor of the bank holdingcompany--is working with the OCC, the regulator of the national bank, toreview the firms response and remedial actions.In particular, the Federal Reserve has been assisting in the oversight ofJPMorgans efforts to manage and de-risk the portfolio in question.As this process proceeds, we anticipate also working with the OCC andFDIC to identify the changes in risk measurement, management andgovernance that will be necessary to improve risk-control practicessurrounding the firms trading activities and to address trading strategiesthat led to these losses. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 106In addition, the Federal Reserve has been looking at other parts of theholding company to determine if governance, risk management andcontrol weaknesses--similar to those exposed by this incident--arepresent elsewhere.While we have, to date, found no evidence that they are, this review is notyet complete.ConclusionThe recent financial crisis disrupted the financial system and the broadereconomy on a scale and scope not seen since the 1930s.Some of the worlds largest financial firms collapsed or requiredgovernment assistance to stay afloat, sending shock waves through thehighly interconnected global financial system.Asset prices fell sharply, flows of credit to American families andbusinesses slowed dramatically, and millions of people lost their jobs.Extraordinary actions by governments around the world helped toprovide stability, but more than four years after the onset of the crisis, therecovery is far from complete.It is critical that we complete the implementation of capital and otherprudential measures to prevent another crisis and protect taxpayers fromhaving again to recapitalize financial firms.Thank you very much for your attention. I would be pleased to answerany questions you may have. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 107NUMBER 10Mortgage financing: FINMA recognises new minimumstandardsPress releaseThe Swiss Financial Market Supervisory Authority FINMA has approvedthe new minimum re-quirements for mortgage financing drawn up by theSwiss Bankers Association (SBA) as a minimum regulatory standard.The new self-regulatory regime, which enters into force from 1 July 2012,for the first time lays down minimum requirements concerningdown-payments by borrowers and introduces compulsory amortisation.The recognition comes in the context of the measures presented today bythe Federal Council concerning the implementation of Basel III, “too bigto fail” and reduction of the risks in the mortgage market, which FINMAexpressly welcomes.FINMA has for a long time been pointing out the risks that could buildup as a result of rapid growth in mortgages for residential property.There is no sign of a weakening in the strong demand for mortgagefinancing, not least due to the exceptionally low level of interest rates.In the course of its supervisory activities and direct inspections, FINMAhas also noted that many banks are stretching their own lending criteriato the limit, as regards both financial sustainability for the borrower andthe loan-to-value ratio applied to the property, and are also makingincreased use of exceptions to policy.This is creating a new segment of borrowers who would not be able toacquire residential property under different market conditions. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 108In particular, there is a risk that rising interest rates would leave suchborrowers unable to service their loans, ultimately raising the possibilityof defaults and falling property prices.When a real-estate bubble bursts, the implications for a country’sfinancial stability can be extremely serious.Guidelines on minimum down-payments and amortisationThe SBA guidelines set out basic requirements concerning minimumdown-payments by borrowers and contain clear rules on amortisation thatmust be taken into account during financial sustainability analyses.Given that this is a self-regulatory regime imposed by the banksthemselves, FINMA ex-pects it to be widely accepted by them andimplemented swiftly and conscientiously.Minimum down-payments from own funds:In future, borrowers will be required to supply at least 10 per cent of thelending value of the property from their own funds, which may not beobtained by pledging or early withdrawal of Pillar 2 assets.This means that the purchase of a property by a mort-gagor using adown-payment derived exclusively from pension fund assets will not meetthe minimum standards.The new guidelines require borrowers to be on a sounder financialfooting.Equally, they reduce the danger that they will put at risk their retirementcapital and, with it, their pensions.Amortisation:Under the new rules, mortgages must in all cases be paid down to twothirds of the lending value within a maximum of 20 years.Waiving amortisation in the expectation of rising property prices wouldnot, therefore, meet the minimum standards. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 109The amortisation rules require the debt burden to be steadily reduced,which will have a positive effect on long-term financial sustainability.Revised Capital Adequacy Ordinance contains reference to thenew minimum standardsIn the event that a mortgage granted after 1 July breaches these newminimum standards, banks will be required to significantly increase thecapital involved to cover it.This is stipulated in the Federal Council’s revised Capital AdequacyOrdinance, which also contains a further instrument for reducingmortgage risks.If a bank grants a mortgage amounting to more than 80 per cent of thelending value, it will be required to back it with a higher level of capital.This measure comes into force on 1 January 2013.As a further measure, from 1 July 2012 the Federal Council will have at itsdisposal a new capital buffer for all banks that can be selectively andtemporarily activated for specific sectors, such as the mortgage business.Although the amortisation requirement has a direct impact on financialsustainability calculations, there are still no binding minimum standardsin this central area of residential property financing.However, a realistic assessment of the medium-term financial situation isinvariably in the interest of borrowers too, as it ensures that their propertyremains affordable for them even if interest rates rise or their own incomefalls.FINMA views the measures as positive stepsThe package of measures for the mortgage sector presented by theFederal Council today, and the binding SBA guidelines issued in thiscontext, are steps towards counteracting the increasing risks in themortgage market.FINMA welcomes these measures and their rapid implementation. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 110In the medium term, the measures will improve the quality of the banks’mortgage portfolios or, alternatively, lead to higher capital requirementsgeared to the risks involved.However, the guidelines will have no direct effect on existing loanagreements and the risks associated with them. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 111Certified Risk and Compliance Management Professional(CRCMP) Distance learning and online certification program.Companies like IBM, Accenture etc.consider the CRCMP a preferredcertificate. You may find more if yousearch (CRCMP preferred certificate)using any search engine.The all-inclusive cost is $297.What is included in the price:A. The official presentations we use in our instructor-led classes(3285 slides)The 2309 slides are needed for the exam, as all the questions are based onthese slides. The remaining 976 slides are for reference.You can find the course synopsis at:www.risk-compliance-association.com/Certified_Risk_Compliance_Training.htmB. Up to 3 Online ExamsYou have to pass one exam.If you fail, you must study the official presentations and try again, but youdo not need to spend money. Up to 3 exams are included in the price.To learn more you may visit:www.risk-compliance-association.com/Questions_About_The_Certification_And_The_Exams_1.pdfwww.risk-compliance-association.com/CRCMP_Certification_Steps_1.pdf _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 112C. Personalized Certificate printed in full color.Processing, printing, packing and posting to your office or home.D. The Dodd Frank Act and the newRisk Management Standards (976slides, included in the 3285 slides)The US Dodd-Frank Wall Street Reformand Consumer Protection Act is the mostsignificant piece of legislation concerningthe financial services industry in about 80years.What does it mean for risk andcompliance management professionals? Itmeans new challenges, new jobs, newcareers, and new opportunities.The bill establishes new risk management and corporate governanceprinciples, sets up an early warning system to protect the economy fromfuture threats, and brings more transparency and accountability.It also amends important sections of the Sarbanes Oxley Act. Forexample, it significantly expands whistleblower protections under theSarbanes Oxley Act and creates additional anti-retaliation requirements.You will find more information at:www.risk-compliance-association.com/Distance_Learning_and_Certification.htm _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 113Visit our Risk and Compliance Management Speakers BureauThe International Association of Risk and Compliance Professionals(IARCP) has established the Speakers Bureau for firms and organizationsthat want to access the expertise of Certified Risk and ComplianceManagement Professionals (CRCPMs) and Certified InformationSystems Risk and Compliance Professionals (CISRCPs).The IARCP will be the liaison between our certified professionals andthese organizations, at no cost. We strongly believe that this can be agreat opportunity for both, our certified professionals and the organizers.To learn more:www.risk-compliance-association.com/Risk_Management_Compliance_Speakers_Bureau.html _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 114 _____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com