International Association of Risk and Compliance                       Professionals (IARCP)      1200 G Street NW Suite 8...
NUMBER 1A letter toWhat is the letter about?      _____________________________________________________________     Intern...
The point?“We are therefore concerned about how Title VII of the Dodd-Frank Actwill apply to the official operations of th...
definitions of "swap" and "security-based swap" contained in theDodd-Frank Ad.We set out attached some considerations on t...
Please note that in certain occasions central banks market activities, ifsubject to public disclosure and external supervi...
As you of course know, Congress has vested the Commissions with therulemaking authority to further define certain terms, i...
NUMBER 2Cayman Islands – An OverviewThe three Cayman Islands, Grand Cayman, Cayman Brac and LittleCayman, are located in t...
Little Cayman lies five miles west of Cayman Brac and is approximatelyten miles long with an average width of just over a ...
Christopher Columbus first sighted Cayman Brac and Little Cayman on10 May 1503. On his fourth trip to the New World, Colum...
On 8 February 1794, an event occurred which grew into one of Caymansfavourite legends -- The Wreck of the Ten Sail.A convo...
The Governor has responsibility for the police, civil service, defence andexternal affairs but handed over the presidency ...
_____________________________________________________________International Association of Risk and Compliance Professional...
The Cayman Islands is recognised as one of the top 10 internationalfinancial centres in the world, with over 40 of the top...
However, these foreign banks including the operations of the CaymanIslands branches must maintain the minimum capital adeq...
CIMA also proposes to communicate directly with those banks that arenot members of CIBA or those banks that have principal...
The objective of the reforms is to improve the banking sector’s ability toabsorb shocks arising from financial and economi...
_____________________________________________________________International Association of Risk and Compliance Professional...
NUMBER 3SPEECHES & TESTIMONY"Please Listen Carefully, Some Menu Options Have Changed"Speech of Commissioner Bart Chilton, ...
due to two culprits to the crisis.One culprit: regulators. People like me. You see, in 1999, Congress andthe President der...
If all those mind-altering financial products weren’t enough to fuel-injectthe festivities, as a special bonus to the trad...
For those that say Dodd-Frank should be repealed, I guess I don’tunderstand why they’d want to go back to the set of circu...
One of the refrains we keep hearing is that we need to identify what “T”is.In other words, we’ve said that we will give fo...
When is the rule expected to be completed? What might be theimplementation timetable? It seems like a fairly modest thing ...
The CFTC is not a price-setting agency. That isn’t our job. However, wedo have a mission to ensure that the price discover...
They are now expecting to spend at least $1 billion more in 2012 thaninitially budgeted. Do they believe speculators are h...
When I say this, I’m talking generally. I realize that all these traders aren’tpassive all the time, but we do see a patte...
markets had increased by 64 percent. In the metals and agriculturalcomplexes, it had increased by roughly 20 percent.Is th...
or F-150, the total is $10.41 and $14.56, respectively. I don’t know howoften you fill up, but over the course of a year w...
This is an issue that has troubled me for a while, and I’m going to use thisforum as an occasion to talk a little about so...
ultimate goal: a “more perfect regulation.” Like the framers of ourConstitution, regulators aspire to reach objectives tha...
high unemployment rates. How do we measure those “costs?”It’s time to put some sense (and cents) back into CBAs, and to cr...
to MF Global, I can’t express what a sorry situation this has caused formany MF Global customers. I have a one paragraph l...
supposed to be. Rather than taking a firm’s word at face value that themoney is where it is supposed to be, we need to do ...
It is all moving and changing fast, fast, fast.We can’t do the job we need to do as regulators without the serious andthou...
NUMBER 4Remarks before the Institute of International Bankers, AnnualWashington ConferenceCommissioner Jill E. Sommers, Ma...
Given this knowledge gap, it makes sense to start with a broader, moreflexible approach, and become narrower and more rest...
In writing these rules we are relying on stale data, and far too little of it.This is just one instance where we have prop...
To that end, I expect the Commission to issue proposed guidance on thisissue in the coming weeks; however, it is my unders...
VolckerI am also going to guess that the other important issue on your mind isthe much discussed “Volcker rule”.The CFTC w...
officials, such as Bank of Canada Governor Mark Carney, EU FinancialServices Commissioner Michel Barnier, and FSA chairman...
At a minimum, we could clarify that use of US financial infrastructure(e.g. clearing, settlement, and trade facilitation) ...
financial system, such as OTC derivatives, and to improve the oversightand transparency of commodity derivative markets.MA...
Lastly, on the international front, I would like to report that the BaselCommittee on Banking Supervision and IOSCO has es...
The JFSA expects the implementing cabinet ordinance and othermeasures to be finalized by November 2012.Hong KongThe Hong K...
The rules prohibit a DCO from setting a minimum adjusted net capitalrequirement of more than $50million for any person tha...
will be consumed over the next few years using our valuable resources torewrite rules that we knew or should have known wo...
NUMBER 57 March 2012Technical features of the Legal Entity Identifier (LEI)The FSB LEI Expert Group has made significant p...
At the same time, this early guidance is subject to final confirmation asthe Expert Group completes its work.First, the Ex...
This report will provide concrete recommendations on the protection ofpublic interests and structures sought in the LEI sy...
NUMBER 6Interesting developmentsMario Draghi, President of the ECB,Vítor Constâncio, Vice-President of the ECB,Frankfurt a...
Over recent months, a wide range of additional non-standard monetarypolicy measures has been implemented by the Eurosystem...
adjustment in the financial and non-financial sectors, are expected tocontinue to dampen the underlying growth momentum.Th...
However, downside risks continue to exist owing to weaker thanexpected developments in economic activity.The monetary anal...
and complying with all commitments remains essential. In this respect,the 2012 European Semester should be used to enforce...
Certainly, we see many signs of a return of confidence in the euro.So-called real money investors have, to some extent, co...
As I have had many opportunities to say, I really cherish the culture andthe tradition of the Bundesbank, of maintaining p...
us what the results are and whether you are actually intending to publishthat survey?Draghi: In answer to your first quest...
Question: On the topic of growth, you mentioned that you expect agradual recovery over the course of this year. Can you gi...
Top 10 risk and compliance management related news stories and world events that (for better or for worse) shaped the week...
Top 10 risk and compliance management related news stories and world events that (for better or for worse) shaped the week...
Top 10 risk and compliance management related news stories and world events that (for better or for worse) shaped the week...
Top 10 risk and compliance management related news stories and world events that (for better or for worse) shaped the week...
Top 10 risk and compliance management related news stories and world events that (for better or for worse) shaped the week...
Top 10 risk and compliance management related news stories and world events that (for better or for worse) shaped the week...
Top 10 risk and compliance management related news stories and world events that (for better or for worse) shaped the week...
Top 10 risk and compliance management related news stories and world events that (for better or for worse) shaped the week...
Top 10 risk and compliance management related news stories and world events that (for better or for worse) shaped the week...
Top 10 risk and compliance management related news stories and world events that (for better or for worse) shaped the week...
Top 10 risk and compliance management related news stories and world events that (for better or for worse) shaped the week...
Top 10 risk and compliance management related news stories and world events that (for better or for worse) shaped the week...
Top 10 risk and compliance management related news stories and world events that (for better or for worse) shaped the week...
Top 10 risk and compliance management related news stories and world events that (for better or for worse) shaped the week...
Top 10 risk and compliance management related news stories and world events that (for better or for worse) shaped the week...
Top 10 risk and compliance management related news stories and world events that (for better or for worse) shaped the week...
Top 10 risk and compliance management related news stories and world events that (for better or for worse) shaped the week...
Top 10 risk and compliance management related news stories and world events that (for better or for worse) shaped the week...
Top 10 risk and compliance management related news stories and world events that (for better or for worse) shaped the week...
Top 10 risk and compliance management related news stories and world events that (for better or for worse) shaped the week...
Top 10 risk and compliance management related news stories and world events that (for better or for worse) shaped the week...
Top 10 risk and compliance management related news stories and world events that (for better or for worse) shaped the week...
Top 10 risk and compliance management related news stories and world events that (for better or for worse) shaped the week...
Top 10 risk and compliance management related news stories and world events that (for better or for worse) shaped the week...
Top 10 risk and compliance management related news stories and world events that (for better or for worse) shaped the week...
Top 10 risk and compliance management related news stories and world events that (for better or for worse) shaped the week...
Top 10 risk and compliance management related news stories and world events that (for better or for worse) shaped the week...
Top 10 risk and compliance management related news stories and world events that (for better or for worse) shaped the week...
Top 10 risk and compliance management related news stories and world events that (for better or for worse) shaped the week...
Top 10 risk and compliance management related news stories and world events that (for better or for worse) shaped the week...
Top 10 risk and compliance management related news stories and world events that (for better or for worse) shaped the week...
Top 10 risk and compliance management related news stories and world events that (for better or for worse) shaped the week...
Top 10 risk and compliance management related news stories and world events that (for better or for worse) shaped the week...
Top 10 risk and compliance management related news stories and world events that (for better or for worse) shaped the week...
Top 10 risk and compliance management related news stories and world events that (for better or for worse) shaped the week...
Top 10 risk and compliance management related news stories and world events that (for better or for worse) shaped the week...
Top 10 risk and compliance management related news stories and world events that (for better or for worse) shaped the week...
Top 10 risk and compliance management related news stories and world events that (for better or for worse) shaped the week...
Top 10 risk and compliance management related news stories and world events that (for better or for worse) shaped the week...
Top 10 risk and compliance management related news stories and world events that (for better or for worse) shaped the week...
Top 10 risk and compliance management related news stories and world events that (for better or for worse) shaped the week...
Top 10 risk and compliance management related news stories and world events that (for better or for worse) shaped the week...
Top 10 risk and compliance management related news stories and world events that (for better or for worse) shaped the week...
Top 10 risk and compliance management related news stories and world events that (for better or for worse) shaped the week...
Top 10 risk and compliance management related news stories and world events that (for better or for worse) shaped the week...
Top 10 risk and compliance management related news stories and world events that (for better or for worse) shaped the week...
Top 10 risk and compliance management related news stories and world events that (for better or for worse) shaped the week...
Top 10 risk and compliance management related news stories and world events that (for better or for worse) shaped the week...
Top 10 risk and compliance management related news stories and world events that (for better or for worse) shaped the week...
Top 10 risk and compliance management related news stories and world events that (for better or for worse) shaped the week...
Top 10 risk and compliance management related news stories and world events that (for better or for worse) shaped the week...
Top 10 risk and compliance management related news stories and world events that (for better or for worse) shaped the week...
Top 10 risk and compliance management related news stories and world events that (for better or for worse) shaped the week...
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Top 10 risk and compliance management related news stories and world events that (for better or for worse) shaped the week's agenda

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Monday, March 12, 2012

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Top 10 risk and compliance management related news stories and world events that (for better or for worse) shaped the week's agenda

  1. 1. International Association of Risk and Compliance Professionals (IARCP) 1200 G Street NW Suite 800 Washington, DC 20005-6705 USA Tel: 202-449-9750 www.risk-compliance-association.com Monday, March 12, 2012 - Top 10 risk and compliance management related news stories and world events that (forbetter or for worse) shaped the weeks agenda, and what is next George Lekatis President of the IARCPDear Member,Do you have “definitional authority? The European Central Bank (ECB) tries hard tounderstand the Dodd Frank Act (so do we).In Number 1 we have an interesting “we wouldtherefore appreciate some clarification from you”letter from the European Central Bank to the USCommodity Futures Trading Commission.The part of the letter I like: “We therefore respectfully ask theCommissions to exercise their definitional authority…” In Number 2 we have thedevelopments in theCayman Islands –environment, Basel ii,Basel iii …Welcome to the Top 10 list.Enjoy! _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  2. 2. NUMBER 1A letter toWhat is the letter about? _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  3. 3. The point?“We are therefore concerned about how Title VII of the Dodd-Frank Actwill apply to the official operations of the ECB and the Eurosystem, andwe would therefore appreciate some clarification from you in this regard.To the extent that your agency is preparing implementation rules to theDodd-Frank Act, we would with all due respect seek from you dueconsideration to the above arguments, as well as to international comity,so that the case of International Organizations (such as the ECB) and offoreign central banks are addressed in the final regulations in a mannerfitting with their official status and tasks.In that direction, please note that the ECBs -and the Eurosystems-mandate requires them to perform public tasks that are broadlycomparable to those attributed in the United States to the Federal ReserveSystem, which necessarily require the ECB to conduct operations in thefinancial markets, including OTC derivatives.These are activities that would, if conducted by a private sector entity,necessarily fall within the ambit of Title VII of the Dodd-Frank Act.In contrast, we note that if those same transactions were entered into bythe Federal Reserve System, they would be expressly excluded from the _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  4. 4. definitions of "swap" and "security-based swap" contained in theDodd-Frank Ad.We set out attached some considerations on the ECB and its mandate,and its status under U.S. Law.The point on which we seek regulatory clarification is whether officialtransactions such as those entered into by the ECB and by the nationalcentral banks of the Eurosystem would be captured by the definitionsof "swap" and "security-based swap" contained in the Dodd-Frank Act.Clearly, our practice to date has been to transact with private sectorentities on market standard documentation for swaps, but given that wehave so far and would in the future only be entering into such transactionspurely in execution of our public mandate - and it is to be noted that weare not authorised to enter into such transactions on any other basis - wesuggest that the transactions that we enter into should not be interpretedand legally defined in the same way as otherwise similar transactionsentered into by private commercial entities:• First, the considerations involved in the management of foreign reservesare not amenable to control and supervision in the same way asprivate-sector profit-maximising transactions.Indeed, as an institution of the European Union, we are not subject tosupervision or licensing requirements and suggest that it would beinappropriate to be subjected to supervisory requirements by a non-EUauthority in respect of a part of our activities.In particular, we are concerned that external control of our activitiesmight not be sufficiently sensitive to the practice of managing foreignreserves and could thus frustrate the ECBs performance of the mandatethat it has been given by the TFEU.• Second, performance of our mandate can require us to act confidentiallyin certain circumstances. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  5. 5. Please note that in certain occasions central banks market activities, ifsubject to public disclosure and external supervision, may causesignalling effects to other market players and finally hinder the policyobjectives of such actions (the CCP itself would also have a privilegedview on the whole set of cleared central bank transactions).This is probably the reason behind the exemption given by Dodd-FrankAct to the Federal Reserve System (a similar exemption to the ECB andother central banks and comparable international institutions is foreseenin the proposed draft EU Regulation on Central Clearing of OTCderivatives in course of definition in Europe).Certain of the requirements of the Dodd Frank Act, if applicable to theECB, could compromise the ECBs ability to take such actions.In this regard, it is noted that the ECB has worked closely with theFederal Reserve System in responding to the financial crisis, and shouldnot be compromised by implementation of the Dodd-Frank Act in itsability to respond similarly in the future.• Third, the specificity of role and functions of central banks make theiruse of CCPs, and other private financial market infrastructures for thatmatter, a very sensitive issue, particularly in times of crisis.For instance, if a central bank were to become a clearing member of aCCP it would need to contribute to the CCP default procedures.In case of crisis, this could force a central bank to eventually absorb otherparticipants and possible the CCPs losses, thereby raising sensitivemoral hazard issues.• Fourth, this may introduce inconsistency between EU and USlegislation concerning the central bank obligations to use designatedCCPsThe abovementioned arguments apply mutatis mutandis to the nationalcentral banks of the Eurosystem. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  6. 6. As you of course know, Congress has vested the Commissions with therulemaking authority to further define certain terms, including "swap"and "security-based swap, and such joint rulemaking on the definition ofthe terms "swap" and "security-based swap" is to be done inconsultation with the Board of Governors.In light of the above, we therefore respectfully ask the Commissions toexercise their definitional authority under the Dodd-Frank Act to definethe terms "swap" and "security-based swap", as used in the CommodityExchange Act and Securities Exchange Act, respectively, to exclude anyagreement, contract or transaction a counterpatty of which is a PublicInternational Organisation such as the ECB, or indeed a national centralbank of a market economy.We stand ready to elaborate on any of the matters raised above, includingwith respect to the size and risk management of our US dollar interest ratederivatives portfolio activities to the extent that this would be helpful toyou.” _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  7. 7. NUMBER 2Cayman Islands – An OverviewThe three Cayman Islands, Grand Cayman, Cayman Brac and LittleCayman, are located in the western Caribbean about 150 miles south ofCuba, 460 miles south of Miami, Florida, and 167 miles northwest ofJamaica.George Town, thecapital, is on thewestern shore ofGrand Cayman.Grand Cayman, thelargest of the threeislands, has an area of about 76 square miles and is approximately 22miles long with an average width of four miles.Its most striking feature is the shallow, reef-protected lagoon, the NorthSound, which has an area of about 35 square miles. The island islow-lying, with the highest point about 60 feet above sea level.Cayman Brac lies about 89 miles northeast of Grand Cayman.It is about 12 miles long with an average width of 1.25 miles and has anarea of about 15 squaremiles.Its terrain is the mostspectacular of the threeislands.The Bluff, a massivecentral limestoneoutcrop, rises steadilyalong the length of the island up to 140 ft. above the sea at the eastern end. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  8. 8. Little Cayman lies five miles west of Cayman Brac and is approximatelyten miles long with an average width of just over a mile.It has an area of about 11 square miles. The island is low-lying with a fewareas on the north shore rising to 40 ft. above sea level.There are no rivers onany of the islands. Thecoasts are largelyprotected by offshorereefs and in some placesby a mangrove fringethat sometimes extendsinto inland swamps.Geographically, the Cayman Islands is part of the Cayman Ridge, whichextends westward from Cuba. The Cayman Trench, the deepest part ofthe Caribbean at a depth of over four miles, separates the three smallislands from Jamaica.The islands are also located on the plate boundary between the NorthAmerican and Caribbean tectonic plates.The tectonic plates in Cayman’s region are in continuous lateralmovement against each other.This movement, with the Caribbean plate travelling in an eastwarddirection and the North American plate moving west, limits the size ofearthquakes and there has never been an event recorded of more thanmagnitude 7.It is not unusual for minor tremors to be recorded. Many residents don’teven notice them. However in December 2004 a quake of 6.8 magnituderocked Grand Cayman and everyone noticed. The earthquake, short induration, opened some small sinkholes but otherwise didn’t cause anydamage. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  9. 9. Christopher Columbus first sighted Cayman Brac and Little Cayman on10 May 1503. On his fourth trip to the New World, Columbus was en routeto Hispaniola when his ship was thrust westward toward "two very smalland low islands, full of tortoises, as was all the sea all about, insomuchthat they looked like little rocks, for which reason these islands werecalled Las Tortugas."A 1523 map show all three Islands with the name Lagartos, meaningalligators or large lizards, but by 1530 the name Caymanas was being used.It is derived from the Carib Indian word for the marine crocodile, which isnow known to have lived in the Islands.Sir Francis Drake, on his 1585-86 voyage, reported seeing "great serpentscalled Caymanas, like large lizards, which are edible."It was the Islands ample supply of turtle, however, that made them apopular calling place for ships sailing the Caribbean and in need of meatfor their crews. This began a trend that eventually denuded local waters ofthe turtle, compelling local turtle fishermen to go further afield to Cubaand the Miskito Cays in search of their catch.The first recorded settlements were located on Little Cayman andCayman Brac during 1661-71.Because of the depredations of Spanish privateers, the governor ofJamaica called the settlers back to Jamaica, though by this time Spain hadrecognised British possession of the Islands in the 1670 Treaty of Madrid.Often in breach of the treaty, British privateers roamed the area takingtheir prizes, probably using the Cayman Islands to replenish stocks offood and water and careen their vessels.The first royal grant of land in Grand Cayman was made by the governorof Jamaica in 1734.It covered 3,000 acres in the area between Prospect and North Sound.Others followed up to 1742, developing an existing settlement, whichincluded the use of slaves. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  10. 10. On 8 February 1794, an event occurred which grew into one of Caymansfavourite legends -- The Wreck of the Ten Sail.A convoy of more than 58 merchantmen sailing from Jamaica to Englandfound itself dangerously close to the reef on the east end of GrandCayman.Ten of the ships, including HMS Convert, the navy vessel providingprotection, foundered on the reef. With the aid of Caymanians, the crewsand passengers mostly survived, although some eight lives were lost.The first census of the Islands was taken in 1802, showing a population onGrand Cayman of 933, of whom 545 were slaves. Before slavery wasabolished in 1834, there were over 950 slaves owned by 116 families.Though Cayman was regarded as a dependency of Jamaica, the reins ofgovernment by that colony were loosely held in the early years, and atradition grew of self-government, with matters of public concern decidedat meetings of all free males. In 1831 a legislative assembly wasestablished.The constitutional relationship between Cayman and Jamaica remainedambiguous until 1863 when an act of the British parliament formally madethe Cayman Islands a dependency of Jamaica.When Jamaica achieved independence in 1962, the Islands opted toremain under the British Crown, and an administrator appointed fromLondon assumed the responsibilities previously held by the governor ofJamaicaThe constitution currently provides for a Crown-appointed Governor, aLegislative Assembly and a Cabinet.Unless there are exceptional reasons, the Governor accepts the advice ofthe Cabinet, which comprises three appointed official members and fiveministers elected from the 15 elected members of the Assembly. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  11. 11. The Governor has responsibility for the police, civil service, defence andexternal affairs but handed over the presidency of the LegislativeAssembly to the Speaker in 1991.Cayman Islands, Banking StatisticsOverviewThere were a total of 234 banksunder the supervision of theBanking Supervision Division atthe end of December 2011.The fundamentals of the bankingsector remain sound and theindustry in general has beenrelatively resilient in a very challenging market environment.Banks continue to consolidate and restructure in search of costefficiencies, and improvements in operational risk management andgovernance.As of September 2011, total assets were reported at US$1.607trillion down from the same period of the previous year where total assetsstood at US$1.725 trillion. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  12. 12. _____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  13. 13. The Cayman Islands is recognised as one of the top 10 internationalfinancial centres in the world, with over 40 of the top 50 banks holdinglicences here.Over 80 percent of more than US$1 trillion on deposit and booked throughthe Cayman Islands, represents inter-bank bookings between onshorebanks and their Cayman Islands branches or subsidiaries.These institutions present a very low risk profile for money laundering.Basel IIThe Cayman Island Monetary Authority (CIMA) is implementing theBasel II Framework.The Basel II Framework describes a more comprehensive measure andminimum standard for capital adequacy that seeks to improve on theexisting Basel I rules by aligning regulatory capital requirements moreclosely to the underlying risks that banks face.The Framework is intended to promote a more forward looking approachto capital supervision that encourages banks to identify risks and todevelop or improve their ability to manage those risks.As a result, it is intended to be more flexible and better able to evolve withadvances in markets and risk management practices.A key objective of the revised Framework is to promote the adoption ofstronger risk management practices by the banking industry.Banks to Which Basel II Applies The Basel II Framework applies to banks that are locally incorporated inthe Cayman Islands (Category A and B banks), all home regulated banksand host regulated banks (subsidiaries of foreign banks), with or withouta physical presence.Branches of foreign banks operating the Cayman Islands, will not berequired to maintain a separate capital requirement, and as such will beexcluded from the local Basel II requirements. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  14. 14. However, these foreign banks including the operations of the CaymanIslands branches must maintain the minimum capital adequacyrequirements as stipulated by their home jurisdictions.Implementation PhasesCIMA proposes to apply the Basel II Framework in twophases leveraging a practical measured approach.First PhaseThe first phase of the implementation was completed on December 31,2010 and comprised the following Pillar 1 approaches: • Credit Risk – Standardized • Market Risk – Standardized • Operational Risk – Basic Indicator Approach and The StandardizedApproachThe first phase of the Basel II implementation includes Pillar 2 –Supervisory Review Process and Pillar 3 - Market Discipline.Second PhaseThe second phase of the CIMA Basel II implementation will beconsidered for implementation after 2012.It will include considering the implementation of advanced approaches,specifically Pillar 1 – Credit Risk – Advanced Approaches (IRB),Operations Risk – Advanced Measurement Approaches (AMA) andMarket Risk – Internal Risk Management Models.Industry InputSince the majority of banks impacted by the application of the Basel IIFramework are members of the Cayman Island Bankers Association(CIBA), CIMA has established a joint CIMA/CIBA Basel II WorkingCommittee.The primary objective of the working committee is to provide banks andCIMA a forum for consultation, discussion and agreement on Basel IIrelated issues. CIMA proposes to obtain the majority of feedback on BaselII related issues from the CIBA/CIMA Basel II Working Committee. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  15. 15. CIMA also proposes to communicate directly with those banks that arenot members of CIBA or those banks that have principal agents that arenot members of CIBA.However, these banks will not have the benefit of consultation orparticipation in discussions on Basel II issues with the majority ofimpacted banks.Banks wishing to participate in the CIBA consultations and discussionsshould contact CIBA directly.Basel iiiThis is the next step, but we have no timeline yet.According to Reina Ebanks, Head of Banking Supervision, CaymanIslands Monetary Authority at the Opening of the FSI & CGBS Seminar -Regional Seminar on Capital Adequacy & Basel III George Town, GrandCayman, Cayman Islands February 22-24, 2011:“It is good that so many of our colleagues from regulatory bodies in theCaribbean region have seen the value of this seminar and have seized thisopportunity to participate.I also appreciate the involvement of our local industry partners who willserve as presenters.We all have experiences to share, and by sharing those experiences wewill learn from each other.The Cayman Islands Monetary Authority believes strongly in thenecessity and benefits of professional training.We have always sought to ensure that our own staff members have everyopportunity to enhance the skills that are necessary for the Authority toeffectively carry out its role.The regulatory reform package of the Basel Committee addressesidentified weaknesses of the pre-crisis banking sector and outlines severalmeasures to promote a more resilient banking sector. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  16. 16. The objective of the reforms is to improve the banking sector’s ability toabsorb shocks arising from financial and economic stress, thus reducingthe risk of spill over from the financial sector to the real economy.The new global standards referred to a “Basel III” cover bothfirm-specific and broader, systematic risks. At this 3 day seminar ourpresenters who are experts in their field are expected to cover specificaspects of Basel III.One of the things you learn quickly as a regulator is how rapidly changesoccur within today’s financial systems and how interconnected andinterdependent they are.The international financial crisis underscored this forcefully, but it is notgoing to change it.Products will continue to evolve; markets will continue to change; ways ofdoing business will continue to be constantly challenged by newinnovations despite the new regulations and standards put in place as aresult of the crisis.However, one of the strong lessons which it has taught us as regulators isthat, in order to stay ahead of the curve, we must expand our knowledgeof the markets and products we are charged with regulating and the roleof the different jurisdictions, large and small, that are part of the globalmarketplace.We must apply that knowledge efficiently in our day-to-day operations.We must cooperate as regulators at the organizational level.We must engage in dialogue and we must take joint action.This is necessary if we are to regulate effectively without stiflinglegitimate business and economic growth.” _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  17. 17. _____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  18. 18. NUMBER 3SPEECHES & TESTIMONY"Please Listen Carefully, Some Menu Options Have Changed"Speech of Commissioner Bart Chilton, Trade Tech 2012, New York, NYMarch 8, 2012Important partsIt is amazing if you think about the elaborate, intricate and inter-relatedglobal financial markets of gargantuan size and breadth—churning,burning, millisecond-splitting, markets operating nearly every day all day.It is amazing that it all works so well. But then again, it hasn’t alwaysdone so, right?We have banks and other institutions (think AIG) which were so largethat just a few years ago when they were toppling, or about to topple,we—all of us—had to fork over hundreds-of-billions of dollars in ahideous, budget-busting bailout.There isnt much doubt about the causes of the economic crash, andcomplexity had a whole lot to do with it.The Financial Crisis Inquiry Commission (FCIC) was established to lookat what happened (always a good thing to do after you spend hundreds ofbillions of dollars. Hey, why did we have to spend that loot?).FCIC concluded the Troubled Asset Relief Program or TARP was needed _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  19. 19. due to two culprits to the crisis.One culprit: regulators. People like me. You see, in 1999, Congress andthe President deregulated banks.Banks were no longer bound by that pesky Depression-era Glass-SteagallAct that cramped their style and limited what they could do with themoney in their institutions.With the repeal of Glass-Steagall, regulators got the message to let thefree markets roll. And, roll they did. They rolled right over the Americanpeople.The second culprit: The captains of Wall Street. FCIC concluded thatsince they were allowed to do so much more without those rules andregulations, they devised all sorts of creative, exotic and,yes-complex-financial products.Some of these things were so multifaceted hardly anyone knew what wasgoing on or how to place a value upon them.Here’s an example. Exhibit A: Credit Default Swaps (CDSs)—bizarrebets upon bets that certain things would actually fail.And these CDSs were sold and resold around the Street to the point thatnobody really understood what they had and how much it was worth. Itwas all way too complicated.The value of CDSs was in the eye of the beholder.Folks were over-leveraged if their books called for it to be so. Make it soNumber One.A case in point would be Lehman Brothers. They were leveraged 30 to 1,according to the last annual financial statement.That data showed the firm held $691 billion in assets divided by only $22billion in actual shareholder equity. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  20. 20. If all those mind-altering financial products weren’t enough to fuel-injectthe festivities, as a special bonus to the traders, it was completely andunreservedly unregulated. “Party on Garth.”CDSs were part and parcel to creating this humongous dark market withno oversight by regulators.When I say humongous, I mean it. We at the CFTC currently overseeroughly $5 trillion in annualized trading on regulated exchanges, but theover-the-counter (OTC) market is roughly—wait for it—$708 trillion.In fact, there are well over 160 million financial transactions taking placeeach day. Like I said, it is humongous.Bottom line: the 2008 economic disaster was created due to- (1) crappy or non-existent oversight and regulation; and- (2) Wall Street creativity and a penchant for the exotic that created financial products so complex they would give Rubik a migraine.The Fixers: Dodd-FrankAs a result of the monstrous economic mess, a mess of which we are stillcrawling out, in 2010, Congress passed and President Obama signed intolaw the Wall Street Reform and Consumer Protection Act—otherwiseknown as Dodd-Frank.The Act is over 2,000 pages long, and has over 300 provisions requiringrulemakings, 80% of which are to be promulgated by the SEC, the CFTC,the Fed, and the CFPB (Consumer Financial Protection Bureau).To fix a complex problem, sometimes there isn’t an easy fix, and that hasbeen the case with financial reform.It isn’t that Members of Congress had voices in their heads telling them tolegislate. Nope, their action was a detailed response to the economiccrisis. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  21. 21. For those that say Dodd-Frank should be repealed, I guess I don’tunderstand why they’d want to go back to the set of circumstances thatled to the ultimate demise of our economy. I just don’t get that.Dodd-Frank generally imposed a 360-day deadline for approval of all theregulations, and while we’ve obviously missed that, we’re working hard toget the regulations in place.A few times we proposed a rule, yet when we received the comments,realized we had totally missed the target and we had to re-propose.For those that follow every move we make, every breath we take, this is allpart of the process: getting the rules right and ensuring they are balanced.But I understand that people have to be diligent to keep up here.I have a lot of sympathy. This is very complex. Like I said, people maywant to listen carefully, some menu options may have changed.So far, the CFTC has issued 28 final rules, and it’s my hope andexpectation that we will meet our Congressional mandate within the nextfew months and finish the 21 additional final rules that we are required towrite.Certain “T’However, just because I expect us to finish all the rules, that doesn’t tellpeople when they will be implemented, or when compliance is necessary.Aside from complexity and changing menu options, one of the worstthings for our industry, from anyone’s perspective, is uncertainty.Regulators don’t like it. Market participants don’t like it. Members ofCongress don’t like it, and the public certainly doesn’t like it.When we aren’t clear about exactly what we’re doing, when rules are to gointo effect, and when people have to comply with those rules, that createsuncertainty with a capital “T.” Let me explain. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  22. 22. One of the refrains we keep hearing is that we need to identify what “T”is.In other words, we’ve said that we will give folks time to comply with ourrules—T+90 days, T+180 days, T+270.The legitimate question is: what the heck is T?Just like the robotic phone tree, people have pushed an options button,and they keep getting an answer, but it either isn’t the answer they wantor it’s not the fulsome answer they need.They may be pushing one for English and then saying “agent” or“operator” but they never get to something or someone who can actuallyhelp them out.We all know that feeling, and it can be maddening. So now, it’s time weprovide another “menu option,” and answer this timing question.We hear folks, and here’s a way to get there.First, we need to get the review of swaps for mandatory clearing ruledone.Second, we need to finalize the implementation timetable rule.This will give all of us—market participants, regulators, Congress, thepublic—firm compliance dates and it will all seem a lot less complex.We should give folks a visual of what we are doing and update that asmenu options change.I have seen some firms that have these.I’ve urged that we simply put all these expected rule dates on a chart sothat people can see them in concert with each other. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  23. 23. When is the rule expected to be completed? What might be theimplementation timetable? It seems like a fairly modest thing to do, yetwe haven’t done so yet. I mean, “Got rudimentary technology?” Doesanyone have PowerPoint in the house?Uncertainty is not just an irritation. It’s bad government, and it’s time wemake sure everyone gets the certain “T” with a capital “T” they need, andfirm answers when they “push the button.”Position Limits—The Time is NowOne of the rules that has been very difficult to get a visual upon is positionlimits. Remember when I said that most of the rules were to be completedwithin 360 days? That would have been last July.Well, there were just a few exceptions to that, and position limits was one.Congress wanted limits done sooner, and told us very specifically so inthe law.We were supposed to start implementing them a year ago January. Butguess what? On one of these charts that a firm showed me a few weeksago, position limits were actually the last regulation to be implemented. Ithink their chart was actually wrong.I hope it was wrong, but I can understand why they might think limitswould be delayed.The Commission passed a final position limits rule in October, but it hasyet to be implemented.We are actually waiting, of all things, for a joint rule with the SEC ondefinitions to be approved before the implementation clock—theT—starts ticking.The problem is this: we need these limits now. I’ve been calling for themsince 2008. We have needed them for years. If you’ve been to the gasstation lately or watched the news, you know people are experiencing a lotof pump price pain. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  24. 24. The CFTC is not a price-setting agency. That isn’t our job. However, wedo have a mission to ensure that the price discovery process is fair.Position limits can assist in ensuring prices they are fair.If we look back to 2008 when there was relatively stable supply anddemand for crude oil, we saw prices ride a rough-and-tumble rollercoaster—going from below a hundred dollars-a-barrel early in the year tonearly $150 in June, then moving all the way down to just over $30-a-barrelin December.There was no justification for such a price swing based upon thefundamentals of supply and demand. The only good explanation is whatmany researchers and prominent economists and others have said aboutthe link to excessive speculation.And guess what? We are seeing something similar this year. The supplyof oil and gasoline is greater today than it was in 2008 and demand for oilin the U.S. is at its lowest level since April of 1997 (so, says the EnergyInformation Administration). Yet, we see what is happening to prices.They are once again rising sharply.The increased cost of fuel can also dampen the economic recovery. Dataconfirms the economy is on the mend, but there is no question therecovery is still fragile.According to the International Monetary Fund, for every $10 increase inthe price of a barrel of crude oil, the entire U.S. GDP is reduced by a halfpercent.We all know fuel prices have a direct impact upon individuals, but thinkabout the enormous drain on businesses large and small. The airlines, forexample, will spend billions more this year than they had anticipated dueto higher fuel costs.A few days ago, I spoke with Delta Air Lines executives Ben Hirst (theGeneral Counsel) and Jon Ruggles (the Vice President for fuel). They tellme that each incremental dollar per barrel of crude impacts their fuelprices by $96 million per year. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  25. 25. They are now expecting to spend at least $1 billion more in 2012 thaninitially budgeted. Do they believe speculators are having an impact onrising prices? You bet they do, and they are not alone.In fact, the association that represents all of the major air carriers hasbeen urging us to impose positions limits for years. They urged evenmore restrictive limit levels that the Commission approved.And by the way, federal, state and local governments are also impactedvery directly by fuel costs, so this is a drain on taxpayers not just withregard to their family budget but because it increases the costs ofgovernment.Here is an example: the U.S. Department of Defense spent $17.3 billionon fuel in 2011.Now, before some of you who have an opposing view about speculationget too worked up, let me say unequivocally that markets needspeculators.There are no markets without them. Speculators are good. But like a lot ofgood things, too much can be problematic.Therefore, it is the excessive speculation that can cause problems, contortmarkets, and result in consumers and businesses paying an unfair price.Some people say: “Well these markets have worked pretty well over theyears. How can you really tag speculation with being a problem in 2008and is it more than just a guess that excessive speculation is a problemtoday?” Well, good question Grasshopper.Between 2005 and 2008 we saw over $200 billion come into futuresmarkets from non-traditional investors. I call them “Massive Passives.”They are the likes of pension funds, index funds, hedge funds and mutualfunds. These funds are very large—massive—and have a fairlyprice-insensitive, passive trading strategy. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  26. 26. When I say this, I’m talking generally. I realize that all these traders aren’tpassive all the time, but we do see a pattern.In fact, new CFTC data says that massive passive long speculators haveshorts outnumbered 12 to 1.Like a rising tide lifts all boats, when we see this unprecedented increasein speculation, it has an impact.I’m not suggesting that the Massive Passives, or speculators in general,are actually driving prices.Let me be clear. I’m not suggesting that they were all in cahoots anddecided to raise oil prices. What I am saying is that they contribute toprice swings, and have a proportional impact in markets based upon theirsize as a whole, and certainly individual traders can push prices around ifthey have a large enough concentration.When prices are on the rise, like now, and the Massive Passives andothers get into markets, they push prices to levels that may beuneconomic—certainly not tied directly to supply and demand—and theprices stay higher longer than they normally would.By the way, although it isn’t as interesting to the media and others, thesame takes place when speculators exit markets. That’s why prices shotdown so far in 2008 by the end of the year.Every trader was bailing from the markets because of the bottom fallingout of the economy and prices for a lot of things tumbled.Now, if people believe there was a lot of speculation with that $200 billioninfusion back in 2008, guess what? It is even higher this year.In energy markets, it’s 43 percent higher than in June of 2008. Andremember, it’s pretty early in the year for gas prices to be this high. It waseven higher last year and not just a little higher.From June of 2008 until January of last year, speculation in energy _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  27. 27. markets had increased by 64 percent. In the metals and agriculturalcomplexes, it had increased by roughly 20 percent.Is that speculation excessive speculation and is it impacting prices? Ithink so and so do many members of the U.S. House and Senate.In fact, in the last two weeks, we have received numerous letters fromdozens of members of the House and Senate—those that actually votedfor the reform law—telling us to get with it and implement position limits.Earlier this week, we received a letter from 23 Senators and 45 Membersof the House.They were clear: get on with position limits already. We gave you that tool.Use it now. Also, last week President Obama said, “When uncertaintyincreases, speculative trading on Wall Street can drive up prices evenmore.”But you don’t have to take it from me, from Senators or U.S.Representatives, or from the President of the United States.In fact, you don’t have to take it at all. There are many who don’t. I cancontinue to explain all this to people, but I can’t comprehend it for them.Nonetheless, let me lay one more piece of research on you with regard tospeculation. This one doesn’t come from some lefty progressive group. Itcomes from one of the big Wall Street banks. In fact, I met with themagain yesterday.Their researchers said that each million barrels of net speculative lengthadds as much as 10 cents to the price of a barrel of crude oil. Thespeculative length is a known quantity.With a little math, you can determine that the “speculative premium” onoil these days is around $23 a barrel—and that translates into about anextra 56 cents for a gallon of gas.What that means is this: if you drive a Honda Civic, the speculativepremium costs $7.39 every time you filler-up. If you drive a Ford Explorer _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  28. 28. or F-150, the total is $10.41 and $14.56, respectively. I don’t know howoften you fill up, but over the course of a year we’re talking realmoney—hundreds of dollars.Imagine a trucker who pays a speculative premium of $112 more to fill upa Freightliner, driving 120,000 miles per year at 6 miles per gallon.The annual cost to the trucking industry: $29.1 billion. For the airlineindustry: $9.8 billion.Our position limits rule is one of the only tools regulators have in ourutility belt to combat unfair prices. We need to use it.We need to implement the rule as soon as possible and I’m working to dojust that.But there is another fly in the ointment on this, and a lot of you knowabout it. Certain Wall Street interests are suing the government in aneffort to stop the rule from going into effect.They contend, among other things, that we didn’t do an appropriate CostBenefit Analysis—a CBA. I suppose they want the ability to speculatewith no limits whatsoever. That’s not good for markets, for the economyor for businesses or consumers.Will position limits take us back to the days of $1.00- per-gallon gasoline?Oh, heck no. Limits will, if we can survive the court challenges andimplementing delays—help reduce the pump price pain.A More Perfect Regulation?We live in not only a complex, but a litigious society. Sure people have theright to go to court and challenge things.But regulators need to keep our eye on the ball and not be scared intomaking rules and regulations weak or ineffective because we are overlyconcerned about what we call “litigation risk.” _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  29. 29. This is an issue that has troubled me for a while, and I’m going to use thisforum as an occasion to talk a little about something that is significant.Bear with me a little here.In the preamble to the Constitution of the United States, there is thiswonderful aspirational language:We the people of the United States, in order to form a more perfect union,establish justice, insure domestic tranquility, provide for the commondefense, promote the general welfare, and secure the blessings of libertyto ourselves and our posterity, do ordain and establish this Constitutionfor the United States of America.“In order to form a more perfect union.” Those words, “in orderto”—they meant that our forefathers were working toward, hoping,aspiring, to form a more perfect union. It wasn’t perfect, and it might notreach perfection, but they were trying to get there.So, here’s something to think about: those wonderful “planks” towardmaking that “more perfect union”—establishing justice, insuringdomestic tranquility, promoting the general welfare—each one of thosedistinct factors didn’t in and of itself create the more perfect union.Rather, each facet was a building block that the Founding Fathersintended to use to “get there,” to become that more perfect union.In other words, “providing for the common defense,” wasn’t the be alland end all, but instead it was one of the important pieces used to get tothe ultimate goal: a more perfect union.Now I’m going to take what you may think is an odd turn. In a similarfashion, Cost Benefit Analyses, like the CBA I mentioned a moment agowith regard to the position limits lawsuit, in regulatory rulemaking areanalogous to those discrete building block factors in the Constitution’spreamble.A CBA is not the ultimate goal of rulemaking, although if you listen tosome you might think it so. A CBA is an important piece of reaching the _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  30. 30. ultimate goal: a “more perfect regulation.” Like the framers of ourConstitution, regulators aspire to reach objectives that protect thecommonweal. That’s our job.In the recent past, however, our jobs have been made significantly moredifficult by a contortion—but I’ll call it as I see it: a bastardization—it is abastardization of the conduct and use of CBAs in regulatory rulemaking.This by no means is a new phenomenon. It has cropped up over the years,time and again, as a convenient tool to scuttle regulatory initiatives.Its use at this moment in history is, however, particularly galling to me,given the focus of the regulations that are being decelerated and the harmthat was caused to the public as a result of the economic crisis of 2008.There are those who bellow about the “costs” of regulation. To thosecatcalls, I would simply ask, what were the “costs” of that multi-hundredbillion dollar taxpayer-funded bailout?What are the “costs” of families losing their homes? What are the “costs”to our economy of skyrocketing oil and gas prices, fueled by unbridledexcessive speculative activity?CBAs are being used as a Sword of Damocles over regulatory agencies.Some regulators live in constant fear and are virtually paralyzed by thethreat—or, indeed, the actuality—of lawsuits brought (spuriously, in myopinion) on the bases of allegedly poor CBAs.When this happens, rulemaking activity slows, or grinds to a halt—andthat is the precise intent of some who threaten, design, and bring, theselawsuits.And at the same time, American consumers and taxpayers continue topay more at the pump for a gallon of gas. The airlines will pay billionsmore. Our Department of Defense and state and local governments willpay more.We will continue to see the devaluation of homes, and continue to face _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  31. 31. high unemployment rates. How do we measure those “costs?”It’s time to put some sense (and cents) back into CBAs, and to criticismsof rules. By that I mean, I’d like to see reasonable, accurate, andwell-supported analyses, and those who criticize our CBAs should berequired to provide, not “masked data,” with no clear or hard figures, butreal, verifiable dollars and cents to rebut our analyses.For example, we put out a proposal, ask for comments and ask what thecosts might be. Then we either aren’t provided with costs of theregulation, or what we get from the commenters isn’t very helpful.We develop the rule and do the best job we can with all the data we haveand go final. Then, opponents of the rules say, “Hey, you didn’t do anadequate CBA.” Give me a break.Then, some talk about or take the government to court. People have aright to go to court, but there is a point at which it seems to me somemight be taking advantage of the system.If we are all held to the same reasonable standards on providing anddeveloping good thoughtful data, and not just throwing mud to try andslow the process down, CBAs might actually be a whole lot moreuseful—as they were intended: as a factor in forming “more perfectregulations.”Ah, good. That feels better.Helen, Mike and MF GlobalFinally, I don’t want to leave here without discussing a little bit about MFGlobal and the mysterious missing millions.Let’s be clear: this was a fresh slap-in-the-face reminder that we needappropriate regulations in place now. MF Global is the new poster childfor why thoughtful financial regulation is needed more than ever.No matter how I talk about this horrific set of circumstances with regard _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  32. 32. to MF Global, I can’t express what a sorry situation this has caused formany MF Global customers. I have a one paragraph letter I received inJanuary and I want to share it with you. It said:“I am 75 years old and my husband is 76 years old. We take care of ourbrain injured son who is 55 years old. All of our money—over $900thousand—was invested in commodities with MF Global.We have no income except for a small Social Security check for both of usand some for my son. We will be losing our home we have lived in for 30years if these funds aren’t returned to us soon.We really made a mistake by trusting too much. We are too old to workanymore. All of our strength we have goes to caring for our son. Cansomeone please help? We are desperate!”I’m not going to use their last name or tell you where they are frombecause I didn’t check with them, but I have it right here and I’ve beencarrying it around for the last few days to remind me that the MF Globalmatter isn’t some esoteric policy issue.It is a real and dire matter for thousands of people like Helen and Mike.For us, job one is always—no excuses—to ensure that customer funds areheld sacrosanct in what are called “segregated accounts,” and that theyare safe and secure. In this case, those funds were not secure.Hundreds of millions of dollars isn’t where it should have been.Aside from trying to find and claw back all the funds and conducting ourinvestigation and going after anyone who broke the law, we also need toensure that we do all we can to avoid this happening in the future.In that regard I have suggested several things that can be done, althoughthere are others:One, we need to engage in regular and robust deep data dives. By that Imean we need to regularly ensure that customer funds are where they are _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  33. 33. supposed to be. Rather than taking a firm’s word at face value that themoney is where it is supposed to be, we need to do the Jerry Maguire andinsist that they “show us the money.”Two, we should allow customers a choice of how or if their funds insegregated accounts are used.People make choices about the types of investment that can be made withtheir money in their pension funds.They should be able to do the same with segregated funds. They shouldalso be able to say: “My money sits there as margin and nothing can bedone with it.”By the way, customer choice is something that is already done in theUnited Kingdom, so we should look to them for guidance on how best toformulate such a plan, and;Three, Congress should approve legislation to establish an insurancefund to serve as a backstop for customers like Helen and Mike shouldthere be a loss in the future.The securities world has such an insurance fund. We all know thebanking world has the Federal Deposit Insurance Corporation.We need such an insurance fund in the futures world.Conclusion—Some Menu OptionsI am grateful for your attention.We live in a complex world and these are all complicated issues. Here iswhat I know: we are in a rapidly changing environment. Markets aremorphing.Laws from less than two years ago don’t even mention things—like highfrequency traders — that are clearly issues for regulators today —something we didn’t have time to discuss. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  34. 34. It is all moving and changing fast, fast, fast.We can’t do the job we need to do as regulators without the serious andthoughtful help of people involved in these markets.We need to know what you think. That is why I’ll be very pleased to takeyour comments and questions if there is time.If we have gotten something wrong, you need to tell us. If somethingneeds changed, shout it out.Here is my personal promise to you: I will listen carefully, because Iunderstand that some menu options may have changed.Thank you.March 8, 2012 _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  35. 35. NUMBER 4Remarks before the Institute of International Bankers, AnnualWashington ConferenceCommissioner Jill E. Sommers, March 5, 2012Important partsI would like to touch on a few developments and give my thoughts on thecurrent state of derivatives regulation both here in the US and abroad.Since September of 2010, the Commission has held 24 public meetings tovote on various Dodd-Frank matters and has issued nearly 60 proposedrules, notices, or other requests seeking public comment, and hascompleted 28 final rules, interim final rules, and exemptions.I think we are about at the half-way mark with at least twenty more rulesto go, including the most significant rules like definitions of a swap dealerand swap.We have one meeting scheduled for March and four more meetingsscheduled for April and May.The ProcessWhen it comes to the rulemaking process, I believe a reasonable,measured approach is critical.Swap markets developed without our involvement, and we have littleexperience with these markets. The truth is we don’t know what the fullimpact of our rules will be, and we don’t know whether the assumptionswe operate under are valid. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  36. 36. Given this knowledge gap, it makes sense to start with a broader, moreflexible approach, and become narrower and more restrictive only asnecessary and after we have sufficient experience and data to make thesedecisions.Unfortunately the Commission has not taken this sensible approach.By way of example, last month the Commission held an open meeting toconsider a final rule related to business conduct standards and a proposedrule related to block trading.Dodd-Frank mandates that the Commission specify the criteria fordetermining what constitutes a large notional swap transaction—or blocktrade— for particular markets and contracts.In determining appropriate block trade sizes, Congress has directed thatthe Commission take into account whether public disclosure oftransactions will reduce market liquidity.This requires a balancing act—if the block threshold is set too low, therewill be reduced transparency in the market.If the block threshold is set too high, there will be reduced liquidity in themarket.Setting block sizes for swaps is not an easy task, and absent robust data,comprehensive analysis, and the benefit of market experience, we couldseverely harm liquidity at this critical regulatory juncture where we seekto bring more swaps onto swap execution facilities.The proposal, which passed by a 3-2 vote, recommends utilizing aformula to determine block size whereby only the largest 6% of all interestrate swaps and credit default swaps would be block trades.This proposal ignores Congress’ mandate that we take into account theimpact of public disclosure on liquidity.We now run the risk of sacrificing liquidity at the altar of transparency.More troubling, the rule writing team only had access to 3 months’ worthof transaction data, and that transaction data dates back to the summer of2010. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  37. 37. In writing these rules we are relying on stale data, and far too little of it.This is just one instance where we have proposed rules without sufficientdata, robust analysis, and complete knowledge of their impact.ExtraterritorialityI am guessing that the issue first and foremost on many of your minds isextraterritoriality.As everyone in this room knows, the swaps market is a global market.Harmonizing our rules to the greatest extent possible with the SEC, otherUS regulators and our foreign counterparts is absolutely crucial forensuring that we accomplish the overall global objectives of reducingsystemic risk and limiting opportunities for regulatory arbitrage.As required by Dodd-Frank, and in keeping with the commitmentsreached by the G-20 leaders in Pittsburgh in September of 2009,Commission staff has been in constant contact with our counterparts inLondon, the European Union and Asia.These issues are very complex, and the possibility of divergent viewsamong international regulators is very real.The challenge lies in building a consistent philosophy for how theregulatory frameworks of many nations fit together to ensure cross-borderswap activities are not disrupted.In Dodd-Frank Congress expressed intent for the statute to apply toactivities abroad in certain circumstances, but was not crystal clear on theparameters.While the statute gives us some direction, the Commission is consideringhow broadly or narrowly it intends to interpret the scope of this limitation.Setting the precise scope of Dodd-Frank with respect to the cross-borderactivities of foreign entities is necessary to preserve the continuity ofglobal business operations and the risk management tools that swapsprovide. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  38. 38. To that end, I expect the Commission to issue proposed guidance on thisissue in the coming weeks; however, it is my understanding the scope ofthe guidance will only speak to who will be required to register as a USswap dealer or major swap participant.The Commission intends to tackle other issues such as clearing andmarket infrastructure in subsequent guidance.I am deeply concerned that there has not been adequate coordinationwith the SEC and the international regulatory community.Of even greater concern to me is that the Commission appears to beconsidering a piecemeal approach to issues of extraterritoriality byproposing guidance in stages rather than by proposing onecomprehensive rule that will give market participants some degree ofcertainty and the entire framework we are considering.I cannot imagine the global consequences of an inconsistent approach tothese issues by the SEC and CFTC.I have spoken to many foreign entities and foreign regulators who arevery interested in how far the CFTC intends to reach into the operationsof entities located overseas.I believe this is one of the single most important issues the Commissionwill address during the implementation of Dodd/Frank.There has been an enormous amount of congressional interest and if wedo not get this one right, I am confident Congress will step in. I wouldlike to see the CFTC propose a joint rule or at the least a coordinated rulewith the SEC.The CFTC has a long history of international cooperation and recognitionfor comparable foreign regulatory regimes.This is not the time for us to abandon policies that have worked well forus over decades of international practice. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  39. 39. VolckerI am also going to guess that the other important issue on your mind isthe much discussed “Volcker rule”.The CFTC waited until January of this year to put out its Volckerproposal, notwithstanding the fact that other US regulators put out theirversion of Volcker last October.The proposal is lengthy and extremely complex and I do not think wespent sufficient time to fully consider all of its implications. I am troubledthat this is the path the Commission has chosen.Given that we waited until January to propose our version of Volcker, wellafter other regulators issued proposals and received comments, we had aunique opportunity to take into consideration the comments filed withthose other agencies.Unfortunately, even with the lag time and the benefit of comment letterswe proposed a rule that is virtually identical to the other agencies’proposed Volcker rule.I had concerns about what the CFTC would do if other agenciesre-propose their rules.I hope we will be prepared to withdraw our proposal and join are-proposed Volcker Rule with the other agencies.Otherwise, it seems as if we have put ourselves on a separate track, whichI fear will needlessly complicate an already convoluted and likelyunworkable set of rules.Central bankers and regulators from around the world have expressedconcern that the rule, which as proposed would apply to the USoperations of foreign banks, may also extend to a firms’ operationsoutside the US.Many countries in Europe and Asia have weighed in, and many industrybodies such as yours have filed helpful comment letters too.In fact, the CFTC, Treasury and other regulators received over 17,000comment letters. We have seen these concerns voiced by high ranking _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  40. 40. officials, such as Bank of Canada Governor Mark Carney, EU FinancialServices Commissioner Michel Barnier, and FSA chairman Lord AdairTurner.For example, the UK and Japanese finance ministers weighed in sayingthat, without an exemption from the rule, their governments’ borrowingcosts would rise.Japan and Britain have called on the US to rewrite the Volcker rule givenconcerns that it could reduce liquidity in sovereign debt markets at acrucial moment for some European governments.Japanese Finance Minister Jun Azumi and his British counterpart GeorgeOsborne pointed out that Volcker may be the "wrong prescription," withunintended consequences.Of particular concern to other nations is the fact that, while the new rulemay adversely impact market liquidity in stocks and corporate andgovernment bonds, there is an exemption that allows the banks to buy USgovernment securities -- but not other sovereign debt instruments.As a consequence, explained Azumi and Osborne, "it could reduceliquidity in non-US sovereign markets, making it more difficult, costlierand riskier for countries to issue and distribute debt."Government debt and related obligations are a major part of the bankingsector’s liquid assets.I believe that we need to really consider, especially at this troubled time inthe sovereign debt markets, whether this exclusion should be applied in abroad manner that allows banks, especially those outside the US, toengage in liquidity management using assets accepted as liquid reservessuch as foreign sovereign debt.Second, after reviewing the many critical comments we shouldre-evaluate the foreign banking entities exemption.I do not believe this exemption should be narrower than is required byDodd-Frank. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  41. 41. At a minimum, we could clarify that use of US financial infrastructure(e.g. clearing, settlement, and trade facilitation) would not make thetransaction subject to the rule.It is critical for US regulators to come together and form a reasonableapproach to the many difficult issues included in the prohibitions andrestrictions on proprietary trading.The implications of this rule will most definitely be felt around the globe.International UpdateAs you know, I chair the Commission’s Global Markets AdvisoryCommittee and have participated for the last three years in the TechnicalCommittee meetings of IOSCO and so am particularly sensitive tointernational regulatory issues.As a quick recap on other jurisdictions, we continue to monitor theprogress of the European Market Infrastructure Regulation (EMIR), theMarkets in Financial Instruments Directive (MIFID) and the relatedMarkets in Financial Instruments Regulation (MIFIR), as well as theproposed revisions to the Market Abuse Directive (MAD) and the BaselCommittee on Banking Supervision and IOSCO joint working group onmargin requirements for uncleared derivatives.A political agreement on EMIR was reached last month; however, anofficial version has yet to be released publicly.Based on conversations with our European Commission (EC)counterparts, EMIR will come into force on January 1, 2013, but will notbe applied until later in 2013.More specifically, authorization of CCPs will not occur until mid-2013 andwe do not have an estimated date for when trade repositories will enterinto force.With regard to MiFID and MiFIR, we expect that the EuropeanParliament will consider them at some point this summer.All three of these proposals are the EU’s responses to the commitmentsmade by G-20 leaders in 2009 to address less regulated parts of the _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  42. 42. financial system, such as OTC derivatives, and to improve the oversightand transparency of commodity derivative markets.MAD/MAR: The European Commission has also proposed regulationsto increase the number of commodity derivatives and OTC derivativesthat are covered by the market abuse regime.The proposals extend the market manipulation prohibition toinstruments whose value relates to exchange traded instruments.So for instance, an OTC derivative referenced to a contract traded on ICEFutures Europe would fall within the new Directive.These updated regulations now include prohibitions against attemptedmanipulation, where the old rules only covered actual manipulation.I should also point out that the new regulation gives the member statesmore enforcement tools and criminalizes certain insider trading andmarket manipulation offenses.We expect these proposals will also be taken up by the EuropeanParliament this summer.The IOSCO Task Force on OTC derivatives (TF) has been busy. Here’s asense of where various work is in the pipeline:- the report on requirements for mandatory clearing;- the TF’s “Follow on analysis to the report on trading”; and- the report on OTC Derivatives Data Reporting and Aggregation Requirements, which is the joint work of the TF and the Committee on Payment and Settlement Systems (CPSS)were all approved before or during the Feb. 2012 Tokyo TechnicalCommittee Meeting.The last report left for the task force to take up, the report on OTCDerivatives Market Intermediaries’ oversight, is nearly finished and likelyto be approved at the May IOSCO Annual meeting in Beijing. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  43. 43. Lastly, on the international front, I would like to report that the BaselCommittee on Banking Supervision and IOSCO has established a jointworking group on margin requirements for uncleared derivatives.The group includes representatives from more than twenty regulatoryauthorities, including the CFTC, and has held two in-person meetingsand numerous conference calls.The topics discussed have included:- the purposes of margin;- the instruments subject to margin;- entities subject to margin;- categorization of counterparties;- calculation of margin;- eligible collateral;- segregation of collateral;- treatment of affiliates; and- cross-border issues.The group is working toward issuing a consultative paper mid-year.US regulators will coordinate with the international effort, and my hope isthat US regulators will not take up the final rulemaking on marginrequirements for uncleared derivatives until after the internationalstandards have been settled.Finally, I will turn to recent developments in Asia.JapanThe Japanese legislature passed the Amendment to the FinancialInstruments and Exchange Act (“FIEA”) in May 2010.This amendment gave the Japanese financial regulator, the JFSA, theauthority to regulate OTC derivatives. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  44. 44. The JFSA expects the implementing cabinet ordinance and othermeasures to be finalized by November 2012.Hong KongThe Hong Kong Monetary Authority (“HKMA”) and Hong KongSecurities and Futures Commission (“SFC”, together with the HKMA,the “Hong Kong Authorities”) released a consultation paper on theirproposed OTC regulatory regime in October 2011.The Hong Kong Authorities propose amending the Securities andFutures Ordinance to set out a general framework for the regulation of theOTC derivatives market, which includes providing relevant rulemakingpowers to the HKMA and SFC.Hong Kong is working to adopt these regulations by the end of 2012.SingaporeOn February 13, 2012 the Monetary Authority of Singapore (“MAS”)published a consultation paper with proposals to meet the G20 mandateon the trading, clearing and reporting of OTC derivatives.To implement the recommendations of the international standard settingbodies, MAS proposed to expand the scope of the Securities and FuturesAct (“SFA”) to mandate central clearing and reporting of OTC derivativescontracts, as well as regulate market operators, clearing facilities, traderepositories and market intermediaries for OTC derivatives contracts.Generally there is a fair amount of consistency between jurisdictions. Ofcourse there are some areas where coordination and cooperation areessential.I know the concept of indemnity in the context of swap data repositoriesis an issue, as well as the desire by some for a central bank exemptionfrom the registration, public reporting and clearing requirements ofDodd-Frank.There is also a conflict regarding the open access to CCP’s rules which wefinalized in October of last year. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  45. 45. The rules prohibit a DCO from setting a minimum adjusted net capitalrequirement of more than $50million for any person that seeks to becomea clearing member in order to clear swaps.This very low number has generated concern from other authorities.As you all know very well, market regulators around the globe are workingdiligently to respond to the commitments made at the G-20 level.Considering the scope of the work for all of these jurisdictions, I think theprogress made up to this point has been remarkable.We will continue our efforts at the Commission coordinating with ourglobal counterparts and will probably be working to establish appropriaterules and regulations for many years to come.ConclusionIn closing, I would like to convey my persistent grief regarding theprocess the Commission is using to finalize these very important rules.I believe we should be crafting all of our regulations in a way that willallow them to stand the test of time and to not favor one market segmentover another.I believe that it is crucial for the marketplace and for market participantsthat we get these rules right and that we finalize them in a way that isreasonable and to not politicize them.It would not be a good outcome if we are re-writing most of these rules inthe next couple of years because the rules do not reflect the useful inputwe have received from the market.We consistently reject reasoned comments from industry professionalswith little justification in our cost benefit analysis to support thoserejections.I have been hopeful for the past year that things would change when westarted finalizing rules, and especially the rules that are so integral to thenew regulatory framework, but things have not changed.I am no longer optimistic; I do not believe that these rules have a chanceof withstanding the test of time but instead believe that this Commission _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  46. 46. will be consumed over the next few years using our valuable resources torewrite rules that we knew or should have known would not work whenwe issued them.March 7, 2012 _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  47. 47. NUMBER 57 March 2012Technical features of the Legal Entity Identifier (LEI)The FSB LEI Expert Group has made significant progress in identifyingthe key issues and developing framework solutions to be presented in thereport to the FSB Plenary by the end of April, to enable the Board to meetthe G-20 mandate provided at the Cannes Summit.Work is proceeding intensively under five workstreams - each having itsown mandate and deliverables:- governance;- operational model;- scope, confidentiality and access;- funding; and- implementation and phasing.The Expert Group is supported by an Industry Advisory Panel composedof 34 representatives from different sectors and regions to help provideimportant industry input into the global public-private LEI initiative.The Expert Group is determining the regulatory interests that must beprotected within the framework of the global LEI system and iscontinuing to review the resulting regulatory requirements for the LEIthat form a key component of the G-20 mandate.The FSB has, however, decided to provide early clarity on two technicalpoints. This clarity is provided in order to give early guidance to industry,to help with expected forthcoming proof of concepts and to provide initialdirection on the work of the Expert Group. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  48. 48. At the same time, this early guidance is subject to final confirmation asthe Expert Group completes its work.First, the Expert Group has agreed that a 20-character alphanumeric codeis a good basis for the global LEI code.Second, the Expert Group is continuing to review the LEI eligibilitycriteria as well as the reference data that the regulatory community viewsas essential and, consequently, would require to be associated with theidentifier.In the first round of discussion, the Expert Group agreed that thefollowing six data elements will all form part of the minimum set ofreference data attributes that will be required by the regulatorycommunity on the launch of the LEI:- The official name of the legal entity;- The address of the headquarters of the legal entity;- The address of legal formation;- The date of the first LEI assignment;- The date of last update of the LEI;- The date of expiry, if applicable.It should be noted that this limited minimum set of the reference data isthe product of the first round of regulatory discussions.As the Expert Group completes its work, it expects to propose additionalelements both for reference data attributes, and for the audit trail ofchanges and updates to the LEI, in order to meet various regulatoryneeds.Work continues on all other aspects of the LEI framework with the aim ofcompleting an internal report to the agreed deadline. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  49. 49. This report will provide concrete recommendations on the protection ofpublic interests and structures sought in the LEI system.The final report will be published in due course. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  50. 50. NUMBER 6Interesting developmentsMario Draghi, President of the ECB,Vítor Constâncio, Vice-President of the ECB,Frankfurt am Main, 8 March 2012Important partsLadies and gentlemen, the Vice-President and I are very pleased towelcome you to our press conference. We will now report on the outcomeof today’s meeting of the Governing Council.Based on our regular economic and monetary analyses, we decided tokeep the key ECB interest rates unchanged.The information that has become available since the beginning ofFebruary has confirmed our previous assessment of the outlook foreconomic activity.Available survey indicators confirm signs of a stabilisation in the euroarea economy.However, the economic outlook is still subject to downside risks. Owingto rises in energy prices and indirect taxes, inflation rates are now likely tostay above 2% in 2012, with upside risks prevailing.Nevertheless, we expect price developments to remain in line with pricestability over the policy-relevant horizon.The underlying pace of monetary expansion remains subdued, consistentwith contained inflationary pressures over the medium term.Looking ahead, we are firmly committed to maintaining price stability inthe euro area, in line with our mandate.To this end, the continued firm anchoring of inflation expectations – inline with our aim of maintaining inflation rates below, but close to, 2%over the medium term – is of the essence. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  51. 51. Over recent months, a wide range of additional non-standard monetarypolicy measures has been implemented by the Eurosystem.These measures, including in particular two three-year longer-termrefinancing operations, were decided upon against the background ofexceptional circumstances in the last quarter of 2011.The first impact of these measures has been positive.Together with fiscal consolidation and stepped-up structural reforms inseveral euro area countries, as well as progress towards a stronger euroarea economic governance framework, they have contributed to asignificant improvement in the financial environment over recent months.We expect that the three-year longer-term refinancing operations willprovide further support for the ongoing stabilisation in financial marketsand, in particular, for lending activity in the euro area.All our non-standard monetary policy measures are temporary in nature.Furthermore, all the necessary tools to address potential upside risks tomedium-term price stability are fully available.Let me now explain our assessment in greater detail, starting withthe economic analysis.Real GDP contracted by 0.3% in the euro area in the fourth quarter of2011.According to recent survey data, there are signs of a stabilisation ineconomic activity, albeit still at a low level.Looking ahead, we expect the euro area economy to recover gradually inthe course of this year.The outlook for economic activity should be supported by foreigndemand, the very low short-term interest rates in the euro area, and all themeasures taken to foster the proper functioning of the euro area financialsector.However, the remaining tensions in euro area sovereign debt markets andtheir impact on credit conditions, as well as the process of balance sheet _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  52. 52. adjustment in the financial and non-financial sectors, are expected tocontinue to dampen the underlying growth momentum.This assessment is also reflected in the March 2012 ECB staffmacroeconomic projections for the euro area, which foresee annual realGDP growth in a range between -0.5% and 0.3% in 2012 and between 0.0%and 2.2% in 2013.Compared with the December 2011 Eurosystem staff macroeconomicprojections, the ranges have been shifted slightly downwards.This outlook remains subject to downside risks. They notably relate to arenewed intensification of tensions in euro area debt markets and theirpotential spillover to the euro area real economy.Downside risks also relate to further increases in commodity prices.Euro area annual HICP inflation was 2.7% in February 2012, according toEurostat’s flash estimate, slightly up from 2.6% in January.Looking ahead, inflation is now likely to stay above 2% in 2012, mainlyowing to recent increases in energy prices, as well as recently announcedincreases in indirect taxes.On the basis of current futures prices for commodities, annual inflationrates should fall again to below 2% in early 2013.Looking further ahead, in an environment of modest growth in the euroarea and well-anchored long-term inflation expectations, underlying pricepressures should remain limited.The March 2012 ECB staff macroeconomic projections for the euro areaforesee annual HICP inflation in a range between 2.1% and 2.7% in 2012and between 0.9% and 2.3% in 2013. In comparison with the December2011 Eurosystem staff macroeconomic projections, the ranges for HICPinflation have been shifted upwards, notably the range for 2012.Risks to projected HICP inflation rates in the coming years are seen to bestill broadly balanced, with upside risks in the near term mainlystemming from higher than expected oil prices and indirect tax increases. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  53. 53. However, downside risks continue to exist owing to weaker thanexpected developments in economic activity.The monetary analysis indicates that the underlying pace of monetaryexpansion remains subdued.The annual growth rate of M3 was 2.5% in January 2012, up from 1.5% inDecember 2011.Loan growth to the private sector also remains subdued. However, itsannual rate (adjusted for loan sales and securitisation) picked up slightlyin January to 1.5% year on year from 1.2% in December.The annual growth rates of loans to non-financial corporations and loansto households (adjusted for loan sales and securitisation) stood at 0.8%and 2.1% respectively in January.The volume of MFI loans to non-financial corporations declined onlyslightly in January, following the pronounced decline in December. Bycontrast, the flow of loans to households in January was positive.Following the signs of improvement in the financial environment, it isessential for banks to strengthen their resilience further, including byretaining earnings.The soundness of banks’ balance sheets will be a key factor in facilitatingan appropriate provision of credit to the economy.To sum up, the economic analysis indicates that price developmentsshould remain in line with price stability over the medium term.A cross-check with the signals from the monetary analysis confirms thispicture.Looking ahead, in order to deliver a favourable environment forsustainable growth and to support confidence and competitiveness, theGoverning Council stresses the urgent need for governments to makefurther progress towards restoring sound fiscal positions andimplementing the structural reform agenda.Regarding fiscal consolidation, many governments in the euro area aremaking progress. Continuing with comprehensive fiscal consolidation _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  54. 54. and complying with all commitments remains essential. In this respect,the 2012 European Semester should be used to enforce rigorously thereinforced fiscal surveillance mechanism.Equally important are structural reforms to increase the adjustmentcapacity and competitiveness of euro area countries and to strengthengrowth prospects and job creation.In this area, more progress is desirable.The Governing Council strongly welcomes the European Commission’sAlert Mechanism Report on macroeconomic imbalances and expects theproposed in-depth country reviews to actively support the reformprocesses under way in euro area countries.We are now at your disposal for questions.***Transcript of the questions asked and the answers given byMario Draghi, President of the ECB, and Vítor Constâncio,Vice-President of the ECBQuestion: Two questions, as permitted. One: I have heard or many heardyour message clearly about LTROs, the temporary measure and thetemporary nature of it, but for those who have not heard it, can you tell usabout the chances of a third LTRO or something further down the line?And the second question, maybe along the same lines: how concerned orupset were you by that leaked letter from the Bundesbank or, morenotably, from Jens Weidmann and, in that context also, how concernedare you that the ECB is not necessarily speaking with one voice at a timewhen it is most critical?Draghi: On your first question: the LTRO, both operations, I would say,are an unquestionable success.The risk environment has improved enormously, markets have reopened,both senior and secure markets, covered bond markets, and even theinterbank market – although still limited to the short term and to nationalboundaries – has also started working a little better. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  55. 55. Certainly, we see many signs of a return of confidence in the euro.So-called real money investors have, to some extent, come back. We seethe presence of money market funds, which were the first to take flightfrom the euro a year and a half ago.We see again pension funds, we see investment funds – so, all in all, wesee that great progress has been achieved. I don’t really need to spendmuch more time on this; you only need to compare the situation inNovember of last year with that today.Let me also add that this is not only the effect of the LTRO, but also of theserious reform effort that has been undertaken by several governments inthe euro area and of the improved governance of the whole euro area; hereI am referring especially to the fiscal compact.But basically, the LTRO had the powerful effect of removing what iscalled “tail risk” from the environment.Now I think the ball is in the court of governments and other actors,especially banks, to continue their reforms, to repair their balance sheetsso that they – especially banks – can actually support the recovery.The LTRO has created a situation where these efforts can certainly beundertaken, but certainly neither governments nor banks nor the otherkey actors ought to be complacent.On the other issue, let me say what I say all the time: I think we all – whenI say “we”, I mean the Governing Council – we all have to do the rightthings and we have to do them together.So let me first, incidentally, say that my personal and professionalrelationship with Jens is excellent. So that is one thing I want to say.I would also like to add that nobody, contrary to what some journals,newspapers and magazines have said, nobody is isolated in theGoverning Council.And the Bundesbank especially is not isolated, and there are severalreasons for this, besides its being a very important central bank. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  56. 56. As I have had many opportunities to say, I really cherish the culture andthe tradition of the Bundesbank, of maintaining price stability. I think weall collectively owe a lot of what we have learned about the stabilityculture to the Bundesbank and to Germany.But now we are all custodians of stability, there is not one specificcustodian of the stability culture. We all share the same view, the sameideals. So I think that ought to be kept in mind.The other thing that is related to the letter – and, incidentally, I don’tthink that the leak came from Jens himself, I am certain that it was nothim – is that the substance, the content of that letter is present in all ourminds: the possible risks of our monetary policy, the complications –which are largely communication-related, I would say – created by theuse of additional credit claims, and the TARGET2 balances as well.We always say that it is normal in a monetary area to have TARGET2balances.We say that it is within the Treaty, that these balances are a normalproduct, especially when interbank markets don’t function. But it is alsotrue that these TARGET2 balances reveal structural differences andstructural weaknesses in some parts of the euro area, and this is thereforenot something that can be ignored.We ought to think about it and reflect on it. And I think that on this, wecompletely share these views. Finally, let me say: we are all in the sameboat. And I think that there is nothing to be gained by fighting or arguingpublicly outside the Governing Council.Question: First, last month you said that you didn’t even discuss interestrates at your monetary policy meeting. Did you discuss them this month?Second, based on the latest information that you might have, howconfident are you that the Greek private sector involvement (PSI) will be asuccess?And finally, you said in Mexico that a special bank lending survey is beingconducted to assess the impact of the first LRTO. Could you perhaps tell _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  57. 57. us what the results are and whether you are actually intending to publishthat survey?Draghi: In answer to your first question, no, we did not discuss interestrate changes.As for the Greek PSI, the operation is unfolding as we speak, and so itwould be completely inappropriate for me to comment on it.Lastly, the bank lending survey I referred to in Mexico is an ad-hoc surveyfor internal use and we do not plan to publish it immediately.However, it certainly shows that from the very, very negative trends incredit and money that we saw in the last three to four months of last year –for the first time in history and the history of the euro, the absolute level ofM3 declined for three consecutive months and the volume of loans to theprivate sector, non-financial corporations, also declined for twoconsecutive months – there has been a modest pick-up in credit and banklending since the first LRTO.Question: Two questions relating to the same subject. Did the GoverningCouncil discuss the issue of a possible restructuring of the Anglo IrishBank’s promissory notes?And second, do you think that such a restructuring or any kind ofconcession on the promissory notes would help Ireland to return to thebond markets next year as planned and would also perhaps help the Irishgovernment in its quest to pass the referendum on the fiscal compact?Draghi: On your last question, let me say that I am really confident thatthe referendum will pass and that the fiscal compact will be approved,because Ireland is probably one of the programme countries that hasmade most progress, under conditions that have been very harsh.And, in spite of these conditions, it has really delivered. We are also awarethat there are certain fragilities that need to be taken care of.On your first question, we didn’t discuss it. It is being examined, but itwas not part of the Governing Council’s discussions. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  58. 58. Question: On the topic of growth, you mentioned that you expect agradual recovery over the course of this year. Can you give us an idea as towhere the ECB sees the sources of this growth coming from? If you lookat austerity, higher oil prices, rising unemployment, none of these thingsseem to bode well for a recovering economy? Can you give us a sense ofhow you all assess where this growth is going to come from?Second, back to the letter and the issue with the Deutsche Bundesbank,one thing that it seems to raise is the fact that these debates within theECB aren’t really published in any kind of way, e.g. meeting minutes orvote counts. Now that you are President of the ECB, would you maybeconsider making these internal debates public – even without mentioningnames – so that they do not create such a drama when they do becomepublic?Draghi: Before I answer your two questions, let me say that I readeverything that you write very carefully. You recently wrote a piece on therisks that are in the ECB’s balance sheet because of the LTRO.In that article, you compare the size of the balance sheet, which is nowaround 3 trillion euro or something to GDP and conclude that theexpansion has been greater in the euro area than in the United States orthe United Kingdom. I am dealing with this now because I have also seenthis mentioned elsewhere.Now, one has to look at the balance sheet for what it is. The comparisonof the overall amount does not really relate to the issue of whether riskshave increased or not.The Eurosystem has a very large volume of assets that have nothing to dowith monetary policy, e.g. gold, foreign exchange reserves, among otherthings.If you compare the ECB’s balance sheet with that of the Federal ReserveSystem or the Bank of England, the latter are very lean, they do not havethe same volume of assets.You have to make the comparison in terms of the additional risks causedby the two LRTOs. You have to compare the ratio of monetary policyinstruments to GDP in the three different areas of the world. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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