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Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events
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Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events

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Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events

Monday May 7 2012 - Top 10 risk and compliance management related news stories and world events

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  • 1. Page |1 International Association of Risk and Compliance Professionals (IARCP) 1200 G Street NW Suite 800 Washington, DC 20005-6705 USA Tel: 202-449-9750 www.risk-compliance-association.com Top 10 risk and compliance management related news storiesand world events that (for better or for worse) shaped the weeks agenda, and what is next George Lekatis President of the IARCPDear Member,To celebrate the launch of the Lifetime Membership opportunity, theInternational Association of Risk and Compliance Professionals (IARCP)is offering $100 discount until Thursday, May 10, 2012.The value of the amazing benefits far exceeds the cost of the lifetimemembership.The all-inclusive discounted cost is $373 until Thursday, May 10, 2012(after May 10 the cost will be $473). This is a one-time fee.Read the amazing benefits at:http://www.risk-compliance-association.com/Lifetime_Membership_Launch_Discount_USD100.htmTime to go to our Top 10 listI was between flights, when I read the alert:NSA responsible for the supervision of the banks.What???_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 2. Page |2In my life, NSA stands for Not Such Agency (some say it is about theNational Security Agency, home to Americas codemakers andcodebreakers).And they are going to supervise banks???I was dead wrong. It was about the NSA (National Supervisory Authority,another European acronym), not the NSA. Read more in No 6 of our list.Oh, no. It is possible to happen again. What else could NSA mean?After a Google search I found:- National Speakers Association- National Society of Accountants- National Scrabble Association- National Sunflower Association- National Smokers Alliance- National Storytelling Association- Nebraska Soybean AssociationThe moral of the story:1. If you see an acronym, you cannot be sure you know what they aretalking about2. Don’t study too hard between flightsWelcome to the Top 10 list._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 3. Page |3We have a very interesting paper from the Bank ofinternational Settlements that clarifies issues of theBasel ii / iii frameworks.Fundamental review of the trading book, consultativedocument, May 2012FSB enhances its process for ongoingmonitoring of compensation practicesGood progress has been made inimplementing the FSB Principles andStandards on Sound Compensation Practices (“Principles andStandards”), but that more work is necessary to overcome constraints tofull implementation by individual national authorities and to addressconcerns by firms of an uneven playing field.More Long-term Investing Can Be Severely Distortedby Inaccurate, Short-term FocusKai Bucher, Associate Director,Inaccurate measurement of investment values, returns,risks and liabilities can create substantial distortions to long-terminvestment strategies and drive long-term investors to adopt a short-termorientation, according to the Measurement, Governance and Long-termInvesting report, released by the World Economic Forum._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 4. Page |4Basel III – the big issuesSpeech by Andrew Bailey, Director of UK Banks &Building Socieities at the Seventh City of London SwissFinancial RoundtableRemarks by Secretary Geithner at the OpeningCeremony of the 2012 Strategic and EconomicDialogue (S&ED)30 April 2012Report on the fulfilment of the EBARecommendation following the 2011EU-wide stress testSocial Media and Investing –Tips for SeniorsThe SEC’s Office of Investor Education and Advocacy is issuing thisInvestor Bulletin to provide seniors who use social media with a few tipsto help them do so more safely and to help them avoid investment fraud._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 5. Page |5A Perspective on the Economic OutlookPresented by Charles I. Plosser, President and ChiefExecutive Officer, Federal Reserve Bank of Philadelphia,CFA Society of San Diego, May 1, 2012Very InterestingNEW CODE OF CORPORATE GOVERNANCESingapore, 2 MAY 2012Testimony on The Collapse of MF Global: LessonsLearned and Policy ImplicationsRobert Cook, Director, Division of Trading and Markets,U.S. Securities and Exchange Commission - Before theCommittee on Banking, Housing, and Urban Affairs, United StatesSenate_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 6. Page |6 We have a very interesting paper from the Bank of international Settlements that clarifies issues of the Basel ii / iii frameworks. Fundamental review of the trading book - consultative document May 2012 This consultative document sets out a revised market risk framework and proposes a number of specific measures to improve trading book capital requirements. These proposals reflect the Committees increased focus on achieving a regulatory framework that can be implemented consistently by supervisors and which achieves comparable levels of capital across jurisdictions. Key elements of the proposals include: A more objective boundary between the trading book and the banking book that materially reduces the scope for regulatory arbitrage - feedback is sought on two alternative approaches; Moving from value-at-risk to expected shortfall, a risk measure that better captures "tail risk"; Calibrating the revised framework in both the standardised and internal models-based approaches to a period of significant financial stress, consistent with the stressed value-at-risk approach adopted in Basel 2.5; Comprehensively incorporating the risk of market illiquidity, again consistent with the direction taken in Basel 2.5; _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 7. Page |7 Measures to reduce model risk in the internal models-based approach, including a more granular models approval process and constraints on diversification; and A revised standardised approach that is intended to be more risk-sensitive and act as a credible fallback to internal models. The Committee is also proposing to strengthen the relationship between the models-based and standardised approaches by establishing a closer link between the calibration of the two approaches, requiring mandatory calculation of the standardised approach by all banks, and considering the merits of introducing the standardised approach as a floor or surcharge to the models-based approach. Furthermore, the treatment of hedging and diversification will be more closely aligned between the two approaches. Comments on this consultative document should be submitted by Friday 7 September 2012 by e-mail to baselcommittee@bis.org. Alternatively, comments may be sent by post to the Secretariat of the Basel Committee on Banking Supervision, Bank for International Settlements, CH-4002 Basel, Switzerland. All comments will be published on the Bank for International Settlementss website unless a commenter specifically requests confidential treatment. Once the Committee has reviewed responses, it intends to release for comment a more detailed set of proposals to amend the Basel III framework. In line with its normal process, the Committee will also subject such proposals to a thorough Quantitative Impact Study. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 8. Page |8AbbreviationsCDS Credit default swapCRM Comprehensive risk measureCTP Correlation trading portfolioCVA Credit valuation adjustmentES Expected shortfallGAAP Generally Accepted Accounting PrinciplesIFRS International Financial Reporting StandardsIRC Incremental risk chargeMTM Mark-to-marketOTC Over-the-counterP&L Profit and lossPVBP Present value of a basis pointRWA Risk-weighted assetsSDR Special drawing rightsSMM Standardised measurement methodVaR Value-at-riskFundamental review of the trading bookExecutive summaryThis consultative document presents the initial policy proposalsemerging from the Basel Committee’s (“the Committee”) fundamentalreview of trading book capital requirements.These proposals will strengthen capital standards for market risk, andthereby contribute to a more resilient banking sector.The policy directions set out in this paper form part of the Committee’sbroader agenda of reforming bank regulatory standards to address thelessons of the financial crisis.These initial proposals build on the series of important reforms that theCommittee has already delivered through Basel III and set out the keyapproaches under consideration by the Committee to revise the marketrisk framework._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 9. Page |9These proposals also reflect the Committee’s increased focus onachieving a regulatory framework that can be implemented consistentlyby supervisors and which achieves comparable levels of capital acrossjurisdictions.The Committee’s policy orientations with regard to the trading book are avital element of the objective to achieve comparability of capital outcomesacross banks, particularly those which are most systemically important.BackgroundThe financial crisis exposed material weaknesses in the overall design ofthe framework for capitalising trading activities and the level of capitalrequirements for trading activities proved insufficient to absorb losses.As an important response to the crisis, the Committee introduced a set ofrevisions to the market risk framework in July 2009 (part of the “Basel 2.5”rules).These sought to reduce the cyclicality of the market risk framework andincrease the overall level of capital, with particular focus on instrumentsexposed to credit risk (including securitisations), where the previousregime had been found especially lacking.However, the Committee recognised at the time that the Basel 2.5revisions did not fully address the shortcomings of the framework.As a result, the Committee initiated a fundamental review of the tradingbook regime, beginning with an assessment of “what went wrong”.The fundamental review seeks to address shortcomings in the overalldesign of the regime as well as weaknesses in risk measurement underboth the internal models-based and standardised approaches.This consultative paper sets out the direction the Committee intends totake in tackling the structural weaknesses of the regime, in order to solicitstakeholders’ comments before proposing more concrete revisions to the_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 10. P a g e | 10market risk capital framework.Key areas of Committee focusThe Committee has focused on the following key areas in its review:The trading book/banking book boundaryThe Committee believes that its definition of the regulatory boundary hasbeen a source of weakness in the design of the current regime.A key determinant of the boundary is banks’ intent to trade, an inherentlysubjective criterion that has proved difficult to police and insufficientlyrestrictive from a prudential perspective in some jurisdictions.Coupled with large differences in capital requirements against similartypes of risk on either side of the boundary, the overall capital frameworkproved susceptible to arbitrage.While the Committee considered the possibility of removing theboundary altogether, it concluded that a boundary will likely have to beretained for practical reasons.The Committee is now putting forth for consideration two alternativeboundary definitions:“Trading evidence”- based boundary:Under this approach the boundary would be defined not only by banks’intent, but also by evidence of their ability to trade and risk manage theinstrument on a trading desk.Any item included in the regulatory trading book would need to bemarked to market daily with changes in fair value recognised in earnings.Stricter, more objective requirements would be used to ensure robust andconsistent enforcement._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 11. P a g e | 11Tight limits to banks’ ability to shift instruments across the boundaryfollowing initial classification would also be introduced.Fundamental to this proposal is a view that a bank’s intention to trade –backed up by evidence of this intent and a regulatory requirement to keepitems in the regulatory trading book once they are placed there – is therelevant characteristic for determining capital requirements.In some jurisdictions, application of this type of definition of theboundary could result in regulatory trading books that are considerablynarrower than at present.Valuation-based boundary:This proposal would move away from the concept of “trading intent” andconstruct a boundary that seeks to align the design and structure ofregulatory capital requirements with the risks posed to a bank’sregulatory capital resources.Fundamental to this proposal is a view that capital requirements formarket risk should apply when changes in the fair value of financialinstruments, whether recognised in earnings or flowing directly to equity,pose risks to the regulatory and accounting solvency of banks.This definition of the boundary would likely result in a larger regulatorytrading book, but not necessarily in a much wider scope of application formarket risk models or necessarily lower capital requirements.Stressed calibrationThe Committee recognises the importance of ensuring that regulatorycapital is sufficient in periods of significant market stress.As the crisis showed, it is precisely during stress periods that capital ismost critical to absorb losses.Furthermore, a reduction in the cyclicality of market risk capital chargesremains a key objective of the Committee._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 12. P a g e | 12Consistent with the direction taken in Basel 2.5, the Committee intends toaddress both issues by moving to a capital framework that is calibrated toa period of significant financial stress in both the internal models-basedand standardised approaches.Moving from value-at-risk to expected shortfallA number of weaknesses have been identified with using value-at-risk(VaR) for determining regulatory capital requirements, including itsinability to capture “tail risk”.For this reason, the Committee has considered alternative risk metrics, inparticular expected shortfall (ES).ES measures the riskiness of a position by considering both the size andthe likelihood of losses above a certain confidence level.In other words, it is the expected value of those losses beyond a givenconfidence level.The Committee recognises that moving to ES could entail certainoperational challenges; nonetheless it believes that these are outweighedby the benefits of replacing VaR with a measure that better captures tailrisk.Accordingly, the Committee is proposing the use of ES for the internalmodels-based approach and also intends to determine risk weights for thestandardised approach using an ES methodology.A comprehensive incorporation of the risk of market illiquidityThe Committee recognises the importance of incorporating the risk ofmarket illiquidity as a key consideration in banks’ regulatory capitalrequirements for trading portfolios.Before the introduction of the Basel 2.5 changes, the entire market riskframework was based on an assumption that trading book risk positions_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 13. P a g e | 13were liquid, ie that banks could exit or hedge these positions over a 10-dayhorizon.The recent crisis proved this assumption to be false.As liquidity conditions deteriorated during the crisis, banks were forcedto hold risk positions for much longer than originally expected andincurred large losses due to fluctuations in liquidity premia andassociated changes in market prices.Basel 2.5 partly incorporated the risk of market illiquidity into modellingrequirements for default and credit migration risk through theincremental risk charge (IRC) and the comprehensive risk measure(CRM).The Committee’s proposed approach to factor in market liquidity riskcomprehensively in the revised market risk regime consists of threeelements:- First, operationalising an assessment of market liquidity for regulatory capital purposes. The Committee proposes that this assessment be based on the concept of “liquidity horizons”, defined as the time required to exit or hedge a risk position in a stressed market environment without materially affecting market prices. Banks’ exposures would be assigned into five liquidity horizon categories, ranging from 10 days to one year.- Second, incorporating varying liquidity horizons in the regulatory market risk metric to capitalise the risk that banks might be unable to exit or hedge risk positions over a short time period (the assumption embedded in the 10-day VaR treatment for market risk).- Third, incorporating capital add-ons for jumps in liquidity premia, which would apply only if certain criteria were met._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 14. P a g e | 14 These criteria would seek to identify the set of instruments that could become particularly illiquid, but where the market risk metric, even with extended liquidity horizons, would not sufficiently capture the risk to solvency from large fluctuations in liquidity premia.Additionally, the Committee is consulting on two possible options forincorporating the “endogenous” aspect of market liquidity.Endogenous liquidity is the component that relates to bank-specificportfolio characteristics, such as particularly large or concentratedexposures relative to the market.The main approach under consideration by the Committee to incorporatethis risk would be further extension of liquidity horizons; an alternativecould be application of prudent valuation adjustments specificallytargeted to account for endogenous liquidity.Treatment of hedging and diversificationHedging and diversification are intrinsic to the active management oftrading portfolios.Hedging, while generally risk reducing, also gives rise to basis risk thatmust be measured and capitalised.In addition, portfolio diversification benefits, whilst seeminglyrisk-reducing, can disappear in times of stress.Currently, banks using the internal models-based approach are allowedlarge latitude to recognise the risk-reducing benefits of hedging anddiversification, while recognition of such benefits is strictly limited underthe standardized approach.The Committee is proposing to more closely align the treatment ofhedging and diversification between the two approaches._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 15. P a g e | 15In part, this will be achieved by constraining diversification benefits inthe internal models-based approach to address the Committee’s concernsthat such models may significantly overestimate portfolio diversificationbenefits that do not materialise in times of stress.Relationship between internal models-based and standardisedapproachesThe Committee considers the current regulatory capital framework forthe trading book to have become too reliant on banks’ internal modelsthat reflect a private view of risk.In addition, the potential for very large differences between standardisedand internal models based capital requirements for a given portfolio is amajor level playing field concern and can also leave supervisors without acredible option of removing model permission when model performanceis poor.To strengthen the relationship between the models-based andstandardised approaches the Committee is consulting on three proposals:- First, establishing a closer link between the calibration of the two approaches;- Second, requiring mandatory calculation of the standardised approach by all banks;- Third, considering the merits of introducing the standardised approach as a floor or surcharge to the models-based approach.Revised models-based approachThe Committee has identified a number of weaknesses with riskmeasurement under the models-based approach.In seeking to address these problems, the Committee intends to_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 16. P a g e | 16(i) Strengthen requirements for defining the scope of portfolios that willbe eligible for internal models treatment; and(ii) Strengthen the internal model standards to ensure that the output ofsuch models reflects the full extent of trading book risk that is relevantfrom a regulatory capital perspective.To strengthen the criteria that banks must meet before regulatory capitalcan be calculated using internal models, the Committee is proposing tobreak the model approval process into smaller, more discrete steps,including at the trading desk level.This will allow ***model approval to be “turned-off” more easily*** thanat present for specific trading desks that do not meet the requirements.At the trading desk level, where the bank naturally has an internal profitand loss (P&L) available, model performance can be verified morerobustly.The Committee is considering two quantitative tools to measure theperformance of models.First, a P&L attribution process that provides an assessment of how well adesk’s risk management model captures risk factors that drive its P&L.Second, an enhanced daily backtesting framework for reconcilingforecasted losses from the market risk metric with actual losses.Although the market risk regime has always required backtesting ofmodel performance, the Committee is proposing to apply it at a moregranular trading desk level in the future.Where a trading desk does not achieve acceptable P&L attribution orbacktesting results, the bank would be required to calculate capitalrequirements for that desk using the standardised approach._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 17. P a g e | 17To strengthen model standards, the Committee is consulting on limitingdiversification benefits, moving to an expected shortfall metric andcalibrating to a period of market stress.In addition, it is consulting on introducing a more robust process forassessing whether individual risk factors would be deemed as“modellable” by a particular bank.This would be a systematic process for identifying, recording andcalculating regulatory capital against risk factors deemed not to beamenable to market risk modelling.Revised standardised approachThe Committee has identified a number of important shortcomings withthe current standardised approach.A standardised approach serves two main purposes.Firstly, it provides a method for calculating capital requirements forbanks with business models that do not require sophisticatedmeasurement of market risk.This is especially relevant to smaller banks with limited trading activities.Secondly, it provides a fallback in the event that a bank’s internal marketrisk model is deemed inadequate as a whole or for specific trading desksor risk factors.This second purpose is of particular importance for larger or moresystemically important banks.In addition, the standardised approach could allow for a harmonisedreporting of risk positions in a format that is consistent across banks andjurisdictions._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 18. P a g e | 18Apart from allowing for greater comparability across banks andjurisdictions, this could also allow for aggregation of risk positions acrossthe banking system to obtain a macroprudential view of market risks.With those objectives in mind the Committee has adopted the followingprinciples for the design of the revised standardised approach:simplicity, transparency and consistency, as well as improved risksensitivity; a credible calibration; limited model reliance; and a crediblefallback to internal models.In seeking to meet these objectives, the Committee proposes a “partialrisk factor” approach as a revised standardised approach.The Committee also invites feedback on a “fuller risk factor” approach asan alternative.More specifically:(a) Partial risk factor approach:Instruments that exhibit similar risk characteristics would be grouped inbuckets and Committee-specified risk weights would be applied to theirmarket value.The number of buckets would be approximately 20 across five broadclasses of instruments, though the exact number would be determinedempirically.Hedging and diversification benefits would be better captured than atpresent by using regulatory correlation parameters.To improve risk sensitivity, instruments exposed to “cross-cutting” riskfactors that are pervasive across the trading book (eg FX and interest raterisk) would be assigned to more than one bucket.For example, a foreign-currency equity would be assigned to theappropriate quity bucket and to a cross-cutting FX bucket._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 19. P a g e | 19(b) Fuller risk factor approach:This alternative approach would map instruments to a set of prescribedregulatory risk factors to which shocks would be applied to calculate acapital charge for the individual risk factors.The bank would have to use a pricing model (likely its own) to determinethe size of the risk positions for each instrument with respect to theapplicable risk factors.Hedging would be recognized for more “systematic” risk factors at therisk factor level.The capital charge would be generated by subjecting the overall riskpositions to a simplified regulatory aggregation algorithm.The appropriate treatment of creditA particular area of Committee focus has been the treatment of positionssubject to credit risk in the trading book.Credit risk has continuous (credit spread) and discrete (default andmigration) components.This has implications for the types of models that are appropriate forcapturing credit risk.In practice, including default and migration risk within an integratedmarket risk framework introduces particular challenges and potentiallymakes consistent capital charges for credit risk in the banking andtrading books more difficult to achieve.The Committee is therefore considering whether, under a futureframework, there should continue to be a separate model for default andmigration risk in the trading book._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 20. P a g e | 20Areas outside the scope of these proposalsThe Committee thinks it is important to note that there are two particularareas that it has considered, but are not subject to any detailed proposalsin this consultative document.Interest rate risk in the banking bookAlthough the Committee has determined that removing the boundarybetween the banking book and the trading book may be impractical, it isconcerned about the possibility of arbitrage across the banking book /trading book boundary.A major contributor to arbitrage opportunities are different capitaltreatments for the same risks on either side of the boundary.One example is interest rate risk, which is explicitly captured in thetrading book under a Pillar 1 capital regime, but subject to Pillar 2requirements in the banking book.The Committee has therefore undertaken some preliminary work on thekey issues that would be associated with applying a Pillar 1 capital chargefor interest rate risk in the banking book.The Committee intends to consider the timing and scope of further workin this area later in 2012.Interaction of market and counterparty riskBasel III introduced a new set of capital charges to capture the risk ofchanges to credit valuation adjustments (CVA).This is known as the CVA risk capital charge and will be implemented asa “stand alone” capital charge under Basel III, with a coordinated startdate of 1 January 2013._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 21. P a g e | 21The Committee is aware that some industry participants believe that CVArisk, as the market component of credit risk, should be captured in anintegrated fashion with other forms of market risk within the market riskframework.The Committee has agreed to consider this question, but remainscautious of the degree to which these risks can be effectively captured in asingle integrated modelling approach.It observes that there is no clear market standard for the treatment of CVArisk in banks’ internal capital.Occasionally, even within individual banks, different treatments for CVArisk seem to exist.For the time being, the Committee anticipates that open questionsregarding the practicality of integrated modelling of CVA and market riskcould constrain moving towards such integration.In the meantime, the industry should focus on ensuring a high-qualityimplementation of the new stand-alone charge on 1 January 2013.This is consistent with the Committee’s broader concerns over the degreeof reliance on internal models and the over-estimation of diversificationbenefits.For this reason, this consultative document sets out initial proposals onrevisions to the capital framework for capturing market risk and does notoffer specific proposals for dealing with CVA risk.Nonetheless, stakeholders may wish to provide their views on whetherCVA risk should be incorporated into the market risk framework and, ifso, how this could be achieved in the context of the emerging revisions tothe market risk framework presented in this paper._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 22. P a g e | 22Next stepsThe Committee welcomes comments from the public on all aspects ofthis consultative document and in particular on the questions in the text(summarised at the end of this document) by 7 September 2012 by e-mailto baselcommittee@bis.org.Alternatively, comments may be sent by post to: Basel Committee onBanking Supervision, Bank for International Settlements,Centralbahnplatz 2, CH-4002 Basel, SwitzerlandAll comments will be published on the Bank for InternationalSettlements’ website unless a commenter specifically requestsconfidential treatment.Once the Committee has reviewed responses, it intends to release forcomment a more detailed set of proposals to amend the Basel IIIframework.As is its normal process, the Committee will subject such proposals to athorough Quantitative Impact Study._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 23. P a g e | 23AnnexLessons from the academic literature and banks’ riskmanagement practicesIn its deliberations on revising the prudential regime for tradingactivities, the Trading Book Group has drawn on lessons both from theacademic literature and banks’ current and emerging risk managementpractices.1. Messages from the academic literature on risk measurementin the trading bookSelected lessons on VaR implementation:(a) There is no unique solution to the problem of the appropriate timehorizon for risk measurement.The horizon depends on characteristics of the portfolio and theeconomic purpose of measuring its risk.(b) Commonly used square-root-of-time VaR scaling rules (which ignorefuture changes in the portfolio) have been found to be an inaccurateapproximation in many studies.That said, no widely accepted alternative has emerged.(c) There are limitations of VaR models that rely on the use of continuousstochastic processes with only deterministic volatility assumptions.Introducing either stochastic volatility assumptions or stochastic jumpprocess into modelling of risk factors will help to overcome theseshortcomings.(d) Backtesting procedures that only focus on the number of VaRviolations are insufficient to determine the appropriateness of the modelassumptions._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 24. P a g e | 24The use of conditional backtesting procedures or other techniques (likethe timing of violations or the magnitude of the VaR exceptions) canimprove the backtesting process.(e) No consensus has yet emerged on the relative benefits of using actualor hypothetical results (ie P&L) to conduct backtesting exercises.Incorporating market liquidity risk:The literature distinguishes, first, between exogenous and endogenousmarket liquidity risks; and, second, between normal (or current) liquidityrisk and extreme (or stressed) liquidity risk.Portfolios may be subject to significant endogenous liquidity costs underall market conditions, depending on their size or on the risk positions ofother market participants.According to accounting standards, endogenous liquidity costs are nottaken into account in the valuation of the trading books.A first step to incorporating this risk in a VaR measure would be to take itinto account in the valuation method.In practice, the time it takes to liquidate a risk position varies, dependingon its transaction costs, the size of the risk position in the market, thetrade execution strategy, and market conditions.Some studies suggest that, for some portfolios, this aspect of liquidity riskcould also be addressed by extending the VaR risk measurement horizon.Risk measures:VaR has been criticised in the literature for lacking subadditivity. Aprominent alternative to VaR is ES, which is subadditive.Despite criticism focused on the complexity, computational burden, andbacktesting issues associated with ES, the recent literature suggests that_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 25. P a g e | 25many issues have been resolved or have been identified as less severe thanoriginally expected. Spectral risk measures are a promising generalisationof ES that is cited in the literature.Stress testing practices for market risk:Stress testing often was implemented as an ad hoc exercise without anyestimate of scenario probability or use of a bank’s VaR risk measurementframework.More recent research advocates the integration of stress testing into therisk modelling framework.This would overcome the drawbacks of reconciling standalone stress testresults with standard VaR model output.Progress has also been achieved in theoretical research on the selection ofstress scenarios.The regulatory stressed VaR approach has not been analysed in theacademic literature.Unified versus compartmentalised risk measurement:Recently, attention has shifted towards unified approaches to riskmeasurement that consider all risk categories jointly.Theoretically, an integrated approach is needed to capture potentialcompounding effects that are ignored in traditional compartmentalisedrisk measurement approaches (eg separate measures for interest rate,market, credit and operational risk).These might underestimate risk if a portfolio cannot be cleanly dividedinto sub-portfolios along risk categories.Irrespective of the separation of assets into “books”, it is not always truethat calculating different risks for the same portfolio in a_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 26. P a g e | 26compartmentalised fashion and adding up the compartmentalisedmeasures will be a conservative estimate of the true risk.This insight is particularly important for “back-fitting packages”, such asthe IRC.Risk management and VaR in a systemic context:A number of studies criticise VaRbased capital rules as being procyclicalin nature.This may induce cyclical lending behavior by banks and exacerbate thebusiness cycle.Another criticism of VaR-based capital rules is that banks may fail toconsider system-wide endogeneity in their internal decisions.If all banks do this, they may act uniformly in booms and busts leading toinstabilities in asset markets.Unfortunately, the literature does not offer convincing alternatives.2. Key findings from a survey of industry practicesThe Trading Book Group conducted a survey of industry practices in riskmanagement, capital allocation and other measures for the trading bookthat could be used to inform the development of regulatory capitalstandards.The key findings are as follows.Length of holding period for risk assessment:For day-to-day risk management the use of one-day VaR is universalamong banks surveyed.However, for internal capital adequacy and strategic risk management,banks are generally moving beyond short-horizon models (eg one-dayand 10-day VaR)._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 27. P a g e | 27It is now acknowledged that, to determine the level of capital necessary toremain in business after sustaining a large loss, risk must be assessedover a longer holding period.Shorter horizons do not address the liquidity risk for all exposures and donot capture tail events that are important for capital adequacy.Some banks are developing risk models with varying holding periods forrisk assessment across products and conditional on the market liquidityof the exposure, though validation will be difficult.Alternatives to traditional VaR models:Many banks see the need for a measure of risk for exposures that are hardto capture in traditional VaR models.Stress tests are utilised but most view that risk needs to be assessed over arange of possible scenarios because the nature of the next crisis cannot bepredicted.Consequently, more ambitious comprehensive statistical models of stressscenarios are used.Such models allow systematic assessment of risk across multiple stressscenarios beyond those present in historical data sets.These approaches are similar to reverse stress tests in that they aresensitive to the scenario to which the bank is most exposed.Alternatively, some banks recommend the use of risk sensitive add-ons torisk model outputs for exposures whose risks cannot be reliably measuredwith VaR.These banks believe that use of add-ons where complexity and modeluncertainty exist would be preferable to blunt risk-insensitivestandardised measures._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 28. P a g e | 28The same complexity and measurement issues that are challenges forVaR models are likely to affect the robustness of standardised riskweights.Model validation:The emerging modelling approaches for assessment of exposure tostress events will present a challenge for model validation because of thepaucity of relevant historical data.In addition, models that assess risk over long holding periods such as inthe IRC model present a validation challenge because some productshave less than 10 years of historical data.In cases where historical data are not sufficient for traditionalbacktesting, several banks suggested using benchmark portfolios todiscover which models were outliers in underestimating of risk.Scaling of VaR and nonlinearities:Nonlinearities in exposures are captured in most banks’ models to somedegree albeit imperfectly.Almost all banks’ VaR models capture nonlinearities at a local level (smallprice changes) for much of their market risk exposure, but many banks’VaR models fail to capture non-linearity at a global level (large pricechanges).A common weakness in the capture of non-linearity is the use of scalingof oneday VaR to estimate exposures at longer holding periods.Such scaling only captures local non-linearity in the range of one-dayprice changes and can underestimate non-linear exposure over longerhorizons, even when full revaluation is used.To learn more:www.bis.org/publ/bcbs219.htm_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 29. P a g e | 29_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 30. P a g e | 30_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 31. P a g e | 31FSB enhances its process for ongoing monitoring ofcompensation practicesThe 2011 FSB peer review on compensation indicated that good progresshas been made in implementing the FSB Principles and Standards onSound Compensation Practices (“Principles and Standards”), but thatmore work is necessary to overcome constraints to full implementation byindividual national authorities and to address concerns by firms of anuneven playing field.Following the completion of the peer review, the Financial Stability Board(FSB) was tasked by the G20 to undertake ongoing monitoring and publicreporting on further progress in compensation practices.In order to strengthen its monitoring in this area, the FSB has recentlyestablished the Compensation Monitoring Contact Group (CMCG), anetwork of national experts from member jurisdictions with regulatory orsupervisory responsibility on compensation practices.The CMCG is responsible for monitoring and reporting to the FSB onnational implementation of the Principles and Standards.In addition, the FSB has established a mechanism for nationalsupervisors from FSB member jurisdictions to bilaterally report, verifyand, if necessary, address specific compensation-related complaints byfinancial institutions that give rise to level playing field concerns.The objectives of the Bilateral Complaint Handling Process (BCHP) areto:- Address evidence-based complaints raised by firms to their home supervisors that document a competitive disadvantage as a result of_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 32. P a g e | 32 the inconsistent implementation of the Principles and Standards by firms headquartered in other jurisdictions.- Produce and report information to the FSB on the nature and outcomes of such complaints so as to inform the scope and intensity of the ongoing monitoring.The BCHP is intended to complement and reinforce normal bilateral ormultilateral supervisory channels that may be used by supervisors toaddress compensation issues.The outcomes of the BCHP will be reported by the CMCG to the FSB aspart of its ongoing monitoring process.Information on the FSB’s implementation monitoring activities ofcompensation practices is available on a dedicated page of the FSBwebsite that can be accessed at the following link:www.financialstabilityboard.org/activities/compensation/cm.htmWhat exactly is happening ?The G20 Leaders in the November 2011 Cannes Summit Declaration,called on the FSB to "undertake an ongoing monitoring and publicreporting on compensation practices focused on remaining gaps andimpediments to full implementation of these standards and carry out anongoing bilateral complaint handling process to address level playingfield concerns of individual firms".Compensation practices is one of the designated priority areas under theFSBs Coordination Framework for Implementation Monitoring(CFIM).All priority areas undergo more intensive monitoring and detailedreporting via periodic progress reports and peer reviews.The Compensation Monitoring Contact Group (CMCG) under the FSBStanding Committee on Standards Implementation (SCSI) is responsiblefor monitoring and reporting on national implementation in this area andon the results of the bilateral complaint handling process, a mechanism_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 33. P a g e | 33by which national supervisors from the FSB member jurisdictions worktogether to verify and, as needed, address specific compensation-relatedcomplaints by financial institutions that give rise to level playing fieldconcerns.It is good to see the G20 Cannes Summit final declaration"BUILDING OUR COMMON FUTURE: RENEWEDCOLLECTIVE ACTION FOR THE BENEFIT OF ALL"1. Since our last meeting, global recovery has weakened, particularly inadvanced countries, leaving unemployment at unacceptable levels.Tensions in the financial markets have increased due mostly to sovereignrisks in Europe.Signs of vulnerabilities are appearing in emerging markets.Increased commodity prices have harmed growth and hit the mostvulnerable.Exchange rate volatility creates a risk to growth and financial stability.Global imbalances persist.Today, we reaffirm our commitment to work together and we have takendecisions to reinvigorate economic growth, create jobs, ensure financialstability, promote social inclusion and make globalization serve the needsof our people.A global strategy for growth and jobs2. To address the immediate challenges faced by the global economy, wecommit to coordinate our actions and policies.We have agreed on an Action plan for Growth and Jobs. Each of us willplay their part._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 34. P a g e | 34Fostering Employment and Social Protection3. We firmly believe that employment must be at the heart of the actionsand policies to restore growth and confidence that we undertake underthe Framework for strong, sustainable and balanced growth.We are committed to renew our efforts to combat unemployment andpromote decent jobs, especially for youth and others who have been mostaffected by the economic crisis.We therefore decide to set up a G20 Task-Force on Employment, with afocus on youth employment, that will provide input to the G20 Labourand Employment Ministerial Meeting to be held under the MexicanPresidency in 2012.We have tasked International organizations (IMF, OECD, ILO, WorldBank) to report to Finance Ministers on a global employment outlook andhow our economic reform agenda under the G20 Framework willcontribute to job creation.4. We recognize the importance of investing in nationally determinedsocial protection floors in each of our countries, such as access to healthcare, income security for the elderly and persons with disabilities, childbenefits and income security for the unemployed and assistance for theworking poor.They will foster growth resilience, social justice and cohesion.In this respect, we note the report of the Social Protection Floor AdvisoryGroup, chaired by Ms Michelle Bachelet.5. We commit to promote and ensure full respect of the fundamentalprinciples and rights at work.We welcome and encourage the ILO to continue promoting ratificationand implementation of the eight ILO Fundamental Conventions._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 35. P a g e | 356. We are determined to strengthen the social dimension of globalisation.Social and employment issues, alongside economic, monetary andfinancial issues, will remain an integral part of the G20 agenda.We call on international organisations to intensify their coordination andmake it more effective.In view of a greater coherence of multilateral action, we encourage theWTO, the ILO, the OECD, the World Bank and the IMF to enhance theirdialogue and cooperation.7. We are convinced of the essential role of social dialogue.In this regard we welcome the B20 and L20 Meetings that took placeunder the French presidency and the willingness of these fora to worktogether as witnessed in their joint statement.8. Our Labour and Employment Ministers met in Paris on September26-27, 2011 to tackle these issues.We endorse their conclusions, annexed to this Declaration. We ask ourMinisters to meet again next year to review progress made on thisagenda.Building a more stable and resilient International MonetarySystem9. In 2010, the G20 committed to working towards a more stable andresilient IMS and to ensure systemic stability in the global economy,improve the global economic adjustment, as well as an appropriatetransition towards an IMS which better reflects the increased weight ofemerging market economies.In 2011, we are taking concrete steps to achieve these goals.Increasing the benefits from financial integration and resilienceagainst volatile capital flows to foster growth and development_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 36. P a g e | 3610. We agreed on coherent conclusions to guide us in the management ofcapital flows drawing on country experiences, in order to reap the benefitsfrom financial globalization, while preventing and managing risks thatcould undermine financial stability and sustainable growth at the nationaland global levels.11. To pursue these objectives, we adopted an action plan to support thedevelopment and deepening of local currency bond markets, scaling uptechnical assistance from different international institutions, improvingthe data base and preparing joint annual progress reports to the G20.We call on the World Bank, Regional Development Banks, IMF,UNCTAD, OECD, BIS and FSB to work together to support the deliveryof this plan and to report back by the time of our next meeting aboutprogress made.Reflecting the changing economic equilibrium and theemergence of new international currencies12. We affirm our commitment to move more rapidly toward moremarket-determined exchange rate systems and enhance exchange rateflexibility to reflect underlying economic fundamentals, avoid persistentexchange rate misalignments and refrain from competitive devaluation ofcurrencies.We are determined to act on our commitments to exchange rate reformarticulated in our Action plan for Growth and Jobs to address short termvulnerabilities, restore financial stability and strengthen themedium-term foundations for growth.Our actions will help address the challenges created by developments inglobal liquidity and capital flows volatility, thus facilitating furtherprogress on exchange rate reforms and reducing excessive accumulationof reserves.13. We agreed that the SDR basket composition should continue to reflectthe role of currencies in the global trading and financial system and beadjusted over time to reflect currencies changing role and characteristics._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 37. P a g e | 37The SDR composition assessment should be based on existing criteria,and we ask the IMF to further clarify them.A broader SDR basket will be an important determinant of itsattractiveness, and in turn influence its role as a global reserve asset.This will serve as a reference for appropriate reforms.We look forward to reviewing the composition of the SDR basket in 2015,and earlier if warranted, as currencies meet the criteria, and call forfurther analytical work of the IMF in this regard, including on potentialevolution.We will continue our work on the role of the SDR.Strengthening our capacity to cope with crises14. As a contribution to a more structured approach, we agreed to furtherstrengthen global financial safety nets in which national governments,central banks, regional financial arrangements and international financialinstitutions will each play a role according to and within their respectivemandate.We agreed to continue these efforts to this end.We recognize that central banks play a major role in addressing liquidityshocks at a global and regional level, as shown by the recentimprovements in regional swap lines such as in East Asia.We agreed on common principles for cooperation between the IMF andRegional Financial Arrangements, which will strengthen crisis preventionand resolution efforts.15. As a contribution to this structured approach and building on existinginstruments and facilities, we support the IMF in putting forward the newPrecautionary and Liquidity Line (PLL).This would enable the provision, on a case by case basis, of increased andmore flexible short-term liquidity to countries with strong policies andfundamentals facing exogenous, including systemic, shocks. _____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 38. P a g e | 38We also support the IMF in putting forward a single emergency facility toprovide non-concessional financing for emergency needs such as naturaldisasters, emergency situations in fragile and post-conflict states, andalso other disruptive events.We call on the IMF to expeditiously discuss and finalize both proposals.16. We welcome the euro areas comprehensive plan and urge rapidelaboration and implementation, including of country reforms.We welcome the euro areas determination to bring its full resources andentire institutional capacity to bear in restoring confidence and financialstability, and in ensuring the proper functioning of money and financialmarkets.We will ensure the IMF continues to have resources to play its systemicrole to the benefit of its whole membership, building on the substantialresources we have already mobilized since London in 2009.We stand ready to ensure additional resources could be mobilised in atimely manner and ask our finance ministers by their next meeting towork on deploying a range of various options including bilateralcontributions to the IMF, SDRs, and voluntary contributions to an IMFspecial structure such as an administered account.We will expeditiously implement in full the 2010 quota and governancereform of the IMF.Strengthening IMF surveillance17. We agreed that effective and strengthened IMF surveillance will becrucial to the efficiency and stability of the IMS.In this context, a strengthening of multilateral surveillance and a betterintegration with bilateral surveillance will be important, as well asenhanced monitoring of interlinkages across sectors, countries andregions._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 39. P a g e | 39Against this background, we welcome the recent improvements to theIMF surveillance toolkit including the consolidated multilateralsurveillance report and spillover reports and ask the IMF to continue toimprove upon these exercises and methodology.18. We call on the IMF to make further progress towards a moreintegrated, even-handed and effective IMF surveillance, taking intoaccount the Independent Evaluation Office report on surveillance,covering in particular financial sector, fiscal, monetary, exchange ratepolicies and an enhanced analysis of their impact on external stability.We call on the IMF to regularly monitor cross-border capital flows andtheir transmission channels and update capital flow managementmeasures applied by countries.We also call on the IMF to continue its work on drivers and metrics ofreserve accumulation taking into account country circumstances, and,along with the BIS, their work on global liquidity indicators, with a viewto future incorporation in the IMF surveillance and other monitoringprocesses, on the basis of reliable indicators.We will avoid persistent exchange rate misalignments and we asked theIMF to continue to improve its assessment of exchange rates and topublish its assessments as appropriate.19. While continuing with our efforts to strengthen surveillance, werecognize the need for better integration of bilateral and multilateralsurveillance, and we look forward to IMF proposals for a new integrateddecision on surveillance early next year.20. We agreed on the need to increase the ownership and traction of IMFsurveillance, which are key components of its effectiveness.We agreed to ensure greater involvement of Ministers and Governors, byproviding greater strategic guidance through the IMFC.To increase the transparency of IMF surveillance, we reaffirm theimportance of all IMF members to contribute to improve data availability,support the Managing Directors proposal to publish multilateral_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 40. P a g e | 40assessments of external balances, and we recommend timely publicationof surveillance reports.We welcome the publication of Art. IV reports by most members of theG20 and look forward to further progress.Next steps21. Building a more stable and resilient IMS is a long-term endeavor.We commit to continue working to ensure systemic stability in the globaleconomy and an appropriate transition towards an IMS which betterreflects the increased weight of emerging market economies.In 2012, we will continue to take concrete steps in this direction.Implementing and deepening Financial sector reforms22. We are determined to fulfill the commitment we made in Washingtonin November 2008 to ensure that all financial markets, products andparticipants are regulated or subject to oversight as appropriate to theircircumstances in an internationally consistent and non-discriminatoryway.Meeting our commitments notably on banks, OTC derivatives,compensation practices and credit rating agencies, andintensifying our monitoring to track deficiencies23. We are committed to improve banks resilience to financial andeconomic shocks.Building on progress made to date, we call on jurisdictions to meet theircommitment to implement fully and consistently the Basel II risk-basedframework as well as the Basel II-5 additional requirements on marketactivities and securitization by end 2011 and the Basel III capital andliquidity standards, while respecting observation periods and reviewclauses, starting in 2013 and completing full implementation by 1 January2019._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 41. P a g e | 4124. Reforming the over the counter derivatives markets is crucial to builda more resilient financial system.All standardized over-the-counter derivatives contracts should be tradedon exchanges or electronic trading platforms, where appropriate, andcentrally cleared, by the end of 2012; OTC derivatives contracts should bereported to trade repositories, and non-centrally cleared contracts shouldbe subject to higher capital requirements.We agree to cooperate further to avoid loopholes and overlappingregulations.A coordination group is being established by the FSB to address some ofthese issues, complementing the existing OTC derivatives workinggroup.We endorse the FSB progress report on implementation and ask the CPSSand IOSCO to work with FSB to carry forward work on identifying datathat could be provided by and to trade repositories, and to defineprinciples or guidance on regulators and supervisors access to data heldby trade repositories.We call on the Basel Committee on Banking Supervision (BCBS), theInternational Organization for Securities Commission (IOSCO) togetherwith other relevant organizations to develop for consultation standards onmargining for non-centrally cleared OTC derivatives by June 2012, and onthe FSB to continue to report on progress towards meeting ourcommitments on OTC derivatives.25. We reaffirm our commitment to discourage compensation practicesthat lead to excessive risk taking by implementing the agreed FSBprinciples and standards on compensation.While good progress has been made, impediments to full implementationremain in some jurisdictions.We therefore call on the FSB to undertake an ongoing monitoring andpublic reporting on compensation practices focused on remaining gapsand impediments to full implementation of these standards and carry out_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 42. P a g e | 42an on-going bilateral complaint handling process to address level playingfield concerns of individual firms.Based on the findings of this ongoing monitoring, we call on the FSB toconsider any additional guidance on the definition of material risk takersand the scope and timing of peer review process.26. We reaffirm our commitment to reduce authorities and financialinstitutions reliance on external credit ratings, and call on standardsetters, market participants, supervisors and central banks to implementthe agreed FSB principles and end practices that rely mechanistically onthese ratings.We ask the FSB to report to our Finance Ministers and Central BankGovernors at their February meeting on progress made in this area bystandard setters and jurisdictions against these principles.27. We agree to intensify our monitoring of financial regulatory reforms,report on our progress and track our deficiencies.To do so, we endorse the FSB coordination framework forimplementation monitoring, notably on key areas such as the Baselcapital and liquidity frameworks, OTC derivatives reforms, compensationpractices, G-SIFI policies, resolution frameworks, and shadow banking.This work will build on the monitoring activities conducted by standardsetting bodies to the extent possible.We stress the need to report the results of this monitoring to the publicincluding on an annual basis through a traffic lights scoreboard preparedby the FSB.We welcome its first publication today and commit to take all necessaryactions to progress in the areas where deficiencies have been identified.Addressing the too big to fail issue28. We are determined to make sure that no financial firm is "too big tofail" and that taxpayers should not bear the costs of resolution._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 43. P a g e | 43To this end, we endorse the FSB comprehensive policy framework,comprising a new international standard for resolution regimes, moreintensive and effective supervision, and requirements for cross-bordercooperation and recovery and resolution planning as well as, from 2016,additional loss absorbency for those banks determined as globalsystemically important financial institutions (G-SIFIs).The FSB publishes today an initial list of G-SIFIs, to be updated eachyear in November.We will implement the FSB standards and recommendations within theagreed timelines and commit to undertake the necessary legislativechanges, step up cooperation amongst authorities and strengthensupervisory mandates and powers.29. We ask the FSB in consultation with the BCBS, to deliver a progressreport by the G20 April Finance meeting on the definition of themodalities to extend expeditiously the G SIFI framework to domesticsystemically important banks.We also ask the IAIS to continue its work on a common framework for thesupervision of internationally active insurance groups, call on CPSS andIOSCO to continue their work on systemically important marketinfrastructures and the FSB in consultation with IOSCO to preparemethodologies to identify systemically important non-bank financialentities by end-2012.Filling in the gaps in the regulation and supervision of thefinancial sector30. Bank-like activities.The shadow banking system can create opportunities for regulatoryarbitrage and cause the build-up of systemic risk outside the scope of theregulated banking sector.To this end, we agree to strengthen the regulation and oversight of theshadow banking system and endorse the FSB initial elevenrecommendations with a work-plan to further develop them in the course_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 44. P a g e | 44of 2012, building on a balanced approach between indirect regulation ofshadow banking through banks and direct regulation of shadow bankingactivities, including money markets funds, securitization, securitieslending and repo activities, and other shadow banking entities.We ask Finance Ministers and Central Bank Governors to review theprogress made in this area at their April meeting.31. Markets.We must ensure that markets serve efficient allocation of investments andsavings in our economies and do not pose risks to financial stability.To this end, we commit to implement initial recommendations by IOSCOon market integrity and efficiency, including measures to address therisks posed by high frequency trading and dark liquidity, and call forfurther work by mid-2012.We also call on IOSCO to assess the functioning of credit default swap(CDS) markets and the role of those markets in price formation ofunderlying assets by our next Summit.We support the creation of a global legal entity identifier (LEI) whichuniquely identifies parties to financial transactions.We call on the FSB to take the lead in helping coordinate work among theregulatory community to prepare recommendations for the appropriategovernance framework, representing the public interest, for such a globalLEI by our next Summit.32. Commodity markets.We welcome the G20 study group report on commodities and endorseIOSCOs report and its common principles for the regulation andsupervision of commodity derivatives markets.We need to ensure enhanced market transparency, both on cash andfinancial commodity markets, including OTC, and achieve appropriateregulation and supervision of participants in these markets._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 45. P a g e | 45Market regulators and authorities should be granted effective interventionpowers to address disorderly markets and prevent market abuses.In particular, market regulators should have, and use formal positionmanagement powers, including the power to set ex-ante position limits,particularly in the delivery month where appropriate, among other powersof intervention.We call on IOSCO to report on the implementation of itsrecommendations by the end of 2012.33. Consumer protection.We agree that integration of financial consumer protection policies intoregulatory and supervisory frameworks contributes to strengtheningfinancial stability, endorse the FSB report on consumer financeprotection and the high level principles on financial consumer protectionprepared by the OECD together with the FSB.We will pursue the full application of these principles in our jurisdictionsand ask the FSB and OECD along with other relevant bodies, to report onprogress on their implementation to the upcoming Summits and developfurther guidelines if appropriate.34. Other regulatory issues.We are developing macro-prudential policy frameworks and tools to limitthe build-up of risks in the financial sector, building on the ongoing workof the FSB-BIS-IMF on this subject.We endorse the joint report by FSB, IMF and World Bank on issues ofparticular interest to emerging market and developing economies and callinternational bodies to take into account emerging market anddeveloping economies specific considerations and concerns in designingnew international financial standards and policies where appropriate.We reaffirm our objective to achieve a single set of high quality globalaccounting standards and meet the objectives set at the London summitin April 2009, notably as regards the improvement of standards for thevaluation of financial instruments. _____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 46. P a g e | 46We call on the IASB and the FASB to complete their convergence projectand look forward to a progress report at the Finance Ministers andCentral Bank governors meeting in April 2012.We look forward to the completion of proposals to reform the IASBgovernance framework.Tackling tax havens and non-cooperative jurisdictions35. We are committed to protect our public finances and the globalfinancial system from the risks posed by tax havens and non cooperativejurisdictions.The damage caused is particularly important for the least developedcountries.Today we reviewed progress made in the three following areas:- In the tax area, the Global Forum has now 105 members. More than 700 information exchange agreements have been signed and the Global Forum is leading an extensive peer review process of the legal framework (phase 1) and implementation of standards (phase 2). We ask the Global Forum to complete the first round of phase 1 reviews and substantially advance the phase 2 reviews by the end of next year. We will review progress at our next Summit. Many of the 59 jurisdictions which have been reviewed by the Global Forum are fully or largely compliant or are making progress through the implementation of the 379 relevant recommendations. We urge all the jurisdictions to take the necessary action to tackle the deficiencies identified in the course of their reviews, in particular the 11 jurisdictions whose framework does not allow them at this stage to qualify to phase 2._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 47. P a g e | 47 We underline in particular the importance of comprehensive tax information exchange and encourage competent authorities to continue their work in the Global Forum to assess and better define the means to improve it. We welcome the commitment made by all of us to sign the Multilateral Convention on Mutual Administrative Assistance in Tax Matters and strongly encourage other jurisdictions to join this Convention. In this context, we will consider exchanging information automatically on a voluntary basis as appropriate and as provided for in the convention;- In the prudential area, the FSB has led a process and published a statement to evaluate adherence to internationally agreed information exchange and cooperation standards. Out of 61 jurisdictions selected for their importance on several economic and financial indicators, we note with satisfaction that 41 jurisdictions have already demonstrated sufficiently strong adherence to these standards and that 18 others are committing to join them. We urge the identified non-cooperative jurisdictions to take the actions requested by the FSB;- In the anti-money laundering and combating the financing of terrorism area, the FATF has recently published an updated list of jurisdictions with strategic deficiencies. We urge all jurisdictions and in particular those identified as not complying or making sufficient progress to strengthen their AML/CFT systems in cooperation with the FATF.36. We urge all jurisdictions to adhere to the international standards in thetax, prudential and AML/CFT areas.We stand ready, if needed, to use our existing countermeasures to dealwith jurisdictions which fail to meet these standards._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 48. P a g e | 48The FATF, the Global Forum and other international organizationsshould work closely together to enhance transparency and facilitatecooperation between tax and law enforcement agencies in theimplementation of these standards.We also call on FATF and OECD to do further work to prevent misuse ofcorporate vehicles.Strengthening the FSB capacity resources and governance37. The FSB has played a key role in promoting development andimplementation of regulation of the financial sector.38. To keep pace with this growing role, we agreed to strengthen FSBscapacity, resources and governance, building on its Chairs proposals.These include:- the establishment of the FSB on an enduring organizational footing: we have given the FSB a strong political mandate and need to give it a corresponding institutional standing, with legal personality and greater financial autonomy, while preserving the existing and well-functioning strong links with the BIS;- the reconstitution of the steering committee: as we move into a phase of policy development and implementation that in many cases will require significant legislative changes, we agree that the upcoming changes to the FSB steering committee should include the executive branch of governments of the G20 Chair and the larger financial systems as well as the geographic regions and financial centers not currently represented, in a balanced manner consistent with the FSB Charter;- the strengthening of its coordination role vis-à-vis other standard setting bodies (SSB) on policy development and implementation monitoring, avoiding any functional overlaps and recognizing the independence of the SSBs.39. We call for first steps to be implemented by the end of this year andwill review the implementation of the reform at our next Summit._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 49. P a g e | 49Addressing Food Price Volatility and Increasing AgricultureProduction and Productivity40. Increasing agricultural production and productivity is essential topromote food security and foster sustainable economic growth.A more stable, predictable, distortion free, open and transparent tradingsystem allows more investment in agriculture and has a critical role toplay in this regard.Mitigating excessive food and agricultural commodity price volatility isalso an important endeavour.These are necessary conditions for stable access to sufficient, safe andnutritious food for everyone.We agreed to mobilize the G20 capacities to address these key challenges,in close cooperation with all relevant international organisations and inconsultation with producers, civil society and the private sector.41. Our Agriculture Ministers met for the first time in Paris on 22-23 June2011 and adopted the Action Plan on Food Price Volatility andAgriculture.We welcome this Action Plan, annexed to this Declaration.42. We have decided to act on the five objectives of this Action Plan:(i) Improving agricultural production and productivity,(ii) Increasing market information and transparency,(iii) Reducing the effects of price volatility for the most vulnerable,(iv) Strengthening international policy coordination and(v) Improving the functioning of agricultural commodity derivativesmarkets._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 50. P a g e | 5043. We commit to sustainably increase agricultural production andproductivity.To feed a world population expected to reach more than 9 billion peopleby 2050, it is estimated that agricultural production will have to increaseby 70% over the same period.We agree to further invest in agriculture, in particular in the poorestcountries, and bearing in mind the importance of smallholders, throughresponsible public and private investment. In this regard, we decide to:- Urge multilateral development banks to finalise their joint action plan on water, food and agriculture and provide an update on its implementation by our next Summit;- Invest in research and development of agricultural productivity. As a first step, we support the "International Research Initiative for Wheat Improvement" (Wheat Initiative), launched in Paris on September 15, 2011 and we welcome the G20 Seminar on Agricultural Productivity held in Brussels on 13 October 2011 and the first G20 Conference on Agricultural Research for Development, held in Montpellier on 12-13 September 2011, designed to foster innovation-sharing with and among developing countries.44. We commit to improve market information and transparency in orderto make international markets for agricultural commodities moreeffective.To that end, we launched:- The "Agricultural Market Information System" (AMIS) in Rome on September 15, 2011, to improve information on markets. It will enhance the quality, reliability, accuracy, timeliness and comparability of food market outlook information. As a first step, AMIS will focus its work on four major crops: wheat, maize, rice and soybeans. AMIS involves G20 countries and, at this stage, Egypt, Vietnam, Thailand, the Philippines, Nigeria, Ukraine and Kazakhstan._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 51. P a g e | 51 It will be managed by a secretariat located in FAO;- The "Global Agricultural Geo-monitoring Initiative" in Geneva on September 22-23, 2011. This initiative will coordinate satellite monitoring observation systems in different regions of the world in order to enhance crop production projections and weather forecasting data.45. We recognize that appropriately regulated and transparentagricultural financial markets are a key for well-functioning physicalmarkets and risk management.We welcome IOSCO recommendations on commodity derivativesendorsed by our Finance Ministers.46. We commit to mitigate the adverse effects of excessive price volatilityfor the most vulnerable through the development of appropriaterisk-management instruments.These actions are detailed in the development section of this finalDeclaration.47. According to the Action Plan, we agree to remove food exportrestrictions or extraordinary taxes for food purchased for non-commercialhumanitarian purposes by the World Food Program and agree not toimpose them in the future.In this regard, we encourage the adoption of a declaration by the WTO forthe Ministerial Conference in December 2011.48. We have launched a "Rapid Response Forum" in Rome on September16, 2011 to improve the international communitys capacity to coordinatepolicies and develop common responses in time of market crises.49. We welcome the production of a report by the internationalorganizations on how water scarcity and related issues could beaddressed in the appropriate fora._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 52. P a g e | 5250. We commend the joint work undertaken by FAO, OECD, The WorldBank Group, IFAD, UNCTAD, WFP, WTO, IMF, IFPRI and the UNHLTF to support our agenda and we request that they continue workingclosely together.51. We will keep progress on the implementation of the Action Plan onFood Price Volatility and Agriculture.Improving the functioning of Energy Markets52. We stress the importance of well-functioning and transparent physicaland financial energy markets, reduced excessive price volatility, improvedenergy efficiency and better access to clean technologies, to achievestrong growth that is both sustainable and inclusive.We are committed to promote sustainable development and green growthand to continue our efforts to face the challenge of climate change.53. We commit to more transparent physical and financial energymarkets. Commodity derivatives are being addressed as part of ourfinancial regulation reform agenda.We have made progress and reaffirm our commitment to improve thetimeliness, completeness and reliability of the JODI-Oil database as soonas possible.We also commit to support the IEF -- JODI work in order to improve thereliability of JODI-Oil and look forward to receiving theirrecommendations.We will regularly review and assess progress made on this front.54. We welcome the IEF Charters commitment to improve dialoguebetween oil producer and consumer countries, as well as the holding onJanuary 24, 2011 of the Riyadh Symposium on short, medium and longterm outlook and forecasts for oil markets._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 53. P a g e | 53We call for those meetings to be held on an annual basis and for the IEF,the IEA and OPEC to release a joint communiqué and a reporthighlighting their outcomes.55. We note the new JODI-Gas database and commit to work oncontributing to it on the basis of the same principles as the JODI-Oildatabase.We also call for annual symposiums and communiqués on short, mediumand long term outlook and forecasts for gas and coal.We call for further work on gas and coal market transparency and ask theIEA, IEF and OPEC, to provide recommendations in this field bymid-2012.56. Recognizing the role of Price Reporting Agencies for the properfunctioning of oil markets, we ask IOSCO, in collaboration with the IEF,the IEA and OPEC, to prepare recommendations to improve theirfunctioning and oversight to our Finance Ministers by mid-2012.57. We reaffirm our commitment to rationalise and phase-out over themedium term inefficient fossil fuel subsidies that encourage wastefulconsumption, while providing targeted support for the poorest.We welcome the country progress reports on implementing strategies forrationalizing and phasing out inefficient fossil fuel subsidies, as well asthe joint report from the IEA, OPEC, OECD and the World Bank onfossil fuels and other energy support measures.We ask our Finance Ministers and other relevant officials to press aheadwith reforms and report back next year.Protecting Marine Environment58. We decide to take further action to protect the marine environment, inparticular to prevent accidents related to offshore oil and gas explorationand development, as well as marine transportation, and to deal with theirconsequences._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 54. P a g e | 54We welcome the establishment of a mechanism to share best practicesand information on legal frameworks, experiences in preventing andmanaging accidents and disasters relating to offshore oil and gas drilling,production and maritime transportation.We ask the Global Marine Environment Protection working group, incooperation with the OECD, the International Regulators Forum andOPEC, to report next year on progress made and to establish thismechanism in order to disseminate these best practices by mid-2012, atwhich point it will be reviewed.We also commit to foster dialogue with international organisations andrelevant stakeholders.Fostering Clean energy, Green Growth and SustainableDevelopment59. We will promote low-carbon development strategies in order tooptimize the potential for green growth and ensure sustainabledevelopment in our countries and beyond.We commit to encouraging effective policies that overcome barriers toefficiency, or otherwise spur innovation and deployment of clean andefficient energy technologies.We welcome the UN Secretary Generals "Sustainable Energy for All"initiative. We support the development and deployment of clean energyand energy efficiency (C3E) technologies.We welcome the assessment of the countries current situation regardingthe deployment of these technologies as well as the on-going exercise ofsharing best practices, as a basis for better policy making.60. We are committed to the success of the United Nations Conference onSustainable Development in Rio de Janeiro in 2012."Rio + 20" will be an opportunity to mobilize the political will needed toreinsert sustainable development at the heart of the international agenda,_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 55. P a g e | 55as a long term solution to growth, job creation, poverty reduction andenvironment protection.A green and inclusive growth will create a broad spectrum ofopportunities in new industries and in areas such as environmentalservices, renewable energy and new ways to provide basic services to thepoor.Pursuing the Fight against Climate Change61. We are committed to the success of the upcoming Durban Conferenceon Climate Change on 28 November - 9 December 2011.We support South Africa as the incoming President of the Conference.We call for the implementation of the Cancun agreements and furtherprogress in all areas of negotiation in Durban.62. We stand ready to work towards operationalization of the GreenClimate Fund as part of a balanced outcome in Durban, building uponthe report of the Transitional Committee.63. Financing the fight against climate change is one of our mainpriorities.In Copenhagen, developed countries have committed to the goal ofmobilizing jointly USD 100 billion per year from all sources by 2020 toassist developing countries to mitigate and adapt to the impact of climatechange, in the context of meaningful mitigation actions andtransparency.We discussed the World Bank -- IMF -- OECD -- regional developmentbanks report on climate finance and call for continued work taking intoaccount the objectives, provisions and principles of the UNFCCC byinternational financial institutions and the relevant UN organizations.We ask our Finance Ministers to report to us at our next Summit onprogress made on climate finance._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 56. P a g e | 5664. We reaffirm that climate finance will come from a wide variety ofsources, public and private, bilateral and multilateral, includinginnovative sources of finance.We recognize the role of public finance and public policy in supportingclimate-related investments in developing countries.We underline the role of the private sector in supporting climate-relatedinvestments globally, particularly through various market-basedmechanisms and also call on the MDBs to develop new and innovativefinancial instruments to increase their leveraging effect on private flows.Avoiding protectionism and reinforcing the Multilateral TradingSystem65. At this critical time for the global economy, it is important tounderscore the merits of the multilateral trading system as a way to avoidprotectionism and not turn inward.We reaffirm our standstill commitments until the end of 2013, as agreed inToronto, commit to roll back any new protectionist measure that mayhave risen, including new export restrictions and WTO-inconsistentmeasures to stimulate exports and ask the WTO, OECD and UNCTADto continue monitoring the situation and to report publicly on asemi-annual basis.66. We stand by the Doha Development Agenda (DDA) mandate.However, it is clear that we will not complete the DDA if we continue toconduct negotiations as we have in the past.We recognize the progress achieved so far.To contribute to confidence, we need to pursue in 2012 fresh, credibleapproaches to furthering negotiations, including the issues of concern forLeast Developed Countries and, where they can bear fruit, the remainingelements of the DDA mandate._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 57. P a g e | 57We direct our Ministers to work on such approaches at the upcomingMinisterial meeting in Geneva and also to engage into discussions onchallenges and opportunities to the multilateral trading system in aglobalised economy and to report back by the Mexico Summit.67. Furthermore, as a contribution to a more effective, rules-based tradingsystem, we support a strengthening of the WTO, which should play amore active role in improving transparency on trade relations and policiesand enhancing the functioning of the dispute settlement mechanism.68. We look forward to welcoming Russia as a WTO member by the endof the year.Development: Investing for Global Growth69. As part of our overall objective for growth and jobs, we commit tomaximise growth potential and economic resilience in developingcountries, in particular in Low-Income Countries (LICs).Development is a key element of our agenda for global recovery andinvestment for future growth.It is also critical to creating the jobs needed to improve peoples livingstandards worldwide.Recognizing that development is a concern and duty to all G20 countries,our Ministers met for the first time on Development in Washington onSeptember 23, 2011.70. We support the report of the Development Working Group, annexedto this Declaration, implementing the G20s Seoul DevelopmentConsensus for Shared Growth, and call for prompt implementation of ourMulti-Year Action Plan.71. We take actions to overcome the most critical bottlenecks andconstraints hampering growth in developing countries.In this regard, we decided to focus on two priorities, food security andinfrastructure, and to address the issue of financing for development._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 58. P a g e | 5872. The humanitarian crisis in the Horn of Africa underscores the urgentneed to strengthen emergency and long-term responses to foodinsecurity.In accordance with our Multi-Year "Action Plan on Food Price Volatilityand Agriculture", we:  welcome the initiative of the Economic Community of Western African States (ECOWAS) to set up a targeted regional emergency humanitarian food reserve system, as a pilot project, and the "ASEAN+3" emergency rice reserve initiative;  Urge multilateral development banks to finalise their joint action plan on water, food and agriculture and provide an update on its implementation by our next Summit;  Support, for those involved, the implementation of the LAquila Food Security Initiative and other initiatives, including the Global Agriculture and Food Security Program;  Launch a platform for tropical agriculture to enhance capacity-building and knowledge sharing to improve agricultural production and productivity;  Foster smallholder sensitive investments in agriculture and explore opportunities for market inclusion and empowerment of small producers in value chains;  Support risk-management instruments, such as commodity hedging instruments, weather index insurances and contingent financing tools, to protect the most vulnerable against excessive price volatility, including the expansion of the Agricultural Price Risk-Management Product developed by the World Bank Group (IFC). We ask international organisations to work together to provide expertise and advice to low-income countries on risk-management and we welcome the NEPAD initiative to integrate risk management in agricultural policies in Africa;_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 59. P a g e | 59  Encourage all countries to support the Principles of Responsible Agricultural Investment (PRAI) to ensure sustained investment in agriculture;  Confirm our commitment to scaling-up nutrition through a combination of direct nutrition interventions and the incorporation of nutrition in all relevant policies.73. Investing in infrastructure in developing countries, especially in LICsand, whilst not exclusively, with a special emphasis on sub-SaharanAfrica, will unlock new sources of growth, contribute to the achievementof the Millennium Development Goals and sustainable development. Wesupport efforts to improve capacities and facilitate the mobilization ofresources for infrastructure projects initiated by public and privatesectors.74. We commissioned a High Level Panel (HLP), chaired by Mr TidjaneThiam, to identify measures to scale-up and diversify sources of financingfor infrastructure and we requested the MDBs to develop a joint actionplan to address bottlenecks.We welcome both the HLPs report and the MDB Action Plan. In thisregard, we support the following recommendations to :- Support the development of local capacities to improve supply and quality of projects and make them bankable and enhance knowledge sharing on skills for employment in low income countries. In this regard, we welcome the High Level Panel fellowship program and MDBs efforts to develop and strengthen regional public-private partnerships practitioners networks;- Increase quality of information available to investors, through the establishment of online regional marketplace platforms to better link project sponsors and financiers, such as the "Sokoni Africa Infrastructure Marketplace", and the extension of the Africa Infrastructure Country Diagnosis, which aim at benchmarking infrastructure data;_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 60. P a g e | 60- Prioritize project preparation financing, encouraging the MDBs to dedicate a greater share of their funds to preparation facilities that can operate on a revolving basis and call on MDBs to improve effectiveness of the existing preparation facilities;- Contribute to building an enabling environment for private and public infrastructure financing, especially for regional projects. We support increased transparency in the construction sector, the review of the Debt Sustainability Framework taking into account the investment-growth nexus. We call on MDBs to harmonize their procurement rules and practices and we support move towards mutual recognition of procedures and eligibility rules;- Improve access to funding, notably through the strengthening of local intermediaries and financial markets, more effective use of MDBs capital, including through use of credit enhancement and guarantee instruments.75. We commissioned the HLP to establish criteria to identify exemplaryinvestment projects in cooperation with multilateral development banks.We highlight the 11 projects mentioned in the HLP report annexed to thisDeclaration, which have the potential to have a transformational regionalimpact by leading to increased integration and access to global markets,with due consideration to environmental sustainability.We call on the MDBs, working with countries involved and in accordancewith regional priorities (in particular the Program for InfrastructureDevelopment in Africa), to pursue the implementation of such projectsthat meet the HLP criteria and to prioritize project preparation financing,notably the NEPAD Infrastructure Projects Preparation Facility.76. We stress the importance of following-up on these concrete actionsand invite MDBs to provide regular updates on the progress achieved.77. Recognizing that economic shocks affect disproportionately the mostvulnerable, we commit to ensure a more inclusive and resilient growth.We therefore decide to support the implementation and expansion of_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 61. P a g e | 61nationally-designed social protection floors in developing countries,especially low income countries.We will work to reduce the average cost of transferring remittances from10% to 5% by 2014, contributing to release an additional 15 billion USDper year for recipient families.78. Recognizing that 2.5 billion people and millions of Small and MediumEnterprises (SMEs) throughout the world lack access to formal financialservices, and the crucial importance for developing countries to overcomethis challenge, we launched in Seoul an ambitious Global Partnership forFinancial Inclusion (GPFI). We commend the ongoing work by the GPFIto foster the development of SME finance and to include financialinclusion principles in international financial standards.We endorse the five recommendations put forward in its report, annexedto this Declaration, and commit to pursue our efforts under the MexicanPresidency.79. We welcome the presentation of the report by Mr Bill Gates onfinancing for development.We recognize the importance of the involvement of all actors, both publicand private, and the mobilisation of domestic, external and innovativesources of finance.80. Consistent with the Multi-Year Action Plan agreed in Seoul, westrongly support developing countries mobilization of domesticresources and their effective management as the main driver fordevelopment.This includes technical assistance and capacity building for designingand efficient managing of tax administrations and revenue systems andgreater transparency, particularly in mineral and natural resourceinvestment.We urge multinational enterprises to improve transparency and fullcompliance with applicable tax laws._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 62. P a g e | 62We welcome initiatives to assist developing countries, on a demand-ledbasis, in the drafting and implementation of their transfer pricinglegislation.We encourage all countries to join the Global Forum on Transparencyand exchange of information in tax purposes.81. We stress the pivotal role of ODA.Aid commitments made by developed countries should be met.Emerging G20 countries will engage or continue to extend their level ofsupport to other developing countries.We welcome the emphasis on ensuring that poor countries benefit rapidlyfrom innovation and technological advances, and agree to encouragetriangular partnerships to drive priority innovations forward.We commit to raise the quality and efficiency of aid by concentrating onthe highest impact interventions and increase the focus on concreteresults and overall impact on development.82. We agree that, over time, new sources of funding need to be found toaddress development needs.We discussed a set of options for innovative financing highlighted by MrBill Gates, such as Advance Market Commitments, Diaspora Bonds,taxation regime for bunker fuels, tobacco taxes, and a range of differentfinancial taxes.Some of us have implemented or are prepared to explore some of theseoptions.We acknowledge the initiatives in some of our countries to tax thefinancial sector for various purposes, including a financial transaction tax,inter alia to support development.83. We welcome the upcoming 4th High-Level Forum on aideffectiveness to be held in Busan, Korea (29 November-1st December2011)._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 63. P a g e | 63The Forum will be an opportunity to establish a more inclusivepartnership to address development effectiveness.84. We look forward to a successful replenishment of the AsianDevelopment Fund and of the International Fund for AgricultureDevelopment.Intensifying our Fight against Corruption85. Corruption is a major impediment to economic growth anddevelopment. We have made significant progress to implement the G20Anti-Corruption Action Plan.We endorse our experts report, annexed to this Declaration, whichoutlines the major steps taken both by individual countries and the G20collectively, and sets out further actions required to ensure that G20countries continue to make positive progress against the Action Plan.86. In this context:- We welcome the ratification by India of the United Nations Convention against Corruption (UNCAC). We also welcome the decision made by Russia to join the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions. We commit to accelerate the ratification and implementation of UNCAC and to have a more active engagement within the OECD Working Group on Bribery on a voluntary basis. We further commend the member countries which are taking steps in the spirit of the Action Plan;- We commend the first reviews on the implementation of UNCAC. We commit to lead by example in ensuring the transparency and inclusivity of UNCAC reviews by considering the voluntary options in accordance with the Terms of Reference of the Mechanism, notably with regards to the participation of civil society and transparency;_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 64. P a g e | 64- We support the work of the Financial Action Task Force (FATF) to continue to identify and engage those jurisdictions with strategic Anti-Money Laundering/Counter-Financing of Terrorism (AML/CFT) deficiencies and update and implement the FATF standards calling for transparency of cross-border wires, beneficial ownership, customer due diligence and enhanced due diligence;- We agree on a work program which includes a framework for asset recovery, building on the World Banks Stolen Asset Recovery (StAR) Initiative, whistle-blowers protection, denial of entry to corrupt officials and public sector transparency, including fair and transparent public procurement, with concrete results by the end of 2012.87. We welcome initiatives aimed at increasing transparency in therelationship between private sector and government, including voluntaryparticipation in the Extractive Industries Transparency Initiative (EITI).We also acknowledge the steps taken by some of us to request companiesin the extractive industry to publish what they pay in countries ofoperation and to support the Construction Sector Transparency Initiative(CoST).88. We commend the enhanced engagement of the private sector to fightagainst corruption. We welcome the commitments by the B20 to build onour Action Plan and urge them to take concrete action.89. We hold ourselves accountable for our commitments and will reviewprogress at our next Summit.Governance90. We welcome the report of UK Prime Minister David Cameron onglobal governance.91. As our premier Forum for international economic cooperation, theG20 is unique in bringing together the major economies, advanced andemerging alike, to coordinate their policies and generate the political_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 65. P a g e | 65agreement necessary to tackle the challenges of global economicinterdependence.It is a Leader-led and informal group and it should remain so. The G20 ispart of the overall framework of international governance.92. We agree that, in order to strengthen its ability to build and sustain thepolitical consensus needed to respond to challenges, the G20 must remainefficient, transparent and accountable.To achieve this, we decide to:- Maintain our focus on the broad global economic challenges;- Bolster our ability to deliver our agenda and work program effectively. We decide to formalise the Troika, made of past, present and future Presidencies to steer the work of the G20 in consultation with its members. We ask our Sherpas to develop working practices for the G20 under the Mexican Presidency;- Pursue consistent and effective engagement with non-members, regional and international organisations, including the United Nations, and other actors, and we welcome their contribution to our work as appropriate. We also encourage engagement with civil society. We request our Sherpas to make us proposals for the next meeting.93. We reaffirm that the G20s founding spirit of bringing together themajor economies on an equal footing to catalyse action is fundamentaland therefore agree to put our collective political will behind oureconomic and financial agenda, and the reform and more effectiveworking of relevant international institutions.94. On December 1st. 2011, Mexico will start chairing the G20. We willconvene in Los Cabos, Baja California, in June 2012, under theChairmanship of Mexico. Russia will chair the G20 in 2013, Australia in2014 and Turkey in 2015._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 66. P a g e | 66We have also agreed, as part of our reforms to the G20, that after 2015,annual presidencies of the G20 will be chosen from rotating regionalgroups, starting with the Asian grouping comprising of China, Indonesia,Japan and Korea.95. We thank France for its G20 Presidency and for hosting the successfulCannes Summit._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 67. P a g e | 67 Long-term Investing Can Be Severely Distorted by Inaccurate, Short-term Focus Kai Bucher, Associate Director, Inaccurate measurement of investment values, returns, risks and liabilities can create substantial distortions to long-term investment strategies and drive long-term investors to adopt a short-term orientation, according to the Measurement, Governance and Long-term Investing report, released by the World Economic Forum. Since long-term capital can play an important role in helping to drive economic growth, stabilize financial markets, and provide financial returns to fund pensions, education and other social goods, the report focuses on the often overlooked, yet increasing number of measurement - related challenges that can hinder long-term investing. Among such challenges: Mark-to-market rules require long-term illiquid portfolios to be evaluated relative to a public market benchmark, however, short-term variations in the value of assets held for the long term can lead to shifts in investment policy or execution that hinder success in long-term investing. Poor risk measurements or an inadequate understanding of risk can lead institutions to hold riskier (or less risky) assets than they should otherwise. Staff evaluation and compensation schemes may create a framework that rewards staff for acting against the stated long-term interests of the institution. The report argues that without effective governance, measurement schemes can distort decisions regarding the choice of investments and the time frame over which they are held. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 68. P a g e | 68And the lack of meaningful, intuitive measurements for performance andrisk over long-time horizons adds more complexity to long-term investingand the governance of such efforts.“Long-term patient capital is vital to promote sustainable growth, createjobs and solve problems plaguing the global economy today.Yet, as this important paper highlights, a short-term orientation in termsof performance measurement, leadership, media focus and regulatoryconstraints threatens to obstruct long-term investment and deprivesociety of the critical benefits it can provide,” stated Scott Kalb, ChiefInvestment Officer, Korea Investment Corporation (KIC), and Chair ofthe World Economic Forum’s Global Agenda Council on Long-termInvesting.The central conclusion and recommendation of this study is thatgoverning bodies and other external stakeholders need to act on theunderstanding that the performance of long-term investments unfoldsover time periods longer than the quarter or the year, even whenshort-term measurements are used.Such metrics should be placed in context, lest long-term strategies beabruptly and unfortunately revised.“In this report, we consider the impact of different types of measurementsand how, combined with thoughtful governance approaches, institutionscan think more carefully about measuring and supporting their long-termstrategies,” observed Josh Lerner, Jacob H. Schiff Professor ofInvestment Banking, Harvard Business School, and the lead researcherfor the report.“Having a long horizon accentuates the importance of governancemodels, and long-term investors can play a critical role in fosteringleading governance practices, both within their own institutions and forthe companies that they invest in,” remarked Mark Wiseman, ExecutiveVice-President, Investments, Canada Pension Plan Investment Board._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 69. P a g e | 69“For long-term investors, good governance that includes a qualifiedboard with a solid long-term orientation and commitment is integral toensuring that they are able to stay the course through economic andinvestment cycles.This report makes the case that without appropriate board oversight onrisk assessment, valuation metrics or compensation structures, investorscan easily lose sight of long-term gains and focus instead on short-termmetrics.”“Although there are numerous metrics for the short-term assessment oflong-term investments, none are without limitations.Good governance therefore is critical to ensure sound decision-makingaround which investments are chosen and for how long they are held,”said Michael Drexler, Senior Director, Head of Investors Industries,World Economic Forum USA.The report was developed by the World Economic Forum in collaborationwith a research team led by Josh Lerner of Harvard Business School.Guidance was provided by the World Economic Forum’s Global AgendaCouncil on Long-term Investing.Leadn more:www3.weforum.org/docs/WEF_FutureLongTermInvesting_Report_2011.pdf_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 70. P a g e | 70Basel III – the big issuesSpeech by Andrew Bailey, Director of UK Banks & Building Socieities atthe Seventh City of London Swiss Financial RoundtableThank you for inviting me to speak thismorning.Firstly I do want to take this opportunity to markthe stalwart service that Angela has given to theBritish Bankers’ Association (BBA) over the lastfive years.None of your predecessors can have faced such a difficult task, which youhave carried out with great fortitude.I want to spend my time this morning on the big issues that lie behind thesubject of Basel III and national finishes.Why are we undertaking such wide-ranging reforms?The simple answer, because we have had a major crisis, is not goodenough as an explanation – it explains the timing of the reforms, but thesubstance of them requires more explanation.Let me put forward a number of principles on which I want to focus thismorning.First, achieving a stable financial system will in turn enable thedevelopment of a strong, competitive system, and likewise will foster thestrength of financial centres.Financial stability and competitiveness are not fundamentally in conflict;rather, the former is a necessary but not sufficient condition of the latter,_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 71. P a g e | 71much as stable low inflation is a condition of sustainable economicgrowth.The key point here is that our respective objectives of stability andcompetitiveness are fundamentally not at odds.Second, the other key objective of the reforms is to achieve the stability ofthe financial system without recourse to public money as the buttress –both implicit dependence and in bad states of the world explicitdependence.This objective has a number of profound consequences, includingplacing the resolution of banks and its planning at the heart of banksupervision.Again, I think this objective of resolvability is fundamentally consistentwith the objective of having a competitive financial system.The reason I believe this strongly is that with well-established resolutiontools and plans, the incentives for governments to want to intervene in theoperations of banks will be reduced.Likewise, as supervisors we should be less interventionist for a bank thatcan be resolved.Of course, resolution is never costless, and this should guide ourinterventions, but other things equal we will be less intrusive where we aremore assured of resolvability.As an example of that approach, I think that with a robust resolution planin place – which can be quite simple for small banks – we should be moreopen to allowing new entrants to start-up, and then sink or swim.This is important because we will only foster more competition if weenable banks to leave the scene if their business model does not work.So, again, an objective of resolvability for banks does support theobjective of competitiveness.The third principle on which I want to focus concerns clarity in theobjectives of supervision._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 72. P a g e | 72Put simply, it does not support an effective regime to create unnecessaryuncertainty on the ultimate objectives of prudential supervision – ie howlarge should the capital and funding buffers held by banks eventually be.Lack of clarity in this respect is not in my view conducive to awell-functioning market economy.There are at least two complications here.First, quite sensibly we want supervision to be judgemental, in otherwords to embody sensible flexibility.Likewise, we think that exercising judgement is in large part aboutapplying the Basel III framework on a forward-looking basis in order toassess the vulnerability of institutions to big risks.Indeed, the big switch here was arguably from the Basel I to Basel IIframeworks, which introduced judgement into the capital adequacyframework by allowing firms to use approved models to measure risk.These models are by their nature inherently judgemental tools for bothfirms and supervisors – the question is not whether the model is right inan absolute sense (it won’t be) but whether it helps to form an acceptableview of prudent capital requirements.But, the use of judgement in this way inevitably creates uncertainty onhow it will be applied in the future.The second complication in terms of clarity around the objectives ofsupervision is that we are applying the Basel III changes as a transitionover a number of years.This is wise in terms of the consequences of the change and their impacton the real economy, but it prompts uncertainty over how Augustinianauthorities may be in their approach to transition.Clearly, I think it is fair enough to say that the UK and Switzerland do notlook to be particularly Augustinian in their approaches.I think the key point here for me is to minimise uncertainty and thus tosupport a functioning market economy._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 73. P a g e | 73I am not a supporter of a system which leaves people guessing what wewill eventually want from banks.Looking at the UK arrangements, it is in my view helpful that a consensusis building around the Independent Commission on Banking’srecommendations of 17% primary loss-absorbing capacity measured on arisk-weighted assets basis, with a core tier one capital or common equitycomponent within that of 10%.All of this should be measured on a Basel III basis, and supported by aleverage ratio, as the ICB recommended.And, there should be clear liquidity standards.Switching to the Basel III capital standard will require a transition wherebanks do restructure their balance sheets and retain more earnings whilethey transition.Providing the objectives are well understood, I believe the banks canmake this transition.But I do accept the challenge that the process needs to be wellunderstood – markets are more likely to give banks credit for theirprudential buffers of capital and liquid assets if they understand theend-points and the ways in which we as supervisors will exercise ourjudgement.An important example of this use of judgement is that when we ask banksto hold prudential buffers we treat them just like that – ie as protectionwhich can be used, and where the response of the supervisor to a firmgoing into a buffer is to require a sensible plan to correct the use of abuffer over a reasonable period of time.To conclude, supervision needs to support banks operating in a marketeconomy.This means earning a sensible rate of return calculated on a basis thatappropriately factors in the amount of risk taken.I do believe that Basel III is correct to raise prudential requirements; thatis the crucial lesson of the crisis. _____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 74. P a g e | 74We are also right in my view to end the dependence on public moneythrough effective resolution techniques.Here, by the way, we should thank a Swiss bank, Credit Suisse, forproviding much of the early thinking to support the notion of bail-in asthe way to end the dependence on public money.But, as policymakers, we need to enable our judgements and standards tobe understood and appropriately predicted so that we support theoperation of banks in a market economy._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 75. P a g e | 75Remarks by SecretaryGeithner at the OpeningCeremony of the 2012Strategic and EconomicDialogue (S&ED)BEIJING, CHINA - I wouldlike to express our appreciationto President Hu, Vice PremierWang, Councilor Dai, and theircolleagues for welcoming us toBeijing.I would particularly like tothank Vice Premier Wang. TheVice Premier combines a broadstrategic perspective with awell-deserved reputation as ahighly effective problem solver-- a rare combination. He is a fierce defender of China’s interests anddedicated to building a positive, cooperative, and comprehensive bilateraleconomic relationship with the United States.We convened the first Strategic & Economic Dialogue three years ago inthe depth of the most serious threat to the global economy and financialsystem in decades.We worked together to put out the fires of the global financial crisis, andtoday the world is better for it.We have worked to address the inevitable problems in our economicrelationship in a constructive manner and with mutual respect.And both of our nations are better for it._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 76. P a g e | 76The diversity of the economic issues we address in this Dialogue reflectsthe breadth and importance of our relationship.We don’t always agree, but we share strong common interests, and werecognize that promoting these common interests requires cooperationand commitment from both sides.As two of the world’s largest trading nations, we both depend on an openglobal trading system in which workers and companies compete on alevel playing field.We have a common interest in promoting productivity growth throughresearch and innovation, by protecting intellectual property and openmarkets.We have a mutual interest in building a global financial system that ismore stable and less prone to crisis.Because of the size and importance of our two economies, we also have ashared responsibility for the global economy.As we have worked to promote economic reforms in the United States andChina, we have worked together to strengthen and reform the IMF andthe World Bank and to mobilize more resources to support developmentin the world’s poorest countries.We have worked together to support Europe’s efforts to better manage itsfinancial crisis.We have worked to build new mechanisms for cooperation oninternational economic and financial issues in the G-20 and the FinancialStability Board.We meet at a time of risk and challenge in the global economy, and weboth face considerable economic challenges at home._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 77. P a g e | 77In the United States, we are making progress in repairing the damagefrom the financial crisis and putting in place a stronger foundation forfuture economic growth.We are putting in place a comprehensive program of economic reforms toimprove education, increase investments in scientific research andinnovation, improve incentives for private investment, and reform thefinancial system.And we are working to legislate a comprehensive program of reforms torestore fiscal sustainability, building on tough, 10-year spending cuts weput in place last summer.While there is still a long way to go to recover from the financial crisis, theeconomic expansion in the United States is now more broad based andresilient, and we are significantly more advanced than are the other majordeveloped economies in addressing the imbalances that helped cause ourcrisis.In China, you are in the process of exploring the next frontier of economicreforms, recognizing as your predecessors did more than 30 years ago,that future economic growth will require another fundamental shift ineconomic policy.These new reforms recognize the new reality that China must rely moreon domestic consumption rather than exports, and more on innovation byprivate companies rather than capacity expansion by state ownedenterprises, with an economy more open to competition from foreignfirms, and with a more modern financial system.The United States has a strong interest in the success of these reforms, asdoes the rest of the world.As we begin this next round of our Strategic and Economic Dialogue, Iwant to reaffirm our commitment to continue to work closely with Chinato build a stronger economic relationship and to build a strongerframework for cooperation on global economic issues that can balancethe interests of the two largest economies in the world. _____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 78. P a g e | 78China and the United States are both now sources of strength for theglobal economy, and we are moving toward the more balanced, andcomplementary growth strategies that are so important for the world.I hope we are able to make progress during these next two days on therange of issues before us.As President Obama made clear at our first meeting in Washington threeyears ago, we are nations with different political values and traditions,different political and economic systems, and as we recognize thosedifferences, it is important that we are able to talk to each other openlyand make progress on issues that benefit both the Chinese and Americanpeople.We will approach these issues with appreciation for the challenges youface in China and with confidence that China is strong enough toembrace the reforms we seek._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 79. P a g e | 79EBA BS 2012 048 final30 April 2012 Report on the fulfilment of the EBARecommendation following the 2011 EU-wide stress testExecutive summaryFollowing the publication of the 2011 EU-wide stress test results in July2011, the EBA issued a Recommendation to national supervisoryauthorities (NSAs) to ensure that appropriate mitigating actions were putin place with respect to(i) Banks with a Core Tier 1 capital (CT1) ratio below 5% in the adversescenario and(ii) To banks with a CT1 ratio close to 5% in the adverse scenario and withsizeable exposures to sovereigns under stress.Forward looking mitigating measures were identified in the publicationtemplates for relevant banks to address weaknesses.The EBA, as a part of its ongoing monitoring activities, has continued toassess the implementation of these mitigating measures against therequirements of the EBA Recommendation.NSAs responsible for the supervision of the banks falling under the scopeof the EBA Recommendation have provided the details of the mitigating_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 80. P a g e | 80measures taken for the respective banks and of their close monitoring ofbanks as a part of ongoing supervisory activities.In total, eight banks of the 90 participating in the EBA 2011 stress testexercise had a CT1 ratio under the adverse scenario below the set 5%benchmark.According to the information provided to the EBA, mitigating measureshave been put in place for all banks with a post stress capital ratio below5%, and were deemed sufficient by the EBA to comply with itsRecommendation.Following a deterioration of the external environment, in many cases,additional measures have been put in place by NSAs which the EBAnotes and supports.In some cases, these actions are ongoing and NSAs have confirmed to theEBA that the mitigating actions are being closely followed under nationalinitiatives and will be finalised within reasonable timelines agreedbetween banks and their respective NSAs.Most of the banks with a CT1 ratio above 5% and with sizeable exposuresto sovereigns under stress will be addressed under the monitoring of theDecember 2011 Recommendation following the results of the 2011 EUCapital exercise, where they have been included in the sample of 71banks.The EBA is, in general, satisfied with progress in the fulfilment of the July2011 Recommendation noting the actions that have been taken thatinclude capital strengthening and adequate recognition of losses.In addition, those banks identified as having weaknesses havesubsequently undergone restructuring processes and will no longer existin the same form as at the moment of the stress test.Some of the banks falling under the scope of the July 2011Recommendation and the December 2011 Recommendation are subjectto the implementation of more stringent measures under the pre-agreed _____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 81. P a g e | 81EU/IMF assistance programmes and to a separate monitoring by the socalled “Troika” authorities (EU Commission, ECB, IMF).Background and introductionThe results of the second EU-wide stress tests conducted by theEuropean Banking Authority (EBA) in cooperation with the EUCommission, European Systemic Risk Board (ESRB), European CentralBank (ECB) and national supervisory authorities (NSAs) were publishedin July 20111.The aim of the stress test was to assess the resilience of 91 participatingbanks from 21 EEA countries against an adverse but plausible scenario.The aggregate Core Tier 1 (CT1) ratio of the 90 banks that publishedinformation in the 2011 EBA stress test decreased from 8.9% to 7.7% aftertwo years of stress.The largest driver of the decrease is impairment charges which led to CT1decrease of 3.6 percentage points.As a result of the application of the adverse macro-economic scenario andcommon constraining assumptions applied in the exercise, the post stresscapital ratios of eight banks fell below the capital threshold set at the levelof 5% CT1 with the overall capital shortfall of EUR 2.5 bn based on theEBA definition of CT1.In addition, 16 banks displayed post stress CT1 ratios between 5 and 6%after the application of the adverse scenario over the two-year timehorizon.On the basis of the results of the stress test, the EBA issued its first formalRecommendation addressed to NSAs and requiring remedial actions.In particular, pursuant to Article 21.2(b) of the EBA Regulation, theRecommendation published as a part of the EBA Aggregate report, statesthe following:_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 82. P a g e | 82a. NSAs to request banks whose CT1 ratio falls below the 5% thresholdunder the adverse scenario defined in the stress test exercise to promptlyremedy this capital shortfall.In particular, national supervisors should ensure that these banks arerequested to present within three months (i.e. by 15 October 2011) to theircompetent authorities a plan to restore the capital position to a level atleast equal to the 5% CT1 benchmark based on this analysis.The remedial measures agreed with the competent authority had to befully implemented by end of 2011, with flexibility allowed only if justifiedby market conditions or required procedures.b. NSAs to request all banks whose CT1 ratio under the adverse scenariois above but close to 5% and which have sizeable exposures to sovereignsunder stress to take specific steps to strengthen their capital position,including where necessary restrictions on dividends, deleveraging,issuance of fresh capital or conversion of lower quality instruments intoCore Tier 1 capital.These banks were expected to plan remedial action within three months.The plans had to be fully implemented within nine months from thepublication of the stress test results.With the publication of these Recommendations, the EBA committed toreviewing their fulfilment and to publishing the outcomes of such review.This report directly addresses the fulfilment of the first part of the July2011 Recommendation (banks failing to meet the 5% CT1 threshold),whereas the second part will be followed–up under the December 2011EU Capital exercise Recommendation.Link to the 2011 Capital exerciseFollowing the further escalation of the sovereign debt crisis, and theannouncement of the European coordinated policy package on 26_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 83. P a g e | 83October 2011, the EBA has conducted a Capital exercise amongst 71banks aimed at assessing banks recapitalisation needs after theprudential revaluation of the sovereign exposures and at applying highercapital threshold set at 9% CT1.It should be noted that the EBA Capital exercise was not a stress test.Against the ongoing developments in the markets and the deterioration ofthe sovereign debt crisis in Europe, the EBA reviewed banks’ actualcapital positions and sovereign exposures as of September 2011 andrequested them to set aside additional capital buffers.The capital buffer is designed to provide reassurance to markets aboutthe ability to withstand a range of shocks and still maintain adequatecapital.Following the outcomes of the Capital exercise, the EBA has issued itssecond Recommendation requiring banks failing to meet the capitalthreshold to ensure that appropriate mitigating measures are put in placeand that by 30 June 2012, all 71 banks attain and maintain until such timeas this Recommendation has been amended, repealed or cancelled, thetemporary capital buffer at a level of 9% CT1 (December 2011Recommendation).To this end, the NSAs have been recommended to ensure that all banksbuild a temporary capital buffer to reach a 9% CT1 ratio by 30 June 2012,after the removal of the prudential filters on the sovereign assets in theavailable-for-sale portfolio and the conservative valuation of sovereigndebt exposures in the held-to-maturity and loans and receivablesportfolios, reflecting market prices as of 30 September 20113.Pursuant to this Recommendation, the EBA has set up a series offollow-up steps requiring banks with a capital shortfall to present therecapitalisation plans outlining the measures they plan to take in order tomeet the 9% CT1 capital threshold by 30 June 2012._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 84. P a g e | 84Such recapitalisation plans have been scrutinised by the respectiveconsolidating NSAs in close cooperation with the Colleges of Supervisorsand the EBA.The December 2011 Recommendation effectively augments the outcomesof the 2011 stress tests.Therefore, the mitigating efforts for banks falling under the second part ofthe July 2011 Recommendation (banks close to the threshold but withsizable exposures to sovereigns under stress), will be monitored under theDecember 2011 Recommendation and are not discussed in this report.Methodology for assessing the fulfilment of theRecommendationThe assessment of the fulfilment of the July 2011 Recommendation isbased on the information on mitigating measures provided to the EBA bythe consolidating NSAs of the banks failing to meet the capital threshold.The assessment is based on recalculating the CT1 ratio under the adversescenario for 2012 adjusting risk weighted assets (RWA) and CT1 capitalaccording to the mitigating actions reported by NSAs (either in a separatecommunication or in the stress test disclosure templates).This assessment is based on the information collected during the stresstests as well as on additional information on the mitigating measuresprovided by the NSAs without recalculating possible impacts of the stressor taking into account actual financial or portfolio information.Some of the banks subject to the July 2011 Recommendation areundergoing deep restructuring as part of the pre-agreed measures underEU/IMF programmes.This directly affects the Greek banks, where quantitative capital targetsstemming from the pre-agreed EU/IMF programmes exceed the resultsof the EBA EU-wide stress tests and the EU Capital exercise._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 85. P a g e | 85The implementation of EU/IMF measures and fulfilment of capitaltargets is being closely followed by the respective national authoritiestogether with the EU Commission, ECB and IMF.Fulfilment of the Recommendation by banks below 5% CT1thresholdIn total, eight out of the 90 banks that published the results of the 2011EU-wide stress test have a CT1 ratio under the adverse scenario that fallsbelow the threshold of 5%.The aggregate CT1 capital shortfall for these banks amounted to EUR 2.5bn (see Chart 1).When analysing the impact of the mitigating measures put in place afterthe stress test, it should be noted that most of the banks with a shortfallhave gone or currently are undergoing restructuring processes and will nolonger exist in the same form as at the moment of the stress test._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 86. P a g e | 86AustriaThe Oesterreichische Volksbanken AG (OeVAG) submitted a detailedrestructuring plan to the Austrian NSAs to promptly remedy its capitalshortfall and has already completed a major step: the closed sale of itsinternational operations (Volksbank International AG) to the RussianSberbank.Furthermore, OeVAG currently pursues the implementation of additionalrestructuring measures - based on a term-sheet agreed on by itsshareholders and the Republic of Austria - combining OeVAG and morethan 60 local Volksbanks into a single affiliated group according to Article3 Directive 2006/48/EC by mid of 2012.On 26 April 2012, OeVAG’s general meeting of shareholders decided on anumber of milestones in this regard, resulting in a new ownership -structure retroactive as of 31 December 2011, where the local Volksbankshold the majority of OeVAG and the Republic of Austria is the secondlargest shareholder.After completion of these fundamental restructuring steps, OeVAGnevertheless will continue to streamline and restructure the group withthe final target of becoming a lean central institution serving the localVolksbanks with a clear focus on the Austrian market.SpainIn total, five Spanish institutions have gone or are undergoing significantintegration processes which will result in their merger with other banks ortheir integration within other groups of credit institutions.Each of these processes is at a different stage and is being closelymonitored by the Spanish authorities.The timeline for their completion depends on different resolutions andauthorisations, and in some cases, it may fall outside the timeframe set bythe EBA Recommendation:_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 87. P a g e | 87- Caixa DEstalvis de Catalunya, Tarragona i Manresa: In this case, Catalunya Bank, in which the FROB has a stake of 90%, has started the necessary steps for an integration process with another credit institution through a competitive procedure in accordance with Article 9.8 of Royal Decree-Law 9/2009, on bank restructuring and credit institutions equity reinforcement.- Caixa DEstalvis Unio de Caixes de Manlleu, Sabadell I Terrassa (Unnim): In the case of Unnim Banc, S.A. on 7 March 2012 the Government Committee of the FROB, which was its sole owner, drew up the restructuring plan for this bank, envisaging its integration within the Spanish bank BBVA.- Grupo Caja 3: This bank announced on 29 February 2012 its merger with Ibercaja Banco.- Caja de Ahorros del Mediterraneo (CAM): On 7 December 2011, the Government Committee of the FROB drew up restructuring plan for Banco CAM, which envisages that it will be integrated within Banco Sabadell.- Banco Popular is finalising its takeover of Banco Pastor.GreeceTwo Greek banks, EFG Eurobank Ergasias and Agricultural Bank ofGreece, have shown a capital shortfall in the stress test.These banks are undergoing deep restructuring as part of the pre-agreedmeasures under the EU/IMF programme.Quantitative capital targets stemming from the latter exceed the results ofthe EBA EU-wide stress tests and EU Capital exercise.The implementation of EU/IMF measures and the fulfilment of capitaltargets are being closely followed by the respective national authoritiestogether with the EU Commission, ECB and IMF._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 88. P a g e | 88GermanyIn addition to the eight banks with identified capital shortfall, the EBAhas followed up on one bank, which did not publish the EBA 2011 stresstest results, namely Landesbank Hessen-Thuringen (Helaba) tounderstand the actions it has taken since the stress test.Helaba has “hardened” its participation capital in order to comply withthe CT1 definition of the EBA.This conversion has led to an increase of CT1 capital by EUR 1.92bn.Conclusions and further monitoringThe EBA is, in general, satisfied with the progress made in the fulfilmentof the July 2011 Recommendation noting that the actions taken includecapital strengthening and adequate recognition of losses.In addition, the EBA supports the measures undertaken to significantlyrestructure those banks in difficulty and sees this as an appropriateresponse to the Recommendation.Generally, the EBA July 2011 Recommendation has been strengthened bythe EBA December 2011 Recommendation.The 71 banks participating in the 2011 Capital exercise are beingmonitored by the EBA in order to check whether they adhere to the CT1ratio of 9% by the end of June 2012.Some Spanish banks subject to the July 2011 Recommendation are notrepresented in the sample for the December 2011 Capital exercise andtherefore do not fall under the scope of the December 2011Recommendation.Those banks remain under close scrutiny by their respective nationalsupervisory authorities, and are also subject to the wide-ranging_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 89. P a g e | 89restructuring programmes undertaken under the aegis of the nationalmeasures put forward by the Spanish Government.The EBA will continue to monitor and assess risks and vulnerabilitiesfrom a micro-prudential perspective in the EU banking sector employinga wide range of tools, including analyses of key risk indicators, bottom-uprisk questionnaires to the supervisors of the largest cross-border bankinggroups, and joint risk assessments done by the colleges of supervisors.The EBA is currently developing its approach to the next EU-wide stresstest exercise, which will take place in 2013._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 90. P a g e | 90Social Media and Investing - Tips for SeniorsThe SEC’s Office of Investor Education and Advocacy is issuing thisInvestor Bulletin to provide seniors who use social media with a few tipsto help them do so more safely and to help them avoid investment fraud.More and more older Americans are using social media every day,including to help guide investment decisions.Whether it is to research particular stocks, to find backgroundinformation on financial professionals, to gather up-to-date news, or todiscuss the markets with others, social media – web-based platforms thatallow interactive communication, such as Facebook, YouTube, Twitter,LinkedIn, bulletin boards, and chat rooms – has become an importantinvesting tool.While social media can provide many benefits, it also presentsopportunities for fraudsters targeting older Americans.As a result, seniors need to proceed with caution when using social mediaas part of their investment process.The following tips can help._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 91. P a g e | 91Tips to Help Avoid Investment Fraud OnlineThe key to avoiding investment scams on the Internet is to be aneducated investor.Below are five tips to help seniors avoid securities fraud1. Look out for “Red Flags”Wherever you come across a recommendation for an investment on theInternet, the following “red flags” should cause you to use caution inmaking an investment decision:It sounds too good to be true.Any investment that sounds too good to be true probably is.Be extremely wary of claims on the Internet that an investment will make“INCREDIBLE GAINS” or is a “BREAKOUT STOCK PICK.”Claims like these are hallmarks of extreme risk or outright fraud.The promise of “guaranteed” returns with little or no risk.Every investment entails some level of risk, which is reflected in the rateof return you can expect to receive.Most fraudsters spend a lot of time trying to convince investors thatextremely high returns are “guaranteed” or that the investment “can’tmiss.”Don’t believe it.Offers to invest outside the United States.You should carefully examine any unsolicited offer to invest outside of theUnited States._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 92. P a g e | 92Many fraudsters set up operations outside the United States to make itmore difficult for regulators to stop their fraudulent activity and recovertheir victims’ money.Pressure to buy RIGHT NOW.Don’t be pressured or rushed into buying an investment before you have achance to think about – and investigate – the “opportunity.”Be especially skeptical of investments that are pitched as“once-in-a-lifetime” opportunities.2. Be Wary of Unsolicited OffersInvestment fraud criminals look for victims, including seniors, on theInternet.If you see a new post on your wall, a tweet mentioning you, a directmessage, an e-mail, or any other unsolicited – meaning you didn’t ask forit and don’t know the sender – communication regarding a so-calledinvestment opportunity, you should exercise extreme caution.An unsolicited sales pitch may be part of a fraudulent investment scheme3. Look out for “Affinity Fraud”An investment pitch made through an online group of which you are amember, or on a chat room or bulletin board catering to an interest youhave, may be an affinity fraud.Affinity fraud refers to investment scams that prey upon members ofidentifiable groups, often seniors, religious or ethnic communities,professional groups, or combinations of those groups.Even if you know the person making the investment offer, be sure tocheck out everything – no matter how trustworthy the person seems whobrings the investment to your attention._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 93. P a g e | 93Remember, the person making you the offer may not know that theinvestment is a scam.4. Be Thoughtful About Privacy and Security SettingsSeniors who use social media as a tool for investing should be mindful ofthe various features on these websites that can help protect privacy.Understand that unless you guard personal information, it may beavailable not only to your friends, but for anyone with access to theInternet – including fraudsters.For more information on privacy and security settings, as well as otherguidance regarding setting up on-line accounts with an eye towardavoiding investment fraud, see our Investor Bulletin Social Media andInvesting: Understanding Your Accounts.5. Ask Questions and Check Out the AnswersBe skeptical.Never judge a person’s integrity, or the merits of an investment, withoutdoing thorough research on both the person selling the investment andthe investment itself.Investigate the investment thoroughly and check the truth of everystatement you are told about the investment.You can check out many investments using the SEC’s EDGAR filingsystem or through your state’s securities regulator.You can check out registered brokers at the Financial IndustryRegulatory Authority’s (FINRA) BrokerCheck website and registeredinvestment advisers at the SEC’s Investment Adviser Public Disclosurewebsite.See our publication Ask Questions for more about information you shouldgather before making an investment._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 94. P a g e | 94A Few Common Investment Scams Using Social Media and theInternetWhile fraudsters are constantly changing the way they approach victimson the Internet, there are a number of common scams of which youshould be aware.Here are a few examples of the types of schemes you should be on thelookout for when using social media:“Pump-and-Dumps” and Market Manipulations“Pump-and-dump” schemes involve the promoting of a company’s stock(typically small, so-called “microcap” companies) through false andmisleading statements to the marketplace, in order to sell the cheaplypurchased stock at a higher price.These false claims could be made on social media such as Facebook andTwitter, as well as on bulletin boards and chat rooms.Fraud Using “Research Opinions,” Online Investment Newsletters, andSpam BlastsWhile legitimate online newsletters may contain useful information aboutinvesting, others are merely tools for fraud.Some companies pay online newsletters to “tout” or recommend theirstocks.Touting isn’t illegal as long as the newsletters disclose who paid them,how much they’re getting paid, and the form of the payment, usually cashor stock.But fraudsters often lie about the payments they receive and their trackrecords in recommending stocks.To learn more, read our tips for checking out newsletters._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 95. P a g e | 95High Yield Investment ProgramsThe Internet is awash in so-called “high-yield investment programs” or“HYIPs.”These are unregistered investments typically run by unlicensedindividuals – and they are often frauds.The hallmark of an HYIP scam is the promise of incredible returns (30 or40 percent – or more) at little or no risk to the investor.Internet-Based OfferingsOffering frauds come in many different forms.Generally speaking, an offering fraud involves a security of some sort thatis offered to the public, where the terms of the offer, such as the likelihoodof a return, are materially misrepresented.What Seniors Should Know About Professional DesignationsSome financial professionals use social media to attract new clients.These financial professionals may use designations such as “seniorspecialist” or “retirement advisor” to imply that they are experts athelping seniors with financial issues.Seniors should be aware that some of these titles require little or notraining or education.In some cases, a financial professional may need to study and pass severalrigorous exams—after working in a designated field for several years—toreceive a particular designation.In other cases, it may be relatively easy in terms of time and effort toreceive a “senior” designation, even for an individual with no relevantexperience._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 96. P a g e | 96If you want to find out more about a particular professional designation,check out the “Understanding Investment Professional Designations”page on FINRA’s website.Please keep in mind that the SEC does not endorse any professionaldesignation.Furthermore, we encourage you to always look beyond a financialprofessional’s designation and determine whether he or she can providethe type of financial services or product you need.You should thoroughly evaluate the background of anyone with whomyou intend to do business-before you hand over your hard-earned cash._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 97. P a g e | 97A Perspective on the Economic OutlookPresented by Charles I. Plosser, President and ChiefExecutive Officer, Federal Reserve Bank ofPhiladelphia, CFA Society of San Diego, May 1, 2012IntroductionThank you for inviting me to speak to the CFA Society of San Diegotoday. I have addressed chartered financial analysts in Philadelphia on anumber of occasions, and I am pleased that travels to California this weekafforded me the opportunity to accept your invitation to present my viewson the economic outlook and monetary policy.Last week, I attended the most recent meeting of the Federal OpenMarket Committee, or the FOMC, which is the body within the FederalReserve responsible for determining monetary policy.As many of you know, according to the Committee’s structure, there are12 voting members on the FOMC — the seven members of the Board ofGovernors in Washington always have a vote; currently only five of theseven seats are filled.The other voters include five of the 12 Reserve Bank presidents: thepresident of the New York Fed, who is a permanent voting member, andfour other presidents, who serve one-year terms on a rotating basis.This year happens to be one in which my colleague John Williams,president of the Federal Reserve Bank of San Francisco, is a votingmember, as I was last year.Whether we vote or not, all Reserve Bank presidents attend the FOMCmeetings, participate in the discussions, and contribute to theCommittee’s assessment of the economy and policy options._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 98. P a g e | 98Each of us prepares for the meetings by gathering informationthroughout our Districts, around the nation, and, in some cases,internationally.The federated structure draws on the strong roots of decentralizedgovernment that our country was founded on and ensures that ournational monetary policy has its roots not just in Washington or on WallStreet but also on Main Street and across our diverse nation.So conversations like the ones I’ve had with some of you today and withother individuals from business and community organizations help megather and share timely information on the economy.This leads to more informed decisions as the Committee seeks to achievethe goals of monetary policy that Congress has set for us in the FederalReserve Act.Specifically, Congress has mandated that the Fed should conduct policyto “promote effectively the goals of maximum employment, stable prices,and moderate long-term interest rates.”Since moderate long-term interest rates generally result when prices arestable and the economy is operating at full employment, it is often saidthat Congress has given the Fed a dual mandate.I believe the diversity of opinion around the FOMC table is one of itsgreat strengths and serves to improve the quality of our decision-making.Yet, it requires me to note that I speak for myself and not the FederalReserve System or my colleagues on the Federal Open MarketCommittee.Economic OutlookNow let me turn to the state of our economy. We have now seen 11consecutive quarters of expansion since mid-2009, when the recessionofficially ended._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 99. P a g e | 99In the third quarter of 2011 we finally surpassed the previous peak in realGDP, which occurred in the fourth quarter of 2007.The expansion, as you read about every day and most likely experience inyour businesses, has not been particularly robust.To many, it occasionally feels like we take two steps forward only to takeone step back.We finished 2011 with GDP growth of just 1.6 percent, compared to 3.1percent in the prior year.Unexpected shocks early in the year, ranging from the disasters in Japanthat led to supply chain disruptions in many industries, to flare-ups in theMiddle East and North Africa that led to a steep rise in oil prices, and there-emergence of the sovereign debt crisis in Europe held GDP growth toless than 1 percent in the first half of the year.Yet, the economy persevered, even through our own debt-ceiling crisis,and grew at an annual rate of 2.4 percent in the second half of the year.In fact, growth accelerated across each of the four quarters, from less thanhalf of a percent in the first quarter to 3 percent in the fourth quarter.The first estimate of first-quarter GDP growth was reported last week as2.2 percent.This number was slightly less than many forecasters anticipated, but itwas in line with my forecast of moderate growth that will strengthen overtime.I anticipate that we will see moderate year-over-year growth of about 3percent in 2012 and 2013. That outlook puts me in a slightly moreoptimistic camp than some forecasters.For example, my forecast is at the top of the central tendency of theFOMC participants’ forecasts that were submitted last week._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 100. P a g e | 100And the Philadelphia Fed’s first-quarter Survey of ProfessionalForecasters reported average estimates of real GDP growing 2.3 percentin 2012 and 2.7 percent in 2013.Our second-quarter survey won’t be released until later this month;however, many private-sector forecasters have marked up their outlookslightly since the early part of the year based on the somewhat better thanexpected first-quarter performance, particularly on the consumption andemployment fronts.Growth in manufacturing has proven to be a bright spot for the economyover the last six to nine months, and it continues to be a reason foroptimism going forward.The Philadelphia Fed’s monthly Business Outlook Survey ofmanufacturers has been a useful barometer of national trends inmanufacturing over many years.The survey’s general activity index tracked with last year’s summer lull,posting a few negative readings during the late spring and summer, butsince then, the survey has reported seven months of positive numbers —indicating a moderate but steady expansion.Moreover, the survey’s indicators of activity six months ahead haveremained strong, suggesting that manufacturers are optimistic about thefuture.Another upbeat indicator can be found in the Philadelphia Fed’scoincident indexes for all 50 states. We produce these indexes monthly tocreate a state-by-state view of the economy.Our latest readings indicate growth in every state for the three monthsending in March.A similar set of leading indicators also shows that growth is expected tocontinue over the next six months in nearly all states, including here inCalifornia._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 101. P a g e | 101Consumer spending, which accounts for about 70 percent of the nation’sGDP, also continues to improve, as the drag from household deleveraginglessens.Despite modest wage growth, retail sales in March grew 0.8 percent fromthe previous month and 6.5 percent above March 2011.The Bureau of Economic Analysis also reported that first-quarterpersonal consumption expenditures (PCE) increased at a 2.9 percentannual rate in the first quarter — up from 2.1 percent in the fourth quarterand the most rapid rate of consumption growth since the last quarter of2010.On the housing front, I expect to see stabilization and maybe slightimprovement in 2012.Yet, as the old real estate saying goes: “Location, location, location!”Whereas some regions saw a tremendous build-up in residential realestate, followed by a sharp decline, other areas, including many parts ofmy region back east, saw neither the dramatic boom nor the tragic bust.At a national level, though, we must acknowledge that we entered therecession over-invested in residential real estate, and we are not likely tosee a strong housing recovery until the surplus inventory of foreclosedand distressed properties declines.Yet we must realize that even as the economy rebalances, housing andrelated sectors are not likely to return to those heady pre-recession highs,nor should we expect them to do so.Those highs were unsustainable, and the housing crash that ensueddestroyed a great deal of wealth for consumers and the economy as awhole.The losses are real and the consequences severe for many individuals andmany businesses._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 102. P a g e | 102Moreover, monetary policy does not create real wealth so it cannoteliminate or offset these losses, nor should it try to do so.Nevertheless, households and businesses continue to make progress onrestoring the health of their balance sheets by paying down debt andincreasing savings.This is a rational reaction and a healthy trend. Most economists,including me, believe that this trend will continue into 2012.Conditions in the labor markets continue to improve modestly, thoughmonthly numbers do bounce around a bit.For example, strong job growth from December through February mayhave partially reflected the effect of unseasonably mild weather thiswinter, and the modest pullback in March may represent some payback.Indeed, March’s gain of 120,000 nonfarm jobs came after three months ofsolid growth of more than 200,000 a month.I prefer to average the quarter’s monthly numbers to infer the underlyingtrend. Doing so, we see that average monthly gains in the first quarteroutpaced those in the fourth quarter by nearly 50,000 jobs per month.So, we continue to make slow, steady progress, as evidenced by anunemployment rate that fell to 8.2 percent in March, down almost a fullpercentage point from the 9.1 percent in August.I expect further gradual declines in the unemployment rate, with the ratefalling to about 7.8 percent by the end of this year.Despite this gradual improvement, we cannot ignore the fact that thereare still too many people unemployed.The U.S. lost 8.8 million jobs from the peak of employment in January2008 to the trough in employment in February 2010._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 103. P a g e | 103We have gained back 3.5 million lost jobs, or 40 percent, but it will takesome time before we, once again, see a truly vibrant labor market.Any forecast is subject to some risks, and today I will discuss two risks onthe horizon.The first is the potential effects of the continuing sovereign debt crisis inEurope, and the second is a lesser risk from rising energy costs.Over the past year, U.S. financial markets have been roiled by worriesabout the European sovereign debt situation.We have often seen good news on the U.S. economy drowned out by thenews from Europe.The crisis was a long time in the making and continues despite the effortsof European leaders.Many who thought that preventing sovereign default by a euro countrywould prevent the crisis from spreading have been proven wrong.A number of the peripheral countries in Europe are unquestionably onfiscal paths that are unsustainable and that must be addressed.I might add that the U.S. is also on an unsustainable fiscal path that mustbe addressed. Let me stress that these are fiscal issues, not monetaryissues.Thus, we should look to the fiscal authorities for solutions, not our centralbanks.I have come to believe that the European governments and theireconomies will muddle through this near-term crisis but at significantcost to the taxpayers all across the euro zone.Nevertheless, the turmoil has resulted in an economic slowdown in theeuro zone that will likely cause a small drag on U.S. exports._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 104. P a g e | 104The other risk facing the U.S. economy has been the rising cost of oil andgasoline. Oil prices have fallen from their recent highs, but they remainover $100 a barrel and gasoline is about $4 a gallon.However, unless the price of oil rises substantially from current levels,this is not likely to derail our recovery.I come to this assessment, in part, because the U.S. economy is lessvulnerable to oil price shocks than it was in the 1970s and 1980s, in partbecause we use about half as much energy to make a dollar of real GDPthan we used to in the 1970s.In addition, while oil prices have risen, natural gas prices have beenfalling, and they are now at their lowest level since 1999.This is a result of both increased production in places like Pennsylvania’sMarcellus Shale areas, as well as reduced demand because of the mildwinter.Thus, while energy is still an important factor of production, our economyis less dependent on oil than it used to be.The larger risk from higher energy prices is not to growth but to inflationand expectations of inflation.The Fed recently set its long-term inflation target at 2 percent, asmeasured by the year-over-year change in the personal consumptionexpenditures chain-weighted price index.By that measure, prices rose at a 2.3 percent annual rate over the yearended in the first quarter, which is above our target.While this may prove to be temporary as oil prices stabilize, there is a riskthat the oil price increases we’ve seen so far this year will not reverse asanticipated, which could put additional pressure on prices and inflationexpectations._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 105. P a g e | 105Thus, we must continue to monitor these inflation trends with some careand be prepared to take appropriate action as necessary.The public has the right to expect the central bank to keep inflation nearits target of 2 percent over the medium to longer term.Inflation often develops gradually, and if monetary policy waits too longto respond, it can be very costly to correct.Measures of slack such as the unemployment rate are often thought toprevent inflation from rising.But the lessons of the 1970s show that is not the case.As you may recall, we ended up with both high unemployment and highinflation, and the sum of those two statistics became known as the miseryindex.More recently, I note that for nearly three years, the Bank of England hasbeen forecasting that inflation will return to its 2 percent target, but it hasfailed to do so, even though England’s economy has contracted over thepast two quarters and many perceive the level of slack in the Britisheconomy as large and increasing.That is not a place we want to find ourselves.Monetary PolicyBefore discussing where monetary policy might go as economicconditions evolve in the coming quarters, it might be helpful to reviewjust how much accommodation we currently have in place.As you know, the Fed has kept the federal funds rate near zero for morethan three years to support the recovery.We have also conducted two rounds of asset purchases that have morethan tripled the size of our balance sheet._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 106. P a g e | 106We continue to implement our maturity extension program, which islengthening the maturity of our holdings of Treasury securities and thecomposition of the portfolio has changed from mainly short-termTreasuries before the crisis to longer-term Treasuries and housing-relatedsecurities, mostly mortgage-backed securities, today.Many of these actions were taken at the height of the financial crisis andthe ensuing deep recession.Yet, since then, as I have indicated, the economy has been healing, ifsomewhat more slowly than we would like, and the financial crisis hassubstantially abated.Of course, problems remain, but things are not nearly as bad or as gloomyas they were in 2009 and early 2010.At its latest meeting in April, the Federal Open Market Committeecontinued to hold to its statement that economic conditions were “likelyto warrant exceptionally low levels for the federal funds rate at leastthrough late 2014.”That follows a structure for forward guidance that the Committee firstbegan last August, when it said conditions were likely to warrantexceptionally low rates through mid 2013.Then in January, it pushed back that calendar date another 18 months tolate 2014.The FOMC has also announced that the Fed intends to complete thematurity extension program, or “operation twist,” first launched lastSeptember and set to end in June.In this program, the Fed is buying $400 billion of longer-term Treasuriesand selling an equal amount of shorter-term Treasuries, in an effort toreduce long-term yields from already historically low levels.The FOMC is also continuing to reinvest principal payments from itsholdings of agency debt and MBS into MBS in an effort to help mortgagemarkets._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 107. P a g e | 107You may know that I dissented from the FOMC decisions in August andSeptember because it was not clear to me that increasing monetary policyaccommodation was appropriate then.After all, inflation was higher and unemployment was lower relative to theprevious year, as we have been discussing.Since that time, unemployment has decreased further, and inflation isabove target.While I believe monetary accommodation is still called for, in the absenceof some shock that derails the recovery, we may well need to begin togradually scale back the level of accommodation well before the end of2014.Another reason I dissented last year was that I did not favor providingforward guidance in terms of a calendar date.Monetary policy should be responsive to economic conditions, and Ibelieve that we should be providing information on the economic factorsthat will influence our monetary policy decisions rather than trying toforecast when that time will be.In January, the Committee took a step to enhance the information itincludes in its economic projections, which are summarized four times ayear in the Survey of Economic Projections, or SEP.I believe such information will prove to be useful in conveying therelationship between changes in economic conditions and monetarypolicy decisions.In particular, the Committee now summarizes the monetary policyassessments that underlie the economic projections of output, inflation,and unemployment.These assessments are what the individual policymakers view as thepolicy path that is appropriate in achieving the Fed’s longer-term goals._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 108. P a g e | 108This additional information has two benefits.First, having more information on the underlying paths should help thepublic better understand the projections.For example, they will have a better understanding of whether inflation isexpected to return to the long-term goal as shocks work their way throughthe economy or whether policymakers anticipate that further monetarypolicy actions will be needed to achieve the Committee’s objective.Second, as views of appropriate policy evolve over time as economic andfinancial conditions change, the public will be able to draw betterinferences about the relation between current economic conditions, theeconomic outlook, and appropriate policy.This then informs the public about how policy is likely to react in thefuture to changes in the economy.For example, in April, the SEP indicated that only four participants nowexpect the first increase in the federal funds rate will occur after 2014,compared to six in the January projections.These projections of the policy path have changed as the centraltendencies of the 2012 projections of growth and inflation were revised upand projections of unemployment were revised down.We know that when monetary policy is conducted in a systematic way —that is, with a systematic relationship between changes in economicconditions and the policy actions taken by the central bank — policybecomes more transparent and easier to communicate.And the better the public and the markets understand how policy is likelyto be adjusted as the economy changes, the more predictable policybecomes, which promotes price stability and better economic outcomes.In addition, policy transparency can increase the public’s ability to holdthe central bank accountable for its policy decisions._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 109. P a g e | 109I believe, and have argued for some time, that the FOMC should strive toprovide information about the factors that will influence our policydecisions. Some call this a policy rule or reaction function.This will not only enhance transparency but also impose an importantdiscipline on policymaking.If policymakers choose to deviate from the guidelines, they are forced toexplain why and when they anticipate returning to more normal operatingpractices.Requiring this type of transparency raises the bar policymakers face toengage in discretionary policies in the first place.I suspect that the FOMC participants may not be quite ready to agree ona specific policy rule or reaction function because they use differentmodels and have different loss functions.However, I do believe it will be possible to provide assessments of theevolution of the key variables influencing our policy choices and thencommunicate our policy decisions in terms of the changes in these keyvariables.If policy was changed, then we would explain that change in terms of howthe variables in our response function changed.If we choose a consistent set of variables and systematically use them todescribe our policy choices, the public will form more accurate judgmentsabout the likely course of policy — reducing uncertainty and promotingstability.ConclusionIn summary, the U.S. economy is continuing to grow at a moderate pace.I expect annual growth of around 3 percent in 2012 and 2013.Prospects for labor markets will continue to improve, with job growthstrengthening and the unemployment rate falling gradually over time._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 110. P a g e | 110I believe inflation expectations will be relatively stable and inflation willremain at moderate levels in the near term.However, with the very accommodative stance of monetary policy thathas now been in place for more than three years, we must guard againstthe medium- and longer-term risks of inflation and further distortionssuch accommodation can create.Monetary policy should be determined by economic conditions and notby a calendar date.I believe the FOMC should continue to work toward increasing thepublic’s understanding of how policy will systematically react to changesin economic conditions.Improving the transparency of our monetary policy decision-makingprocess will help to improve the effectiveness of monetary policy and theFed’s accountability with the public._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 111. P a g e | 111Very InterestingNEW CODE OF CORPORATEGOVERNANCESingapore, 2 MAY 2012Principle:1 Every company should be headed by aneffective Board to lead and control thecompany.The Board is collectively responsible for the long-term success of thecompany.The Board works with Management to achieve this objective andManagement remains accountable to the Board.Guidelines:1.1 The Boards role is to:(a) Provide entrepreneurial leadership, set strategic objectives, andensure that the necessary financial and human resources are in place forthe company to meet its objectives;(b) Establish a framework of prudent and effective controls which enablesrisks to be assessed and managed, including safeguarding ofshareholders interests and the companys assets;(c) Review management performance;(d) Identify the key stakeholder groups and recognise that theirperceptions affect the companys reputation;_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 112. P a g e | 112(e) Set the companys values and standards (including ethical standards),and ensure that obligations to shareholders and other stakeholders areunderstood and met; and(f) Consider sustainability issues, e.g. environmental and social factors, aspart of its strategic formulation.1.2 All directors must objectively discharge their duties andresponsibilities at all times as fiduciaries in the interests of the company.1.3 The Board may delegate the authority to make decisions to any boardcommittee but without abdicating its responsibility. Any such delegationshould be disclosed.1.4 The Board should meet regularly and as warranted by particularcircumstances, as deemed appropriate by the board members.Companies are encouraged to amend their Articles of Association (orother constitutive documents) to provide for telephonic andvideo-conference meetings.The number of meetings of the Board and board committees held in theyear, as well as the attendance of every board member at these meetings,should be disclosed in the companys Annual Report.1.5 Every company should prepare a document with guidelines settingforth:(a) The matters reserved for the Boards decision; and(b) Clear directions to Management on matters that must be approved bythe Board.The types of material transactions that require board approval under suchguidelines should be disclosed in the companys Annual Report.1.6 Incoming directors should receive comprehensive and tailoredinduction on joining the Board. _____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 113. P a g e | 113This should include his duties as a director and how to discharge thoseduties, and an orientation program to ensure that they are familiar withthe companys business and governance practices.The company should provide training for first-time director1 in areas suchas accounting, legal and industry-specific knowledge as appropriate.It is equally important that all directors should receive regular training,particularly on relevant new laws, regulations and changing commercialrisks, from time to time.The company should be responsible for arranging and funding thetraining of directors.The Board should also disclose in the companys Annual Report theinduction, orientation and training provided to new and existingdirectors.1.7 Upon appointment of each director, the company should provide aformal letter to the director, setting out the directors duties andobligations.Principle:2 There should be a strong and independent element on the Board, whichis able to exercise objective judgement on corporate affairsindependently, in particular, from Management and 10% shareholders.No individual or small group of individuals should be allowed todominate the Boards decision making.Guidelines:2.1 There should be a strong and independent element on the Board, withindependent directors making up at least one-third of the Board._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 114. P a g e | 1142.2 The independent directors should make up at least half of the Boardwhere:(a) The Chairman of the Board (the "Chairman") and the chief executiveofficer (or equivalent) (the "CEO") is the same person;(b) The Chairman and the CEO are immediate family members;(c) The Chairman is part of the management team; or(d) The Chairman is not an independent director.2.3 An "independent" director is one who has no relationship with thecompany, its related corporations, its 10% shareholders or its officers thatcould interfere, or be reasonably perceived to interfere, with the exerciseof the directors independent business judgement with a view to the bestinterests of the company.The Board should identify in the companys Annual Report each directorit considers to be independent.The Board should determine, taking into account the views of theNominating Committee ("NC"), whether the director is independent incharacter and judgement and whether there are relationships orcircumstances which are likely to affect, or could appear to affect, thedirectors judgement.Directors should disclose to the Board any such relationship as and whenit arises.The Board should state its reasons if it determines that a director isindependent notwithstanding the existence of relationships orcircumstances which may appear relevant to its determination, includingthe following:(a) A director being employed by the company or any of its relatedcorporations for the current or any of the past three financial years;_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 115. P a g e | 115(b) A director who has an immediate family member who is, or has beenin any of the past three financial years, employed by the company or anyof its related corporations and whose remuneration is determined by theremuneration committee;(c) A director, or an immediate family member, accepting any significantcompensation from the company or any of its related corporations for theprovision of services, for the current or immediate past financial year,other than compensation for board service;(d) A director:(i) Who, in the current or immediate past financial year, is or was; or(ii) Whose immediate family member, in the current or immediate pastfinancial year, is or was, a 10% shareholder of, or a partner in (with 10% ormore stake), or an executive officer of, or a director of, any organisation towhich the company or any of its subsidiaries made, or from which thecompany or any of its subsidiaries received, significant payments ormaterial services (which may include auditing, banking, consulting andlegal services), in the current or immediate past financial year.As a guide, payments aggregated over any financial year in excess ofS$200,000 should generally be deemed significant;(e) A director who is a 10% shareholder or an immediate family memberof a 10% shareholder of the company; or(f) A director who is or has been directly associated with a 10%shareholder of the company, in the current or immediate past financialyear.The relationships set out above are not intended to be exhaustive, and areexamples of situations which would deem a director to be notindependent.If the Board wishes, in spite of the existence of one or more of theserelationships, to consider the director as independent, it should disclose_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 116. P a g e | 116in full the nature of the directors relationship and bear responsibility forexplaining why he should be considered independent.2.4 The independence of any director who has served on the Boardbeyond nine years from the date of his first appointment should besubject to particularly rigorous review.In doing so, the Board should also take into account the need forprogressive refreshing of the Board.The Board should also explain why any such director should beconsidered independent.2.5 The Board should examine its size and, with a view to determining theimpact of the number upon effectiveness, decide on what it considers anappropriate size for the Board, which facilitates effective decisionmaking.The Board should take into account the scope and nature of theoperations of the company, the requirements of the business and the needto avoid undue disruptions from changes to the composition of the Boardand board committees.The Board should not be so large as to be unwieldy.2.6 The Board and its board committees should comprise directors whoas a group provide an appropriate balance and diversity of skills,experience, gender and knowledge of the company.They should also provide core competencies such as accounting orfinance, business or management experience, industry knowledge,strategic planning experience and customer-based experience orknowledge.2.7 Non-executive directors should:(a) Constructively challenge and help develop proposals on strategy; and_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 117. P a g e | 117(b) Review the performance of Management in meeting agreed goals andobjectives and monitor the reporting of performance.2.8 To facilitate a more effective check on Management, non-executivedirectors are encouraged to meet regularly without the presence ofManagement.Principle:3 There should be a clear division of responsibilities between theleadership of the Board and the executives responsible for managing thecompanys business.No one individual should represent a considerable concentration ofpower.Guidelines:3.1 The Chairman and the CEO should in principle be separate persons,to ensure an appropriate balance of power, increased accountability andgreater capacity of the Board for independent decision making.The division of responsibilities between the Chairman and the CEOshould be clearly established, set out in writing and agreed by the Board.In addition, the Board should disclose the relationship between theChairman and the CEO if they are immediate family members.3.2 The Chairman should:(a) Lead the Board to ensure its effectiveness on all aspects of its role;(b) Set the agenda and ensure that adequate time is available fordiscussion of all agenda items, in particular strategic issues;(c) Promote a culture of openness and debate at the Board;_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 118. P a g e | 118(d) Ensure that the directors receive complete, adequate and timelyinformation;(e) Ensure effective communication with shareholders;(f) Encourage constructive relations within the Board and between theBoard and Management;(g) Facilitate the effective contribution of non-executive directors inparticular; and(h) Promote high standards of corporate governance.The responsibilities set out above provide guidance and should not betaken as a comprehensive list of all the duties and responsibilities of aChairman.3.3 Every company should appoint an independent director to be the leadindependent director where:(a) The Chairman and the CEO is the same person;(b) The Chairman and the CEO are immediate family members;(c) The Chairman is part of the management team; or(d) The Chairman is not an independent director.The lead independent director (if appointed) should be available toshareholders where they have concerns and for which contact through thenormal channels of the Chairman, the CEO or the chief financial officer(or equivalent) (the "CFO") has failed to resolve or is inappropriate.3.4 Led by the lead independent director, the independent directorsshould meet periodically without the presence of the other directors, andthe lead independent director should provide feedback to the Chairmanafter such meetings._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 119. P a g e | 119BOARD MEMBERSHIPPrinciple:4 There should be a formal and transparent process for the appointmentand re-appointment of directors to the Board.Guidelines:4.1 The Board should establish a NC to make recommendations to theBoard on all board appointments, with written terms of reference whichclearly set out its authority and duties.The NC should comprise at least three directors, the majority of whom,including the NC Chairman, should be independent.The lead independent director, if any, should be a member of the NC.The Board should disclose in the companys Annual Report the names ofthe members of the NC and the key terms of reference of the NC,explaining its role and the authority delegated to it by the Board.4.2 The NC should make recommendations to the Board on relevantmatters relating to:(a) The review of board succession plans for directors, in particular, theChairman and for the CEO;(b) The development of a process for evaluation of the performance of theBoard, its board committees and directors;(c) The review of training and professional development programs for theBoard; and(d) The appointment and re-appointment of directors (including alternatedirectors, if applicable)._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 120. P a g e | 120Important issues to be considered as part of the process for the selection,appointment and re-appointment of directors include composition andprogressive renewal of the Board and each directors competencies,commitment, contribution and performance (e.g. attendance,preparedness, participation and candour) including, if applicable, as anindependent director.All directors should be required to submit themselves for re-nominationand re-appointment at regular intervals and at least once every threeyears.4.3 The NC is charged with the responsibility of determining annually,and as and when circumstances require, if a director is independent,bearing in mind the circumstances set forth in Guidelines 2.3 and 2.4 andany other salient factors.If the NC considers that a director who has one or more of therelationships mentioned therein can be considered independent, it shallprovide its views to the Board for the Boards consideration.Conversely, the NC has the discretion to consider that a director is notindependent even if he does not fall under the circumstances set forth inGuideline 2.3 or Guideline 2.4, and should similarly provide its views tothe Board for the Boards consideration.4.4 When a director has multiple board representations, he must ensurethat sufficient time and attention is given to the affairs of each company.The NC should decide if a director is able to and has been adequatelycarrying out his duties as a director of the company, taking intoconsideration the directors number of listed company boardrepresentations and other principal commitments.Guidelines should be adopted that address the competing timecommitments that are faced when directors serve on multiple boards._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 121. P a g e | 121The Board should determine the maximum number of listed companyboard representations which any director may hold, and disclose this inthe companys Annual Report.4.5 Boards should generally avoid approving the appointment of alternatedirectors.Alternate directors should only be appointed for limited periods inexceptional cases such as when a director has a medical emergency.If an alternate director is appointed, the alternate director should befamiliar with the company affairs, and be appropriately qualified.If a person is proposed to be appointed as an alternate director to anindependent director, the NC and the Board should review and concludethat the person would similarly qualify as an independent director, beforehis appointment as an alternate director.Alternate directors bear all the duties and responsibilities of a director.4.6 A description of the process for the selection, appointment andre-appointment of directors to the Board should be disclosed in thecompanys Annual Report.This should include disclosure on the search and nomination process.4.7 Key information regarding directors, such as academic andprofessional qualifications, shareholding in the company and its relatedcorporations, board committees served on (as a member or chairman),date of first appointment as a director, date of last re-appointment as adirector, directorships or chairmanships both present and those held overthe preceding three years in other listed companies, and other principalcommitments, should be disclosed in the companys Annual Report.In addition, the companys annual disclosure on corporate governanceshould indicate which directors are executive, non-executive orconsidered by the NC to be independent._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 122. P a g e | 122The names of the directors submitted for appointment or re-appointmentshould also be accompanied by details and information to enableshareholders to make informed decisions.Such information, which should also accompany the relevant resolution,would include:(a) Any relationships including immediate family relationships betweenthe candidate and the directors, the company or its 10% shareholders;(b) A separate list of all current directorships in other listed companies;and(c) Details of other principal commitments.BOARD PERFORMANCEPrinciple:5 There should be a formal annual assessment of the effectiveness of theBoard as a whole and its board committees and the contribution by eachdirector to the effectiveness of the Board.Guidelines:5.1 Every Board should implement a process to be carried out by the NCfor assessing the effectiveness of the Board as a whole and its boardcommittees and for assessing the contribution by the Chairman and eachindividual director to the effectiveness of the Board.The Board should state in the companys Annual Report how theassessment of the Board, its board committees and each director has beenconducted.If an external facilitator has been used, the Board should disclose in thecompanys Annual Report whether the external facilitator has any otherconnection with the company or any of its directors._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 123. P a g e | 123This assessment process should be disclosed in the companys AnnualReport.5.2 The NC should decide how the Boards performance may beevaluated and propose objective performance criteria.Such performance criteria, which allow for comparison with industrypeers, should be approved by the Board and address how the Board hasenhanced long-term shareholder value.These performance criteria should not be changed from year to year, andwhere circumstances deem it necessary for any of the criteria to bechanged, the onus should be on the Board to justify this decision.5.3 Individual evaluation should aim to assess whether each directorcontinues to contribute effectively and demonstrate commitment to therole (including commitment of time for meetings of the Board and boardcommittees, and any other duties).The Chairman should act on the results of the performance evaluation,and, in consultation with the NC, propose, where appropriate, newmembers to be appointed to the Board or seek the resignation ofdirectors.ACCESS TO INFORMATIONPrinciple:6 In order to fulfil their responsibilities, directors should be provided withcomplete, adequate and timely information prior to board meetings andon an on-going basis so as to enable them to make informed decisions todischarge their duties and responsibilities.Guidelines:6.1 Management has an obligation to supply the Board with complete,adequate information in a timely manner._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 124. P a g e | 124Relying purely on what is volunteered by Management is unlikely to beenough in all circumstances and further enquiries may be required if theparticular director is to fulfil his duties properly.Hence, the Board should have separate and independent access toManagement.Directors are entitled to request from Management and should beprovided with such additional information as needed to make informeddecisions.Management shall provide the same in a timely manner.6.2 Information provided should include board papers and relatedmaterials, background or explanatory information relating to matters tobe brought before the Board, and copies of disclosure documents,budgets, forecasts and monthly internal financial statements.In respect of budgets, any material variance between the projections andactual results should also be disclosed and explained.6.3 Directors should have separate and independent access to thecompany secretary.The role of the company secretary should be clearly defined and shouldinclude responsibility for ensuring that board procedures are followedand that applicable rules and regulations are complied with.Under the direction of the Chairman, the company secretarysresponsibilities include ensuring good information flows within theBoard and its board committees and between Management andnon-executive directors, advising the Board on all governance matters, aswell as facilitating orientation and assisting with professionaldevelopment as required.The company secretary should attend all board meetings._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 125. P a g e | 1256.4 The appointment and the removal of the company secretary should bea matter for the Board as a whole.6.5 The Board should have a procedure for directors, either individually oras a group, in the furtherance of their duties, to take independentprofessional advice, if necessary, and at the companys expense.REMUNERATION MATTERSPROCEDURES FOR DEVELOPING REMUNERATIONPOLICIESPrinciple:7 There should be a formal and transparent procedure for developingpolicy on executive remuneration and for fixing the remunerationpackages of individual directors.No director should be involved in deciding his own remuneration.Guidelines:7.1 The Board should establish a Remuneration Committee ("RC") withwritten terms of reference which clearly set out its authority and duties.The RC should comprise at least three directors, the majority of whom,including the RC Chairman, should be independent.All of the members of the RC should be non-executive directors.This is to minimise the risk of any potential conflict of interest.The Board should disclose in the companys Annual Report the names ofthe members of the RC and the key terms of reference of the RC,explaining its role and the authority delegated to it by the Board._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 126. P a g e | 1267.2 The RC should review and recommend to the Board a generalframework of remuneration for the Board and key managementpersonnel.The RC should also review and recommend to the Board the specificremuneration packages for each director as well as for the keymanagement personnel.The RCs recommendations should be submitted for endorsement by theentire Board.The RC should cover all aspects of remuneration, including but notlimited to directors fees, salaries, allowances, bonuses, options,share-based incentives and awards, and benefits in kind.7.3 If necessary, the RC should seek expert advice inside and/or outsidethe company on remuneration of all directors.The RC should ensure that existing relationships, if any, between thecompany and its appointed remuneration consultants will not affect theindependence and objectivity of the remuneration consultants.The company should also disclose the names and firms of theremuneration consultants in the annual remuneration report, and includea statement on whether the remuneration consultants have any suchrelationships with the company.7.4 The RC should review the companys obligations arising in the eventof termination of the executive directors’ and key managementpersonnels contracts of service, to ensure that such contracts of servicecontain fair and reasonable termination clauses which are not overlygenerous.The RC should aim to be fair and avoid rewarding poor performance._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 127. P a g e | 127LEVEL AND MIX OF REMUNERATIONPrinciple:8 The level and structure of remuneration should be aligned with thelong-term interest and risk policies of the company, and should beappropriate to attract, retain and motivate(a) The directors to provide good stewardship of the company, and(b) Key management personnel to successfully manage the company.However, companies should avoid paying more than is necessary for thispurpose.Guidelines:8.1 A significant and appropriate proportion of executive directors’ andkey management personnels remuneration should be structured so as tolink rewards to corporate and individual performance.Such performance-related remuneration should be aligned with theinterests of shareholders and promote the long-term success of thecompany.It should take account of the risk policies of the company, be symmetricwith risk outcomes and be sensitive to the time horizon of risks.There should be appropriate and meaningful measures for the purpose ofassessing executive directors’ and key management personnelsperformance.8.2 Long-term incentive schemes are generally encouraged for executivedirectors and key management personnel.The RC should review whether executive directors and key managementpersonnel should be eligible for benefits under long-term incentiveschemes._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 128. P a g e | 128The costs and benefits of long-term incentive schemes should be carefullyevaluated.In normal circumstances, offers of shares or grants of options or otherforms of deferred remuneration should vest over a period of time.The use of vesting schedules, whereby only a portion of the benefits canbe exercised each year, is also strongly encouraged.Executive directors and key management personnel should beencouraged to hold their shares beyond the vesting period, subject to theneed to finance any cost of acquiring the shares and associated taxliability.8.3 The remuneration of non-executive directors should be appropriate tothe level of contribution, taking into account factors such as effort andtime spent, and responsibilities of the directors.Non-executive directors should not be over-compensated to the extentthat their independence may be compromised.The RC should also consider implementing schemes to encouragenon-executive directors to hold shares in the company so as to betteralign the interests of such non-executive directors with the interests ofshareholders.8.4 Companies are encouraged to consider the use of contractualprovisions to allow the company to reclaim incentive components ofremuneration from executive directors and key management personnel inexceptional circumstances of misstatement of financial results, or ofmisconduct resulting in financial loss to the company.DISCLOSURE ON REMUNERATIONPrinciple:9 Every company should provide clear disclosure of its remuneration_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 129. P a g e | 129policies, level and mix of remuneration, and the procedure for settingremuneration, in the companys Annual Report.It should provide disclosure in relation to its remuneration policies toenable investors to understand the link between remuneration paid todirectors and key management personnel, and performance.Guidelines:9.1 The company should report to the shareholders each year on theremuneration of directors, the CEO and at least the top five keymanagement personnel (who are not also directors or the CEO) of thecompany.This annual remuneration report should form part of, or be annexed tothe companys annual report of its directors.It should be the main means through which the company reports toshareholders on remuneration matters.The annual remuneration report should include the aggregate amount ofany termination, retirement and post-employment benefits that may begranted to directors, the CEO and the top five key management personnel(who are not directors or the CEO).9.2 The company should fully disclose the remuneration of eachindividual director and the CEO on a named basis.For administrative convenience, the company may round off thedisclosed figures to the nearest thousand dollars.There should be a breakdown (in percentage or dollar terms) of eachdirectors and the CEOs remuneration earned through base/fixed salary,variable or performance-related income/bonuses, benefits in kind, stockoptions granted, share-based incentives and awards, and other long-termincentives._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 130. P a g e | 1309.3 The company should name and disclose the remuneration of at leastthe top five key management personnel (who are not directors or theCEO) in bands of S$250,000. Companies need only show the applicablebands.There should be a breakdown (in percentage or dollar terms) of each keymanagement personnels remuneration earned through base/fixedsalary, variable or performance-related income/bonuses, benefits in kind,stock options granted, share-based incentives and awards, and otherlong-term incentives.In addition, the company should disclose in aggregate the totalremuneration paid to the top five key management personnel (who arenot directors or the CEO).As best practice, companies are also encouraged to fully disclose theremuneration of the said top five key management personnel.9.4 For transparency, the annual remuneration report should disclose thedetails of the remuneration of employees who are immediate familymembers of a director or the CEO, and whose remuneration exceedsS$50,000 during the year.This will be done on a named basis with clear indication of theemployees relationship with the relevant director or the CEO.Disclosure of remuneration should be in incremental bands of S$50,000.The company need only show the applicable bands.9.5 The annual remuneration report should also contain details ofemployee share schemes to enable their shareholders to assess thebenefits and potential cost to the companies.The important terms of the share schemes should be disclosed, includingthe potential size of grants, methodology of valuing stock options,exercise price of options that were granted as well as outstanding,whether the exercise price was at the market or otherwise on the date of _____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 131. P a g e | 131grant, market price on the date of exercise, the vesting schedule, and thejustifications for the terms adopted.9.6 For greater transparency, companies should disclose moreinformation on the link between remuneration paid to the executivedirectors and key management personnel, and performance.The annual remuneration report should set out a description ofperformance conditions to which entitlement to short-term and long-termincentive schemes are subject, an explanation on why such performanceconditions were chosen, and a statement of whether such performanceconditions are met.ACCOUNTABILITY AND AUDITACCOUNTABILITYPrinciple:10 The Board should present a balanced and understandable assessmentof the companys performance, position and prospects.Guidelines:10.1 The Boards responsibility to provide a balanced and understandableassessment of the companys performance, position and prospectsextends to interim and other price sensitive public reports, and reports toregulators (if required).10.2 The Board should take adequate steps to ensure compliance withlegislative and regulatory requirements, including requirements underthe listing rules of the securities exchange, for instance, by establishingwritten policies where appropriate.10.3 Management should provide all members of the Board withmanagement accounts and such explanation and information on amonthly basis and as the Board may require from time to time to enable_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 132. P a g e | 132the Board to make a balanced and informed assessment of the companysperformance, position and prospects.RISK MANAGEMENT AND INTERNAL CONTROLSPrinciple:11 The Board is responsible for the governance of risk.The Board should ensure that Management maintains a sound system ofrisk management and internal controls to safeguard shareholdersinterests and the companys assets, and should determine the nature andextent of the significant risks which the Board is willing to take inachieving its strategic objectives.Guidelines:11.1 The Board should determine the companys levels of risk toleranceand risk policies, and oversee Management in the design,implementation and monitoring of the risk management and internalcontrol systems.11.2 The Board should, at least annually, review the adequacy andeffectiveness of the companys risk management and internal controlsystems, including financial, operational, compliance and informationtechnology controls.Such review can be carried out internally or with the assistance of anycompetent third parties.11.3 The Board should comment on the adequacy and effectiveness of theinternal controls, including financial, operational, compliance andinformation technology controls, and risk management systems, in thecompanys Annual Report._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 133. P a g e | 133The Boards commentary should include information needed bystakeholders to make an informed assessment of the companys internalcontrol and risk management systems.The Board should also comment in the companys Annual Report onwhether it has received assurance from the CEO and the CFO:(a) That the financial records have been properly maintained and thefinancial statements give a true and fair view of the companys operationsand finances; and(b) Regarding the effectiveness of the companys risk management andinternal control systems.11.4 The Board may establish a separate board risk committee orotherwise assess appropriate means to assist it in carrying out itsresponsibility of overseeing the companys risk management frameworkand policies.AUDIT COMMITTEEPrinciple:12 The Board should establish an Audit Committee ("AC") with writtenterms of reference which clearly set out its authority and duties.Guidelines:12.1 The AC should comprise at least three directors, the majority ofwhom, including the AC Chairman, should be independent.All of the members of the AC should be non-executive directors.The Board should disclose in the companys Annual Report the names ofthe members of the AC and the key terms of reference of the AC,explaining its role and the authority delegated to it by the Board._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 134. P a g e | 13412.2 The Board should ensure that the members of the AC areappropriately qualified to discharge their responsibilities.At least two members, including the AC Chairman, should have recentand relevant accounting or related financial management expertise orexperience, as the Board interprets such qualification in its businessjudgement.12.3 The AC should have explicit authority to investigate any matterwithin its terms of reference, full access to and co-operation byManagement and full discretion to invite any director or executive officerto attend its meetings, and reasonable resources to enable it to dischargeits functions properly.12.4 The duties of the AC should include:(a) Reviewing the significant financial reporting issues and judgementsso as to ensure the integrity of the financial statements of the companyand any announcements relating to the companys financial performance;(b) Reviewing and reporting to the Board at least annually the adequacyand effectiveness of the companys internal controls, including financial,operational, compliance and information technology controls (suchreview can be carried out internally or with the assistance of anycompetent third parties);(c) Reviewing the effectiveness of the companys internal audit function;(d) Reviewing the scope and results of the external audit, and theindependence and objectivity of the external auditors; and(e) Making recommendations to the Board on the proposals to theshareholders on the appointment, re-appointment and removal of theexternal auditors, and approving the remuneration and terms ofengagement of the external auditors.12.5 The AC should meet_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 135. P a g e | 135(a) With the external auditors, and(b) With the internal auditors, in each case without the presence ofManagement, at least annually.12.6 The AC should review the independence of the external auditorsannually and should state(a) The aggregate amount of fees paid to the external auditors for thatfinancial year, and(b) A breakdown of the fees paid in total for audit and non-audit servicesrespectively, or an appropriate negative statement, in the companysAnnual Report.Where the external auditors also supply a substantial volume of non-auditservices to the company, the AC should keep the nature and extent ofsuch services under review, seeking to maintain objectivity.12.7 The AC should review the policy and arrangements by which staff ofthe company and any other persons may, in confidence, raise concernsabout possible improprieties in matters of financial reporting or othermatters.The ACs objective should be to ensure that arrangements are in place forsuch concerns to be raised and independently investigated, and forappropriate follow-up action to be taken.The existence of a whistle-blowing policy should be disclosed in thecompanys Annual Report, and procedures for raising such concernsshould be publicly disclosed as appropriate.12.8 The Board should disclose a summary of all the ACs activities in thecompanys Annual Report.The Board should also disclose in the companys Annual Reportmeasures taken by the AC members to keep abreast of changes to_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 136. P a g e | 136accounting standards and issues which have a direct impact on financialstatements.12.9 A former partner or director of the companys existing auditing firmor auditing corporation should not act as a member of the companys AC:(a) Within a period of 12 months commencing on the date of his ceasingto be a partner of the auditing firm or director of the auditing corporation;and in any case(b) For as long as he has any financial interest in the auditing firm orauditing corporation.INTERNAL AUDITPrinciple:13 The company should establish an effective internal audit function thatis adequately resourced and independent of the activities it audits.Guidelines:13.1 The Internal Auditors primary line of reporting should be to the ACChairman although the Internal Auditor would also reportadministratively to the CEO.The AC approves the hiring, removal, evaluation and compensation of thehead of the internal audit function, or the accounting / auditing firm orcorporation to which the internal audit function is outsourced.The Internal Auditor should have unfettered access to all the companysdocuments, records, properties and personnel, including access to theAC.13.2 The AC should ensure that the internal audit function is adequatelyresourced and has appropriate standing within the company._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 137. P a g e | 137For the avoidance of doubt, the internal audit function can be in-house,outsourced to a reputable accounting/auditing firm or corporation, orperformed by a major shareholder, holding company or controllingenterprise with an internal audit staff.13.3 The internal audit function should be staffed with persons with therelevant qualifications and experience.13.4 The Internal Auditor should carry out its function according to thestandards set by nationally or internationally recognised professionalbodies including the Standards for the Professional Practice of InternalAuditing set by The Institute of Internal Auditors.13.5 The AC should, at least annually, review the adequacy andeffectiveness of the internal audit function.SHAREHOLDER RIGHTS AND RESPONSIBILITIESSHAREHOLDER RIGHTSPrinciple:14 Companies should treat all shareholders fairly and equitably, andshould recognise, protect and facilitate the exercise of shareholdersrights, and continually review and update such governance arrangements.Guidelines:14.1 Companies should facilitate the exercise of ownership rights by allshareholders.In particular, shareholders have the right to be sufficiently informed ofchanges in the company or its business which would be likely tomaterially affect the price or value of the companys shares.14.2 Companies should ensure that shareholders have the opportunity toparticipate effectively in and vote at general meetings of shareholders._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 138. P a g e | 138Shareholders should be informed of the rules, including votingprocedures, that govern general meetings of shareholders.14.3 Companies should allow corporations which provide nominee orcustodial services to appoint more than two proxies so that shareholderswho hold shares through such corporations can attend and participate ingeneral meetings as proxies.COMMUNICATION WITH SHAREHOLDERSPrinciple:15 Companies should actively engage their shareholders and put in placean investor relations policy to promote regular, effective and faircommunication with shareholders.Guidelines:15.1 Companies should devise an effective investor relations policy toregularly convey pertinent information to shareholders.In disclosing information, companies should be as descriptive, detailedand forthcoming as possible, and avoid boilerplate disclosures.15.2 Companies should disclose information on a timely basis throughSGXNET and other information channels, including a well-maintainedand updated corporate website.Where there is inadvertent disclosure made to a select group, companiesshould make the same disclosure publicly to all others as promptly aspossible15.3 The Board should establish and maintain regular dialogue withshareholders, to gather views or inputs, and address shareholdersconcerns._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 139. P a g e | 13915.4 The Board should state in the companys Annual Report the steps ithas taken to solicit and understand the views of the shareholders e.g.through analyst briefings, investor roadshows or Investors Day briefings.15.5 Companies are encouraged to have a policy on payment of dividendsand should communicate it to shareholders. Where dividends are notpaid, companies should disclose their reasons.CONDUCT OF SHAREHOLDER MEETINGSPrinciple:16 Companies should encourage greater shareholder participation atgeneral meetings of shareholders, and allow shareholders the opportunityto communicate their views on various matters affecting the company.Guidelines:16.1 Shareholders should have the opportunity to participate effectively inand to vote at general meetings of shareholders.Companies should make the appropriate provisions in their Articles ofAssociation (or other constitutive documents) to allow for absentia votingat general meetings of shareholders.16.2 There should be separate resolutions at general meetings on eachsubstantially separate issue.Companies should avoid "bundling" resolutions unless the resolutionsare interdependent and linked so as to form one significant proposal.16.3 All directors should attend general meetings of shareholders.In particular, the Chairman of the Board and the respective Chairman ofthe AC, NC and RC should be present and available to addressshareholders queries at these meetings._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 140. P a g e | 140The external auditors should also be present to address shareholdersqueries about the conduct of audit and the preparation and content of theauditors report.16.4 Companies should prepare minutes of general meetings that includesubstantial and relevant comments or queries from shareholders relatingto the agenda of the meeting, and responses from the Board andManagement, and to make these minutes available to shareholders upontheir request.16.5 Companies should put all resolutions to vote by poll and make anannouncement of the detailed results showing the number of votes castfor and against each resolution and the respective percentages.Companies are encouraged to employ electronic polling.THE ROLE OF SHAREHOLDERS IN ENGAGING WITHCOMPANIES IN WHICH THEY INVESTThe Code on Corporate Governance focuses on providing principles andguidelines to listed companies and their Boards to spur them towards ahigh standard of corporate governance.To ensure that these standards are achieved and sustained in practice,active and constructive shareholder relations is crucial.Bearing in mind the diversity of shareholders in a listed company andtheir differing investment objectives, this statement sets out certain broadviews on the role of shareholders.The objective of creating sustainable and financially sound enterprisesthat offer long-term value to shareholders is best served through aconstructive relationship between shareholders and the Boards ofcompanies.Shareholder inputs on governance matters are useful to strengthen theoverall environment for good governance policies and practices, andconvey shareholders expectations to the Board._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 141. P a g e | 141By constructively engaging with the Board, shareholders can help to setthe tone and expectation for governance of the company.A shareholders vote at general meetings is a direct way of expressingviews and expectations to the Board.Hence, shareholders should exercise their right to attend generalmeetings and vote responsibly.Where relevant, shareholders should communicate to the Board theirreasons for disagreeing with any proposal tabled at a general meeting.Where appropriate, specific shareholder groups and their associations areencouraged to consider adopting international best practices.Initiatives by relevant industry associations or organisations to developguidelines on their roles as shareholders of listed companies will bewelcomed.For the avoidance of doubt, this statement does not form part of the Codeof Corporate Governance. It is aimed at enhancing the quality ofengagement between shareholders and companies, so as to help drivehigher standards of corporate governance and improve long-term returnsto shareholders.GLOSSARYThe following terms, unless the context requires otherwise, have thefollowing meanings:"AC": Audit Committee"Board": The board of directors of the company"CEO": Chief executive officer or equivalent"CFO": Chief financial officer or equivalent_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 142. P a g e | 142"Chairman": Chairman of the Board"Directly associated": A director will be considered "directly associated"to a 10% shareholder when the director is accustomed or under anobligation, whether formal or informal, to act in accordance with thedirections, instructions or wishes of the 10% shareholder in relation to thecorporate affairs of the corporation.A director will not be considered "directly associated" to a 10%shareholder by reason only of his appointment having been proposed bythat 10% shareholder"Immediate family": As currently defined in the Listing Manual, to meanthe persons spouse, child, adopted child, step-child, brother, sister andparent"Key management personnel": The CEO and other persons havingauthority and responsibility for planning, directing and controlling theactivities of the company"NC": Nominating Committee"Principal commitments": Includes all commitments which involvesignificant time commitment such as full-time occupation, consultancywork, committee work, non-listed company board representations anddirectorships and involvement in non-profit organisations.Where a director sits on the Boards of non-active related corporations,those appointments should not normally be considered principalcommitments"Related corporation": In relation to the company, as currently defined inthe Companies Act, to mean a corporation that is the companys holdingcompany, subsidiary or fellow subsidiary"RC": Remuneration Committee_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 143. P a g e | 143"10% shareholder": A person who has an interest or interests in one ormore voting shares in the company; and the total votes attached to thatshare, or those shares, is not less than 10% of the total votes attached to allthe voting shares in the company."Voting shares": exclude treasury sharesReference to any gender shall include reference to any other gender,unless the context otherwise requires._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 144. P a g e | 144Testimony on The Collapse of MF Global:Lessons Learned and Policy ImplicationsRobert Cook, Director, Division of Trading andMarkets, U.S. Securities and ExchangeCommission - Before the Committee on Banking,Housing, and Urban Affairs, United States SenateChairman Johnson, Ranking Member Shelby, members of theCommittee:My name is Robert Cook, and I am the Director of the Division ofTrading and Markets at the Securities and Exchange Commission("SEC").Thank you for the opportunity to testify on behalf of the SEC concerningthe collapse of MF Global.The bankruptcy of MF Global has resulted in serious hardship for manyof its customers, who have experienced significant delays and uncertaintywith respect to their ability to access their own assets.More broadly, the firms collapse and the apparent shortfall in customerassets highlight the need for financial firms and regulators to remainvigilant in ensuring that customer assets are appropriately protected andmade readily available to customers whenever they may be needed.To that end, the SEC and its staff are working with the trustee, our fellowfinancial regulators, and other authorities to facilitate the orderlyliquidation of MF Global and the return of MF Global customer assets.While the examination and review of the causes and implications of thecollapse of MF Global are ongoing, my testimony provides an overview ofthe regulation of MF Globals SEC-registered broker-dealer subsidiary_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 145. P a g e | 145prior to the bankruptcy, the key events leading up to the bankruptcy, thestatus of approximately 318 securities accounts in the liquidationproceedings, and the securities customer protection regime.My testimony also describes some implications of MF Globalsbankruptcy for market oversight, as well as a summary of recent efforts bythe SEC to promote sharing of information among regulators, a proposalby the SEC to further strengthen the rules that affect the protection ofcustomer assets, and self-regulatory organization ("SRO") initiatives toenhance the financial responsibility regime for broker-dealers.Regulation of MF Global Prior to its BankruptcyMF Global Holdings Ltd. (together with its subsidiaries, "MF Global")was a publicly traded holding company that conducted financial activitiesthrough a number of subsidiaries located in various countries.MF Global Inc. ("MFGI"), an indirect subsidiary of the holdingcompany, was dually registered with the Commodity Futures TradingCommission ("CFTC") as a futures commission merchant ("FCM") andwith the SEC as a broker-dealer.As of October 31, 2011, MFGI had approximately 36,000 futures customersand approximately 318 custodial accounts for non-affiliated securitiescustomers.MFGI also was authorized by the Federal Reserve Bank of New York toact as a primary dealer in the U.S. Treasury markets.Another affiliate, MF Global UK Limited, was regulated by the U.K.Financial Services Authority ("FSA").There was no consolidated supervisor of MF Global at the holdingcompany level.The "front-line" supervisory function for the securities activities ofbroker-dealers is performed by the SROs, including the FinancialIndustry Regulatory Authority ("FINRA") and the various securitiesexchanges._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 146. P a g e | 146When a broker-dealer is a member of multiple SROs, one SRO functionsas the "designated examining authority" ("DEA") responsible in the firstinstance for examining the securities component of the firms financialand operational programs, including its compliance with the SECscapital and customer protection requirements.In the case of MFGI, the DEA was the Chicago Board Options Exchange("CBOE"), although FINRA was also closely involved in the oversight ofMFGIs broker-dealer activities.The futures activities of financial firms, including related segregationrequirements, are overseen by the CFTC and the futures SROs, includingthe National Futures Association and the Chicago Mercantile Exchange.The SEC oversees the regulatory functions of securities SROs andregularly communicates and coordinates with them on examinations andother matters.In its SRO role, CBOE conducted examinations of MFGI for compliancewith financial responsibility rules.FINRA conducted examinations for compliance with other rules, such assales practice requirements.In addition, the SECs national examination program conducts its ownrisk-based examinations of SEC-registered broker-dealers.Unlike some other regulators of financial firms, the SEC does not have an"on site" presence at any broker-dealer and generally does not haveexamination staff dedicated solely to particular broker-dealers.Key Events Leading Up to the BankruptcyAlthough the investigation of the causes of MFGIs collapse is ongoing,we can highlight our current understanding of several key events leadingup to its failure._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 147. P a g e | 147Capital Treatment of Repo-to-Maturity TransactionsDuring 2010, MFGI started acquiring significant proprietary positions inEuropean sovereign debt, which were financed using an instrumentcalled a "repo-to-maturity" ("RTM").As of March 31, 2011, MFGI had accumulated several billion dollars ofEuropean sovereign debt positions using RTM transactions.In the summer of 2011, based on an analysis of MFGIs financialstatements, FINRA and CBOE staffs questioned MFGI about whetherthe firm was properly recognizing its RTM positions for purposes of itsregulatory net capital computations.The SECs net capital rules (which are similar to those of the CFTC inimportant respects) require broker-dealers, including MFGI, to maintaincertain minimum amounts of liquid capital based on their businessactivities.After consulting with SEC staff, SRO staff informed MFGI that under theSECs rules it must take capital charges for the European sovereignpositions as if they were on the firms balance sheet, notwithstanding thefact that the bonds had been "sold" pursuant to the RTM transactions.In August 2011, representatives of MFGI contacted SEC staff inWashington, D.C., to request a meeting to present the firms view that theRTM positions should be subject to lesser capital charges than thosedetermined by staff from the SROs and SEC.On August 15, 2011, SEC staff met with representatives of MF Global,including its Chief Executive Officer, Jon S. Corzine, to discuss this issue.After further consultations among the regulators, FINRA staff informedMFGI on or around August 24 that the regulators collective view that acapital charge was required for the RTM positions had not changed.Following the resolution of that issue, the regulators also discussed withMFGI:_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 148. P a g e | 148(1) whether MFGI needed to provide a formal net capital deficiencynotice under SEC Rule 17a-11, which generally requires broker-dealers toprovide a "hindsight notice" of any deficiency in their compliance withthe SECs financial responsibility rules; and(2) whether MFGI needed to restate and refile its monthly "FOCUS"report (containing capital and certain other financial information) for July2011, which could result in the net capital deficiency becoming public.Pursuant to Rule 17a-11, once the deficiency was identified, the firm wasrequired to file the "hindsight notice" and, on August 25, it did so.After consulting with SEC staff, SRO staff also required the firm to file anamended FOCUS report for July 2011.On August 31, MFGI amended its FOCUS report for July 2011 to reflectthe required capital charges, reporting a "hindsight" capital deficiency ofapproximately $150 million as of July 31, 2011.At the holding company level, MF Global disclosed the net capital issueregarding the RTM positions at MFGI in an amendment to MF Globalspublic filings on September 1.7Bankruptcy of MF GlobalDuring the week of October 17, 2011, press reports noted that regulatorshad directed MF Global to increase capital at MFGI due to concernsabout MFGIs capital treatment of its RTM positions.On Tuesday, October 25, 2011, MF Global announced quarterly earnings,reporting a net loss of $192 million for the three months ending September30, 2011.Its stock price declined almost 50 percent that day and continued todecline over the week.During this same week, certain credit rating agencies downgraded thefirms credit rating or put it on negative watch. _____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 149. P a g e | 149MF Global informed SEC staff during this week that certaincounterparties and customers were reducing their exposures to MFGI,and MFGI was undertaking significant efforts to reduce the size of itsbalance sheet.SEC staff commenced a continuous on-site presence at MFGIs NewYork office beginning on October 27 to monitor the firms condition, andto engage with senior management regarding the steps that were beingtaken by the firm.On Friday, October 28, MF Global management reported ondevelopments to Chairman Mary Schapiro and SEC staff, includingmyself.According to the firm, it was in discussions with various parties regardingpotential strategic transactions, such as the sale of the firm, the sale of theRTM positions, and the sale of the firms customer business.We continued to receive updates from our on-site staff and from calls withfirm management on Saturday and Sunday, and we continued to consultclosely with other regulators, including the CFTC, FINRA and the FSA.By Sunday afternoon, MF Global reported that the firm was close toconcluding a strategic transaction with a potential purchaser of thecustomer business of MFGI, which could provide customers withcontinued access to their accounts.SEC staff worked closely with the CFTC and FSA to review and commenton the key transaction terms to determine that they provided adequatecustomer protection.However, MF Global subsequently reported in the early morning hours ofMonday, October 31, that MFGI had identified a significant deficiency inits segregated accounts for futures customers, and that the acquisitionnegotiations had terminated.At that point, after considering MFGIs financial condition and availablealternatives, SEC staff determined, in consultation with the CFTC, that_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 150. P a g e | 150the safest and most prudent course of action to protect customer accountsand assets was to initiate a liquidation proceeding under the SecuritiesInvestor Protection Act ("SIPA").A referral was made to the Securities Investor Protection Corporation("SIPC") early in the morning on Monday, October 31.On that same day, the U.S. District Court for the Southern District of NewYork entered an order granting the application of SIPC to commence aliquidation of MFGI under SIPA and appointing James W. Giddens astrustee for the liquidation.The case was then removed to the U.S. Bankruptcy Court for the SouthernDistrict of New York ("Bankruptcy Court").Also on October 31, MF Global Holdings Ltd. separately filed a voluntarybankruptcy petition in the Bankruptcy Court, and MF Global U.K.Limited entered administration proceedings in the United Kingdom.MFGI Liquidation and the Impact on Securities CustomersThe preferred method of returning securities customer assets in a SIPAliquidation generally is to transfer those assets in bulk to another solventbroker-dealer.This approach typically provides customers with access to their securitiesand funds more quickly than the claims process.Accordingly, shortly after the initiation of the SIPA proceeding, thetrustee solicited from other broker-dealers interest in taking over MFGIssecurities customer accounts.Based on the available expressions of interest, on November 30, 2011, thetrustee filed an expedited motion seeking authorization to sell andtransfer substantially all securities custody accounts to anotherbroker-dealer.This sale and transfer applied to approximately 318 accounts held fornon-affiliated securities customers of MFGI._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 151. P a g e | 151The transaction was approved by the Bankruptcy Court on December 9,2011.Securities customers are able to trade their securities and use their fundsupon completion of the transfer of their accounts.Moreover, each customer is given the option of maintaining thecustomers securities account at the receiving broker-dealer or movingthe account to a different broker-dealer selected by the customer.According to the trustee, of all former MFGI securities customers, nearlyall have received 60 percent or more of their account value, and 194 havereceived the entirety of their account balances, after giving effect to theprotection afforded by SIPC (up to $500,000).Customers who do not ultimately receive 100 percent of their net equitythrough this initial transfer may be able to receive additional funds, up tothe aggregate amount of their net equity, if the trustee determines thatthere is customer property available for that purpose.Although the claims submission deadline was January 31, 2012, for formerMFGI commodities customers and former MFGI securities customersseeking the maximum protection under SIPA, securities customers andall general claimants may still submit claims to the trustee through June2, 2012.Throughout this process, SEC staff has been working closely with thetrustee and SIPC, seeking to expedite the return of assets to customers ofMFGI.To that end, SEC staff has been in frequent communication with thetrustee with respect to the status of the transfers and claims made bysecurities customers.Securities Customer Protection RegimeMFGI acted as a "carrying" firm for a small number of securitiescustomers, meaning that it held their funds and securities._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 152. P a g e | 152MFGI also had additional securities customers for which it executedpurchases and sales of securities but did not hold funds and securities —rather, such securities were held at other custodians that settledtransactions executed through MFGI on a "delivery versus payment"basis.As a broker-dealer registered with the SEC, MFGI was subject to theSECs customer protection rule.This rule requires that each broker-dealer that holds securities or cash forcustomers take two primary steps to safeguard customer property.These steps are designed to protect customer property by prohibitingbroker-dealers from using customer funds and securities to support theirproprietary positions or expenses.Together with the applicable SEC capital requirements, this regime alsois meant to make it more likely that, if the broker-dealer fails, segregatedsecurities and funds will be readily available to be returned to thecustomers.The first step required under the customer protection rule is that thebroker-dealer must maintain physical possession or control oversecurities that customers have paid for in full.This means that if a customer has fully paid for his or her securities, theycannot be used by the broker-dealer in its business — for example, theycannot be pledged as collateral to finance the firms own trades or to raisefunds for the firm to invest.Further, if a customer has a margin loan, the customer protection rulestrictly limits the amount of securities that can be used by thebroker-dealer for financing purposes.The goal in both cases is to require broker-dealers to hold customersecurities in a manner that allows those securities to be readily availableto customers, either on demand or upon the liquidation of the firm._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 153. P a g e | 153The second step required under the customer protection rule is that thebroker-dealer must maintain a reserve in an account at a bank for thebenefit of customers in an amount that exceeds the net funds attributableto customer positions.These funds cannot be invested in any instrument that is not guaranteed,as to principal and interest, by the full faith and credit of the U.S.government.The amount owed to customers must be computed pursuant to aprescribed formula, normally on a weekly basis.A broker-dealer cannot make a withdrawal from the reserve account untilthe next computation, and then only if the computation indicates thatthere is an excess amount in reserve — greater than what is required to bemaintained under the rule.In essence, this requirement complements the protection afforded tosecurities held at a broker-dealer by requiring the firm to maintain areserve of funds or U.S. government guaranteed securities equal to its netcash obligations attributable to customer positions.A broker-dealer that complies with the customer protection rule —isolating customer funds and securities through these steps andseparating them from the firms proprietary business — should be in aposition to return all the securities and funds it owes to customers if itfalls into financial difficulty.If a broker-dealer cannot return all the securities and funds owed tocustomers, SIPC has the responsibility to institute a proceeding underSIPA to liquidate the broker-dealer.Under SIPA, all securities customers share pro rata in the availablesecurities customer property before any other types of creditors of thebroker-dealer.If the available securities customer property is insufficient to return 100percent of the amount owed to securities customers, SIPC may advance_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 154. P a g e | 154up to $500,000 per customer (of which $250,000 can be used to make up acash shortfall).Implications for Market OversightWhile our near term focus has been on working with SIPC and the trusteeto facilitate the return of securities and funds to customers of MFGI, theSEC will continue to strive to identify further enhancements to itscustomer protection regime that may be appropriate.The events leading up to the bankruptcy of MF Global and its aftermathreinforce the importance of close and ongoing coordination andinformation sharing among regulators and other interested parties.In this case, these parties included not only the SEC and CFTC and otherfederal regulators, but also the SROs, the FSA, SIPC and, following thebankruptcy filing, the trustee.Protection of Customer AssetsWhile our experience with addressing MF Globals failure highlights theimportance of domestic and international regulatory coordination, it alsounderscores the paramount importance of the rules governing protectionof customer assets and the controls that are crucial for compliance withthose rules.In general, the rules governing protection of customer funds andsecurities that apply to registered broker-dealers, described above, haveworked well over time, but we are considering whether there are ways thatthey could be strengthened.In particular, in June 2011, the SEC proposed rule changes that are meantto clarify and strengthen the rules governing audits of broker-dealers,including an auditors examination of broker-dealer controls relating tothe custody of customer assets, as well as to enhance the SECs oversightof broker-dealers that hold customer securities and funds.Specifically, the proposal would:_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 155. P a g e | 155- Enhance the current requirement that a broker-dealer undergo an annual audit by a public accounting firm registered with the Public Company Accounting Oversight Board by strengthening the standards that govern the auditors examination of the broker-dealers compliance, and internal controls over compliance, with SEC net capital and custody requirements.- Require that broker-dealers that maintain custody of customer assets file with the SEC a new "Form Custody" every quarter.This form would contain more detailed information about howbroker-dealers maintain custody of customer assets in order to furtherfacilitate verification by examiners that customer assets are beingproperly protected.SEC staff has evaluated comments received in response to this proposaland is working to finalize a recommendation to the Commission.More broadly, the staff is evaluating other possible rule changes to thefinancial responsibility requirements, including some previouslyconsidered by the Commission that could strengthen customerprotection.For example, one change under consideration would be to limit, forpurposes of the customer reserve fund required by Rule 15c3-3, theamount of cash a broker-dealer could maintain in any one bank, as apercentage of capital of the broker-dealer or the bank.The SEC also continues to work with the SROs to help strengthenbroker-dealer financial responsibility requirements.For example, in June 2011, the SEC approved a FINRA rule filing toestablish registration, qualification, examination, and continuingeducation requirements for certain operations — or "back office" —personnel, including those who handle customer assets.This rule should help to better ensure that those responsible foroperations functions are fully versed in all the relevant rules and their_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 156. P a g e | 156obligations, including those relating to the segregation and protection ofcustomer assets.In addition, in February 2012, the SEC approved a FINRA proposal torequire each member firm to file certain additional financial oroperational schedules or reports to supplement existing requirements tofile FOCUS reports with FINRA pursuant to SEC Rule 17a-5.This rule allows FINRA to receive more granular data pertinent toincome and expense items, and therefore to better identify firms thatwarrant heightened scrutiny and to evaluate industry-wide trends.In February of this year, the SIPC Modernization Task Force, which wasestablished by SIPC for the purpose of undertaking a comprehensivereview of its operations and policies and to propose reforms to modernizeSIPA and SIPC, issued a number of recommendations, includingproposed statutory changes.SEC staff is evaluating these recommendations, several of which aredirected to the scope and dollar limit of protection for individualcustomers in SIPC liquidations.Although SIPC has not itself yet responded to the recommendations, welook forward to discussing them with SIPC as part of our review.Finally, with regard to accounting standards, in March 2012, theChairman of the Financial Accounting Standards Board ("FASB") addeda project to the FASBs agenda to reconsider the accounting anddisclosure requirements for repurchase agreements and similartransactions.The FASB Chairman cited the need to revisit the accountingrequirements to address application issues as a result of changes in themarketplace and to ensure that investors obtain useful information aboutthese transactions.As part of the project, the FASB is expected to reconsider the accountingand disclosures requirements related to RTM transactions._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 157. P a g e | 157There is ongoing communication between SEC staff and the FASBregarding their standard-setting efforts.Regulatory CooperationGiven the pace of developments in the financial markets generally and, inparticular, how quickly the financial condition of a financial firm that is indistress can deteriorate, the SEC is engaged in a number of efforts — bothdomestic and international — to share more and better data andqualitative assessments of firms and markets, and to do so in a timelyway.Some of these efforts involve coordination with the SROs, in recognitionof their importance as "front-line" supervisors. For example, examinationstaff in the SECs Office of Compliance Inspections and Examinations("OCIE") recently initiated quarterly meetings with FINRA and CBOEand semi-annual meetings with the Chicago Stock Exchange ("CHX"),in each case in respect of the SROs capacity as a DEA.Further, OCIE recently has sought to enhance its inter-regulator Summitof Securities Regulators, increasing the frequency with which it convenesand expanding the group of regulators such that it now includes FINRA,CBOE, CHX, the Municipal Securities Rulemaking Board, the NorthAmerican Securities Administrators Association, the Federal ReserveBoard, various Federal Reserve Banks, and the CFTC.The first meeting of the expanded group will take place this month andwill provide an opportunity for this diverse gathering of regulators todiscuss issues and concerns regarding registrants, current regulatorydevelopments, and to identify common risks and collaborationopportunities.In addition to these recent initiatives, the Commission has been a keyparticipant in the Intermarket Surveillance Group ("ISG") since itsformation in the 1980s.The ISG provides a critical venue for sharing investigative informationand surveillance data among domestic and foreign market centers,_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 158. P a g e | 158market regulators, and exchanges, including both securities and futuresexchanges.For many years, the SEC has been engaged in numerous and ongoingefforts to increase cooperation and the flow of information relevant tomarket oversight among international regulators, through various means,including cooperative arrangements, such as memoranda ofunderstanding ("MOU"), informal and formal bilateral discussions, andparticipation in multilateral organizations.In the international sphere, the SEC works closely with both banking andsecurities regulators through various venues, including the FinancialStability Board, IOSCO, the Council of Securities Regulators of theAmericas, the Cross-border Crisis Management Working Group, and theSenior Supervisors Group.The SEC also has ongoing bilateral dialogues with key internationalregulatory counterparts, including the United Kingdom, India, China,Korea and Turkey.Furthermore, the SEC participates alongside the Department of theTreasury and the Federal Reserve Board in the Financial MarketsRegulatory Dialogue with the European Union.ConclusionThe SEC and its staff are working with our fellow financial regulators andother authorities to facilitate the identification and return of customerassets.We also are engaged in ongoing efforts to increase the exchange amongregulators of information that is relevant to oversight of markets andmarket intermediaries, and are considering measures to furtherstrengthen the existing customer protection regime. I would be pleased toanswer any questions you may have._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 159. P a g e | 159Certified Risk and Compliance Management Professional(CRCMP) Distance learning and online certification program.Companies like IBM, Accenture etc.consider the CRCMP a preferredcertificate. You may find more if yousearch (CRCMP preferred certificate)using any search engine.The all-inclusive cost is $297.What is included in the price:A. The official presentations we use in our instructor-led classes(3285 slides)The 2309 slides are needed for the exam, as all the questions are based onthese slides. The remaining 976 slides are for reference.You can find the course synopsis at:www.risk-compliance-association.com/Certified_Risk_Compliance_Training.htmB. Up to 3 Online ExamsYou have to pass one exam.If you fail, you must study the official presentations and try again, but youdo not need to spend money. Up to 3 exams are included in the price.To learn more you may visit:www.risk-compliance-association.com/Questions_About_The_Certification_And_The_Exams_1.pdfwww.risk-compliance-association.com/CRCMP_Certification_Steps_1.pdf_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 160. P a g e | 160C. Personalized Certificate printed in full color.Processing, printing, packing and posting to your office or home.D. The Dodd Frank Act and the newRisk Management Standards (976slides, included in the 3285 slides)The US Dodd-Frank Wall Street Reformand Consumer Protection Act is the mostsignificant piece of legislation concerningthe financial services industry in about 80years.What does it mean for risk andcompliance management professionals? Itmeans new challenges, new jobs, newcareers, and new opportunities.The bill establishes new risk management and corporate governanceprinciples, sets up an early warning system to protect the economy fromfuture threats, and brings more transparency and accountability.It also amends important sections of the Sarbanes Oxley Act. Forexample, it significantly expands whistleblower protections under theSarbanes Oxley Act and creates additional anti-retaliation requirements.You will find more information at:www.risk-compliance-association.com/Distance_Learning_and_Certification.htm_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 161. P a g e | 161Visit our Risk and Compliance Management Speakers BureauThe International Association of Risk and Compliance Professionals(IARCP) has established the Speakers Bureau for firms and organizationsthat want to access the expertise of Certified Risk and ComplianceManagement Professionals (CRCPMs) and Certified InformationSystems Risk and Compliance Professionals (CISRCPs).The IARCP will be the liaison between our certified professionals andthese organizations, at no cost. We strongly believe that this can be agreat opportunity for both, our certified professionals and the organizers.To learn more:www.risk-compliance-association.com/Risk_Management_Compliance_Speakers_Bureau.html_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 162. P a g e | 162_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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