Risk and Compliance Management News June 2012


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Risk and Compliance Management News June 2012

  1. 1. International Association of Risk and Compliance Professionals (IARCP) 1200 G Street NW Suite 800 Washington, DC 20005-6705 USA Tel: 202-449-9750 www.risk-compliance-association.com Dear Member, 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; _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  2. 2.  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; 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. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  3. 3. Once the Committee has reviewed responses, it intends to release forcomment a more detailed set of proposals to amend the Basel IIIframework.In line with its normal process, the Committee will also subject suchproposals to a thorough Quantitative Impact Study.AbbreviationsCDS 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. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  4. 4. 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.These 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 trading _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  5. 5. book 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 themarket 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: _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  6. 6. “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.Tight 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 for _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  7. 7. market 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.Consistent 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 outweighed _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  8. 8. by 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 positionswere 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. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  9. 9. 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. 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. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  10. 10. 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.In 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: _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  11. 11. - 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(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. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  12. 12. 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.To 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. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  13. 13. 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.Apart 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. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  14. 14. 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.(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. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  15. 15. 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.Areas 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. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  16. 16. 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.The 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. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  17. 17. 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.Next 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
  18. 18. AnnexLessons 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
  19. 19. The 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
  20. 20. many 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
  21. 21. compartmentalised 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. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  22. 22. However, for internal capital adequacy and strategic risk management,banks are generally moving beyond short-horizon models (eg one-dayand 10-day VaR).It 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. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  23. 23. These banks believe that use of add-ons where complexity and modeluncertainty exist would be preferable to blunt risk-insensitivestandardised measures.The 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. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  24. 24. 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
  25. 25. _____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  26. 26. FSB 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 the inconsistent implementation of the Principles and Standards by firms headquartered in other jurisdictions. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  27. 27. - 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 mechanismby which national supervisors from the FSB member jurisdictions worktogether to verify and, as needed, address specific compensation-related _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  28. 28. complaints 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
  29. 29. Fostering 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
  30. 30. 6. 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 development10. We agreed on coherent conclusions to guide us in the management ofcapital flows drawing on country experiences, in order to reap the benefits _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  31. 31. from 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.The SDR composition assessment should be based on existing criteria,and we ask the IMF to further clarify them. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  32. 32. 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.We also support the IMF in putting forward a single emergency facility toprovide non-concessional financing for emergency needs such as natural _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  33. 33. disasters, 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.Against 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. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  34. 34. 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 multilateralassessments 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. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  35. 35. 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 January2019.24. 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 be _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  36. 36. reported 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 outan 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. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  37. 37. 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.To 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). _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  38. 38. 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 courseof 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. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  39. 39. 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.Market 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. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  40. 40. 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.We 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. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  41. 41. 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. 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 _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  42. 42. 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.The 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. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  43. 43. 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.Addressing Food Price Volatility and Increasing AgricultureProduction and Productivity _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  44. 44. 40. 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.43. We commit to sustainably increase agricultural production andproductivity. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  45. 45. 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. It will be managed by a secretariat located in FAO; _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  46. 46. - 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.50. We commend the joint work undertaken by FAO, OECD, The WorldBank Group, IFAD, UNCTAD, WFP, WTO, IMF, IFPRI and the UN _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  47. 47. HLTF 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.We 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. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  48. 48. 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.We 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. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  49. 49. 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,as 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 environmental _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  50. 50. services, 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.64. 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. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  51. 51. 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.We 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 a _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  52. 52. more 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.72. 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: _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  53. 53.  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; 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. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  54. 54. 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;- 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 _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  55. 55. 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 ofnationally-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 financial _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com