P a g e | 1International Association of Risk and ComplianceProfessionals (IARCP)1200 G Street NW Suite 800 Washington, DC ...
P a g e | 2―I am very pleased tobe here among anaudience of professionaleconomists,whichiscertainlypreferabletoappearingbe...
P a g e | 3noeasytask. I enjoyed you told all theseto professional economists.Read moreat Number 7below.Welcometo the Top ...
P a g e | 4ChairmanBen S.BernankeAt Bard College at Simons Rock, Great Barrington,MassachusettsEconomic Prospects for the ...
P a g e | 5Whocallsthe shots?The problem of fiscaldominanceSpeechby Dr JensWeidmann, President of theDeutscheBundesbank, a...
P a g e | 6toAsia.Asia isexpected to continuetoprosper in the decadesahead asthemiddleclassexpandsin linewith strong econo...
P a g e | 7TheSingleResolution Mechanism – whyit isneededSpeechby Mr Benoît Coeuré, Member of theExecutiveBoard of theEuro...
P a g e | 8ChairmanBen S.BernankeAt Bard College at Simons Rock, GreatBarrington, MassachusettsEconomic Prospects for the ...
P a g e | 9My emphasistodaywill be on prospectsfor thelong run.In particular, I will be lookingbeyond thevery real challen...
P a g e | 10Thesecond extended waveof inventioncoincidedwiththemodernindustrial era, whichlastedfrom the mid-1800swell int...
P a g e | 11I must report that not everyone thinksso.Indeed, some knowledgeable observers have recently made the case that...
P a g e | 12Nevertheless,though my memorymaybeselective, it doesnt seem tomethat the differencesin daily life betweenthen ...
P a g e | 13In the entertainment sphere,Americansdid not yet have accesstocommercial radio broadcastsand movieswouldbe sil...
P a g e | 14First, innovation, almost by definition, involvesideasthat noonehasyethad, which meansthat forecastsof future ...
P a g e | 15Moreover,even asthe basictechnologies improve, the commercialapplicationsof thesetechnologieshave arguablythus...
P a g e | 16Invention wasoncethe provinceof the isolatedscientist or tinkerer.Thetransmissionofnewideasandtheadaptationoft...
P a g e | 17During your workinglives,you will have to reinvent yourselves manytimes.Successand satisfactionwill not come f...
P a g e | 18ConsultationPaperOn Draft ImplementingTechnicalStandardsOn Additional LiquidityMonitoring Metrics underArticle...
P a g e | 19All contributionsreceived will be publishedfollowingthe closeof theconsultation, unlessyou request otherwise.P...
P a g e | 20The EBA will review the ITSproposals to ensure that theytake account ofany changes made in the final text of t...
P a g e | 21and location, product type, currency, amount received, weightedaverageand residual maturity.oconcentrationof f...
P a g e | 22that wishesto take up operationsin another Member State hasto applydifferent setsof rules.Background and regul...
P a g e | 23comprehensiveview of the liquidityrisk profile, proportionateto thenature, scaleand complexityof an institutio...
P a g e | 24Thematurityladderformspart ofthepackageof‗monitoringtools‘whichtheEBA hasdesigned.Thematurity ladder is a moni...
P a g e | 25exceedsa threshold of 1%of total liabilities,together withinformationonthecounterpartyname, counterpartytype a...
P a g e | 26Insight in thesespecific types of concentrations cannot sufficientlybeobtainedfrom other templates.Thetemplate...
P a g e | 27Thescope and level of applicationof theseITSseek tobe consistent withthescope and level of application of theC...
P a g e | 28Timing of ITSdevelopment and application dateConsideringthat theEBA is consultingon this reporting for additio...
P a g e | 29mismatchof an institutions balancesheet to be captured; metrics basedon theconcentrationof funding by counterp...
P a g e | 30EXPLANATORYMEMORANDUM TOTHE FINANCIAL CONGLOMERATES AND OTHERFINANCIAL GROUPS (AMENDMENT) REGULATIONSThis expl...
P a g e | 31TheFinancial ConglomeratesDirective2002wasimplemented in theUKmainlyby rulesmade by the Financial ServicesAuth...
P a g e | 32Policy background - What is being done and whyTheaim of Directive2011/ 89/ EU is toact asa quick fix in respon...
P a g e | 33This noted theimportanceof taking intoaccount the recent and pendingchangestosectoral legislation– such asSolv...
P a g e | 34Adraft of these Regulationswassubject toa public consultation in thedocument CP12/40: Financial ConglomeratesD...
P a g e | 35TheFinancial ConglomeratesDirective2002wasoriginallytransposedmainlyby wayof rulesmade by theFinancial Service...
P a g e | 36MostoftheprovisionsofthisDirectiveareduetoapplyfrom10June2013.Amendmentsto theFinancial Conglomeratesand Other...
P a g e | 37Whocallsthe shots?The problemof fiscal dominanceSpeechby Dr JensWeidmann, President of theDeutscheBundesbank, ...
P a g e | 38Thus, I wouldlike tothank the Banquede Francefor hostingthis event.This sessionof the conferenceistitled:―Fisc...
P a g e | 39These―backlashers‖ argue that in the current economicsituationinflationarypressure is only of limited concern....
P a g e | 40In their setup, fiscalpolicy runsachronicprimarydeficit whichleadstoacorrespondingincreasein themoney supply.A...
P a g e | 41Thus, higher inflation reducesdebt in real terms and lowerreal interestratesreducethe real debt serviceburden ...
P a g e | 42And asa consequence, monetary policy might come under pressuretostep in and stabilisegovernment debt.Thus, eve...
P a g e | 43Well, the right conclusion is that fiscal consolidation is cruciallyimportant tokeep inflationexpectationsanch...
P a g e | 444. But will consolidation hurt growth?Toput my view in a nutshell:I seenoconflict betweenconsolidationandgrowt...
P a g e | 45trust in fiscalsustainabilityand the concretedesignof the consolidationmeasures.Recent researchhashighlightedt...
P a g e | 46rather small.Onceother control variables areincluded and variation of thecountrysampleis taken intoaccount, th...
P a g e | 47This, in turn, wouldbring down long-term interest ratesor ensure thattheyremain at a low level, which wouldbe ...
P a g e | 48Solvency II update for allfirmsAs part of our commitment to sharingdevelopmentsin our approachtotheimplementat...
P a g e | 49Directivewhichis currentlyscheduled for a vote in theEuropeanParliament on 22October 2013.On 27 March2013,EIOP...
P a g e | 50EIOPA will consider all responsesto theconsultationswitha view toproducingfinal guidelinesin theautumn; and Na...
P a g e | 51We have startedtodeliver the new approach withthe first firms in theprocess.It is too earlyto share learningsf...
P a g e | 52In the meantime, firmsshould continuetoensure that their chosenmethod to calculatetheir SolvencyII SolvencyCap...
P a g e | 53Pleasecontinuetoraise issuesand questionswithyour usual supervisorycontact sothat wecan consider them in the p...
P a g e | 54International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
P a g e | 55Dear FirmMonitoring levelsof capital and early warning indicatorsI wrote to you in June and again in September...
P a g e | 56Requirement (pMCR) to be an appropriate EWI for life (excludingwithprofits)and general insurers.In the interim...
P a g e | 57I attacha technicalnote withthedetails of the modifiedindicatorwhichyou may wishtoshare with others asappropri...
P a g e | 58EIOPA is alsoconsideringearlywarningindicatorsaspart of thetoolstobedeveloped to monitor the ongoing appropria...
P a g e | 59Technical note to the alternative with-profits indicatorWe want toinvestigate whethera more reliable EWI can b...
P a g e | 60Management actionscan be takentoreducethe capital impact of thestressscenario on with-profitsbusinessin both t...
P a g e | 61Despitethis,wefeel that due to the widerangeof theproportion ofnon-profit businesswrittenin with-profitsfunds,...
P a g e | 62Data collection exercisesin 2013We have consideredtechniquesand toolsthat are informative, costeffectiveand st...
P a g e | 63Minor changeshavebeen madetothesetoolstoincreasetheir usefulnessin 2013.We may repeat someor all of theseinfor...
P a g e | 64liabilitiescalculatedusing the scenario 1matchingadjustment and zeroCounter-Cyclical Premium), split by riskfa...
P a g e | 65This is an extension of a pilot studyconductedearlier thisyear.General insurance firmsComparison of ICAS, stan...
P a g e | 66Singapore – pursuing broader and deepereconomic integration with majoreconomiesOpeningkeynote speechby Mr Lim ...
P a g e | 67In Indonesia, almost 60per cent of Indonesianhouseholds, in a countryof 240million people, are expectedto reac...
P a g e | 68Let me updateyou on theprogresssofar.•On tradein goods, virtuallyall goodsin ASEAN alreadymovethroughout the r...
P a g e | 69Regional Comprehensive Economic Partnership (RCEP) andRenminbi (RMB) InternationalisationThis agreement builds...
Risk management presentation June 3 2013
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Risk management presentation June 3 2013

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Risk management presentation June 3 2013

  1. 1. P a g e | 1International Association of Risk and ComplianceProfessionals (IARCP)1200 G Street NW Suite 800 Washington, DC 20005-6705 USATel: 202-449-9750 www.risk-compliance-association.comTop 10 risk and compliance management related news storiesand world events that (for better or for worse) shaped theweeks agenda, and what is nextDear Member,―During your workinglives,you will have toreinvent yourselvesmanytimes.Successand satisfactionwill not come from masteringa fixed body ofknowledgebut from constant adaptationand creativityin a rapidlychangingworld.‖Whosaid that?ChairmanBen S.Bernanke, at Bard College at Simons Rock, GreatBarrington, Massachusetts.What elsedid he say?- Theword"graduate" comesfrom the Latin wordfor "step."- Another prediction, just assafe, is that peoplewill neverthelesscontinuetoforecast the end of innovation.Agreat speech! Read moreat Number 1below.At Number 7 …… I enjoyed anotherspeech:International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  2. 2. P a g e | 2―I am very pleased tobe here among anaudience of professionaleconomists,whichiscertainlypreferabletoappearingbeforeanaudienceof unprofessional economists.‖Whosaid that?SarahBloom Raskin, Member of theBoard of Governorsof theFederalReserveSystem, at the Societyof Government Economistsand theNational EconomistsClub, Washington DC.Well, Sarah… don‘t bebrutallyhonest, asprofessional economistscanbeasrudeasunprofessional economists…Shewasbrutallyhonest. She said:―I like your kind!Your talentsare needednow more than ever aswetry to put the toolsofthe economic professiontoworkfor thecommon good.Its easyto be an economist wholooksback on crisesand crashesandtriestoexplain whythey happened, but much harder tobe an economistwhoseeffortsmanagetohelpstopthemfrom happeningin thefirstplace.Economicpolicymaking, at itsbest, reflectsa continuousstruggletomakesurethat dataandexplanationsofsuchdataareconsistent withrealexperience.If were to engagein thisstrugglehonestly, its noeasytask.It involvesunderstandingnot just thereliability and signal in variousdata, but alsoquestioningwhetherthe data accordswith ourunderstandingof actual experience.So, to get thisright requires many different perspectives, not just on thedata but on the underlying realitiesthe data are trying to capture.‖Sara,I like your speech. I agree, to engagein this strugglehonestly, itsInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  3. 3. P a g e | 3noeasytask. I enjoyed you told all theseto professional economists.Read moreat Number 7below.Welcometo the Top 10list.BestRegards,GeorgeLekatisPresident of the IARCPGeneral Manager, ComplianceLLC1200G Street NW Suite800,Washington DC 20005,USATel: (202) 449-9750Email: lekatis@risk-compliance-association.comWeb: www.risk-compliance-association.comHQ:1220N. Market Street Suite 804, Wilmington DE19801,USATel: (302) 342-8828International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  4. 4. P a g e | 4ChairmanBen S.BernankeAt Bard College at Simons Rock, Great Barrington,MassachusettsEconomic Prospects for the Long Run―Graduationfrom college is onlyone step on a journey, but it is animportant one and well worthcelebrating.‖ConsultationPaperOn Draft ImplementingTechnical StandardsOn Additional Liquidity Monitoring MetricsunderArticle403(2) of the draft Capital Requirements Regulation (CRR)EXPLANATORYMEMORANDUM TOTHE FINANCIAL CONGLOMERATES AND OTHERFINANCIAL GROUPS (AMENDMENT) REGULATIONSTheseRegulationsimplement, in part, Directive2011/ 89/ EU of theEuropeanParliament andoftheCouncil amendingDirectives98/78/EC, 2002/ 87/ EC, 2006/48/EC and 2009/ 138/ EC (OJL 326/1138.12.2011)asregards thesupplementarysupervision of financial entitiesin a financialconglomerate.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  5. 5. P a g e | 5Whocallsthe shots?The problem of fiscaldominanceSpeechby Dr JensWeidmann, President of theDeutscheBundesbank, at the4th Bank of France -DeutscheBundesbank MacroeconomicsandFinanceConference, Paris.Solvency II update for all firmsAs part of our commitment to sharingdevelopmentsin our approachtotheimplementationof SolvencyII, I thought it wouldbe helpful towritetoall firms affectedby the Directiveto give an update on thecurrentpositionand what this meansfor thework that hastobe done in thecomingmonths.As you know, there continuesto be significant uncertaintyover thetimetableand final shape of the SolvencyII regime.Singapore – pursuing broader and deepereconomic integration with major economiesOpeningkeynote speechbyMr Lim HngKiang,Ministerfor Tradeand Industry and DeputyChairman of theMonetaryAuthority of Singapore, at DeutscheBankAccessAsia Conference2013,Singapore.―In the last 10 years, thecentre of gravityof the worldeconomy hasbeenmoving awayfrom theUS and EuropeInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  6. 6. P a g e | 6toAsia.Asia isexpected to continuetoprosper in the decadesahead asthemiddleclassexpandsin linewith strong economicgrowth.China is set to be thelargest economy in the worldby 2030and isalreadycreatingmegacitiesof over 10million at an averagerate of oneper year.Besides China, Ind ia‘s midd le class is expectedtogrow to almost600million peopleby 2025.In Indonesia, almost 60per cent of Indonesianhouseholds, in a countryof 240million people, are expectedto reach middle-classstatusby 2020.‖Prospects for a stronger recoverySpeechby Ms SarahBloom Raskin, Member of theBoard of Governorsof the Federal Reserve System, attheSocietyof Government Economistsand theNational EconomistsClub, Washington DC.Merely Cracking the Glass Ceiling isNotEnough: CorporateAmerica NeedsMore thanJust AFew Women in LeadershipByCommissionerLuisA. Aguilar, U.S. SecuritiesandExchangeCommission, Womens ExecutiveCircleofNew York, The UniversityClub of New York, NewYork, New York.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  7. 7. P a g e | 7TheSingleResolution Mechanism – whyit isneededSpeechby Mr Benoît Coeuré, Member of theExecutiveBoard of theEuropean Central Bank, attheICMAAnnual General Meetingand Conference2013,organisedby the International Capital MarketAssociation, Copenhagen.―Thefinancial crisis has highlightedtheweaknessesof the institutionalframeworkof Economic and MonetaryUnion.Thenegative feedback loop betweenbanksand sovereignsaswell assignsof market fragmentation made European leaderstakeanextraordinarydecision last summer, namelyto establish the EuropeanBankingUnion.‖The Important Role of Immigrants inOur EconomyBy CommissionerLuisA. AguilarU.S. Securitiesand ExchangeCommissionRemarksat the 2013Annual GalaGeorgia Hispanic Chamber of CommerceAtlanta, GeorgiaInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  8. 8. P a g e | 8ChairmanBen S.BernankeAt Bard College at Simons Rock, GreatBarrington, MassachusettsEconomic Prospects for the Long RunLet me start bycongratulatingthegraduatesandtheirparents.Theword"graduate" comesfrom theLatinwordfor "step."Graduation from collegeis onlyone step on a journey, but it isanimportant one and well worthcelebrating.I think everyone hereappreciateswhat aspecialprivilegeeachof you hasenjoyed in attendinga unique institutionlike Simons Rock.It is, tomy knowledge,the only"early college" in the United States;manyof you came here after the10th or 11th grade in searchof a differenteducational experience.And withonly about 400studentson campus, I am sure each of you hasfelt yourself to be part of a close-knit community.Most important, though, you have completeda curriculum thatemphasizescreativityand independent criticalthinking, habitsof mindthat I am sure will stay withyou.Whats soimportant about creativityand criticalthinking?There aremany answers.I am an economist, soI will answer by talkingfirst about our economicfuture--oryour economicfuture, I should say, becauseeachof you willhavemanyyears, I hope,tocontributetoandbenefit fromanincreasinglysophisticated, complex, and globalizedeconomy.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  9. 9. P a g e | 9My emphasistodaywill be on prospectsfor thelong run.In particular, I will be lookingbeyond thevery real challengesofeconomicrecovery that wefacetoday--challengesthat I have everyconfidencewewill overcome--tospeak, for a change, about economicgrowth asmeasured in decades,not monthsor quarters.Many factorsaffect thedevelopment of the economy, notablyamongthem a nationseconomic and politicalinstitutions,but over longperiodsprobablythe most important factor is thepace of scientificandtechnological progress.Betweenthe daysof theRoman Empire and whenthe IndustrialRevolution took hold in Europe, thestandard of livingof the averageperson throughout most of the worldchangedlittlefrom generation togeneration.For centuries,many, if not most, peopleproducedmuch of what theyandtheir familiesconsumed and never traveledfar from wheretheywereborn.By themid-1700s, however, growingscientific and technical knowledgewasbeginningto find commercial uses.Sincethen, accordingto standard accounts,theworldhasexperienced atleast three major wavesof technological innovation and itsapplication.Thefirst wavedrove thegrowth of the earlyindustrial era, which lastedfrom themid-1700stothemid-1800s.This period sawtheinvention of steam engines,cotton-spinningmachines,and railroads.Theseinnovations,by introducingmechanization, specialization, andmassproduction, fundamentallychanged how and where goodswereproduced and, in theprocess,greatly increasedthe productivityofworkersand reduced thecost of basic consumer goods.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  10. 10. P a g e | 10Thesecond extended waveof inventioncoincidedwiththemodernindustrial era, whichlastedfrom the mid-1800swell intotheyears afterWorld War II.This era featured multipleinnovationsthat radicallychanged everydaylife, such asindoorplumbing, theharnessingof electricityfor useinhomesand factories, the internal combustionengine, antibiotics, poweredflight, telephones,radio, television, andmany more.Thethird era, whoserootsgoback at leastto the1940sbut whichbegantoenter thepopular consciousnessin the 1970sand 1980s,is definedbytheinformation technology(IT) revolution, aswell asfieldslikebiotechnologythat improvementsin computing helped make possible.Of course,theIT revolutionisstill goingonandshapingourworldtoday.Now heres a question--infact, a key question, I imagine, from yourperspective.What doesthe futurehold for the workinglivesof todays graduates?Theeconomicimplicationsof the first twowavesof innovation, from thesteam enginetotheBoeing 747, wereenormous.Thesewavesvastlyexpandedthe rangeof availableproductsand theefficiencywithwhichtheycould be produced.Indeed, accordingtothebest availabledata, output per personin theUnitedStatesincreasedbyapproximately30timesbetween1700and 1970or so, growththat hasresultedin multipletransformationsof oureconomy and society.Historysuggeststhat economic prospectsduring thecoming decadesdepend on whetherthe most recent revolution, the IT revolution, haseconomiceffectsof similar scaleand scope astheprevioustwo.But will it?International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  11. 11. P a g e | 11I must report that not everyone thinksso.Indeed, some knowledgeable observers have recently made the case thatthe IT revolution, as important as it surely is, likely will not generate thetransformative economic effectsthat flowed from the earlier technologicalrevolutions.As a result, theseobserversargue, economicgrowth and change incomingdecadeslikelywill be noticeablyslowerthanthe paceto whichAmericanshave becomeaccustomed.Such an outcome wouldhaveimportant socialand political--aswell aseconomic--consequencesfor our country and the world.This provocativeassessment of our economic future hasattracted plentyof attention among economistsand othersaswell.Doesit make sense?Heres one wayto think more concretely about theargument that thepessimistsare making:Fifty yearsago, in 1963, I wasa nine-year-old growingup in amiddle-classhome in a small town in South Carolina.As a way of getting a handle on the recent pace of economic change, itsinteresting to ask how my familys everyday life back then differed fromthat of a typical familytoday.Well, if I think about it, I could quicklycome up withtheInternet, cellphones,and microwaveovensasimportant conveniencesthat most of your familieshavetoday that my family lacked50 years ago.Health carehasimproved some sinceI wasyoung; indeed, lifeexpectancyat birth in the United Stateshasrisen from 70years in 1963to78years today, although some of this improvement isprobablyduetobetter nutrition and generallyhigher levelsof income rather thanadvancesin medicinealone.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  12. 12. P a g e | 12Nevertheless,though my memorymaybeselective, it doesnt seem tomethat the differencesin daily life betweenthen and now are all that large.Heating, air conditioning, cooking, and sanitation in my childhoodwerenot all that different from today.We had a dishwasher, a washingmachine, and a dryer.My familyowned a comfortable car with air conditioning and a radio, andthe experience of commercial flight was much like today but without thelongsecurity lines.For entertainment, wedid not havethe Internet or videogames, asImentioned, but wehad plentyof books, radio, musical recordings,and acolor TV (although, I must acknowledge, thecolorsweregarishand thereweremany fewerchannelsto choosefrom).Thecomparison of theworldof 1963withthat of todaysuggestsquitesubstantial but perhapsnot transformativeeconomicchangesincethen.But now lets run thisthought experiment back another 50 years, to 1913(theyear theFederal Reserve wascreated by the Congress,by theway), and compare how my grandparentsand your great-grandparentslived with how my familylivedin 1963.Lifein 1913wassimplymuch harder for most Americansthan it wouldbelater in thecentury.Many peopleworked longhoursat dangerous, dirty, and exhaustingjobs--upto 60hoursper week in manufacturing, for example, and evenmore in agriculture.Housework involved a great deal of drudgery;refrigerators,freezers,vacuum cleaners,electric stoves, and washingmachineswerenot in general use, whichshould not be terriblysurprisingsincemost urban households, and virtuallyall ruralhouseholds, werenot yet wired for electricity.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  13. 13. P a g e | 13In the entertainment sphere,Americansdid not yet have accesstocommercial radio broadcastsand movieswouldbe silent for anotherdecadeand a half.Somepeoplehad telephones,but nolong-distanceservice wasavailable.In transportation, in 1913Henry Ford wasjustbeginning themassproduction of the Model T automobile, railroadswerepoweredby steam,and regular commercial air travel wasquitea few years away.Importantly, life expectancyat birth in 1913wasonly53 years, reflectingnot onlythe stateof medical scienceat the time--infection-fightingantibioticsandvaccinesformanydeadlydiseaseswouldnot bedevelopedfor several more decades--but alsodeficienciesin sanitationandnutrition.Thiswasquiteadifferent worldthantheoneinwhichI grewupin1963orin whichwelivetoday.Thepurpose of these comparisonsisto make concretetheargumentmadeby some economists,that theeconomic and technologicaltransformation of thepast 50years, whilesignificant, doesnot match thechangesof the 50years--or, for that matter, the 100years--before that.Extrapolatingtothefuture, theconclusion some havedrawnisthat thesustainablepace of economicgrowthand changeand the associatedimprovement in livingstandardswill likely slowfurther, asour mostrecent technological revolution, in computersand IT, will not transformour livesasdramaticallyaspreviousrevolutionshave.Well, thatssort of depressing.Is it true, then, asbaseball player Yogi Berra said, that the future aintwhat it used to be?Nobody reallyknows;asBerra alsoastutelyobserved, its tough to make predictions,especiallyabout thefuture.But there are somegood argumentson the other side of this debate.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  14. 14. P a g e | 14First, innovation, almost by definition, involvesideasthat noonehasyethad, which meansthat forecastsof future technological changecanbe, and often are, wildly wrong.Asafeprediction, I think, isthat human innovation and creativitywillcontinue;it ispart of our verynature.Another prediction, just assafe, is that peoplewill neverthelesscontinuetoforecast theend of innovation.ThefamousBritish economist John Maynard Keynesobserved asmuchin themidst of the Great Depressionmore than 80years ago.He wrotethen, "We are sufferingjustnow from a bad attack of economicpessimism.It is common to hear peoplesaythat theepoch of enormouseconomicprogresswhichcharacterisedthe19th century is over; that therapidimprovement in thestandard of life is now goingto slow down."Sound familiar?By theway, Keynesargued at that time that suchaview wasshortsightedand, in characterizingwhat he called"theeconomic possibilitiesfor ourgrandchildren," hepredictedthat income per person, adjusted forinflation, could rise asmuch asfour toeight timesby 2030.His guesslookspretty good; income per person in the United Statestodayis roughly six timeswhat it wasin 1930.Second, not onlyare scientific and technicalinnovation themselvesinherentlyhard to predict, soare thelong-run practicalconsequencesofinnovation for our economy and our daily lives.Indeed, some wouldsaythat wearestill in the earlydays of theITrevolution; after all, computing speedsand memory have increasedmanytimesover inthe30-plusyearssincethefirstpersonal computerscame onthemarket, and fieldslike biotechnologyare alsoadvancing rapidly.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  15. 15. P a g e | 15Moreover,even asthe basictechnologies improve, the commercialapplicationsof thesetechnologieshave arguablythusfar onlyscratchedthesurface.Consider,for example, the potential for IT and biotechnologyto improvehealth care, one of the largest and most important sectorsof oureconomy.Astrong casecan be made that themodernizationof health-careITsystemswouldleadtobetter-coordinated, more effective, and lesscostlypatient carethan wehave today, includinggreater responsivenessofmedical practiceto the latest research findings.Robots, lasers, and other advanced technologies are improving surgicaloutcomes, and artificial intelligence systems are being used to improvediagnosesand chart coursesof treatment.Perhapseven more revolutionaryis the trend toward so-calledpersonalizedmedicine, whichwouldtailor medical treatmentsfor eachpatient based on informationdrawnfrom that individuals genetic code.Taken together, such advancescould lead to another jump in lifeexpectancyand improved health at older ages.Other promisingareasfor the applicationof new technologies includethedevelopment of cleaner energy--for example, the harnessingofwind, wave,and solar power and thedevelopment of electric and hybridvehicles--aswell aspotential further advancesin communicationsandrobotics.Im sure that I cant imagineall of the possibilities,but historiansofsciencehave commented on our collectivetendencyto overestimatetheshort-term effectsof new technologies while underestimatingtheirlonger-term potential.Finally, pessimistsmay bepaying toolittleattentionto the strength of theunderlying economicandsocial forcesthat generateinnovationin themodern world.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  16. 16. P a g e | 16Invention wasoncethe provinceof the isolatedscientist or tinkerer.Thetransmissionofnewideasandtheadaptationofthebestnewinsightstocommercial useswereslowand erratic.But all of that is changingradically.We live on a planet that isbecoming richer and more populous,and inwhichnot onlythemost advanced economiesbut alsolargeemergingmarket nationslike China and India increasinglyseetheir economicfuturesastied to technologicalinnovation.In that context, the number of trainedscientistsand engineersisincreasingrapidly, asare theresourcesfor research beingprovidedbyuniversities,governments,and theprivate sector.Moreover,becauseof the Internet and other advancesincommunications,collaboration and the exchangeof ideastake place athigh speed and withlittleregard for geographic distance.For example, researchpapersare now disseminatedand critiqued almostinstantaneouslyrather than after publicationin a journal several yearsafter theyare written.And, importantly, astrade and globalization increasethe size of thepotential market for new products, the possibleeconomicrewardsforbeingfirst withan innovativeproduct or processare growingrapidly.In short, both humanitys capacitytoinnovateand the incentivestoinnovatearegreater today than at any other time in history.Well, what doesall thishave to dowithcreativityand criticalthinking, whichis whereI started?Thehistory of technological innovationand economic developmentteachesusthat changeis the only constant.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  17. 17. P a g e | 17During your workinglives,you will have to reinvent yourselves manytimes.Successand satisfactionwill not come from masteringa fixed body ofknowledgebut from constant adaptationand creativityin a rapidlychangingworld.Engagingwithand applying new technologies will be a crucial part ofthat adaptation.Your work here at Simons Rock, and the intellectual skills, creativity, andimagination that that work has fostered, are the best possible preparationfor thesechallenges.And while I have emphasized technologicaland scientificadvancestoday, it is important to remember that the artsand humanitiesfacilitatenew and creativethinking aswell, whilehelpingustodraw meaningthatgoesbeyond thepurely material aspectsof our lives.I wishyou thebest in facingthedifficult but excitingchallengesthat lieahead.Congratulations.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  18. 18. P a g e | 18ConsultationPaperOn Draft ImplementingTechnicalStandardsOn Additional LiquidityMonitoring Metrics underArticle 403(2) of the draft CapitalRequirementsRegulation (CRR)1.Responding to thisConsultationTheEBA invitescommentsonall proposalsput forwardin thispaperandin particular on the specificquestionssummarisedin 5.2. Commentsaremost helpful if they:- respond tothequestionstated;- indicatethespecific point towhicha comment relates;- contain a clear rationale;- provideevidencetosupport theviewsexpressed/ rationaleproposed;and-describeany alternativeregulatory choicesthe EBA should consider.Pleasesend your commentsto theEBA by email toEBA-CP-2013-18@eba.europa.eu by 14.08.2013,indicatingthereference‗EBA/CP/2012/18‘on the subject field.Pleasenotethat commentssubmitted after the deadline, or sent toanother e-mail addresswill not be processed.Publication of responsesInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  19. 19. P a g e | 19All contributionsreceived will be publishedfollowingthe closeof theconsultation, unlessyou request otherwise.Pleaseindicateclearlyand prominentlyin your submissionany part youdonot wishtobe publicly disclosed.Astandard confidentiality statement in an e-mail messagewill not betreatedasa request for non-disclosure.Aconfidential responsemaybe requested from usin accordancewiththeEBA‘s ruleson publicaccessto documents.We may consult you if we receive such a request. Any decision we makenot to disclose the response is reviewable by the EBA‘s Board of AppealandtheEuropean Ombudsman.Data protectionInformationondataprotectioncanbefoundat www.eba.europa.euundertheheading ‗Legal Notice‘.2. Executive SummaryTheproposed Capital RequirementsDirective/ Regulation(CRR/ CRD)setsout requirementsconcerning liquiditywhichare expected to applyfrom 1January 2014and mandatestheEBAto preparedraft regulatory/ implementingtechnical standards(RTS/ITS) in this area.The EBAhas developed these ITSproposals on the basis of the legislativetexts for the CRR agreed by the European Parliament and the Council inApril 2013, in accordance with the mandate contained in Articles403(2) ofthosetexts.Thesetextswill besubject tolegal-linguisticreviewbeforebeingformallyadopted and the final text published in theOfficial Journal of theEuropean Union.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  20. 20. P a g e | 20The EBA will review the ITSproposals to ensure that theytake account ofany changes made in the final text of the CRR, as well as to take accountof anychangesarisingout of the consultationprocess.Main featuresof the ITSThisCP containstheEBA proposal in relationtosupervisoryreportingofadditional monitoringmetricsfor liquidity.In definingitsproposal,theEBAfollowedtheapproachdevelopedbytheBasel Committeeon BankingSupervision(BCBS).TheEBA‘s proposed metrics tobe covered bythis ITSincludethefollowing:- a maturityladder(templateand instructions). This issimilar tothecontractual maturitymismatch put forwardby theBCBStext andprovidesinsight intothe extent to whicha bank relieson maturitytransformation under itscurrent contracts.It comprisestwoseparate templates(set out in twoworksheets), onefor contractual flowsand one for behavioural flows.Thematurity of theoutflowsand inflowsto be reported in bothtemplatesrange from open maturity up togreater than 10 years (13bucketsin total).- someadditional monitoring tools(templatesand instructions) relatedto:oconcentrationof fundingby counterparty: This issimilar totheconcentration of fundingmetricput forwardby the BCBS, and it allowstheidentification of thosesourcesof wholesaleand retail fundingof suchsignificancethat their withdrawalcould trigger liquidityproblems.It is proposedthat institutionsreport thetop ten largest counterpartiesfrom whichfundingobtainedexceedsathresholdof 1% oftotalliabilities, together withinformation on thecounterpartyname, counterparty typeInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  21. 21. P a g e | 21and location, product type, currency, amount received, weightedaverageand residual maturity.oconcentrationof fundingby product type: Thisseeksto collectinformation about theinstitutions concentration of funding by producttype, broken down intodifferent fundingtypesrelated to retail andwholesalefunding.It isproposedthat institutionsreportthetotal amount offundingreceivedfrom each product category, whenit exceedsa threshold of 1% of totalliabilities.o prices for various lengths of funding: This seeks to collect informationabout the average transaction volume and prices paid by institutions forfundingwithdifferent maturitiesranging from overnight to10years.o rollover of funding: This seeks to collect information about the volumeof funds maturing and new funding obtained i.e. ‗roll-over of funding‘ ona daily basisover a monthlytime horizon.3. Background and rationaleThenature of ITS under EU lawThepresent draft ITSare produced in accordancewithArticle 15 of EBAregulation. Paragraph 4 of that same articleprovidesthat ITSshall beadopted by meansof an EU Regulationor Decision.According to EU law, EU regulationsare binding in their entiretyanddirectlyapplicablein all Member States.Thismeansthat, onthe date of their entry intoforce, theybecomepart ofthenational law of theMember Statesand that their implementationintonational law is not onlyunnecessarybut alsoprohibited by EUlaw, except in sofar asthis is expresslyrequired by them.Shapingtheserulesin theform of a Regulationwouldensurealevel-playing field by preventingdivergingnational requirementsandwouldeasethecross-borderprovisionof services;currently, aninstitutionInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  22. 22. P a g e | 22that wishesto take up operationsin another Member State hasto applydifferent setsof rules.Background and regulatory approach followed in the draft ITSIn January 2013, the Basel Committeeon BankingSupervision (BCBS)publisheditsrevisedtext on the liquiditycoverage ratio (LCR) andliquidityrisk monitoring tools.Thesemonitoring tools, together withthe LCR standard, provide thecornerstoneof informationthat aid supervisorsin assessingtheliquidityrisk of an institution, becausetheycan help competent authoritiesidentify potential liquiditydifficultiessignaledthrough a negativetrendin themetricsor through an absoluteresult of the metrics.The EBA will observe further work conducted by the BCBS in respect ofliquidity risk monitoring and consider amendments to its own proposalsasnecessary.Onesuch topicmay be monitoring tools for intra-dayliquiditymanagement.Withinthis context, theEBA may consider increasingfurther thegranularityof some of theproposed time bucketscoveringtheperiod ofthefirst 3months.Input from theindustry on theselast aspectswouldbe welcome.TheCRR provisionsrelated toliquidityreportingtranslatetheseBCBSproposalsintoEU law.Thus, in addition tothe LCR, institutionswill have to report totheircompetent authoritiesinformation related to additional metrics.In this context, the CRR alsoprovides, inArticle 403(3)(b), that the EBAshall develop draft ITStospecify the additional liquiditymonitoringmetricsrequired toallowcompetent authoritiesto obtain aInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  23. 23. P a g e | 23comprehensiveview of the liquidityrisk profile, proportionateto thenature, scaleand complexityof an institutionsactivities.ThisCP containstheEBA proposal in relationtosupervisoryreportingofadditional monitoringmetricsfor liquidity.In definingitsproposal,theEBAfollowedtheapproachdevelopedbytheBCBS.TheEBA‘s proposed metricstobe covered bythis ITSincludethefollowing:- a maturityladder(templateand instructions)osome additional monitoring tools(templatesand instructions)relatedto:oconcentrationof fundingby counterpartyoconcentrationof fundingby product typeopricesfor variouslengthsof fundingorollover of fundingThemetric relatedtothematurityladder is similar tothe contractualmaturitymismatch put forwardby the BCBStext.Thetemplatedevelopedin theITSisdesignedtocapture thematuritymismatchof an institutions balancesheet, and assuch, is referredtoasthe‗maturityladder‘.Thesematurity mismatchesindicatehow much liquiditya bank wouldpotentiallyneed toraise in each of different time bandsif all outflowsoccurred at theearliestpossibledate.This metric providesinsight intothe extent towhichthe bank relies onmaturitytransformation under itscurrent contracts.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  24. 24. P a g e | 24Thematurityladderformspart ofthepackageof‗monitoringtools‘whichtheEBA hasdesigned.Thematurity ladder is a monitoring tool whichcomprisestwoseparatetemplates(whichareset out in twoworksheets),onefor contractual flowsand one for behavioural flows(inflowsand outflows).Thecontractual flowsresultingfrom legallybindingagreementsshouldbereported accordingto theprovisionsof these agreements, while thebehaviouralflowsshould be based upon a base-caseeconomicscenarioused by the reportinginstitutionin itscurrent businessplanning(thescenariothat theinstitutionexpectstohappen, asopposedtopre-definedstressed conditions).Thematurity of theoutflowsand inflowsto be reportedboth in thecontractual templateand thebehavioural template range from openmaturityup to greater than 10 years (13bucketsin total), which allowsallrelevant maturitiestobe captured.Themetrics related to the additional monitoring toolsare designed tomonitor an institutions liquidityrisk that fallsoutsidethe scope of thereportson LiquidityCoverage and StableFunding.Thetemplateon concentration of funding by counterparty, similar to theconcentration of fundingmetricput forwardby the BCBStext, allowstheidentificationof thosesourcesof wholesaleand retail fundingof suchsignificancethat their withdrawalcould trigger liquidityproblems.Excessiverelianceon individual counterpartiescould lead to thecrystallisation of liquidityrisk, wherethefundingrelationship to ceaseduring a stressscenario.It isthereforeimportant toprovidetemplatesforreportingontheseitems,soasto help institutionsto identify these risksearlyand seekfundingfrom a widerangeof counterparties.For thepurposeof thisITS,it isproposedthat institutionsarerequiredtoreport thetop ten largest counterpartiesfrom whichfunding obtainedInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  25. 25. P a g e | 25exceedsa threshold of 1%of total liabilities,together withinformationonthecounterpartyname, counterpartytype and location, producttype, currency, amount received, weightedaverage and residual maturity.Thetemplateon fundingby product type seekstocollect informationabout theinstitutions concentration of funding by product type, brokendownintodifferent funding types relatedto retail and wholesalefunding.Excessiverelianceon specific product types could lead to thecrystallisation of liquidityrisk, werethespecific product typesproven tobesubject to high outflowsduring a stressscenario.It isthereforeimportant toprovidetemplatesforreportingontheseitems,soasto help institutionsto identify these risksearlyand seekfundingfrom a widerangeof product types.For thepurposeof completingthe ITStemplates,it is proposedthatinstitutionsreport thetotal amount of funding received from eachproduct category, whenit exceedsa threshold of 1% of total liabilities.With regard to the counterbalancing capacity on the assets side, the EBAis considering integrating into the final ITSthe template and instructionsshownin theappendix of thisconsultationpaper.Thispart of thereportingaimsat capturingconcentrationsof assetsusedtocounterbalanceoutflowsand wouldcollect informationabout the tenlargest holdingsin thoseassetsissuedby a singlename.It is clearthat high concentrationsmay represent a risk of overestimationof the counterbalancingcapacityif the marketsfor the variousfinancialinstrumentsissued by a specificindividual issuer fall dry.Additional information onthe issuer/ counterparty locationmay addinsight on interconnectedness.As part of the total, the template seeksalsoinformation on receivedstand-byliquidityfacilitieswhichareseenaspart of thecounterbalancingcapacityby the institution.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  26. 26. P a g e | 26Insight in thesespecific types of concentrations cannot sufficientlybeobtainedfrom other templates.Thetemplateon pricesfor variouslengthsof funding seekstocollectinformation about theaveragetransactionvolume and pricespaid byinstitutionsfor fundingwithdifferent maturities ranging from overnightto10 years.Finally, the templateon theroll-over of funding seeksto collectinformation about thevolume of fundsmaturing and new fundingobtainedi.e. ‗roll-over of funding‘on a daily basisover a monthlytimehorizon.As a reminder, please note that Article 403(2) of the draft CRR stipulatesthat an institution shall report separately to the competent authorities ofthe home Member State the items subject to liquidity risk reporting in acurrencywhenit has(i)aggregateliabilitiesin that currency, different from thesinglecurrencyused for reporting, amounting toor exceeding5 % of the institution‘sorthesingleliquiditysub-group‘stotal liabilities;or(ii)a significant branch asdefined inArticle 52of theCRD in a hostMemberStateusinga currencydifferent from thereportingcurrency.Thepresent ITShave been developed to provide competent authoritieswith harmonisedinformation on institutions‘liquidityrisk profile, takingintoaccount thenature, scaleand complexityof institutions activities.As the ITSon additional liquidity monitoring metricswill become part ofthe general supervisory reporting framework requirements, following theintroduction of liquidity requirements, formats have been developed withtheaim of ensuringconsistencywhereallowedbytheCRR proposedtext.Scope/ level of application and frequencyInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  27. 27. P a g e | 27Thescope and level of applicationof theseITSseek tobe consistent withthescope and level of application of theCRR and of theprudentialreporting requirements(COREP), i.e. it applies:-on a consolidatedbasis(Article 10(3) of the CRR): to EU parent creditinstitutionsand investment firms and tocredit institutionsandinvestment firmscontrolledby an EU parent financial holding companyor by anEU parent mixed financial holdingcompany;-onan individual basis(Article 5(4) of theCRR) : toall credit institutionsand investment firmsthat are authorisedto providethe investmentserviceslisted in points3 and 6 of sectionAofAnnex I to Directive2004/ 39/ EC.However,accordingtoArticle 7(1) of theproposed CRR text, competentauthoritieswillbeallowedtowaivein full orin part theapplicationofPartSix oftheCRR (Liquidityrequirements)toainstitutionandtoall orsomeof itssubsidiaries, if they fulfill a set a predefined conditions,including iftheparent institutioncomplieson a consolidatedbasiswiththeobligationset forth inArticle 401and 403.Thereporting frequencywill bemonthlyforall monitoringmetrics.Under specific clear and factual criteria, dulyframed in theITS,proportionateto the nature, scaleand complexityof aninstitutionsactivities, the reportingfrequency can bereduced, respectivelyto a quarterly basis.Thesespecificcriteriarelatetotheexistenceofcross-borderactivitiesandsizeof the institution‘sbalancesheet.It shall be noted that Article64of the CRD related tosupervisorypowersallowscompetent authoritiesto imposeadditional or more frequentreporting requirements, includingreportingon liquiditypositions.For examplein periodsof stresscompetent authoritiescould imposesome reportingwitha daily frequency.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  28. 28. P a g e | 28Timing of ITSdevelopment and application dateConsideringthat theEBA is consultingon this reporting for additionalmetricsat alaterstagethanfortheotherreportingrequirements,theEBAmay consider further the appropriateapplicationdatecompared totheapplicationdate of other reporting requirements(in particular thereporting requirementsfor liquiditycoverageand stablefunding).According to the draft CRR, the EBAis expectedtosubmit theseITStotheEuropean Commission (EC) by 1January 2014.Thedata point model related tothe reportingon additional monitoringmetricswill be publishedfor consultationin the courseof 2013.4. Draft implementing technical standardsonAdditionalLiquidity Monitoring Metrics under the Capital RequirementsRegulation (CRR)THE EUROPEAN COMMISSION,Having regard to theTreaty on the Functioningof theEuropeanUnion, HavingregardtoRegulationxx/ XX/ EU oftheEuropeanParliamentand of the Council of [dd mmmm yyyy] on prudentialrequirementsfor credit institutionsand investment firms [CRR], and inparticulartoArticles......and403(3)(b) thereof,[ADDENDUM TO THE LEGAL BASESASPRESENTED IN CP50AND SUBSEQUENT CPsON VARIOUSASPECTSOF REPORTING]Whereas:...[ADDENDUM TO THE RECITALSAS PRESENTED IN CP50ANDSUBSEQUENT CPsON VARIOUSASPECTSOF REPORTING](xx)(xx) Reportingforadditionalmetricsrelatingtoliquidityshouldcomprisea maturityladder,because this is what wouldallowthematurityInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  29. 29. P a g e | 29mismatchof an institutions balancesheet to be captured; metrics basedon theconcentrationof funding by counterparty and producttype, becausethesemetricsidentify counterparties and instrumentsthatare of such relevance that withdrawalof fundsor decliningmarketliquiditycould trigger liquidityproblems;metricsbased on the pricesforvariouslengthsof funding and the rollover of funding becausesuchinformation will become valuableover timeassupervisorswouldbe madeawareof changesin funding spreads, volumesand tenors.(xx) Given that articles5 to 9 of Regulationxx/ xxx [CRR] specify thelevel of applicationof the liquiditycoverage, the level and scope of thereporting of that liquiditycoverageand on the additional monitoringmetricsshould be aligned with that, and thereforethe reportingon theseadditional monitoringmetricsshouldberequired only at the level ofconsolidationat whichreportingon liquiditycoverageis requiredaccordingtoArticle 403(3)(a).International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  30. 30. P a g e | 30EXPLANATORYMEMORANDUM TOTHE FINANCIAL CONGLOMERATES AND OTHERFINANCIAL GROUPS (AMENDMENT) REGULATIONSThis explanatorymemorandum hasbeen prepared by HM Treasuryandis laid beforeParliament by Command of Her Majesty.Purposeof the instrumentTheseRegulationsimplement, in part, Directive2011/ 89/ EU of theEuropeanParliament andoftheCouncil amendingDirectives98/78/EC, 2002/ 87/ EC, 2006/48/EC and 2009/ 138/ EC (OJ L 326/1138.12.2011)asregards thesupplementarysupervision of financial entitiesin a financialconglomerate.ThePrudential RegulationAuthority(―PRA‖) and theFinancialConductAuthority (―FCA‖) are responsiblefor implementingthemajority of theprovisionsof this Directive.TheRegulationsmake a limitednumber of technical and definitionalamendmentstoexistingsecondary legislationwhichimposesobligationson the PRA and FCAwith regard totheir supervisoryfunctions,inparticular concerninginformation sharingand consultationrequirements.Legislative ContextTheFinancial ConglomeratesDirective2002 (Directive2002/ 87/EC), providesthe framework for the prudential supervision offinancial conglomeratesinvolved in both banking and insuranceactivities, supplementingthe relevant banking and insurance sectoraldirectivesbyproviding additional supervision at thegroup level.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  31. 31. P a g e | 31TheFinancial ConglomeratesDirective2002wasimplemented in theUKmainlyby rulesmade by the Financial ServicesAuthority (―FSA‖ – thepredecessortothe PRA and FCA) under the Financial ServicesandMarketsAct 2000(―FSMA‖), but certainprovisionswhich imposedobligationson the supervisory authority, weretransposed by theFinancialConglomeratesand Other Financial GroupsRegulations2004(S.I.2004/1862).Directive2011/ 89/ EU is the result of a technical review of the2002Directivewhichwascommenced by theEuropean Commissionin 2008andmakes changestothe Financial ConglomeratesDirective2002andtherelevant sectoraldirectivesto improve theeffectivenessof thecurrentrules.TheseRegulationstransposethoseaspectsof Directive2011/ 89/ EUwhichrequire amendmentsto be madetoexistingsecondarylegislation, notablythe Financial Conglomeratesand Other FinancialGroupsRegulations2004and theCapital RequirementsRegulations2006(S.I. 2006/ 3221), by thetranspositiondeadlineof 10 June 2013.Most of theDirective provisionsarebeingtransposed by rulesmade bythePRA and FCA.Thoseprovisionsof the Directive whichrelate to alternativeinvestmentfund managers, and which alsorequire amendmentsto the FinancialConglomeratesand Other Financial GroupsRegulations2004, but have alater transpositiondeadlineof 22July2013,will be transposed bywayof aseparateset of Regulationswhich is duetobe made for the purposesoftransposingtheAlternative Investment Fund ManagersDirective(Directive2011/ 61/EU) by that deadline.TheseRegulationsalsoupdatecertain cross-referencesin theFinancialConglomeratesand Other Financial GroupsRegulations2004toprovisionsin Part 12of FSMA, whichwereamendedby the FinancialServicesand MarketsAct 2000(Controllers) Regulations2009(S.I.2009/ 534)aspart oftheexerciseoftransposingtheAcquisitionsDirective(Directive2007/44/EC).International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  32. 32. P a g e | 32Policy background - What is being done and whyTheaim of Directive2011/ 89/ EU is toact asa quick fix in responsetogapsinconglomeratesupervisionthat werehighlightedbytheexperienceof the financial crisisand identifiedin thereview of the FinancialConglomeratesDirective2002carried out by theEuropean Commissionin 2008/2009.Thechangesareexpectedtoeliminatetheunintendedconsequencesandtechnicalomissionsin the relevant sectoral directives(coveringthesupervision of banking and insuranceinstitutions), and improve theconsistencyof supervision of group risks.Thechangesincludeamendmentstothecapitalcalculationmethodologyfor conglomerates, a requirement toincludeasset managementcompanies and alternativeinvestment fund managersin theconglomeratesidentificationprocess, and amendmentsto theidentificationthreshold triggers,aswellasprovidingfor conglomeratestresstesting.Most of thesesubstantivechangeswill be implementedby amendmentsto PRAand FCArules.However,a limitednumber of amendmentsare required to existingsecondarylegislationwhichimposesobligationson the PRAand FCAwith regard totheir supervisoryfunctionsin relationtoconglomerates.Thesemainlyconcern consequential amendmentsto consultation andinformation sharing requirements.Amore fundamental review of theFinancial ConglomeratesDirective2002 iscurrentlyunderway.Theaim of thisis toprovide a wider-rangingassessment of thethefinancial crisis.TheEuropean Commission published aprogressupdate report on thisreview in December 2012.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  33. 33. P a g e | 33This noted theimportanceof taking intoaccount the recent and pendingchangestosectoral legislation– such asSolvencyII and theCapitalRe qu iremen ts Direct ive (―CRD 4‖) – aswell astheimplicationsof Banking Union proposalsfor conglomeratesupervision.Asaresult, thereport statedthattheCommissiondoesnot intendtobringforwardlegislativeproposalsin 2013,but will keepthe situationunderreview to determinethe appropriatetimingfor the revision.ConsolidationThere arenocurrent plans toconsolidatetheamendmentstotheFinancial Conglomeratesand Other Financial GroupsRegulations2004or the Capital RequirementsRegulations2006.However,the 2004Regulationsare likelytobe amended again followingthecurrent more fundamental review of theFinancial ConglomeratesDirective2002,at whichstage further consideration will be given toconsolidation.TheCapital RequirementsRegulations2006are expectedtobe furtheramendedorreplacedaspart oftheexerciseoftransposingCRD4 whichisduetobe adoptedlater this year.Consultation outcomeTheEuropean Commission undertook a targeted pre-legislativeconsultation on itsreview of the Financial ConglomeratesDirectiveinNovember 2009, prior toissuingits formal proposal in August 2010.We understand that a UK stakeholderrespondedbut theresponsewasnot made public.Details of theconsultation, includingpublished responses,are availableat:http:/ / ec.europa.eu/ internal_market/ consultations/2009/fcd_review_en.htmInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  34. 34. P a g e | 34Adraft of these Regulationswassubject toa public consultation in thedocument CP12/40: Financial ConglomeratesDirective– Technicalreviewamendments, a joint FSA-HM Treasuryconsultation, whichwaspublishedon the FSAwebsiteon 21December 2012,and is availableat:http:/ / www.fsa.gov.uk /static/ pubs/cp/ cp12-40.pdf.Theconsultationclosedon21March2013andnoresponseswerereceivedconcerningtheTreasury‘sdraft Regulations.The Treasury also consulted the FSAand itssuccessor authorities prior tomaking these Regulations, which impose obligations directly on the PRAand FCA, and theFSAwascontent withthedraft Regulations.GuidanceTheTreasuryisnot planningtoissueanyguidanceontheseRegulations,whichdo not imposeobligationsdirectlyon business.ThePRAand the FCAaredue to issuepolicy statementsdetailing theirfinal rules implementingother partsof Directive2011/ 89/ EU.TRANSPOSITION NOTE FOR DIRECTIVE 2011/ 89/EUThis transpositionnote setsout the legislationwhichtransposesintoUKlaw Directive2011/ 89/EU of theEuropean Parliament and of theCouncilamendingDirectives98/78/ EC, 2002/87/EC, 2006/48/ EC and2009/ 138/ EC asregards the supplementarysupervision of financialentitiesin a financial conglomerate.This Directive makestechnical amendmentsto the FinancialConglomeratesDirective2002(Directive2002/ 87/ EC), whichdealswiththe supplementarysupervision of financial conglomerates,whicharegroupswhichcarry out significant activities in both thebanking/ investment servicesand insurancesectors.It alsomakesconsequential amendmentsto the relevant sectoraldirectivesdealing withthe regulationof banks/investment firms andinsurancefirms.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  35. 35. P a g e | 35TheFinancial ConglomeratesDirective2002wasoriginallytransposedmainlyby wayof rulesmade by theFinancial ServicesAuthority (the―FSA‖) under the Financial Servicesand MarketsAct 2000, and alsoinpart bythe Financial Conglomeratesand Other Financial GroupsRegulations2004(SI 2004/ 1862)madeby the Treasury.Thenew Directivemakes technical changestothe FinancialConglomeratesDirective2002, includingchangesto theconglomeratecapital calculationsmethodology, changesto includeasset managementcompanies and alternativeinvestment fund managerswithintheprocessforidentifyingafinancialconglomerate,andchangestotheapplicationofidentificationthreshold triggers.Thenew Directiveisbeingtransposedmainlybythewayof amendmentsbeingmade to therulesof thePrudential RegulationAuthority (the―PRA‖) and (wherenecessary) theFinancial Conduct Authority (the―FCA‖), which wereestablishedin placeof the FSAwitheffect from 1April 2013(whentheFinancial ServicesAct 2012came intoforce).Theserulescontinueto bemade under the Financial ServicesandMarketsAct 2000(asamendedby the Financial ServicesAct 2012).Thenew Directive includesamendmentsto Directive 2009/138/EC(―SolvencyII‖), whosetranspositiondateis currentlydelayed.TheFSAhasconsultedon proposed amendmentsarising from thenewDirectivetothe draft PRAprudential sourcebook(SOLPRU) whichwill, in due course, transposeaspectsof SolvencyII.Referencesto thesedraft PRAHandbook rules are shownin thisTranspositionNotealthough SOLPRU will not be made until thetranspositionof SolvencyII takesplace.TheDirectiveis alsobeingtransposed in part by wayof amendmentsbeingmade by the Treasury tothe Financial Conglomeratesand OtherFinancial GroupsRegulations2004and the Capital RequirementsRegulations2006(SI 2006/ 3221), together withconsequentialamendmentsbeing made to other legislation.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  36. 36. P a g e | 36MostoftheprovisionsofthisDirectiveareduetoapplyfrom10June2013.Amendmentsto theFinancial Conglomeratesand Other FinancialGroupsRegulations2004relatingto alternativeinvestment fund managers(whichapplyfrom 22July2013) will bemadeseparatelybywayof theRegulationsbeingmadetotransposetheAlternative InvestmentFund ManagersDirective(Directive 2011/61/EU).International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  37. 37. P a g e | 37Whocallsthe shots?The problemof fiscal dominanceSpeechby Dr JensWeidmann, President of theDeutscheBundesbank, at the 4th Bank of France- DeutscheBundesbankMacroeconomicsand FinanceConference, Paris.1. IntroductionLadies and gentlemen,I wouldlike tothank you for theopportunity tospeak here today.Indeed, in springtimethereis no better placeto be than Paris.As Henry Millerput it:―God knows, when spring comestoParis the humblest mortal alivemust feel that hedwellsin Paradise‖.However,other partsof Europe are currentlya long wayfrom Paradise.Numerouscountriesare experiencinga severe crisis, and many peopleare goingthrough a time of great hardship.Thus, our most important challengeis toovercome thecrisis,restoregrowth and lead Europeback to prosperity– without endangeringpricestability.Toachieve thisobjectivemany difficult and far-reachingdecisionshavetobe taken.Against this backdrop, conferencessuch asthis one are essential. Afterall, scientific researchis a central pillar of good decision-making.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  38. 38. P a g e | 38Thus, I wouldlike tothank the Banquede Francefor hostingthis event.This sessionof the conferenceistitled:―FiscalPolicyin a MonetaryUnion‖.What is a central banker‘srolein sucha discussion?Well, Mervyn King oncesaid: ―Central banksareoften accused of beingobsessedwithinflation. This isuntrue. If theyare obsessedwithanything, it is withfiscalpolicy.‖As sooften, Mervyn King wasright, wecentral bankersare indeedobsessed withfiscal policy – and German onesquiteprobablysomewhatmore sothan those of a different nationality.This obsession is drivenby twointerrelatedobservations:First, high levelsof public debt harbour the riskof higher inflation.Second, sooner or later high levelsof public debt are bound tohurteconomicgrowth.Given the high levelsof public debt in manyEuropean countries, onewouldexpect a broad consensusin favour of consolidation– and not justamongfixated central bankers.However,the reality is a bit more complex than I just implied.There aredifferent viewson thedangersand meritsof public debt.In fact, wearecurrentlyobserving a changeof mood that hasbeendubbedthe ―austeritybacklash‖.Some politicians claim that their countries are dying from mere austerityon its own; others convey the impression that the policy of consolidationhasreached itslimits.Consequently, theycall for it to be postponed.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  39. 39. P a g e | 39These―backlashers‖ argue that in the current economicsituationinflationarypressure is only of limited concern.Along the same linesthey arguethat consolidationrather than debt hurtsgrowththe most – at least in the short run.In my speechI wouldlike to discussthesetwoissues:first, therelationship betweenpublic debt and inflationand second, the questionof consolidation and growth.2. Sound public finances asa prerequisite for monetary policyPublicdebt and inflationare related on account of monetarypolicy‘spowertoaccommodate high levelsof public debt.Thus, thehigher public debt becomes, the greater thepressure that canbeput upon monetary policy torespond accordingly.Suddenlyit might befiscalpolicythat callstheshots–monetarypolicynolonger followsthe objectiveof price stability but rather the concernsoffiscalpolicy.Astateof fiscal dominancehasbeen reached.Technically, fiscaldominancereferstoa regime wheremonetary policyensuresthesolvencyof the government.Thetraditional rolesare reversed: monetary policy stabilisesrealgovernment debt while inflationis determinedby theneedsof fiscalpolicy.In the conventional view, fiscaldominanceentails thefamous―unpleasant monetarist arithmetic‖.In the wordsof Sargent and Wallace: ―…themonetary authority… musttry tofinancewithseigniorageanydiscrepancybetween therevenuedemanded by the fiscal authorityand theamountsof bondsthat can besoldtothepublic.‖International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  40. 40. P a g e | 40In their setup, fiscalpolicy runsachronicprimarydeficit whichleadstoacorrespondingincreasein themoney supply.As a simplemoneydemand holdsin themodel, thepricelevel adjuststoestablishequilibrium in themoney market.Put more bluntly: thecentral bank financesgovernment deficitsthroughtheprinting press.Recently, however,anotherconcept offiscaldominancehasgainedmuchattention in the academic literature:thefiscal theory of theprice level.According to this theory, fiscal policy can affect inflation even if it doesnot monetisepublic debt along the linesof Sargent and Wallace.In the wordsof Woodford: ―Fiscal dominancemanifestsitself throughpressure on the central bank tousemonetary policy tomaintain themarket value of government debt.‖Themain pillar of thefiscal theory restson the fact that bondsare claimstonominal payoffs.Now, if governmentsare unabletoraisesufficient real resources, a newdirect link arisesbetweencurrent and expected deficitsand inflation.Intuitively, the logic of the fiscal theory can be described asfollows:Let usassumeadditional expenditure,forinstancehighertransfers,whicharenotfinanced by additional taxesbut by issuingadditionalbonds.Consequentlythevalueof real debt is now higher than thepresent valueof future tax payments.Householdsfeel richer and thusconsumemore, causing output andinflationto increase.Monetarypolicyhastostabilise real debt toavoid aninflationspiral, withtheresult that it respondsat a rate of lessthan 1to 1to inflation, therebyviolatingthe Taylor principle.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  41. 41. P a g e | 41Thus, higher inflation reducesdebt in real terms and lowerreal interestratesreducethe real debt serviceburden of existinggovernment debt.In each of thetwocases,a regime of fiscal dominanceis characterisedbyhigher inflation and probablyalsomore volatileinflation.Monetarypolicyis nolonger ableto control the inflation rate, andthereforewelfarelosseswill occur.However,the story doesnot end here.Remainingwithin the worldof theory, wecan continue asfollows:becauseeconomicagentsareforward-looking, it isquitepossiblethat theconsequencesI have just described could manifest themselvesbeforetheeconomyhasentered theregimeof fiscal dominance.Looking ahead, public debt cannot be accumulatedforever.Sooner or later, governmentsthat run largedeficitsfor a longperiod oftimerisk hittingafiscallimit – apoint at whichgovernment revenuescannolonger be increasedto stabilise government debt.This inabilitytoraiserevenuesmight have economicreasons, such asacrossingof the peak of the Laffer curve.But there might alsobe political reasonsthat make it infeasibleto raisetaxes.Certainly, the actual fiscal limit ishighlyuncertain in many ways:it is aprobabilitydistributionrather than a point and dependsonexpectations,shocksand policy measurestaken.And forward-lookingagentsknow:oncethe government hitsthefiscallimit, either an adjustment of fiscal spendingor an adjustment ofmonetarypolicy needsto occur.Otherwisedebt cannot be stabilised.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  42. 42. P a g e | 42And asa consequence, monetary policy might come under pressuretostep in and stabilisegovernment debt.Thus, even if fiscal policy hasnot yet reached itslimit, theeconomicmechanismsattached to the fiscal theory of theprice level might alreadyswinginto action.Tobe specific: let usassume that agentsexpect, withsomeprobability, that monetary policywill bear the burden of adjustment andstabilisereal government debt through higher inflation.Onceinflationexpectationsstart rising, thesamemight happenwithinflationaswell.Thus, even if the fiscal limit hasnot been reached, it may still affectinflation.In other words,how policy makersare expected to cope withthe fiscallimit, includingtheir effortsto consolidate,not onlyaffectsexpectationsconcerningfuture policy regimesbut can alsoaffect today‘swelfare.Against thebackdrop of this theoretical analysis, onething should bemadeclear from a monetary policyperspective:policymakers should notassume that theyare on safeground just becauseinflationexpectationsare firmly anchored.Onlyif agentsexpect deviationsfrom a ―virtuousregime‖ of monetarydominancetobe short-lived– say, becausepolicymakers still enjoy highcredibility– will inflationexpectationsremain well anchored.However,if agentslearnthat thedeviationis goingtolast for longer thaninitiallyexpected, their inflation expectationswill change.And thismight happen very suddenly.3. Hence, the case for consolidationWhat conclusion can wedraw from thistheoreticalanalysis?International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  43. 43. P a g e | 43Well, the right conclusion is that fiscal consolidation is cruciallyimportant tokeep inflationexpectationsanchored.On thisbasis, one could make a solid casefor consolidation.For it is incumbent on governmentstoreducethelevel of public debt.Indeed, theyhave to do this topromote economic growth and to ensureprice stability.As Olivier Blanchard put it: wehavetoget out of the danger zone.Certainly, over thepast three years manycountrieshave made greateffortsto consolidatetheir public finances.However,the main driver of theseeffortswasnot academictheory butprofanemarket pressure.As Simon Nixon recentlywrote in the Wall Street Journal:―For euro-zonecountriesfacinghigh borrowingcostsor reliant oninternational aid tofund their budget deficits,fiscal consolidation wasn‘ta choicebut a necessity.‖And it still is.Even so, now that market pressure haseasedsomewhat, sohasthepoliticalwill to consolidate.Many argue that consolidationhasgonetoofar and that it will impedegrowth given the current stateof the economy.But is that a tenableargument against theneed to reducepublic debt, toget out of the danger zone?Let ustake a closer look at the relationship betweenconsolidation andgrowth.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  44. 44. P a g e | 444. But will consolidation hurt growth?Toput my view in a nutshell:I seenoconflict betweenconsolidationandgrowth.And, indeed, there is not much controversyregardingthe long-termrelationship betweenconsolidation and growth.Variousstudieshave confirmedthat, in the longrun, solid public financeshaveabeneficialeffectongrowth– andI am not justreferringtotheReinhart- Rogoff study that hasreceivedsome criticism recently.Cecchetti and others, for instance, alsofind that high debt levelsinhibitpotential growth.Nevertheless, theshort-term relationshipbetweenconsolidationandgrowth ishotlydebated.And this debate iscurrentlyobscuringthe consensuson thelonger-termeffectsof consolidation.This is becausethedebate relatesdirectlyto policydecisionsand totheirshort-term effectson whichpoliticiansare very strongly focused.Morespecifically, the debate is focusingon theappropriate pace ofconsolidationin the current circumstances.Thediscussion, therefore, is revolving around the size of thefiscalmultiplier.Thelargerthemultiplier, thegreater thenegativeeffect consolidationhason short-term growth.In general, thesize of themultiplier dependson anumber of factors.It dependson thespecific fiscal and economic situation of the relevantcountry, includingthesize of theexport sector,theexchangerate regime,International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  45. 45. P a g e | 45trust in fiscalsustainabilityand the concretedesignof the consolidationmeasures.Recent researchhashighlightedthefact that themultiplier might alsobestate-dependent.This would implythepossibilitythat themultiplier is larger in a crisis.Onereason for this could be that monetary policy isconstrainedby thezero lowerbound.Another reasoncould bethat the number of liquidity-constrainedhouseholdsisincreasing.Empirical studiestend tofind that multipliersare indeed larger inrecessionsand in situationswhereconsolidationtakesplaceduring afinancial crisis.However,many of thesestudies suffer from a lack of data asdeeprecessionstend to be quite rare events.Moreover,the wayin whichsuch studiesare set up isoften rather basicand fraught with estimationchallenges.Finally, there are alsostudies which implythat thefiscal multiplier mightbesmaller whenpublic debt ratiosare high and thesustainability ofpublic financesis in doubt.Now, what doesall this tell us about thecurrent situation and theappropriatepaceof consolidation?Blanchardand Leigh, in a recent workingpaper, suggest that the fiscalmultiplier iscurrentlylarger than previouslythought.Therefore, theyconcludethat consolidationwouldcurrentlybe rathercostlyin terms of growthand more ―backloading‖ wouldbedesirable.However,the data set from whichtheseresultshave been obtained isInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  46. 46. P a g e | 46rather small.Onceother control variables areincluded and variation of thecountrysampleis taken intoaccount, theresultsare nolonger robust.All things considered, the size of fiscal multipliers seems to be subject toconsiderable uncertainty – both in general and with regard to the currentsituation.Consequently, I think weshouldlookbeyond the size of theshort-termfiscalmultiplier whendiscussingconsolidation.In general, if consolidationisachievedby reducingpublic spending, forinstance,it will enhancepotential growth.In addition, consolidationwill foster fiscalsustainability.In this regard, it isimportant to consider how financial marketsjudgeacountry‘sfiscalsituationand translatetheresultsintheir riskassessment.There is widespreadagreement that the influenceof country-specificfiscalcharacteristicshasrisen over the courseof the crisis.Thecurrent crisisis, to a largeextent, a crisisof confidence– financialmarketshavelost their confidencein thesustainability of public finances.Against thisbackdrop, sustainedandcredibleconsolidationwouldsendaclear signal.Also, with regard to political acceptance, I doubt that turning defermentof consolidation into a never-ending story will find more public supportthan a fairlyswift correction.And this iswhyI believethat determinedconsolidationwouldhelpconvincethemarketsthat the future fiscal position is going tobe sound.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  47. 47. P a g e | 47This, in turn, wouldbring down long-term interest ratesor ensure thattheyremain at a low level, which wouldbe beneficial for economicgrowth.By delaying consolidation, on theother hand, governmentswouldrisk anincreasein market uncertainty.As a consequence, sovereignbond spreadswouldremain high or go upeven further.5. ConclusionLadies and gentlemenHigh levelsof public debt are one of the majoreconomicpolicychallengesof our times– especiallyfrom a centralbanker‘spoint of view.Sustainablepublic financesarea necessary prerequisite for a stablecurrency– a prerequisitethat monetarypolicy itselfcannot create.Giventhat highlevelsofpublic debt alsohurt economicgrowth, thereisasolidcasefor consolidation.True, in theshort run, consolidationcan dampen growth;that isundisputed.Nevertheless, a crediblecommitment to soundpublic financeswill alsoinspire confidence.And confidenceis what islackingin theeuro area.Thank you.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  48. 48. P a g e | 48Solvency II update for allfirmsAs part of our commitment to sharingdevelopmentsin our approachtotheimplementationof SolvencyII, I thought it wouldbe helpful towritetoall firms affectedby the Directiveto give an update on thecurrentpositionand what this meansfor thework that hastobe done in thecomingmonths.As you know, there continuesto be significant uncertaintyover thetimetableand final shape of the SolvencyII regime.We are very consciousof the implicationsfor the industry of thecontinuing delaysin terms of complexityand cost.Wecannot yet providethecleartimetablebut weareactingintwowaystohelp theUK industry, both in theEuropean negotiation and in ourapproachto implementationfor UK firms.I willtake each of thesepointsin turn.European timetableWe are actively engagingwithEuropean colleaguestosupport the timelyresolutionof policy issues.Earlier this year weinvited firms totake part in thelong-term guaranteesassessment and wesubmitted data to theEuropean InsuranceandOccupational PensionsAuthority (EIOPA) at theend ofApril.EIOPA is currentlyanalysing data from Member Stateswitha view topreparinga report for European co-legislatorsin June.This is expected to be followedby a report from the EuropeanCommission whichwill inform thedevelopment of the OmnibusIIInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  49. 49. P a g e | 49Directivewhichis currentlyscheduled for a vote in theEuropeanParliament on 22October 2013.On 27 March2013,EIOPA published itsconsultationson preparatoryguidelinesfor SolvencyII.Theguidelinescover areasthat EIOPAconsidersto be themost stableand fundamental to ensure effectivepreparationby MemberStatesstartingfrom 1January 2014.It is important to note that the guidelinesfocuson preparednessratherthan bringingforwardelementsof SolvencyII early.Thefour areasare:i)systems of governance;ii)forward-lookingassessment of the undertaking‘sown risks(based ontheORSAprinciples);iii) submissionof information(reporting);andiv) pre-applicationfor internal models.We are very much awareof the concernsraised by industry, inparticular,with regardstothecost of potential duplicationof workandparallelrunningstemmingfrom thereportingguidelines.TheEIOPAposition onthe reportingguidelineswill be clearer towardstheend of the year, and wevery muchsupport thereview clauseinEIOPA‘scover notetotheconsultationsdesignedtoremovethepotentialfor an extended period of parallel running.We will be respondingto EIOPA‘s consultationsbythe deadlineof 19June,andI wouldliketothank firmsfortheirattendanceandconstructiveinput which will inform our response.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  50. 50. P a g e | 50EIOPA will consider all responsesto theconsultationswitha view toproducingfinal guidelinesin theautumn; and National CompetentAuthorities(NCAs), includingthe PRA, will have twomonthsto respondasto whethertheywill complyor intend tocomplywith each of theguidelines,and/ orgive reasonsfor non-compliancewhereneeded.We appreciatethat the timingis difficult asit leaveslittletimefor usandfor you toprepare.We will provideasmuch information to the UK industry assoonaswecan.Theworkon the long-term guaranteesassessment, theOmnibusIIDirectiveand theEIOPApreparatoryguidelinesshould cometogether intheautumn.Thereis,therefore,unlikelytobeanycertaintyabout thetimetablebeforethen.Approach to implementationIn October 2012 I acknowledged the EU delay to the implementation ofSolvency II and set out a new planning horizon of 31 December 2015 forUK firms.We have rephased and scaledback our plansfor future workon SolvencyII and webelievethat theaction wehave taken is both sensibleandpragmatic.It hasreduced considerably thecost to industry under the special projectfeesthis year.Sincemy lettertofirmsabout ‗ICAS+‘ in Januarythis year, wehavereceivedrequestsfrom just under half of the firmsin our internal modelapproval process(IMAP) that wishtoleveragetheinvestment in theirSolvencyII internal models to meet thecurrent regulatory requirements.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  51. 51. P a g e | 51We have startedtodeliver the new approach withthe first firms in theprocess.It is too earlyto share learningsfrom ICAS+ asweare still at apreliminarystage, but weplan to dosoassoon aswecan, particularlydevelopmentsused by firms in their modellingtechniques.As I have said previously, given the complexityinherent in modelledapproaches,wecontinueto believein the importanceof non-modelledcrosschecks.Tothat end, wehavebeen developingearlywarningindicators(EWIs) tomonitor thecontinuing appropriatenessof the firm‘sinternal model todeliverthe SolvencyII calibrationrequirement (i.e. 99.5%over a one-yearperiod).I am sendinga separateletter toIM AP firms todayon theintroductionofthoseindicatorswewill use in the ICAS regime to inform and assist oursupervision, and test the calibrationsof theEWIs in the run up toSolvencyII.For standard formula firms, weare currentlyconsideringa number ofareasand circumstancesin which the standard formula may not beappropriate;for example, in capturing pensionrisk.Thedatasubmittedbyfirmslastyear hasinformedourapproachtogetherwith our assessment of firms‘preparednessfor SolvencyII.Our conclusionswill alsodepend on thefinalised standard formulacalibrationsin the Level 2 text.Our eventual approachwill needtobe consistent with thePRA‘sapproachtosupervision and reflect our responseto EIOPA‘s guidelineson preparingfor SolvencyII.We will update the industry more fullyon our approachwhenwehavegreater certaintyof theEuropean timetablelater this year.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  52. 52. P a g e | 52In the meantime, firmsshould continuetoensure that their chosenmethod to calculatetheir SolvencyII SolvencyCapital Requirement(SCR) issuitable,and wherenecessary, considerwhetherit isappropriatetouseundertakingspecificparameters,or a partial internal model, wherethestandard formula doesnot adequatelyreflect the firm‘s riskprofile.Finally, at theendof thismonth wewill bewritingtoanumber of life andgeneralinsurancefirmswithdatarequestsfortheir responsesbyendJuly.The requestswill include a comparison of ICAS to the standard formulaSCR and internal model SCR, a credit benchmark portfolio survey and arequestfor standardisedrisk information.This will allowustoidentify trendsand outliers,and weneed your inputtomake our reviewsefficient and up todate acrossthe sector.It is essential for us, and theindustry, that the data is consistent.Ultimately, these numbersare critical in our judgements.Details of thedata collectionexercise,includingthe scope, purposeandfirmsaffected, areavailableat the PRA‘s SolvencyII webpages.Wewillcontinuetogiveasmuchfeedbackasweareableat both firm andindustrylevel.Next stepsWe remain committedto updating you of developmentsin our approachtoimplementation of the SolvencyII Directive, and sharing earlydevelopmentsand feedback from our work asfar aspossible.We are lookingto hold an industrybriefing later this year, and willprovidefurther informationin September.I attachatimetable,basedon informationavailableat thetimeofwriting, that wehope you will find useful.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  53. 53. P a g e | 53Pleasecontinuetoraise issuesand questionswithyour usual supervisorycontact sothat wecan consider them in the planningof our futurecommunications.YourssincerelyJulianInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  54. 54. P a g e | 54International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  55. 55. P a g e | 55Dear FirmMonitoring levelsof capital and early warning indicatorsI wrote to you in June and again in September last year outliningourintentionto monitor the on-going appropriatenessof SolvencyII internalmodelspost approval through theuseof earlywarningindicators(EWIs).Thesewouldact asa non-modelled crosscheck to ensure firms‘modelscontinueto meet the SolvencyII calibrationrequirement (i.e. 99.5% overa one-year period).I am writingto you now toset out our implementationplan.We propose to usethe period beforethe formal implementationofSolvencyII to trial the useof EWIsin theICAS regimefor all firms usingan internal model for regulatorycapital assessment.This will meet twoobjectives.It will:assist our supervisiontomonitor any downwarddrift in capital;andinform our use and test the calibrationsof the EWIs.Basedon analysis of thedata returnedbyfirmsin responsetoour requestin Q3 2012and feedback from the industry tomy lettersin 2012,wehavedeveloped separateindicatorsfor life (excludingwith-profits),with-profitsfunds,andgeneralinsurancebusiness, incl. Londonmarkets.Life and general insurance business, excluding with-profitsWe consider the ratiobetweenthe modelledSolvencyCapitalRequirement (SCR) and theSolvencyII pre-corridorMinimum CapitalInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  56. 56. P a g e | 56Requirement (pMCR) to be an appropriate EWI for life (excludingwithprofits)and general insurers.In the interim period wewill use firms‘Individual Capital Guidance(ICG)asthe capitalrequirement, and the pMCR will be calculatedusingthelong-term guaranteesassessment specificationspublishedby EIOPAinJanuary2013.Basedon further analysisof data providedby firms, the ICG to pMCRindicatorthreshold hasbeen set at:300% for life business(excludingwith-profits);and175% for general insurancebusiness, includingLondonmarkets.Thesethresholdshave been set at a level whichshould mean thatapproximately10%of firmswill fall below them.This will allowthe PRA tounderstand better thebehaviour of the EWIs.With-profitsbusinessThedatasubmittedbyfirmsbased on a2011year endand responsesfromfirmsto my previouslettershave suggestedthat thesimplepMCR maynot be appropriate for with-profitsfundsasit doesnot accuratelytakeintoaccount theeconomic cost of contractual guaranteesor thenatureandcompositionof freeassetsor non-profits businesscontainedwithinthefund.In addition to the simple ICG to pMCR ratio, we will therefore also usethe interim period to test an alternative modified indicator that reflectsthesefactors.At theend of thisperiod wewill assesswhetherthe additional complexityin thewith-profitsEWI is warranted.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  57. 57. P a g e | 57I attacha technicalnote withthedetails of the modifiedindicatorwhichyou may wishtoshare with others asappropriate.Basedon analysisof data provided by firms, the with-profitsindicatorthresholdshavebeen set at:125% for the original (ICG topMCR) ratio for with-profitsbusiness;and200% for thealternativemodified indicator.Next stepsFrom September 2013onwardsweexpect you tobe awareof theperformanceof your internal model againstthe EWIs and to be preparedtodiscussit with your supervisor.You should alsobepreparedto discussreasonsfor anysignificant actualor projectedchange in positionand the causesof thosechanges,especiallyany actual or projectedfall below thethresholds.Forthefirst calculationweplantousetheinformationcontainedinadatarequestbeingsent toa number of life and general insurancefirmson 31May 2013.In future wewill need to request a small amount of relevant data tocalculate the EWI but wewill seektorationalisethis aspart of otherrequests.In additiontothe six monthly reviewsacrosssectors,weplan to usetheindicatorasan input to ICAS or ICAS+ review panels.However,wedo not intendfundamentallyto alter the wayin whichthePRAsetsICG.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  58. 58. P a g e | 58EIOPA is alsoconsideringearlywarningindicatorsaspart of thetoolstobedeveloped to monitor the ongoing appropriatenessof internal modelspost approval in a SolvencyII regime.We are contributingto this work.Pleasecontinuetodiscussyour developinginternal model, and anyquestionsyou may have, withyour usual supervisorycontact.YourssincerelyInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  59. 59. P a g e | 59Technical note to the alternative with-profits indicatorWe want toinvestigate whethera more reliable EWI can be constructedfor with-profitsfunds.Tothisend, weareproposingtotestanalternativeindicatorbasedonthefollowingthreekey factorsthat contributeto the variability in theeconomiccapital positionof with-profitsfunds:1.thecost of contractual guaranteeswithin thefund;2. thelevel of free assets;and3. theamount of non-profit businesswrittenin the fund.Our analysisshowsthat variability in thesethree factorsacrosswith-profits fundscaused highlydispersed resultsagainst theoriginalpMCR-basedEWI indicatingthat thismay not be a sufficientlyreliableindicatorfor our purpose.1. Economic cost of contractual guaranteesThecost ofguaranteesisthekeydriverofrisk-basedcapitalrequirementsfor with-profitsfunds.In stressed economicconditions, decliningasset valuesin awith-profitsfund lead toa reduction in policyholders‘discretionarybenefits.Theextent towhichthisreduction impactsthe cost of guaranteesandhencethe capital requirement dependson whether theguaranteesbite, i.e. whetherthe guarantees are in themoney or not.We believethat the reliabilityof the EWI could be improved if anapproximateallowancewasmade for both the cost of the guaranteesandtheextent to whichtheyare in the money.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  60. 60. P a g e | 60Management actionscan be takentoreducethe capital impact of thestressscenario on with-profitsbusinessin both the ICAand the realisticbalancesheet and can differ betweentheseassessments.For EWI purposesnoadjustmentsshould be made to themanagementactionsassumed under either assessment.2. The level of free assetsFor assetsthat back policyholder liabilities,in stressedeconomicconditions,generallythefall in asset valuesisoffset in part by a fall inliabilities(thedifferencebroadlybeing the capital requirement).For ‗free assets‘there are no associatedpolicyholder liabilitiesand hencetheimpact of economic stressesflowsstraight through tocapitalrequirements.Our analysisshowsthat an allowancefor thelevel of freeassetscouldenhancethe reliabilityof the EWI for with-profitsfunds.It is worthclarifying thetreatment of thelevel of free assetsin respect ofclosedwith-profitsfunds.For such funds, freeassetsare included in realistic balancesheetsas―plannedenhancements‖ rather than excesscapital.ForthealternativeEWI, suchplannedenhancementsshouldbetreatedinthesamewayasexcesscapital in the fund.3.Non-profit businessNon-profit businesswithinthe with-profitsfund isusuallybackedbyassetsthat are wellmatched to the liabilitiessoitscontribution to thecapital requirementsis often comparatively modestcompared to the sizeof the business.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  61. 61. P a g e | 61Despitethis,wefeel that due to the widerangeof theproportion ofnon-profit businesswrittenin with-profitsfunds,an allowancefor thelevel of non-profit businessimprovesthe reliabilityof the EWI forwith-profits funds.The alternative with-profitsEWI formulaIn order toreflect thesefactorscontributingto capital requirementsinwith-profitsfunds,thealternativeEWI formulahasbeendevelopedastheratio of the capital requirement to:15%x Cost of guarantees+10% x sizeof thefreeassets+ 2% x Non-ProfitLiabilitiesMoneynessof guaranteesAs withour other EWIs, theICG will bethe capital requirement for theinterim EWI.Thepercentageweights(15%, 10% and 2%) havebeen chosento reflecttherelativeimportanceof thedata item asdescribed above in itscontributiontothe overall capital requirement and the sensitivitiestochangesin stressscenarios.Thepercentageswerederivedsothat EWI factor calculatedfor mostwithprofitsfundslayin the range1to 5.Thefactor whichattemptstocapture theextent to which guaranteesarein themoney is calculated asthe formula in the tablebelow.This is an approximate formula to represent the averagemoneynessofguaranteesof the different types and generationsof with-profitsbusinessin thewith-profitsfund.For clarification, thesourceof thedataand their descriptionsare given inthetablebelow.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  62. 62. P a g e | 62Data collection exercisesin 2013We have consideredtechniquesand toolsthat are informative, costeffectiveand straightforwardtoimplement for usand firms whenweareassessingmodels and model output.Thetechniquesand toolsare alsodesignedto gather and usedataefficientlyto perform industry analysis, and tousethat information forfirm-specific reviewsasappropriate.We havedeveloped thefollowingquantitativetechniquesandtools, which apply tolife and general insurancefirms.These tools are very similar to those used previously in 2011 and 2012when information was gathered and analysed in the third and fourthquarters.Theanalysis of the information wasparticularlyuseful and it helpedinform and focusour discussionswithfirms.We recognise that firms‘ internal modelsand calibration workhavedeveloped further sincethen.Assuch, wesetout our intentiontorepeat theanalysisandextendvarioustoolstocover more firms.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  63. 63. P a g e | 63Minor changeshavebeen madetothesetoolstoincreasetheir usefulnessin 2013.We may repeat someor all of theseinformation requestsin thefuture.What weare asking you to doOn Friday 31 May 2013, we will send two emails to firms affected by thedata collection exercises – one to life insurance firms and one to generalinsurancefirms– requestingresponsesby cob Wednesday 31July2013.If thefirm hasbothlife andgeneralinsuranceoperations,theywillreceivetwoemails withsupportingmaterials.We will collate all responsesand perform our analysisin Q3 and Q4 2013.Theresultswill allowefficient industry analysisand will assist ourdiscussionswithfirms during ICAS and ICAS+ reviews(includingICGassessments), and both thepre-applicationand submission phasesofIM AP.Fortheseexercises,weareaskingforinformationasat 31December2012.Wherethisis not possiblethen a suitabledate should bechosenthat is asnear to31December 2012aspossible.It is imperativethat data at the same valuationdate is used for alltemplates.Life insurance firmsComparison of ICAS, standard formula Solvency CapitalRequirement (SCR) and internal model SCRWewill askall life IMAP firmstoprovideuswiththecapitalrequirementsfrom their ICAS, standard formula SCR and internalmodel SCRcalculations(based on thetechnical specificationspublishedby EIOPAon 28January2013aspart of the long-term guaranteesassessment, withInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  64. 64. P a g e | 64liabilitiescalculatedusing the scenario 1matchingadjustment and zeroCounter-Cyclical Premium), split by riskfactor, alongwithanexplanation of the material differences.This will help ustoidentify assumptions, methodologiesor other areasfor potential further review during both thepre-applicationandsubmission phasesof IM AP.In addition weare seekingindicativeinformationon capital resources(ownfunds), and thedifferencein asset and liabilityvaluesbetweentheinternalmodel and ICA.This will help ustounderstand the changesin capital requirements.We will alsobeusing this information to support our ongoingdevelopment and monitoring of earlywarningindicators(EWIs).Standardised risk informationThis request will ask all life IMAP firms toprovideinformation (e.g.percentilesofdistributions)forkeyriskvariables inastandardisedformatfor their UK sololife entities.Credit benchmark portfolio surveyTherequest will askfirmsto disclosetheimpact (i.e. the fall in assetvalue) of specifiedstresseson a benchmark portfolio of corporate bondassets.This isan extensionof a pilot study conducted earlier this year toall Category1and 2life IMAP firms withmaterial credit risk exposure.Stochastic simulations surveyWe will alsoincludea request toCategory1and 2 life IMAP firms withstochastic internalmodels,askingthem to providethe stochasticsimulation files used to calculatetheir capital requirements,includingadditional standardisedrisk variables.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  65. 65. P a g e | 65This is an extension of a pilot studyconductedearlier thisyear.General insurance firmsComparison of ICAS, standard formula SCR and internal modelSCRAs for life IMAP firms, wewill askall general insuranceIMAP firms togiveusthecapital requirementsfrom their ICAS, standard formula SCRbased and internal model SCR calculations(based on the technicalspecificationspublishedby EIOPAon 28January 2013aspart of thelong-term guaranteesassessment, with liabilitiescalculatedusing thescenario1matchingadjustment and zero Counter-Cyclical Premium), split by riskfactor,along withan explanation of the material differences.This will help ustoidentify assumptions, methodologiesor other areasduring both the pre-applicationand submission phasesof IM AP.In addition weare seekingindicativeinformationon capital resources(ownfunds), and thedifferencein asset and liabilityvaluesbetweentheinternalmodel and ICA.This will help ustounderstand the changesin capital requirements.We will alsobeusing this information to support our ongoingdevelopment and monitoring of EWIs.Standardised risk informationAs part of firms‘ICAsubmissions, wehave previouslyrequired firms toprovidea standard templateof percentilesof claim distributions.We have found this information veryuseful and have now decidedtorequest this information from general insurancefirms(IM AP andnon-IMAP) at a common date, i.e. year end 31December 2012.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  66. 66. P a g e | 66Singapore – pursuing broader and deepereconomic integration with majoreconomiesOpeningkeynote speechby Mr Lim HngKiang, Minister for Tradeand IndustryandDeputyChairman of the MonetaryAuthority ofSingapore, at DeutscheBank AccessAsiaConference2013,Singapore.Distinguishedguests, Ladies and gentlemen, Avery good morningtoall of you.It is my pleasure tojoin you at DeutscheBank‘sAccessAsia Conference2013.Let me first thank Deutsche Bank for theinvitation to speak at yourconference.Thisisthelargestevent hostedbyDeutscheBank eachyear globally, anda huge turnout is a clear indicator of thestrong corporateand investorinterest in Asia.In the last 10years, thecentre of gravityof the worldeconomyhasbeenmoving awayfrom the USand EuropetoAsia.Asia isexpected to continuetoprosper in thedecadesahead asthemiddleclassexpandsin linewith strong economicgrowth.China is set to be thelargest economy in theworldby2030and isalreadycreatingmegacitiesof over 10million at an averagerate of oneper year.Besides China, Ind ia‘s midd le class is ex pected to grow toalmost 600million peopleby 2025.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  67. 67. P a g e | 67In Indonesia, almost 60per cent of Indonesianhouseholds, in a countryof 240million people, are expectedto reach middle-classstatusby 2020.Beinga very small state, Singaporehas and will continuetomaintain anopen economy.We will participateactivelytopropagate freeand open tradingalliancesasAsia growsand becomesmore economicallyintegrated.In this way, wehelp to unlockthe value, spin off new opportunitiesandcreategood jobsfor Singaporeans.ASEAN and AEC 2015Onekeymarket for Singapore isASEAN.ASEAN isagrowingregionandhasacombinedpopulationof600millionpeople.ASEAN alsohas a GDP that is thethird largest inAsia, after China andJapan.In recent years,ASEAN hasembarked on an enterprise to integrate oureconomiesintoa regional bloc.ASEAN today, through initiativeslike theASEAN Free TradeArea, hasresultedin virtuallynotariffsfor flowsof goodsbetween our countries.Going forward,ASEAN is making good progresstowardsbecoming thesinglemarket and product baseenvisionedin theASEAN EconomicCommunity(AEC).Therealisation of theAEC by 2015will result in an even more tightlyintegratedregion, and thishasopened up more opportunitiesforcorporatesaswell asinvestors.Akey principleunderpinningtheAEC 2015is thefree flowofgoods,servicesand investment withintheregion by 2015.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  68. 68. P a g e | 68Let me updateyou on theprogresssofar.•On tradein goods, virtuallyall goodsin ASEAN alreadymovethroughout the region tariff-free.We are now workingon reducing non-tariff barriers.•On services,ASEAN MemberStateshaverecentlycompletedtheeighthpackageof commitmentsunder theASEAN FrameworkAgreement onServices.What this meansis that wecan expect thereductionof servicesbarriers,such asforeign equitylimitsin theASEAN countries.•On investment, theASEAN Comprehensive Investment Agreemententeredintoforce in Marchlast year.This agreement hasestablishedstronger, pro-businessrules, withenhancedinvestment protectionforbothASEAN-ownedinvestmentsandalsoforeign-ownedinvestmentsbased inASEAN.Singapore‘s multilateral agreementsHowever,to enablebusinessestoaccessmajor marketsmore easily,Singaporehasalsobroadenedour engagement withAsia Pacific beyondASEAN.By doing so, weaim to reducetradingcosts.Tothis end, Singaporeactively participatesin negotiationsof severalmultilateral tradeagreements.Oneexampleof such a multilateral tradeagreement isthe RegionalComprehensiveEconomic Partnership, or RCEP, which is a partnershipbetweenASEAN andsixothercountries, namelyAustralia, NewZealand,China, Japan, India and South Korea.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  69. 69. P a g e | 69Regional Comprehensive Economic Partnership (RCEP) andRenminbi (RMB) InternationalisationThis agreement buildsupon theexistingASEAN+1 free tradeagreements(FTAs) FTAs by bringing togetherASEAN‘sexistingFTAswith itskey partnersintoa singlecomprehensiveagreement.RCEP will be one of thebiggest FTAs in the world, covering3 billionpeopleand accountingfor one-third of the world‘sGDP.RCEP isa significant agreement forASEAN.It isanambitiousattempt todeepenregionaleconomicintegrationandtolink ASEAN‘s varioustrading partners,many of whom donot haveexistingtrade agreementswithone another.Onekeypartner forASEAN in RCEP is China.China will continuetoplay an increasinglyimportant role in trade withASEAN, and thiswill grow even further with itsparticipationin RCEP.In 2012,ASEAN-China trade volumesreached a record high of US$400billion,andby2015,ASEAN isexpectedtobeChina‘stoptradingpartner.As a result, in thenext few years, wecanexpect a greater acceptanceanduseof theRenminbi (RMB) asa trade settlement currency, especiallyinASEAN.What doesthis mean for us?China hasalreadysignedbilateral currencyswaparrangementswith keyASEAN countries,such asSingapore, Malaysiaand Indonesia.Corporates,investorsandfinancialinstitutionsneedtobepreparedif theyare tocapitaliseon the opportunitiesbrought on by theincreasinginternationalisationof theRMB.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com

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