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1200 G Street NW Suite 800 Washington, DC 20005-6705 USA Tel: 202-449-9750 www.risk-compliance-association.com

International Association of Risk and Compliance Professionals (IARCP)

Top 120 risk and compliance management related news stories and world events that (for better or for worse) shaped the week's agenda, and what is next
George Lekatis President of the IARCP

Dear Member, If you plan to continue to work as a risk and compliance management expert, officer or director throughout the rest of your career, it makes perfect sense to become a Life Member of the Association, and continue your journey without interruption and without renewal worries. You will get a lifetime of benefits as well. You can check the amazing benefits that include: 1. 50% discount for the CRCMP and CISRCP distance learning and online certification programs 2. Two of our web pages dedicated to you (www.risk-compliance-association.com/Your_Name.htm) To learn more: www.risk-compliance-association.com/Lifetime_Membership.htm Enjoy the convenience of making a single payment for your entire tenure as a member, and get all the benefits. Welcome to the Top 120 list.
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In the States, President Obama signed the Jumpstart Our Business Startups (JOBS) Act, a bipartisan bill that encourages startups and support small businesses. In the world, we will have interesting changes in risk management and corporate governance, as the Financial Stability Board finds that the global financial crisis highlighted a number of corporate governance failures and weaknesses in financial institutions, including inappropriate Board structures and processes, weak risk governance systems, and unduly complex or opaque firm organisational structures and activities. In Europe, we have a very important development. The impact of the new Basel III framework is monitored semi-annually by both the Basel Committee at a global level and the European Banking Authority (EBA, formerly CEBS) at the European level, using data provided by participating banks on a voluntary and confidential basis. Well, in Europe, the aggregate Group 1 and Group 2 shortfall of liquid assets is at approx. €1.2 trillion which represents 3.7% of the approx. €31 trillion total assets of the aggregate sample. [Group 1 banks are those with Tier 1 capital in excess of €3 bn and internationally active. All other banks are categorized as Group 2 banks] A total of 158 banks submitted data for this exercise, consisting of 48 Group 1 banks and 110 Group 2 banks. For the banks in the sample, monitoring results show a shortfall of liquid assets of €1.15 trillion (which represents 3.7% of the €31 trillion total assets of the aggregate sample) as of 30 June 2011, if banks were to make no changes whatsoever to their liquidity risk profile.

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Table of Contents
Monday, April 2, 2012 Monday, April 9, 2012 Monday, April 16, 2012 Monday, April 23, 2012 Monday, April 30, 2012 Monday, May 7, 2012 Monday, May 14, 2012 Monday, May 21, 2012 Monday, May 28, 2012 Monday, June 4, 2012 Monday, June 11, 2012 Monday, June 18, 2012 Monday, June 25, 2012 Page 5 Page 99 Page 209 Page 377 Page 471 Page 636 Page 789 Page 903 Page 1069 Page 1182 Page 1302 Page 1416 Page 1747

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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1200 G Street NW Suite 800 Washington, DC 20005-6705 USA Tel: 202-449-9750 www.risk-compliance-association.com

International Association of Risk and Compliance Professionals (IARCP)

Monday, April 2, 2012 - Top 10 risk and compliance management related news stories and world events that (for better or for worse) shaped the week's agenda, and what is next
George Lekatis President of the IARCP Dear Members,

I want to thank you very much. We have received some emails with so
polite words! I am really moved. We have also received some suggestions, how to make this weekly newsletter better. Some of you asked for page numbers (how in the world could we forget it?) and a table of contents (how in the world could we forget it too?). Fixed! This week we have made this newsletter better, because of your recommendations. Thank you very much. Have you downloaded the 120 Developments in Risk Management and Compliance (in January, February, March 2012 - 691 pages)? It is a great reference e-book. Download it now: http://www.risk-compliance-association.com/120_Developments_Risk_ Management_Compliance_January_to_March_2012.html _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

Page |2 Welcome to the Top 10 list. Number 1 (Page 4) Surprise, surprise… The Cayman Islands Monetary Authority (CIMA) and the United States Securities and Exchange Commission (SEC) have entered into a memorandum of understanding (MOU) Number 2 (Page 7) Very interesting speeches by Mario Draghi, President of the European Central Bank, Charles I Plosser, President and Chief Executive Officer of the Federal Reserve Bank of Philadelphia and Christian Noyer, Governor of the Bank of France and Chairman of the Board of Directors of the BIS Number 3 (Page 35) More Solvency II and Occupational Retirement Provision headaches – we will understand better where we are, in the interview with Gabriel Bernardino, Chairman of EIOPA conducted by Anke Dembowski, Institutional Money (Germany) Number 4 (Page 45) We have such interesting risks… like bribery and corruption risk … (is the risk of the firm or anyone acting on the firm’s behalf, engaging in bribery and corruption). FSA review into anti-bribery and corruption systems and controls in investment banks and proposed new guidance for all firms Number 5 (Page 51) Financial risk management - Opening remarks by Ewart S Williams, Governor of the Central Bank of Trinidad and Tobago, at the Caribbean Centre for Money and Finance Conference, Port-of-Spain. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

Page |3 Number 6 (Page 58) The Dodd-Frank Act requires the CFPB to share consumer complaint information with the Federal Trade Commission (“FTC”) and other state and federal agencies. Consumer response now sharing complaints with FTC Consumer Sentinel. Number 7 (Page 60) What about short selling in Europe? You must read Regulation (EU) No 236/2012 of the European Parliament and of the Council on short selling and certain aspects of credit default swaps Number 8 (Page 74) Atomic clocks are the most accurate frequency standard and timing devices in the world. Their range of uses include being the international standard for timekeeping, managing broadcasts and satellite positioning, navigation and timing (PNT). DARPA Chip-Scale Atomic Clocks Aboard International Space Station Number 9 (Page 77) Unlike in banking, there is no common global capital standard for insurance companies. Address by Mr Lee Boon Ngiap, Assistant Managing Director, Monetary Authority of Singapore Number 10 (Page 85) Oil and Gas… it is quite a challenge to regulate the sector. Remarks by the US President on Oil and Gas Subsidies

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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NUMBER 1

The Cayman Islands Monetary Authority (CIMA) and the United States Securities and Exchange Commission (SEC) have entered into a memorandum of understanding (MOU)
The agreement concerns consultation, cooperation and information exchange related to the supervision and oversight of regulated entities that operate on a cross-border basis in the USA and the Cayman Islands. The MOU supplements the International Organisation of Securities Commissions (IOSCO) multilateral MOU on cooperation in securities regulation, to which both the SEC and CIMA are signatories and which focuses more on cooperation on enforcement matters between the parties. The Cayman Islands Premier and Minister responsible for Finance, the Hon. McKeeva Bush, OBE, JP, congratulated CIMA on the agreement. He commented: “Through this MOU, CIMA has demonstrated its commitment to continuing to work with the SEC to fulfill their respective regulatory mandates. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

Page |5 It shows, too, the commitment of the Cayman Islands to providing the highest quality domicile for financial services. The signing of this MOU adds to the growing list of international regulatory and supervisory bodies with which the Cayman Islands has entered agreements and is a key endorsement of our financial services regime. We are convinced that this is not only good for ensuring stability and integrity of the global financial system, but is good for business for this jurisdiction.” Mrs. Scotland explained that the process of negotiating the latest agreement was enhanced by the solid ties that the two authorities have established over time: “CIMA and the SEC have had a strong working relationship for many years. This has enabled us to collaborate on several levels. For example, we have been able to obtain information from, and provide information to, the SEC that has been valuable in both regulators’ routine supervisory activities as well as, on occasion, in criminal investigations that have resulted in convictions. We have conducted joint on-site inspections of Cayman-regulated funds and securities entities, and have worked together to provide training for Cayman and regional regulators. ” The CIMA-SEC MOU is the 23rd cooperation and information exchange agreement that CIMA has effected with overseas regulatory authorities since 1998. CIMA’s Chairman, Mr. George McCarthy, OBE, JP, said: “the Monetary Authority is committed to collaboration and cooperation with financial services authorities in all the jurisdictions with which Cayman-regulated entities do business. In addition to the agreements that CIMA already has in place, we actively _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

Page |6 seek to formalise cooperation with other regulators. This MOU with the SEC is particularly important as Cayman is a major domicile for hedge funds and securities in which US institutions and persons of high net worth invest. It will enable more effective supervision on both sides.” The MOU details the scope of consultation, cooperation and information exchange between CIMA and the SEC; the procedures for carrying out on-site inspections and for the execution of requests for assistance; the permissible uses of information provided; the confidentiality of information, and the process for onward sharing of information in certain circumstances.

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NUMBER 2 Mario Draghi: Remarks at the Annual Reception of the Association of German Banks
Speech by Mr Mario Draghi, President of the European Central Bank, at the Annual Reception of the Association of German Banks, Berlin, 26 March 2012 Ladies and Gentlemen, I would like to take this opportunity to provide you with my assessment of the current situation in the euro area and shed light on recent signs of improvements in the overall outlook. I would particularly like to draw your attention to the effectiveness of the policy measures implemented by the Eurosystem, the EU institutions and national authorities. And to remind you of the measures that we all must continue to pursue over the coming months and years with great diligence in order to continue on this path of stabilisation.

The current economic situation
As this audience knows very well, in November last year, the prospects for the euro area financial sector were very bleak. Banks were experiencing a period of heightened stress. The inter-bank market was closed except to the strongest institutions in the safest countries, and funding markets were impaired. Unable to raise funds beyond short maturities, many banks were reducing medium term lending to the real economy. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

Page |8 At the same time came the requirement to increase capital ratios to 9%. This increased the risks of substantial deleveraging, including the risk of banks cutting back on loans, notably those to small and medium-sized enterprises. We could see the intensity of the deleveraging pressures in bank lending surveys and other data. In the fourth quarter of 2011, there was a significant tightening of credit standards on loans to both companies and households. There was no doubt that the euro area was on the brink of a major credit crunch, with potentially adverse consequences for the economy and employment. At that time, many observers had little confidence in the capacity of the euro area to reverse the situation. Yet today, only four months on, the picture looks different. There are signs of stabilisation in both financial markets and overall economic activity – albeit still at low levels. Conditions in bank funding markets have improved. For example, euro area banks have already issued about 70 billion euro in senior unsecured debt so far this year, which is well above the amount they issued in the whole second half of 2011. Banks are meeting their new capital requirements. The capital plans submitted to the European Banking Authority (EBA) indicate an intention to exceed the benchmarks by more than 20%. EBA has also confirmed that there will be no stress test this year. Bank lending is also stabilising. Banks are starting to assess their financial situation more positively and in many cases their willingness to make loans is increasing. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

Page |9 How has the picture changed so clearly in only four months? There are two parts to the answer. First, the doomsday predictions were always exaggerated. Not because the situation last November was not very serious. But because the willingness of euro area authorities to take the measures necessary to restore stability was greater than many commentators realised. Second, euro area authorities have proved their commitment to safeguarding financial stability through a number of important policy measures. The Eurosystem, the EU institutions and national authorities have all played a role in constructing a comprehensive and coherent response to the economic, financial and fiscal challenges that we face. Let me now explain the key elements of this response in more detail.

The policy response of the Eurosystem
The primary explanation for the improvement in sentiment over the last few months has been the measures taken by the Eurosystem – that is, we at the European Central Bank (ECB) and our colleagues at the national central banks of the 17 countries that share the euro. As you know, since December last year the Eurosystem has launched two long-term refinancing operations – LTROs – with a maturity of three years. While the total liquidity requested by banks in these operations amounted to around 1 trillion euro, the net liquidity injection by the Eurosystem has been around half a trillion euro because the other half has been shifted over from other operations. Let me be clear about why we implemented the three-year LTROs. It was not to support sovereign debt markets. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 10 It was also not to bolster bank profits. The LTROs were specifically designed to prevent a credit crunch that could compromise the maintenance of price stability in the euro area. With funding markets closed, banks needed liquidity assurance over the medium term to avoid pre-emptive deleveraging and to continue lending. To understand why these operations were necessary requires a euro area wide perspective. It would be misleading to judge the urgency for action – or the necessary responses – based on the situation in any one country or groups of countries. The Eurosystem acts in the interests of the euro area as a whole with 330 million citizens. This is the perspective that always informs our decisions. Some observers have raised questions about these operations. The questions tend to fall into three categories and since they touch on fundamental issues, I would like to spend a moment responding to them. First, some wonder whether there is really any transmission from the LTROs to the real economy. The argument goes that banks are simply taking cheap liquidity and setting up carry trades or putting the liquidity back into our deposit facility. The facts show that this is an incomplete view. Over 800 banks participated in the February LTRO, compared with around 500 in December. This number included 460 banks from Germany, most of them – literally hundreds – being smaller banks. I cannot tell you names of the towns and villages in which these banks are located because often they are the only bank in town and could be easily _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 11 identified. But I can tell you this: that the money is now closer to small and medium-sized enterprises than it was before. We cannot say that this money will necessarily go to these smaller enterprises but it is certainly very close to them. We have this in mind because nearly three quarters of corporate employment in the euro area is in the small and medium-sized business sector. The banks I am talking about are ones whose main business is lending to the Mittelstand and thereby supporting the real economy. It is also not accurate to claim that banks are returning the liquidity straight back to the Eurosystem. We know that banks using the deposit facility are not identical to those borrowing from the Eurosystem. This implies that even though the bulk of the liquidity is returned eventually, it is being directed within the banking system as intended. The second category of question involves concerns that some have expressed that the Eurosystem is exposing itself to excessive risks. Critics point in particular to the differentiated collateral framework adopted by some national central banks to allow banks to participate in the three-year LTROs. Let me underscore that high haircuts are applied to the additional credit claims so as to ensure risk equivalence between this collateral and the regular framework. Moreover, the main elements of the risk management framework applied are common: the eligibility criteria and risk control measures were approved by the Governing Council, and the Council will monitor the effectiveness of the risk control framework on an ongoing basis. Hence, there is only limited national discretion. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 12 I should also emphasise that the Eurosystem has a long experience in the acceptance of credit claims in its collateral framework. Moreover, the Eurosystem is being very careful to manage any risks that may ensue from our current operations. We employ a conservative risk management framework. On the additional collateral presented so far, the average haircut is 53%. This means that on a nominal value of 100 euro we provide 47 euro of liquidity. This shows you how prudently such collateral is accepted. If over time the market value or quality of the collateral posted were to decline, counterparties would have to provide additional collateral or return part of the liquidity. This too serves to protect the financial soundness of the Eurosystem as a whole. The third kind of question comes from some observers who worry that the liquidity created by the LTRO will lead to inflation or asset price distortions. Here it is important to distinguish between different concepts of liquidity. We would expect an impact on inflation and asset prices only following a sustained and strong increase in money and credit – not following an increase in central bank liquidity per se. The tentative signs we are seeing of a stabilisation in money and credit growth do not signal increasing inflationary pressures over the medium term. For example, growth in monetary aggregates remains at low levels, with M3 increasing by 2.5% in January 2012, well below the average growth rate of M3 in monetary union so far, which was 5.9%. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 13 The same is true of the counterparts of M3 – loans to the euro area private sector increased by only 1.5% in January, compared with an average of 6.8% since the start of the euro. Market indicators of inflation expectations overall show no signs of inflation above our medium-term objective. Investors overall assume a break-even inflation rate in five years of around 1.7%. Looking further out at the inflation expectations between five years and ten years also shows that, adjusted for the usual risk premia, market expectations of long-term inflation are fully consistent with our definition of medium-term price stability. Moreover, the Eurosystem has a range of tools at its disposal to absorb excess liquidity if that is deemed necessary in the future. Available tools include increases in reserve requirements and the conduct of liquidity absorbing operations including not only short-term but also longer-term deposits. Hence, there are tools and the Governing Council can use them as needed. Moreover, our balance sheet has grown and shrunk in the past without creating inflation – for example, this was evident over the course of both 2009 and 2010. In other words, we are constantly alert to threats to medium-term price stability. Euro area citizens can be certain that our objective is delivering price stability over the medium term – and that we have all the necessary tools to achieve it. The consistent strong anchoring of inflation expectations confirms that our commitment is credible. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 14 Let me address one final issue, and this concerns the debate in this country about Target2 balances. It is important that this debate is framed correctly – in particular, by distinguishing between symptoms and causes. Target2 is a payment system that reflects the flow of funds within the euro area. Imbalances within Target2 are a symptom of real and financial imbalances between euro area countries. Restoring normality within Target2 requires not that we address the symptom – the payment system – but that we address the cause: the underlying imbalances. This is not the task of monetary policy. It is the task of the national authorities and EU institutions that are responsible for fiscal, economic and financial policies. Important progress has been made in recent months to strengthen the credibility of these policies – and this has been recognised by financial markets. This is the second explanation for the overall stabilisation we have witnessed since November – and it is something to which I will now turn briefly.

Policy responses at the national and EU level
The signature at the last European Council of the International Treaty, including the fiscal compact, is an important signal of commitment to reducing deficit and debt levels. Enshrining balanced budget rules in national legislation creates a new “first line of defence” against fiscal imbalances. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 15 Like the Schuldenbremse in this country, this legislation shifts the onus for enforcement away from Brussels and onto national institutions. Prevention is better than cure – and that is the spirit of the compact. Member States have also taken important steps to strengthen euro area and global firewalls. The entry into force of the European Stability Mechanism has been advanced and the paying-in of capital will be accelerated to reach full lending capacity sooner than originally planned. On top of this, euro area countries have committed to providing an additional 150 billion euro to the IMF. Seen together, these measures represent a coherent strategy to strengthen euro area economic governance. The focus is not, as some commentators claim, skewed towards fiscal consolidation. Stronger fiscal rules are one – albeit essential – element in a larger package that addresses real and financial imbalances and provides a safety net for countries in financial difficulties. But stronger governance cannot be effective without individual Member States also fulfilling their responsibilities. Here too we have witnessed a number of positive developments in recent months. The new governments in Spain and Italy have shown determination to address their twin challenges of fiscal and macroeconomic imbalances. The government of Spain remains committed to bringing its deficit below 3% by 2013 and taking the necessary measures to ensure a rapid and secure transition to this target from the high deficit in 2011. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 16 The latest review missions confirm that the Irish and Portuguese programmes are on track – with authorities in both countries strongly committed to meeting their targets and with a solid track record. It is important that observers recognise that these reforms at the national level will take time. They are addressing deep-rooted obstacles to competitiveness and growth, and the positive effects may not be visible immediately. But once realised, they will put employment and growth on a new and more sustainable track. The example of Germany shows the need for patience. The structural reforms passed many years ago did not immediately feed through into higher growth and employment. But now they have, and Germany is reaping the benefits and leading the way in Europe. With a new governance framework in place and strong commitments from national governments, there are solid grounds for trusting that reforms will be implemented across the euro area as a whole.

Conclusion
Let me conclude. The turnaround we have witnessed since November is the result of every institution of the euro area fulfilling its responsibilities. No single institution can carry the burden of addressing a set of challenges that are simultaneously economic, financial and fiscal. Everyone has played their part. But let me emphasise that the current stabilisation should not make us pause in our responses to these challenges. Indeed, this is a time for continued action. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 17 The present situation provides a window of opportunity for governments to accelerate efforts to consolidate budgets, to boost employment and to enhance competitiveness – and to do so with confidence. It also creates a benign environment for banks to strengthen their resilience further – including by retaining earnings and cutting dividends and bonuses. Decisive policy measures brought about the stabilisation since last November. Now, further decisive policy measures are required to strengthen fiscal positions and competitiveness. These measures will lay the foundations for future sustainable and balanced growth in the euro area. Thank you.

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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Charles I Plosser: Restoring central banks after the crisis
Speech by Mr Charles I Plosser, President and Chief Executive Officer of the Federal Reserve Bank of Philadelphia, at the conference of the Global Interdependence Center / Bank of France, Paris, 26 March 2012. *** The views expressed today are my own and not necessarily those of the Federal Reserve System or the FOMC.

Introduction
I am delighted to be here today in this beautiful city and to have the honor to serve on such a distinguished panel with friends and colleagues. David Kotok has been the guiding force behind the GIC conferences over the past several years. He and his team at the GIC never fail to gather an interesting and knowledgeable group of people to discuss important topics on truly global issues. So, I want to thank him and the GIC for their efforts and contributions. I also want to thank our hosts, Christian Noyer and the Banque de France. I am going to take a little different tack on the subject matter of this gathering. Rather than focus on what new orthodoxy we should take away from the financial crisis, I want to argue that we need to restore some of the old orthodoxy. David did suggest that he wanted to have a conversation on important issues, so I intend to be somewhat provocative in an effort to stimulate such conversation. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 19 As usual, I want to stress that my views are my own and not necessarily those of my colleagues in the Federal Reserve System. I will focus my remarks on two related topics that have emerged as a consequence of the crisis. The first is the relation between monetary policy and fiscal policy. The second topic involves the role of a central bank’s balance sheet as a policy tool. These are issues that I believe are of fundamental importance to the role of central banks in our economies.

The relationship between monetary and fiscal policies
Let me begin by sharing some thoughts on the appropriate relationship between monetary and fiscal policies. In the wake of the financial crisis and the ensuing recession, many countries around the world responded with a significant increase in government spending. Some of this increase came about through what economists call automatic stabilizers. But there has also been a dramatic expansion in budget deficits attributable to deliberate efforts to apply fiscal stimulus to improve economic outcomes. This expansion in government spending has been very significant in the U.S., but it has also occurred in other countries. So what does this have to do with monetary policy? Well, it turns out, a great deal. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 20 It is widely understood that governments can finance expenditures through taxation, debt – that is, future taxes – or printing money. In this sense, monetary policy and fiscal policy are intertwined through the government budget constraint. For good reasons, though, societies have converged toward arrangements that provide a fair degree of separation between the functions of central banks and those of their fiscal authorities. For example, in a world of fiat currency, central banks are generally assigned the responsibility for establishing and maintaining the value or purchasing power of the nation’s unit of account. Yet, that task can be undermined, or completely subverted, if fiscal authorities set their budgets in a manner that ultimately requires the central bank to finance government expenditures with significant amounts of seigniorage in lieu of current or future tax revenue. The ability of a central bank to maintain price stability can also be undermined when the central bank itself ventures into the realm of fiscal policy. History teaches us that unless governments are constrained institutionally or constitutionally, they often resort to the printing press to try to escape what appear to be intractable budget problems. And the budget problems faced by many governments today are, indeed, challenging. But history also teaches us that resorting to the printing press in lieu of making tough fiscal choices is a recipe for creating substantial inflation and, in some cases, hyperinflation. Awareness of these long-term consequences of excessive money creation is the reason that over the past 60 years, country after country has moved to establish and maintain independent central banks – that is, central _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 21 banks that have the ability to make monetary policy decisions free from short-run political interference. Without the protections afforded by independence, the temptation of governments to exploit the printing press to avoid fiscal discipline is often just too great. Thus, it is simply good governance and wise economic policy to maintain a healthy separation between those responsible for tax and spending policy and those responsible for money creation. It is equally important for central banks that have been granted independence to be constrained from using their own authority to engage in activities that more appropriately belong to the fiscal authorities or the private sector. In other words, with independence comes responsibility and accountability. Central banks that breach their boundaries risk their legitimacy, credibility, and ultimately, their independence. Given the benefits of central bank independence, that could prove costly to society in the long run. There are a number of approaches to placing limits on independent central banks so that the boundaries between monetary policy and fiscal policy remain clear. First, the central bank can be given a narrow mandate, such as price stability. In fact, this has been a prominent trend during the last 25 years. Many major central banks now have price stability as their sole or primary mandate. Second, the central bank can be restricted as to the type of assets it can hold on its balance sheet. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 22 This limits its ability to engage in credit policies or resource allocations that rightfully belong under the purview of the fiscal authorities or the private marketplace. And third, the central bank can conduct monetary policy in a systematic or rule-like manner, which limits the scope of discretionary actions that might cross the boundaries between monetary and fiscal policies. Milton Friedman’s famous k-percent money growth rule is one example, as are Taylor-type rules for the setting of the interest rate instrument. Unfortunately, over the past few years, the combination of a financial crisis and sustained fiscal imbalances has led to a breakdown in the institutional framework and the previously accepted barriers between monetary and fiscal policies. The pressure has come from both sides. Governments are pushing central banks to exceed their monetary boundaries, and central banks are stepping into areas not previously viewed as appropriate for an independent central bank. Let me offer a couple of examples to illustrate these pressures. First, despite the well-known benefits of price stability, there are calls in many countries to abandon this commitment and create higher inflation to devalue outstanding nominal government and private debt. That is, some suggest that we should attempt to use inflation to solve the debt overhang problem. Such policies are intended to redistribute losses on nominal debt from the borrowers to the lenders. Using inflation as a backdoor to such fiscal choices is bad policy, in my view. Pressure on central banks is also showing up through other channels. In some circles, it has become fashionable to invoke lender-of-last-resort _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 23 arguments as a rationale for central banks to lend to “insolvent” organizations, either failing businesses or, in some cases, failing governments. Such arguments go beyond the well-accepted principles established by Walter Bagehot, who wrote in his 1873 classic Lombard Street that central bankers could limit systemic risk in a banking crisis by “lending freely at a penalty rate against good collateral”. Central bankers have abandoned this basic Bagehot principle in the last few years but have not replaced it with a clear alternative. Indeed, actions were often confusing and unpredictable and lacked a coherent framework. I believe that central banks need to think hard about how and when they exercise this important role. We need to have a well-articulated and systematic approach to such actions. Otherwise, our actions will exacerbate moral hazard and encourage excessive risk-taking, thus sowing the seeds for the next crisis. Unfortunately, neither financial reform nor central banks have adequately addressed this dilemma. Breaching the boundaries is not confined to the fiscal authorities asking central banks to do their heavy lifting. The Fed and other central banks have undertaken other actions that have blurred the distinction between monetary policy and fiscal policy, such as adopting credit policies that favor some industries or asset classes relative to others. Such steps were taken with the sincere belief that they were absolutely necessary to address the challenges posed by the financial crisis. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 24 The clearest examples can be seen when the Federal Reserve established credit facilities to support markets for commercial paper and asset-backed securities. Most notable has been the effort by the Fed to support the housing market through its purchases of mortgage backed securities. These credit allocations have not only breached the traditional boundaries between fiscal and monetary policy, they have generated pointed public criticisms of the Fed. Once a central bank ventures into fiscal policy, it is likely to find itself under increasing pressure from the private sector, financial markets, or the government to use its balance sheet to substitute for other fiscal decisions. Such actions by a central bank can create their own form of moral hazard, as markets and governments come to see central banks as instruments of fiscal policy, thus undermining incentives for fiscal discipline. This pressure can threaten the central bank’s independence in conducting monetary policy and thereby undermine monetary policy’s effectiveness in achieving its mandate. In my view, this blurring of the boundaries between monetary and fiscal policies is fraught with risks. As I said, these boundaries arose for good reason, and we ignore their breach at our peril. I believe we must seek ways to restore the boundaries.

The central bank’s balance-sheet policy
Another related issue facing central banks arises from the degree to which central banks have expanded their balance sheets. There are two dimensions to this issue. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 25 One is the composition of the balance sheet. In the U.S., for example, the balance sheet of the Federal Reserve has changed from one made up almost entirely of short-term U.S. Treasury securities to one that is mostly long-term Treasuries, plus significant quantities of long-term mortgage-backed securities. This concentration of housing-related securities is problematic because it is a form of credit allocation and thus violates the monetary/fiscal policy boundaries I just mentioned. The second aspect is the overall size of the balance sheet. Many central banks expanded their balance sheets in an effort to ease monetary policy after their usual policy instrument – an interest rate – had reached the zero lower bound. Do central bankers anticipate that their balance sheets will shrink to more normal levels as they move away from the zero lower bound? Is it desirable to do so? Or should monetary policy now be seen as having another tool, even in normal times? Some have suggested that central banks adopt a regime in which the monetary policy rate is the interest rate on reserves rather than a market interest rate, such as the federal funds rate. This would then permit the central bank to manage its balance sheet separately from its monetary instrument, freeing it to respond to liquidity demands of the financial system without altering the stance of monetary policy. In principle, this would take pressure off central banks to shrink their balance sheets from the current high levels and simply rely on raising the interest rate on reserves to tighten monetary policy.

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 26 The alternative is to return to a more traditional operating regime in which the central bank sets a target for a market interest rate, such as the federal funds rate in the U.S., above the interest rate on reserves. Implementing this regime would require a smaller balance sheet. I am very skeptical of an operating regime that gives central banks a new tool without boundaries or constraints. Without an understanding, or even a theory, as to how the balance sheet should or can be manipulated, we open the door to giving vast new discretionary abilities to our central banks. This violates the principle of drawing clear boundaries between monetary policy and fiscal policy. When markets or governments come to believe that a central bank can freely expand its balance sheet without directly impacting the stance of monetary policy, I believe that various political and private interests will come forward with a long list of good causes, or rescues, for which such funds could or should be used. Economic theory and practice teach us that monetary policy works best when it is clear about its objectives and systematic in its approach to achieving those objectives. Granting vast amounts of discretion to our central banks in the expectation that they can cure our economic ills or substitute for our lack of fiscal discipline is a dangerous road to follow. In June, the Federal Reserve’s Open Market Committee outlined some principles that would guide its exit from this period of extraordinary monetary accommodation. In my view, those principles represented an important first step in the FOMC’s attempt to restore the boundaries between monetary and fiscal policies. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 27 In particular, the FOMC clearly stated its desire to return to an operating environment in which the federal funds rate is the primary instrument of monetary policy. To achieve that objective, the Fed will have to shrink its balance sheet to a more normal level. I interpret this as saying that our balance sheet should not be viewed as a new independent instrument of monetary policy in normal times. The exit principles also indicated the Committee’s desire to return the Fed’s balance sheet to an all-Treasuries portfolio. This re-establishes the idea that the Fed should not use its balance sheet to actively engage in credit allocations. In other speeches, I have outlined a framework that I have termed a “new accord” between the Federal Reserve and the Treasury. It would enable the central bank to act in emergencies when requested by the Treasury or the fiscal authorities, but it would be clear up front that any non-Treasury assets that accrued on the central bank’s balance sheet would be swapped for government securities within a specified period of time. This would ensure that fiscal policy decisions remain under the purview of the fiscal authorities, not the central bank.

Summary
To summarize, it is important for governments to maintain independent central banks so that they are better able to achieve their mandates. It is also sound policy to limit the discretionary ability of central banks to engage in policies that fundamentally belong to fiscal authorities or private markets. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 28 Establishing and maintaining clear boundaries between monetary and fiscal policies protects the independence of the central bank and its ability to carry out its core mandate – maintaining price stability. Clear boundaries and resisting the use of the balance sheet as a new policy tool would also improve fiscal discipline by making it more difficult for the fiscal authorities to resort to the printing press as a solution to unsustainable budget policies.

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 29

Christian Noyer: Re-examining central bank orthodoxy for un-orthodox times
Speech by Mr Christian Noyer, Governor of the Bank of France and Chairman of the Board of Directors of the Bank for International Settlements, at the conference of the Global Interdependence Center/Bank of France, Paris, 26 March 2012. The unconventional policies implemented during the crisis have transformed the face of central banking. But will these changes prove permanent and will “the unconventional become the new normal?” There is not yet definitive answer to this question. We may not, as easily as we would like, be able to revert exactly to the status quo ante. However, I strongly believe we must make sure that the gains from the pre-crisis period, in terms of monetary and price stability, are not compromised in the process. Prior to the crisis, a description of central banks would have centred on four characteristics: - They were focused with price stability being their primary or key objective, and no responsibility was sought or given for financial stability; - They were of limited size with very small balance sheets and interest rates as their only policy instrument;

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 30 - They were independent, a condition recognised as necessary to anchor inflation expectations, and embodied in very strong institutional frameworks; - And they were successful: the “Great moderation”, a period of exceptional low volatility in output and inflation, was widely seen as a product of efficient and wise monetary policies. There was a happy feeling that, at last, a perennial monetary regime had been found, well-tailored to the characteristics of a modern market economy. Financial markets were efficient and the zero lower bound and liquidity trap appeared to be no more than historical curiosities. With hindsight, of course, we can see now that this “ideal” economy may never have existed. The Great Moderation was as much a product of “good luck” (brought by disinflationary effects of globalisation) than good policy. Monetary stability is a necessary but not a sufficient condition of financial stability, because capital markets are not always and necessarily efficient. And downward financial spirals may quickly bring our economies to the point where interest rates can no longer be used as effective tools. Therefore, as the crisis unfolded, central banks responded by taking unprecedented measures and, in the process, underwent three major changes

A diversification of their interventions. In order to both:
- Unclog financial markets (both private and public). This involved exceptional liquidity provision to banks as well as temporary purchases of assets, both private and public. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 31 - Circumvent the zero lower bound and bring down real long-term interest rates through purchases of government bonds, and/ or interest rate guidance.

As a consequence, central banks’ balance sheets expanded by a factor of three, dramatically increasing their role in financial intermediation and

sometimes raising concerns, at least in some quarters, about the possible inflationary impact Together, this diversification and the increase in size have created more complex interactions with fiscal policies. Specifically, asset purchases are sometimes seen as “quasi fiscal policies” both on the asset side (due to the potential risks attached) and the liability side (when they contribute significantly to meeting the funding needs of the sovereigns). At the time they were decided, those exceptional interventions were absolutely necessary. Although it had been forgotten, central banks were initially created to protect the economy from excessive financial disturbances. This was, historically, their “raison d’être”. As ultimate and unique providers of liquidity, they cannot escape this responsibility and let the financial system and the economy collapse. At the same time, by doing so, central banks have exposed themselves to a number of risks

First, there are risks linked to balance sheet expansion. They cannot be

ignored, although all central banks have been extremely careful in valuing the assets purchased or taken as collateral.

Second, they run the risk of blurring the lines between fiscal and monetary responsibilities. A dynamic use of their balance sheets by
_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 32 central banks has effects on the allocation and distribution of resources in the economy. They may favour or penalise some types of collateral or certain borrowers. If central banks take on additional responsibilities in the area of financial stability, they will have to do so in close cooperation with fiscal authorities, thus exposing themselves to possible interferences with monetary policy.

The major risk, however, is the risk of confusion. A multiplicity of interventions could be interpreted as a relative dilution of objectives.
There is a tendency by market participants and some policymakers to consider central banks to be “universal problem solvers” whose balance sheets can be used, without cost, for all purposes. There is also a doubt, at least an ambiguity, in the minds of some analysts, about the true purpose of government bond purchases. Central banks’ activism may create doubts as to their ability to stick to their core mandate – price stability – in the face of increasing pressures and constraints. Overall, the euro area is well protected against all of these risks thanks to the robustness of its institutional framework Price stability is unambiguously the priority objective of monetary policy Monetary financing of governments is strictly prohibited The Eurosystem (the ECB and National Central Banks) is extremely well capitalised, which protects its independence. This has allowed the Eurosystem to implement nonstandard measures on a large scale without endangering its credibility. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 33 Of course, we do not control fiscal policy. We will never accept a situation where fiscalimbalances could constrain monetary policy. It is very important, therefore, that credible fiscal consolidation takes place across the euro area. This will make it easier for the Eurosystem to be active in protecting financial stability. On the contrary, doubts over governments’ resolve to ensure the sustainability of public finances would make us powerless to fight instability and expose the euro area to great dangers. Now for the more normative aspects. We may have to live with nonstandard measures for a long time. Indeed, some central banks have adopted interest rate guidance announcements covering the next two years. It is likely that monetary policy will, for some time, make use of a diversity of instruments. Macro-prudential measures will interact with monetary policies in a complex way. In that context, it is therefore all the more important to keep clarity of purpose and stick to two crucial features inherited from the pre-crisis consensus: the focus on price stability and, its corollary, central bank independence. There should be no ambiguity about what central banks are trying to achieve. The more non-conventional their actions, the less obscurity there should be as to their ultimate purpose.

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 34 Non-conventional measures, like any others, can only achieve their objectives if inflation expectations are solidly and clearly anchored. From that point of view, calls by some economists and market participants for a temporary relaxation of price stability objectives are, in my view, totally misguided. I find it significant, on the contrary, that two major central banks have recently decided to quantify their price stability objectives and enhance their communication accordingly.

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 35 NUMBER 3 March 29

Interview with Gabriel Bernardino, Chairman of EIOPA
conducted by Anke Dembowski, Institutional Money (Germany)

1. Insurance companies vs. Occupational Retirement Provision (IORPs)
EIOPA has submitted its advice for the Occupational Retirement Provision (IORP)'directive on 15th of February 2012. What is EIOPA's standpoint in this advice?
The intention is not to have a copy - paste exercise between Solvency II and the pensions directive. The intention is to find out the elements that in terms of risk are similar between those two. If risks are similar, you should treat them in a consistent way. And if risks are different, you should treat them in a different way. That’s what we advocate in this advice.

Which are the main differences between pensions and the insurance system?
One of the differences is the type of involvement the sponsor company, i.e. the employer has in the pension fund. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 36 If there is a need for more capital within an insurance company, the shareholders are often subject to a limited liability regime. This is different in the pension fund area. Here, you don't have a transfer of the risk to the pension fund. The fund is only a vehicle to finance the responsibilities of the employer. Consequently, if there is a need for capital, the employer may be required by social and labour law to put the money in.

You want to introduce a holistic balance sheet. How does that look like?
At the regulation level, we need to take these differences into account. That's why we are trying to develop the concept of a holistic balance sheet, where we integrate not only the market value of the assets, but also the economic value of the liabilities. In addition, we are integrating other elements that take account of the specificities of the pension area. And there are different elements in each country. For example, the Dutch system, where you have the possibility to cut back the pension benefits retroactively. Or take the systems where you can reduce the indexations of the pensions for the future, et cetera. These specifications have an effect on the value of the liabilities, and you need to take it into account for the holistic balance sheet.

And which similarities do you see between pensions and insurance companies?
For example, all the elements about governance, risk management and transparency. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 37 We firmly believe that the sound principles of Solvency II can also be applied in a context of pension funds - provided of course, that you take into account the necessary proportionality. We are aware that there are many pension schemes that are quite small and that we cannot fully apply in a mechanistic way all the good principles of governance, risk management and control to them.

What is the timeframe for the Solvency II and the pension directive?
Solvency II has already been discussed for many years and we are now in the last phases of implementing measures. We intend to have the Solvency II framework implemented in 2014. On the IORP side, the process is still at an early stage. As you have mentioned in the beginning, the European Commission has asked us a long list of questions in a call for advice and we have answered them, on 15th of February. We believe that several tests need to be made, especially on the calculation of the technical provisions and of the solvency requirements. So we want to run the first quantitative impact study (QIS) on the pension side soon.

Will those QIS'studies be similar to the ones that you have done on the insurance side?
Again, there are some elements that are common, but some different elements will be coming from the holistic balance sheet approach. And also the process in itself is going to be different. In the insurance QIS we tried to capture most of the insurance market in Europe. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 38 But it is not the case for pensions, because the pensions market is so diverse across the 27 EU member countries. Therefore, we are going to conduct the first QIS study only in those seven countries where defined benefit plans are more relevant: Germany, UK, Ireland, the Netherlands, Portugal, Sweden, and Belgium. We are working on the common technical specifications to be applied in the test and will discuss the timeline with the European Commission. The Commission intends to have a first schedule for proposal on the revised IORP Directive by the end of this year.

And what qualitative measures are necessary for pension funds?
Also pension funds need to have a liquidity assessment and a management of their liquidity needs. This is part of the qualitative pillar II requirements. But making an analysis of ones liquidity needs is part of common good management rules anyway. Of course, a pension fund needs to know the pensions it has to pay in the years to come and what its revenues from the assets will be. Only then the fund can try to match those two and try to avoid surprises.

2. Investment issues for insurance companies
Insurance companies have been refinancing banks in the past, and we cannot see banks isolated from insurance companies. Basel III regulation is now forcing banks to hold higher equity ratios. Will insurance companies under Solvency II be able to refinance banks as they used to in the past?
Well, it is not the purpose of insurance companies to finance banks. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 39 The purpose of insurance companies is to have good products for their customers and to provide long term security for their customers. Solvency II will not force insurance companies to only buy one type of assets. But it is clear: The more stability you have in the banking sector, the better it will be from the risk perspective to invest into banks. It is normal that when banks are in a stress situation, or when there are doubts about their capital capacity, investors - not only insurance companies - refrain from investing long term into banks. With the elements that have been introduced about recapitalizing the banking sector, I believe that in the future, insurers will come back to finance banks.

So EIOPA's intention is not to disconnect the insurance and the banking sector in order to reduce cyclical ties?
No, with Solvency II or any kind of regulatory regime we are not trying to intervene in that sense. But what we want to do is to introduce a risk based system. We say that the more risk an insurance company has, the better capitalized it must be. We do not say 'don't invest into risky assets' or 'only invest into sovereign bonds' - that is not up to the supervisors. We only say that the capital has to commensurate with the risk. An insurance company can have a bigger risk appetite, but then on the other side, it needs to provide more capital. That is a fundamental element in the whole financial system. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 40

Will Solvency II have an effect on the products that insurance companies will offer?
I believe that with Solvency II consumers will continue to have choice between different products, with different types of guarantees and liquidity characteristics. If an insurance company creates liabilities which attract more risk - for example if it wants to offer products with a guaranteed interest rate for 20, 30 or 40 years, it can do that, because consumers value those products. But the risk involved needs to be priced correctly. We must not bring risk into the system without pricing it well. I think that this is the lesson we clearly learned from the financial crisis.

What exactly was the lesson the insurance sector learned from the financial crisis?
In the banking sector we have seen that there was poor underwriting on the subprime business, where risks were brought into the system without being priced correctly. We have also seen that if you bring risk into the system, it will never disappear, no matter how much packaging and re-selling you do with it. The risk remains there and you need to manage it. If it is not well priced, someone will pay in the end, either the companies, the consumers or the taxpayer.

Does the regulation intend to reduce the risk to a minimum?
No! When the financial system is risk averse, the economy will not work.

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 41 Look what the insurers are doing for us as individuals: We transfer our risks to them. Insurers by definition cannot be risk averse, because dealing with risk and managing is their core business. As regulators, our duty for the society is to have a good balance between security and growth. If you want to have a system with 100 Percent security, it will be unaffordable. So I am not advocating that we have capital requirements that are bulletproof. In Solvency II, we are building a system based on a with a 99.5 percent confidence level. But in an extreme situation, an insurance company can become insolvent. What we want to assure is that insurers will have excellent risk management systems that will help them to manage prudently their risks.

Looking at the low interest environment: Do you think that life insurance companies will need to change their business models, for example to avoid the long guarantees that stretch over the lifetime of a man?
Yes, we will probably see some changes in the products. But it is not because we are applying Solvency II, that long lasting guarantees are problematic - the products exist already. What Solvency II brings, is more market consistent pricing of risk, so that we can see clearer where the difficulties could lie when going forward. Some of the risks of long lasting guarantees need to be better assessed, and probably some of these products will cost a bit more in the future. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 42

What happens if an insurance company falls below the solvency capital requirement?
Then the supervisor and the insurance company will need to maintain a close dialogue, and together they analyze the reasons behind it. The company will have to present a plan how it intends to recover its capital or reduce its risk. So this approach is anti-cyclical. The company does not immediately need to reinforce capital, as this would have a procyclical effect on the market. However, if things continue to go wrong and the capital falls below the minimum capital requirement, the supervisor has the duty to close the business and in drastic situations even to close the company, because then the policy holders' rights are at stake. The system is designed in a way that it is not a safe heaven, it’s not a zero failure system, but it has different levels of protection.

How does transparency help investors?
From the investor's perspective, Solvency II is a system that gives far better information to decide on an investment. That is the biggest added value a regulatory regime can have. The worst thing would be to give an incentive to hide the risk. In the current system, the solvency figures in the insurance sector are completely stable, as they are not based on the market value of the assets. But we all know that markets are volatile, so investors feel that something is wrong. Under Solvency II, the solvency capital requirements will be more volatile. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 43 You can have a situation where in one quarter you have 160 percent of your capital requirements, and in the next quarter only 120 percent.

Is more transparency always better?
Under the Solvency II regime, insurance companies will be disclosing more information, and the information given will be much more linked to the reality of the risks and the markets. At first sight, it will seem that figures are more volatile, but this is due to the higher transparency we will have, not because the insurance company has intrinsically a more volatile business. We as supervisors know this, and we hope that analysts and investors will understand this as well and will not penalize insurance companies by higher cost of capital.

Under the current Solvency II ' regime, government bonds from OECD countries do not have any capital requirements at all. This seems a bit odd, considering the problems that some European countries are currently facing. What is the reason why capital requirements for government bonds are not pegged to their rating, like it is the case for corporate bonds? And are there plans that this policy will be changed in the future or is that a very political issue?
Before the euro area debt crisis government bonds were widely considered as risk free instruments that is why there was no need to peg capital requirements for government bonds to their rating. Naturally in this area as in others the perception of risk is constantly evolving and so I believe that in the future we need to explore ways to deal more properly with the risks of sovereign exposures and find a suitable way to integrate them in the overall risk-based framework.

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 44

Should the insurance supervision be directive or pre'emptive?
We want to have a supervisory system where we capture things in advance. We do not want to be like firemen that arrive when there is already a fire. We want to see things in advance and to avoid the fires. This is preventive supervision.

What gives you sleepless nights at the moment?
I think that the overall market situation certainly worries all of us because it definitely has an impact on the whole financial system. Insurers basically need two things: Stability of the markets and a well functioning economy. This also includes a certain level of interest rates, so that insurance companies can fulfil their role of providing long term guarantees. Having the low interest rates we are seeing now, is of course a difficult situation for insurance companies. But … I am still sleeping well.

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 45 NUMBER 4

FSA review into anti-bribery and corruption systems and controls in investment banks and proposed new guidance for all firms
29 Mar 2012 The Financial Services Authority (FSA) published the findings of its thematic review into anti-bribery and corruption (ABC) systems and controls in investment banks. In response to those findings, the FSA will consult on proposed amendments to the FSA’s regulatory guidance, ‘Financial crime: a guide for firms’. This proposed new guidance applies to all firms within scope of our financial crime rules, not just investment banks. From August 2011, the FSA visited 15 firms, including eight major global investment banks and a number of smaller operations, to examine how firms mitigate bribery and corruption risk. Bribery and corruption risk is the risk of the firm, or anyone acting on the firm’s behalf, engaging in bribery and corruption. The FSA found that, despite a long-standing regulatory requirement to mitigate financial crime risk, the majority of firms in our sample had more work to do to implement effective anti-bribery and corruption systems and controls. In particular, we found the following common weaknesses: - Most firms had not properly taken account of our rules covering bribery and corruption, either before the implementation of the Bribery Act 2010 or after; _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 46 - Nearly half the firms in our sample did not have an adequate ABC risk assessment; - Management information on ABC was poor, making it difficult for us to see how firms’ senior management could provide effective oversight; - Only two firms had either started or carried out specific ABC internal audits; - There were significant issues in firms’ dealings with third parties used to win or retain business; - Though many firms had recently tightened up their gifts, hospitality and expenses policies, few had processes to ensure gifts and expenses in relation to particular clients/projects were reasonable on a cumulative basis. Although firms in our sample had been slow and reactive in managing bribery and corruption risk, our visits and the introduction of the Bribery Act had acted as a trigger for firms to focus on ABC issues. The FSA is considering whether further regulatory action is required in relation to certain firms in its review. Tracey McDermott, acting director of enforcement and financial crime, said: “It is imperative that firms have adequate arrangements to control the risks of financial crime. We have seen examples of good practice and some examples of poor practice. Overall, despite the high profile of the issue, the investment banking sector has been too slow and too reactive in managing bribery and corruption risks. “Firms across all sectors must have appropriate controls to manage their financial crime risks, whether related to bribery and corruption or otherwise. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 47 The FSA and, from next year, the Financial Conduct Authority will continue to focus on financial crime risks in this sector and beyond to ensure firms are meeting their legal and regulatory obligations.”

Notes for editors
The FSA requires firms to establish and maintain effective systems and controls to mitigate financial crime risk. Financial crime risk includes the risk of bribery and corruption. In addition to these regulatory requirements, bribery, whether committed in the UK or abroad, is a criminal offence under the Bribery Act 2010, which has consolidated and replaced previous anti-bribery and corruption legislation in the UK. The FSA does not enforce, or give guidance on, the Bribery Act. FSA Principles require FSMA authorised firms to conduct their business with integrity and with due skill, care and diligence; and to take reasonable care to organise and control their affairs responsibly and effectively with adequate risk management systems. The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: 1. Maintaining market confidence; 2. Securing the appropriate degree of protection for consumers; 3. Fighting financial crime; and 4. Contributing to the protection and enhancement of the stability of the UK financial system.

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 48

SEC Charges Medical Device Company Biomet with Foreign Bribery
Washington, D.C., March 26, 2012 — The Securities and Exchange Commission today charged Warsaw, Ind.-based medical device company Biomet Inc. with violating the Foreign Corrupt Practices Act (FCPA) when its subsidiaries and agents bribed public doctors in Argentina, Brazil, and China for nearly a decade to win business. Biomet, which primarily sells products used by orthopedic surgeons, agreed to pay more than $22 million to settle the SEC’s charges as well as parallel criminal charges announced by the U.S. Department of Justice today. The charges arise from the SEC and DOJ’s ongoing proactive global investigation into medical device companies bribing publicly-employed physicians. The SEC alleges that Biomet and its four subsidiaries paid bribes from 2000 to August 2008, and employees and managers at all levels of the parent company and the subsidiaries were involved along with the distributors who sold Biomet’s products. Biomet’s compliance and internal audit functions failed to stop the payments to doctors even after learning about the illegal practices. “Biomet’s misconduct came to light because of the government’s proactive investigation of bribery within the medical device industry,” said Kara Novaco Brockmeyer, Chief of the Enforcement Division’s Foreign Corrupt Practices Act Unit. “A company’s compliance and internal audit should be the first line of defense against corruption, not part of the problem.” According to the SEC’s complaint filed in federal court in Washington D.C., employees of Biomet Argentina SA paid kickbacks as high as 15 to 20 percent of each sale to publicly-employed doctors in Argentina. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 49 Phony invoices were used to justify the payments, and the bribes were falsely recorded as “consulting fees” or “commissions” in Biomet’s books and records. Executives and internal auditors at Biomet’s Indiana headquarters were aware of the payments as early as 2000, but failed to stop it. The SEC alleges that Biomet’s U.S. subsidiary Biomet International used a distributor to bribe publicly-employed doctors in Brazil by paying them as much as 10 to 20 percent of the value of their medical device purchases. Payments were openly discussed in communications between the distributor, Biomet International employees, and Biomet’s executives and internal auditors in the U.S. For example, a February 2002 internal Biomet memorandum about a limited audit of the distributor’s books stated: Brazilian Distributor makes payments to surgeons that may be considered as a kickback. These payments are made in cash that allows the surgeon to receive income tax free. …The accounting entry is to increase a prepaid expense account. In the consolidated financials sent to Biomet, these payments were reclassified to expense in the income statement. According to the SEC’s complaint, two additional subsidiaries – Biomet China and Scandimed AB – sold medical devices through a distributor in China who provided publicly-employed doctors with money and travel in exchange for their purchases of Biomet products. Beginning as early as 2001, the distributor exchanged e-mails with Biomet employees that explicitly described the bribes he was arranging on the company’s behalf. For example, one e-mail stated: [Doctor] is the department head of [public hospital]. [Doctor] uses about 10 hips and knees a month and it’s on an uptrend, as he told us over dinner a week ago. …Many key surgeons in Shanghai are buddies of his. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 50 A kind word on Biomet from him goes a long way for us. Dinner has been set for the evening of the 24th. It will be nice. But dinner aside, I’ve got to send him to Switzerland to visit his daughter. The SEC alleges that some e-mails described the way that vendors would deliver cash to surgeons upon completion of surgery, and others discussed the amount of payments. The distributor explained in one e-mail that 25 percent in cash would be delivered to a surgeon upon completion of surgery. Biomet sponsored travel for 20 Chinese surgeons in 2007 to Spain, where a substantial part of the trip was devoted to sightseeing and other entertainment. Biomet consented to the entry of a court order requiring payment of $4,432,998 in disgorgement and $1,142,733 in prejudgment interest. Biomet also is ordered to retain an independent compliance consultant for 18 months to review its FCPA compliance program, and is permanently enjoined from future violations of Sections 30A, 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of 1934. Biomet agreed to pay a $17.28 million fine to settle the criminal charges. The SEC’s investigation was conducted by Brent S. Mitchell with Tracy L. Price of the Enforcement Division’s FCPA Unit and Reid A. Muoio. The SEC acknowledges the assistance of the U.S. Department of Justice’s Fraud Section and the Federal Bureau of Investigation. The investigation into bribery in the medical device industry is continuing.

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 51 NUMBER 5

Financial risk management

Opening remarks by Mr Ewart S Williams, Governor of the Central Bank of Trinidad and Tobago, at the Caribbean Centre for Money and Finance Conference, Port-of-Spain, 26 March 2012. Good Morning Ladies and Gentlemen Let me add my own words of welcome to all our participants of this very timely seminar on Financial Risk Management. As you know, the seminar forms part of a wider project involvingthe central banks in the Caribbean/CARICOM region. The project is being funded mainly by the Inter-American Development Bank (IDB) that has partnered with the University of the West Indies (UWI) and Caribbean Centre for Money and Finance (CCMF) to make this initiative possible. I would like to say a special word of welcome to former President of the Caribbean Development Bank and now acting Executive Director of the CCMF, Dr. Compton Bourne and Mrs. Michelle Cross-Fenty, Country Representative of the IADB, which is a major sponsor of this Project. Welcome also to all our distinguished participants from our regional Central Banks and regulatory bodies and from the international and regional financial institutions. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 52 I also thank the media for their presence. It is no secret, ladies and gentlemen, that our financial systems have been severely tested in the last few years by the outbreak of the global financial crisis whose powerful shock waves have not only rattled financial markets the world over, but also triggered a deep recession with which many countries are still grappling. For the most part, regional financial systems displayed remarkable resilience to the global financial crisis, even though our economies were buffeted by the global recession that ensued. Regional financial systems, however, faced their own challenges arising from the collapse of the Stanford Bank and more notably, from the demise of the largest regional conglomerate, CL Financial. The stresses faced by CL’s financial subsidiaries (Clico Insurance, Clico Investment Bank (CIB), British American and BAICO) tested the foundations of the regional financial system, which even so, proved to be resilient. Two aspects of what has become to be known as the “Clico crisis” are worth mentioning. The first is its regional reach: it entrapped in its net, not only Trinidad and Tobago, but also Barbados, Guyana and Suriname (that had Clico subsidiaries) as well as the OECS and the Bahamas, which housed BAICO insurance companies, all CLF subsidiaries. The second aspect that stands out is its tremendous cost. The bill is still accumulating but for the region as a whole, the cost could be somewhere in the vicinity of 10–15 per cent of regional GDP. For all its negatives, the Clico crisis served as an important wake-up call to the region. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 53 Coming on the heels of the global financial turmoil, it was a clear reminder of the need to strengthen our financial and regulatory systems, so that they could withstand exogenous shocks and it underscored the idea that a co-ordinated regional approach was needed. It was against this background that the CARICOM Heads’ of Government, at their July 2009 meeting requested regional central banks and other stakeholders to put in place a framework for regional financial stability to increase our resilience both to exogenous shocks and to intra-regional stresses. It is worth noting, ladies and gentlemen, that the objective characteristics of our region make a strong case for the regional approach to financial stability. We are small economies, with extensive economic links, with high vulnerability indices, compared with other regional groups (like, for example, the EU). Moreover our islands are dominated by a short list of over-lapping financial institutions. On the downside, however, we currently have no regional regulatory institutions. Specifically, we have nothing like the European Systemic Risk Board which has some regulatory authority. The closest we come to a regional regulatory authority is the ECCB, which covers only the OECS. What’s more, given the current state of the regional movement, I am not sure of the chances for a pan-caribbean regulatory authority. Putting aside this issue for the time being, I would like to address the question, “What should be the main elements of a new regional financial stability infra-structure for the Caribbean region?” _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 54 And, I would like to propose the following: - First – the region needs strengthened financial sector legislation, in the first round covering the banking system, the insurance and the credit union sectors; - Second – we need to substantially upgrade financial sector supervision; - Third – all countries should have deposit insurance; - Fourth – all countries should have national crisis management plans; and - Fifth – building on these national plans, we need to formulate a regional crisis management plan. Permit me to say a few words about each of these elements. In many countries in the region, including my own, financial sector legislation is grossly deficient when compared to what obtains in advanced or emerging market countries. We, in Trinidad and Tobago, recently introduced a modern Financial Institutions Act to cover the banking system and new insurance legislation is currently in Parliament. Some countries in the region have been upgrading their banking legislation but the situation is not as promising with regard to insurance legislation, which remains woefully outdated in the entire region. This must be seen against the background that both the Jamaican financial crisis of the late 1990s and the Clico/BAICO regional crisis originated in the insurance sector. In principle, strengthened, harmonized legislation would be the ideal to forestall regulatory arbitrage. However, the obstacles faced by the CARICOM Model Financial Institutions Bill clearly demonstrated the _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 55 potential challenges likely to face any kind of harmonized financial legislation. Countries in the region also need to upgrade financial sector supervision, including the introduction of consolidated supervision. I am told that a first attempt is currently underway to conduct a supervisory exercise on a systemically important institution, with cross-border operations, involving supervisory teams from different jurisdictions. This is an important initiative and I hope that over time these kinds of exercises could become routine examples of regional regulatory cooperation. More and more countries are adding stress-testing and the use of financial stability reports to their supervisory tool kit. Properly used, these could provide early warning signals and improve the assessment of threats to the financial system. I know that the preparation of financial stability reports is an important component of the IDB-financed project, and I would like to return to this topic later. Deposit insurance schemes could contribute significantly to the maintenance of regional financial stability, as they protect lower-income depositors and prevent bank-runs. A harmonized regional deposit insurance scheme would be ideal but the obstacles would be formidable. National schemes should still be regarded as an important part of the regional stability infrastructure. Because financial instability can sometimes arise without adequate warning, all countries should have a national crisis management plan, to _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 56 be able to move quickly and to contain the potential cost of a national financial crisis. Such a plan invariably requires close coordination between the various national regulatory bodies, the Government and other stakeholders, and should constitute a kind of road map to the process of crisis-resolution. The element of certainty that such plans bring, bolsters consumer confidence and facilitates quick crisis resolution. A regional crisis management plan is another indispensable part of a regional financial stability, but it is the element that is likely to present the greatest challenges. The critical pre-requisites to such regional plan are: (i) Agreement on what constitutes a systemic threat to the regional financial system; (ii) The existence of information sharing protocols among regional jurisdictions; (iii) Agreement on the strategies to be considered in the resolution process and on the guiding principles for cost-sharing in the event that public intervention is deemed necessary. A crisis management plan for our region is likely to face several challenges, among which are differences in legislation or supervisory approaches across the region; competing national priorities or differences in resource availability among the regional governments. The implementation of a regional crisis management plan requires a high level regional council with the authority to make binding decisions as to the use of resources. This could be another challenge in our current circumstances. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 57 I would like to make a few comments on one of the critical components of the IDB-financed project – the preparation of comparable regional Financial Stability Reports (FSR). We need to remember that these reports are designed to serve as early warning signals by pointing out to policy makers the key risks and vulnerabilities faced by policy makers. Most financial stability reports do this by reporting the latest level of key financial soundness ratios. There is a new body of research that suggests the assessment value of these reports could be enhanced by including at least a qualitative discussion of the near term outlook for these ratios based on various policy assumptions. I fully recognize, of course, that the preparation of these FSRs is resource intensive and particularly challenging for smaller central banks. Thus, conferences and seminars, like this one, where we bring our ideas and experiences together, are an invaluable learning opportunity. We need to leverage off each other if we are to do this exercise successfully. As all of you know all too well, the range of dis-aggregated commercial bank information that central banks in developed countries take for granted is sometimes difficult to collect in our region where the culture of disclosure is not deeply rooted. This makes our effort to develop FSRs all the more challenging but at the same time all the more necessary. Let me end by wishing you all two days of very stimulating discussions.

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 58 NUMBER 6

Consumer response now sharing complaints with FTC Consumer Sentinel - By Sartaj Alag
The Dodd-Frank Act requires the CFPB to share consumer complaint information with the Federal Trade Commission (“FTC”) and other state and federal agencies. Last August, the Bureau took the first step towards fulfilling this mandate by signing an agreement with the FTC that allows the CFPB to access consumer complaints in the FTC’s Consumer Sentinel system. Consumer Sentinel is an online database of consumer complaints maintained by the FTC that helps law enforcement track and respond to consumer complaints. Recently, the Bureau started sharing its complaints with Consumer Sentinel. The database is accessible only to law enforcement, and adding the CFPB’s complaint data to the database will increase its effectiveness as a law enforcement tool. Many entities, both government and non-government, already share complaints with Consumer Sentinel. Among the government entities are several state Attorneys General (including Idaho, Michigan, Mississippi, North Carolina, Ohio, Oregon, Tennessee, and Washington State), the U.S. Postal Inspection Service, and the FBI’s Internet Crime Complaint Center. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 59 Our goal in sharing complaints with the FTC is to remove artificial barriers that stand in the way of efficient, transparent, and effective governance. By removing these barriers, we are encouraging agencies to work together to better protect American consumers. We are excited about our collaboration with the FTC, and we look forward to maintaining a close and fruitful partnership.

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 60 NUMBER 7

30/03/2012

Regulation (EU) No 236/2012 of the European Parliament and of the Council of 14 March on short selling and certain aspects of credit default swaps (the Regulation)
requires ESMA to develop draft regulatory (RTS) and implementing technical standards (ITS) in relation to several provisions contained in Articles 9, 11, 12 and 16 of the Regulation.

The draft RTS and ITS published today will be submitted to the European Commission by 31 March 2012. The Commission has three months to decide whether to endorse ESMAs draft technical standards. A further regulatory technical standard, on the method of calculation of the fall in value of a financial instrument required under Article 24(8) of the Regulation will be submitted together with the technical advice in the course of April 2012.

Final report
Draft technical standards on the Regulation (EU) No 236/2012 of the European Parliament and of the Council on short selling and certain aspects of credit default swaps. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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I. Executive Summary Reasons for publication
Regulation (EU) No 236/2012 of the European Parliament and of the Council of 14 March on short selling and certain aspects of credit default swaps (the Regulation) requires ESMA to develop draft regulatory (RTS) and implementing technical standards (ITS) in relation to several provisions contained in Articles 9, 11, 12 and 16 of the Regulation. ESMA has consulted market participants on the proposed draft RTS and ITS through a public consultation launched on 24 January 2012 (Consultation Paper; ESMA/2012/30). The Securities and Markets Stakeholder Group (SMSG) established under the Regulation (EU) No 1095/2010 establishing the European Supervisory Authority (ESMA Regulation) was also requested to provide an opinion in accordance with Articles 10 and 15 of that regulation.

Contents
ESMA has considered the feedback it received to the consultation in drafting these RTS and ITS in accordance with Articles 10 and 15 of the ESMA Regulation. This document sets out a summary of the responses received by ESMA and describes any material changes to the proposed technical standards. It also includes in the Annex II a cost-benefit analysis on which ESMA was not able to consult as explained in the consultation paper (ESMA/2012/30). Finally, it contains the final draft RTS and ITS to be submitted to the European Commission.

Next steps

The draft RTS and ITS will be submitted to the European Commission by 31 March 2012. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 62 The Commission has three months to decide whether to endorse ESMAs draft technical standards. A further regulatory technical standard, on the method of calculation of the fall in value of a financial instrument required under Article 24(8) of the Regulation will be submitted together with the technical advice in the course of April 2012.

II. Background
1. According to the Regulation, ESMA has to submit its technical standards to the Commission by 31 March 2012. Further to this, ESMA received a letter from the Commission on 24 November 2011 requesting to also provide an advice on all the delegated acts contained in the Regulation by the same deadline – 31 March 2012. 2. Taking into account the amount of work, complexity of the issues and the very tight deadlines, the process of preparing technical standards and drafting the advice on all delegated acts has been significantly compressed compared to normal ESMA practices. The most important differences compared to normal practices were the absence of a previous call for evidence (used normally to gather early views to help shape the legal proposals), the length of the consultation period (reduced to 3 weeks) and the absence of a cost-benefit analysis incorporated in the consultation paper on the draft technical standards. Nevertheless, it was possible to organise a roundtable with European and international associations representing the various stakeholders at the beginning of December in order to collect views on the approach to be taken in the main technical standards and delegated acts foreseen in the Regulation. Although the formal consultation period had closed, there was also a subsequent opportunity for interested parties to make comments on _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 63 ESMA’s proposals for draft technical standards at an open hearing held on 29 February. 3. The Regulation (EU) No 1095/2010 establishing the European Supervisory Authority (ESMA Regulation) empowered ESMA to develop draft regulatory and implementing technical standards where the European Parliament and the Council delegate power to the Commission to adopt regulatory standards by means of delegated acts under Article 290 TFEU or implementing acts under Article 291 TFEU. 4. Articles 10(1) and 15(1) of the ESMA Regulation state that before submitting draft technical standards to the Commission, ESMA shall conduct open public consultations on draft regulatory technical standards and analyse the potential related costs and benefits, unless such consultations and analyses are disproportionate in relation to the scope and impact of the draft technical standards concerned or in relation to the particular urgency of the matter. 5. The legislative mandate for ESMA to develop draft regulatory and implementing technical standards is provided in Annex I. 6. This document does not include the draft RTS on the method of calculation of the fall in value of a financial instrument required under Article 24(8) of the Regulation. Considering the interdependence with the provisions of a future Commission’s delegated act on the definition of what is a significant fall in value of financial instruments other than liquid shares, these draft RTS will be delivered upon finalisation of the ESMA technical advice on delegated acts. 7. The following sections describe the changes made to the final draft RTS and ITS after considering comments received from the different interested parties. The final version of the draft technical standards is set out in Annexes III and IV. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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III. Feedback from market participants and changes to the draft technical standards
8. Having considered the responses to the public consultation, ESMA clarifies below certain common issues raised by market participants. In this section ESMA also provides reasons for the changes made to the proposed draft technical standards after considering the comments and proposals and explains why certain market participants’ suggestions were not followed. 9. ESMA wishes to clarify that the scope of the legislative mandate for drafting technical standards does not encompass the provisions relating to Buy-in procedures (Article 15 of the Regulation). 10. In addition, some comments or requests for changes received could not have been dealt with by ESMA in these technical standards as they relate directly to the scope of or the wording used in provisions of the Regulation itself. This is notably the case in relation to the scope of application of the reasonable expectation test for sovereign debt under Article 13 of the Regulation.

On the agreements, arrangements and measures that adequately ensure that the share or the sovereign debt will be available for settlement.
11. Many respondents to the consultation questioned ESMA’s approach of seeking to draw up exhaustive lists of these types of agreements, arrangements and measures. However, given that the technical standards to be drafted in relation to the restrictions on uncovered short sales in shares or in sovereign debt (Articles 12 and 13 of the Regulation) are implementing (not regulatory) technical standards , ESMA has little flexibility as to the approach to adopt for specifying the types of agreements to borrow or other _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 65 enforceable claims and the type of arrangements and measures that ensure that settlement can be effected when it is due as well as the third parties to these arrangements. Nevertheless, even though the exhaustive list approach is followed with the objective to specify an appropriate and stable framework through the ITS, ESMA has tried to provide sufficient flexibility to allow for innovation and the development of future arrangements provided that they meet specified conditions or to preclude entities from acting as third parties unless they fulfil specific criteria. This is the purpose of the revised articles 5(1)(f) and 8(1)(f) and (g) of the draft ITS. In addition, it should be noted that ESMA can keep the situation under review and, when needed, propose amendments to the technical standards. 12. There were also comments that securities lending and prime brokerage agreements had been missed out from the list. In fact, ESMA considers that these agreements are certainly contemplated to fall under the permissible borrowing agreements provided they meet the conditions set out in the draft technical standards, notably under letter f) of Article 5 of the draft ITS, which is designed in such a way to be future proof. In any case, it has to be highlighted, for the sake of maximum clarity, that a master lending agreement, typically covering the standard conditions applicable for a long timeframe and a wide range of possible securities, will hardly meet by itself the conditions of Article 5 letter f) unless it is complemented for each short sale with a specific confirmation or term sheet under that master agreement containing a specific number of a specific security and a specific execution or delivery date, meeting the conditions required by Article 5 letter f). 13. ESMA has amended the drafting of Article 6 of the ITS on arrangements and measures in relation to shares so as to clearly and unambiguously indicate the two-step nature of the process. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 66 In all cases here a locate confirmation is required before a short sale of shares can be undertaken. For liquid shares and for intra-day short selling, provided that an additional confirmation is obtained that a share is easy to borrow or to purchase; the shares need not be put on hold before the short sale. However, where this confirmation cannot be provided and for all cases where the short sale concerns an illiquid share and the short selling will be for longer than an intra-day period, the shares must at least be put on hold. 14. With respect to the “Liquid Shares Locate Arrangements and Measures”, ESMA remains mindful to provide clarity and certainty across Europe on the scope of the shares concerned, without creating additional complexity for investors through a new definition of liquid shares based on each individual third party assessment. Nevertheless, ESMA takes note that the MiFID definition of liquid shares might be too limited and therefore widens the scope to other shares under certain conditions to be fulfilled (constituent of a main national index and underlying of a derivative contract admitted to trading on a trading venue). 15. As regards the arrangements with third parties to be taken in relation to sovereign debt, various respondents to the consultation questioned whether the correct interpretation of Article 13. 1 (c) of the Regulation was that such an arrangement was necessary in order to provide a reasonable expectation that settlement can be effected when it is due. They considered that the reasonable expectation needed to be on the part of the short seller. However, this is another issue related to the interpretation of the Level 1 text rather than the drafting of the ITS themselves and as such not a matter for ESMA. Nevertheless, ESMA considers that the list of measures which would provide a reasonable expectation of timely settlement provided for in _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 67 Article 7 of the draft ITS could be usefully complemented with additional situations brought to its attention by some responses to the consultation. 16. Some respondents proposed that the list of third parties provided in Article 8 of the draft ITS should explicitly refer to other types of entities. ESMA considers it is legitimate to refer specifically to investment firms, including retail services providers where relevant, as a specific type of third party with whom arrangements can be made given the activities they carry out. ESMA considers that it is not necessary to make specific references to other entities such as insurances companies, credit institutions or pension funds since their activities are not necessarily primarily related to securities business. However, ESMA emphasises that, even though not mentioned by name, such entities would fall under the category of third party defined under Article 8(1)(f) of the ITS provided they fulfil the criteria specified in that article. In relation to central securities depositories (CSDs) and International CSDs, ESMA confirms that it considers that both types of entities are within the scope of Article 8(1)(c) of the ITS as they are covered by the Settlement Finality Directive for their European activities 17. In relation to entities from third countries, ESMA has amended the draft ITS to clarify the conditions which they need to fulfil to fall under an eligible type of third party listed in the ITS. 18. Finally, many respondents expressed concerns about the fact that third party should be a distinct legal entity from the entity entering into the short sale. They argued that this would run counter to current practices, causing practical problems and entailing additional costs notably for the investors, and even increase the potential risks of settlement fails. However, while ESMA notes these comments, it considers that this issue is a matter of legal interpretation of the provision enshrined in the Regulation itself rather than one which can be resolved through the ITS. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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On the details of the information on net short positions and the means for disclosure
19. ESMA notes that the transparency regime for net short positions set out in the Regulation foresees a notification requirement to the relevant competent authority both in relation to issuers of shares and sovereign issuers when the relevant thresholds are reached or exceeded or are crossed downward. The initial and incremental thresholds in relation to the issued share capital are defined in the Regulation whereas the initial and incremental thresholds for sovereign issuers will be defined in a delegated act to be adopted by the Commission and shall be expressed in Euro nominal amounts. 20. The disclosure to the public however applies only to net short positions relating to an issuer of shares. These disclosure thresholds are already defined in the Regulation. The drafting of Article 2 of the ITS has been amended in order to avoid misinterpretation of the net short positions on an issuer posted on the central website operated or supervised by the relevant competent authority that is available when accessing that website. Thus, ESMA has clarified that the information displayed should cover not only net short positions exceeding the publication thresholds but also those that reach them. In addition, ESMA believes it is not necessary to prescribe a specific file format for this information; the machine readable requirement set out in Article 2(d) of the ITS is sufficiently generic to cater for the use of existing and new technologies. 21. Some of the comments raised in the responses relate to topics that are of relevance for the technical advice on delegated acts ESMA should submit to the Commission rather than to these draft technical standards. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 69 The treatment of index ETFs with synthetic replication and the issue of currency conversion or whether notifications of net short position in sovereign debt issuers would be required when thresholds are crossed due to movements in exchanges rates are topics to be dealt in the advice on the method of calculation of net short positions. The concerns raised on who shall report and what positions are expected in relation to fund management and investment managers relate to the delegated act regarding specification of the method of calculating positions when different entities in a group have long or short positions or for fund management activities related to separate funds. 22. In relation to the details of the information to be provided in the net short position notification forms, some respondents questioned the need to include the field “date of previous notification”. ESMA considers that this field, that actually refers to the date of the last valid position reported (not a cancelled position), is necessary as it will be of assistance for supervisory purposes as well as for traceability of the reporting. In addition, ESMA considers that under the Regulation the duty to notify or disclose the net short position lies on the position holder. Therefore, all the information required for the notification should be provided by the position holder to the reporting entity when the position holder is not reporting directly to the competent authority. 23. For the information required on the identity of the position holder and, if relevant, of the reporting entity, ESMA recalls that they are not meant for authentication purposes. According to the Regulation, authentication is a matter for national competent authorities which may have their own specific requirements in that respect. The technical standards mandate prescribes only the details of the information to be provided in the notifications. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 70 The level of details set out in the draft RTS, including the contact details, notably the fax number, is considered necessary by ESMA for the competent authorities to be able to manage the errors in particular notifications or questions arising for supervisory purposes. When competent authorities have in place secure identification systems (that can be, among others, dedicated IT systems to submit regulated information in a secure manner to the competent authority) that allow these competent authorities to identify precisely the sender of a notification and the full identity and contact details of the position holder, ESMA considers that it is not necessary to repeat all the information on the identity of the position holder, its contact details and the reporting person in each notification, provided this information can be obtained in full from the authentication systems in place. 24. For the sake of proper transparency to both the competent authorities and the public and in line with the disclosure of major shareholdings under the Transparency Directive, ESMA confirms that it is appropriate to use a 2 decimal points format for expressing the size of a net short position as a percentage of the issued share capital. 25. The use of the ISIN code for identifying in the notification form the issuer in relation to which the relevant position is held was widely supported. However, most respondents expressed a preference for the ISIN code of the main class of shares (usually ordinary shares) rather than for the one of the share class first admitted to trading which was argued to be potentially misleading and difficult and onerous to keep track of. ESMA has therefore modified the technical standard accordingly. 26. In relation to the identification of the issuers, responses frequently included a request to ESMA to publish and update regularly, if not daily, the full list of the issuers covered by the short selling regime, including the amount of the issued share capital or the outstanding debt of sovereign issuers and the relevant competent authority for notification purposes. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 71 ESMA would like to recall that the Regulation only requires ESMA to publish the list of exempted shares. In addition, the list of sovereign issuers will be made available to the public further to the requirement for ESMA to publish on its website the relevant notification threshold for each sovereign issuer according to Article 7(2) of the Regulation. For shares admitted to trading on a Regulated Market, ESMA notes that the information on the relevant competent authority for the purposes of the Regulation is already available in the MiFID database published on its website as, according to Article 2(1)(j)(v) of the Regulation, the definition of such an authority coincides with the definition of the relevant competent authority for a share under MiFID. Finally, under Article 15 of the Transparency Directive, issuers of shares are required to monthly update the information they disclose on their issued share capital. ESMA would expect that given the increased importance of the disclosure of the issued share capital, particular for the Regulation, national competent authorities will enhance their monitoring of the compliance with the issuers’ disclosure requirements. 27. Finally, without questioning the proposed approach to use common formats for notification and cancellation of reported net short positions that has been widely supported by the respondents, the structure of the formats specified in Annex II and III of the RTS have been reorganised to facilitate their usability.

On the determination of the principal trading venue for the exemption pursuant to Article 16 of the Regulation
28. ESMA would like to recall that the turnover calculation for the determination of the principal venue applies on a per trading venue basis for a specific share and not on the overall turnover for that share irrespective of where it is traded. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 72 29. ESMA welcomes the willingness expressed by operators of regulated markets to assist in the performance of the calculations for the determination of the principal venue. However, defining whether an agreement on compensation should be established to cover for the costs of performing such calculations is a matter for individual competent authorities and is not in the scope of these technical standards. 30. Some respondents to the consultation commented that the occurrence of a merger or acquisition could be added as a situation warranting an update of the list of exempted shares within the 2-year period. However, ESMA believes that there is no need to explicitly mention this situation as such scenarios are already covered in points a) and b) of Article 13(1) of the draft ITS.

On the information to be provided to ESMA by competent authorities
31. Further to some comments, the wording of Article 4(2) has been aligned with the one of Article 3(2) of the ITS, as ESMA intends to establish a system that would allow for exchanging the information to be provided by competent authorities both periodically and upon request. 32. Finally, to ensure alignment with the content of Article 4 of the RTS on the details of the information to be provided on a quarterly basis – as specified in the Regulation – to ESMA by competent authorities, Annex II of the ITS describing their format has been amended and now includes the “End of quarter aggregated net short position on other shares”.
To read more: http://www.esma.europa.eu/system/files/2012-228_0.pdf

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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Acronyms
BIC Bank Identifier Code CSD Central securities depository ISIN International securities identification number ITS Implementing technical standards LEI Legal entity identifier RTS Regulatory technical standards ESMA European Securities and Markets Authority MiFID Directive on markets in financial instruments (Directive 2004/39/EC of the European Parliament and of the Council of April 2004) SMSG Securities and Markets Stakeholder Group

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 74 NUMBER 8

DARPA Chip-Scale Atomic Clocks Aboard International Space Station
March 27, 2012 Atomic clocks are the most accurate frequency standard and timing devices in the world. Their range of uses include being the international standard for timekeeping, managing broadcasts and satellite positioning, navigation and timing (PNT). Traditional atomic clocks are too large to be placed on board small satellites so a downlink with Earth is needed for the accurate PNT required for space operations. Chip-scale atomic clocks (CSAC) were first developed by DARPA and the National Institute of Standards and Technology (NIST) in 2004.

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 75 These devices are smaller than traditional atomic clocks by a factor of 100 (down to about the size of a computer chip) and are more power-efficient by a factor of 10. Although CSACs are now commercially available, they have not yet been applied to space technologies. On October 27, 2011, Progress 40 launched from Baikonur Cosmodrome carrying two DARPA CSACs, the first ever into space. The CSACs will soon be tested on board the International Space Station (ISS) in support of DARPA’s Micro-PNT program. The chips will be inserted into bowling-ball sized satellites on the ISS called Synchronized Position, Hold, Engage and Reorient Experimental Satellites (SPHERES). Once the chips have been validated as operational, the SPHERES will perform a synchronized maneuver through the ISS cabin. After the experiment, the chips containing the CSACs will be removed and tested against the atomic clock onboard the ISS. “DARPA hopes that testing confirms that chip-scale atomic clocks can operate in orbit with the level of accuracy for which they were designed,” explained Andrei Shkel, DARPA program manager. “A successful test after transportation, launching and space operations will mean that CSACs are one step closer to being integrated into future space platforms. Such integration should allow various space platforms more autonomy in positioning, navigation and timing.”

Note:
The Defense Advanced Research Projects Agency (DARPA) was established in 1958 to prevent strategic surprise from negatively impacting U.S. national security and create strategic surprise for U.S. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 76 adversaries by maintaining the technological superiority of the U.S. military. To fulfill its mission, the Agency relies on diverse performers to apply multi-disciplinary approaches to both advance knowledge through basic research and create innovative technologies that address current practical problems through applied research. DARPA’s scientific investigations span the gamut from laboratory efforts to the creation of full-scale technology demonstrations in the fields of biology, medicine, computer science, chemistry, physics, engineering, mathematics, material sciences, social sciences, neurosciences and more. As the DoD’s primary innovation engine, DARPA undertakes projects that are finite in duration but that create lasting revolutionary change.

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 77 NUMBER 9

Address by Mr Lee Boon Ngiap, Assistant Managing Director, Monetary Authority of Singapore,
General Insurance Association of Singapore Annual General Meeting Luncheon, 27 March 2012, Intercontinental Hotel, Singapore GIA President, Mr Derek Teo, Distinguished Guests, Ladies and Gentlemen, 1 Thank you for inviting me to your Annual General Meeting Luncheon. May I congratulate Mr Derek Teo on your re-election as President of GIA, as well as the other newly-elected management committee members. I would also like to thank them for agreeing to take up the challenge of leading the industry over the next year. 2 This afternoon, I will start off by recapping some of the major achievements of GIA, before outlining some of the immediate challenges facing the general insurance industry.

GIA’s Contributions
3 Under the leadership of its management committee, GIA has accomplished much in the past few years. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 78 4 I would like to commend GIA for its pro-active approach in strengthening the self-regulatory framework for general insurance agents. GIA’s Agents’ Registration Board has put in much efforts to improve the standards of general insurance agents through initiatives such as the Trade Specific Agent Schemes. An industry working group formed by the GIA is now finalising a Telemarketing Code of Practice for general insurers. These initiatives will continue to raise the competency and professional standards of the general insurance industry, and provide consumers with better quality advice and higher service standards. These augur well for the development of the industry. 5 Over the past year, GIA has been active in educating consumers on general insurance products. One example is the travel insurance seminar jointly organized by GIA with the National Association of Travel Agents Singapore and the Consumers Association of Singapore. The seminar provided a useful platform for the industry to share insights and knowledge on how consumers can purchase the right type of travel insurance for their needs. GIA was also involved in the revamp of the Moneysense website, and had made contributions to the publications on the website. I am glad to note that GIA will continue such efforts to educate consumers on the specific risks and considerations when buying general insurance products. 6 GIA has also made active contributions to an industry-led working group that is looking to enhance reinsurance contract certainty practices in Singapore. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 79 Together with the Singapore Reinsurance Association, Reinsurance Brokers Association, Lloyd’s and Insurance Law Association of Singapore, the working group is finalising guidelines and best practices to secure contract certainty. The guidelines will highlight the need for reinsurers and brokers to provide cedants with their signed copy of the contract. It will also require both parties to ensure that there is no ambiguity in the terms and conditions of the contract prior to risk inception. This will minimise potential disputes over claims and coverage. MAS views this as a very important initiative and will work with the industry on a smooth implementation of these new guidelines and best practices. 7 On the talent development front, GIA, with the Regional Development Committee, have contributed significantly through its Global Internship Program (GIP). According to Lloyd’s Risk Index 2011, “talent and skills shortage” was identified as one of the top three risks facing the insurance industry in the Asia Pacific region. GIA’s efforts in helping to build the talent pipeline is crucial. I would like to encourage GIA to continue to explore talent initiatives to support the industry’s needs in more specialised risk areas as well as actuarial and leadership development. MAS will continue to work with GIA to explore the possibility of expanding the depth and breadth of the GIP to better cater to the growing needs of the industry.

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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Challenges Ahead
8 GIA should be proud of these achievements, which has contributed much to the development of the general insurance industry in Singapore. There is much more work in the years ahead as the industry faces important challenges in a riskier and more difficult market. Allow me to share my thoughts on two of these immediate challenges. 9 First, let me congratulate the industry for reporting underwriting profits in all lines of domestic business last year. In particular, the motor business registered its first underwriting profit in six years. The last time the industry managed to turn a profit in the highly competitive motor business was in 2004 and 2005, after more than a decade of losses. But stiff competition set in immediately and many insurers started compromising on underwriting and pricing discipline in pursuit of market share. Problems with fraudulent and inflated claims also started to plague the motor insurance business. This resulted in the industry reporting record underwriting losses of $168 million in 2008, with losses in each subsequent year until last year. 10 GIA, through its introduction of the Motor Claims Framework in 2008, and active participation in the Motor Insurance Task Force, has contributed to measures to minimise fraudulent and inflated claims. These efforts are commendable and MAS is committed to working together with GIA and other relevant stakeholders to combat this problem.

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 81 But such measures alone will not sustain the profitability of the motor business if insurers do not exercise underwriting and pricing discipline. 11 While competitive premium rates may benefit consumers, they are not sustainable if they are achieved without regard to sound underwriting and pricing. Eventually, insurers will suffer losses which become too great to bear and some will exit the business, leaving consumers with fewer choices. Those that remain will be forced to raise premium rates sharply, and complaints from unhappy motorists can be expected to follow. Ultimately, this is detrimental to consumers and the insurance industry. We have seen this episode played out before in the domestic motor insurance market. The challenge for the industry therefore is to take heed of the lessons learnt and maintain your underwriting and pricing discipline this time round. It is in the interest of both consumers and insurers that all of you only pursue business strategies that are sustainable and not sacrifice prudence for potential short-term gains. 12 The second challenge for the industry that I would like to touch on is the need to keep pace with global regulatory reforms. Much has been said and written about the weaknesses in regulations and business practices that caused the global financial crisis. The insurance business model enabled the majority of insurers to withstand the financial crisis better than other financial institutions. Nevertheless, there are corporate governance, capital adequacy and risk management lessons from the crisis that are applicable to the insurance _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 82 industry. Let me share the regulatory initiatives in these areas that MAS is focusing on this year. 13 First, one lesson from the crisis is that good corporate governance matters. The failure by Boards to exercise effective risk management oversight had damaging consequences for many institutions. To raise the corporate governance standards of the insurance industry, MAS recently issued a consultation paper proposing to extend the Insurance Corporate Governance Regulations to all locally-incorporated insurers. We intend to make it mandatory for all locally-incorporated general insurers to meet minimum corporate governance requirements, which will be calibrated to take into account the significance of an insurer’s operations. Insurers’ compliance with the Corporate Governance Regulations will be assessed as part of MAS’ ongoing supervisory programme. 14 Second, MAS will shortly issue a consultation paper to propose enhancements to our capital framework for insurance companies. Singapore was among the first in Asia to introduce a risk-based capital (RBC) framework for insurance companies back in 2005. Our proposed enhancement aims to improve the comprehensiveness of risk-coverage and the risk-sensitivity of the framework, while ensuring that the proposals are practical and takes into account market realities. Unlike in banking, there is no common global capital standard for insurance companies. So a review of our RBC framework is a major undertaking requiring both a fundamental analysis of the appropriateness of our existing framework as well as a comparative study of the insurance capital frameworks in other jurisdictions. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 83 I look forward to receiving feedback from GIA and its members when our consultation paper is issued. 15 Third, MAS’ efforts to improve risk management standards in the industry will continue apace. MAS issued a set of guidelines on risk management practices for insurance companies in 2007. The guidelines spell out sound risk management practices for each core activity such as product development, pricing and underwriting. MAS will add to these guidelines with additional rules on enterprise risk management (ERM). The ERM standards will go beyond addressing risks in each core activity to also cover MAS’ expectations on how insurers identify and manage interdependencies between key risks, and how this is translated into strategic management actions and capital planning.

Conclusion
16 In conclusion, let me once again thank GIA for its good work in raising the standards of general insurance agents, educating and empowering consumers, assisting MAS in our regulatory work, and developing talent for the industry. But there is no room for complacency. The insurance environment has become more volatile in recent years, and consumers are increasingly more sophisticated and demanding. So the industry must enhance its ability to operate in a riskier environment, and service standards must continue to improve. MAS will continue to work closely with GIA to promote a sound and dynamic general insurance industry in Singapore. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 84 We have enjoyed a very good working relationship over the years and we look forward to continuing this partnership in the years ahead. 17 Thank you.

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 85 NUMBER 10

March 29, 2012 Remarks by the President on Oil and Gas Subsidies
Today, members of Congress have a simple choice to make: They can stand with the big oil companies, or they can stand with the American people. Right now, the biggest oil companies are raking in record profits –profits that go up every time folks pull up into a gas station. But on top of these record profits, oil companies are also getting billions a year -- billions a year in taxpayer subsidies -– a subsidy that they’ve enjoyed year after year for the last century. Think about that. It’s like hitting the American people twice. You’re already paying a premium at the pump right now. And on top of that, Congress, up until this point, has thought it was a good idea to send billions of dollars more in tax dollars to the oil industry. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 86 It’s not as if these companies can’t stand on their own. Last year, the three biggest U.S. oil companies took home more than $80 billion in profits. Exxon pocketed nearly $4.7 million every hour. And when the price of oil goes up, prices at the pump go up, and so do these companies’ profits. In fact, one analysis shows that every time gas goes up by a penny, these companies usually pocket another $200 million in quarterly profits. Meanwhile, these companies pay a lower tax rate than most other companies on their investments, partly because we’re giving them billions in tax giveaways every year. Now, I want to make clear, we all know that drilling for oil has to be a key part of our overall energy strategy. We want U.S. oil companies to be doing well. We want them to succeed. That’s why under my administration, we’ve opened up millions of acres of federal lands and waters to oil and gas production. We’ve quadrupled the number of operating oil rigs to a record high. We’ve added enough oil and gas pipeline to circle the Earth and then some. And just yesterday, we announced the next step for potential new oil and gas exploration in the Atlantic. So the fact is, we’re producing more oil right now than we have in eight years, and we’re importing less of it as well. For two years in a row, America has bought less oil from other countries than we produce here at home -– for the first time in over a decade. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 87 So American oil is booming. The oil industry is doing just fine. With record profits and rising production, I’m not worried about the big oil companies. With high oil prices around the world, they’ve got more than enough incentive to produce even more oil. That’s why I think it’s time they got by without more help from taxpayers who are already having a tough enough time paying the bills and filling up their gas tank. And I think it’s curious that some folks in Congress, who are the first to belittle investments in new sources of energy, are the ones that are fighting the hardest to maintain these giveaways for the oil companies. Instead of taxpayer giveaways to an industry that’s never been more profitable, we should be using that money to double-down on investments in clean energy technologies that have never been more promising -- investments in wind power and solar power and biofuels; investments in fuel-efficient cars and trucks, and energy-efficient homes and buildings. That’s the future. That’s the only way we're going to break this cycle of high gas prices that happen year after year after year. As the economy is growing, the only time you start seeing lower gas prices is when the economy is doing badly. That’s not the kind of pattern that we want to be in. We want the economy doing well, and people to be able to afford their energy costs. And keep in mind, we can’t just drill our way out of this problem. As I said, oil production here in the United States is doing very well, and it's been doing well even as gas prices are going up. Well, the reason is because we use more than 20 percent of the world’s oil but we only have 2 percent of the world’s known oil reserves. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 88 And that means we could drill every drop of American oil tomorrow but we’d still have to buy oil from other countries to make up the difference. We’d still have to depend on other countries to meet our energy needs. And because it’s a world market, the fact that we’re doing more here in the United States doesn’t necessarily help us because even U.S. oil companies they’re selling that oil on a worldwide market. They’re not keeping it just for us. And that means that if there’s rising demand around the world then the prices are going to up. That’s not the future that I want for America. I don’t want folks like these back here and the folks in front of me to have to pay more at the pump every time that there’s some unrest in the Middle East and oil speculators get nervous about whether there’s going to be enough supply. I don’t want our kids to be held hostage to events on the other side of the world. I want us to control our own destiny. I want us to forge our own future. And that’s why, as long as I’m President, America is going to pursue an all-of-the-above energy strategy, which means we will continue developing our oil and gas resources in a robust and responsible way. But it also means that we’re going to keep developing more advanced homegrown biofuels, the kinds that are already powering truck fleets across America. We’re going to keep investing in clean energy like the wind power and solar power that’s already lighting thousands of homes and creating thousands of jobs.

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 89 We’re going to keep manufacturing more cars and trucks to get more miles to the gallon so that you can fill up once every two weeks instead of every week. We’re going to keep building more homes and businesses that waste less energy so that you’re in charge of your own energy bills. We’re going to do all of this by harnessing our most inexhaustible resource: American ingenuity and American imagination. That’s what we need to keep going. That’s what’s at stake right now. That’s the choice that we face. And that’s the choice that’s facing Congress today. They can either vote to spend billions of dollars more in oil subsidies that keep us trapped in the past, or they can vote to end these taxpayer subsidies that aren’t needed to boost oil production so that we can invest in the future. It’s that simple. And as long as I’m President, I’m betting on the future. And as the people I’ve talked to around the country, including the people who are behind me here today, they put their faith in the future as well. That’s what we do as Americans. That’s who we are. We innovate. We discover. We seek new solutions to some of our biggest challenges. And, ultimately, because we stick with it, we succeed. And I believe that we’re going to do that again. Today, the American people are going to be watching Congress to see if they have that same faith. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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Certified Risk and Compliance Management Professional (CRCMP) Distance learning and online certification program.
Companies like IBM, Accenture etc. consider the CRCMP a preferred certificate. You may find more if you search (CRCMP preferred certificate) using any search engine. The all-inclusive cost is $297. What is included in the price:

A. The official presentations we use in our instructor-led classes (3285 slides)
The 2309 slides are needed for the exam, as all the questions are based on these slides. The remaining 976 slides are for reference. You can find the course synopsis at: www.risk-compliance-association.com/Certified_Risk_Compliance_Tra ining.htm

B. Up to 3 Online Exams
You have to pass one exam. If you fail, you must study the official presentations and try again, but you do not need to spend money. Up to 3 exams are included in the price. To learn more you may visit: www.risk-compliance-association.com/Questions_About_The_Certifica tion_And_The_Exams_1.pdf www.risk-compliance-association.com/CRCMP_Certification_Steps_1.p df _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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C. Personalized Certificate printed in full color.
Processing, printing, packing and posting to your office or home.

D. The Dodd Frank Act and the new Risk Management Standards (976 slides, included in the 3285 slides)
The US Dodd-Frank Wall Street Reform and Consumer Protection Act is the most significant piece of legislation concerning the financial services industry in about 80 years. What does it mean for risk and compliance management professionals? It means new challenges, new jobs, new careers, and new opportunities. The bill establishes new risk management and corporate governance principles, sets up an early warning system to protect the economy from future threats, and brings more transparency and accountability. It also amends important sections of the Sarbanes Oxley Act. For example, it significantly expands whistleblower protections under the Sarbanes Oxley Act and creates additional anti-retaliation requirements.

You will find more information at:

www.risk-compliance-association.com/Distance_Learning_an d_Certification.htm

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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Visit our Risk and Compliance Management Speakers Bureau
The International Association of Risk and Compliance Professionals (IARCP) has established the Speakers Bureau for firms and organizations that want to access the expertise of Certified Risk and Compliance Management Professionals (CRCPMs) and Certified Information Systems Risk and Compliance Professionals (CISRCPs). The IARCP will be the liaison between our certified professionals and these organizations, at no cost. We strongly believe that this can be a great opportunity for both, our certified professionals and the organizers. To learn more: www.risk-compliance-association.com/Risk_Management_Compliance _Speakers_Bureau.html

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

1200 G Street NW Suite 800 Washington, DC 20005-6705 USA Tel: 202-449-9750 www.risk-compliance-association.com

International Association of Risk and Compliance Professionals (IARCP)

Monday, April 9, 2012 - Top 10 risk and compliance management related news stories and world events that (for better or for worse) shaped the week's agenda, and what is next
George Lekatis President of the IARCP Dear Member, In the States, President Obama signed the Jumpstart Our Business Startups (JOBS) Act, a bipartisan bill that encourages startups and support small businesses. In the world, we will have interesting changes in risk management and corporate governance, as the Financial Stability Board finds that the global financial crisis highlighted a number of corporate governance failures and weaknesses in financial institutions, including inappropriate Board structures and processes, weak risk governance systems, and unduly complex or opaque firm organisational structures and activities. In Europe, we have a very important development. The impact of the new Basel III framework is monitored semi-annually by both the Basel Committee at a global level and the European Banking Authority (EBA, formerly CEBS) at the European level, using data provided by participating banks on a voluntary and confidential basis. Well, in Europe, the aggregate Group 1 and Group 2 shortfall of liquid assets is at approx. €1.2 trillion which represents 3.7% of the approx. €31 trillion total assets of the aggregate sample. [Group 1 banks are those with Tier 1 capital in excess of €3 bn and internationally active. All other banks are categorized as Group 2 banks] A total of 158 banks submitted data for this exercise, consisting of 48 Group 1 banks and 110 Group 2 banks. For the banks in the sample, monitoring results show a shortfall of liquid assets of €1.15 trillion (which represents 3.7% of the €31 trillion total assets of the aggregate sample) as of 30 June 2011, if banks were to make no changes whatsoever to their liquidity risk profile.

Welcome to the Top 10 list.

Number 1 (Page 4) April 2012 - Results of the Basel III monitoring exercise as of 30 June 2011. Since the beginning of 2011, the impact of the new requirements related to the Basel iii reforms is monitored and evaluated by the Basel Committee on Banking Supervision on a semi-annual basis for its member jurisdictions. At European level, this analysis is conducted by the European Banking Authority (EBA), also based on the Basel III reform package as the CRD IV, the European equivalent to the Basel III framework, has not yet been finalised. Number 2 (Page 33) The Financial Industry Regulatory Authority (FINRA) issued a new Investor Alert called It Pays

to Understand Your Brokerage Account Statements and Trade Confirmations to help guide investors through the key
elements of their account statements and trade confirmations. Number 3 (Page 43) President Obama signed the Jumpstart Our Business Startups (JOBS) Act, a bipartisan bill that enacts many of the President’s proposals to encourage startups and support small businesses. Number 4 (Page 48) Learning more about Supervisory Agencies: BaFin Since it was established in May 2002, the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht - known as BaFin for short) has brought the supervision of banks and financial services providers, insurance undertakings and securities trading under one roof. Number 5 (Page 56) Federal Reserve Policy Statement on Rental of Residential Other Real Estate Owned Properties In light of the large volume of distressed residential properties and the indications of higher demand for rental housing in many markets, some banking organizations may choose to make greater use of rental activities in their disposition strategies than in the past.

Number 6 (Page 64) We have access to the minutes of the Federal Open Market Committee. Developments in Financial Markets and the Federal Reserve's Balance Sheet - Staff Review of the Economic Situation Number 7 (Page 88) Final rule and interpretive guidance. Section 113 of the Dodd-Frank Act authorizes the Financial Stability Oversight Council to determine that a nonbank financial company shall be supervised by the Board of Governors of the Federal Reserve System and shall be subject to prudential standards Number 8 (Page 91) The Alternative Investment Management Association (AIMA), the global hedge fund trade association, has expressed concern about the European Commission’s new draft text for the implementation of the Alternative Investment Fund Managers Directive (AIFMD). Number 9 (Page 94) Thematic review on risk governance Questionnaire for national authorities The global financial crisis highlighted a number of corporate governance failures and weaknesses in financial institutions, including inappropriate Board structures and processes, weak risk governance systems, and unduly complex or opaque firm organisational structures and activities. Number 10 (Page 105) The White House Blog How Your Tax Dollars Are Spent On Wednesday, the updated Federal Taxpayer Receipt was released, which lets you enter a few pieces of information about the taxes you paid last year and calculates how much of your money went toward different national priorities like education, defense, and health care.

NUMBER 1

April 2012 Results of the Basel III monitoring exercise as of 30 June 2011
To assess the impact of the new capital and liquidity requirements set out in the consultative documents of June and December 2009, both the Basel Committee on Banking Supervision and the Committee of European Banking Supervisors (CEBS) conducted a so-called comprehensive quantitative impact study (C-QIS) for their member jurisdictions based on data as of 31 December 2009. The main results of both impact studies have been published in December 2010. After finalisation of the regulatory framework (referred to as “Basel III”) in December 2010, the impact of this new framework is monitored semi-annually by both the Basel Committee at a global level and the European Banking Authority (EBA, formerly CEBS) at the European level, using data provided by participating banks on a voluntary and confidential basis. This report summarises the results of the latest monitoring exercise using consolidated data of European banks as of 30 June 2011. A total of 158 banks submitted data for this exercise, consisting of 48 Group 1 banks and 110 Group 2 banks. [Group 1 banks are those with Tier 1 capital in excess of €3 bn and internationally active. All other banks are categorised as Group 2 banks] Member countries’ coverage of their banking system was very high for Group 1 banks, reaching 100% coverage for many jurisdictions (aggregate coverage in terms of Basel II risk-weighted assets: 98.5%), while for Group 2 banks it was lower with a larger variation across jurisdictions (aggregate coverage: 35.8%). Furthermore, Group 2 bank results are driven by a relatively small number of large but non-internationally active banks, ie the results presented in this report may not be as representative as it is the case for Group 1 banks. [There are 19 Group 2 banks that have Tier 1 capital in excess of €3 billion. These banks account for 64.3% of total Group 2 RWA.]

Since the new EU directive and regulation are not finalised yet, no EU specific rules are analysed in this report. Accordingly, this monitoring exercise is carried out assuming full implementation of the Basel III framework, ie transitional arrangements such as phase-in of deductions and grandfathering arrangements are not taken into account. The results are compared with the respective current national implementation of the Basel II framework. In addition, it is important to note that the monitoring exercise is based on static balance sheet assumptions, ie capital elements are only included if the eligibility criteria have been fulfilled at the reporting date. Planned management actions to increase capital or decrease risk-weighted assets are not taken into account (“static balance sheet assumption”). This allows for identifying effective changes in banks’ capital base instead of identifying changes which are solely based on changes in underlying modelling assumptions. As a consequence, monitoring results are not comparable to industry estimates as the latter usually include assumptions on banks’ future profitability, planned capital and/or further management actions that mitigate the impact of Basel III. In addition, monitoring results are not comparable to C-QIS results, which assessed the impact of policy proposals published in 2009 that differed significantly from the final Basel III framework. The actual capital and liquidity shortfalls related to the new requirements by the time Basel III is fully implemented will differ from those shown in this report as the banking sector reacts to the changing economic and regulatory environment. The monitoring exercise provides an impact assessment of the following aspects: - Changes to banks’ capital ratios under Basel III, and estimates of any capital shortfalls. In addition, estimates of capital surcharges for global systemically important banks (G-SIBs) are included, where applicable; - Changes to the definition of capital that result from the new capital standard, referred to as common equity Tier 1 (CET1), including modified rules on capital deductions, and changes to the eligibility criteria for Tier 1 and total capital; - Changes in the calculation of risk-weighted assets (RWA) resulting from changes to the definition of capital, securitisation, trading book and counterparty credit risk requirements;

- The capital conservation buffer; - The leverage ratio; and - Two liquidity standards – the liquidity coverage ratio (LCR) and the net stable funding ratio (NSFR).

Key results - Impact on regulatory capital ratios and estimated capital shortfall
Assuming full implementation of the Basel III framework as of 30 June 2011 (i.e. without taking into account transitional arrangements), the CET1 capital ratios of Group 1 banks would have declined from an average CET1 ratio of 10.2% (with all country averages above the 7.0% target level) to an average CET1 ratio of 6.5%. 80% of Group 1 banks would be at or above the 4.5% minimum while 44% would be at or above 7.0% target level. The CET1 capital shortfall for Group 1 banks is €18 bn at a minimum requirement of 4.5% and €242 bn at a target level of 7.0% (including the G-SIB surcharge). As a point of reference, the sum of profits after tax prior to distributions across the Group 1 sample in the second half of 2010 and the first half of 2011 was €102 bn. With respect to the average Tier 1 and total capital ratio, monitoring results show a decline from 11.9% to 6.7% and from 14.4% to 7.8%, respectively. Capital shortfalls comparing to the minimum ratios (excl. the capital conservation buffer) amount for €51 bn (Tier 1 capital) and €128 bn (total capital). Taking into account the capital conservation buffer and the surcharge for systemically important banks, the Group 1 banks’ capital shortfall rises to €361 bn (Tier 1 capital) and €485 bn (total capital). For Group 2 banks, the average CET1 ratio declines from 9.8% to 6.8% under Basel III, where 87% of the banks would be at or above the 4.5% minimum and 72% would be at or above the 7.0% target level. The respective CET1 shortfall is approx. €11 bn at a minimum requirement of 4.5% and €35 bn at a target level of 7.0%. The sum of profits after tax prior to distributions across the Group 2 sample in the second half of 2010 and the first half of 2011 was €17 bn.

Main drivers of changes in banks’ capital ratios
For Group 1 banks, the overall impact on the CET1 ratio can be attributed in almost equal parts to changes in the definition of capital and to changes related to the calculation of risk-weighted assets: while CET1 declines by 22.7%, RWA increase by 21.2%, on average. For Group 2 banks, while the change in the definition of capital results in a decline in CET1 of 25.9%, the new rules on RWA affect Group 2 banks far less (+6.9%), which may be explained by the fact that these banks´ business models are less reliant on exposures to counterparty and market risks (which are the main drivers of the RWA increase under the new framework). Reductions in Group 1 and Group 2 banks’ CET1 are mainly driven by goodwill (-17.3% and -14.8%, respectively), followed by deductions for holdings of capital of other financial companies (-4.4% and -7.0%, respectively). As to the denominator of regulatory capital ratios, the main driver is the introduction of CVA capital charges which result in an average RWA increase of 8.0% and of 2.9% for Group 1 and Group 2 banks, respectively. In addition to CVA capital charges, trading book exposures and the transition from Basel II 50/50 deductions to a 1250% risk weight treatment are the main contributors to the increase in Group 1 banks’ RWA. As Group 2 banks are in general less affected by the revised counterparty credit risk rules, these banks show a much lower increase in overall RWA (+6.9%). However, even within this group, the RWA increase is driven by CVA capital charges, followed by changes related to the transition from Basel II 50/50 capital deductions to a 1250% risk weight treatment, and to the items that fall below the 10/15% thresholds.

Leverage ratio
Monitoring results indicate a positive correlation between bank size and the level of leverage, since the average LR is significantly lower for Group 1 banks. Assuming full implementation of Basel III, Group 1 banks show an average Basel III Tier 1 leverage ratio (LR) of 2.7%, while Group 2 banks’ leverage ratio is 3.4%. 41% of participating Group 1 and 72% Group 2 banks would meet the 3% target level as of June 2011. If a hypothetical current leverage ratio was already in place, Group 1 and Group 2 banks’ LR would be 4.0% and 4.7%, respectively.

Liquidity standards
A total of 156 Group 1 and Group 2 banks participated in the liquidity monitoring exercise for the end-June 2011 reporting period. Group 1 banks have reported an average LCR of 71% while the average LCR for Group 2 banks is 70%. The aggregate Group 1 and Group 2 shortfall of liquid assets is at approx. €1.2 trillion which represents 3.7% of the approx. €31 trillion total assets of the aggregate sample. Group 1 banks reported an average NSFR of 89% (Group 2 banks: 90%). To fullfil the minimum standard of 100% on a total basis, banks need stable funding of approx. €1.9 trillion. Both liquidity standards are currently subject to an observation period which includes a review clause to address any unintended consequences prior to their respective implementation dates.

1. General remarks
In September 2010, the Group of Governors and Heads of Supervision (GHOS), the Basel Committee on Banking Supervision’s oversight body, announced a substantial strengthening of existing capital requirements and fully endorsed the agreements reached on 26 July 2010. Since the beginning of 2011, the impact of the new requirements related to these capital reforms and the introduction of two international liquidity standards is monitored and evaluated by the Basel Committee on Banking Supervision on a semi-annual basis for its member jurisdictions. At European level, this analysis is conducted by the European Banking Authority (EBA), also based on the Basel III reform package as the CRD IV, the European equivalent to the Basel III framework, has not yet been finalised. This report presents the results of the latest monitoring exercise based on consolidated data of European banks as of 30 June 2011. The monitoring exercise provides an impact assessment of the following aspects: - Changes to banks’ capital ratios under Basel III, and estimates of any capital shortfalls. In addition, estimates of capital surcharges for global systemically important banks (G-SIBs) are included, where applicable; - Changes to the definition of capital that result in a new capital standard, referred to as common equity Tier 1 (CET1), a reallocation of regulatory adjustments to CET1 and changes to the eligibility criteria for Tier 1 and total capital,

- Changes in the calculation of risk-weighted assets due to changes to the definition of capital, trading book, securitisation and counterparty credit risk requirements, - The capital conservation buffer of 2.5%, - The introduction of a leverage ratio and - The introduction of two international liquidity standards – the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR) The related policy documents are: - Revisions to the Basel II market risk framework9 and Guidelines for computing capital for incremental risk in the trading book; - Enhancements to the Basel II framework11 which include the revised risk weights for re-securitisations held in the banking book; - Basel III: A global framework for more resilient banks and the banking system as well as the Committee’s 13 January press release on loss absorbency at the point of non-viability; - International framework for liquidity risk measurement, standards and monitoring; and - Global systemically important banks: Assessment methodology and the additional loss absorbency requirement.

1.1. Sample of participating banks
The report includes an analysis of data submitted by 48 Group 1 banks from 16 countries and 110 Group 2 banks from 18 countries. Table 1 shows the distribution of participation by jurisdiction.

Coverage of the banking sector is high, reaching 100% of Group 1 banks in some countries (aggregate coverage in terms of Basel II risk-weighted assets: 98.5%). Coverage of Group 2 banks is lower and varies across countries (aggregate coverage: 35.8%). Group 2 results are driven by a relatively small number of banks sufficiently large to be classified as Group 1 banks, but that have been classified as Group 2 banks by their supervisor because they are not internationally active.

1.2. Methodology “Composite bank” weighting scheme
Average amounts in this document have been calculated by creating a composite bank at a total sample level, which implies that the total sample averages are weighted. For example, the average common equity Tier 1 capital ratio is the sum of all banks’ common equity Tier 1 capital for the total sample divided by the sum of all banks’ risk-weighted assets for the total sample.

Box plots illustrate the distribution of results
To ensure data confidentiality, most charts show box plots which give an indication of the distribution of the results among participating banks. The box plots are defined as follows:

1.3. Interpretation of results
The impact assessment was carried out by comparing banks’ capital positions under Basel III to the current regulatory framework. With the exception of transitional arrangements for non-correlation trading securitisation positions in the trading book, results are calculated assuming full implementation of Basel III ie without considering transitional arrangements related to the phase-in of deductions and grandfathering arrangements. This implies that the Basel III capital amounts shown in this report assume that all common equity deductions are fully phased in and all non-qualifying capital instruments are fully phased out. As such, these amounts underestimate the amount of Tier 1 capital and total capital held by a bank as they do not give any recognition for non-qualifying instruments that are actually phased out over a 10 year horizon. The treatment of deductions and non-qualifying capital instruments under the assumption of full implementation of Basel III also affects figures reported in the leverage ratio section. The potential underestimation of Tier 1 capital will become less of an issue as the implementation date of the leverage ratio approaches. In particular, in 2013, the capital amounts based on the capital requirements in place on the Basel III implementation monitoring reporting date will reflect the amount of non-qualifying capital instruments included in capital at that time. These amounts will therefore be more representative of the capital held by

banks at the implementation date of the leverage ratio (for more detail see section 5). In addition, it is important to note that the monitoring exercise is based on static balance sheet assumptions, ie capital elements are only included if the eligibility criteria have been fulfilled at the reporting date. Planned bank measures to increase capital or decrease risk-weighted assets are not taken into account. This allows for identifying effective changes in bank capital instead of identifying changes which are simply based on changes in underlying modelling assumptions. As a consequence, monitoring results are not comparable to industry estimates as the latter usually include assumptions on banks’ future profitability, planned capital and/or management actions that mitigate the impact of Basel III. In addition, monitoring results are not comparable to prior C-QIS results, which assessed the impact of policy proposals published in 2009 that differed significantly from the final Basel III framework. As one example, the C-QIS did not consider the impact of capital surcharges for G-SIBs based on the initial list of G-SIBs announced by the Financial Stability Board in November 2011. To enable comparisons between the current regulatory regime and Basel III, common equity Tier 1 elements according to the current regulatory framework are defined as those elements of current Tier 1 capital which are not subject to a limit under the respective national implementation of Basel II.

1.4. Data quality
For this monitoring exercise, participating banks submitted comprehensive and detailed non-public data on a voluntary and best-efforts basis. National supervisors worked extensively with banks to ensure data quality, completeness and consistency with the published reporting instructions. Banks are included in the various analyses that follow only to the extent they were able to provide data of sufficient quality to complete the analyses.

2. Overall impact on regulatory capital ratios and estimated capital shortfall
One of the core intentions of the Basel III framework is to increase the resilience of the banking sector by strengthening both the quantity and quality of regulatory capital. Therefore, higher minimum requirements have to be met and stricter rules for the definition of capital and the calculation of risk weighted assets apply. As the Basel III monitoring exercise assumes full implementation of Basel III (without taking into account any transitional arrangements), it compares capital ratios under current rules with capital ratios that banks would show if Basel III were already fully in force at the reporting date. In this context, it is important to elaborate on the implications the assumption of full implementation of Basel III has on the monitoring results. The Basel III capital amounts reported in this exercise assume that all common equity deductions are fully phased in and all non-qualifying capital instruments are fully phased out. Thus, these amounts may underestimate the amount of Tier 1 capital and total capital under current rules held by banks as they do not give any recognition for non-qualifying instruments which are actually phased out over a 10 year horizon. Table 2 shows the overall change in common equity Tier 1 (CET1), Tier 1 and total capital if Basel III were fully implemented, as of 30 June 2011.

For Group 1 banks, the impact on the average CET1 ratio is a reduction from 10.2% to 6.5% (a decline of 3.7 percentage points) while the average Tier 1 and total capital ratio would decline from 11.9% to 6.7% and from 14.4% to 7.8% respectively. Contrary to the current framework, for Group 2 banks average capital ratios are higher than for Group 1. The following chart gives an indication of the distribution of results among participating banks.

It includes the respective regulatory minimum requirement (thick red line), the weighted average (depicted as “x”) and the median (thin red line), ie the value separating the higher half of a sample from the lower half (that means that 50% of all observations are below this value, 50% are above).

80% of Group 1 banks would be at or above the 4.5% minimum requirement while 44% would be at or above the 7.0% target level, ie it is expected that in the next years banks will put in place several measures to increase high quality capital. With respect to Group 2 banks, 87% reported CET1 ratios at or above 4.5% while 72% would be at or above the 7.0% target level. The reduction in CET1 ratios is driven both by a new definition of capital deductions (numerator) and by increases in risk-weighted assets (denominator). Banks engaged heavily in trading or in activities subject to counterparty credit risk tend to show the largest denominator effects as these activities attract substantially higher capital charges under the new framework. For Group 1 banks, the aggregate impact on the CET1 ratio can be attributed in almost equal parts to changes in the definition of capital and to changes related to the calculation of risk-weighted assets: while CET1 declines by 22.7%, RWA increase by 21.2%, on average.

For Group 2 banks, while the change in the definition of capital results in a decline in CET1 of 25.9%, the new rules on RWA affect Group 2 banks far less (+6.9%), which may be explained by the fact that these banks´ business models are less reliant on exposures subject to counterparty credit risk and market risk (which are the main drivers of the RWA increase under the new framework). The Basel III framework includes the following phase-in arrangements for capital ratios: - For CET1, the highest form of loss absorbing capital, the minimum requirement will be raised to 4.5% and will be phased in by 1 January 2015. Deductions from CET1 will be fully phased in by 1 January 2018; - For Tier 1 capital, the minimum requirement will be raised to 6.0% and will be phased in by 1 January 2015; - An additional 2.5% capital conservation buffer above the regulatory minimum capital ratios, which must be met with common equity, after the application of deductions, will be phased in by 1 January 2019; and - The additional loss absorbency requirement for G-SIBs, which ranges from 1.0% to 2.5% and must be met with common equity, after the application of deductions and as an extension of the capital conservation buffer, will be phased in by 1 January 2019. Table 3 and Chart 2 provide estimates of the additional amount of capital that Group 1 and Group 2 banks would need between 30 June 2011 and 1 January 2022 to meet the target CET1, Tier 1 and total capital ratios under Basel III assuming fully phased-in target requirements and deductions as of 30 June 2011. For Group 1 banks, the CET1 capital shortfall is €18 bn at a minimum requirement of 4.5% and €242 bn at a target level of 7.0%. With respect to the Tier 1 and total capital ratios, the capital shortfall comparing to the minimum ratios amount for €51 bn and €128 bn respectively. For Group 2 banks, the CET1 capital shortfall is €11 bn at a minimum requirement of 4.5% and €35 bn at a target level of 7.0%. The Tier 1 and total capital shortfall calculated relative to the 4.5% minimum amount for €18 and €22 bn, respectively. The surcharges for G-SIBs are a binding constraint for 12 of the 13 G-SIBs included in this monitoring exercise. It should be mentioned, that the shortfall figures are not comparable to those of

the EBA recapitalisation exercise since the capital definitions and the calculation of the risk-weighted assets differ. Given these results, a significant effort by banks to fulfil the risk-based capital requirements is expected.

3. Impact of the new definition of capital on Common Equity Tier 1
As noted above, reductions in capital ratios under the Basel III framework are attributed in part to capital deductions previously not applied at the common equity level of Tier 1 capital. Table 4 shows the impact of various deduction categories on the gross CET1 capital (i.e. CET1 before applying deductions) of Group 1 and Group 2 banks.

In the aggregate, deductions reduce gross CET1 of Group 1 banks by 37.2% with goodwill being the most important driver, followed by holdings of capital of other financial companies. Deductions for defined benefit pension obligations and provisioning shortfalls relative to expected losses tend to be the largest contributors to other deductions across most countries. For Group 2 banks, average results are similar: CET1 deductions reduce gross CET1 by 37.4% due in particular to goodwill, and again followed by holdings of capital of other financial companies as the second most important driver. However, it should be noted that these results are driven by large Group 2 banks (defined as those with Tier1 capital in excess of €3 billion). Without considering these banks, the overall decline of gross CET1 due to deductions would be 22.6%. Mortgage servicing rights related deductions have no impact, for both groups.

4. Changes in risk-weighted assets
Reductions in capital ratios under Basel III are also attributed to increases in risk-weighted assets as shown in Table 5 for the following four categories:

Definition of capital:
Here we distinguish three effects: The column heading “50/50” measures the increase in risk-weighted assets applied to securitisation exposures currently deducted under the Basel II framework that are risk-weighted at 1250% under Basel III. The negative sign in column “other” indicates that this effect reduces the RWA. This relief in RWA is mainly technical since it is compensated by deductions from capital. The column heading “threshold” measures the increase in risk-weighted assets for exposures that fall below the 10% and 15% limits for CET1 deduction;

Counterparty credit risk (CCR):
This column measures the increased capital charge for counterparty credit risk and the higher capital charge that results from applying a higher asset correlation parameter against exposures to financial institutions under the IRB approaches to credit risk. The effects of capital charges for exposures to central counterparties (CCPs) or any impact of incorporating stressed parameters for effective expected positive exposure (EEPE) are not included;

Securitisation in the banking book:
This column measures the increase in the capital charges for certain types of securitisations (e.g. resecuritisations) in the banking book; and

Trading book:
This column measures the increased capital charges for exposures held in the trading book to include capital requirements against stressed value-at-risk, incremental risk capital charge, and securitisation exposures in the trading book (see section 4.2 for more details).

4.1. Overall results
Risk-weighted assets for Group 1 banks increase overall by 21.2% which can be mainly attributed to higher risk-weighted assets for counterparty credit risk exposures (+8.0%), followed by changes due to the new RWA treatment of

current Basel II 50/50 capital deductions (+5.9%) and the new trading book rules (+4.2%). The main driver behind the capital charges for counterparty credit risk is the charge for credit valulation adjustments (CVA) while the higher asset correlation parameter results in an increase in overall risk-weighted assets of only 1.2%. For Group 2 banks, aggregate RWA increase overall by 6.9%. The smaller increase relative to Group 1 banks is as expected since Group 2 banks tend to have less exposure to market risk and counterparty exposures. However, even for Group 2 banks, CCR capital charges (2.9%) are the main contributor to the change in RWA for Group 2 banks. Moving Basel II 50/50 deductions to a 1250% risk weight treatment and increases in RWA attributable to items that fall below the 10/15% thresholds affect RWA by 2.2% each.

Chart 3 gives an indication of the distribution of the results across participating banks and illustrates that the dispersion is much higher within the Group 1 bank sample as compared to Group 2 banks.

4.2. Market risk-related capital charges
Table 6 presents details on the impact of the revised trading book capital charges on overall risk-weighted assets for Group 1 banks. Group 2 banks are not presented separately because the market risk requirements have a very minor influence on overall Group 2 bank risk-weighted assets. Some of these banks do not have any trading books at all and are therefore not subject to any related capital charges. Stressed VaR (2.1%), the incremental risk capital charge or “IRC” (1.2%), and the capital charge for non-correlation trading securitisation exposures under the standardised measurement method or “SMM non-CTP” (0.7%) are the three most relevant drivers behind the increase. Increases in risk-weighted assets are partially offset by effects related to previous capital charges (resulting from the event risk surcharge and previous standardised or VaR-based charges for the specific risk capital requirements of securitisations), and the changes to positions treated with standardised measurement methods (column “SMM”).

4.3. Impact of the rules on counterparty credit risk (CVA only)
Credit valuation adjustment (CVA) risk capital charges lead to a 7.8% increase in total RWA for the subsample of 36 banks which provided the relevant data (6.8% for the full Group 1 sample). A larger fraction of the total effect is attributable to the application of the standardised method than to the advanced method. The impacts on Group 2 banks are smaller but still significant, adding up to an overall 3.5% increase in RWA over a subsample of 57 banks (2.3% for the full Group 2 sample), totally attributable to the standardised method. Further details are provided in Table 7.

5. Leverage Ratio
A simple, transparent, non-risk based leverage ratio has been introduced in the Basel III framework in order to act as a credible supplementary measure to the risk based capital requirements. It is intended to constrain the build-up of leverage in the banking sector and to complement the risk based capital requirements with a non-risk based “backstop” measure. For the interpretation of the results of the leverage ratio section it is important to understand the terminology used to describe a bank’s leverage.

Generally, when a bank is referred to as having more leverage, or being more leveraged, this refers to a multiple of exposures to capital (i.e. 50 times) as opposed to a ratio (i.e. 2.0%). Therefore, a bank with a high level of leverage will have a low leverage ratio. 155 Group 1 and Group 2 banks provided sufficient data to calculate the leverage ratio according to the Basel III framework. In total, aggregate Tier 1 capital according to Basel III (numerator of the leverage ratio) is €0.76 trillion for Group 1 banks while the total aggregate exposure according to the definition of the denominator of the leverage ratio is €27.69 trillion. For Group 2 banks, the corresponding figures are €0.16 trillion (Tier 1 capital) and €4.59 trillion (total exposure). To illustrate the impact of the new capital framework, a hypothetical current leverage ratio is shown assuming the leverage ratio was already in place. This hypothetical ratio is based on the current definition of Tier 1 capital. It is important to recognize that the monitoring results may underestimate the amount of capital that will actually be held by the bank over the next few years. The reason is as follows. The Basel III capital amounts reported in this monitoring exercise assume that all common equity deductions are fully phased in and all non-qualifying capital instruments are fully phased out. Thus, these amounts ceteris paribus underestimate the amount of Tier 1 capital and total capital under current rules held by banks as they do not give any recognition for non-qualifying instruments which are actually phased out over a nine year horizon. In this exercise, Common Equity Tier 1, Tier 1 capital and total capital could be very similar if all (or most) of the banks’ Additional Tier 1 and Tier 2 instruments are considered non-qualifying under Basel III. As the implementation date of the leverage ratio approaches, this will become less of an issue. With respect to the total sample of banks, the average Basel III Tier 1 leverage ratio is 2.8%. Group 1 banks’ average Basel III LR is 2.7% while for Group 2 banks the leverage ratio is significantly higher at 3.4%. Assuming full implementation of Basel III at 30 June 2011, 41.3% of Group 1 banks would meet the calibration target of 3% for the leverage ratio while 80%

would be at or above the 4.5% minimum requirement for the risk-based CET1 ratio. Regarding Group 2 banks, 71.6% show a leverage ratio at or above the target level while 87% reported CET1 ratios at or above the CET1 minimum requirement of 4.5%. Using Tier 1 capital according to current rules in the numerator, the leverage ratio is 4.1% for the total sample. For Group 1 banks it is 4.0% (Group 2: 4.7%). Comparing the average results for Group 1 and Group 2 banks, monitoring results indicate a positive correlation between bank size and the level of leverage, since the average LR is significantly lower for Group 1 banks. Chart 4 gives an indication of the distribution of the results across participating banks. The thick red lines show the calibration target of 3% while the thin red lines represent the 50th percentile19 (the “median”), ie the value separating the higher half of a sample from the lower half (it means that 50% of all observations fall below this value, 50% are above this value). The weighted average is shown as “x”. For further information on the methodology see section 1.2.

Table 8 shows the average Basel III leverage ratios and the capital shortfall under the assumption that banks already fulfill the risk-based capital requirements for the Tier 1 ratio of 6% and 8.5%, respectively.

The shortfall is the additional amount of Tier 1 capital that banks would need to raise in order to meet the target level of 3% for the leverage ratio (i.e. after the risk-based minimum requirements have been met).

Assuming that banks with a risk-based Tier 1 ratio below 6% would have raised capital to fulfill the minimum requirement of 6%, 52% of Group 1 banks and 21% of Group 2 banks would not meet the calibration target of 3% for the leverage ratio. The additional shortfall related to the leverage ratio requirement would be €95 bn (Group 1) and €12 bn (Group 2), respectively. Assuming that banks with a risk-based Tier 1 ratio below 8.5% would have raised capital to meet the minimum requirement of 8.5%, 17% of both Group 1 and Group 2 banks would show a leverage ratio below the 3% target level. The additional shortfall would be €17 bn and €10 bn for Group 1 and Group 2 banks, respectively.

6. Liquidity 6.1. Liquidity Coverage Ratio
One of the new minimum standards is a 30-day liquidity coverage ratio (LCR) which is intended to promote short-term resilience to potential liquidity disruptions. The LCR has been designed to require banks to have sufficient high-quality liquid assets to withstand a stressed 30-day funding scenario specified by supervisors. The LCR numerator consists of a stock of unencumbered, high quality liquid assets that must be available to cover any net outflow, while the denominator is comprised of cash outflows less cash inflows (subject to a cap at 75% of total outflows) that are expected to occur in a severe stress scenario. 157 Group 1 and Group 2 banks provided sufficient data in the mid-2011 Basel III implementation monitoring exercise to calculate the LCR according to the Basel III liquidity framework. The average LCR is 71% for Group 1 banks and 70% for Group 2 banks.

These aggregate numbers do not speak of the range of results across the banks. Chart 5 below gives an indication of the distribution of bank results; the thick red line indicates the 100% minimum requirement, the thin red horizontal lines indicate the median for the respective bank group while the mean value is shown as “x”. 34% of the banks in the sample already meet or exceed the minimum LCR requirement and 39% have LCRs that are at or above 85%.

For the banks in the sample, monitoring results show a shortfall of liquid assets of €1.15 trillion (which represents 3.7% of the €31 trillion total assets of the aggregate sample) as of 30 June 2011, if banks were to make no changes whatsoever to their liquidity risk profile. This number is only reflective of the aggregate shortfall for banks that are below the 100% requirement and does not reflect surplus liquid assets at banks above the 100% requirement.

Banks that are below the 100% required minimum have until 2015 to meet the minimum standard by scaling back business activities which are most vulnerable to a significant short-term liquidity shock or by lengthening the term of their funding beyond 30 days. Banks may also increase their holdings of liquid assets. The key components of outflows and inflows are presented in Table 9. Group 1 banks show a notably larger percentage of total outflows, when compared to balance sheet liabilities, than Group 2 banks. This can be explained by the relatively greater contribution of wholesale funding activities and commitments within the Group 1 sample, whereas, for Group 2 banks, retail activities, which attract much lower stress factors, comprise a greater share of funding activities.

Cap on inflows
Two Group 1 and 21 Group 2 banks reported inflows that exceeded the cap. Of these, 7 fail to meet the LCR, so the cap is binding on them.

Composition of highly liquid assets
The composition of high quality liquid assets currently held at banks is depicted in Chart 6. The majority of Group 1 and Group 2 banks’ holdings, in aggregate, are comprised of Level 1 assets; however the sample, on the whole, shows diversity in their holdings of eligible liquid assets. Within Level 1 assets, 0% risk-weighted securities issued or guaranteed by sovereigns, central banks and PSEs, and cash and central bank reserves comprise significant portions of the qualifying pool. Comparatively, within the Level 2 asset class, the majority of holdings is comprised of 20% risk-weighted securities issued or guaranteed by sovereigns, central banks or PSEs, and qualifying covered bonds.

Cap on Level 2 assets
€53 billion of Level 2 liquid assets were excluded because reported Level 2 assets were in excess of the 40% cap. 40 banks currently reported assets excluded, of which 80.0% (20.4% of the total sample) had LCRs below 100%.

Chart 7 combines the above LCR components by comparing liquidity resources (buffer assets and inflows) to outflows. Note that the €900 billion difference between the amount of liquid assets

and inflows and the amount of outflows and impact of the cap displayed in the chart is smaller than the €1.15 trillion gross shortfall noted above as it is assumed here that surpluses at one bank can offset shortfalls at other banks.
In practice the aggregate shortfall in the industry is likely to lie somewhere between these two numbers depending on how efficiently banks redistribute liquidity around the system.

6.2. Net Stable Funding Ratio
The second standard is the net stable funding ratio (NSFR), a longer-term structural ratio to address liquidity mismatches and to provide incentives for banks to use stable sources to fund their activities. 156 Group 1 and Group 2 banks provided sufficient data in the mid-2011 Basel III implementation monitoring exercise to calculate the NSFR according to the Basel III liquidity framework. 37% of these banks already meet or exceed the minimum NSFR requirement, with 70% at an NSFR of 85% or higher.

The average NSFR for each of the Group 1 bank and Group 2 samples is 89% and 90%, respectively. Chart 8 shows the distribution of results for Group 1 and Group 2 banks; the thick red line indicates the 100% minimum requirement, the thin red horizontal lines indicate the median for the respective bank group.

The results show that banks in the sample had a shortfall of stable funding of €1.93 trillion at the end of June 2011, if banks were to make no changes whatsoever to their funding structure.

[The shortfall in stable funding measures the difference between balance sheet positions after the application of available stable funding factors and the application of required stable funding factors for banks where the former is less than the latter. ]
This number is only reflective of the aggregate shortfall for banks that are below the 100% NSFR requirement and does not reflect any surplus stable funding at banks above the 100% requirement.

Banks that are below the 100% required minimum have until 2018 to meet the standard and can take a number of measures to do so, including by lengthening the term of their funding or reducing maturity mismatch. It should be noted that the shortfalls in the LCR and the NSFR are not necessarily additive, as decreasing the shortfall in one standard may result in a similar decrease in the shortfall of the other standard, depending on the steps taken to decrease the shortfall

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Abbreviations
C-QIS CCPs CCR CET1 CRD CRM CTP CVA DTA EBA EEPE GHOS G-SIB ISG IRC LCR LR MSR NSFR OBS PFE quantitative impact study central counterparties counterparty credit risk common equity tier 1 capital requirements directive comprehensive risk model correlation trading portfolio credit value adjustment deffered tax assets European Banking Authority effective expected positive exposure Group of Governors and Heads of Supervision global systemically important banks Impact Study Group incremental risk charge liquidity coverage ratio leverage ratio mortgage servicing rights net stable funding ratio off-balance sheet potential future exposure

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 32

PSE RWA SMM VaR

public sector entities risk-weighted assets standardised measurement-method value at risk

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 33

NUMBER 2

FINRA Issues New Investor Alert to Help Investors Understand Their Brokerage Account Statements
WASHINGTON — The Financial Industry Regulatory Authority (FINRA) issued a new Investor Alert called It Pays to Understand Your Brokerage Account Statements and Trade Confirmations to help guide investors through the key elements of their account statements and trade confirmations. FINRA is reminding investors that reviewing their account statements not only helps them stay on top of their holdings, but also alerts them to errors or broker or firm misconduct, such as unauthorized trading or overcharging customers for handling transactions. "Investors whose portfolios have taken a hit might not be keen to open their account statements, but investors should review their statements carefully—and immediately call the firm that issued the statement about any fee they do not understand or transaction they did not authorize," said Gerri Walsh, FINRA's Vice President for Investor Education. "Investors should also review trade confirmations as soon as they receive them because a single keystroke can make the difference between 100 and 1,000 shares." In most cases, brokerage firms are required to provide customers with quarterly account statements and written notification of trade confirmations at or before completion of a transaction. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 34 It Pays to Understand Your Brokerage Account Statements details in plain language the key elements of account statements and "red flags" that can help investors spot and avert problems. Many account statements include an investment objective that characterizes an investor's strategy, such as "growth" or "conservative." Investors should ensure that this description, as well as the account activity, accurately reflects their goals. Consolidated account statements, which provide customers with a single document that combines information on most or all of their financial holdings regardless of where those assets are held, are growing in popularity. Investors should understand that these consolidated statements supplement, but do not replace, the required brokerage account statement. Investors who receive both kinds of statements should keep in mind that the official brokerage statement is used in case of a dispute with the broker or firm. It Pays to Understand Your Brokerage Account Statements explains that trade confirmations disclose whether your broker acted as an agent for you or whether the firm acted as a principal for its own account. In equity transactions, if the firm acts as an agent, then the firm must disclose the commission you were charged either on the confirmation or upon request by you. If the firm acts as principal, it is acting for its own benefit, and any markup or markdown or commission-equivalent must be disclosed on the confirmation. Investors who find inaccuracies or discrepancies on any of their statements should contact their broker or firm as soon as possible, and if the problem is not resolved, FINRA urges investors to file a complaint using FINRA's online Complaint Center. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 35 FINRA, the Financial Industry Regulatory Authority, is the largest independent regulator for all securities firms doing business in the United States. FINRA is dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services. FINRA touches virtually every aspect of the securities business – from registering and educating all industry participants to examining securities firms, writing rules, enforcing those rules and the federal securities laws, informing and educating the investing public, providing trade reporting and other industry utilities, and administering the largest dispute resolution forum for investors and firms.

It Pays to Understand Your Brokerage Account Statements and Trade Confirmations
FINRA often reminds investors to review their brokerage account statements and trade confirmations—with good reason. Not only do these documents help you stay on top of your investment holdings, but they also provide valuable information that can alert you to errors, or even misconduct by your broker or brokerage firm such as unauthorized trading or overcharging customers for handling transactions. The accuracy of statements and trade confirmations is something securities regulators take very seriously. FINRA is issuing this alert to guide investors through the key elements of their brokerage account statements and trade confirmations and to provide tips that can help avoid problems. Investors should review their statements carefully—and immediately call the firm that issued the statement or confirmation about any transaction or entry they do not understand or did not authorize, and re-confirm any oral communication in writing with the firm. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 36 In most cases, brokerage firms are required to provide customers with quarterly account statements and written notification of trade confirmations at or before completion of a transaction. Be aware that the brokerage firm you opened an account with may not be the one that sends you your account statements and trade confirmations. Introducing firms generally make recommendations, take orders and have an arrangement with clearing and carrying firms, which are the ones that finalize ("settle" or "clear") trades and hold the funds or securities. If you work with an introducing firm, your statements most likely come from the clearing firm.

Spotting Fraud: Appearance Counts
Keep an eye peeled for statements that look unprofessional, crooked or altered in any way. This may signal fraud. Check graphic elements such as logos—if a logo has poor resolution or is inconsistent with other statements or communications from the firm, it is a red flag. In some cases, fraudsters simply cut and paste the logo of a legitimate firm onto their own bogus statement. Many account statements include an investment objective that characterizes your investment strategy—for example "growth," "speculative" or "conservative." Make sure this description accurately describes your financial goals, and that the activity in your account reflects these goals. Keep in mind that your financial objectives may change over time and should be updated accordingly.

Consolidated Account Statements
Consolidated account statements are growing in popularity as a way to provide customers with a single document that combines information _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 37 regarding most or all of the customer’s financial holdings, regardless of where those assets are held. These consolidated reports offer a broad view of customers’ investments, and may provide not only account balances and valuations, but also performance data. In many cases, these consolidated reports are prepared at the request of the customer, who may also direct which of his or her accounts to include and provide access to data for accounts not held by their brokerage firm. Investors should understand that these communications supplement, but do not replace, the required brokerage account statement. If you receive consolidated statements—read them carefully. Many of the red flags cited above also apply to consolidated statements. But you shouldn’t substitute the reading of your brokerage statement with reading only the consolidated one. If you get both—read, compare and understand both—but keep in mind that it is the official brokerage statement which is used in case of a dispute with your broker or brokerage firm.

Carefully Review Your Trade Confirmations
Trade confirmations contain key trade details. These include the date and time of the transaction, price at which you bought or sold a security and the quantity of shares bought or sold. When a single keystroke can make the difference between 100 and 1,000 shares, it is important to review this information carefully—and as soon as you receive a confirmation. Confirmations also inform you of whether your broker acted as an agent for you or another customer, or whether the broker or brokerage firm acted as a principal for its own account. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 38 In equity transactions, if the firm acts as agent, that means the firm acts on your behalf to buy or sell a security. In this capacity, the firm must disclose the amount of the commission you were charged either on the confirmation, or upon request by you. If the firm acts as principal, it is acting for its own benefit, and any markup, markdown or commission-equivalent must be disclosed on the confirmation. In bond transactions, if the firm acts as agent, it must disclose the amount of the commission you were charged either on the confirmation, or upon request by you, just as with equity transactions. However, where the firm acts as principal and executes trades from its own account at net prices the price you pay (or receive) for the bond includes the firm’s markup or markdown. The firm is not required to disclose this amount to you.

Don’t Be Shy
Don’t hesitate to ask your broker to provide the details about mark-up, mark-downs or any fees or commissions associated with your investment. These costs ultimately impact the overall return on your investment and you have a right to know this information. If you feel that these costs are excessive, you may file a complaint using FINRA’s online Complaint Center. As with account statements, trade confirmations also include the clearing firm and its contact information, which may be extremely helpful should you have trouble tracking down your investments, or in the event your brokerage firm closes its doors. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 39 Many of the tips and red flags associated with account statements also apply to trade confirmations. In addition, the following checklist can help you avoid problems: Check your trade confirmation against the information in your brokerage statement for the period in which the trade took place. Confirm the date and transaction amount. Contact the firm about any trade you did not authorize, and re-confirm any oral communication in writing with the firm. Confirmations might indicate whether trades are unsolicited or solicited. Check to be sure trades are properly categorized. Treat as a red flag an investment that was the broker’s idea, but reflected on the confirmation as an unsolicited trade. Scrutinize any fees that might have been added—for example, handling fees or mailing charges—and be sure to ask for an explanation for any fees you had not expected or that seem unreasonable. For example, FINRA recently took enforcement actions against five brokerage firms that mischaracterized commissions on trade confirmations and fee schedules to look like handling services and postage charges.

Bottom Line
Always check to see if there are inaccuracies or discrepancies in any of your statements—and, if so, contact your broker or firm as soon as possible. If the problem is not resolved, file a complaint using FINRA's online Complaint Center. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 43 NUMBER 3

President Obama signed the JOBS Act - April 5, 2012. Will Announce New Steps to Promote Access to Capital for Entrepreneurs and Protections for Investors
WASHINGTON, DC – President Obama signed the Jumpstart Our Business Startups (JOBS) Act, a bipartisan bill that enacts many of the President’s proposals to encourage startups and support our nation’s small businesses. The President believes that our small businesses and startups are driving the recovery and job creation. That’s why he put forward a number of specific ways to encourage small business and startup investment in the American Jobs Act last fall, and worked with members on both sides of the aisle to sign these common-sense measures into law today. The JOBS Act will allow Main Street small businesses and high-growth enterprises to raise capital from investors more efficiently, allowing small and young firms across the country to grow and hire faster. “America’s high-growth entrepreneurs and small businesses play a vital role in creating jobs and growing the economy,” said President Obama. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 44 “I’m pleased Congress took bipartisan action to pass this bill. These proposals will help entrepreneurs raise the capital they need to put Americans back to work and create an economy that’s built to last.” Throughout this effort, the President has maintained a strong focus on ensuring that we expand access to capital for young firms in a way that is consistent with sound investor protections. To that end, the President today will call on the Treasury, Small Business Administration and Department of Justice to closely monitor this legislation and report regularly to him with its findings. In addition, major crowfunding organizations sent a letter to the President today committing to core investor protections, including a new code of conduct for crowdfunding platforms. In March of last year, the President directed his Administration to host a conference titled “Access to Capital: Fostering Growth and Innovation for Small Companies.” The conference brought together policymakers and key stakeholders whose ideas directly led to many of the proposals contained in the JOBS Act. A primary takeaway from the conference was that capital from public and private investors helps entrepreneurs achieve their dreams and turn ideas into startups that create jobs and fuel sustainable economic growth.

Key Elements of the JOBS Act
The JOBS Act includes all three of the capital formation priorities that the President first raised in his September 2011 address to a Joint Session of Congress, and outlined in more detail in his Startup America Legislative Agenda to Congress in January 2012: allowing “crowdfunding,” expanding “mini-public offerings,” and creating an “IPO on-ramp” consistent with investor protections. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 45 The JOBS Act is a product of bipartisan cooperation, with the President and Congress working together to promote American entrepreneurship and innovation while maintaining important protections for American investors. It will help growing businesses access financing while maintaining investor protections, in several ways: • Allowing Small Businesses to Harness “Crowdfunding”: The Internet already has been a tool for fundraising from many thousands of donors. Subject to rulemaking by the U.S. Securities and Exchange Commission (SEC), startups and small businesses will be allowed to raise up to $1 million annually from many small-dollar investors through web-based platforms, democratizing access to capital. Because the Senate acted on a bipartisan amendment, the bill includes key investor protections the President called for, including a requirement that all crowdfunding must occur through platforms that are registered with a self-regulatory organization and regulated by the SEC. In addition, investors’ annual combined investments in crowdfunded securities will be limited based on an income and net worth test. • Expanding “Mini Public Offerings”: Prior to this legislation, the existing “Regulation A” exemption from certain SEC requirements for small businesses seeking to raise less than $5 million in a public offering was seldom used. The JOBS Act will raise this threshold to $50 million, streamlining the process for smaller innovative companies to raise capital consistent with investor protections. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 46 • Creating an “IPO On-Ramp”: The JOBS Act makes it easier for young, high-growth firms to go public by providing an incubator period for a new class of “Emerging Growth Companies.” During this period, qualifying companies will have time to reach compliance with certain public company disclosure and auditing requirements after their initial public offering (IPO). Any firm that goes public already has up to two years after its IPO to comply with certain Sarbanes-Oxley auditing requirements. The JOBS Act extends that period to a maximum of five years, or less if during the on-ramp period a company achieves $1 billion in gross revenue, $700 million in public float, or issues more than $1 billion in non-convertible debt in the previous three years. Additionally, the JOBS Act changes some existing limitations on how companies can solicit private investments from “accredited investors,” tasks the SEC with ensuring that companies take reasonable steps to verify that such investors are accredited, and gives companies more flexibility to plan their access to public markets and incentivize employees. Additional Initiatives Announced Today to Promote Capital Access and Investor Protection • Monitoring of JOBS Act Implementation: The President is directing the Treasury Department, Small Business Administration and Department of Justice to closely monitor the implementation of this legislation to ensure that it is achieving its goals of enhancing access capital while maintaining appropriate investor protections. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 47 These agencies, consulting closely with the SEC and key non-governmental stakeholders, will report their findings to the President on a biannual basis, and will include recommendations for additional necessary steps to ensure that the legislation achieves its goals. • Crowdfunding Platforms Commit to Investor Protections: In a letter to President Obama, a consortium of crowdfunding companies are committing to work with the SEC to develop appropriate regulation of the industry, as required by the JOBS Act. Members of this leadership group are committing to establish core investor protections, including an enforceable code of conduct for crowdfunding platforms, standardized methods to ensure that investors do not exceed statutory limits, thorough vetting of companies raising funds through crowdfunding, and an industry standard “Investors’ Bill of Rights.”

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 48 NUMBER 4

Learning more about Supervisory Agencies BaFin - Bundesanstalt für Finanzdienstleistungsaufsicht Bundesrepublik Deutschland (Federal Republic of Germany)
Since it was established in May 2002, the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht - known as BaFin for short) has brought the supervision of banks and financial services providers, insurance undertakings and securities trading under one roof. BaFin is an independent public-law institution and is subject to the legal and technical oversight of the Federal Ministry of Finance. It is funded by fees and contributions from the institutions and undertakings that it supervises. It is therefore independent of the Federal Budget.

Organisation
Banking Supervision, Insurance Supervision and Securities Supervision/Asset Management are three different organisational units within BaFin – the so-called Directorates.

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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International
The large number of players operating on the global financial markets has been increasing steadily for many years now. Even though there is no legal framework that is binding internationally, markets are still expanding across borders. Financial supervision, however, is still largely inward-looking, since sovereign powers usually end at the national border.

Functions
BaFin operates in the public interest. Its primary objective is to ensure the proper functioning, stability and integrity of the German financial system. Bank customers, insurance policyholders and investors ought to be able to trust the financial system. BaFin has over 1,900 employees working in Bonn and Frankfurt am Main. They supervise around 1,900 banks, 717 financial services institutions, approximately 600 insurance undertakings and 30 pension funds as well as around 6,000 domestic investment funds and 73 asset management companies (as of March 2011). Under its solvency supervision, BaFin ensures the ability of banks, financial services institutions and insurance undertakings to meet their payment obligations. Through its market supervision, BaFin also enforces standards of professional conduct which preserve investors' trust in the financial markets. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 50 As part of its investor protection, BaFin also seeks to prevent unauthorised financial business.

Legal basis
BaFin’s By-Laws represent a major set of precepts for how it acts. They contain regulations governing its structure and organisation and its rights and obligations. They also govern the functions and powers of BaFin’s supervisory body, its Administrative Council (Verwaltungsrat), and details of its budget. BaFin also bases the way in which it carries out its supervisory activities on the Mission Statement it gave itself shortly after it was established. According to this Mission Statement, BaFin’s function is to limit risks to the German financial system at both the national and international level and to ensure that Germany as a financial centre continues to function properly and that its integrity is preserved. As part of the Federal administration, BaFin is subject to the legal and technical oversight of the Federal Ministry of Finance, with the framework of which the legality and fitness for purpose of BaFin's administrative actions are monitored.

BaFin Text Solvency II
Among other things, Solvency II – the project to reform the European legal framework for insurance supervision – harmonises the solvency capital requirements for insurance firms and groups. Following the adoption of the Solvency II Directive in November 2009, the focus in 2010 was on developing the implementing measures that are _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 51 to be adopted and on performing the fifth quantitative impact study (QIS5). It is currently planned to make the initial amendments to the Solvency II Directive at the end of 2011 by way of the Omnibus II Directive, for which the European Commission presented a proposal on 19 January 2011. This contains amendments to two key areas of legislation. Firstly, it amends directives governing insurance and securities prospectuses to reflect the new EU rules on financial market supervision and in particular the new EU financial supervisory authorities that began work on 1 January 2011. For example, EIOPA is incorporated into the Solvency II Directive as the successor to CEIOPS. Provision is also made for the binding settlement of disputes by EIOPA. Secondly, the proposal contains amendments to the Solvency II Directive. For example, the Directive provides for the implementation of Solvency II to be postponed by two months until 1 January 2013. The Omnibus II Directive also enables the European Commission to specify transitional requirements for individual elements of the Framework Directive, with different maximum transition periods being set for each area. The Omnibus II Directive is of considerable significance for the continuing evolution of Solvency II. For technical reasons, the European Commission cannot present the official draft of the Solvency II implementing measures until after the Omnibus II Directive has been adopted. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 52 The Omnibus II Directive will therefore have a significant influence on the ongoing work on the implementing measures.

Implementing measures
The Solvency II Directive gives the European Commission the authority to adopt implementing measures for particular areas. These are intended to add detail to the Directive and hence improve the harmonisation and consistency of supervision in Europe. In spring 2010, CEIOPS submitted its proposals in this area to the Commission, which at the end of 2010 presented an initial informal full draft of the implementing measures based on the proposals. In 2011, this draft will be discussed further with the member states, with specific consideration being given to the findings of QIS5. The official draft of the Solvency II implementing measures will not be presented by the Commission and discussed with the Council and the Parliament until after the Omnibus II Directive has been adopted.

Impact studies
The QIS5 study conducted by the Commission in the year under review is based on the Solvency II Directive and reflects the implementing measures developed up until that time. The objective was to test the quantitative impact of Solvency II in detail. European insurance firms and groups were asked to take part in the study between July and November 2010. The results received from solo firms were initially evaluated by the national supervisory authorities, while the data received from groups were analysed by CEIOPS or EIOPA. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 53 All results and findings were incorporated into a European report, which EIOPA presented to the Commission in March 2011. In addition, BaFin published a national report. The results of the study will have a major influence on the discussion regarding the Solvency II implementing measures

Guidelines for supervisors
In future, the provisions of the Directive and the implementing measures adopted by the European Council and the European Parliament will be complemented by guidelines for supervisors adopted by EIPOA, with the aim being to further harmonise supervisory practice in Europe. The four existing CEIOPS and EIOPA working groups began work on these guidelines in the year under review. In addition, EIOPA will develop binding standards (on the design of the yield curve, for example). One of the working groups, the Financial Requirements Expert Group (FinReq), has three areas of work: capital requirements (SCR/MCR), the statement of technical provisions and own funds. Among other things, it has drawn up initial proposals for guidelines related to the procedure to be followed for the approval of undertaking-specific parameters for use in calculating the solvency capital requirement and the recognition of ancillary own funds. In cooperation with the Groupe Consultatif, a forum of European actuarial associations, it is also developing actuarial standards for calculating technical provisions. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 54 The Internal Governance, Supervisory Review and Reporting Expert Group (IGSRR) is responsible for the requirements for public disclosure and supervisory reporting by undertakings, capital addons and the valuation of assets and liabilities, and is developing guidance for supervisors on what the supervisory process may look like under Solvency II. In doing so, it is focusing specifically on the evaluation of the own risk and solvency assessment (ORSA) and the templates for future reporting to supervisors. On a closely related topic, consideration is being given to how and which data may in future be exchanged electronically between national supervisory authorities and with EIOPA. In 2010, the Internal Models Expert Group (IntMod) developed guidance on the use test and on calibration, showing supervisors and the insurance industry how they can fulfil the future requirements. The Group also drew up general guidelines on hitherto less-discussed topics, such as the inclusion of profit and loss attribution in the internal model. The fourth CEIOPS/EIOPA working group, the Insurance Groups Supervision Committee (IGSC), is drawing up guidance on practical cooperation in the colleges and in coordinating measures. The working group is also developing harmonised approaches for identifying, reporting and assessing risk concentrations and intragroup transactions.

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 56 NUMBER 5

Federal Reserve Policy Statement on Rental of Residential Other Real Estate Owned Properties
April 5, 2012 In light of the large volume of distressed residential properties and the indications of higher demand for rental housing in many markets, some banking organizations may choose to make greater use of rental activities in their disposition strategies than in the past. This policy statement reminds banking organizations and examiners that the Federal Reserve’s regulations and policies permit the rental of residential other real estate owned (OREO) properties to third party tenants as part of an orderly disposition strategy within statutory and regulatory limits. [The term “residential properties” in this policy statement encompasses all one-to-four family properties and does not include multi-family residential or commercial properties.] This policy statement applies to state member banks, bank holding companies, nonbank subsidiaries of bank holding companies, savings and loan holding companies, non-thrift subsidiaries of savings and loan holding companies, and U.S. branches and agencies of foreign banking organizations (collectively, banking organizations). The general policy of the Federal Reserve is that banking organizations should make good-faith efforts to dispose of OREO properties at the earliest practicable date. Consistent with this policy, in light of the extraordinary market conditions that currently prevail, banking organizations may rent residential OREO properties (within statutory and regulatory holding _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 57 period limits) without having to demonstrate continuous active marketing of the property, provided that suitable policies and procedures are followed. Under these conditions and circumstances, banking organizations would not contravene supervisory expectations that they show “good-faith efforts” to dispose of OREO by renting the property within the applicable holding period. Moreover, to the extent that OREO rental properties meet the definition of community development under the Community Reinvestment Act (CRA) regulations, they would receive favorable CRA consideration. In all respects, banking organizations that rent OREO properties are expected to comply with all applicable federal, state, and local statutes and regulations.

Background
Home prices have been under considerable downward pressure since the financial crisis began, in part due to the large volume of houses for sale by creditors, whether acquired through foreclosure or voluntary surrender of the property by a seriously delinquent borrower (distressed sales). Creditors, in turn, often seek to liquidate their inventories of such properties quickly. Since 2008, it is estimated that millions of residential properties have passed through lender inventories. These distressed sales represent a significant proportion of all home sales transactions, despite some ebb and flow, and thus are a contributing element to the downward pressure on home prices. With mortgage delinquency rates remaining stubbornly high, the continued inflow of new real estate owned properties to the market _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 58 --expected to be millions more over the coming years-- will continue to weigh on house prices for some time. Banking organizations include their holdings of such properties in OREO on regulatory reports and other financial statements. Existing federal and state laws and regulations limit the amount of time banking organizations may hold OREO property. In addition, there are established supervisory expectations for management of OREO properties and the nature of the efforts banking organizations should make to dispose of these properties during that period.

Risk Management Considerations for Residential OREO Property Rentals
In all circumstances, the Federal Reserve expects a banking organization considering such rentals to evaluate the overall costs, benefits, and risks of renting. The banking organization’s decision to rent OREO might depend significantly on the condition of individual properties, local market conditions for rental and owner-occupied housing, and its capacity to engage in rental activity in a safe and sound manner and consistent with applicable laws and regulations. Banking organizations should have an operational framework for their residential OREO rental activities that is appropriate to the extent to which they rent OREO properties. In general, banking organizations with relatively small holdings of residential OREO properties--fewer than 50 individual properties rented or available for rent--should use a framework that appropriately records the organizations’ rental decisions and transactions as they take place, _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 59 preserves key documents, and is otherwise sufficient to safeguard and manage the individual OREO assets. In contrast, banking organizations with large inventories of residential OREO properties-- 50 or more individual properties available for rent or rented--should utilize a framework that systematically documents how they meet the supervisory expectations described in the next section. All banking organizations that rent OREO properties, irrespective of the size of their holdings, should adhere to the guidance set forth in this section.

Compliance with maximum OREO holding-period requirements
Banking organizations should pursue a clear and credible approach for ultimate sale of the rental OREO property within the applicable holding-period limitations. Exit strategies in some cases may include special transaction features to facilitate the sale of OREO, potentially including prudent use of seller-assisted financing or rent-to-own arrangements with tenants.

Compliance with landlord-tenant and other associated requirements
Banking organizations’ residential property rental activities are expected to comply with all applicable federal, state, and local laws and regulations, including: - landlord-tenant laws; - landlord licensing or registration requirements; property maintenance standards;

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 60 - eviction protections (such as under the Protecting Tenants at Foreclosure Act); - protections under the Servicemembers Civil Relief Act; and - anti-discrimination laws, including the applicable provisions of the Fair Housing Act and the Americans with Disabilities Act. Prior to undertaking the rental of OREO properties, banking organizations should determine whether such activities are legally permissible under applicable laws, including state laws. When applicable, banking organizations should review homeowner and condominium association bylaws and local zoning laws for prohibitions on renting a property. Banking organizations may use third-party vendors to manage properties but should provide necessary oversight to ensure that property managers fully understand and comply with these federal, state, and local requirements.

Other considerations
Banking organizations should account for OREO assets in accordance with generally accepted accounting principles and applicable regulatory reporting instructions. Banking organizations should also provide the appropriate classification treatment for their residential OREO holdings. Residential OREO is typically treated as a substandard asset, as defined by the interagency classification guidelines. However, residential properties with leases in place and demonstrated cash flow from rental operations sufficient to generate a reasonable rate of return should generally not be classified. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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Specific Expectations for Large-Scale Residential OREO Rentals
Banking organizations with large inventories of residential OREO properties that decide to engage in rental activities should have in place a documented rental strategy, including formal policies and procedures for OREO rental activities, and a documented operational framework. Policies and procedures should clearly describe how the banking organization will comply with all applicable laws and regulations. Policies and procedures should include processes for determining whether the properties meet local building code requirements and are otherwise habitable, and whether improvements to the properties are needed in order to market them for rent. In addition, policies and procedures should establish operational standards for the banking organization’s rental activities, including that adequate insurance policies are in place, that property and other tax obligations are met on a timely basis, and that expenditures on improvements are appropriate to the value of the property and to prevailing norms in the local market. Policies and procedures should also require plans for rental of residential OREO properties, down to the individual property level, that cover the full holding period from the time the bank received title to ultimate sale by the bank. Plans should identify which properties would be eligible for rental. Plans also should establish criteria by which properties are chosen for marketing as rental properties, and the process by which rental decisions should be made and implemented. Plans should describe the general conditions under which the organization believes a rental approach is likely to be successful, _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 62 including appropriate consideration of rental market and economic conditions in respective local markets. Finally, policies and procedures should address all risk management issues that arise in renting residential OREO properties. Some risk elements parallel those found in other banking activities, for example, the credit risk associated with tenants’ potential failure to make timely rent payments, or potential conflict of interest issues such as the use of a firm by a banking organization to both provide information on a property’s value and list that property for sale on behalf of the banking organization. Other risks unique to such rental include: Dealing with vacancy, marketing, and re-rental of previously occupied properties; Liability risk arising from rental activities, along with the use and management of liability insurance or other approaches to mitigate that liability and risk; and Legal requirements arising from the potential need to take action against tenants for rent delinquency, potentially including eviction. Such requirements may include notice periods. Banking organizations may need to develop new policies and risk management processes to address properly these categories of risk. In many cases, banking organizations will use third-party vendors (for example, real estate agents or professional property managers) to manage their OREO properties. Policies and procedures should provide that such individuals or organizations have appropriate expertise in property management, be in sound financial condition, and have a good track record in managing _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 63 similar properties. Policies and procedures should also call for contracts with such vendors to carry appropriate terms and provide, among other key elements, for adequate management information systems and reporting to the banking organization, including rent rolls (along with actual lease agreements), maintenance logs, and security deposits and charges to these deposits. Banking organizations should provide for adequate oversight of vendors.

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 64 NUMBER 6

We have access to the minutes of the Federal Open Market Committee Developments in Financial Markets and the Federal Reserve's Balance Sheet Staff Review of the Economic Situation
The information reviewed at the March 13 meeting suggested that economic activity was expanding moderately. Labor market conditions continued to improve and the unemployment rate declined further, although it remained elevated. Overall consumer price inflation was relatively subdued in recent months. More recently, prices of crude oil and gasoline increased substantially. Measures of long-run inflation expectations remained stable. Private nonfarm employment rose at an appreciably faster average pace in January and February than in the fourth quarter of last year, and declines in total government employment slowed in recent months. The unemployment rate decreased to 8.3 percent in January and stayed at that level in February. Both the rate of long-duration unemployment and the share of workers employed part time for economic reasons continued to be high. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 65 Initial claims for unemployment insurance trended lower over the intermeeting period and were at a level consistent with further moderate job gains. Manufacturing production increased considerably in January, and the rate of manufacturing capacity utilization stepped up. Factory output was boosted by a sizable expansion in the production of motor vehicles, but there also were solid and widespread gains in other industries. In February, motor vehicle assemblies remained near the strong pace recorded in January; they were scheduled to edge up, on net, through the second quarter. Broader indicators of manufacturing activity, such as the diffusion indexes of new orders from the national and regional manufacturing surveys, were at levels suggesting moderate increases in factory production in the coming months. Households' real disposable income increased, on balance, in December and January as labor earnings rose solidly. Moreover, households' net worth grew in the fourth quarter of last year and likely was boosted further by gains in equity values thus far this year. Nevertheless, real personal consumption expenditures (PCE) were reported to have been flat in December and January. Although households' purchases of motor vehicles rose briskly, spending for other consumer goods and services was weak. In February, nominal retail sales excluding purchases at motor vehicle and parts outlets increased moderately, while motor vehicle sales continued to climb. Consumer sentiment was little changed in February, and households _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 66 remained downbeat about both the economic outlook and their own income and finances. Housing market activity improved somewhat in recent months but continued to be restrained by the substantial inventory of foreclosed and distressed properties, tight credit conditions for mortgage loans, and uncertainty about the economic outlook and future home prices. After increasing in December, starts of new single-family homes remained at that higher level in January, likely boosted in part by unseasonably warm weather; in both months, starts ran above permit issuance. Sales of new and existing homes stepped up further in recent months, though they still remained at quite low levels. Home prices were flat, on balance, in December and January. Real business expenditures on equipment and software rose at a notably slower pace in the fourth quarter of last year than earlier in the year. Moreover, nominal orders and shipments of nondefense capital goods declined in January. However, a number of forward-looking indicators of firms' equipment spending improved, including some survey measures of business conditions and capital spending plans. Nominal business spending for nonresidential construction firmed, on net, in December and January, but the level of spending was still subdued, in part reflecting high vacancy rates and tight credit conditions for construction loans. Inventories in most industries looked to be reasonably well aligned with sales in recent months, although stocks of motor vehicles continued to be lean. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 67 Data for federal government spending in January and February indicated that real defense expenditures continued to step down after decreasing significantly in the fourth quarter. Real state and local government purchases looked to be declining at a slower pace than last year, as those governments' payrolls edged up in January and February and their nominal construction spending rose a little in January. The U.S. international trade deficit widened in December and January, as imports increased more than exports. The expansion of imports was spread across most categories, with petroleum products and automotive products posting strong gains in January. The rise in exports was supported by shipments of capital goods and automotive products, while exports of consumer goods and industrial supplies declined on average. Data through December indicated that net exports made a moderate negative contribution to the rate of growth in real gross domestic product (GDP) in the fourth quarter of last year. Overall U.S. consumer prices, as measured by the PCE price index, increased at a modest rate in December and January. Consumer energy prices rose in January after decreasing markedly in December, and survey data indicated that gasoline prices moved up considerably in February and early March. Meanwhile, increases in consumer food prices slowed in recent months. Consumer prices excluding food and energy also rose modestly in December and January. Near-term inflation expectations from the Thomson Reuters/University _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 68 of Michigan Surveys of Consumers were unchanged in February, and longer-term inflation expectations in the survey remained in their recent range. Measures of labor compensation generally indicated that nominal wage gains continued to be subdued. Increases in compensation per hour in the nonfarm business sector picked up somewhat over the four quarters of 2011. However, the employment cost index increased at a more modest pace than the compensation per hour measure over the past year, and the 12-month change in average hourly earnings for all employees remained muted in January and February. Recent indicators suggested some improvement in foreign economic activity early this year after a significant slowing in the fourth quarter of last year. Aggregate output in the euro area contracted in the fourth quarter, but manufacturing purchasing managers indexes (PMIs) improved in January and February relative to their low fourth-quarter readings, and consumer and business confidence edged up. Floods caused steep production declines in the fourth quarter in Thailand and also had negative effects on output in other countries linked through Thai supply chains. However, economic activity in Thailand recovered sharply around year-end, and manufacturing PMIs moved up across Asia through February. Higher prices for energy and food put upward pressure on headline inflation in foreign economies, but measures of core inflation remained subdued. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 69

Staff Review of the Financial Situation
On balance, U.S. financial conditions became somewhat more supportive of growth over the intermeeting period, and strains in global financial markets eased, as domestic and foreign economic data were generally better than market participants had expected and investors appeared to see diminished downside risks associated with the situation in Europe. Measures of the expected path for the federal funds rate derived from overnight index swap (OIS) rates suggested that the near-term portion of the expected policy rate path was about unchanged, on balance, since the January FOMC meeting, but the path beyond the middle of 2014 shifted down a bit, reportedly reflecting in part the change in the forward rate guidance in the Committee's January statement. On balance, yields on Treasury securities were little changed over the intermeeting period. Indicators of inflation compensation over the next five years edged up, while changes in measures of longer-term inflation compensation were mixed. Conditions in unsecured short-term dollar funding markets improved over the period, especially for financial institutions with European parents. The spread of the three-month London interbank offered rate (LIBOR) over the OIS rate narrowed. In addition, spreads of rates on asset-backed commercial paper over those on AA-rated nonfinancial paper decreased significantly, and the amounts outstanding from programs with European sponsors remained stable. Moreover, the average maturity of unsecured U.S. commercial paper issued by European banks lengthened somewhat over the intermeeting period. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 70 Responses to the March 2012 Senior Credit Officer Opinion Survey on Dealer Financing Terms indicated little change, on balance, over the past three months in credit terms for important classes of counterparties. Demand for securities financing was reported to have risen somewhat across asset types, but dealers indicated that the risk appetite of most clients had changed relatively little over the previous three months. Broad U.S. equity price indexes rose significantly over the intermeeting period; equity prices of large banking organizations increased about in line with the broader market. Aggregate earnings per share for firms in the Standard & Poor's 500 index declined in the fourth quarter, but profit margins for large corporations remained wide by historical standards. Reflecting a narrowing of spreads over yields on comparable-maturity Treasury securities, yields on investment- and speculative-grade corporate bonds continued to decline over the period, moving toward the low end of their historical ranges. Prices in the secondary market for syndicated leveraged loans moved up further, supported by continued strong demand from institutional investors. The spreads of yields on A2/P2-rated unsecured commercial paper issued by nonfinancial firms over yields on A1/P1-rated issues narrowed slightly on balance. Bond issuance by financial firms was strong in January and February, likely reflecting in part the refinancing of maturing debt that had been issued during the financial crisis under the Federal Deposit Insurance Corporation's Temporary Liquidity Guarantee Program. The issuance of bonds by domestic nonfinancial firms was solid in recent months, and indicators of credit quality remained firm. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 71 Growth of commercial and industrial (C&I) loans continued to be substantial and was widespread across domestic banks, though holdings of such loans at U.S. branches and agencies of European banks decreased further. Financing conditions in the commercial real estate sector continued to be tight, and issuance of commercial mortgage-backed securities remained low in the fourth quarter of last year. Gross public equity issuance by nonfinancial firms was still solid in January and February, boosted by continued strength in initial public offerings. Share repurchases and cash-financed mergers by nonfinancial firms maintained their strength in the fourth quarter, leading to a sharp decline in net equity issuance. Although mortgage rates remained near their historical lows, conditions in residential mortgage markets generally remained depressed. Consumer credit rose in recent months, with the growth in nonrevolving credit led by continued rapid expansion of government-originated student loans. Issuance of consumer credit asset-backed securities remained at moderate levels in the fourth quarter of 2011 and in early 2012. Gross long-term issuance of municipal bonds was subdued in the first two months of this year. Meanwhile, spreads on credit default swaps for debt issued by states were roughly flat over the intermeeting period. Bank credit rose at a modest pace, on average, in January and February, mainly reflecting strong increases in securities holdings and C&I loans. Commercial real estate loans held by banks continued to decline, while _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 72 noncore loans--a category that includes lending to nonbank financial institutions--grew at a slower pace than in previous months. The aggregate credit quality of loans on banks' books continued to improve across most asset classes in the fourth quarter. M2 advanced at a rapid pace in January, apparently reflecting year-end effects, but its growth slowed in February. The rise in M2 was mainly attributable to continued strength in liquid deposits, reflecting investors' preferences for safe and liquid assets as well as very low yields on short-term instruments outside M2. Currency expanded robustly, and the monetary base also grew significantly over January and February. Foreign equity markets ended the period higher, particularly in Japan, and benchmark sovereign bond yields declined. Spreads of yields on euro-area peripheral sovereign debt over those on German bunds generally continued to narrow, and foreign corporate credit spreads also declined further. The staff's broad nominal index of the foreign exchange value of the dollar moved down modestly over the intermeeting period. Funding conditions for euro-area banks eased over the period, as the European Central Bank (ECB) conducted its second three-year refinancing operation and widened the pool of eligible collateral for refinancing operations. Spreads of three-month euro LIBOR over the OIS rate narrowed, on balance, and European banks' issuance of unsecured senior debt and covered bonds increased. Dollar funding pressures continued to diminish, and the implied cost of dollar funding through the foreign exchange swap market fell moderately _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 73 further. Reflecting the improved conditions in funding markets, demand for dollars at ECB lending operations declined and the outstanding amounts drawn under the Federal Reserve's dollar liquidity swap lines with other foreign central banks remained small. Several other central banks in advanced and emerging market economies eased policy further. In particular, the Bank of England increased the size of its existing gilt purchase program in February, and the Bank of Japan scaled up its Asset Purchase Program. The Bank of Japan also introduced a 1 percent inflation goal.

Staff Economic Outlook
In the economic projection prepared for the March FOMC meeting, the staff revised up its near-term forecast for real GDP growth a little. Although the recent data on aggregate spending were, on balance, about in line with the staff's expectations at the time of the previous forecast, indicators of labor market conditions and production improved somewhat more than the staff had anticipated. In addition, the decline in the unemployment rate over the past year was larger than what seemed consistent with the modest reported rate of real GDP growth. Against this backdrop, the staff reduced its estimate of the level of potential output, yielding a measure of the current output gap that was a little narrower and better aligned with the staff's estimate of labor market slack. In its March forecast, the staff's projection for real GDP growth over the medium term was somewhat higher than the one presented in January, _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 74 mostly reflecting an improved outlook for economic activity abroad, a lower foreign exchange value for the dollar, and a higher projected path of equity prices. Nevertheless, the staff continued to forecast that real GDP growth would pick up only gradually in 2012 and 2013, supported by accommodative monetary policy, easing credit conditions, and improvements in consumer and business sentiment. The wide margin of slack in product and labor markets was expected to decrease gradually over the projection period, but the unemployment rate was expected to remain elevated at the end of 2013. The staff also revised up its forecast for inflation a bit compared with the projection prepared for the January FOMC meeting, reflecting recent data indicating higher paths for the prices of oil, other commodities, and imports, along with a somewhat narrower margin of economic slack in the March forecast. However, with energy prices expected to level out in the second half of this year, substantial resource slack persisting over the forecast period, and stable long-run inflation expectations, the staff continued to project that inflation would be subdued in 2012 and 2013. Participants' Views on Current Conditions and the Economic Outlook In their discussion of the economic situation and outlook, meeting participants agreed that the information received since the Committee's previous meeting, while mixed, had been positive, on balance, and suggested that the economy had been expanding moderately. Labor market conditions had improved further: Payroll employment had continued to expand, and the unemployment rate had declined notably in recent months. Still, unemployment remained elevated. Household spending and business fixed investment had continued to _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 75 advance. Despite signs of improvement or stabilization in some local housing markets, most participants agreed that the housing sector remained depressed. Inflation had been subdued in recent months, although prices of crude oil and gasoline had increased of late. Longer-term inflation expectations had remained stable, and most meeting participants saw little evidence of cost pressures. With respect to the economic outlook, participants generally saw the intermeeting news as suggesting that economic growth over coming quarters would continue to be moderate and that the unemployment rate would decline gradually toward levels that the Committee judges to be consistent with its dual mandate. While a few participants indicated that their expectations for real GDP growth for 2012 had risen somewhat, most participants did not interpret the recent economic and financial information as pointing to a material revision to the outlook for 2013 and 2014. Financial conditions had improved notably since the January meeting: Equity prices were higher and risk spreads had declined. Nonetheless, a number of factors continued to be seen as likely to restrain the pace of economic expansion; these included slower growth in some foreign economies, prospective fiscal tightening in the United States, the weak housing market, further household deleveraging, and high levels of uncertainty among households and businesses. Participants continued to expect most of the factors restraining economic expansion to ease over time and so anticipated that the recovery would gradually gain strength. In addition, participants noted that recent policy actions in the euro area _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 76 had helped reduce financial stresses and lower downside risks in the short term; however, increased volatility in financial markets remained a possibility if measures to address the longer-term fiscal and banking issues in the euro area were not put in place in a timely fashion. Inflation had been subdued of late, although the recent increase in crude oil and gasoline prices would push up inflation temporarily. With unemployment expected to remain elevated, and with longer-term inflation expectations stable, most participants expected that inflation subsequently would run at or below the 2 percent rate that the Committee judges most consistent with its statutory mandate over the longer run. In discussing the household sector, meeting participants generally commented that consumer spending had increased moderately of late. While a few participants suggested that recent improvements in labor market conditions and the easing in financial conditions could help lay the groundwork for a strengthening in the pace of household spending, several other participants pointed to factors that would likely restrain consumption: Growth in real disposable income was still sluggish, and consumer sentiment, despite some improvement since last summer, remained weak. A number of participants viewed the recent run-up in petroleum prices as likely to limit gains in consumer spending on non-energy items for a time; a couple of participants noted, however, that the unseasonably warm weather and the declining price of natural gas had helped cushion the effect of higher oil and gasoline prices on consumers' overall energy bills. Most participants agreed that, while recent housing-sector data had shown some tentative indications of upward movement, the level of activity in that sector remained depressed and was likely to recover only slowly over time. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 77 One participant, while agreeing that the housing market had not yet turned the corner, was more optimistic about the potential for a stronger recovery in the market in light of signs of reduced inventory overhang and stronger demand in some regions. Reports from business contacts indicated that activity in the manufacturing, energy, and agriculture sectors continued to advance in recent months. In the retail sector, sales of new autos had strengthened, but reports from other retailers were mixed. A number of businesses had indicated that they were seeing some improvement in demand and that they had become somewhat more optimistic of late, with some reporting that they were adding to capacity. But most firms reportedly remained fairly cautious--particularly on hiring decisions--and continued to be uncertain about the strength of the recovery. Participants touched on the outlook for fiscal policy and the export sector. Assessments of the outlook for government revenues and expenditures were mixed. State and local government spending had recently shown modest growth, following a lengthy period of contraction, and declines in public-sector employment appeared to have abated of late. However, it was noted that if agreement was not reached on a longer-term plan for the federal budget, an abrupt and sharp fiscal tightening would occur at the start of 2013. A number of participants observed that exports continued to be a positive factor for U.S. growth, while noting risks to the export picture from economic weakness in Europe or a greater than expected slowdown in China and emerging Asia. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 78 Participants generally observed the continued improvement in labor market conditions since the January meeting. A couple of participants stated that the progress suggested by the payroll numbers was also apparent in a broad array of labor market indicators, and others noted survey measures suggesting further solid gains in employment going forward. One participant pointed to inflation readings and a high rate of long-duration unemployment as signs that the current level of output may be much closer to potential than had been thought, and a few others cited a weaker path of potential output as a characteristic of the present expansion. However, a number of participants judged that the labor market currently featured substantial slack. In support of that view, various indicators were cited, including aggregate hours, which during the recession had exhibited a decline that was particularly severe by historical standards and remained well below the series' pre-recession peak; the high number of persons working part time for economic reasons; and low ratios of job openings to unemployment and of employment to population. Most participants noted that the incoming information on components of final spending had exhibited less strength than the indicators of employment and production. Some participants expressed the view that the recent increases in payrolls likely reflected, in part, a reversal of the sharp cuts in employment during the recession, a scenario consistent with the weak readings on productivity growth of late. In this view, the recent pace of employment gains might not be sustained if the growth rate of spending did not pick up. Several participants noted that the unseasonably warm weather of recent _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 79 months added one more element of uncertainty to the interpretation of incoming data, and that this factor might account for a portion of the recent improvement in indicators of employment and housing. In a contrasting view, the improvements registered in labor market indicators could be seen as raising the likelihood that GDP data for the recent period would undergo a significant upward revision. Many participants noted that strains in global financial markets had eased somewhat, and that financial conditions were more supportive of economic growth than at the time of the January meeting. Among the evidence cited were higher equity prices and better conditions in corporate credit markets, especially the markets for high-yield bonds and leveraged loans. Banking contacts were reporting steady, though modest, growth in C&I loans. Many meeting participants believed that policy actions in the euro area, notably the Greek debt swap and the ECB's longer-term refinancing operations, had helped to ease strains in financial markets and reduced the downside risks to the U.S. and global economic outlook. Nonetheless, a number of participants noted that a longer-term solution to the banking and fiscal problems in the euro area would require substantial further adjustment in the banking and public sectors. Participants saw the possibility of disruptions in global financial markets as continuing to pose a risk to growth. While the recent readings on consumer price inflation had been subdued, participants agreed that inflation in the near term would be pushed up by rising oil and gasoline prices. A few participants noted that the crude oil price increases in the latter half of 2010 and the early part of 2011 had been part of a broad-based rise in commodity prices; in contrast, non-energy commodity prices had been more stable of late, which suggested that the recent upward pressure on _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 80 oil prices was principally due to geopolitical concerns rather than global economic growth. A couple of participants noted that recent readings on unit labor costs had shown a larger increase than earlier, but other participants pointed to other measures of labor compensation that continued to show modest increases. With longer-run inflation expectations still well anchored, most participants anticipated that after the temporary effect of the rise in oil and gasoline prices had run its course, inflation would be at or below the 2 percent rate that they judge most consistent with the Committee's dual mandate. Indeed, a few participants were concerned that, with the persistence of considerable resource slack, inflation might be below the mandate-consistent rate for some time. Other participants, however, were worried that inflation pressures could increase as the expansion continued; these participants argued that, particularly in light of the recent rise in oil and gasoline prices, maintaining the current highly accommodative stance of monetary policy over the medium run could erode the stability of inflation expectations and risk higher inflation.

Committee Policy Action
Members viewed the information on U.S. economic activity received over the intermeeting period as suggesting that the economy had been expanding moderately and generally agreed that the economic outlook, while a bit stronger overall, was broadly similar to that at the time of their January meeting. Labor market conditions had continued to improve and unemployment had declined in recent months, but almost all members saw the unemployment rate as still elevated relative to levels that they viewed as consistent with the Committee's mandate over the longer run. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 81 With the economy facing continuing headwinds, members generally expected a moderate pace of economic growth over coming quarters, with gradual further declines in the unemployment rate. Strains in global financial markets, while having eased since January, continued to pose significant downside risks to economic activity. Recent monthly readings on inflation had been subdued, and longer-term inflation expectations remained stable. Against that backdrop, members generally anticipated that the recent increase in oil and gasoline prices would push up inflation temporarily, but that subsequently inflation would run at or below the rate that the Committee judges most consistent with its mandate. In their discussion of monetary policy for the period ahead, members agreed that it would be appropriate to maintain the existing highly accommodative stance of monetary policy. In particular, they agreed to keep the target range for the federal funds rate at 0 to 1/4 percent, to continue the program of extending the average maturity of the Federal Reserve's holdings of securities as announced in September, and to retain the existing policies regarding the reinvestment of principal payments from Federal Reserve holdings of securities. With respect to the statement to be released following the meeting, members agreed that only relatively small modifications to the first two paragraphs were needed to reflect the incoming economic data, the improvement in financial conditions, and the modest changes to the economic outlook. With the economic outlook over the medium term not greatly changed, almost all members again agreed to indicate that the Committee expects to maintain a highly accommodative stance for monetary policy and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 82 at least through late 2014. Several members continued to anticipate, as in January, that the unemployment rate would still be well above their estimates of its longer-term normal level, and inflation would be at or below the Committee's longer-run objective, in late 2014. It was noted that the Committee's forward guidance is conditional on economic developments, and members concurred that the date given in the statement would be subject to revision in response to significant changes in the economic outlook. While recent employment data had been encouraging, a number of members perceived a nonnegligible risk that improvements in employment could diminish as the year progressed, as had occurred in 2010 and 2011, and saw this risk as reinforcing the case for leaving the forward guidance unchanged at this meeting. In contrast, one member judged that maintaining the current degree of policy accommodation much beyond this year would likely be inappropriate; that member anticipated that a tightening of monetary policy would be necessary well before the end of 2014 in order to keep inflation close to the Committee's 2 percent objective. The Committee also stated that it is prepared to adjust the size and composition of its securities holdings as appropriate to promote a stronger economic recovery in a context of price stability. A couple of members indicated that the initiation of additional stimulus could become necessary if the economy lost momentum or if inflation seemed likely to remain below its mandate-consistent rate of 2 percent over the medium run. At the conclusion of the discussion, the Committee voted to authorize and direct the Federal Reserve Bank of New York, until it was instructed otherwise, to execute transactions in the System Account in accordance with the following domestic policy directive: _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 83 "The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To further its long-run objectives, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to 1/4 percent. The Committee directs the Desk to continue the maturity extension program it began in September to purchase, by the end of June 2012, Treasury securities with remaining maturities of approximately 6 years to 30 years with a total face value of $400 billion, and to sell Treasury securities with remaining maturities of 3 years or less with a total face value of $400 billion. The Committee also directs the Desk to maintain its existing policies of rolling over maturing Treasury securities into new issues and of reinvesting principal payments on all agency debt and agency mortgage-backed securities in the System Open Market Account in agency mortgage-backed securities in order to maintain the total face value of domestic securities at approximately $2.6 trillion. The Committee directs the Desk to engage in dollar roll transactions as necessary to facilitate settlement of the Federal Reserve's agency MBS transactions. The System Open Market Account Manager and the Secretary will keep the Committee informed of ongoing developments regarding the System's balance sheet that could affect the attainment over time of the Committee's objectives of maximum employment and price stability." The vote encompassed approval of the statement below to be released at 2:15 p.m.: "Information received since the Federal Open Market Committee met in January suggests that the economy has been expanding moderately. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 84 Labor market conditions have improved further; the unemployment rate has declined notably in recent months but remains elevated. Household spending and business fixed investment have continued to advance. The housing sector remains depressed. Inflation has been subdued in recent months, although prices of crude oil and gasoline have increased lately. Longer-term inflation expectations have remained stable. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects moderate economic growth over coming quarters and consequently anticipates that the unemployment rate will decline gradually toward levels that the Committee judges to be consistent with its dual mandate. Strains in global financial markets have eased, though they continue to pose significant downside risks to the economic outlook. The recent increase in oil and gasoline prices will push up inflation temporarily, but the Committee anticipates that subsequently inflation will run at or below the rate that it judges most consistent with its dual mandate. To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014. The Committee also decided to continue its program to extend the _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 85 average maturity of its holdings of securities as announced in September. The Committee is maintaining its existing policies of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate to promote a stronger economic recovery in a context of price stability." Voting for this action: Ben Bernanke, William C. Dudley, Elizabeth Duke, Dennis P. Lockhart, Sandra Pianalto, Sarah Bloom Raskin, Daniel K. Tarullo, John C. Williams, and Janet L. Yellen. Voting against this action: Jeffrey M. Lacker. Mr. Lacker dissented because he did not agree that economic conditions were likely to warrant exceptionally low levels of the federal funds rate at least through late 2014. In his view, with inflation close to the Committee's objective of 2 percent, the economy expanding at a moderate pace, and downside risks somewhat diminished, the federal funds rate will most likely need to rise considerably sooner to prevent the emergence of inflationary pressures. Mr. Lacker continues to prefer to provide forward guidance regarding future Committee policy actions through the inclusion of FOMC participants' projections of the federal funds rate in the Summary of Economic Projections (SEP). _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 86

Monetary Policy Communications
As it noted in its statement of principles regarding longer-run goals and monetary policy strategy released in January, the Committee seeks to explain its monetary policy decisions to the public as clearly as possible. With that goal in mind, participants discussed a range of additional steps that the Committee might take to help the public better understand the linkages between the evolving economic outlook and the Federal Reserve's monetary policy decisions, and thus the conditionality in the Committee's forward guidance. The purpose of the discussion was to explore potentially promising approaches for further enhancing FOMC communications; no decisions on this topic were planned for this meeting and none were taken. Participants discussed ways in which the Committee might include, in its postmeeting statements, additional qualitative or quantitative information that could convey a sense of how the Committee might adjust policy in response to changes in the economic outlook. Participants also discussed whether modifications to the SEP that the Committee releases four times per year could be helpful in clarifying the linkages between the economic outlook and the Committee's monetary policy decisions. In addition, several participants suggested that it could be helpful to discuss at a future meeting some alternative economic scenarios and the monetary policy responses that might be seen as appropriate under each one, in order to clarify the Committee's likely behavior in different contingencies. Finally, participants observed that the Committee introduced several important enhancements to its policy communications over the past year or so; these included the Chairman's postmeeting press conferences as well as changes to the FOMC statement and the SEP. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 87 Against this backdrop, some participants noted that additional experience with the changes implemented to date could be helpful in evaluating potential further enhancements. It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, April 24-25, 2012. The meeting adjourned at 4:10 p.m. on March 13, 2012.

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 88 NUMBER 7

FINANCIAL STABILITY OVERSIGHT COUNCIL Authority to Require Supervision and Regulation of Certain Nonbank Financial Companies
ACTION: Final rule and interpretive guidance. Section 113 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) authorizes the Financial Stability Oversight Council (the “Council”) to determine that a nonbank financial company shall be supervised by the Board of Governors of the Federal Reserve System (the “Board of Governors”) and shall be subject to prudential standards, in accordance with Title I of the Dodd-Frank Act, if the Council determines that material financial distress at the nonbank financial company, or the nature, scope, size, scale, concentration, interconnectedness, or mix of the activities of the nonbank financial company, could pose a threat to the financial stability of the United States. Section 111 of the Dodd-Frank Act (12 U.S.C. 5321) established the Financial Stability Oversight Council. Among the purposes of the Council under section 112 of the Dodd-Frank Act (12 U.S.C. 5322) are “(A) To identify risks to the financial stability of the United States that could arise from the material financial distress or failure, or ongoing _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 89 activities, of large, interconnected bank holding companies or nonbank financial companies, or that could arise outside the financial services marketplace; (B) To promote market discipline, by eliminating expectations on the part of shareholders, creditors, and counterparties of such companies that the Government will shield them from losses in the event of failure; and (C) To respond to emerging threats to the stability of the United States financial system.” In the recent financial crisis, financial distress at certain nonbank financial companies contributed to a broad seizing up of financial markets and stress at other financial firms. Many of these nonbank financial companies were not subject to the type of regulation and consolidated supervision applied to bank holding companies, nor were there effective mechanisms in place to resolve the largest and most interconnected of these nonbank financial companies without causing further instability. To address any potential risks to U.S. financial stability posed by these companies, the Dodd-Frank Act authorizes the Council to determine that certain nonbank financial companies will be subject to supervision by the Board of Governors and prudential standards. The Board of Governors is responsible for establishing the prudential standards that will be applicable, under section 165 of the Dodd-Frank Act, to nonbank financial companies subject to a Council determination. Title I of the Dodd-Frank Act defines a “nonbank financial company” as a domestic or foreign company that is “predominantly engaged in financial activities,” other than bank holding companies and certain other types of firms. The Dodd-Frank Act provides that a company is “predominantly engaged” in financial activities if either _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 90 (i) The annual gross revenues derived by the company and all of its subsidiaries from financial activities, as well as from the ownership or control of insured depository institutions, represent 85 percent or more of the consolidated annual gross revenues of the company; or (ii) The consolidated assets of the company and all of its subsidiaries related to financial activities, as well as related to the ownership or control of insured depository institutions, represent 85 percent or more of the consolidated assets of the company. The Dodd-Frank Act requires the Board of Governors to establish the requirements for determining whether a company is “predominantly engaged in financial activities” for this purpose.

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 91 NUMBER 8

AIMA EXPRESSES CONCERN ABOUT NEW EUROPEAN COMMISSION AIFMD IMPLEMENTATION TEXT
London – 2nd April 2012: The Alternative Investment Management Association (AIMA), the global hedge fund trade association, has expressed concern about the European Commission’s new draft text for the implementation of the Alternative Investment Fund Managers Directive (AIFMD). The European Commission proposed the new text in response to advice received on implementation of AIFMD by the European Securities and Markets Authority (ESMA). It is seeking to implement AIFMD swiftly through the format of a “Regulation” which enters effect more quickly than a “Directive”, which is transposed into national law and offers member states more flexibility of implementation. The Commission has given EU member states and the European Parliament only two weeks to respond to this new text. Andrew Baker, AIMA CEO, said: “We are concerned that this draft Regulation appears to significantly and substantially diverge from the ESMA advice in a number of key areas, including third country provisions, depositaries, delegation, leverage, own funds, professional indemnity insurance, appointment of prime brokers and calculation of assets under management. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 92 “We fully respect the Commission’s right not to follow ESMA advice when producing secondary legislation. However, there should be more transparency and better consultation if the Commission has decided to depart from the advice in such crucial areas for the global asset management industry.” As a global trade association AIMA is particularly concerned about the international ramifications of the third country provisions. These relate to non-EU jurisdictions (such as the United States, Canada, Hong Kong, Singapore, Japan, Australia and Brazil) and how managers operating in those jurisdictions may access EU investors. Andrew Baker, AIMA CEO, said: “The proposed third country provisions do not appear to reflect advice the European Commission received from ESMA on implementing AIFMD. The Commission is contemplating a requirement that EU and non-EU regulators sign co-operation agreements which are legally binding on both parties. These would be extremely problematic if not impossible to conclude if the Regulation prescribes that the cooperation agreements ensure that third country regulators enforce EU law in their territories. It could be extremely difficult for many regulators to be able to sign up to that. We urge the Commission to clarify this issue in their final text. “Without cooperation agreements, asset managers outside the EU will not be able to access investors in the EU except through reverse solicitation. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 93 This would close the door to national private placement regimes in the EU, which would have a major impact on asset managers globally. It would also prevent delegation of portfolio management outside of the EU, which would be of great concern for global asset managers. “ESMA has made it clear in its advice that cooperation agreements are to be signed on a best-efforts basis and are meant to reflect international norms such as the IOSCO Multilateral Memorandum of Understanding. We hope the Commission follows this advice.”

About AIMA
As the global hedge fund association, the Alternative Investment Management Association (AIMA) has over 1,300 corporate members (with over 6,000 individual contacts) worldwide, based in over 40 countries. Members include hedge fund managers, fund of hedge funds managers, prime brokers, legal and accounting firms, investors, fund administrators and independent fund directors. They all benefit from AIMA’s active influence in policy development, its leadership in industry initiatives, including education and sound practice manuals and its excellent reputation with regulators worldwide. AIMA is a dynamic organisation that reflects its members’ interests and provides them with a vibrant global network. AIMA is committed to developing industry skills and education standards and is a co-founder of the Chartered Alternative Investment Analyst designation (CAIA) – the industry’s first and only specialised educational standard for alternative investment specialists.

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 94 NUMBER 9

Thematic review on risk governance Questionnaire for national authorities
The global financial crisis highlighted a number of corporate governance failures and weaknesses in financial institutions, including inappropriate Board structures and processes, weak risk governance systems, and unduly complex or opaque firm organisational structures and activities. Many of these shortcomings have been highlighted and documented in various reports that have been issued since 2008. The October 2011 FSB Supervisory Intensity and Effectiveness (SIE) progress report to the G20 notes that much progress has been made in corporate governance at both the supervisory and firm levels, particularly for SIFIs. However, effective risk appetite frameworks that are actionable and measurable by both firms and supervisors have not yet been widely adopted. The SIE report concludes that more intense supervisory oversight is needed to evaluate the effectiveness of improved governance, particularly risk governance that is critical to ensuring a strong risk management culture in firms. The report recommends that the FSB conduct a thematic review on risk governance to assess practices at firms, focusing on the risk committees of executive Boards, as well as the risk management functions (e.g. the Chief Risk Officer organisation) and independent assessment functions (e.g. the Chief Auditor function), and on how supervisors assess their effectiveness. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 95 In light of the recommendation of the SIE report, and the importance and cross-sectoral nature of the topic, the FSB Standing Committee on Standards Implementation (SCSI) agreed, in its conference call on 10 November 2011, to undertake a peer review on risk governance in early 2012. SCSI members also agreed that the peer review would only cover banks and broker-dealers; insurers and other non-bank financial institutions would not be covered. There is currently no single comprehensive set of principles and standards that fully address and integrate corporate and risk governance requirements. The review therefore will not assess compliance with any specific standard, but will use existing standards and recommendations (as appropriate) in order to evaluate progress as well as identify good practices and remaining gaps in firms’ risk governance frameworks, and in the assessment of those frameworks by supervisory authorities. The primary source of information for the peer review will be the responses provided to this questionnaire, and a questionnaire for firms to be developed in March. The peer review will focus on the roles and interplay between the firm’s Board members that oversee risk management, the enterprise risk management function and relevant aspects of the process for assessing the risk governance framework, processes and practices, either by internal audit or by third parties (e.g. external auditors, consultants). In particular, the peer review will focus on:

Board responsibilities and practices
The Board is responsible for ensuring that the firm has an appropriate risk governance framework given the firm’s business model, complexity and size. How Boards assume such responsibilities varies across jurisdictions and for the purposes of this report, the risk committee refers to a specialised _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 96 Board committee responsible for advising the Board on the firm’s overall current and future risk appetite and strategy, and for overseeing senior management’s implementation of that strategy.

Risk management function
The independent risk management function is responsible for the firm’s risk management framework across the entire organisation, ensuring that the firm’s risk meets the desired risk profile as approved by the Board. The risk management function is responsible for identifying, measuring, monitoring, recommending strategies to control or mitigate risks, and reporting on risk exposures.

Independent assessment of the risk governance framework by internal audit and third parties
The independent (e.g. from the business unit and risk management function) assessment of the firm’s risk framework plays a crucial role in the ongoing maintenance of a firm’s internal control, risk management and risk governance. It helps a firm accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control and governance processes. This may include internal processes, such as internal audit, or external processes such as third party reviews (e.g. external auditors, consultants). FSB member jurisdictions are requested to provide a consolidated national response to the questionnaire, which should include descriptions of differences where these exist in oversight of risk governance within the jurisdiction (e.g. for banks vs. broker dealers, based on the size, business model, complexity of the firm), with a particular emphasis on any framework or behavioural changes that have occurred since the crisis.

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 97 In order to limit the burden on FSB members and to avoid unnecessary duplication of information collection efforts, authorities can attach links to relevant documents (where available in English). Feedback should be submitted by 11 May 2012 to fsb@bis.org under the subject heading “FSB Thematic Peer Review on Risk Governance.” Individual submissions will not be made public.

National authorities’ approach toward risk governance oversight
Please describe your jurisdiction’s overall approach to assessing firms’ risk governance frameworks (e.g. legislation, regulation or supervisory guidance)? Please provide links to relevant documents. Has your jurisdiction evaluated whether such guidance is consistent with the BCBS or OECD principles on corporate governance or other recommendations provided by the industry? How does your jurisdiction assess alignment or implementation of any legislation, regulation or supervisory guidance in the area of risk governance? How does your jurisdiction determine that your significant financial institutions have effective risk governance frameworks, policies and practices? Please briefly describe whether firms in your jurisdiction have made changes in response to increased supervisory and regulatory oversight of risk governance. In addition, please provide examples of any material changes in the effectiveness of firms’ risk governance practices over the last few years (e.g. decisions regarding whether to reduce/increase certain business activities based on the Board’s risk strategy). _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 98 During the global financial crisis, were there weaknesses in your oversight of risk governance that became apparent? Please summarise any initiatives planned to strengthen your jurisdiction’s oversight of firms’ risk governance practices. Does your jurisdiction regularly review whether your supervisory, regulatory and enforcement authorities are sufficiently resourced, independent and empowered to deal with risk governance weaknesses that have been identified? Does this review include an assessment of inter-agency as well as internal communication and decision-making processes? Does your jurisdiction have dedicated teams of qualified personnel to assess firms’ risk governance frameworks, or is oversight of risk governance embedded within other risk oversight functions (e.g. operational, market or credit risk)? What regulatory and supervisory tools are available in your jurisdiction to incentivise firms to remediate deficiencies within the risk governance framework (e.g. restrictions on activities, capital charges, fines)? Please describe any regulatory or supervisory actions taken to incentivise firms to remediate weaknesses and the firm’s responses (if possible in a way that respects national confidentiality rules). How are relevant internal control weaknesses and other significant internal control deficiencies factored into the assessment of risk governance frameworks (e.g. a control deficiency that allows significant unauthorised trading activities)? Please describe any bilateral efforts initiated by supervisors in other jurisdictions regarding the supervision of risk management policies and practices. Please indicate instances where supervisory work plans have been impacted as a result of those meetings. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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Board responsibilities and practices
Risk committee refers to a specialised Board committee responsible for advising the Board on the firm’s overall current and future risk appetite and strategy, and for overseeing senior management’s implementation of that strategy. Risk committees comprising management members that reside below the Board level (e.g. within business units, management committees) do not fall in this definition.
Do supervisory requirements or expectations exist concerning the role and responsibilities of the Board for risk governance? If so, how have these requirements or expectations been established (e.g. legislation, regulation, supervisory guidance)? Do supervisory requirements or expectations exist concerning the role and responsibilities of the risk committee? If so, how have these requirements or expectations been established (e.g. legislation, regulation, supervisory guidance)? Do supervisory requirements or expectations exist concerning the governance of the Board’s own practices (and where they exist, the practices of any relevant sub-committees)? If so, how have these requirements or expectations been established (e.g. legislation, regulation, supervisory guidance)? Do supervisory requirements or expectations exist concerning the information that Boards (or any relevant sub-committees) are supposed to receive, or able to request, from the firm (e.g. CRO, risk management function) and/or third parties (e.g. external auditors, consultants)? If so, how have these requirements or expectations been established (e.g. legislation, regulation, supervisory guidance)? _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 100 How does your jurisdiction assess whether supervisory expectations or requirements concerning the Board’s responsibilities and practices (including the Board’s use of sub-committees) are achieving desired outcomes?

Risk management function
Does your jurisdiction require firms to have an independent senior executive (e.g. a Chief Risk Officer or equivalent) with distinct responsibility for the risk management function and the firm’s comprehensive risk management framework across the entire organisation? How does your jurisdiction assess the stature, authority and independence of the CRO (or equivalent) and the risk management function? Please outline what criteria are considered in your jurisdiction when assessing the stature, authority and independence. How does your jurisdiction evaluate the qualifications of the CRO and risk management personnel? How does your jurisdiction evaluate the hiring and performance evaluation process of the CRO? What is your jurisdiction’s approach to regularly assessing firms’ overall risk management policies and practices? How does your jurisdiction assess firms’ implementation of effective risk appetite frameworks? Are risk measures clearly defined, actionable and effective in enabling the firm to pursue its strategic objectives and maintain the risk profile as set out in the risk appetite framework? _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 101 Is the risk appetite assessed globally, or for each type of risk (e.g. credit, market, liquidity, operational)? How does your jurisdiction regularly assess the adequacy of firms’ risk management resources (e.g. number, quality, effectiveness)? Does your jurisdiction review the “ownership” and accountability of risk management resources? How does your jurisdiction assess the role and effectiveness of firms’ risk management process for (i) Approval of new products and material modifications to existing ones; (ii) Strategic planning; (iii) Changes in systems, processes, business models; and (iv) Major acquisitions? What work has been undertaken in your jurisdiction to assess the adequacy, timeliness, and independence of information prepared by risk management and provided to senior management and the Board (or any relevant sub-committee)? How does your jurisdiction evaluate the type and nature of risk reporting to the Board (or any relevant sub-committee)? Does it include (i) the manner in which information is compiled; (ii) what the decision-making process is for information to be included in the Board reporting; and (iii) who/what part of the firm is responsible for compiling this material? _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 102 Does your jurisdiction collect standardised information from firms on certain risk areas to (i) Compare firms’ across risk dimensions; (ii) Identify the need to initiate possible supervisory reviews; or (iii) Update supervisory risk management expectations? Does your jurisdiction assess the effectiveness of firms’ forward-looking stress tests, scenario analysis, contingency arrangements, recovery plans (e.g. raising capital or reducing exposures) and resolution plans (if any). If so, what criteria are used in this assessment? How does your jurisdiction incorporate market and macroeconomic conditions, cross-sectoral developments as well as changes in firms’ business and risk profile into your evaluation of the adequacy of risk management and its ability to respond to changing circumstances? To what extent are the requirements for the risk management function adapted to firm characteristics, such as size, complexity, business model and systemic importance?

Assessment of the risk governance framework
Does your jurisdiction require internal audit functions at firms to assess the firm’s risk governance framework at the enterprise level, legal entity level, and/or for the largest revenue-generating business units? If so, are the requirements specified in legislation, regulation or supervisory guidance? What aspects of the risk governance framework are internal auditors or other internal functions (if independent) expected to assess? _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 103 Are supervisory requirements and expectations specified in legislation, regulation or supervisory guidance? Does your jurisdiction allow the use of third parties (e.g. external auditors or other experts) to provide an independent assessment of firms’ risk governance frameworks? If so, does your jurisdiction impose any limitations on certain aspects of internal audit’s responsibilities that can be directed toward third parties (e.g. outsourced)? Are supervisory requirements and expectations specified in legislation, regulation or supervisory guidance? What aspects of the risk governance framework are external experts expected to assess? Are supervisory requirements and expectations specified in legislation, regulation or supervisory guidance? Are internal audit reports, prudential reports, and/or external expert reports monitored as part of the supervision of a firm’s risk governance assessment process? If so, please describe the types of reports and frequency of review. How does your jurisdiction evaluate the qualifications of the internal auditor and internal audit personnel? How does it evaluate the hiring and performance evaluation process of the chief auditor (or equivalent)? Where relevant, is this evaluation process also applied to third parties? How does your jurisdiction conduct assessments of the governance of firms’ risk management at the enterprise level (e.g. through on-site inspections, off-site monitoring, standard reporting mechanisms, supervisory colleges)? _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 104 Are escalation processes in place to facilitate the communication of specific situations/behaviours by individuals within a firm to the supervisor (escalation process and/or whistle-blowing)? Does your jurisdiction monitor firms’ remediation of weaknesses identified by the independent assessment of risk governance functions? If so, is the monitoring embedded in the supervisory process or based on firms’ progress reports?

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 105 NUMBER 10

The White House Blog President Obama Wants You to Know How Your Tax Dollars Are Spent
On Wednesday, we released the updated Federal Taxpayer Receipt, which lets you enter a few pieces of information about the taxes you paid last year and calculates how much of your money went toward different national priorities like education, defense, and health care. President Obama spoke about the receipt earlier this week as a “terrific way for people to be able to get information about where their tax dollars are actually going.” The breakdown below shows the different categories of spending in the 2011 Federal Budget.

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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Certified Risk and Compliance Management Professional (CRCMP) Distance learning and online certification program.
Companies like IBM, Accenture etc. consider the CRCMP a preferred certificate. You may find more if you search (CRCMP preferred certificate) using any search engine. The all-inclusive cost is $297. What is included in the price:

A. The official presentations we use in our instructor-led classes (3285 slides)
The 2309 slides are needed for the exam, as all the questions are based on these slides. The remaining 976 slides are for reference. You can find the course synopsis at: www.risk-compliance-association.com/Certified_Risk_Compliance_Tra ining.htm

B. Up to 3 Online Exams
You have to pass one exam. If you fail, you must study the official presentations and try again, but you do not need to spend money. Up to 3 exams are included in the price. To learn more you may visit: www.risk-compliance-association.com/Questions_About_The_Certifica tion_And_The_Exams_1.pdf www.risk-compliance-association.com/CRCMP_Certification_Steps_1.p df _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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C. Personalized Certificate printed in full color.
Processing, printing, packing and posting to your office or home.

D. The Dodd Frank Act and the new Risk Management Standards (976 slides, included in the 3285 slides)
The US Dodd-Frank Wall Street Reform and Consumer Protection Act is the most significant piece of legislation concerning the financial services industry in about 80 years. What does it mean for risk and compliance management professionals? It means new challenges, new jobs, new careers, and new opportunities. The bill establishes new risk management and corporate governance principles, sets up an early warning system to protect the economy from future threats, and brings more transparency and accountability. It also amends important sections of the Sarbanes Oxley Act. For example, it significantly expands whistleblower protections under the Sarbanes Oxley Act and creates additional anti-retaliation requirements.

You will find more information at:

www.risk-compliance-association.com/Distance_Learning_an d_Certification.htm

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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Visit our Risk and Compliance Management Speakers Bureau
The International Association of Risk and Compliance Professionals (IARCP) has established the Speakers Bureau for firms and organizations that want to access the expertise of Certified Risk and Compliance Management Professionals (CRCPMs) and Certified Information Systems Risk and Compliance Professionals (CISRCPs). The IARCP will be the liaison between our certified professionals and these organizations, at no cost. We strongly believe that this can be a great opportunity for both, our certified professionals and the organizers. To learn more: http://www.risk-compliance-association.com/Risk_Management_Com pliance_Speakers_Bureau.html

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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1200 G Street NW Suite 800 Washington, DC 20005-6705 USA Tel: 202-449-9750 www.risk-compliance-association.com

International Association of Risk and Compliance Professionals (IARCP)

Monday, April 16, 2012 - Top 10 risk and compliance management related news stories and world events that (for better or for worse) shaped the week's agenda, and what is next
George Lekatis President of the IARCP Dear Member, Crying is not a sign of weakness. You may let out your tears! Assuming full implementation of the Basel III requirements as of 30 June 2011, including changes to the definition of capital and risk-weighted assets, and ignoring phase-in arrangements, Group 1 banks would have an overall shortfall of €38.8 billion for the CET1 minimum capital requirement of 4.5%, which rises to €485.6 billion for a CET1 target level of 7.0% (ie including the capital conservation buffer); the latter shortfall already includes the G-SIB surcharge where applicable. As a point of reference, the sum of profits after tax prior to distributions across the same sample of Group 1 banks in the second half of 2010 and the first half of 2011 was €356.6 billion. Under the same assumptions, the capital shortfall for Group 2 banks included in the Basel III monitoring sample is estimated at €8.6 billion for the CET1 minimum of 4.5% and €32.4 billion for a CET1 target level of 7.0%. The sum of Group 2 bank profits after tax prior to distributions in the second half of 2010 and the first half of 2011 was €35.6 billion. Welcome to the Top 10 list. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

Page |2 Number 1 (Page 4) The Basel Committee published the results of its Basel III monitoring exercise. The study is based on rigorous reporting processes set up by the Committee to periodically review the implications of the Basel III standards for financial markets. Number 2 (Page 40) Study on the Cross-Border Scope of the Private Right of Action Under Section 10(b) of the Securities Exchange Act of 1934 As Required by Section 929Y of the Dodd-Frank Wall Street Reform and Consumer Protection Act Number 3 (Page 52) 12 April 2012 - The European Banking Authority (EBA) publishes today the results of the survey on the implementation of CEBS Guidelines on remuneration policies and practices. Number 4 (Page 96) Jumpstart Our Business Startups Act: Frequently Asked Questions. The Jumpstart Our Business Startups Act (the “JOBS Act”) was enacted on April 5, 2012. Number 5 (Page 101) EBA, ESMA and EIOPA publish two reports on Money Laundering. The Joint Committee of the three European Supervisory Authorities (EBA, ESMA and EIOPA) has published two reports on the implementation of the third Money Laundering Directive [2005/60/EC] (3MLD). _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

Page |3 Number 6 (Page 105) BIS - Peer review of supervisory authorities' implementation of stress testing principles. Stress testing is an important tool used by banks to identify the potential for unexpected adverse outcomes across a range of risks and scenarios. Number 7 (Page 136) The Hong Kong Monetary Authority (HKMA) announced (Thursday) that investigation of over 99% of a total of 21,851 Lehman-Brothers-related complaint cases received has been completed. Number 8 (Page 138) DARPA seeks robot enthusiasts Hardware, software, modeling and gaming developers sought to link with emergency response and science communities to design robots capable of supervised autonomous response to simulated disaster Number 9 (Page 141) The Securities and Exchange Commission announced the formation of a new Investor Advisory Committee required by the Dodd-Frank Wall Street Reform and Consumer Protection Act. Number 10 (Page 144) EIOPA - Report on Good Practices for Disclosure and Selling of Variable Annuities This Report summarises the findings of an Expert Group, set up in May 2011 under the auspices of EIOPA’s Committee on Consumer Protection and Financial Innovation (CCPFI) with the aim of establishing good disclosure and selling practices for variable annuities (VA).

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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NUMBER 1 Quantitative impact study results published by the Basel Committee, 12 April 2012
The Basel Committee published the results of its Basel III monitoring exercise. The study is based on rigorous reporting processes set up by the Committee to periodically review the implications of the Basel III standards for financial markets. A total of 212 banks participated in the study, including 103 Group 1 banks (ie those that have Tier 1 capital in excess of €3 billion and are internationally active) and 109 Group 2 banks (ie all other banks). While the Basel III framework sets out transitional arrangements to implement the new standards, the monitoring exercise results assume full implementation of the final Basel III package based on data as of 30 June 2011 (ie they do not take account of the transitional arrangements such as the phase in of deductions). No assumptions were made about bank profitability or behavioural responses, such as changes in bank capital or balance sheet composition. For that reason the results of the study are not comparable to industry estimates. Based on data as of 30 June 2011 and applying the changes to the definition of capital and risk-weighted assets, the average common equity Tier 1 capital ratio (CET1) of Group 1 banks was 7.1%, as compared with the Basel III minimum requirement of 4.5%. In order for all Group 1 banks to reach the 4.5% minimum, an increase of _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

Page |5 €38.8 billion CET1 would be required. The overall shortfall increases to €485.6 billion to achieve a CET1 target level of 7.0% (ie including the capital conservation buffer); this amount includes the surcharge for global systemically important banks where applicable. As a point of reference, the sum of profits after tax and prior to distributions across the same sample of Group 1 banks in the second half of 2010 and the first half of 2011 was €356.6 billion. For Group 2 banks, the average CET1 ratio stood at 8.3%. In order for all Group 2 banks in the sample to meet the new 4.5% CET1 ratio, the additional capital needed is estimated to be €8.6 billion. They would have required an additional €32.4 billion to reach a CET1 target 7.0%; the sum of these banks' profits after tax and prior to distributions in the second half of 2010 and the first half of 2011 was €35.6 billion. The Committee also assessed the estimated impact of the liquidity standards. Assuming banks were to make no changes to their liquidity risk profile or funding structure, as of June 2011, the weighted average Liquidity Coverage Ratio (LCR) for Group 1 banks would have been 90% while the weighted average LCR for Group 2 banks was 83%. The aggregate LCR shortfall is €1.76 trillion which represents approximately 3% of the €58.5 trillion total assets of the aggregate sample. The weighted average Net Stable Funding Ratio (NSFR) is 94% for both Group 1 and Group 2 banks. The aggregate shortfall of required stable funding is €2.78 trillion. Banks have until 2015 to meet the LCR standard and until 2018 to meet _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

Page |6 the NSFR standard, which will reflect any revisions following each standard's observation period. As noted in a January 2012 press statement issued by the Group of Governors and Heads of Supervision, the Basel Committee's oversight body, modifications to a few key aspects of the LCR are currently under investigation but will not materially change the framework's underlying approach. The Committee will finalise and subsequently publish its recommendations in these areas by the end of 2012. Banks that are below the 100% required minimum thresholds can meet these standards by, for example, lengthening the term of their funding or restructuring business models which are most vulnerable to liquidity risk in periods of stress. It should be noted that the shortfalls in the LCR and the NSFR are not additive, as reducing the shortfall in one standard may also reduce the shortfall in the other standard.

Results of the Basel III monitoring exercise as of 30 June 2011 April 2012 Executive summary
In 2010, the Basel Committee on Banking Supervision conducted a comprehensive quantitative impact study (C-QIS) using data as of 31 December 2009 to ascertain the impact on banks of the Basel III framework, published in December 2010. The Committee intends to continue monitoring the impact of the Basel III framework in order to gather full evidence on its dynamics. To serve this purpose, a semi-annual monitoring framework has been set up on the risk-based capital ratio, the leverage ratio and the liquidity _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

Page |7 metrics using data collected by national supervisors on a representative sample of institutions in each jurisdiction. This report summarises the aggregate results of the latest Basel III monitoring exercise, using data as of 30 June 2011. The Committee believes that the information contained in the report will provide the relevant stakeholders with a useful benchmark for analysis. Information for this report was submitted by individual banks to their national supervisors on a voluntary and confidential basis. A total of 212 banks participated in the study, including 103 Group 1 banks and 109 Group 2 banks. Members’ coverage of their banking sector is very high for Group 1 banks, reaching 100% coverage for some jurisdictions, while coverage is comparatively lower for Group 2 banks and varied across jurisdictions. The Committee appreciates the significant efforts contributed by both banks and national supervisors to this ongoing data collection exercise. The report focuses on the following items: - Changes to bank capital ratios under the new requirements, and estimates of any capital deficiencies relative to fully phased-in minimum and target capital requirements (to include capital charges for global systemically important banks – G-SIBs); - Changes to the definition of capital that result from the new capital standard, referred to as common equity Tier 1 (CET1), including a reallocation of deductions to CET1, and changes to the eligibility criteria for Additional Tier 1 and Tier 2 capital; - Increases in risk-weighted assets resulting from changes to the definition of capital, securitisation, trading book and counterparty credit risk requirements; _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

Page |8 - The international leverage ratio; and - Two international liquidity standards – the liquidity coverage ratio (LCR) and the net stable funding ratio (NSFR). With the exception of the transitional arrangements for non-correlation trading securitisation positions in the trading book, this report does not take into account any transitional arrangements such as phase-in of deductions and grandfathering arrangements. Rather, the estimates presented assume full implementation of the final Basel III requirements based on data as of 30 June 2011. No assumptions have been made about banks’ profitability or behavioural responses, such as changes in bank capital or balance sheet composition, since this date or in the future. For this reason the results are not comparable to current industry estimates, which tend to be based on forecasts and consider management actions to mitigate the impact, and incorporate estimates where information is not publicly available. The results presented in this report are also not comparable to the prior C-QIS, which evaluated the impact of policy questions that differ in certain key respects from the finalised Basel III framework. As one example, the C-QIS did not consider the impact of capital surcharges for global systemically important banks.

Capital shortfalls
Assuming full implementation of the Basel III requirements as of 30 June 2011, including changes to the definition of capital and risk-weighted assets, and ignoring phase-in arrangements, Group 1 banks would have an overall shortfall of €38.8 billion for the CET1 minimum capital requirement of 4.5%, which rises to €485.6 billion for a CET1 target level of 7.0% (ie including the capital conservation buffer); the latter shortfall already includes the G-SIB surcharge where applicable. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

Page |9 As a point of reference, the sum of profits after tax prior to distributions across the same sample of Group 1 banks in the second half of 2010 and the first half of 2011 was €356.6 billion. Under the same assumptions, the capital shortfall for Group 2 banks included in the Basel III monitoring sample is estimated at €8.6 billion for the CET1 minimum of 4.5% and €32.4 billion for a CET1 target level of 7.0%. The sum of Group 2 bank profits after tax prior to distributions in the second half of 2010 and the first half of 2011 was €35.6 billion. Further details on additional capital needs to meet the Basel III requirements are included in Section 2.

Capital ratios
The average CET1 ratio under the Basel III framework would decline from 10.2% to 7.1% for Group 1 banks and from 10.1% to 8.3% for Group 2 banks. The Tier 1 capital ratios of Group 1 banks would decline, on average from 11.5% to 7.4% and total capital ratios would decline from 14.2% to 8.6%. As with the CET1 ratios, the decline in other capital ratios is comparatively less pronounced for Group 2 banks; Tier 1 capital ratios would decline on average from 10.9% to 8.6% and total capital ratios would decline on average from 14.3% to 10.6%.

Changes in risk-weighted assets
As compared to current risk-weighted assets, total risk-weighted assets increase on average by 19.4% for Group 1 banks under the Basel III framework. This increase is driven largely by charges against counterparty credit risk and trading book exposures. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 10 Securitisation exposures, principally those risk-weighted at 1250% under the Basel III framework (which were previously 50/50 deductions under Basel II), are also a significant contributor to the increase. Banks that have significant exposures in these areas influence the average increase in risk-weighted assets heavily. As Group 2 banks are less affected by the revised counterparty credit risk and trading book rules, these banks experience a comparatively smaller increase in risk-weighted assets of only 6.3%. Even within this sample, higher risk-weighted assets are attributed largely to Group 2 banks with counterparty and securitisation exposures (ie those subject to a 1250% risk weighting).

Leverage ratio
The weighted average current Tier 1 leverage ratio for all banks is 4.5%. For Group 1 banks, it is somewhat lower at 4.4% while it is 5.0% for Group 2 banks. The average Basel III Tier 1 leverage ratio for all banks is 3.5%. The Basel III average for Group 1 banks is 3.4%, and the average for Group 2 banks is 4.2%.

Liquidity standards
Both liquidity standards are currently subject to an observation period which includes a review clause to address any unintended consequences prior to their respective implementation dates of 1 January 2015 for the LCR and 1 January 2018 for the NSFR. Basel III monitoring results for the end-June 2011 reporting period give an indication of the impact of the calibration of the standards and highlight several key observations: A total of 103 Group 1 and 102 Group 2 banks participated in the liquidity monitoring exercise for the end-June 2011 reference period. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 11 The weighted average LCR for Group 1 banks is 90% while the weighted average LCR for Group 2 banks is 83%. The aggregate LCR shortfall is €1.76 trillion which represents approximately 3% of the €58.5 trillion total assets of the aggregate sample. The weighted average NSFR is 94% for both Group 1 and Group 2 banks. The aggregate shortfall of required stable funding is €2.78 trillion.

General remarks
At its 12 September 2010 meeting, the Group of Governors and Heads of Supervision (GHOS), the Committee’s oversight body, announced a substantial strengthening of existing capital requirements and fully endorsed the agreements it reached on 26 July 2010. These capital reforms together with the introduction of two international liquidity standards, delivered on the core of the global financial reform agenda presented to the Seoul G20 Leaders summit in November 2010. Subsequent to the initial comprehensive quantitative impact study published in December 2010, the Committee continues to monitor and evaluate the impact of these capital and liquidity requirements (collectively referred to as “Basel III”) on a semi-annual basis. This report summarises results of the latest Basel III monitoring exercise using 30 June 2011 data.

Scope of the impact study
All but one of the 27 Committee member jurisdictions participated in Basel III monitoring exercise as of 30 June 2011. The estimates presented are based on data submitted by the participating banks to national supervisors in reporting questionnaires in accordance with the instructions prepared by the Committee in September 2011. The questionnaire covered components of eligible capital, the calculation _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 12 of risk-weighted assets (RWA), the calculation of a leverage ratio, and components of the liquidity metrics. The results were initially submitted to the Secretariat of the Committee in October 2011. The purpose of the exercise is to provide the Committee with an ongoing assessment of the impact on participating banks of the capital and liquidity proposals set out in the following documents: - Revisions to the Basel II market risk framework and Guidelines for computing capital for incremental risk in the trading book; - Enhancements to the Basel II framework which include the revised risk weights for re-securitisations held in the banking book; - Basel III: A global framework for more resilient banks and the banking system as well as the Committee’s 13 January 2011 press release on loss absorbency at the point of non-viability; - International framework for liquidity risk measurement, standards and monitoring; and - Global systemically important banks: Assessment methodology and the additional loss absorbency requirement.

Sample of participating banks
A total of 212 banks participated in the study, including 103 Group 1 banks and 109 Group 2 banks. Group 1 banks are those that have Tier 1 capital in excess of €3 billion and are internationally active. All other banks are considered Group 2 banks. Banks were asked to provide data as of 30 June 2011 at the consolidated level. Subsidiaries of other banks are not included in the analyses to avoid double counting. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 13 Table 1 shows the distribution of participation by jurisdiction. For Group 1 banks members’ coverage of their banking sector was very high reaching 100% coverage for some jurisdictions. Coverage for Group 2 banks was comparatively lower and varied across jurisdictions.

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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Not all banks provided data relating to all parts of the Basel III framework. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 15 Accordingly, a small number of banks are excluded from individual sections of the Basel III monitoring analysis due to incomplete data.

Methodology
The impact assessment was carried out by comparing banks’ capital positions under Basel III to the current regulatory framework implemented by the national supervisor. With the exception of transitional arrangements for non-correlation trading securitisation positions in the trading book, Basel III results are calculated without considering transitional arrangements pertaining to the phase-in of deductions and grandfathering arrangements. Reported average amounts in this document have been calculated by creating a composite bank at a total sample level, which effectively means that the total sample averages are weighted. For example, the average common equity Tier 1 capital ratio is the sum of all banks’ common equity Tier 1 capital for the total sample divided by the sum of all banks’ risk-weighted assets for the total sample. To maintain confidentiality, many of the results shown in this report are presented using box plots charts. These charts show the distribution of results as described by the median values (the thin red horizontal line) and the 75th and 25th percentile values (defined by the blue box). The upper and lower end points of the thin blue vertical lines show the values which are 1.5 times the range between the 25th and the 75th percentile above the 75th percentile or below the 25th percentile, respectively. This would correspond to approximately 99.3% coverage if the data were normally distributed. The red crosses indicate outliers. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 16 To estimate the impact of implementing the Basel III framework on capital, comparisons are made between those elements of Tier 1 capital which are not subject to a limit under the national implementation of Basel I or Basel II, and CET1 under Basel III.

Data quality
For this monitoring exercise, participating banks submitted comprehensive and detailed non-public data on a voluntary and best-efforts basis. As with the C-QIS, national supervisors worked extensively with banks to ensure data quality, completeness and consistency with the published reporting instructions. Banks are included in the various analyses that follow only to the extent they were able to provide sufficient quality data to complete the analyses. For the liquidity elements, data quality has improved significantly throughout the iterations of the Basel III monitoring exercise, although it is still the case that some differences in banks’ reported liquidity risk positions could be attributed to differing interpretations of the rules, rather than underlying differences in risk. Most notably individual banks appear to be using different methodologies to identify operational wholesale deposits and exclusions of liquid assets due to failure to meet the operational requirements.

Interpretation of results
The following caveats apply to the interpretation of results shown in this report: These results are not comparable to those shown in the C-QIS, which evaluated the impact of policy questions that differ in certain key respects from the finalised Basel III framework. As one example, the C-QIS did not consider the impact of capital surcharges for G-SIBs based on the _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 17 initial list of G-SIBs announced by the Financial Stability Board in November 2011. One member country, Switzerland, has already implemented certain elements of the Basel III framework pertaining to new rules for market risk and enhancements to the treatment of securitisations held in the banking book (often referred to collectively as “Basel 2.5”). For banks in this country, the results included in this report reflect the impact of adopting the Basel III requirements relative to the Basel II and Basel 2.5 frameworks already in place. The new rules for counterparty credit risk are not fully accounted for in the report, as data for capital charges for exposures to central counterparties (CCPs) and stressed effective expected positive exposure (EEPE) could not be collected. The actual impact of the new requirements will likely be lower than shown in this report given the phased-in implementation of the rules and interim adjustments made by the banking sector to changing economic conditions and the regulatory environment. For example, the results do not consider bank profitability, changes in capital or portfolio composition, or other management responses to the policy changes since 30 June 2011 or in the future. For this reason, the results are not comparable to industry estimates, which tend to be based on forecasts and consider management actions to mitigate the impact, as well as incorporate estimates where information is not publicly available. The Basel III capital amounts shown in this report assume that all common equity deductions are fully phased in and all non-qualifying capital instruments are fully phased out. As such, these amounts underestimate the amount of Tier 1 capital and Tier 2 capital held by a bank as they do not give any recognition for non-qualifying instruments that are actually phased out over nine years. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 18 The treatment of deductions and non-qualifying capital instruments also affects figures reported in the leverage ratio section. The underestimation of Tier 1 capital will become less of an issue as the implementation date of the leverage ratio nears. In particular, in 2013, the capital amounts based on the capital requirements in place on the Basel III monitoring reporting date will reflect the amount of non-qualifying capital instruments included in capital at that time. These amounts will therefore be more representative of the capital held by banks at the implementation date of the leverage ratio.

Capital shortfalls and overall changes in regulatory capital ratios
Table 2 shows the aggregate capital ratios under the current and Basel III frameworks and the capital shortfalls if Basel III were fully implemented, both for the definition of capital and the calculation of risk-weighted assets as of 30 June 2011.

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As compared to current CET1, the average CET1 capital ratio of Group 1 banks would have fallen by nearly one-third from 10.2% to 7.1% (a decline of 3.1 percentage points) when Basel III deductions and risk-weighted assets are taken into account. The reduction in the CET1 capital ratio of Group 2 banks is smaller (from 10.1% to 8.3%), which indicates that the new framework has greater impact on larger banks. Results show significant variation across banks as shown in Chart 1. The reduction in CET1 ratios is driven by the new definition of eligible capital, by deductions that were not previously applied at the common equity level of Tier 1 capital in most jurisdictions (numerator) and by increases in risk-weighted assets (denominator).

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P a g e | 20 Banks engaged heavily in trading or counterparty credit activities tend to show the largest denominator effects as these activities attract substantively higher capital charges under the new framework. Tier 1 capital ratios of Group 1 banks would on average decline 4.1 percentage points from 11.5% to 7.4%, and total capital ratios of this same group would decline on average by 5.6 percentage points from 14.2% to 8.6%. As with CET1, Group 2 banks show a more moderate decline in Tier 1 capital ratios from 10.9% to 8.6%, and a decline in total capital ratios from 14.3% to 10.6%.

The Basel III framework includes the following phase-in provisions for capital ratios: _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 21 For CET1, the highest form of loss absorbing capital, the minimum requirement will be raised to 4.5% and will be phased-in by 1 January 2015; For Tier 1 capital, the minimum requirement will be raised to 6.0% and will be phased-in by 1 January 2015; For total capital, the minimum requirement remains at 8.0%; Regulatory adjustments (ie possibly stricter sets of deductions that apply under Basel III) will be fully phased-in by 1 January 2018; An additional 2.5% capital conservation buffer above the regulatory minimum capital ratios, which must be met with CET1, will be phased-in by 1 January 2019; and The additional loss absorbency requirement for G-SIBs, which ranges from 1.0% to 2.5%, will be phased in by 1 January 2019. It will be applied as the extension of the capital conservation buffer and must be met with CET1. The Annex includes a detailed overview of all relevant phase-in arrangements. Chart 2 and Table 2 provide estimates of the amount of capital that Group 1 and Group 2 banks would need between 30 June 2011 and 1 January 2019 in addition to the capital they already held at the reporting date, in order to meet the target CET1, Tier 1, and total capital ratios under Basel III assuming fully phased-in target requirements and deductions as of 30 June 2011. Under these assumptions, the CET1 capital shortfall for Group 1 banks with respect to the 4.5% CET1 minimum requirement is €38.8 billion. The CET1 shortfall with respect to the 4.5% requirement for Group 2 banks, where coverage of the sector is considerably smaller, is estimated at €8.6 billion.

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P a g e | 22 For a CET1 target of 7.0% (ie the 4.5% CET1 minimum plus the 2.5% capital conservation buffer, plus any capital surcharge for G-SIBs as applicable), Group 1 banks’ shortfall is €485.6 billion and Group 2 banks’ shortfall is €32.4 billion. The surcharges for G-SIBs are a binding constraint on 24 of the 28 G-SIBs included in this Basel III monitoring exercise. As a point of reference, the aggregate sum of after-tax profits prior to distributions for Group 1 and Group 2 banks in the same sample was €356.6 billion and €35.6 billion, respectively in the second half of 2010 and the first half of 2011. Assuming the 4.5% CET1 minimum capital requirements were fully met (ie, there were no CET1 shortfall), Group 1 banks would need an additional €66.6 billion to meet the minimum Tier 1 capital ratio requirement of 6.0%. Assuming banks already hold 7.0% CET1 capital, Group 1 banks would need and an additional €221.4 billion to meet the Tier 1 capital target ratio of 8.5% (ie the 6.0% Tier 1 minimum plus the 2.5% CET1 capital conservation buffer), respectively. Group 2 banks would need an additional €7.3 billion and an additional €16.6 billion to meet these respective Tier 1 capital minimum and target ratio requirements. Assuming CET1 and Tier 1 capital requirements were fully met (ie, there were no shortfalls in either CET1 or Tier 1 capital), Group 1 banks would need an additional €119.3 billion to meet the minimum total capital ratio requirement of 8.0% and an additional €223.2 billion to meet the total capital target ratio of 10.5% (ie the 8.0% Tier 1 minimum plus the 2.5% CET1 capital conservation buffer), respectively. Group 2 banks would need an additional €5.5 billion and an additional €11.6 billion to meet these respective total capital minimum and target ratio requirements.

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P a g e | 23 As indicated above, no assumptions have been made about bank profits or behavioural responses, such as changes balance sheet composition, that will serve to ameliorate the impact of capital shortfalls over time.

Impact of the definition of capital on Common Equity Tier 1 capital
As noted above, reductions in capital ratios under the Basel III framework are attributed in part to capital deductions not previously applied at the common equity level of Tier 1 capital in most jurisdictions. Table 3 shows the impact of various deduction categories on the gross CET1 capital (ie, CET1 before deductions) of Group 1 and Group 2 banks. In the aggregate, deductions reduce the gross CET1 of Group 1 banks under the Basel III framework by 32.0%. The largest driver of Group 1 bank deductions is goodwill, followed by combined deferred tax assets (DTAs) deductions, and intangibles other than mortgage servicing rights. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 24 These deductions reduce Group 1 bank gross CET1 by 15.4%, 4.9%, and 3.6%, respectively. The category described as other deductions reduces Group 1 bank gross CET1 by 3.0% and pertain mainly to deductions for provision shortfalls relative to expected credit losses and deductions related to defined benefit pension fund schemes. Holdings of capital of other financial companies reduce the CET1 of Group 1 banks by 2.9%. The category “Excess above 15%” refers to the deduction of the amount by which the aggregate of the three items subject to the 10% limit for inclusion in CET1 capital exceeds 15% of a bank’s CET1, calculated after all deductions from CET1. These 15% threshold bucket deductions reduce Group 1 bank gross CET1 by 2.1%. Deductions for MSRs exceeding the 10% limit have a minor impact on Group 1 CET1. Deductions reduce the CET1 of Group 2 banks by 26.9%. Goodwill is the largest driver of deductions for Group 2 banks, followed by holdings of the capital of other financial companies, and combined DTAs deductions. These deductions reduce Group 2 bank CET1 by 10.5%, 4.4%, and 4.3%, respectively. Other deductions, which are driven significantly by deductions for provision shortfalls relative to expected credit losses, result in a 3.5% reduction in Group 2 bank gross CET1. Deductions for intangibles other than mortgage servicing rights and deductions for items in excess of the aggregate 15% threshold basket reduce Group 2 bank gross CET1 by 2.5% and 1.8%, respectively. Deductions for mortgage servicing rights above the 10% limit have no impact on Group 2 banks. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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Changes in risk-weighted assets Overall results
Reductions in capital ratios under the Basel III framework are also attributed to increases in risk-weighted assets. Table 4 provides additional detail on the contributors to these increases, to include the following categories:

Definition of capital:
These columns measure the change in risk-weighted assets as a result of proposed changes to the definition of capital. The column heading “other” includes the effects of lower risk-weighted assets for exposures that are currently included in risk-weighted assets but receive a deduction treatment under Basel III.

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P a g e | 26 The column heading “50/50” measures the increase in risk-weighted assets applied to securitisation exposures currently deducted under the Basel II framework that are risk-weighted at 1250% under Basel III. The column heading “threshold” measures the increase in risk-weighted assets for exposures that fall below the 10% and 15% limits for CET1 deduction;

Counterparty credit risk (CCR):
This column measures the increased capital charge for counterparty credit risk and the higher capital charge that results from applying a higher asset value correlation parameter against exposures to financial institutions under the IRB approaches to credit risk. Not included in CCR are risk-weighted asset effects of capital charges for exposures to central counterparties (CCPs) or any impact of incorporating stressed parameters for effective expected positive exposure (EEPE);

Securitisation in the banking book:
This column measures the increase in the capital charges for certain types of securitisations (eg, resecuritisations) in the banking book; and

Trading book:
This column measures the increased capital charges for exposures held in the trading book to include capital requirements against stressed value-at-risk, incremental default risk, and securitisation exposures in the trading book. Risk-weighted assets for Group 1 banks increase overall by 19.4% for Group 1 banks. This increase is to a large extent attributed to higher risk-weighted assets for counterparty credit risk exposures, which result in an overall increase in total Group 1 bank risk-weighted assets of 6.6%. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 27 The predominant driver behind this figure is capital charges for counterparty credit risk as the higher asset value correlation parameter results in an increase in overall risk-weighted assets of only 1.0%. Trading book exposures and securitisation exposures currently subject to deduction under Basel II, also contribute significantly to higher risk-weighted assets at Group 1 banks at 5.2% for each category.

Securitisation exposures currently subject to deduction, counterparty credit risk exposures, and exposures that fall below the 10% and 15% CET1 eligibility limits are significant contributors to changes in risk-weighted assets for Group 2 banks. Changes in risk-weighted assets show significant variation across banks as shown in Chart 3. Again, these differences are explained in large part by the extent of banks’ counterparty credit risk and trading book exposures, which attract significantly higher capital charges under Basel III as compared to current rules.

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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Impact of the revisions to the Basel II market risk framework
Table 5 shows further detail on the impact of the revised trading book capital charges on overall risk-weighted assets for Group 1 banks. The sample analysed here is smaller than the one in Table 4 as not all the Group 1 banks provided data on market risk exposures. For this reduced sample of banks, trading book exposures resulted in a 6.1% increase in total risk-weighted assets. The main contributors to this increase are stressed value-at-risk (stressed VaR), non-correlation trading securitisation exposures subject the standardised measurement method (column heading “SMM non-CTP”), and the incremental risk capital charge (IRC), which contribute 2.2%, _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 29 1.7%, and 1.4%. Less significant contributors to the increase in overall risk-weighted assets are capital charges for correlation trading exposures. Increases in risk-weighted assets are partially offset by effects related to previous capital charges24 and changes to the standardised measurement method (SMM).

Impact of the rules on counterparty credit risk (CVA only)
Credit valuation adjustment (CVA) risk capital charges lead to a 7.3% increase in total RWA for the subsample of 77 banks which provided the relevant data (6.6% on the full Group 1 sample). A larger fraction of the total effect is attributable to the application of the standardised method than to the advanced method. The impacts on Group 2 banks are smaller but still significant, adding up to an overall 2.9% increase in RWA over a subsample of 63 banks (2.2% for the full Group 2 sample), totally attributable to the standardised method. Further detailed are provided in Table 6. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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Findings regarding the leverage ratio
The results regarding the leverage ratio are provided using two alternative measures of Tier 1 capital in the numerator: Basel III Tier 1, which is the fully phased-in Basel III definition of Tier 1 capital, and Current Tier 1, which is Tier 1 capital eligible under the Basel II agreement (the phase-in period of Basel III begins in 2013). Total exposures of Group 1 banks according to the definition of the denominator of the leverage ratio were €59.2 trillion while total exposures for Group 2 banks were €5.6 trillion. One important element in understanding the results of the leverage ratio section is the terminology used to describe a bank’s leverage. Generally, when a bank is referred to as having more leverage, or being more leveraged, this refers to a multiple (eg 33 times) as opposed to a ratio (eg 3%). Therefore, a bank with a high level of leverage will have a low leverage ratio. Chart 4 presents leverage ratios based on Basel III Tier 1 and current Tier 1 capital. The chart provides this information for all banks, Group 1 banks and Group 2 banks.

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The weighted average current Tier 1 leverage ratio for all banks is 4.5%. For Group 1 banks, it is somewhat lower at 4.4% while it is 5.0% for Group 2 banks. The average Basel III Tier 1 leverage ratio for all banks is 3.5%. The Basel III average for Group 1 banks is 3.4%, and the average for Group 2 banks is 4.2%. The analysis shows that Group 2 banks are generally less leveraged than Group 1 banks, and this difference increases under Basel III when the requirements are fully phased in. It is likely that a portion of this effect is due to the changes in the definition of capital, which, as seen in Section 2, are likely to affect Group 1 banks to a greater extent than Group 2 banks.

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P a g e | 32 Under the current Tier 1 leverage ratio, 17 banks would not meet the 3% Tier 1 leverage ratio level, including six Group 1 banks and 11 Group 2 banks. Under the Basel III Tier 1 leverage ratio, 63 banks would not meet the 3% Tier 1 leverage ratio level, including 36 Group 1 banks and 27 Group 2 banks.

Liquidity Liquidity coverage ratio
One of the two standards introduced by the Committee is a 30-day liquidity coverage ratio (LCR) which is intended to promote short-term resilience to potential liquidity disruptions. The LCR has been designed to require global banks to have sufficient high-quality liquid assets to withstand a stressed 30-day funding scenario specified by supervisors. The LCR numerator consists of a stock of unencumbered, high quality liquid assets that must be available to cover any net outflow, while the denominator is comprised of cash outflows less cash inflows (subject to a cap at 75% of outflows) that are expected to occur in a severe stress scenario. 103 Group 1 and 102 Group 2 banks provided sufficient data in the 30 June 2011 Basel III monitoring exercise to calculate the LCR according to the Basel III liquidity framework. The weighted average LCR was 90% for Group 1 banks and 83% for Group 2 banks. These aggregate numbers do not speak to the range of results across the banks. Chart 5 below gives an indication of the distribution of bank results; the thick red line indicates the 100% minimum requirement, the thin red horizontal lines indicate the median for the respective bank group. 45% of the banks in the Basel III monitoring sample already meet or _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 33 exceed the minimum LCR requirement and 60% have LCRs that are at or above 75%.

For the banks in the sample, Basel III monitoring results show a shortfall of liquid assets of €1.76 trillion (which represents approximately 3% of the €58.5 trillion total assets of the aggregate sample) as of 30 June 2011, if banks were to make no changes whatsoever to their liquidity risk profile. This number is only reflective of the aggregate shortfall for banks that are below the 100% requirement and does not reflect surplus liquid assets at banks above the 100% requirement. Banks that are below the 100% required minimum have until 2015 to meet the standard by scaling back business activities which are most vulnerable to a significant short-term liquidity shock or by lengthening the term of their funding beyond 30 days. Banks may also increase their holdings of liquid assets. The key components of outflows and inflows are shown in Table 7. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 34 Group 1 banks show a notably larger percentage of total outflows, when compared to balance sheet liabilities, than Group 2 banks. This can be explained by the relatively greater contribution of wholesale funding activities and commitments within the Group 1 sample, whereas, for Group 2 banks, retail activities, which attract much lower stress factors, comprise a greater share of funding activities.

Cap on inflows
No Group 1 and 19 Group 2 banks reported inflows that exceeded the cap. Of these, six fail to meet the LCR, so the cap is binding on them. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 35 Of the banks impacted by the cap on inflows, 18 have inflows from other financial institutions that are in excess of the excluded portion of inflows. The composition of high quality assets currently held at banks is depicted in Chart 6. The majority of Group 1 and Group 2 banks’ holdings, in aggregate, are comprised of Level 1 assets; however the sample, on whole, shows diversity in their holdings of eligible liquid assets. Within Level 1 assets, 0% risk-weighted securities issued or guaranteed by sovereigns, central banks and PSEs, and cash and central bank reserves comprising significant portions of the qualifying pool. Comparatively, within the Level 2 asset class, the majority of holdings is comprised of 20% risk-weighted securities issued or guaranteed by sovereigns, central banks or PSEs, and qualifying covered bonds.

Cap on Level 2 assets
€121 billion of Level 2 liquid assets were excluded because reported Level 2 assets were in excess of the 40% cap as currently operationalised. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 36 34 banks currently reported assets excluded, of which 24 (11% of the total sample) had LCRs below 100%. Chart 7 combines the above LCR components by comparing liquidity resources (buffer assets and inflows) to outflows. Note that the €800 billion difference between the amount of liquid assets and inflows and the amount of outflows and impact of the cap displayed in the chart is smaller than the €1.76 trillion gross shortfall noted above as it is assumed here that surpluses at one bank can offset shortfalls at other banks. In practice the aggregate shortfall in the industry is likely to lie somewhere between these two numbers depending on how efficiently banks redistribute liquidity around the system.

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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Net stable funding ratio
The second standard is the net stable funding ratio (NSFR), a longer-term structural ratio to address liquidity mismatches and provide incentives for banks to use stable sources to fund their activities. 103 Group 1 and 102 Group 2 banks provided sufficient data in the 30 June 2011 Basel III monitoring exercise to calculate the NSFR according to the Basel III liquidity framework. 46% of these banks already meet or exceed the minimum NSFR requirement, with three-quarters at an NSFR of 85% or higher. The weighted average NSFR for each of the Group 1 bank and Group 2 samples is 94%. Chart 8 shows the distribution of results for Group 1 and Group 2 banks; the thick red line indicates the 100% minimum requirement, the thin red horizontal lines indicate the median for the respective bank group.

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The results show that banks in the sample had a shortfall of stable funding of €2.78 trillion at the end of June 2011, if banks were to make no changes whatsoever to their funding structure. This number is only reflective of the aggregate shortfall for banks that are below the 100% NSFR requirement and does not reflect any surplus stable funding at banks above the 100% requirement. Banks that are below the 100% required minimum have until 2018 to meet the standard and can take a number of measures to do so, including by lengthening the term of their funding or reducing maturity mismatch. It should be noted that the shortfalls in the LCR and the NSFR are not necessarily additive, as decreasing the shortfall in one standard may result in a similar decrease in the shortfall of the other standard, depending on the steps taken to decrease the shortfall. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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NUMBER 2 Study on the Cross-Border Scope of the Private Right of Action Under Section 10(b) of the Securities Exchange Act of 1934 As Required by Section 929Y of the Dodd-Frank Wall Street Reform and Consumer Protection Act April 2012
This study has been prepared by the Staff of the U.S. Securities and Exchange Commission. The Commission has expressed no view regarding the analysis, findings, or conclusions contained herein.

Executive Summary
This study stems from two significant legal developments in the Summer of 2010 regarding the application of Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) to transnational securities frauds. Section 10(b) is an antifraud provision designed to combat a wide variety of manipulative and deceptive activities that can occur in connection with the purchase or sale of a security. The Securities and Exchange Commission (“Commission”) has civil enforcement authority under Section 10(b) and the Department of Justice (“DOJ”) has criminal enforcement authority. Further, injured investors can pursue a private right of action under Section 10(b); meritorious private actions have long been recognized as an important supplement to civil and criminal law-enforcement actions. On June 24, 2010, the Supreme Court in Morrison v. National Australia Bank concluded that there is no “affirmative indication” in the Exchange Act that Section 10(b) applies extraterritorially. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 41 Finding no affirmative indication of an extraterritorial reach, the Supreme Court adopted a new transactional test under which: Section 10(b) reaches the use of a manipulative or deceptive device or contrivance only in connection with the purchase or sale of a security listed on an American stock exchange, and the purchase or sale of any other security in the United States. Congress promptly responded to the Morrison decision by adding Section 929P(b)(2) of Title IX of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”). Section 929P(b)(2) provided the necessary affirmative indication of extraterritoriality for Section 10(b) actions involving transnational securities frauds brought by the Commission and DOJ. Specifically, Section 929P(b)(2) provides the district courts of the United States with jurisdiction over Commission and DOJ enforcement actions if the fraud involves: (1) conduct within the United States that constitutes a significant step in furtherance of the violation, even if the securities transaction occurs outside the United States and involves only foreign investors; or (2) conduct occurring outside the United States that has a foreseeable substantial effect within the United States. With respect to private actions under Section 10(b), Section 929Y of the Dodd-Frank Act directed the Commission to solicit public comment and then conduct a study to consider the extension of the cross-border scope of private actions in a similar fashion, or in some narrower manner. Additionally, Section 929Y provided that the study shall consider and analyze the potential implications on international comity and the potential economic costs and benefits of extending the cross-border scope of private actions. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 42

Background
Conduct and Effects Tests. Prior to the Supreme Court’s Morrison
decision, the lower federal courts had applied two tests to determine the cross-border reach of Section 10(b): the conduct test and the effects test. Under the conduct test, Section 10(b) applied if a sufficient level of conduct comprising the transnational fraud occurred in the United States, even if the victims or the purchases and sales were overseas. Although the courts had adopted a range of approaches to defining when the level of domestic conduct was sufficient, courts generally found the conduct test satisfied where: (1) the mastermind of the fraud operated from the United States in a scheme to sell shares in a foreign entity to overseas investors; (2) much of the important efforts such as the underwriting, drafting of prospectuses, and accounting work that led to the fraudulent offering of a U.S. issuer’s securities to overseas investors occurred in the United States; or (3) the United States was used as a base of operations for meetings, phone calls, and bank accounts to receive overseas investors’ funds. Under the effects test, Section 10(b) applied to transnational securities frauds when conduct occurring in foreign countries caused foreseeable and substantial harm to U.S. interests. Among other situations, the effects test applied where either overseas fraudulent conduct or a predominantly foreign transaction resulted in a direct injury to: (1) Investors resident in the United States (even if the U.S. investors are relatively small in number);

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P a g e | 43 (2) Securities traded on a U.S. exchange or otherwise issued by a U.S. entity; or (3) U.S. domestic markets, at least where a reasonably particularized harm occurred.

Morrison Litigation. Morrison involved a so-called “foreign-cubed” class

action – a class action on behalf of foreign investors who had acquired the common stock of a foreign corporation through purchases effected on foreign securities exchanges. The plaintiffs alleged that the foreign corporation made false and misleading statements outside the United States to the plaintiff-investors that were based on false financial figures that had been generated in the United States by a wholly-owned U.S. subsidiary. The federal district court dismissed the case, holding that the conduct test had not been satisfied. The court of appeals affirmed the dismissal. At the Supreme Court, many of the arguments raised by the parties and the various amici curiae (i.e., non-parties who voluntarily submitted their views and analysis to assist the Court) centered on policy arguments supporting or opposing the conduct and effects tests in comparison to a bright-line test that would restrict the cross-border reach of Section 10(b). The plaintiffs and their supporting amici argued, among other things, that: (1) there is an inherent U.S. interest in ensuring that even foreign purchasers of globally traded securities are not defrauded, because the prices that they pay for their securities will ultimately impact the prices at which the securities are sold in the United States; (2) foreign issuers that cross-list in the United States benefit from the prestige and increased investor confidence that results from a U.S. listing, and thus it is reasonable to hold these foreign issuers to the full force of the U.S. securities laws regardless of where the particular transaction occurs; _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 44 (3) without the cross-border application of Section 10(b) afforded by the conduct and effects tests, there generally would be no legal options for redress open to the foreign victims of frauds committed by persons residing in the United States; and (4) eliminating the conduct and effects tests could be a significant factor weighing against further or continued foreign investment in the United States. The defendants and their supporting amici (excluding foreign governments) argued, among other things, that: (1) the uncertainty and lack of predictability resulting from the conduct and effects tests discourage investment in the United States and capital raising in the United States, which would not occur with a bright-line test limiting Section 10(b) only to transactions within the United States; (2) application of Section 10(b) private liability to frauds resulting in transactions on foreign exchanges would result in wasteful and abusive litigation, cause the United States to become a leading venue for global securities class actions, and subject foreign issuers to the burdens and uncertainty of extensive U.S. discovery, pre-trial litigation, and perhaps trial before plaintiffs’ claims can be dismissed under the conduct and effects tests; and (3) different nations have reached different conclusions about what constitutes fraud, how to deter it, and when to prosecute it, and the cross-border application of U.S. securities law would interfere with those sovereign policy choices. The U.S. Solicitor General, joined by the Commission, recommended to the Supreme Court a standard that would permit a private plaintiff who suffered a loss overseas as part of a transnational securities fraud to pursue redress under Section 10(b) if the U.S. component of the fraud directly caused the plaintiff’s injury. Although the Solicitor General acknowledged the potential for private securities actions brought under U.S. law to conflict with the procedures _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 45 and remedies afforded by foreign nations, the Solicitor General opposed a transactional test that would permit a Section 10(b) private action only if the securities transaction occurred in the United States. A transactional test, the Solicitor General explained, would produce arbitrary outcomes, including denying a Section 10(b) private action even when the fraud was hatched and executed entirely in the United States and the injured investors were in the United States if the transactions induced by the fraud were executed abroad. The British, French, and Australian Governments opposed to varying degrees the cross-border scope of private rights of action under Section 10(b). Each argued that it had made different policy choices about the prevention of fraud and enforcement of antifraud rules based on its own sovereign interests, and asserted that each choice deserved respect. The British and French Governments expressly supported a bright-line test.

Morrison Decision. As noted above, the Supreme Court adopted a new

transactional test under which Section 10(b) applies only to frauds in connection with the “the purchase or sale of a security listed on an American stock exchange, and the purchase or sale of any other security in the United States.” In rejecting the conduct and effects tests, the Court expressly identified the potential threat of regulatory conflict and international discord that private securities class actions can pose in the context of transnational securities frauds. Justice Stevens filed a concurrence in which he argued in favor of the conduct and effects tests, and criticized the transactional test as unduly excluding from private redress under Section 10(b) frauds that transpire in the United States or directly target U.S. citizens. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 46

Post-Morrison Legal Developments
Following the Morrison decision, the lower federal courts have addressed a number of questions regarding the interpretation and application of the transactional test. To date, the courts have issued decisions holding that: 1) Although the Supreme Court stated in Morrison that Section 10(b) applies to the “purchase or sale of a security listed on an American stock exchange,” an investor in a U.S. and foreign cross-listed security cannot maintain a Section 10(b) private action if he or she acquired the security on the foreign stock exchange. 2) An investor who acquires an exchange-traded American depositary receipt (ADR), which is a type of security that represents an ownership interest in a specified amount of a foreign security, can maintain a Section 10(b) private action. 3) The purchase or sale of a security on a foreign exchange by a U.S. investor is not within the reach of Section 10(b) even if the transaction was initiated in the United States (e.g., the purchase or sale order was placed with a U.S. broker-dealer by a U.S. investor). 4) A Section 10(b) private action is not available for a U.S. counter-party to a security-based swap that references a foreign security, at least to the extent that the counter-party is suing a third party (i.e., a non-party to the swap) for fraudulent conduct related to the foreign-referenced security. 5) Section 10(b) applies where a defendant engages in insider trading overseas with respect to a U.S. exchange-traded corporation by acquiring contracts for difference, which are a type of security in which the purchaser acquires the future movement of the underlying company’s common stock without taking formal ownership of the company’s shares. 6) A Section 10(b) private action is not available against a securities intermediary such as a broker-dealer, investment adviser, or underwriter _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 47 if the transaction for which the investor suffered a loss occurred on a foreign exchange or otherwise outside the United States, even if (i) the intermediary resided in the United States and primarily engaged in the fraudulent conduct here, or (ii) the intermediary traveled to the United States frequently to meet with the U.S. investor-client. 7) Investors who purchase shares of an off-shore feeder fund that holds itself out as investing exclusively or predominantly in a U.S. fund cannot maintain a Section 10(b) private action unless the purchase of the feeder fund’s shares occurred in the United States. Courts are divided on the issue of how to determine whether a purchase or sale of securities not listed on a U.S. or foreign exchange takes place in the United States, setting forth a number of competing approaches that include looking to: (a) whether either the offer or the acceptance of the off-exchange transaction occurred in the United States; (b) whether the event resulting in “irrevocable liability” occurred in the United States; or (c) whether the issuance of the securities occurred in the United States.

Responses to Request for Public Comment
In response to the Commission’s request for public comments, as of January 1, 2012 the Commission received 72 comment letters (excluding duplicate and follow-up letters) – 30 from institutional investors; 19 from law firms and accounting firms; 8 from foreign governments; 7 from public companies and associations representing them; 7 from academics; and 1 from an individual investor.

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P a g e | 48 Of these, 44 supported enactment of the conduct and effects tests or some modified version of the tests, while 23 supported retention of the Morrison transactional test.

Arguments in Favor of the Transactional Test. The comment letters in

support of the transactional test asserted that cross-border extension of Section 10(b) private actions would create significant conflicts with other nations’ laws, interfere with the important and legitimate policy choices that these nations have made, and result in wasteful and abusive litigation involving transactions that occur on foreign securities exchanges. Those comment letters argue that, by contrast, retention of the transactional test would foster market growth because the test provides a bright-line standard for issuers to reasonably predict their liability exposure in private Section 10(b) actions.

Arguments Against the Transactional Test. The comment letters opposed

to the transactional test argued, among other things, that: whether an exchange-traded securities transaction executed through a broker-dealer occurs in the United States or overseas may not be either apparent to U.S. investors or within their control; the transactional test impairs the ability of U.S. investment funds to achieve a diversified portfolio that includes foreign securities because the funds will have to either trade in the less liquid and potentially more costly ADR market in the United States or, alternatively, forgo Section 10(b) private remedies to trade overseas or pursue foreign litigation; and the transactional test fails to provide a private action in situations where U.S. investors are induced within the United States to purchase securities overseas.

Arguments in Favor of the Conducts and Effects Tests. The comment

letters supporting enactment of the conduct and effects tests argued that doing so would promote investor protection because private actions would be available to supplement Commission enforcement actions involving transnational securities frauds. These comment letters also argued that the conduct and effects tests reflect the economic reality that although a company’s shares may trade on a foreign exchange and the company may be incorporated overseas, _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 49 the entity may have an extensive U.S. presence justifying application of U.S. securities laws. Further, comment letters also argued that the conduct and effects tests ensure that fraudsters operating in the United States or targeting investors in the United States cannot easily avoid the reach of Section 10(b) private liability, and facilitates international comity by balancing the interests of the United States and foreign jurisdictions.

Arguments Against the Conduct and Effects Tests. The arguments

against the conduct and effects tests largely mirrored those set forth above in favor of the transactional test. In addition, these comment letters argued that: investor protection and deterrence of fraud are sufficiently achieved in the context of transnational securities fraud by Congress having enacted the conduct and effects tests for cases brought by the Commission and DOJ; small U.S. investors do not need the heightened protection of the conduct and effects tests because they generally do not directly invest overseas; the conduct and effects tests’ fact-specific analysis bears little relationship to investors’ expectations about whether they are protected by U.S. securities laws; and foreign legal regimes already provide sufficient remedies for investors who engage in transactions abroad.

Alternative Approaches that Commenters Proposed. Several comment
letters argued in support of conduct and effects tests limited to U.S. resident investors.

According to these comment letters, such an approach would minimize many of the international comity concerns associated with the conduct and effects tests because foreign nations recognize that the United States has a strong interest in protecting its own citizens. Another option that the comment letters suggested was a fraud-in-the-inducement standard under which an investor could maintain a Section 10(b) private action if the investor was induced to purchase or sell the security in reliance on materially false or misleading material provided to the investor in the United States. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 50 Comment letters supporting this alternative argued that it would be consistent with investors’ expectations, because investors generally believe that they will be protected by the legal regime that applies in the locations where they are subjected to fraudulent information or conduct.

Options Regarding the Cross-Border Reach of Section 10(b) Private Actions
The Staff advances the following options for consideration:

Options Regarding the Conduct and Effects Tests.
Enactment of conduct and effects tests for Section 10(b) private actions similar to the test enacted for Commission and DOJ enforcement actions is one potential option. Consideration might also be given to alternative approaches focusing on narrowing the conduct test’s scope to ameliorate those concerns that have been voiced about the negative consequences of a broad conduct test. One such approach (which the Solicitor General and the Commission recommended in the Morrison litigation) would be to require the plaintiff to demonstrate that the plaintiff’s injury resulted directly from conduct within the United States. Among other things, requiring private plaintiffs to establish that their losses were a direct result of conduct in the United States could mitigate the risk of potential conflict with foreign nations’ laws by limiting the availability of a Section 10(b) private remedy to situations in which the domestic conduct is closely linked to the overseas injury. The Commission has not altered its view in support of this standard. Another option is to enact conduct and effects tests only for U.S. resident investors.

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 51 Such an approach could limit the potential conflict between U.S. and foreign law, while still potentially furthering two of the principal regulatory interests of the U.S. securities laws – i.e., protection of U.S. investors and U.S. markets. Options to Supplement and Clarify the Transactional Test. In addition to possible enactment of some form of conduct and effects tests, the Study sets forth four options for consideration to supplement and clarify the transactional test. One option is to permit investors to pursue a Section 10(b) private action for the purchase or sale of any security that is of the same class of securities registered in the United States, irrespective of the actual location of the transaction. A second option, which is not exclusive of other options, is to authorize Section 10(b) private actions against securities intermediaries such as broker-dealers and investment advisers that engage in securities fraud while purchasing or selling securities overseas for U.S. investors or providing other services related to overseas securities transactions to U.S. investors. A third option is to permit investors to pursue a Section 10(b) private action if they can demonstrate that they were fraudulently induced while in the United States to engage in the transaction, irrespective of where the actual transaction takes place. A final option is to clarify that an off-exchange transaction takes place in the United States if either party made the offer to sell or purchase, or accepted the offer to sell or purchase, while in the United States

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P a g e | 52 NUMBER 3

Survey on the implementation of the CEBS Guidelines on Remuneration Policies and Practices
12 April 2012 - The European Banking Authority (EBA) publishes today the results of the survey on the implementation of CEBS Guidelines on remuneration policies and practices. The survey findings indicate that in most countries the Guidelines came into force on 1 January 2011 and that supervisors have actively assessed remuneration policies requiring, where needed, interventions in the remuneration structures and payouts of the variable component. While considerable progress has been reported with respect to the governance of remuneration, some areas of concern remain. Further supervisory guidance is needed in setting up the criteria for identifying risk takers as well as in the application of the proportionality principle and of the risk alignment practices. The findings of the survey have showed a satisfactory implementation of the Guidelines into the respective legal and supervisory frameworks and good progress by the industry has been reported namely as to the practices in the governance of remuneration. However, the scope of the Guidelines is one of the areas for concern as considerable variations exist in the extent to which the remuneration requirements are applied beyond the scope of the CRD. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 53 With regard to the identification of risk takers, the survey has highlighted inconsistencies across institutions in the criteria used to identify staff that have a material impact on the firm’s risk profile. Furthermore, such criteria have not always proved to sufficiently grasp the risk impact aspect of the exercise.

Inconsistencies have also emerged in the application of the

proportionality principle with practices varying from predetermined fixed criteria to open case-by-case approaches to determine if the set of specific remuneration rules should be applied to identified staff. Finally, the survey has showed that risk alignment practices across the industry remain underdeveloped namely with regard to the interaction of parameters used for risk management and the structure of bonus pools. In light of the shortcomings identified by the survey, it is welcomed that the Danish Presidency, in its January compromise text on the CRD IV package, has proposed to widen the scope of the mandate for the EBA to elaborate criteria to identify categories of staff whose professional activities have a material impact on the institution’s risk profile.

CONTEXT FOR THE SURVEY
This report presents the results of an EBA survey on the implementation of the CEBS Guidelines on Remuneration Policies and Practices (hereafter: the Guidelines) amongst European banking supervisors, conducted in Q 4 2011. The Guidelines were published on 10 December 2010. The aim of the survey was twofold i.e. to get an overview of - how legislators and supervisors have implemented the Guidelines in their legislative frameworks and/or their supervisory policies, focusing on possible differences between these implementations and the Guidelines;

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P a g e | 54 - more importantly, how the requirements of the Guidelines have been supervised in practice, what progress has been made by institutions and which areas need further development. This aim is set off against a level playing field concern that was raised when adopting the Guidelines, both by the sector and between supervisors. Although the Guidelines provide an extensive supporting framework to interpret the CRD III requirements on remuneration, they include numerous open aspects where judgment by institutions and by supervisors is required. The concern was that this judgment would lead to different implementations within the EU, further intensified by the fact that prudential supervision over remuneration policies has been since the crisis a completely new field of supervisory competence in most EU countries. Through this report the EBA wants to encourage greater regulatory consistency across the EU jurisdictions. The survey benchmarks progress and further work to be done against the Guidelines, and consequently has a European context, with no direct link to level playing field concerns between Europe and other members of the FSB. In this respect, the FSB published in October 2011 a Thematic Review on Compensation that included this kind of level playing concerns, amongst other implementation survey work on the FSB Principles and Implementation Standards. As a follow-up, the FSB has launched a detailed ongoing monitoring program. In the European Union, this survey is not the only tool through which EBA monitors remuneration practices and levels in institutions across the Member States. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 55 A benchmark exercise based on remuneration data collected in accordance with the criteria for disclosure established in point 15(f) of part 2 Annex XII of CRD III, will be launched by EBA. Twenty-one supervisors have participated in the survey; questions in the survey were mainly open and qualitative of nature, but for some aspects, numerical information was asked for a sample of institutions that represents 60 % of total assets in the banking sector or at least the 20 largest institutions in a particular Member State. Answers about practices in institutions relate mainly to the 2010 remuneration cycle (i.e. for performances in 2010), the first year of application of the CRD III requirements. The intention of this implementation report is not to repeat the requirements of the Guidelines. Where necessary, references will be made to the numbers of the relevant paragraphs of the Guidelines in footnotes. Words or expressions used in this report which are also used in the Guidelines shall have the meaning in this report as in the Guidelines.

Executive Summary
The CRD III remuneration requirements sought to develop risk-based remuneration policies and practices, aligned with the long term interests of the institution and avoiding short-term incentives that could lead to excessive risk-taking. This was seen as a key contributory reform in restoring overall financial stability after the 2007-2008 financial crisis. In most countries, the Guidelines came into force on 1 January 2011, with some countries suffering from delays in the legislative process.

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P a g e | 56 The CRD III combination of articles and annexes, with the Guidelines on top of these, is often mirrored in the countries as a combination of legislative acts, regulation, circulars and/or explanatory memoranda. The balance between legally prescriptive and supervisory regulatory approaches differs between the respondents. Supervisors have actively assessed remuneration policies, imposing where needed - amendments to the policy and consequently intervening in the remuneration structures and actual payouts of variable remuneration. In all countries, the Guidelines are part of the supervisory review over institutions.

The scope of the Guidelines is an area of significant concern.
Regarding the scope of institutions, there are effectively no substantive exemptions at national level to the application of the remuneration requirements to institutions covered by CRD III. Considerable variations exist in the extent to which the remuneration requirements are applied beyond the scope of CRD III e.g. in some countries this extends to the financial sector as a whole. While these findings are reassuring or at least not problematic at first sight, they need further nuancing when put in the context of groups or when taken together with the proportionality CRD III allows. Groups with non-EEA entities or groups with non-regulated subsidiaries or regulated subsidiaries that are not subject to CRD III do not always obtain the standard of group-wide application of the remuneration policy. Differences in how the Guidelines apply beyond the EEA borders often have their origin in different implementation of the FSB Principles and Implementing Standards by third countries. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 57 Proportionality regimes, sometimes based on predetermined fixed criteria, other times based on an open case-by-case approach, can lead to significant variation in the net degree by which institutions are subject to the CRD III requirements. Regarding staff under scope of the specific risk alignment requirements, CRD III requires that institutions identify the categories of staff that have a material impact on the risk profile of the institution (hereafter: the Identified Staff). Institutions use a large variety of criteria for this internal exercise but these are not always sufficient to grasp the risk impact aspect of this exercise or to take into account less quantifiable risks such as reputational risk. The numbers of Identified Staff differ considerably between Member States, but there is a clear tendency of institutions to select very low numbers. This affects the core of the CRD III requirements and undermines the effectiveness of EU supervisory reforms on remuneration. The process to determine the Identified Staff in a group can be applied differently between parent undertaking and subsidiaries. There is a genuine concern on supervisory differences regarding the identification process, within and outside the EEA. These differences can lead to regulatory arbitrage and competitive disadvantages. Many supervisors express the need for clear criteria and a process to identify risk takers in a single entity and within groups. More guidance is also needed on the application of the proportionality principle and the neutralization of requirements. Further harmonisation of the identification process is essential for a level playing field. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 58 In order to be able to align with the risk profile of institutions, a balance should be found between clarity and flexibility.

The governance of remuneration has shown considerable progress.
This may be explained by the fact that remuneration governance is part of broader governance reforms after the financial crisis. There is a widespread good implementation of the Guidelines with regard to the general principles on corporate governance, the role of the management body in its supervisory and management function and the setting up of a Remuneration Committee (hereafter: Rem Co). If weaknesses occur, those mainly stem from the group governance context: differences in the implementation of the Guidelines across jurisdictions often have their origin in different corporate laws and practices; another source may be the difficult balance between the coherent application of the group policy and the local responsibilities, based on local risks profiles and regulatory environment, that subsidiaries may have in the field of remuneration.

The risk alignment of remuneration policies and practices remain underdeveloped.
In the first cycle of application of CRD III, it appears that too many supervisory resources often have been spent to discussions with institutions regarding the numbers of Identified Staff rather than focusing more on risk alignment principles. Hardly any supervisory guidance, additional to the Guidelines, has been developed at national level. Changes are perceptible in risk alignment during performance measurement of employees and in the parameters used ex ante for setting bonus pools.

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P a g e | 59 Net profits and to a certain extent also risk-adjusted performance parameters are now more in use for setting bonus pools, but much more experience needs to be gained here on the credibility of the parameters and on their simultaneous internal use for risk management purposes outside remuneration so that they can really become embedded in the organisation's risk management framework. The interaction of such risk-adjusted parameters and discretionary judgment needs more transparency and the level at which the ex ante adjustment is applied is still restricted too much to the highest levels of the organisation. Also it is particularly important to ensure that the level of variable remuneration is consistent with the need to maintain, strengthen and restore a sound capital base. Regarding ex post risk alignment, more improvements seem to be desirable with a view to establishing sufficiently sensitive malus criteria which trigger forfeiture of deferred, i. e. unvested, variable remuneration. The malus criteria used do not always reflect the back testing character, which is inherent in the idea of a malus, with regard to the initially measured performance. In light of the underdevelopment of risk adjustment techniques, the ratios of variable to fixed that institutions have set in their remuneration policies and that were used in this first CRD III cycle do not appear to signal a breach with practices from the past and tend to be high. The criteria by which institutions decide on the ratios in practice are not always clear. Progress can however be observed in setting up multi-year frameworks, with deferral periods now being widespread. National requirements on the different elements of the multi-year framework (e.g. proportion being deferred, time horizon, vesting process, _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 60 time span between end of accrual and vesting of deferred amount) show some minor variance or divergence from the Guidelines.

The use of instruments as part of variable remuneration suffers from a feasibility gap.
CRD III introduced a requirement to pay at least 50% of the variable component of remuneration in instruments. Because the wording used for this requirement includes an "appropriate balance" of different types of instruments, there was some room for institutions to tailor this requirement to their own needs and possibilities. In some countries, there is delay in complying with this CRD III requirement because banks have difficulties in finding suitable instruments. Listed institutions in several jurisdictions do not use common shares due to practical and dilution problems, even though based on the CRD III text there were expectations that such shares would be used by listed institutions. So-called "phantom shares plans" (equivalent non cash instruments) are more frequently used by both listed and non-listed institutions, although their development is still subject to many open issues. The main open issue concerns the valuation of these plans: by whom should the value be determined and what kind of method should be used to that end? Further practical experience is needed in this respect, especially to develop these instruments for non-listed companies. Still, some strong practices are emerging which may help to shape further policy. Hybrid tier 1 instruments, part of the "appropriate balance" that CRD III envisaged, are so far in practice not used. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 61

Disclosure of remuneration policies and practices deserves greater attention.
Greater attention on disclosure of remuneration policies and practices could enhance the implementation. The tandem between public disclosure and supervisory reporting, once the EBA Guidelines 46 and Guidelines 47 on remuneration data collection exercises are implemented, should be helpful in this respect. Effective disclosure in fact allows the market's awareness on remuneration to increase. At the same time, it increases monitoring by the markets and regulators on the relation between pay, risk-taking and performance and can facilitate the emergence of best practices that address both financial stability concerns and the institutions' need for competitive pay schemes. It is therefore important to ensure an equal level of application of the disclosure requirements. Today, this is still hampered mainly by the fact that disclosure requirements relate to those categories of staff selected as Identified Staff, whose number can differ considerably between Member States, as already mentioned.

Analysis of the Implementation Scope
Scope issues are structured as follows: first the report discusses the institutions in scope, then the report examines how the concept of Identified Staff has been implemented. These two subsections have three parts: a general discussion and then an elaboration of how (1) the group context and _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 62 (2) neutralization influence implementation. The Guidelines distinguish between proportionality between institutions and proportionality between staff, with neutralization being the most far-reaching form of these types of proportionality.

INSTITUTIONS WITHIN SCOPE General
The CRD III remuneration requirements apply to credit institutions as defined under art. 4(1) of Directive 2006/48 and investment firms as defined under Directive 2006/49/EC, which in turn refers to Directive 2004/39/EC on markets in financial instruments (MiFID) (article 4 (1)(1)). It is clear that the implementation of the remuneration requirements has ensured comprehensive coverage of these institutions. Overall, jurisdictions have in place no substantive exemptions to the application of the requirements. However there were considerable divergences in two important areas: - The extent to which the CRD III remuneration requirements were applied to sectors not within the scope of CRD III; and - The approach which individual markets have taken to proportionality and the degree to which the remuneration requirements may be neutralized. (In this context neutralization means the decision not to apply certain of the remuneration requirements to certain covered institutions dependent upon nationally determined criteria). Many jurisdictions apply the remuneration requirements solely to those institutions covered by CRD III. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 63 However, some others extend the application in relatively modest ways including, for example, the utilisation of broader definitions of credit institutions or extension to settlement and clearing institutions. Some authorities, though, have chosen to apply the requirements much more widely including in some cases to the whole of the financial services sector or to a significant number of additional sub-sectors, for example to insurance and reinsurance companies, investment management companies and private pension funds, asset management and finance leasing firms. The key positive outcome is that the remuneration requirements are comprehensively being applied to CRD III institutions and some jurisdictions have used national discretion to apply the requirements more widely. Future EU legislation for other financial services sectors e.g. Solvency II, will lead to more harmonisation.

Neutralization at the level of institutions
However, although all firms within scope are covered, there are very wide divergences across jurisdictions in the extent to which the remuneration provisions can be neutralized and the ways in which that neutralization is achieved. In a few cases there was little or no neutralization. Three jurisdictions operate tiered proportionality regimes. Whilst these have some differences in structure and detail, the proportionality regimes apply neutralization primarily in relation to the size, scope, complexity and nature of firms’ businesses with the most significant firms unable to neutralize any of the provisions.

Germany
Germany has a very heterogeneous banking market with many smaller institutions that have a conservative business model, esp. with a focus on local retail and smaller to medium corporate client business. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 64 For this reason the Remuneration Regulation for Institutions (Instituts-Vergütungsverordnung, in short InstitutsVergV) makes a distinction between general requirements applying to all institutions and all employees (sections 3, 4 and 7 InstitutsVergV), and additional more demanding requirements (sections 5, 6 and 8 InstitutsVergV) that are relevant for “major institutions” and the remuneration schemes of their management board and identified staff. Institutions that are not "major" may neutralize the following requirements listed in Annex 2 of the Guidelines ("major institutions" cannot neutralize the following requirements): - (g) on performance criteria, - (h) on the multi-year framework, except for the management body of every institution, - (o) on instruments, - (p) on deferral, - (q) on risk adjustments, - (r) on pension policy as “discretionary pension benefits” play no role in the German institutions - the establishment of a Rem Co. The general requirements of the InstitutsVergV (sections 3, 4 and 7) implement all other requirements listed in Annex 2 of the Guidelines (including Annex 2 (l) on the ratio variable/fix). Qualification as a "major institution" depends on total assets and a risk analysis which the institution is required to perform itself. This risk analysis is relevant for all institutions whose total assets on the respective balance sheet dates for the last three completed financial years reached or exceeded an average of €10 billion. The risk analysis shall take particular account of the institution’s size, its remuneration structure and the nature, scope, complexity, risk content and international scale of the business activities conducted. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 65 In this regard, particular significance will be attached to an institution’s business activities. Institutions with total assets of at least €40 billion are generally considered to be "major". Institutions with total assets under €10 billion are not considered to be "major" unless these institutions deem themselves to be major.

Italy
Italy operates a proportionality regime based on three categories of institutions: (a) ‘major’ banking groups with total consolidated assets of over €40 billion are required to adopt all the general and stricter requirements of the CRD III and the Guidelines; (b) ‘medium’ banks and banking groups with total consolidated assets between €3.5 and €40 billion are required to apply all the general requirements and may consider not to apply the stricter requirements on a case by case basis; (c) ‘minor’ banks with total consolidated assets lower than €3.5 billion are required to comply with the general requirements but not with the stricter provisions.

Stricter requirements are:
(i) the payment of at least 50% of variable remuneration in shares/other financial instruments; (ii) the deferral of at least 40% to 60% of the variable remuneration for at least 3 to 5 years; (iii) the appointment of a Rem Co. All the other CRD III provisions have to be intended as "general requirements". As a result of such proportionate approach, all Italian institutions must therefore comply with all the CRD III provisions and the Guidelines. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 66 Medium and minor institutions might neutralize only the stricter requirements. A Rem Co shall be however appointed in all listed institutions regardless of size.

Group context
In the case of groups, the remuneration requirements are generally implemented worldwide and in relation to all regulated and non-regulated subsidiaries. The responses received reveal that national regulations in all countries completely reflect the minimum requirements of the Guidelines with regard to the application of remuneration policies on a consolidated basis. In many jurisdictions, the group Rem Co has a role in ensuring that remuneration provisions are applied at both group and subsidiary level. In practice, the balance between the requirement of the parent company to have the group remuneration policy applied coherently and the requirement of subsidiaries to take into account local responsibilities, based on local risk profile and regulatory environment, proves to be difficult to obtain. Some supervisors faced practices where the parent company determined group wide policies which did not sufficiently respect the subsidiary’s local responsibilities. Divergences occurred in the extent to which national regulations might take into account local non-EEA regulations (since within the EU there is a harmonised framework), practices or culture. In certain cases local regulations prevailed or were taken into account but in one case only if local regulation was tighter than national regulation. In those circumstances local requirements took precedence. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 67 In certain other jurisdictions home regulation automatically applied regardless of where the business was carried out. Sometimes institutions use (the absence of) local non-EEA regulations, practices or culture as an argument to implement less stringent remuneration policies in relation to activity in those third country markets. A supervisory response noted in that case was to bring activity in those markets at least within scope of the group policy, to ensure transparency towards and oversight by the management body. There are similarly differences in the application of proportionality principles ranging from the full application of home country proportionality regimes to application on a case by case basis to no scope for proportionality. There is thus the potential here for Member States to operate different regimes for their institutions in the same third country markets. The possible impact of this would be greatest where local jurisdictions operated markedly less restrictive remuneration regimes than those applicable in the EEA.

STAFF WITHIN SCOPE
CRD III requires that institutions identify the categories of staff that have a material impact on the risk profile of the institution. The scope of the Identified Staff determines the scope of the specific risk alignment requirements. Therefore the identification of staff is the essential starting point for the effective management of risks. It is clear from the implementation report that the selection of Identified Staff has been the most important subject of discussion between institutions and supervisors. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 68 Because of the impact on the scope of the remuneration policies and on the competition between institutions, discussions between supervisors and institutions 'stuck' at this phase of the implementation of sound remuneration policies. The differentiation in the number of Identified Staff hinders the creation of a level playing field.

Institutional practices
CRD III and the CEBS Guidelines state the categories of staff which should be selected. The CEBS Guidelines provide some guidance on the selection of Identified Staff. However, it is clear from the implementation report that more guidance is needed. Varying practices lead to differences in the criteria used to identify staff and in the number of Identified Staff within jurisdictions and internationally. Those differences can lead to regulatory arbitrage and competitive disadvantages. The result is that institutions have tended to select low numbers of Identified Staff, which is contrary to the objective of managing effectively risks resulting from remuneration policies and practices. Institutions use different processes to select Identified Staff. Some institutions first identify the relevant types of activity and then select the Identified Staff within these activities. Others base their selection on a risk analysis. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 69 Within the different categories of Identified Staff, mentioned in CRD III and the Guidelines, the category 'other risk takers' has proved to be the most challenging. The implementation report also provides some information on the selection criteria. Institutions use a variety of criteria to select the 'other risk takers'; often more than one. The criteria are quantitative as well as qualitative. The good practices identified in the implementation report are mainly quantitative metrics which are based on responsibilities or are linked to the risk impact of the employee's activity. Examples which were mentioned are: credit competence; trading limits; bounded economic capital on business unit level; Value at Risk, Risk Weighted Assets-, revenue- or Profit&Loss impact; risk capital, total remuneration, ratio fixed to variable remuneration, and various thresholds (threshold above which staff are allowed to operate; amounts of revenue; assets under management). Qualitative criteria which are used by the institutions are the seniority of staff; hierarchy in the institution; type of responsibility of staff members; type of activity; and employee rating. Most of these criteria are applied at individual level. In one jurisdiction institutions are required to use also criteria at institutional level. The implementation report also provides information per jurisdiction on the percentage of the total number of employees which institutions have selected as Identified Staff. These percentages should be treated with some care, because they are not always comparable. One reason for this is the different sizes of institutions. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 70 Although the absolute number of Identified Staff of a big institution will usually be higher than the number of a small institution, the percentage of the total number of staff can be lower. Also national regulation on proportionality or proportionality practices may impact the percentage of Identified Staff. Nevertheless, the clear conclusion can been drawn that the numbers of Identified Staff which institutions have selected vary considerably per jurisdiction. This conclusion applies to all three categories of banks on which the Implementation report requested data: 'all institutions', 'investment banks', and 'retail banks'. For example, in the category 'all institutions' there are 6 jurisdictions with an average Identified Staff < 1% of total number of employees; in 5 jurisdictions the average Identified Staff is between 1-5 %; in 3 jurisdictions the average is between 5-10 %; and in 2 jurisdictions the average is more than 10%. Institutions tend to identify lower numbers of Identified Staff, especially the bigger institutions. In the view of supervisors this is inadequate for effective risk management. Five supervisors have provided information on investment banks. Although one would expect investment banks consistently to have a higher percentage of Identified Staff than retail banks due to the higher risk profile, this is not the case in practice. In three jurisdictions investment banks have a higher percentage of Identified Staff than retail banks. However, in the other two jurisdictions the investment banks have a lower percentage. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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In the majority of jurisdictions the management body is involved in the identification process. Often the board has the responsibility to set the criteria for the selection of Identified Staff. In a few jurisdictions the supervisory board has a role. More often the Rem Co is involved, but its responsibilities vary between jurisdictions. Among the control functions, the human resources function is the most commonly involved in the identification process. The risk management function is clearly less often involved, although the aim of sound remuneration policies is the management of risks. The compliance function and the audit function appear to have only a minor role in the identification process.

Supervisory practices and guidance
Almost all supervisors have indicated that they apply the institution-wide rules of CRD III and that the regulation covers all staff. In three jurisdictions, the regulations apply to a wider group of people, such as consultants, intermediaries, and persons to whom the institution has outsourced certain activities. The aim of covering this wider group is to avoid circumvention of the regulation. Almost all jurisdictions indicated that every institution covered by CRD has to select Identified staff. The determination of Identified Staff (especially in the category ‘other risk takers’, at lower level of the hierarchy) proves to be difficult, because a process and clear criteria are lacking. One supervisor has developed further guidance on ‘material impact’. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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Other supervisors have published guidance on the functions which should be appointed as Identified Staff and on the category ‘remuneration bracket’.

The Netherlands
The Dutch supervisor has published a Q&A concerning Identified staff. With regard to the category "other risk takers"' the Dutch Q&A gives criteria related to the most common financial risks. Depending on a bank’s or investment firm’s business, the relative importance of risk types may vary. It is up to the firm to demonstrate which are most important. For banks that engage in (mortgage) lending, credit risk may generally be expected to be among the principal risk types. Where a firm (also) does significant business in the wholesale or financial markets, market risk will be a prominent financial risk. For most banks, funding and liquidity risk will also be of importance. Where credit, market, capital and liquidity risk are concerned, the Dutch supervisor regards a (non-additive) combination of three criteria as a starting point for gauging the materiality of staff activities.

Taken individually, every one of these tests have their limitations (e.g.: trading business is relatively immaterial in capital terms; taking capital as the sole criterion will provide inconclusive evidence). Thus a combination of all three tests provides the fullest overview of ‘material activities’. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 73 Note that the test results are non-additive. Where a test score ‘sticks out’, the associated activity is assumed to materially affect the firm’s risk profile. Next, relevant staff members may be identified within the scope of the selected activities. Functions which have a material influence on the risk profile are not limited to management functions (hierarchical positions), but also contain operational and controlling functions. With regard to nonfinancial risks (e.g. reputation, legal, or IT risks) the Dutch Q&A states that it is difficult to lay down a single or a small number of quantitative measures. Therefore, institutions should primarily select staff responsible for decisions with strong impact on a firm’s operational risk profile.

Denmark
The Danish order on remuneration includes the following criteria on which persons should be appointed as identified staff: 1) the management of the part of the institution that deals with or approves financial instruments, 2) the management of the part of the institution that invests the institution's own book, 3) employees in the part of the institution as mentioned in 1 and 2 who via financial instruments can take a material risk on behalf of the institution on the institutions own book (proprietary trading), 4) the management of the actuary function and the reassurance function who can take a material risk on behalf of the institution on the institution's own book, _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 74 5) managers of the part of the institution who control compliance of thresholds for risk taking, and 6) other employees that can cause the institution a material credit risk.

The UK
The UK FSA Handbook states that the first three categories of Identified Staff ("Code staff" in the Handbook) (senior management, risk takers and staff engaged in control functions) should include persons who perform a significant influence function for the firm, or is a senior manager; individuals holding key positions, including heads of significant business lines and support and control functions; and other risk takers, which firms may identify through setting their own metrics. Many supervisors express the need for clear criteria and a process to select Identified Staff in a single entity and within groups. Further harmonisation of the identification process is essential for alevel playing field to operate. In view of this it is also suggested to set appropriate quantitative and qualitative criteria for the number of Identified Staff. In order to be able to align with the risk profile of institutions, a balance should be found between clarity and flexibility. Specific issues on which more guidance is needed are: (i) the definition of the term ‘material’, with regard to activities /subsidiaries /business lines as well as to 'other risk takers'. Without a better definition, institutions interpret functions (such as CFO and control functions) differently. (ii) the material impact of operating staff. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 75 This proves to be more difficult to determine than staff in hierarchical positions. (iii) the relevant level in the organisation. Some supervisors mention that it is not clear how far down in the organisation institutions have to select Identified Staff. Although low in hierarchy, certain activities of staff in lower positions can have an impact on the risk profile. (iv) the measurement of reputational risk and other not – easy – to – measure - risks when assessing the impact on the risk profile. (v) determination of the category of ‘risk takers who have collectively impact on the risk profile’. Clear criteria for the identification of this category are lacking. (vi) the identification of Identified Staff within a group. Especially there are questions about the level within subsidiaries at which staff have to be identified (e.g. only the highest control function in a subsidiary or also the level below), and whether a further difference should be made between regulated and non-regulated subsidiaries. (vii) the application of the proportionality principle and the neutralization of requirements. Diverging regulation or supervisory guidance on this point could have impact on the level playing field.

Neutralization at the level of Identified Staff
Annex 2 of the CEBS Guidelines provides a table which shows the applicability and the possibility of neutralization of requirements for Identified Staff. In three jurisdictions neutralization is not possible. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 76 In all other jurisdictions neutralization is allowed for the requirements (o), (p) and (q): pay out in financial instruments (combined with retention) and deferral (including ex post adjustment). In a few jurisdictions institutions have made use of this. Reasons given for the neutralization of the requirements are: the business model in combination with the total (limited) number of employees; low ratio variable to fixed remuneration; the size of the group of persons which has collectively material impact; maximum threshold of total variable remuneration; the relative level of seniority of staff members; the size of the possible obligation entered into on behalf of the institution.

GOVERNANCE
Much progress has been made in the field of governance of remuneration. Both institutions and supervisors have increased their awareness in this respect and have taken concrete actions to strengthen the governance arrangements. This may be explained by the fact that governance of remuneration is part of broader governance reforms undertaken after the financial crisis. The degree of compliance of national regulations with the Guidelines is therefore high. However, while many countries have proved themselves to be fully compliant from a regulatory point of view, many have pointed out that more time is still needed to complete an exhaustive assessment of good and bad practices. In a few circumstances, institutions claimed that the regulations were too recent to be fully and properly implemented. The Guidelines on corporate governance have been generally well implemented, in particular in respect of: the role and compensation of the _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 77 management body in its supervisory and management functions5; the setting up, role and composition of the Rem Co and the definition, role and composition of the control functions. However, problems still persist in few limited areas; in these cases, supervisors have often expressly required institutions to rectify the practices and non-compliance (i.e. institutions have been asked to limit the role of the CEO, improve the formalisation and functioning of all the reporting lines, ensure adequate discussion among all corporate bodies etc.). The effective involvement of the control functions in the design, oversight and review of the overall remuneration policy is of paramount importance in order to achieve the prudential goals of CRD III and the Guidelines; nonetheless in many countries neither direct contact of the control functions with the bodies responsible for the design and approval of the compensation policy, nor access to the information needed to fully participate in the decision-making process seem to be guaranteed. There is room for further regulatory convergence across EU jurisdictions on some detailed aspect of the governance Guidelines. However, some other differences can not be removed, as they stem from national corporate governance legislative frameworks (e.g. some specificities may derive from the different allocation of roles and responsibilities within the management and supervisory boards). Despite significant progress, many countries raised specific concerns with regard to group-wide remuneration policies and the structural relationship between the parent company and its subsidiaries (from a governance point of view). This increases diversity across Member States. The most frequent concerns mentioned are: the identification of the Identified Staff (see above in section 3.1.B - group context); clear documentation of the remuneration decision making process and the relationship between the subsidiaries and their parent company in that _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 78 respect; the timely allocation of bonus pools at the subsidiary levels; too little or only an unbalanced interaction between the control functions (compliance, internal audit, HR) at parent and subsidiary level. There are good practices that may help in solving problems arising in the field of the group context.

For example:
1) the human resources function at the subsidiary level receives a yearly local inspection of its remuneration policy performed by group control functions; 2) the internal audit function of the parent company reports to the home supervisory authority about the remuneration policy of the whole group; 3) a clear documentation on which local specificities (activities and risks of a subsidiary, local regulatory environment etc.) apply and how they are integrated in the group policy. Besides encouraging these good practices, some supervisors have also required from parent institutions to provide them detailed data and information on the compensation schemes adopted at the subsidiary levels. Another good evolution is that cooperation and coordination initiatives amongst supervisory authorities have been activated, to ensure the effective compliance with regulation in cross-border groups.

France
French supervisors have required main banking institutions to report several months in advance their forecasting on the global pool of compensation that their business units and subsidiaries will submit to their control and supervisory functions.

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 79 This practice has provided the French supervisor with both information and tools for 1. ensuring institutions’ ability to comply in real time with the requirement that compensation pools are effectively aligned with institutions’ risk profile and results; 2. testing the time needed for supervisory and control functions to perform in a group context an assessment of the amount and computation modalities of compensation pools which are submitted by management functions.

RISK ALIGNMENT: UNDERDEVELOPED TECHNIQUES
The need for risk aligned variable remuneration was a core issue raised in the wake of the financial crisis. However, institutions and supervisors also had to focus on more supporting but important questions related to this risk alignment, such as the scope of remuneration requirements on institutions and staff. Therefore the issue of the actual risk alignment itself has to be given considerably more attention by institutions and supervisors. In this context, it is also important thatvariable remuneration is reduced where necessary to maintain, strengthen and restore a sound capital base.

OVERALL RISK ALIGNMENT
Risk alignment of variable remuneration has many different aspects that are reflected in CRD III and the Guidelines. The idea of risk alignment is embodied in several requirements like the alignment of remuneration systems with the institutions’ strategies, the prohibition of guaranteed bonuses, personal hedging strategies and golden parachutes, the implementation of minimum ratios fixed to variable remuneration, the limits to the variable compensation when _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 80 inconsistent with a sound capital base as well as the use of risk adjusted performance parameters in the accrual period and of deferred variable remuneration with malus or clawback arrangements. Most of the reporting Member States stated that the national provisions with regard to risk alignment of the variable remuneration show no identifiable differences to the Guidelines. Often Member States keep the national provisions on a more abstract and compacted level than the Guidelines. Nevertheless the Guidelines are at least used for interpretation and are sometimes even directly referred to. Some Member States seem to accentuate certain aspects with regard to risk alignment in their regulation and their supervisory practices. In some Member States the supervisory practice or regulation reached more prescriptive outcomes with regard to the scope or the maximum ratios of variable to fixed remuneration.

Alignment with strategies
Institutions’ remuneration system and especially the variable part of the remuneration influence employees’ behaviour with regard to (inappropriate) risk taking. Thus remuneration systems – intentionally or not – also serve as a management tool. As such remuneration systems could be aligned with institutions’ business and risk strategies as well as in the risk management system. The link between strategies and especially between risk strategies and the remuneration system is not always well developed or documented.

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 81 In some cases this may also have to do with underdeveloped business and risk strategies that make it difficult to derive operational objectives from these strategies. Also remuneration systems are not always sufficiently embedded in the strategy planning, transposition, assessment and modification process. Thus, performance parameters used for risk management purposes are still underrepresented in remuneration systems. A good practice is to link the remuneration-related processes to the institutions’ business and risk strategy process. This ensures that the remuneration system is aligned with the strategies and the operational objectives derived from these strategies. Furthermore those functions that are in charge of the strategy process including the risk management function should formally be involved in the process of development, implementation and modification of a remuneration system especially with a view to the objectives set out at the different levels of an institution’s remuneration system.

Prohibitions
CRD III and the Guidelines disallow guaranteed bonuses (except when hiring new staff and limited to the first year of employment), personal hedging strategies to undermine the risk alignment effects as well as “golden parachutes” that would reward for failure, are not allowed. All responding Member States adopted these requirements in their national jurisdictions. Most institutions incorporated the aforementioned prohibitions in their remuneration policies. Good progress has been made with a view to guaranteed bonuses. Except when hiring new staff and limited to the first year of employment guaranteed bonuses seem to play no relevant role in the remuneration practices of Member States' institutions. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 82 However, in practice also the classification of payments as guaranteed bonuses may not always be obvious. Supervisors notice cases where certain payments are presented as fixed payments, but where further examination of the characteristics of these payments leads to re-assessment of that qualification. A similar observation can be made with regard to golden parachutes. Their use is claimed to be nonexistent by institutions. Nevertheless, the classification of certain arrangements under "payments related to the early termination of a contract that do not reward for failure" may be questionable, e.g. in cases where persons have an entitlement to their fixed remuneration for the residual period of a fixed term contract in case the performance under that contract has been terminated before the originally anticipated term. With a view to the prohibition of hedging strategies and liability-related insurance it is good practice if institutions require a commitment of their employees to adhere to this requirement.

RATIOS VARIABLE TO FIXED
Overall national regulations are in line with the Guidelines' requirements to have an appropriately balanced ratio of variable to fixed remuneration to ensure a fully flexible bonus that could be zero. In some Member States this provision has to be applied by all institutions and for all employees and is not limited to Identified Staff. Most Member States leave it to the institutions to set an internal maximum ratio. This ratio can differ internally between business lines of an institution. The criteria by which institutions decide on the ratios in practice are not yet well known. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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This may have to do with the fact that the use of ratios has a certain tradition and is therefore not always explainable. Another factor is market usages with a view to benchmarking among peer groups. However, it seems questionable whether institutions really use sophisticated approaches to determine such ratios. Only few Member States introduced maximum ratios. With the implementation of more detailed requirements for the variable part of the remuneration, industry shifted parts of the variable pay into the fixed part of the remuneration. Some Member States found it opportune to prevent this unintended consequence of CRD III and introduced a requirement to keep the variable part of the remuneration sufficiently high so that risk adjustment requirement can have sufficient impact on that part when needed. The ratios of variable to fixed remuneration for executive members of the management body (executives) and the other Identified Staff varied among Member States. Through the implementation report, data have been collected on the average and maximum ratios of variable to fixed remuneration paid in the different Member States to executives and other Identified Staff. National competent authorities were asked to base their data collection on a representative sample of institutions in their jurisdiction, comprising either 60% of total domestic banking assets or the 20 largest institutions. Aggregate information on fixed to variable remuneration ratios was reported as minimum and maximum and average among all observations on an individual bank basis. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 84 For the purpose of this report, Member State figures have then been aggregated at Union level. The data show that the median of the average ratios among MS is 122% for executives and 139% for the other identified staff. The highest value of the average ratios that were reported by the MS was 220% for executives and 313% for the other identified staff. Furthermore, looking at the maximum ratios reported by the MS, the median of this is 225% for executives and 324% for the other identified staff. The highest reported values of these maximum ratios were 429% for executives and 940% for the other identified staff. Because of the differences in the degree to which Identified Staff are determined by the institutions (see above in this report in section 3.1.B) and because the sample of institutions for which data have been collected may include very different types of institutions depending on the Member State concerned, the level of detail of these data did not allow numerical conclusions to be drawn from them. However, the general conclusion is that in all Member States, the variable part of the remuneration exceeds the fixed remuneration considerably for all Identified Staff. Moreover, in all Member States, this ratio is generally higher for the category "other risk takers" than for the category "executive members" (for the categories, see paragraph 16 of the Guidelines). Taking into account the nominal pay levels for the fixed component for executives and the other risk takers, the ratios observed can lead to very high variable remuneration components. If the potential variable remuneration is the dominating part of the total remuneration, this could incentivise staff to take too much risk in order to assure a certain minimum pay level. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 85 Some supervisors informally communicate to their institutions a certain numerical maximum ratio of variable to fixed that they consider as appropriate; this allows them to obtain a clear level playing field in the whole sector under their supervision. In this context, observed practices within institutions are: - The remuneration policy determines in a detailed way the underlying reasons why for a particular business unit or person, it is considered appropriate to have a ratio variable to fixed remuneration above a certain level. - High ratios above a certain threshold are approved by the management body in its supervisory function. - Approval for ratios inside a division that exceed the average of the ratios inside this division considerably. - Higher ratios result in a higher part of the variable payment deferred as well as in longer deferral and retention periods.

RISK ALIGNMENT TECHNIQUES EX ANTE AND EX POST
Risk alignment of variable remuneration has two main perspectives. Risks already have to play a prominent role in the performance measurement or accrual period and the award process when a certain pool of variable remuneration is determined and then allocated to divisional subpools, business units and individuals (ex ante perspective). As this forward-looking ex ante perspective may not identify all risks that later may emerge , risks also have to be considered retrospectively similar to a back testing of the initially measured performance (ex post perspective).

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 86 The ex post perspective of risk alignment is subject to those requirements that cover the pay out process of variable remuneration, especially in the deferral and malus or clawback arrangements. Although these two perspectives cannot be mixed, they can not be seen separately either. A more conservative approach in one perspective may allow for a more flexible approach in the other perspective. For example institutions that apply longer accrual periods with risk adjusted performance parameters may only apply the minimum deferral period of three years or use shorter retention periods for instruments like shares. The CRD III and the Guidelines require that the total variable remuneration does not limit the ability of institutions to maintain a sound capital base. In this respect, Member States shall have the power to impose corrective measures (e.g. limits to the variable remuneration, capital add-ons) and institutions shall have in place well-functioning ex ante (potential reduction of the bonus pool) and ex post risk alignment mechanisms. The responses received reveal that national regulations in the majority of Member States completely reflect the CRD III and Guidelines requirements. As regard practices carried out by institutions, the level of capital seems to be taken into account among the risk-adjustment indicators, but there is no evidence as to if and how it operated to reduce, when necessary, the overall variable remuneration. Risk alignment of variable remuneration is the most challenging aspect of a sound remuneration system. The practices in institutions and experiences of supervisors are still nascent. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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Ex ante perspective
An important way to incorporate risks in the system of measuring remuneration-related performance is the use of risk adjusted performance parameters. Risk adjusted parameters are still underrepresented among the quantitative performance parameters used by institutions to determine and allocate the bonus pools. This may be partly due to the limitations of existing measures for different types of risk and assets. Rather, performance criteria used by banks tend to include measures (such as revenues, profit, RoE, business volume, earnings per share,...) that may be subject to financial manipulation or do not provide employees with sufficient incentives to consider the quality of the business undertaken. Common techniques used to adjust profits and capital for risks are based on the calculation of economic profit or economic capital (VaR, RAROC, RORAC). Accounting profits do not capture adequately future risks and may imply a certain degree of judgment in decisions on the performance-related part of remuneration is necessary. Adjusting remuneration for risk over a multi-year period, seems also to be quite difficult to achieve in practice for an institution. However, if compensation schemes rely on imperfect risk measures, they run the risk of becoming ineffective and, more importantly, of creating arbitrage-like opportunities for employees to take on risks that are not fully recognized by the measures. It is therefore important for institutions not to rely blindly on their risk models but to make qualitative judgments as well. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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Institutions often also use discretion to adjust the bonus pools, e. g. to reflect external or unexpected events. However, discretion is also used for upward adjustments which makes the measurement and award process less transparent and susceptible to possible manipulations. In this context a very important factor that is considered when bonus pools - not only on institutional level but also on divisional and business unit level - are adjusted by discretion is the competitive environment in which institutions have to retain or attract their staff. Therefore even a bonus pool which is calculated predominantly on the basis of conservative performance parameters is often dominated by the need to grant competitive remuneration packages and especially variable remuneration. This has an overriding effect on the risk adjusted performance parameters used. Many institutions determine and allocate their variable remuneration in more or less modified top-down approaches. A top-down approach starts by setting a bonus pool on the level of the institution, which is then allocated to business units and to individuals. Bigger institutions often have additional divisional sub pools under the bonus pool at the level of institution, which are then further distributed. On each of the aforementioned levels ex ante risk adjustment can be exercised. Furthermore institutions seem to use risk adjusted parameters more at higher bonus pool levels, i. e. at the level of institution and at divisional level. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 89 At the level of the business unit, but especially at individual level, consideration of risk metrics by institutions seems to be rarely used. Real risk adjustments at these levels are more based on red flags raised e. g. in case of breaches of compliance. The other performance parameters used at business unit and individual level seem to be based more on operating results and some qualitative parameters like customer satisfaction etc. Some jurisdictions have more detailed expectations with a view to the ratio of institution wide, business unit and individual performance parameters (e. g. management board: 50% institution wide, 50% individual; others: in principle 1/3 on each level). The use of more risk adjusted performance parameters also at lower levels, i. e. business unit and individual level, should be a key future objective. This is because the behaviour of an employee in his specific job function will primarily be influenced by those parameters he can affect through his performance etc. It is good practice to use a combination of appropriate quantitative and qualitative parameters on each level of performance measurement, i. e. on institutional, divisional and business unit level as well as on individual level. Quantitative parameters that refer to the annual performance of the institutions should refer to a multi-year period to avoid a high volatility of these metrics, which could lead to inappropriate risk taking. There should also be a formalized process and predefined criteria for a possible discretionary adjustment of these parameters, especially to reflect the adjustment of profits. The Rem Co and risk management function should formally be involved in this process. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 90 Possible adjustments and their rationale should be documented and be part of the reporting to the management body in its supervisory function. Supervisors should ask for the full calculations behind variable remuneration, checking the traceability of the different decisions. Furthermore it is good practice to use the aforementioned performance parameters in combination with a secondary risk adjusted metric, which should coincide with the risk metrics used for risk management purposes at the respective level of performance measurement. For example, if the allocation of a divisional bonus pool to a business unit depends on operating results of a business unit, an existing VaR limit for this business unit could also serve as a performance cap. This performance cap would reduce the incentive to take higher risks in order to increase operative results. For supervisors, it is important to monitor the strength of the incentives given by remuneration to executives and identified staff, by looking, for instance, at how much executives and other identified staff are insulated from downside risks.

Ex post perspective
More improvements seem to be desirable with a view to sufficient sensitive malus criteria which trigger forfeiture of deferred, i. e. unvested, variable remuneration. Malus criteria used do not always reflect the back testing character, which is inherent in the idea of a malus, with regard to the initially measured performance. Often, the ex post risk adjustment is only qualitative in nature, or where it is quantitative in nature, it is not sufficiently defined.

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 91 For example, institutions often use a “significant downturn” as a parameter for ex post risk adjustment, without giving any details on what a “significant downturn” means. Also the malus trigger should be applied at lower levels, i.e. business unit and individual level, as this has a more substantial effect on the employees’ behaviour (see above). Often malus triggers at lower levels do not take full account of negative operational performance and risk profiles of the business unit. At individual level a malus is often only triggered in the case of severe compliance breaches or when an employee leaves the firm voluntarily. It is good practice if malus or clawback arrangements include a performance forfeiture on each level where the performance initially was assessed, i.e. on the institutional, divisional and business unit level as well as on individual level. This performance forfeiture should revert to those performance parameters that were already used in the ex ante accrual process to assess the initial performance on the respective level.

SETTING UP MULTI YEAR FRAMEWORKS
Performance measurement periods, deferral schedules with malus or clawback arrangements attached to them and retention periods in case instruments are used to pay out variable remuneration introduce a multi-year element, linking the employees' compensation schemes to the long term performance of the institutions. This is by now a widespread practice in institutions. There are no major differences in the national regulation with respect to the requirements of the CRD and Guidelines for the different components of the multi year framework. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 92 In some countries longer accrual periods of at least two years are expected for members of the management body. The portion of variable remuneration to be deferred varies between minimum 40% and 60%, as prescribed in CRD, while the deferral period varies between minimum 3 and 5 years. Some countries fixed a threshold of variable remuneration below which there is no requirement for deferral to take place. Another country fixed a threshold of variable remuneration for which 60% needs to be deferred. The payment is in general on a pro-rata basis, with yearly vesting periods after the end of the accrual period, as prescribed in the Guidelines. In general, no specific retention period has been fixed, an issue also left open in the Guidelines. Several countries, though, indicate a minimum retention period based on best practice and which can vary between 6 months and 2 years. Member States seem to comply as well with the application of the 50% minimum threshold for the instruments to be divided equally over the deferred and the non-deferred part, although some supervisors are of the opinion that rremuneration in shares is only likely to impact positively on behaviours if there is a requirement for the shares to be held for prolonged periods of time and that this is undermined by the requirement to pay 50% of the upfront portion in shares. Institutions signal the administrative burden in designing and implementing new CRD III compliant incentive plans. Another difficulty is adjusting the multi year framework to the tasks and responsibilities of the different Identified Staff; up to now, there is little differentiation among the different levels of personnel in the multi year elements that are applied to them. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 93 With a view to the length of the accrual period one year periods seem to be widespread. Nevertheless longer periods are also used, especially for higher management levels. For deferral, institutions stick to the legal minima, with little variation in the 40 to 60 % or the 3 to 5 years ranges. The percentage deferred is however in general slightly higher for executive members of the management body. In almost all countries, most of the Identified Staff receives 50% of variable remuneration paid in instruments. The deferral period is 3 years in the practice of almost all countries. The retention period most commonly chosen is between 6 months and 18 months. Occasionally, conceptually wrong deferral schemes are persistently presently by institutions. The following examples show a good and an inappropriate practice to consider a multi-year performance measurement:

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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While the first example shows an approach that combines a longer accrual period with the other requirements of the CEBS Guidelines, especially with a view to the pay out requirements (deferral etc.), the approach in the second example does not. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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The approach in the second example considers the accrual period simultaneously as a deferral period. Beside the very clear textual distinction between these periods in CRD III and in the CEBS Guidelines, the approach unduly blends the ex ante and ex post perspectives of risk alignment. Finally the performance parameters can be changed annually during the accrual period. Thus the multi-year accrual period in fact has the character of a short term accrual period.

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 96 NUMBER 4

Jumpstart Our Business Startups Act Frequently Asked Questions
Changes to the Requirements for Exchange Act Registration and Deregistration, April 11, 2012 The Jumpstart Our Business Startups Act (the “JOBS Act”) was enacted on April 5, 2012. In these Frequently Asked Questions, the Division of Corporation Finance is providing guidance on the implementation and application of the JOBS Act, based on our current understanding of the JOBS Act and in light of our existing rules, regulations and procedures. These FAQs are not rules, regulations or statements of the Commission. Further, the Commission has neither approved nor disapproved these FAQs. Title V and Title VI of the JOBS Act amend Section 12(g) and Section 15(d) of the Exchange Act as follows:

The holders of record threshold for triggering Section 12(g) registration for issuers (other than banks and bank holding companies) has been raised from 500 or more persons to either (1) 2,000 or more persons or (2) 500 or more persons who are not accredited investors. Banks and bank holding companies, as such term is defined in the Bank Holding Company Act of 1956, will have a Section 12(g) registration obligation as of any fiscal year-end after April 5, 2012 with respect to a class of equity security held of record by 2,000 or more persons. Under Exchange Act Section 12(i), banks do not register their securities or file reports with the Commission. Accordingly, these FAQs relate only to bank holding companies.

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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The holders of record threshold for Section 12(g) deregistration for banks and bank holding companies has been increased from 300 to 1,200 persons. The holders of record threshold for the suspension of reporting under Section 15(d) for banks and bank holding companies has been increased from 300 to 1,200 persons. In calculating the number of holders of record for purposes of determining whether Section 12(g) registration is required with respect to a class of equity security, issuers (including banks and bank holding companies) may exclude persons who received the securities pursuant to an employee compensation plan in transactions exempted from the registration requirements of Section 5 of the Securities Act.

(1) Question:
How do the amendments to Section 12(g)(1)(A) affect the obligations of issuers (other than bank holding companies) to register a class of equity security under Section 12(g) where such obligations were triggered as of a fiscal year-end before April 5, 2012?

Answer:
If an issuer that is not a bank holding company triggered a Section 12(g) registration obligation with respect to a class of equity security as of a fiscal year-end before April 5, 2012 but would not trigger such obligation under the amended holders of record threshold contained in the JOBS Act, and the issuer has not yet registered that class of equity security under Section 12(g), then the issuer is no longer subject to a Section 12(g) registration obligation with respect to that class. Therefore, if the issuer has not filed an Exchange Act registration statement, it is no longer required to do so. If the issuer has filed an Exchange Act registration statement and the registration statement is not yet effective, then the issuer may withdraw the registration statement.

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 98 If the issuer has registered a class of equity security under Section 12(g), it would need to continue that registration unless it is eligible to deregister under Section 12(g) or current rules.

(2) Question:
How do the amendments to Section 12(g)(1)(B) affect the obligations of bank holding companies to register a class of equity security under Section 12(g) where such obligations were triggered as of a fiscal year-end on or before April 5, 2012?

Answer:
Under Section 12(g)(1)(B), a bank holding company will have a Section 12(g) registration obligation if, as of any fiscal year-end after April 5, 2012, it has total assets of more than $10 million and a class of equity security held of record by 2,000 or more persons. We consider that the effect of this provision is to eliminate, for bank holding companies, any Section 12(g) registration obligation with respect to a class of equity security as of a fiscal year-end on or before April 5, 2012. Therefore, if a bank holding company has filed an Exchange Act registration statement and the registration statement is not yet effective, then it may withdraw the registration statement. If a bank holding company has registered a class of equity security under Section 12(g), it would need to continue that registration unless it is eligible to deregister under Section 12(g) or current rules.

(3) Question:
On or after April 5, 2012, how can a bank holding company terminate the registration of a class of equity security under Section 12(g)?

Answer:
If the class of equity security is held of record by less than 1,200 persons, the bank holding company may file a Form 15 to terminate the Section 12(g) registration of that class. Form 15 has not yet been amended to reflect the change to Exchange Act Section 12(g)(4). _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 99 Therefore, a bank holding company should include an explanatory note in its Form 15 indicating that it is relying on Exchange Act Section 12(g)(4) to terminate its duty to file reports with respect to that class of equity security. Pursuant to Section 12(g)(4), the Section 12(g) registration will be terminated 90 days after the bank holding company files the Form 15. Until that date of termination, the bank holding company is required to file all reports required by Exchange Act Sections 13(a), 14 and 16. Alternatively, a bank holding company could rely on Exchange Act Rule 12g-4, which permits the immediate suspension of Section 13(a) reporting obligations upon filing a Form 15, if it meets the requirements of that rule. Note that Rule 12g-4 has not yet been amended to incorporate the new 1,200 holder deregistration threshold.

(4) Question:
On or after April 5, 2012, how can a bank holding company suspend its reporting obligations under Section 15(d)?

Answer:
In general, the Section 15(d) reporting obligation is suspended if, and for so long as, the issuer has a class of security registered under Section 12. When an issuer terminates Section 12 registration, it must address any Section 15(d) obligation that would apply once the Section 15(d) suspension is lifted. For the current fiscal year, a bank holding company can suspend its obligation to file reports under Section 15(d) with respect to a class of security that was sold pursuant to a Securities Act registration statement and that was held of record by less than 1,200 persons as of the first day of the current fiscal year. Such suspension would be deemed to have occurred as of the beginning of the fiscal year in accordance with Section 15(d) (as amended by the JOBS Act). _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 100 If, during the current fiscal year, a bank holding company has a registration statement that becomes effective or is updated pursuant to Securities Act Section 10(a)(3), then it will have a Section 15(d) reporting obligation for the current fiscal year. If a bank holding company with a class of security held of record by less than 1,200 persons as of the first day of the current fiscal year has a registration statement that is updated during the current fiscal year pursuant to Securities Act Section 10(a)(3), but under which no sales have been made during the current fiscal year, the bank holding company may be eligible to seek no-action relief to suspend its Section 15(d) reporting obligation. Such issuers should contact the Division’s Office of Chief Counsel for further information.

(5) Question:
Section 503 of the JOBS Act requires the Commission to revise the definition of “held of record” to exclude, from the Section 12(g)(1) holder of record calculation, persons who received the securities pursuant to an employee compensation plan in transactions exempted from the registration requirements of Section 5 of the Securities Act. May an issuer (including a bank holding company) exclude such persons before the effective date of the revised definition? If so, would an issuer also be able to exclude former employees?

Answer:
Yes. As of April 5, 2012, an issuer (including a bank holding company) may exclude persons who received securities pursuant to an employee compensation plan in Securities Act-exempt transactions whether or not the person is a current employee of the issuer. Although Section 503 of the JOBS Act directs the Commission to adopt “safe harbor provisions that issuers can follow when determining whether holders of their securities received the securities pursuant to an employee compensation plan in transactions that were exempt from the registration requirements of section 5 of the Securities Act of 1933,” the lack of a safe harbor does not affect the application of Exchange Act Section 12(g)(5). _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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NUMBER 5

EBA, ESMA and EIOPA publish two reports on Money Laundering
The Joint Committee of the three European Supervisory Authorities (EBA, ESMA and EIOPA) has published two reports on the implementation of the third Money Laundering Directive [2005/60/EC] (3MLD). The “Report on the legal, regulatory and supervisory implementation across EU Member States in relation to the Beneficial Owners Customer Due Diligence requirements” analyses EU Member States’ current legal, regulatory and supervisory implementation of the anti - money laundering/counter terrorist financing (AML/CTF) frameworks related to the application by different credit and financial institutions of Customer Due Diligence (CDD) measures on their customers’ beneficial owners. The report sought to identify differences in the implementation of the Directive and to determine whether such differences create a gap in the EU AML/CTF regime that could be exploited by criminals for money laundering and terrorist financing purposes. The “Report on the legal and regulatory provisions and supervisory expectations across EU Member States of Simplified Due Diligence _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 102 requirements where the customers are credit and financial institutions” provides an overview of EU Member States’ legal and regulatory provisions and supervisory expectations in relation to the application of Simplified Due Diligence (SDD) requirements of the 3MLD. The report focuses exclusively on one particular situation of low risk where SDD is applicable, namely where the customer is a credit or financial institution situated in a EU/EEA state or in a country that imposes equivalent AML/CFT requirements. Both reports come to the conclusion that there are significant differences in the implementation across the EU Member States, and that some of these differences could create undesirable effects on the common European Anti Money Laundering Regime. The reports find that some of these differences are not due to the Directive’s minimum harmonisation approach, but instead appear to stem from different national interpretations of the Directive’s requirements. Both reports also call on the European Union to consider addressing these problems.

The Joint Committee
The Joint Committee is a forum for cooperation that was established on 1st January 2011, with the goal of strengthening cooperation between the European Banking Authority (EBA), European Securities and Markets Authority (ESMA) and European Insurance and Occupational Pensions Authority (EIOPA), collectively known as the three European Supervisory Authorities (ESAs). Through the Joint Committee, the three ESAs cooperate regularly and closely and ensure consistency in their practices. In particular, the Joint Committee works in the areas of supervision of financial conglomerates, accounting and auditing, microprudential _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 103 analyses of crosssectoral developments, risks and vulnerabilities for financial stability, retail investment products and measures combating money laundering. In addition to being a forum for cooperation, the Joint Committee also plays an important role in the exchange of information with the European Systemic Risk Board (ESRB) and in developing the relationship between the ESRB and the ESAs.

Interesting Abbreviations
AML – Anti Money Laundering AMLTF – Anti-Money Laundering Task Force of the EBA, ESMA and EIOPA AML Committee – The Joint Committee of the European Supervisory Authorities’ Sub Committee on Anti Money Laundering CDD - Customer Due Diligence CPMLTF – EU Committee on the Prevention of Money Laundering and Terrorist Financing CTF – Counter Terrorist Financing EBA - European Banking Authority EC – European Commission EEA - European Economic Area EIOPA - European Insurance and Occupational Pensions Authority EDD – Enhanced Due Diligence ESMA - European Securities and Markets Authority EU – European Union _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 104 FATF – Financial Action Task Force ID - Identity ML – Money Laundering MS – Member State of the European Union SDD - Simplified Due Diligence TF – Terrorist Financing UBO – Ultimate Beneficial Owner WG – Working Group 3rd MLD - Third Money Laundering Directive (2005/60/EC)

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 105 NUMBER 6

BIS - Peer review of supervisory authorities' implementation of stress testing principles -April 2012
Stress testing is an important tool used by banks to identify the potential for unexpected adverse outcomes across a range of risks and scenarios. In 2009, the Committee reviewed the performance of stress testing practices during the financial crisis and published recommendations for banks and supervisors entitled Principles for sound stress testing practices and supervision. As part of its mandate to assess the implementation of standards across countries and to foster the promotion of good supervisory practice, the Committee's Standards Implementation Group (SIG) conducted a peer review during 2011 of supervisory authorities' implementation of the principles. The review found that stress testing has become a key component of the supervisory assessment process as well as a tool for contingency planning and communication. Countries are, however, at varying stages of maturity in the implementation of the principles; as a result, more work remains to be done to fully implement the principles in many countries. Overall, the review found the 2009 stress testing principles to be generally _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 106 effective. The Committee, however, will continue to monitor implementation of the principles and determine whether, in the future, additional guidance might be necessary.

Peer review of supervisory authorities’ implementation of stress testing principles, April 2012 Executive summary
This report summarises the Basel Committee’s peer review on how supervisory authorities have implemented the Committee’s 2009 Principles for sound stress testing practices and supervision.

The global financial crisis and the 2009 stress testing principles
Stress testing is an important tool for banks to identify unexpected adverse outcomes across a range of risks. It plays a particularly important role in: - providing forward-looking assessments of risk; - overcoming limitations of models and historical data; - supporting internal and external communication; - feeding into capital and liquidity planning procedures; - informing the setting of banks’ risk tolerance; and - facilitating the development of risk mitigation or contingency plans across a range of stressed conditions. In 2009, the Committee reviewed the performance of stress testing practices during the crisis and found weaknesses in various areas.

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 107 Based on the findings, and as part of its efforts to incorporate lessons from the crisis in supervisory practices, the Committee published recommendations for banks and supervisors entitled Principles for sound stress testing practices and supervision. The guidance sets out a comprehensive set of principles for the sound governance, design and implementation of stress testing programmes at banks. The principles also established high-level expectations for the role and responsibilities of supervisors in evaluating stress testing practices.

Scope of the review
As part of its mandate to assess the implementation of standards across countries, during 2011 the Committee's Standards Implementation Group undertook a peer review of supervisory authorities’ implementation of the principles. The review was conducted via an off-site survey of supervisory authorities. All Committee member countries and one non-member country participated in the review. The review focused primarily on progress in supervisory processes used to implement the principles. It was not designed to provide a detailed country-by-country assessment or to assess the adequacy of banks' stress testing programmes. Increasingly, supervisory stress tests are being used to set minimum capital requirements, determine explicit capital buffers or to limit capital distributions by banks. This recent development was not extensively considered in the principles and as a result was not a key focus of the review. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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Key findings Progress overview
In the period since the principles were issued, stress testing has become a key component of the supervisory assessment process as well as a tool for contingency planning and communication. Many of the countries participating in this peer review have been working to implement and refine stress testing frameworks and methodologies at the same time as their economies and banking systems have been affected by a high degree of global economic and financial uncertainty. Although many supervisory authorities and banks had operational stress testing frameworks in place, existing guidance and rules had to be revised and new expectations put in place to broaden and deepen stress testing capabilities at both banks and supervisory authorities. The review found that countries are at varying stages of maturity in their implementation of the principles. Nearly half of the countries were considered to be at an early stage. These countries showed some progress toward implementing the principles, but they may not have issued or finalised prudential requirements on enterprise-wide stress testing since the principles were published. They generally had not conducted regular on-site or off-site reviews other than in the context of risk-specific modelling requirements such as for market risk, and had conducted industry-wide stress tests infrequently, or only as part of International Monetary Fund Financial Sector Assessment Program (FSAP) reviews. In contrast, a few countries were considered to be advanced. For these countries, the survey responses provided evidence of a rigorous regular review process that included a combination of on-site and off-site assessments, some review and feedback on detailed stress testing models _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 109 used by banks, evidence of follow-up actions and a well-embedded supervisory stress testing programme that was not limited to externally imposed scenarios. The remainder of countries were found to fall between the above two groups. These countries have issued some formal requirements or guidance consistent with the principles, are generally performing regular supervisory stress tests on large banks in their jurisdictions and are reviewing stress testing in the context of annual internal capital adequacy assessment process (ICAAP) reviews and specific risk reviews. These countries have more to do in deepening their stress testing programmes, including issuing updated requirements and conducting more detailed on-site and off-site reviews of banks' stress testing capabilities.

Remaining challenges and examples of good practices
The most common overall supervisory approach was to conduct some review of banks' stress testing as part of regular ICAAP assessments and in the context of specific risks where ongoing supervisory review of exposure modelling is now routine, notably market and liquidity risks. Conducting more detailed, comprehensive reviews of banks' enterprise-wide stress testing governance and modelling as envisioned in the principles requires expert skills and resourcing at both banks and supervisors, and as a result has not yet become standard practice in many countries. A significant development in the last several years has been the increased use of supervisory stress tests. A majority of countries now regularly conduct mandated stress tests with prescribed scenarios across the large banks in their jurisdictions, although for some countries, this is limited to the FSAP stress tests.

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 110 A number of countries noted the resource-intensive nature of industry-wide stress tests. In particular, the more advanced countries note that resourcing at both supervisory authorities and banks to support stress testing is challenging, with a trend towards establishing specially staffed units or internal task forces for stress testing. Many, however, found that these exercises have been helpful in terms of enhancing the visibility of stress testing and providing a structured basis for dialogue with banks on their capabilities. It was noted that industry dialogue around mandated stress tests had led to improvements in bank capabilities. The following types of practices are also associated with relatively more advanced countries: - plans for, or completed horizontal or thematic reviews of, stress testing either at an enterprise-wide level or for specific portfolios; - engagement with boards of directors on stress testing scenarios and governance; - review of detailed evidence of how banks are using stress test outcomes in their decision-making and risk-appetite setting; - well-articulated plans for improving their stress testing supervision programmes; - involvement of both generalist and specialist supervision staff; and - publication of the results and provision of consistent feedback to banks. While not a primary focus of the peer review, many countries provided views on areas for improvement in stress testing practices at banks.

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 111 These responses focused fairly consistently on areas such as governance and the use of stress testing in bank decision-making, data and information technology infrastructure, severity of scenarios and firm-wide modelling challenges. The review found the principles to be generally effective. The Committee, however, will continue to monitor implementation of the principles and determine whether, in the future, additional guidance might be necessary.

Introduction
Stress testing is an important tool for banks to identify unexpected adverse outcomes across a range of risks. The financial crisis highlighted significant weaknesses in banks' stress testing programmes that contributed to failures to identify the nature and magnitude of key risks. As a result, the Committee engaged with the industry in examining stress testing practices and, in May 2009, the Committee published recommendations for banks and supervisors entitled Principles for sound stress testing practices and supervision. The guidance set out a comprehensive set of principles for the sound governance, design and implementation of stress testing programmes at banks. The principles established expectations for the role and responsibilities of supervisors in evaluating stress testing practices. Overall, the guidance includes fifteen principles for banks and six principles for supervisors. As part of its mandate to assess the implementation of its standards across countries, the Committee's Standards Implementation Group undertook a peer review of supervisory authorities’ implementation of the principles. The objectives of this review were to: _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 112 - assess the extent to which the principles have been implemented in a rigorous and consistent manner across the Committee's member authorities; - identify and provide feedback on factors that are most critical to the effective implementation of the principles; and - assess the effectiveness of the principles themselves. An important element of the review was the context in which the principles are being implemented. Many of the countries participating in this peer review have been working to implement and refine stress testing frameworks and methodologies at the same time their economies and banking systems have been affected by a high degree of global economic and financial uncertainty. Although many supervisory authorities and banks had operational stress testing frameworks in place, existing guidance and rules had to be revised and new expectations put in place to broaden and deepen stress testing capabilities at both banks and supervisors. This is being done in a stressed environment and is also being conducted at a time when stress testing infrastructure, including the ability to collect appropriate data, develop models and aggregate results, is evolving. As a result, the current environment has provided a useful early test of how countries are putting the principles into practice. More broadly, it was evident that countries are implementing stress testing regimes and activities in different ways that may reflect their individual situations and not all will follow the same progression or path in implementing the principles. The review was intended to deliver feedback on good supervisory practice to help supervisors implement standards more effectively.

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 113 Indeed, several countries have reported significant progress subsequent to the completion of the peer review survey, particularly with regard to supervisory stress testing practices.

Methodology
The peer review was conducted through a questionnaire which was distributed to Committee member countries in September 2011. Analysis of the responses was conducted by a working group of representatives of supervisory authorities with expertise in stress testing. The questionnaire focused primarily on the implementation activities of supervisors and consisted of both factual multiple choice questions and free-form responses. The review team used the information provided by each country and, where relevant, source documents demonstrating its implementation of the principles, to assess and compare the progress made across countries. Given the off-site and high-level nature of the review, it was not intended to produce a definitive assessment of individual countries' implementation of the principles, but, rather, to allow an overall view of progress across countries. A detailed report was provided to the Standards Implementation Group and to the Committee. The review focused primarily on the implementation of principles 16-21 for supervisors, as it was not within the scope of the peer review to assess compliance by banks with principles 1-15 on stress testing practices. However, countries were invited to provide their views on the ease and effectiveness of implementation for each of the principles for banks in their jurisdiction. In their responses, supervisory authorities were asked to focus on supervision of the largest banks in their jurisdiction, although some also _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 114 addressed their supervisory expectations for stress testing at smaller banks.

Assessment of principles for supervisors Overall maturity of implementation
For purposes of assessing and comparing implementation of the principles, participating countries were stratified as being in an early, intermediate or advanced state of implementation. These assessments were based on indicators of maturity developed for this purpose by the review team, as well as the quality and thoroughness of the questionnaire responses. Countries in the early category (nearly half of respondents) showed some progress towards implementing the principles; however, they may not have issued or finalised prudential requirements on enterprise-wide stress testing since the principles were published. These countries generally had not conducted regular on-site or off-site reviews other than in the context of risk-specific modelling requirements such as for market risk, and have conducted industry-wide stress tests infrequently, or only as part of FSAP reviews. In contrast, a few countries were classified as advanced. For these countries, the review team saw evidence of a rigorous regular review process that included a combination of: - on-site and off-site assessments; - some review and feedback on detailed stress testing models used by banks; - evidence of follow-up actions; and - a well-embedded supervisory stress testing programme that was not limited to FSAP or regionally-imposed scenarios. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 115 The remainder of countries (approximately half of respondents) fell into the intermediate category. These countries have issued some formal requirements or guidance consistent with the principles, were generally performing regular supervisory stress tests on their large banks and were reviewing stress testing in the context of annual ICAAP reviews and specific risk reviews. These countries have more to do in deepening their programmes, including issuing updated requirements and conducting more detailed on-site and off-site reviews of banks' stress testing capabilities. Notably, several countries have reported significant progress subsequent to the completion of the peer review survey, particularly with regard to supervisory stress testing practices and also in some cases issuance of stress testing requirements or guidance. Specific areas of supervisory activity in relation to the principles are discussed in more detail below.

Prudential framework
The review found that all countries have in place prudential requirements relating to stress testing. In many cases these requirements were implemented as a component of Basel II, namely the ICAAP requirements, or otherwise pre-date the principles. In addition, a large majority of the respondents stated that they had issued specific rules or guidance implementing the principles. However, approximately one-third of respondents has not issued any rules or guidance on stress testing post-2009, and thus would not be considered to have implemented the principles explicitly. These countries rely on other rules relating to stress testing, particularly under the Basel II credit or market risk requirements.

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P a g e | 116 In terms of future plans, a number of countries across different levels of maturity are in the process of, or are planning to strengthen or finalise guidance or regulations. In some cases, key elements of the principles have been incorporated into the Pillar 2 requirements and in other cases as (non-mandatory) guidance for banks. Some countries issued informal guidance based generally on the principles or on other regional guidelines. A number of countries are still in the early phases of issuing prudential expectations for enterprise-wide stress testing. At least a few countries have not yet issued requirements relating to Basel II ICAAPs, which was the most common means of implementing the principles. Other countries have already updated their rules and adapted the principles or other guidelines for their own circumstances. These would be considered to have a more mature supervision framework for stress testing. A few other countries have issued their own good practice guidelines which incorporate the principles as well as key findings from supervisory activities and industry dialogue. Roughly three-quarters of respondents reported that there have not been any impediments to implementing the principles. However, resourcing and other supervisory priorities were noted as a constraint by a number of other countries. A number of countries asserted that because their banks or banking systems are not complex, some of the aspects of the principles are not relevant (eg structured products and highly leveraged counterparties).

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P a g e | 117 Further, banks in some jurisdictions generally do not have the infrastructure and skills to be able to comply with sophisticated stress testing requirements.

Supervisory review
Principle 16 recommends that supervisors should make regular and comprehensive assessments of banks' stress testing programmes. The review found that supervisory authorities use a combination of on-site and off-site reviews to assess banks’ stress testing practices. Most countries indicated that they have conducted some form of on-site review of stress testing at banks. For specific risk areas (primarily market, liquidity and to some extent credit risk), there are well established supervisory review programmes. Almost three-quarters of countries indicated that they perform extensive regular review of firm-wide stress testing practices. The most common approach for assessing firm-wide stress testing is through annual ICAAP reviews, which generally cover capital planning as well as other matters. Given the scope of ICAAP reviews, it may be difficult to assess all of the principles during a routine ICAAP review. Indeed, a few countries indicated that they conduct horizontal or thematic reviews specifically on firm-wide stress testing including the principles, which is considered a more advanced practice. The frequency of on-site reviews of firm-wide stress testing varied across countries. About one-third of countries conducted less-than-annual reviews (every 2-4 years) while roughly half of responding countries reported that they conduct annual or more frequent on-site reviews of stress testing.

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P a g e | 118 Some supervisors have conducted a one-time review of the principles through self-assessments, questionnaires, or benchmarking studies across a range of banks. In terms of the scope of supervisory review, supervisory activities regularly covered stress testing for firm-wide risks, general credit risks, retail mortgages and corporate credit risks, market risk, banking book interest rate risk and liquidity risk. Authorities reported that areas such as operational risk, overseas operations, as well as specific portfolios such as commercial property and sovereign risks, receive less coverage. Supervisory authorities in most countries reported conducting annual or more frequent review of board and senior management reporting of stress test results. Use of stress testing in loan loss provisioning was reviewed regularly by about half of the countries. The role of stress testing to help set risk appetite and identify risk concentrations were areas that were less commonly reviewed; this is an area where supervisory and bank practice is at a very early stage. Review of contingency plans for operational risk is the surveyed area least likely to have been assessed by supervisors in the context of stress testing. Some countries noted different requirements or expectations of stress testing across banks, mainly depending on the banks’ systemic importance (including size, complexity and relevance to economy) and risk profile. Most emphasised that supervisors have proportionately different expectations when conducting stress testing reviews of smaller banks. Several countries (particularly those at the more advanced stages of implementation of the principles) indicated that they are planning to increase the expectations of smaller institutions with respect to stress testing going forward. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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Supervisory action
Principle 17 indicates that supervisors should take action on deficiencies in banks' stress testing programmes. The review found that the two most common areas for supervisory follow-up were improving governance processes for stress testing and use of additional (in particular, more severe) scenarios. Many countries either regularly or occasionally imposed requirements to improve data or model validation processes. The least common supervisory follow-up action indicated in the responses was to require the bank to review or change limits or exposures (less than half of the countries reported taking this action regularly). Principle 19 encourages supervisors to consider the results of stress tests in assessing capital adequacy and in setting prudential buffers for capital and liquidity. A large majority of countries indicated that they sometimes or regularly impose capital or liquidity requirements as a result of stress testing deficiencies. In particular, use of stress scenarios for setting liquidity requirements appears to be fairly well established, particularly as countries work toward implementing the Basel III liquidity framework, which is based on stressed cash flows. Nearly all of the countries indicated regular review of liquidity stress testing. Use of stress tests for setting minimum capital requirements, determining explicit capital buffers or for limiting capital distributions by banks is a more recent development that was not extensively considered in the principles and as a result was not a key focus of the review. A small number of countries indicated that stress testing has become a key tool for setting or assessing capital requirements. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 120 Some countries have issued new requirements in the past year or so specifically related to the use of stress tests in assessing capital adequacy. While use of stress tests to set formal minimum capital requirements is not common, use of standard supervisory stress scenarios as a benchmarking tool is increasingly prevalent. Other countries took the view that stress test results are just one factor in assessing how much capital is needed to offset the risk of unexpected losses. In a number of countries, and even those with fairly advanced stress testing supervision programmes, stress testing was seen as one of several tools in assessing capital adequacy and there was a reluctance to place primary reliance on stress test scenario outcomes. This may reflect the evolving nature of supervisory and bank practices.

Supervisory resourcing
As stress testing is a fairly new and specialised area of supervision, the review found that resourcing and capabilities for stress testing supervision were key challenges for many supervisory authorities. Only a few countries have established units specifically dedicated to stress testing. Most countries are primarily relying on separate teams of staff to conduct supervisory stress tests and, in many cases, also to review stress testing practices at banks. These teams also perform other tasks in addition to reviewing or conducting stress testing. Typically, a set of specially trained supervisors is responsible for coordinating with banks with respect to the collection of data for stress testing and reviewing and consolidating the stress test information. Often an inter-departmental team is used to conduct the stress tests. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 121 In general, it was noted that staff with a variety of different backgrounds can be useful in stress testing, including macro-surveillance economists, risk specialists and modelling experts, as well as generalist supervisors who are most familiar with individual institutions or accounting experts. Similarly, most countries utilise both risk specialists and generalist supervisors in reviewing stress testing practices at banks. In most countries, generalist supervisors are involved in the review of stress testing practices; however, they are not generally involved in conducting supervisory stress tests. At the same time, some countries noted that where stress testing is allocated to a separate unit, it can be more difficult to ensure that stress testing is embedded within routine supervision and that stress test outcomes are understood and used by the generalist supervisors. This was seen as an evolving challenge. The more advanced countries, in particular, noted a general lack of specialised stress testing resources. Indeed, some countries found that prioritisation of supervisory work is a major issue as key individuals involved often have other responsibilities. Most countries indicated they had established some form of training programme on stress testing for supervisors. In many cases, the training was of a quite general nature and in some cases limited to presentation of the results of supervisory stress tests or high-level discussion in the context of introductory training on Pillar 2 approaches. A few countries provide quite advanced training programmes, including case studies, and some offer training to other countries' supervisors or to banks in their jurisdiction. Not surprisingly, several countries noted that stress testing training is an area of focus in their future plans. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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Supervisory stress testing
Principle 20 recommends that supervisors should consider implementing stress test exercises based on common scenarios. It is clear that there has been a significant increase in the use of supervisory stress tests in recent years. In fact, all countries indicated that they conduct some form of supervisory stress test. As a result, progress in this area can be considered more advanced generally than some other aspects of the principles. Portfolio-level stress tests were reported by more than half of the countries. In recent years, this has included specific stress tests on, for example, housing loan portfolios, consumer debt, sovereign risks and liquidity risk. Some countries indicated that they conduct very frequent sensitivity testing for specific risks, for example, applying market risk and liquidity shocks on a regular basis. In terms of firm-wide stress tests based on a common scenario, there was a range of experience. A few countries have performed FSAP stress tests only. While these stress tests provide an important basis and experience for designing supervisory stress tests, in many cases they tended to be led by the FSAP mission team and the national central bank, and did not have a supervisory focus. About one-third of countries were not running stress tests on a firm-wide basis. In a couple of countries, firm-wide stress tests were conducted by the (non-supervisory) central bank, although with some involvement by the supervisory authority. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 123 Many countries conduct both bank-run and supervisor-run stress tests. This can involve the supervisory authority running the same scenario using supervisory or public data in order to benchmark banks' results from the bank-run stress test. Some countries run both regional and country-specific stress tests. Directing banks to run a stress test using a common scenario is considered to be a more advanced practice for supervisors, as it requires more detailed understanding of bank modelling capabilities and an ability to assess the results. About half of the countries have conducted bank-run, firm-wide stress tests (outside of the FSAP process), of which about half conduct these on an annual basis.

Supervisory assessment and challenge
The overall assessment and challenge of the reasonableness of banks' stress test scenarios and outputs is a difficult area for supervision. In many countries, the models, assumptions and approaches used are evolving, and banks are at varying degrees of sophistication. At a general level, the review found a range of supervisory methods for challenging the scope and results of banks’ stress tests and scenarios. The most widely used method was to compare outputs with historical experience, such as a past severe recession. However, in countries with little history of financial crisis, this approach may be more difficult. A number of countries conducted their own parallel stress tests on bank financial data to benchmark results produced by banks or placed high reliance on reasonableness checks based on supervisors’ understanding of portfolios. Peer comparisons were very useful in countries where banks subject to stress testing are comparable in size and scope. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 124 Some countries facilitate this by requiring banks to report the results of their stress tests in a standardised manner. A number of countries also place moderate to high reliance on banks' own internal model validation reporting. Independent review by external auditors or consultants can be one element of the assessment and challenge process for some countries. But more than half of countries indicated they do not rely at all on independent review of stress testing results as part of their supervision activities. Another supervisory trend is that supervisory authorities are more actively reviewing scenarios chosen by the banks in their internal stress testing and, for example, the banks’ ICAAPs. Monitoring or keeping a systematic inventory of scenarios used by banks is a more advanced practice as it allows better benchmarking of peer banks’ internal view of stressed conditions and possible vulnerabilities. Several countries maintain a database of scenarios used by their banks, and others have plans to do this. Over half of the countries periodically review the scenarios used by banks in their internal stress testing. A few countries in the earlier stages of maturity were not regularly reviewing scenarios used by banks. Supervisory authorities in several countries indicated that they have performed reverse stress tests, that is, stress tests designed to be sufficiently severe that they challenge the viability of the bank. However, reverse stress testing has not become a common supervisory practice. In fact, the supervisory stress tests appear to be the vehicle for assessing the impact of more severe scenarios. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 125 In terms of the choice of scenario for supervisory stress tests, the most common approach was to look to a previous severe recession or input from the central bank. Also very common was to target the scenario to known vulnerabilities. About half of the countries have used externally prescribed scenarios (for example, from a regional authority or FSAP process).

Dialogue with public and private sectors
Stress testing is increasingly part of the public debate on the strength and transparency of supervision. Supervisory authorities have regular discussions with banking industry risk officers or hold occasional seminars, workshops or roundtables with banks to exchange experiences on stress testing methodologies and use of results. In some cases, this has resulted in publication of local industry guidance based on the Committee's principles. Some supervisors also have a formal process for coordinating with other official organisations within their country. In some cases, a formal committee of regulators and other authorities (including the central bank) discusses systemic vulnerabilities and provides input into stress testing programmes and the scenarios to be tested. A number of other supervisors coordinate with their central bank in conducting a quantitative macroeconomic stress test, including consideration of potential systemic issues that may be caused by banks’ management reactions to a common stress scenario. Regional-level coordinating bodies have also become increasingly important.

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Effective supervisory approaches
The review highlighted a number of different supervisory approaches that appear to have been more effective and are reflective of more advanced progress. One of the most effective tools in advancing stress testing practices has been the significantly heightened focus on industry-wide supervisory stress tests. Many countries found that this process has helped focus on common expectations, provide a structured approach for dialogue on better stress testing practices, and identify gaps in banks' stress testing infrastructure. By challenging the loss results reported by banks on the prescribed scenarios, supervisors have motivated banks to justify their results and hence improve their internal assessment of key risk areas. In contrast, there was some evidence that countries that have only conducted supervisory stress tests or supervisory review of stress testing practices without leveraging these two aspects together have not made as much progress in implementing the principles. In addition, countries that address bank stress testing practices through the ICAAP review process have generally found this to be an effective mechanism, although periodic horizontal or thematic reviews that allow detailed comparison of practices across banks is a more advanced approach that is in use or under consideration in some countries. A formal self-assessment process conducted in some countries helped banks identify where their practices are consistent with the principles and where gaps exist in stress testing programmes. Open dialogue with banks was also seen as a key element of an effective supervisory programme. Annual meetings with banks can include discussions of risk developments and best practices in stress testing that effectively create incentives for banks to strengthen their own practices. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 127 Another approach highlighted by some countries was to engage in dialogue on scenario selection, dynamics of models, reporting templates and data capabilities, and overall robustness of the stress test at the highest level of bank management. Several countries have issued publications describing observed good practices arising from benchmarking or initial implementation reviews of the principles. This type of guidance allows banks to benchmark themselves against their local peers. Banks, and to some extent regulators, are increasingly using stress testing as a means of communicating their risk profiles to the market. However, disclosure requirements and practices vary considerably by country. Many countries now publish aggregate summaries of stress tests results in their regular financial stability reports, and in some cases outcomes for individual banks. Some banks now routinely provide stress test results as part of their financial results.

Future plans
Most supervisory authorities described future enhancements to their stress testing supervision programmes. Those countries in the early phases of maturity are planning to issue, finalise or update rules on stress testing and to commence review and assessment of stress testing practices. Some are also conducting supervisory stress tests for the first time. Those supervisory authorities in intermediate to advanced stages of maturity plan to focus on deepening their current on-site and off-site review programmes, with the aim of better assessing how stress test outcomes are used in bank decision-making and risk appetite setting. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 128 Stress testing results are expected to have a greater impact on contingency planning including recovery and resolution. Additional supervisory work is planned for identifying and assessing how banks are integrating stress tests results in the development of risk appetite and overall risk management. Some supervisors will also use horizontal reviews across multiple banks to assess these areas as well as to benchmark banks’ internal stress test scenarios and assumptions. Greater focus on the use of stress test outputs in assessing capital adequacy and liquidity was evident in a few countries, with some also planning more explicit consideration of stress test outcomes in setting capital buffers.

Principles for Banks
As the peer review focused on supervisory implementation, an assessment of stress testing practices at banks was not within the scope of this review. Nevertheless, many countries provided high-level comments on progress of banks in their jurisdictions that were reasonably consistent and may be of broader interest. In particular, all countries reported significant improvements in stress testing capabilities at banks since publication of the principles. Authorities noted an overall improvement in the rigor and quality of stress testing and the quality of information presented in ICAAPs. Risk-specific stress testing, particularly regarding market and liquidity risk, was found to be reasonably well developed. More recently, banks have focused increasingly on centralised, firm-wide stress testing that encompasses a broader range of risks, but many countries note this area is still evolving.

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P a g e | 129 Banks have strengthened their resourcing, with some banks now having set up dedicated stress testing units. Banks are using a broader range of scenarios, including those that are more severe and complex. However, as noted below, many countries indicated that banks’ scenarios continue to be less severe than supervisors might find appropriate. Banks generally are establishing stronger governance frameworks with clear lines of responsibility for stress testing, and some banks are giving more importance to stress test results in their decision making. Some countries have seen an improvement in data systems and ability to adapt to new vulnerabilities and specific scenarios. The level of documentation has also improved. Countries' responses to the review survey highlighted the following common areas of future improvement in bank stress testing practices.

Integrating results into decision-making.
A number of countries pointed to challenges banks have in incorporating stress test results into business and strategic decisions. Stress testing tools are still immature and some countries felt that in many cases the banks take a compliance-oriented approach in order to meet regulatory requirements.

Governance
There is a sense that banks need to have a better understanding of stress testing limitations, assumptions, and uncertainties by users of stress test results, including senior management and the board of directors.

Severity of scenarios
A number of countries saw a need for firms to deepen the severity of scenarios. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 130 Supervisors in these countries remain concerned that banks' internal stress test scenarios do not plausibly reflect potential severe scenarios and outcomes.

Data and IT infrastructure.
A number of countries noted that data and IT systems remain a key impediment to implementing effective stress testing programmes. Accumulation of sufficient data for modelling purposes is a challenge for banks in some countries and aggregating information across the bank remains an issue. Generally, some manual intervention is needed to support the banks’ current IT and data infrastructure to run regular stress tests.

Modelling issues
Translating and calibrating scenarios into stress outcomes continues to be an area where banks' capabilities are challenged. Multiple risk class impacts generally have not been modelled in a sophisticated manner, although some banks attempt to take into account correlations between risks. Incorporating feedback effects and system-wide interactions remains very difficult. Another technical area cited is the identification and aggregation of correlated risks and integration between credit, market and liquidity risks.

Conclusions
The current environment has provided a sound test of how countries are putting into practice the Committee's 2009 principles for stress testing supervision. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 131 There is clearly room for further progress among the supervisory community in the supervision of stress testing. Many countries in the early to intermediate stages of implementation are working to finalise their prudential requirements for stress testing and implement regular review programmes that cover enterprise-wide stress testing governance, capabilities and models. Even those countries considered to be in the advanced phase of implementation of the principles felt that there are many remaining challenges with respect to their own stress testing programmes. Authorities are continuing with their efforts to embed the use of stress testing within their supervisory programmes. In many cases, this requires additional resources and training for both generalist and specialist supervision staff. Stress testing infrastructure, including the ability to collect appropriate data, develop models and aggregate results, continues to evolve. Explicit consideration of stress test outcomes in assessing liquidity and market risk capital requirements is well established in supervisory frameworks. Stress testing has traditionally not featured as prominently in assessment of overall bank capital adequacy but practices are evolving in this area. The peer review has highlighted that there are different supervisory approaches and it is difficult to state which is most effective. A combination of supervisory stress tests together with involvement of generalist and specialist supervision staff in reviews of banks’ stress testing practices at an enterprise-wide level often characterises the more well developed supervisory programmes.

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P a g e | 132 More advanced countries are encouraging development of more rigorous practices at banks by conducting horizontal and thematic reviews, publishing the results and providing feedback to banks. Finally, while the review found the principles themselves to be generally effective in setting high-level expectations, the Committee will continue to monitor implementation of the principles and determine whether, in the future, additional guidance might be necessary.
1 Stress testing should form an integral part of the overall governance and risk management culture of the bank. Stress testing should be actionable, with the results from stress testing analyses impacting business decisions of the board and senior management. Board and senior management involvement in the stress testing programme is essential for its effective operation A bank should operate a stress testing programme that promotes risk identification and control; provides a complementary risk perspective to other risk management tools; improves capital and liquidity management; and enhances internal and external communication. Stress testing programmes should take into account of views from across the organisation and should cover a range of perspectives and techniques. A bank should have written policies and procedures governing the stress testing programme. The operation of the programme should be appropriately documented. A bank should have a suitably robust infrastructure in place, which is sufficiently flexible to accommodate different and possibly challenging stress tests at an appropriate level of granularity. A bank should regularly maintain and update its stress testing framework. The effectiveness of the stress testing programme, as well as the robustness of major individual components, should be

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assessed regularly and independently. 7 Stress tests should cover a range of risks and business areas, including at the firm-wide level. A bank should be able to integrate effectively, in a meaningful fashion, across the range of its stress testing activities to deliver a complete picture of firm-wide risk. Stress testing programmes should cover a range of scenarios, including forward-looking scenarios, and aim to take into account system-wide interactions and feedback effects. Stress tests should feature a range of severities, including events capable of generating the most damage whether through size of loss or through loss of reputation. A stress testing programme should also determine what scenarios could challenge the viability of the bank (reverse stress tests) and thereby uncover hidden risks and interactions among risks. As part of an overall stress testing programme, a bank should aim to take account of simultaneous pressures in funding and asset markets, and the impact of a reduction in market liquidity on exposure valuation. The effectiveness of risk mitigation techniques should be systematically challenged. The stress testing programme should explicitly cover complex and bespoke products such as securitised exposures. Stress tests for securitised assets should consider the underlying assets, their exposure to systematic market factors, relevant contractual arrangements and embedded triggers, and the impact of leverage, particularly as it relates to the subordination level in the issue structure. The stress testing programme should cover pipeline and warehousing risks. A bank should include such exposures in its stress tests regardless of their probability of being securitised.

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14 A bank should enhance its stress testing methodologies to capture the effect of reputational risk. The bank should integrate risks arising from off-balance sheet vehicles and other related entities in its stress testing programme. A bank should enhance its stress testing approaches for highly leveraged counterparties in considering its vulnerability to specific asset categories or market movements and in assessing potential wrong-way risk related to risk mitigation techniques. Supervisors should make regular and comprehensive assessments of a bank's stress testing programme. Supervisors should require management to take corrective action if material deficiencies in the stress testing programme are identified or if the results of stress tests are not adequately taken into consideration in the decision-making process. Supervisors should assess and if necessary challenge the scope and severity of firm-wide scenarios. Supervisors may ask banks to perform sensitivity analysis with respect to specific portfolios or parameters, use specific scenarios or to evaluate scenarios under which their viability is threatened (reverse stress testing scenarios). Under Pillar 2 (supervisory review process) of the Basel II framework, supervisors should examine a bank's stress testing results as part of a supervisory review of both the bank's internal capital assessment and its liquidity risk management. In particular, supervisors should consider the results of forward-looking stress testing for assessing the adequacy of capital and liquidity. Supervisors should consider implementing stress test exercises based on common scenarios. Supervisors should engage in a constructive dialogue with other public

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authorities and the industry to identify systemic vulnerabilities. Supervisors should also ensure that they have the capacity and skills to assess a bank's stress testing programme.

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P a g e | 136 NUMBER 7

Progress of the HKMA's investigations in Lehman-Brothers-related cases
The Hong Kong Monetary Authority (HKMA) announced (Thursday) that investigation of over 99% of a total of 21,851 Lehman-Brothers-related complaint cases received has been completed. These include: - 15,769 cases which have been resolved by a settlement agreement reached under section 201 of the Securities and Futures Ordinance; - 3,370 cases which have been resolved through the enhanced complaint handling procedures required by the settlement agreement; - 2,467 cases which were closed because insufficient prima facie evidence of misconduct was found after assessment or no sufficient grounds and evidence were found after investigation; - 25 cases (including minibond cases) which are under disciplinary consideration after detailed investigation by the HKMA, of which proposed disciplinary notices are being prepared; and - 168 cases in respect of which investigation work has been completed and are going through the decision process to decide whether there are sufficient grounds for disciplinary actions or whether the cases should be closed because of insufficient evidence or lack of disciplinary grounds. Investigation work is underway for the remaining 50 cases.

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Notes:
These are cases where eligible customers accepted the settlement offers made by the distributing banks in respect of Lehman Brothers-related investment products in accordance with the agreements reached under section 201 of the Securities and Futures Ordinance. The HKMA has informed the distributing banks that, since these agreements contain detailed arrangements for settlement of claims and the implementation of robust systems for selling unlisted structured investment products and dealing with related customer complaints in future, it is not the intention of the HKMA to take any enforcement action in relation to the Lehman Brothers-related cases that involve eligible customers who accept the settlement offers made by the distributing banks pursuant to these agreements.

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P a g e | 138 NUMBER 8

DARPA SEEKS ROBOT ENTHUSIASTS (AND YOU) TO FACE OFF FOR $2M PRIZE!
Hardware, software, modeling and gaming developers sought to link with emergency response and science communities to design robots capable of supervised autonomous response to simulated disaster As iconic symbols of the future, robots rank high with flying cars and starships, but basic robots are already in use in emergency response, industry, defense, healthcare and education. DARPA plans to offer a $2 million prize to whomever can help push the state-of-the-art in robotics beyond today’s capabilities in support of the DoD’s disaster recovery mission. DARPA’s Robotics Challenge will launch in October 2012. Teams are sought to compete in challenges involving staged disaster-response scenarios in which robots will have to successfully navigate a series of physical tasks corresponding to anticipated, _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 139 real-world disaster-response requirements. Robots played a supporting role in mitigating fallout from the Fukushima nuclear plant disaster in Japan, and are used by U.S. military forces as assistants for servicemembers in diffusing improvised explosive devices. True innovation in robotics technology could result in much more effective robots that could better intervene in high-risk situations and thus save human lives and help contain the impact of natural and man-made disasters. The DARPA Robotics Challenge consists of both robotics hardware and software development tasks. It is DARPA’s position that achieving true innovation in robotics, and thus success in this challenge, will require contributions from communities beyond traditional robotics developers. The challenge is structured to increase the diversity of innovative solutions by encouraging participation from around the world including universities, small, medium and large businesses and even individuals and groups with ideas on how to advance the field of robotics. “The work of the global robotics community brought us to this point—robots do save lives, do increase efficiencies and do lead us to consider new capabilities,” said Gill Pratt, DARPA program manager. “What we need to do now is move beyond the state of the art. This challenge is going to test supervised autonomy in perception and decision-making, mounted and dismounted mobility, dexterity, strength and endurance in an environment designed for human use but degraded due to a disaster. Adaptability is also essential because we don’t know where the next disaster will strike. The key to successfully completing this challenge requires adaptable robots with the ability to use available human tools, from hand tools to _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 140 vehicles. “Robots undoubtedly capture the imagination, but that alone does not justify an investment in robotics,” said DARPA Acting Director, Kaigham J. Gabriel. “For robots to be useful to DoD they need to offer gains in either physical protection or productivity. The most successful and useful robots would do both via natural interaction with humans in shared environments.” The DARPA Robotics Challenge supports the National Robotics Initiative launched by President Barack Obama in June 2011. To answer questions regarding the Robotics Challenge and provide an opportunity for interested parties to connect, DARPA will hold a virtual Proposers’ Day workshop on April 16, 2012. This online workshop will introduce interested communities to the effort, explain the mechanics of this DARPA challenge, and encourage collaborative arrangements among potential performers from a wide range of backgrounds. The meeting is in support of the DARPA Robotics Challenge Broad Agency Announcement.

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NUMBER 9 SEC Announces Members of New Investor Advisory Committee
Washington, D.C., April 9, 2012 –The Securities and Exchange Commission today announced the formation of a new Investor Advisory Committee required by the Dodd-Frank Wall Street Reform and Consumer Protection Act. The 21-member committee replaces the advisory committee that was disbanded after the Dodd-Frank Act became law. Section 911 of the Dodd-Frank Act established the new committee to advise the Commission on regulatory priorities, the regulation of securities products, trading strategies, fee structures, the effectiveness of disclosure, and on initiatives to protect investor interests and to promote investor confidence and the integrity of the securities marketplace. The Dodd-Frank Act authorizes the committee to submit findings and recommendations for review and consideration by the Commission. Members of the newly formed committee were nominated by all five sitting Commissioners and represent a wide variety of interests, including senior citizens and other individual investors, mutual funds, pension funds, and state securities regulators. "The SEC’s new Investor Advisory Committee is made up of individuals with a broad range of backgrounds and experiences," said SEC Chairman Mary Schapiro. "I look forward to their insight and recommendations as to how we can further the SEC’s critical investor protection mission." The members of the new Investor Advisory Committee are:

Darcy Bradbury, Managing Director and Director of External Affairs, D.E. Shaw & Co., L.P. J. Robert Brown, Jr., Law Professor, University of Denver

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Joseph Dear, Chief Investment Officer, California Public Employees’ Retirement System Eugene Duffy, Partner and Principal, Paradigm Asset Management Co. LLC Roger Ganser, Chairman of the Board of Directors of BetterInvesting James Glassman, Executive Director, George W. Bush Institute Craig Goettsch, Director of Investor Education and Consumer Outreach, Iowa Insurance Division Joseph Grundfest, William A. Franke Professor of Law and Business, Stanford Law School Mellody Hobson, President and Director of Ariel Investments, LLC Stephen Holmes, General Partner and Chief Operating Officer, InterWest Partners Adam Kanzer, Managing Director and General Counsel of Domini Social Investments and Chief Legal Officer of the Domini Funds Roy Katzovicz, Partner, Investment Team Member and Chief Legal Officer, Pershing Square Capital Management, L.P. Barbara Roper, Director of Investor Protection, Consumer Federation of America Kurt Schacht, Managing Director, CFA Institute Alan Schnitzer, Vice Chairman and Chief Legal Officer, The Travelers Companies, Inc. Jean Setzfand, Director of Financial Security for the AARP Anne Sheehan, Director of Corporate Governance, California State Teachers’ Retirement System Damon Silvers, Associate General Counsel for the AFL-CIO

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Mark Tresnowski, Managing Director and General Counsel, Madison Dearborn Partners, LLC Steven Wallman, Founder and Chief Executive Officer, Foliofn, Inc. Ann Yerger, Executive Director, Council of Institutional Investors

The Investor Advisory Committee will begin its work in the near future.

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P a g e | 144 NUMBER 10

EIOPA - Report on Good Practices for Disclosure and Selling of Variable Annuities
1. This Report summarises the findings of an Expert Group, set up in May 2011 under the auspices of EIOPA’s Committee on Consumer Protection and Financial Innovation (CCPFI) with the aim of establishing good disclosure and selling practices for variable annuities (VA). 2. It seeks to inform the debate on variable annuities from a consumer protection perspective with the aim of promoting common supervisory approaches and practices. However, it does not set forth any guidelines or recommendations. 3. The Expert Group has been able to draw on the conclusions of a previous Task Force, established by EIOPA’s predecessor, the Committee of Insurance and Occupational Pensions Supervisors (CEIOPS), which had assessed variable annuities from a prudential perspective. In addition the Expert Group has been assisted in its work by the analysis on market structure and basic product features, undertaken by EIOPA’s Financial Stability Committee. The outcome of this analysis has been published in EIOPA’s Financial Stability Report for Spring 20112. The Expert Group also benefitted from comments received during public consultation and from a Feedback Statement by EIOPA’s Insurance and Reinsurance Stakeholder Group (IRSG). _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 145 4. In response to the losses suffered by some large insurance groups on their VA books during the recent financial crises, product characteristics have changed significantly to allow for better risk management. As a consequence of an increased focus on risk management, insurance undertakings have had to reflect the associated costs in the charging structure for variable annuity products, thus reducing the potential benefits to customers compared to pre-crises product offerings. 5. The Expert Group referenced the cross-border business model often encountered in relation to the writing and sale of variable annuities. Many large insurance groups have set up specialised subsidiaries dedicated to this business (“VA product companies”), which underwrite variable annuities in several Member States through freedom of establishment or freedom of services. The Group also considered the objectives of consumers who invest in these policies. Consumers may purchase them as a means of saving for their retirement or for investment purposes more generally as an alternative to traditional life insurance or other savings products. Both the business model and the objectives pursued by customers have a bearing on what constitutes good disclosure and selling practices. 6. Good disclosure practices attempt to ensure that customers can make their choices on an informed basis. Customers need to be informed how the product works under different market conditions, what they are charged and which options they can exercise during the life of the contract. In addition they need to be provided with some general information on the product provider, the law governing the contract and details on the relevant supervisory authorities to take account of the common cross-border business model referred to above. The use of “frequently asked questions” is considered to be a transparent way of communicating the relevant information.

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P a g e | 146 7. Good selling practices for variable annuities have to ensure that the demands and needs of a customer are taken into account. Because of their inherent complexity, variable annuities should always be sold on an advised basis via a salesperson, which may be an insurance intermediary or an agent or employee of the insurance undertaking. To avoid the risk of misselling a number of areas, in particular, should be addressed by the salesperson. The Expert Group has suggested an indicative list of questions that could be used in this context. 8. Finally, chapter 4.2. examines good practices by the product provider where it does not control the sales process. Insurance undertakings should still ensure that sales are adequate by, inter alia, carrying out a due diligence on the intermediary firms as well as reviewing the clients they have taken on to ensure that they are as expected regardless of who controls the sales process. 9. The main findings of the Report are that good practices • in relation to disclosures o should provide general information on the insurance undertaking and the legal and supervisory regime it operates under to take account of the cross-border nature of this business o should also include product specific information to address product complexity • in relation to selling practices o should ensure that variable annuities are always sold on an advised basis, even when they are sold directly by the company o should focus on the customer’s objectives to determine his demands and needs.

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2. BACKGROUND TO THE REPORT 2.1.MANDATE AND SCOPE OF WORK

Mandate
10. This Report examines, specifically in relation to variable annuities, good practices on product disclosure and selling arrangements. These issues had not been covered by the mandate of the previous CEIOPS Task Force that focused only on prudential matters. 11. Following the adoption of the recommendations put forward by the previous Task Force, the Board of Supervisors therefore requested the Committee on Consumer Protection and Financial Innovation (CCPFI) to look into these consumer-related issues. To this end, the CCPFI set up a subgroup (Expert Group) to assist it in its work. This exercise was informed by the potential of some variable annuities products to achieve outcomes that are not easy for the consumer to understand. 12. The Report benefitted from the comments received during public consultation and from the Feedback Statement prepared by EIOPA’s Insurance and Reinsurance Stakeholder Group (IRSG).

Scope
13. Concerning product disclosures, the objective is to identify good practices regarding the product-specific information aimed at providing a proper understanding of the risks assumed by the policyholder in a variable annuity contract. These disclosure requirements apply in addition to the information that needs to be provided on the life insurance undertaking and on the commitments the undertaking assumes vis-à-vis the policyholders. 14. In this context, particular attention should be paid to the multi-layered charging structure often encountered in variable annuities. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 148 15. Concerning selling practices, the aim is to look at good practices regarding advice given to customers, which should be based on their demands and needs. Where the sales process takes place through insurance intermediaries as defined in the IMD, it has also been assessed how insurance undertakings should ensure that sales are appropriate. 16. This Report has been prepared in response to EIOPA’s monitoring role in relation to new financial activities. Variable annuities fall within the broader category of insurance contracts with an investment element. Bearing in mind that at a European level there are several legislative initiatives under way, which may have an impact on the sales of variable annuities, namely on product disclosure and on selling practices (such as the upcoming legislative proposal on Packaged Retail Investment Products –PRIPS- and the revision of the Insurance Mediation Directive -IMD), the purpose of the Report is limited to analysing good practices, to promote common supervisory approaches and practices, and to inform the debate on this topic. However, its aim is not to pre-empt the above mentioned legislative proposals nor does it set forth any guidelines or recommendations. 17. The Report has a clear product-specific focus in line with its mandate, which has driven the range of topics that have been analysed by the Expert Group. The scope of previous work by EIOPA’s predecessor CEIOPS in the form of technical advice to the European Commission on PRIPS and on IMD had been determined by the respective call for advice and, in relation to selling practices, covered a number of areas (such as transparency of remuneration, conflicts of interests and inducements), which are not dealt with in this Report. These aspects are broader in nature and should be developed further as the wider legal framework evolves. 18. In identifying good practices, the Expert Group has taken existing EU legislation for the insurance sector as a starting point. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 149 In the future, legal concepts originally developed for other financial sectors (such as the KIID for pre-contractual disclosures or MiFID for rules on sales) may be increasingly relevant as a benchmark for the insurance sector. As these issues are equally of a wider nature, the Expert Group did not want to anticipate any developments in this respect. 19. The focus of this Report is on good practices at the point of sale. Given the long term nature of many VA contracts with options that can be exercised over the lifetime of the policy, the CCPFI noted the importance for policyholders to receive timely and clear information on the performance of their account value, so that they can exercise their options on an informed basis.

2.2. BASIC PRODUCT FEATURES
20. Variable annuities (VAs) are unit-linked life insurance contracts with investment guarantees provided by the insurance undertaking which, in exchange for single or regular premiums, allow the policyholder to benefit from the upside of the unit, but be partially or totally protected when the unit loses value. 21. A common business model pursued by many larger insurance groups consists of setting up specific subsidiaries dedicated to variable annuities business, which underwrite in several Member States, through freedom of establishment or freedom of services. 22. In the US (where variable annuities have been sold in a significant way since the 1990s) as well as in some other markets such as Japan these products are very popular. In Europe, VAs have become increasingly widespread too, as the possibility to gain from the exposure to specific underlying assets and being protected against a depreciation of these assets at the same time makes them quite appealing.

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P a g e | 150 23. Recently, in some countries new variants of unit-linked policies have emerged that equally aim to provide some downside protection, but which do not include a guarantee by the insurance company. 24. As per the previous paper, these types of contracts fall outside the scope of this report. 25. In their basic form, the guarantees embedded in variable annuities cover the amount of premiums paid, but quite often they entail additional features, for instance, that the premiums paid yield at least at a pre-defined interest rate (roll-up). Alternatively, the guarantee may be reset to the highest account value throughout the insurance period, evaluated in accordance to a set of pre-defined time frames (ratchet). 26. Policyholders’ entitlements are determined on the basis of the guaranteed minimum benefits, if the underlying funds depreciate in value (or gain less than warranted by the roll-up rate). In all other instances, their claims are determined by the performance of the underlying funds. 27. Regarding the size and the characteristics of the VA market EIOPA has published the key findings of a survey concentrating on larger insurance groups in its First Half Year Financial Stability Report 2011. From a consumer perspective it is important to look at the type of minimum benefit being offered. 28. There are several kinds of guarantees or minimum benefits that can be embedded into a VA contract. Examples of common offerings include: • GMDB (guaranteed minimum death benefit): Minimum benefit in case of death; _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 151 • GMAB (guaranteed minimum accumulation benefit): Minimum guaranteed capital after a predefined period; • GMIB (guaranteed minimum income benefit): Minimum guaranteed lifetime or term annuity starting at a predefined age on a defined benefit base; • GMWB (guaranteed minimum withdrawal benefits): deferred or immediate, temporary or lifelong income stream. 29. The Financial Stability Report indicates that most contracts (72.2 % of gross written premiums) include a minimum death benefit. Regarding minimum living benefits, GMAB seems the most frequent feature, followed by GMWB and GMIB. Most policies are single premium contracts. 30. There are two major markets for these products. Some variable annuity contracts are intended for specific purposes (such as for private retirement savings) and seek to attract specific customer groups (such as affluent individuals approaching retirement age), often when the products are offered in tax preferred wrappers. In relation to these products, the “insurance element” (i.e. the guaranteed minimum living benefits) typically plays a prominent role in their marketing. 31. Other offerings are less focused in terms of the target clients and their goals. They look to attract a broad range of customers by promoting variable annuities as an investment opportunity with limited downside risk. For these offerings, more emphasis is generally placed on the “investment element” (i.e. the underlying funds). _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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2.3. CURRENT TRENDS IN PRODUCT DEVELOPMENT
32. Current trends in product development can be traced back, to a large extent, to the lessons learned during the recent financial crises, which resulted in severe losses for some important insurance groups. To mitigate the effects of losses, these groups had, for example, to inject significant levels of capital into VA subsidiaries, halt product offerings and/or withdraw from certain markets. The complexity of the products offered, market volatility, inadequate hedging and poor product design were some of the main reasons why these losses occurred. 33. One of the key features of many variable annuity products is the long-term nature of the guarantee in the form of living benefits. In addition, policyholders are usually given a number of choices and options – for instance in relation to fund selection - which they can exercise at inception or during the life of the contract. These two factors combined tend to make variable annuities offerings particularly complex from a risk management perspective. In particular, the implementation of a robust hedging programme, designed to ensure that the movements in the liabilities are offset by the movement in the financial derivative instruments used for hedging, presents a huge challenge for VA product companies. The losses experienced in the course of the financial crises have evidenced that the risks associated with these products are difficult to understand and to risk manage. 34. VA product companies have put in place various initiatives with the aim to reduce the risk embedded in VA contracts. These trends in product development include, among others, the use of volatility limits _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 153 and the reduction of fund options (for example, through only allocating investments to index based funds). This Report has as its sole objective to evaluate the impact of such initiatives on consumers, but does not assess their effectiveness from a risk management perspective. 35. It should be noted, however, that the cost of hedging and related risk-mitigation must be fully reflected in the charging structure for these products, thus reducing the potential benefits to consumers compared to pre-crises offerings. It is, therefore, important that the product information provided is sufficiently clear to enable consumers to fully understand the VA contract they have been presented with.

3. DISCLOSURES 3.1. GENERAL AND PRODUCT SPECIFIC DISCLOSURES
36. The purpose of this section is to outline a possible approach to good disclosure practices for variable annuities. Under current EU law, insurance companies are obliged to provide a certain set of pre-contractual information on the life insurance policies they offer, but the format, in which it is presented, is up to their discretion. To convey the essential product characteristics in a short document insurers often use a key features document, which is prescribed by national law in some jurisdictions. 37. The key features document and any promotional material that may be used for pre-contractual information must be consistent with the general terms and conditions applicable to a variable annuities offering. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 154 It is therefore seen as good practice for the promotional material to refer, where appropriate, to the relevant sections of the general terms and conditions. In doing so, the insurance companies can ensure consistency between their disclosure documents and the actual provisions in the contract, but it also allows customers to see how the pre-contractual information they receive is reflected in the general terms and conditions. 38. It is essential for the product provider to explain a number of areas of relevance to a customer in terms that are easily understandable, clear, fair and not misleading. In relation to variable annuities some of the features, which need to be conveyed, are very product specific such as those that result from the interplay of minimum benefits and the performance of the underlying funds. Others concern general information on the product provider, the law governing the product offering and the supervisory regime. Their relevance is due to the cross-border business model generally found with variable annuities. 39. EIOPA recognises that consumers in different European countries may have different preferences for the types of product disclosures received. One way of addressing consumer information needs is through the use of frequently-asked-questions (FAQs). The questions below, which could be presented to the potential customer both in the promotional material and in the pre-contractual information documents, are aimed at ensuring that any reader will have a good understanding of the product, the charges, terms in relation to redemption/maturity and any specific risks that they should be aware of. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 155 These have therefore been grouped under 5 headings, although these are by no means exhaustive. Notwithstanding the questions below, insurance companies must follow all legal and regulatory requirements they are subject to. Finally, the questions as laid out below are indicative only, and companies may be flexible in their presentation of these to prospective customers, for example using scenarios, tables, graphics and “frequently asked questions” to ensure that the information is portrayed in a consumer-friendly manner.

3.1.1. THE PRODUCT
• What is the product and how does it work? (This should describe the main features of the product and the type of guarantee(s) offered. It should clearly state at what point any monies are payable and how much these will be.) • What choice does the policy holder have in where premium(s) are invested and what are those choices? (This should describe the underlying funds in which monies may be invested and the ability of the investor to choose) • What are the main features of these funds in terms of investment objective and risk profile? (This should describe the investment objective of the underlying funds in a clear manner with an indication of risk which should follow the same approach as that used for UCITS) • How does the guarantee work? (This should describe how the investment works, how the guarantee works and the interaction between the two) • Is the insurance undertaking entitled to unilaterally modify the degree of the guarantee? If so, is the minimum degree of the guarantee determined? • Do the guarantee benefits rise or fall under any circumstances? (If the product is subject to mechanisms such as roll-up or ratchet, this should clearly describe how these mechanisms work) _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 156 • Are there any circumstances where the guarantee will not be applicable? (This should clearly state any circumstances where the guarantee will cease to exist or clearly state that the guarantee will apply in all eventualities) • If the underlying funds lose money, what will be impact on the policy? (This should describe, perhaps by way of a simple table or graph, what happens to the payout to the policy holder in certain situations) • May the policy-holder change the funds in which money is invested? (This will describe the process whereby a policy-holder may or may not have discretion on allocation, and if there is discretion, how often and to what extent that can be exercised) • Will changing allocation cost the policy holder anything?

3.1.2. CHARGES
• What charges are applicable to the policy and how much are they in percentage terms? • How much of the initial premium(s) is/are used to pay the various charges payable under the policy? • What charges are payable on a regular basis and what is the impact of these? (This will describe the effect the regular charges have on the return on the policy) • If the policy-holder redeems early, will there be a cost associated with that? Or how long does the policy-holder have to stay in the policy to avoid any such surrender cost? • In case the charges can be modified unilaterally, is the maximum amount of those charges determined?

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3.1.3. SURRENDERS/REDEMPTIONS/MATURITY
• When does the policy mature? • What does the policy-holder receive on maturity? • Can the policy be surrendered earlier than maturity? • What happens if surrendered early and is there a cost associated? • Does the guarantee lapse if surrendered earlier than maturity? • Are there any bonus payments payable? • Can the benefits of the policy be transferred to someone else? • If so, how will this affect the policy?

3.1.4. RISKS
• Is there any risk that the insurance company will not be able to pay the benefits?
• How

exposed is the policy-holder to the riskiness in the underlying funds?

• Are there any circumstances where the policy-holder may not obtain the guarantee? • Is the policy-holder exposed to the risk that the funds will perform badly? • How does the policy-holder know that the premiums are being invested as requested? _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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3.1.5. COMPLAINTS/LEGAL/TAX/REGULATION
• Which company does the policy-holder have a contract with? • What is the name and address of the regulatory body of the insurance company that the policy-holder has a contract with? • Which regulatory body does the policy-holder contact in the event of a complaint? Does he have access to an Alternative Dispute Resolution (ADR) system? • Is that company a member of an Insurance Guarantee Scheme? In what country? • What are the legal consequences for the policy-holder in the event that the insurance company becomes insolvent or winds up? • In the event of a legal dispute between the policy-holder and the insurance company, under which jurisdiction will the legal proceedings happen (i.e. the governing law of the contract)? • Are there any tax or legal issues that the policy-holder should be aware of?

3.2. ILLUSTRATIONS
40. The use of illustrations is governed by EU legislation in a number of aspects. For the insurance sector Directive 2009/138/EC (“Solvency II”), in particular, sets forth certain requirements on insurance undertakings, when they provide figures relating to potential payments above and beyond the contractually agreed payments. These also apply in relation to variable annuity contracts, as the guaranteed benefits constitute minimum promises, which may _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 159 be increased in the event that the underlying funds appreciate in value. The following examples illustrate, specifically for variable annuities, good practice in implementing these legal requirements. 41.Illustrations should be used to give customers an understanding of what payouts they may receive and what it might cost them in a given set of circumstances. It is usually sensible to show this on a number of different bases derived from the specific details of the case. Other illustrations on top of these could be provided but these should not assume investment growth above the top rate of the core illustration. 42. By contrast, the systematic use of favourable scenarios (when all scenarios presented lead to a positive outcome) would be misleading. Unfavourable scenarios should always also be presented and illustrated; otherwise the customer could wrongly assume that his contract has no downside. The scenarios should also make clear the maximum risk assumed by the customer. 43. In addition given that many of the charges applied to these products are based on the underlying investment it is also good practice to show the effect of these charges on the growth of the fund. This can be done as an effective reduction on the yield of the investment or as an effect of charges calculation (based on a standard investment growth rate or indeed no growth). _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 160 44. Furthermore it is also reasonable to use case studies to show what might happen in certain circumstances but these should not be misleading, should show the negative cases as well as the positive ones and should not take away from the standard illustrations above. 45. All of the above should be caveated with the fact that these are just illustrations and should not be seen to give any promise that this will be what the customer will actually get.

4. SELLING PRACTICES 4.1. DEMANDS AND NEEDS OF THE CUSTOMER
46. This section identifies good selling practices for variable annuities irrespective of the distribution channel via which they are sold (direct sales or through intermediaries). For the insurance sector, current EU legislation only covers sales by insurance intermediaries, defined as any person who, for remuneration, takes up or pursues insurance mediation. Insurance intermediaries shall specify prior to the conclusion of any specific contract, in particular on the basis of information provided by the customer, the demands and needs of that customer as well as the underlying reasons for any advice given to the customer on a given insurance product. 47. In view of the complexity of many VA offerings, their long-term nature and the importance these products frequently have in the context of private wealth management, it is good practice to apply these principles to the distribution of variable annuities generally as, irrespective of the distribution channel, the demands and needs of a customer should always determine the type of contract that is being offered. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 161 The sales process should be conducted by suitably qualified salespersons. 48. The objective pursued by a customer, based on the material facts that he has disclosed, should be a key consideration in assessing his demands and needs. Determining whether a certain product offering is suitable will namely depend on whether it is used for private retirement savings or as investment opportunity more generally. 49. The Expert Group identified a number of areas where there is a potential risk of mis-selling (advice based on personal circumstances, use of clear projections, use of clear language). The questions below are intended to prevent such risk from materialising. It should be noted that this list is indicative.

4.1.1. PERSONAL CIRCUMSTANCES
• Does the sales person ask for customer’s age, financial situation, personal demand, knowledge of financial markets and the time horizon for his investment (short, medium or long-term) etc.? • Based on this demand does the sales person outline alternative products (direct investments, unit-linked contracts etc.) to VA products? Which features should the customer focus on when comparing VA to other products? • Is the VA product tailored to the customer’s demand (private pension plan, investment)? • Are there any personal circumstances under which the sales person should not advise VA? _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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4.1.2. USE OF CLEAR PRODUCT DESCRIPTIONS INCL. ILLUSTRATIONS
The sales person should inform the customer in a clear and comprehensive way about the relevant aspects of the VA product to ensure the customer understands correctly the product he wants to buy. • Have potential risks of the VA product been explained in detail? • Has the fund performance been illustrated by adequate and plausible scenarios? (An adequate depiction includes positive scenarios as well as negative developments. It should also include a worst case scenario.) • What are the benefits of the contract in case of surrender and death and have these been clearly illustrated? • Does the insurance undertaking prepare information sheets for the sales person/intermediary that they should use when informing the customer? • Does the insurance undertaking monitor the intermediary? • Does the customer have to confirm in writing that he understood the information received?

4.1.3. USE OF CLEAR LANGUAGE
The sales person should be able to illustrate all relevant aspects of the VA product without using too many technical terms to avoid any confusion. If technical terms are used, for instance in written product information (e.g. volatility), the intermediary should be able to explain them in a clear manner. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 163 The customer should be able to take purchase decisions and to exercise his options during the contract period on an informed basis. • Does the sales person use terms which are understandable also for non experts? • Is the sales person trained to explain the complex basis of the VA products? • Does the sales person explain the written product information to the customer?

4.1.4. UNDERSTANDING POTENTIAL FUTURE OUTCOMES
The performance of funds underlying VA contracts depends on different economic variables and conditions. Despite a variety of illustrations the customer may not be able to assess, which scenario is more realistic, if he is unaware of these variables and how they may affect the performance of fund investments underlying his policy and ultimately his account value. Customers should be made aware that the performance of their account value depends on how these economic variables and conditions change over time in a way, which is comprehensible to them. Only then can they decide which illustration they consider more realistic. • Does the sales person explain how external factors e.g. on capital markets can affect the fund development?

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 164 • In order to explain how external factors can affect the fund development, does the sales person refer to fund developments of the past? Does he explain that past performance is not necessarily an indication of future performance? • How does the sales person measure that the customer has understood the information received? The mechanics how a VA-product generates profits or losses may be very complex. Even if the customer can assess which scenario is more realistic, he does not know whether he has losses or profits in such a scenario. • Does the sales person explain the basic features and underlyings of the VA-product in question? • Depending on the type of the VA-product, does the sales person show the difference between a classical unit-linked product and a VA-product (Type of guarantee, contractual claims in case of a positive or negative fund development, structure of charges)? • Does the sales person explain what kind of different options the customer can exercise during the duration of the contract and how this can affect the fund development? • Does the sales person explain in which cases the customer gets only the guaranteed benefits at the end of the contract duration (e.g. adverse fund development) or to what extent he benefits from a positive fund performance?

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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Certified Risk and Compliance Management Professional (CRCMP) Distance learning and online certification program.
Companies like IBM, Accenture etc. consider the CRCMP a preferred certificate. You may find more if you search (CRCMP preferred certificate) using any search engine. The all-inclusive cost is $297. What is included in the price:

A. The official presentations we use in our instructor-led classes (3285 slides)
The 2309 slides are needed for the exam, as all the questions are based on these slides. The remaining 976 slides are for reference. You can find the course synopsis at: www.risk-compliance-association.com/Certified_Risk_Compliance_Tra ining.htm

B. Up to 3 Online Exams
You have to pass one exam. If you fail, you must study the official presentations and try again, but you do not need to spend money. Up to 3 exams are included in the price. To learn more you may visit: www.risk-compliance-association.com/Questions_About_The_Certifica tion_And_The_Exams_1.pdf www.risk-compliance-association.com/CRCMP_Certification_Steps_1.p df _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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C. Personalized Certificate printed in full color.
Processing, printing, packing and posting to your office or home.

D. The Dodd Frank Act and the new Risk Management Standards (976 slides, included in the 3285 slides)
The US Dodd-Frank Wall Street Reform and Consumer Protection Act is the most significant piece of legislation concerning the financial services industry in about 80 years. What does it mean for risk and compliance management professionals? It means new challenges, new jobs, new careers, and new opportunities. The bill establishes new risk management and corporate governance principles, sets up an early warning system to protect the economy from future threats, and brings more transparency and accountability. It also amends important sections of the Sarbanes Oxley Act. For example, it significantly expands whistleblower protections under the Sarbanes Oxley Act and creates additional anti-retaliation requirements.

You will find more information at:

www.risk-compliance-association.com/Distance_Learning_an d_Certification.htm

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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Visit our Risk and Compliance Management Speakers Bureau
The International Association of Risk and Compliance Professionals (IARCP) has established the Speakers Bureau for firms and organizations that want to access the expertise of Certified Risk and Compliance Management Professionals (CRCPMs) and Certified Information Systems Risk and Compliance Professionals (CISRCPs). The IARCP will be the liaison between our certified professionals and these organizations, at no cost. We strongly believe that this can be a great opportunity for both, our certified professionals and the organizers. To learn more: www.risk-compliance-association.com/Risk_Management_Compliance _Speakers_Bureau.html

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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1200 G Street NW Suite 800 Washington, DC 20005-6705 USA Tel: 202-449-9750 www.risk-compliance-association.com

International Association of Risk and Compliance Professionals (IARCP)

Top 10 risk and compliance management related news stories and world events that (for better or for worse) shaped the week's agenda, and what is next
George Lekatis President of the IARCP

Dear Member,

We will start with a “Guess who said it” game.

Who said it (and for whom)?
“In our audit of fiscal years 2011 and 2010 financial statements, we identified four significant deficiencies in internal control as of September 30, 2011. These significant internal control deficiencies represent continuing deficiencies concerning controls over (1) information systems, (2) financial reporting and accounting processes … ” And later: “We start with a from a Significant Deficiency over Information Security” “… despite this progress, we identified new weaknesses in information security controls regarding (1) incomplete implementation of your information security program and (2) inadequate review of service auditors’ reports that jeopardized the _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

Page |2 confidentiality and integrity of your financial information”

Looks like a Sarbanes Oxley report?
Yes, but it is not something like it.

Well, who wrote it?
The U.S. Government Accountability Office (GAO) – that is an independent, nonpartisan agency that works for Congress. Often called the congressional watchdog, GAO investigates how the federal government spends taxpayer dollars. The head of GAO, the Comptroller General of the United States, is appointed to a 15-year term by the President from a slate of candidates Congress proposes. Gene L. Dodaro became the eighth Comptroller General of the United States and head of the U.S. Government Accountability Office (GAO) on December 22, 2010, when he was confirmed by the United States Senate. He was nominated by President Obama in September of 2010 and had been serving as Acting Comptroller General since March of 2008.

Ok, for whom the GAO said the above?
For the boss of the PCAOB, that has a critical role for the implementation of the Sarbanes Oxley Act… You guessed it! For the U.S. Securities and

Exchange Commission!

The moral of the story: Nobody is perfect.
Welcome to the Top 10 list. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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Improvements Needed in SEC’s Internal Controls and Accounting Procedures

Speech, Chairman Ben S. Bernanke At the Russell Sage Foundation and The Century Foundation Conference on "Rethinking Finance" New York Some Reflections on the Crisis and the Policy Response

UBS launches education initiative to mark its 150th anniversary

Speech by the Chancellor of the Exchequer, Rt Hon George Osborne MP, at the City of London RMB launch event

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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Board of Governors of the Federal Reserve System, Commodity Futures Trading Commission, Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, Securities and Exchange Commission Volcker Rule Conformance Period Clarified

The White House April 17, 2012 Remarks by the President on Increasing Oversight on Manipulation in Oil Markets

EBA, Consultation on draft guidelines on the assessment of the suitability of members of the management body and key function holders

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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Office of Minority and Women Inclusion Annual Report As Required by Section 342(e) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 This is a report prepared by the Staff of the Office of Minority and Women Inclusion of the U.S. Securities and Exchange Commission.

Committee on Payment and Settlement Systems Technical Committee of the International Organization of Securities Commissions Principles for financial market infrastructures

Supervisory policies and bank deleveraging: a European perspective Andrea Enria, Chairperson European Banking Authority 21st Annual Hyman P. Minsky Conference on the State of the U.S. and World Economies Debt, Deficits and Financial Instability _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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The Honorable Mary L. Schapiro Chairman, U.S. Securities and Exchange Commission

Subject: Management Report: Improvements Needed in SEC’s Internal Controls and Accounting Procedures
Dear Ms. Schapiro: On November 15, 2011, we issued our opinion on the U.S. Securities and Exchange Commission’s (SEC) and its Investor Protection Fund’s (IPF) fiscal years 2011 and 2010 financial statements. We also issued our opinion on the effectiveness of SEC’s internal controls over financial reporting as of September 30, 2011, and our evaluation of SEC’s compliance with selected provisions of laws and regulations during fiscal year 2011.2 In that report, we identified significant deficiencies in SEC’s internal control over financial reporting. The purpose of this report is to (1) Present new recommendations related to the significant deficiencies we identified in our November 2011 report; (2) Communicate less significant internal control issues we identified during our fiscal year 2011 audit of SEC’s internal controls and accounting procedures, along with our related recommended corrective actions; and _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

Page |7 (3) Summarize information on the status of the recommendations reported as open in our March 29, 2011, management report.

Results in Brief
In our audit of SEC’s fiscal years 2011 and 2010 financial statements, we identified four significant deficiencies in internal control as of September 30, 2011. These significant internal control deficiencies represent continuing deficiencies concerning controls over (1) Information systems, (2) Financial reporting and accounting processes, (3) Budgetary resources, and (4) Registrant deposits and filing fees. These significant control deficiencies may adversely affect the accuracy and completeness of information used and reported by SEC’s management. We are making a total of 10 new recommendations to address these continuing significant internal control deficiencies. A control deficiency exists when the design or operation of a control does not allow management or employees in the normal course of performing their assigned functions to prevent or detect and correct misstatements on a timely basis. [Note from George Lekatis: Sorry, I cannot resist. The definition of a control deficiency - a nightmare for all Sarbanes Oxley experts – can be found at the SOX standards endorsed by the SEC, and now the GAO explains to the SEC what a control deficiency is] _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

Page |8 A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. In contrast, a material weakness is a deficiency, or combination of deficiencies, in internal control such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented or detected and corrected on a timely basis. We also identified other internal control issues that although not considered material weaknesses or significant control deficiencies, nonetheless warrant SEC management’s attention. These issues concern SEC’s controls over: • payroll monitoring, • implementation of post-judgment interest accounting procedures, • accounting for disgorgement and penalty transactions, and • the government purchase card program. We are making a total of 9 new recommendations related to these other internal control deficiencies. We are also providing summary information on the status of SEC’s actions to address the recommendations from our prior audits as of the conclusion of our fiscal year 2011 audit. By the end of our fiscal year 2011 audit, we found that SEC took action to fully address 38 of the 66 recommendations from our prior audits, subsequent to our March 29, 2011, management report. Lastly, we found that SEC took action to address and resolve all four weaknesses in information systems controls that we identified in public and “Limited Official Use Only” reports issued in 2008 through 2009 that were reported as open at the time of our March 29, 2011, management report. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

Page |9 In providing written comments on a draft of this report, the SEC Chairman stated that continued improvement in the agency's internal control structure, particularly in the areas of information security, financial reporting and accounting processes, budgetary resources, and registrant deposits and filing fees, is a top priority. The Chairman stated that the center piece of SEC’s effort to strengthen financial controls is to migrate SEC’s core financial system and transaction processing to a federal shared service provider. We will evaluate SEC’s actions, strategies, and plans as part of our fiscal year 2012 audit. SEC’s written comments are reprinted in enclosure II. SEC also provided technical comments, which we considered and incorporated as appropriate.

Scope and Methodology
As part of our audit of SEC’s fiscal years 2011 and 2010 financial statements, we evaluated SEC’s internal controls over financial reporting and tested its compliance with selected provisions of laws and regulations. We designed our audit procedures to test relevant controls over financial reporting, including those designed to provide reasonable assurance that transactions are properly recorded, processed, and summarized to permit the preparation of financial statements in conformity with U.S. generally accepted accounting principles, and that assets are safeguarded against loss from unauthorized acquisition, use, or disposition. As part of our audit, we considered and evaluated the work performed and conclusions reached by SEC management in its internal control assessment. Further details on our scope and methodology are included in our November 2011 report on our audit of SEC’s fiscal years 2011 and 2010 financial statements and are summarized in enclosure III. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 10 We conducted our audit of SEC’s fiscal years 2011 and 2010 financial statements in accordance with U.S. generally accepted government auditing standards. We believe our audit provided a reasonable basis for our conclusions in this report.

Significant Deficiency over Information Security
As we reported in our report on our audit of SEC’s fiscal years 2011 and 2010 financial statements, SEC has made progress in strengthening internal control over its financial information systems. However, despite this progress, we identified new weaknesses in information security controls regarding (1) Incomplete implementation of SEC’s information security program and (2) Inadequate review of service auditors’ reports that jeopardized the confidentiality and integrity of SEC’s financial information, as discussed below. During our audit, we identified new deficiencies that limited the effectiveness of information security controls protecting the confidentiality and integrity of key financial systems and databases that support financial reporting. Specifically, SEC had not consistently or fully implemented controls for identifying and authenticating users, authorizing access to resources, ensuring that sensitive data are encrypted, or auditing actions taken on its systems. In addition, SEC had not installed patch updates on its software, exposing it to known vulnerabilities, which could jeopardize data integrity and confidentiality. To read more: http://www.gao.gov/assets/600/590114.pdf

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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Speech, Chairman Ben S. Bernanke At the Russell Sage Foundation and The Century Foundation Conference on "Rethinking Finance" New York

Some Reflections on the Crisis and the Policy Response
I would like to thank the conference organizers for the opportunity to offer a few remarks on the causes of the 2007-09 financial crisis as well as on the Federal Reserve's policy response. The topic is a large one, and today I will be able only to lay out some basic themes. In doing so, I will draw from talks and testimonies that I gave during the crisis and its aftermath, particularly my testimony to the Financial Crisis Inquiry Commission in September 2010. Given the time available, I will focus narrowly on the financial crisis and the Federal Reserve's response in its capacity as liquidity provider of last resort, leaving discussions of monetary policy and the aftermath of the crisis to another occasion.

Triggers and Vulnerabilities
In its analysis of the crisis, my testimony before the Financial Crisis Inquiry Commission drew the distinction between triggers and vulnerabilities. The triggers of the crisis were the particular events or factors that touched off the events of 2007-09--the proximate causes, if you will. Developments in the market for subprime mortgages were a prominent example of a trigger of the crisis. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 12 In contrast, the vulnerabilities were the structural, and more fundamental, weaknesses in the financial system and in regulation and supervision that served to propagate and amplify the initial shocks. In the private sector, some key vulnerabilities included high levels of leverage; excessive dependence on unstable short-term funding; deficiencies in risk management in major financial firms; and the use of exotic and nontransparent financial instruments that obscured concentrations of risk. In the public sector, my list of vulnerabilities would include gaps in the regulatory structure that allowed systemically important firms and markets to escape comprehensive supervision; failures of supervisors to effectively apply some existing authorities; and insufficient attention to threats to the stability of the system as a whole (that is, the lack of a macroprudential focus in regulation and supervision). The distinction between triggers and vulnerabilities is helpful in that it allows us to better understand why the factors that are often cited as touching off the crisis seem disproportionate to the magnitude of the financial and economic reaction. Consider subprime mortgages, on which many popular accounts of the crisis focus. Contemporaneous data indicated that the total quantity of subprime mortgages outstanding in 2007 was well less than $1 trillion; some more-recent accounts place the figure somewhat higher. In absolute terms, of course, the potential for losses on these loans was large--on the order of hundreds of billions of dollars. However, judged in relation to the size of global financial markets, aggregate exposures to subprime mortgages were quite modest. By way of comparison, it is not especially uncommon for one day's paper losses in global stock markets to exceed the losses on subprime mortgages suffered during the entire crisis, without obvious ill effect on _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 13 market functioning or on the economy. Thus, losses on subprime mortgages can plausibly account for the massive reaction seen during the crisis only insofar as they interacted with other factors--more fundamental vulnerabilities--that served to amplify their effects. On the surface, the puzzle of disproportionate cause and effect seems somewhat less stark if one takes the boom and bust in the U.S. housing market as the trigger of the crisis, as the paper gains and losses associated with the swing in house prices were many times the losses associated directly with subprime loans. Indeed, the 30 percent or so aggregate decline in house prices since their peak has by now eliminated nearly $7 trillion in paper wealth. However, on closer examination, it is not clear that even the large movements in house prices, in the absence of the underlying weaknesses in our financial system, can account for the magnitude of the crisis. First, much of the decline in house prices has occurred since the most intense phase of the crisis; the decline in prices since September 2008 is probably better viewed as largely the result of, rather than a cause of, the crisis and ensuing recession. More fundamentally, however, any theory of the crisis that ties its magnitude to the size of the housing bust must also explain why the fall of dot-com stock prices just a few years earlier, which destroyed as much or more paper wealth--more than $8 trillion--resulted in a relatively short and mild recession and no major financial instability. Once again, the explanation of the differences between the two episodes must be that the problems in housing and mortgage markets interacted with deeper vulnerabilities in the financial system in ways that the dot-com bust did not. So let me turn, then, to a discussion of those vulnerabilities and how they amplified the effects of triggers like the collapse of the subprime _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 14 mortgage market. A number of the vulnerabilities I listed a few moments ago were associated with the increased importance of the so-called shadow banking system.

Shadow banking, as usually defined, comprises a diverse set of institutions and markets that, collectively, carry out traditional banking functions--but do so outside, or in ways only loosely linked to, the
traditional system of regulated depository institutions. Examples of important components of the shadow banking system include securitization vehicles, asset-backed commercial paper (ABCP) conduits, money market mutual funds, markets for repurchase agreements (repos), investment banks, and mortgage companies. Before the crisis, the shadow banking system had come to play a major role in global finance. Economically speaking, as I noted, shadow banking bears strong functional similarities to the traditional banking sector. Like traditional banking, the shadow banking sector facilitates maturity transformation (that is, it is used to fund longer-term, less-liquid assets with short-term, more-liquid liabilities), and it channels savings into specific investments, mostly debt-like instruments. In part, the rapid growth of shadow banking reflected various types of regulatory arbitrage--for example, the minimization of capital requirements. However, instruments that fund the shadow banking system, such as money market mutual funds and repos, also met a rapidly growing demand among investors, generally large institutions and corporations, seeking cash-like assets for use in managing their liquidity. Commercial banks were limited in their ability to meet this growing demand by prohibitions on the payment of interest on business checking _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 15 accounts and by relatively low limits on the size of deposit accounts that can be insured by the Federal Deposit Insurance Corporation (FDIC). As became apparent during the crisis, a key vulnerability of the system was the heavy reliance of the shadow banking sector, as well as some of the largest global banks, on various forms of short-term wholesale funding, including commercial paper, repos, securities lending transactions, and interbank loans. The ease, flexibility, and low perceived cost of short-term funding also supported a broader trend toward higher leverage and greater maturity mismatch in individual shadow banking institutions and in the sector as a whole. While banks also rely on short-term funding and leverage, they benefit from a government-provided safety net, including deposit insurance and backstop liquidity provision by the central bank. Shadow banking activities do not have these safeguards, so they employ alternative mechanisms to gain investor confidence. Among these mechanisms are the collateralization of many shadow banking liabilities; regulatory or contractual restrictions placed on portfolio holdings, such as the liquidity and credit quality requirements applicable to money market mutual funds; and the imprimaturs of credit rating agencies. Indeed, the very foundation of shadow banking and its rapid growth before the crisis was the widely held view (among both investors and regulators) that these safeguards would protect shadow banking activities against runs and panics, similar to the protection given to commercial banking by the government safety net. Unfortunately, this view turned out to be wrong. When it became clear to investors that these alternative protections might not be adequate to protect against losses, widespread flight from the shadow banking system occurred, with pernicious dynamics reminiscent _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 16 of the banking panics of an earlier era. Although the vulnerabilities associated with short-term wholesale funding and excessive leverage can be seen as structural weaknesses of the global financial system, they can also be viewed as a consequence of poor risk management by financial institutions and investors, which I would count as another major vulnerability of the system before the crisis. Unfortunately, the crisis revealed a number of significant defects in private-sector risk management and risk controls, importantly including insufficient capacity by many large firms to track firm wide risk exposures, such as off-balance-sheet exposures. This lack of capacity by major financial institutions to track firm wide risk exposures led in turn to inadequate risk diversification, so that losses--rather than being dispersed broadly--proved in some cases to be heavily concentrated among relatively few, highly leveraged companies. Here, I think, is the principal explanation of why the busts in dot-com stock prices and in the housing and mortgage markets had such markedly different effects. In the case of dot-com stocks, losses were spread relatively widely across many types of investors. In contrast, following the housing and mortgage bust, losses were felt disproportionately at key nodes of the financial system, notably highly leveraged banks, broker-dealers, and securitization vehicles. Some of these entities were forced to engage in rapid asset sales at fire-sale prices, which undermined confidence in counterparties exposed to these assets, led to sharp withdrawals of funding, and disrupted financial intermediation, with severe consequences for the economy. Private-sector risk management also failed to keep up with financial innovation in many cases. An important example is the extension of the traditional _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 17 originate-to-distribute business model to encompass increasingly complex securitized credit products, with wholesale market funding playing a key role. In general, the originate-to-distribute model breaks down the process of credit extension into components or stages--from origination to financing and to the post financing monitoring of the borrower's ability to repay--in a manner reminiscent of how manufacturers distribute the stages of production across firms and locations. This general approach has been used in various forms for many years and can produce significant benefits, including lower credit costs and increased access of consumers and small and medium-sized businesses to capital markets. However, the expanded use of this model to finance subprime mortgages through securitization was mismanaged at several points, including the initial underwriting, which deteriorated markedly, in part because of incentive schemes that effectively rewarded originators for the quantity rather than the quality of the mortgages extended. Loans were then packaged into securities that proved complex, opaque, and unwieldy; for example, when defaults became widespread, the legal agreements underlying the securitizations made reasonable modifications of troubled mortgages difficult. Rating agencies' ratings of asset-backed securities were revealed to be subject to conflicts of interest and faulty models. At the end of the chain were investors who often relied mainly on ratings and did not make distinctions among AAA-rated securities. Even if the ultimate investors wanted to do their own credit analysis, the information needed to do so was often difficult or impossible to obtain. Dependence on short-term funding, high leverage, and inadequate risk management were critical vulnerabilities of the private sector prior to the crisis. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 18 Derivative transactions further increased risk concentrations and the vulnerability of the system, notably by shifting the location and apparent nature of exposures in ways that were not transparent to many market participants. But even as private-sector activities increased systemic risk, the public sector also failed to appreciate or sufficiently respond to the building vulnerabilities in the financial system--both because the statutory framework of financial regulation was not well suited to addressing some key vulnerabilities and because some of the authorities that did exist were not used effectively. In retrospect, it is clear that the statutory framework of financial regulation in place before the crisis contained serious gaps. Critically, shadow banking activities were, for the most part, not subject to consistent and effective regulatory oversight. Much shadow banking lacked meaningful prudential regulation, including various special purpose vehicles, ABCP conduits, and many nonbank mortgage-origination companies. No regulatory body restricted the leverage and liquidity policies of these entities, and few if any regulatory standards were imposed on the quality of their risk management or the prudence of their risk-taking. Market discipline, imposed by creditors and counterparties, helped on some dimensions but did not effectively limit the systemic risks these entities posed. Other shadow banking activities were potentially subject to some prudential oversight, but weaknesses in the statutory and regulatory framework meant that in practice they were inadequately regulated and supervised. For example, the Securities and Exchange Commission supervised the largest broker-dealer holding companies but only through an opt-in arrangement that lacked the force of a statutory regulatory regime. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 19 Large broker-dealer holding companies faced serious losses and funding problems during the crisis, and the instability of such firms as Bear Stearns and Lehman Brothers severely damaged the financial system. Similarly, the insurance operations of American International Group, Inc. (AIG), were supervised and regulated by various state and international insurance regulators, and the Office of Thrift Supervision had authority to supervise AIG as a thrift holding company. However, oversight of AIG Financial Products, which housed the derivatives activities that imposed major losses on the firm, was extremely limited in practice. The gaps in statutory authority had the additional effect of limiting the information available to regulators and, consequently, may have made it more difficult to recognize the underlying vulnerabilities and complex linkages in the overall financial system. Shadow banking institutions that were unregulated or lightly regulated were typically not required to report data that would have adequately revealed their risk positions or practices. Moreover, the lack of preexisting reporting and supervisory relationships hindered systematic gathering of information that might have helped policymakers in the early days of the crisis. A broader failing was that regulatory agencies and supervisory practices were focused on the safety and soundness of individual financial institutions or markets--what we now refer to as microprudential supervision. In the United States and most other advanced economies, no governmental entity had either a mandate or sufficient authority--now often called macroprudential authority--to take actions to limit systemic risks that could result from the collective behavior of financial institutions and markets. Gaps in the statutory framework were an important reason for the _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 20 buildup of risk in certain parts of the system and for the inadequate response of the public sector to that buildup. But even when the relevant statutory authorities did exist, they were not always used forcefully or effectively enough by regulators and supervisors, including the Federal Reserve. Notably, bank regulators did not do enough to force large financial institutions to strengthen their internal risk-management systems or to curtail risky practices. The Federal Reserve's Supervisory Capital Assessment Program, undertaken in the spring of 2009 and popularly known as the "stress tests," played a critical role in restoring confidence in the U.S. banking system, but it also demonstrated that many institutions' information systems could not provide timely, accurate information about bank exposures to counterparties or complete information about the aggregate risks posed by different positions and portfolios. Regulators had recognized these problems in some cases but did not press firms vigorously enough to fix them. Even without a macroprudential mandate, regulators could also have done more to try to mitigate risks to the broader financial system. In retrospect, stronger bank capital standards--notably those relating to the quality of capital and the amount of capital required for banks' trading book assets--and more attention to the liquidity risks faced by the largest, most interconnected firms would have made the financial system as a whole more resilient.

The Crisis as a Classic Financial Panic
Having laid out some of the triggers and vulnerabilities that set the stage for the crisis, I can briefly sketch the evolution of the crisis itself. As I have noted, developments in housing and mortgage markets played an important role as triggers. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 21 Beginning in 2007, declining house prices and rising rates of foreclosure raised serious concerns about the values of mortgage-related assets and considerable uncertainty about where those losses would fall. The economy officially fell into recession in December 2007, following several months of financial stress. However, the most severe economic consequences followed the extreme market movements in the fall of 2008. To a significant extent, the crisis is best understood as a classic financial panic--differing in details but fundamentally similar to the panics described by Bagehot and many others. The most familiar type of panic that has occurred historically, involving runs on banks by retail depositors, had been made largely obsolete by deposit insurance, central bank backstop liquidity facilities, and the associated government supervision of banks. But a panic is possible in any situation in which longer-term, illiquid assets are financed by short-term, liquid liabilities and in which providers of short-term funding either lose confidence in the borrower or become worried that other short-term lenders may lose confidence. The combination of dependence on wholesale, short-term financing; excessive leverage; generally poor risk management; and the gaps and weaknesses in regulatory oversight created an environment in which a powerful, self-reinforcing panic could begin. Indeed, panic-like phenomena arose in multiple contexts and in multiple ways during the crisis. The repo market, a major source of short-term credit for many financial institutions, notably including the independent investment banks, was an important example. In repo agreements, loans are collateralized by financial assets, and the maximum amount of the loan is the current assessed value of the _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 22 collateral less a safety margin, or haircut. The secured nature of repo agreements gave firms and regulators confidence that runs were unlikely. But this confidence was misplaced. Once the crisis began, repo lenders became increasingly concerned about the possibility that they would be forced to receive collateral instead of cash, collateral that would then have to be disposed of in falling and illiquid markets. In some contexts, lenders responded by imposing increasingly higher haircuts, cutting the effective amount of funding available to borrowers. In other contexts, lenders simply pulled away, as in a deposit run; in these cases, some borrowers lost access to repo entirely, and some securities became unfundable in the repo market. In either case, absent sufficient funding, borrowers were frequently left with no option but to sell assets into illiquid markets. These forced sales drove down asset prices, increased volatility, and weakened the financial positions of all holders of similar assets. Volatile asset prices and weaker borrower balance sheets in turn heightened the risks borne by repo lenders, further boosting the incentives to demand higher haircuts or withdraw funding entirely. This unstable dynamic was operating in full force around the time of the near failure of Bear Stearns in March 2008, and again during the worsening of the crisis in mid-September of that year. Classic panic-type phenomena occurred in other contexts as well. Early in the crisis, structured investment vehicles and many other asset-backed programs were unable to roll over their commercial paper as investors pulled back, and the programs were forced to draw on liquidity lines from banks or to sell assets. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 23 The resulting pressure on the bank liquidity providers, evident especially in the market for dollar-denominated loans in short-term funding markets, impeded the functioning of the financial system throughout the crisis. Following the Lehman collapse and the "breaking of the buck" by a money market mutual fund that held commercial paper issued by Lehman, both money market mutual funds and the commercial paper market were also subject to runs. More generally, during the crisis, runs of short-term uninsured creditors created severe funding problems for a number of financial firms, including several large broker-dealers and also some bank holding companies. In some cases, withdrawals of funds by creditors were augmented by "runs" in other guises--for example, by prime brokerage customers of investment banks concerned about the safety of cash and securities held at those firms or by derivatives counterparties demanding additional margin. Overall, the emergence of run-like phenomena in a variety of contexts helps explain the remarkably sharp and sudden intensification of the financial crisis, its rapid global spread, and the fact that standard market indicators largely failed to forecast the abrupt deterioration in financial conditions. The multiple instances of run-like behavior during the crisis, together with the associated sharp increases in liquidity premiums and dysfunction in many markets, motivated much of the Federal Reserve's policy response. Bagehot advised central banks--the only institutions that have the power to increase the aggregate liquidity in the system--to respond to panics by lending freely against sound collateral. Following that advice, from the beginning of the crisis, the Fed, like other major central banks, provided large amounts of short-term liquidity to financial institutions, including primary dealers as well as banks, on a _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 24 broad range of collateral. Reflecting the contemporary institutional environment, it also provided backstop liquidity support for components of the shadow banking system, including money market mutual funds, the commercial paper market, and the asset-backed securities markets. To be sure, the provision of liquidity alone can by no means solve the problems of credit risk and credit losses, but it can reduce liquidity premiums, help restore the confidence of investors, and thus promote stability. It can also reduce panic-driven credit problems in cases in which such problems result from price declines during liquidity-driven fire sales of assets. The pricing of the liquidity facilities was an important part of the Federal Reserve's strategy. Rates could not be too high; to have a positive effect, and to minimize the stigma of borrowing, the facilities had to be attractive relative to rates available (or nominally available) in illiquid, dysfunctional markets. At the same time, pricing had to be sufficiently unattractive that borrowers would voluntarily withdraw from these facilities as market conditions normalized. This desired outcome in fact occurred: By early 2010, emergency lending had been drastically reduced, along with the demand for such lending. The Federal Reserve's responses to the failure or near failure of a number of systemically critical firms reflected the best of bad options, given the absence of a legal framework for winding down such firms in an orderly way in the midst of a crisis--a framework that we now have. However, those actions were, again, consistent with the Bagehot approach of lending against collateral to illiquid but solvent firms. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 25 The acquisition of Bear Stearns by JPMorgan Chase was facilitated by a Federal Reserve loan against a designated set of assets, and the provision of liquidity to AIG was collateralized by the assets of the largest insurance company in the United States. In both cases the Federal Reserve determined that the loans were adequately secured, and in both cases the Federal Reserve has either been repaid with interest or holds assets whose assessed values comfortably cover remaining loans. To say that the crisis was purely a liquidity-based panic would be to overstate the case. Certainly, an important part of the resolution of the crisis involved assuring markets and counterparties of the solvency of key financial institutions, and that assurance was provided in significant part by the injection of capital, including public capital, and the issuance of guarantees--measures not available to the Federal Reserve. In these respects, the Treasury-managed Troubled Asset Relief Program and the FDIC's Temporary Liquidity Guarantee Program played critical roles. As I have noted, the Federal Reserve did help restore confidence in the solvency of the banking system by leading the stress tests of the 19 largest U.S. bank holding companies in the spring of 2009. These stress tests, which were both rigorous and transparent, helped make it possible for the tested banks to raise $120 billion in private capital in the ensuing months. The response to the panic also involved an extraordinary amount of international consultation and coordination. Following a key meeting of the Group of Seven finance ministers and central bank governors in Washington on October 10, 2008, the governments of other industrial countries took strong measures to stabilize key financial institutions and markets. Central banks collaborated closely throughout the crisis; in particular, the _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 26 Federal Reserve undertook swap agreements with 14 other central banks to help ensure adequate dollar liquidity in global markets and thus keep credit flowing to U.S. households and businesses.

Conclusion
The financial crisis of 2007-09 was difficult to anticipate for two reasons: First, financial panics, being to a significant extent self-fulfilling crises of confidence, are inherently difficult to foresee. Second, although the crisis bore some resemblance at a conceptual level to the panics known to Bagehot, it occurred in a rather different institutional context and was propagated and amplified by a number of vulnerabilities that had developed outside the traditional banking sector. Once identified, however, the panic could be addressed to a significant extent using classic tools, including backstop liquidity provision by central banks, both here and abroad. To avoid or at least mitigate future panics, the vulnerabilities that underlay the recent crisis must be fully addressed. As you know, this process is well under way at both the national and international levels. I will have to leave to another time a discussion of the extensive changes in regulatory frameworks, as well as the changes in the Federal Reserve's own organization and practices, that have been or are being put in place. Instead, I will close by noting that the events of the past few years have forcibly reminded us of the damage that severe financial crises can cause. Going forward, for the Federal Reserve as well as other central banks, the promotion of financial stability must be on an equal footing with the management of monetary policy as the most critical policy priorities. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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Notes
- See Ben S. Bernanke (2010), "Causes of the Recent Financial and Economic Crisis," statement before the Financial Crisis Inquiry Commission, Washington, September 2 - According to the Federal Reserve's statistical release "Flow of Funds Accounts of the United States," the value of real estate held by households fell from $22.7 trillion in the first quarter of 2006 to $20.9 trillion in the fourth quarter of 2007 (down 8.1 percent from the first quarter of 2006). It then declined to $18.5 trillion in the third quarter of 2008 (down 18.6 percent from the first quarter of 2006) and to $16.0 trillion in the fourth quarter of 2011 (down 29.7 percent from the first quarter of 2006). The stock market wealth of U.S. households peaked at $18.1 trillion in the first quarter of 2000 and fell $6.2 trillion to $11.9 trillion through the third quarter of 2001. After a short-lived recovery, stock market wealth bottomed at $9.9 trillion in the third quarter of 2002. Overall, stock market wealth fell $8.3 trillion (or 46 percent) between its peak in the first quarter of 2000 and its trough in the third quarter of 2002. - See Walter Bagehot ([1873] 1897), Lombard Street: A Description of the Money Market (New York: Charles Scribner's Sons). The classic theoretical analysis of "pure" banking panics is in Douglas W. Diamond and Philip H. Dybvig (1983), "Bank Runs, Deposit Insurance, and Liquidity," Journal of Political Economy, vol. 91 (3), pp. 401-19). Note that the term "panic" does not necessarily imply irrational behavior on the part of depositors or investors; it is perfectly rational _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 28 to participate in a run if one fears that the bank will be forced to close. However, the collective action of many depositors or investors can lead to outcomes that are undesirable from the point of view of the economy as a whole. Return to text - For an analysis of the determinants of runs on money market mutual funds during the crisis, see Patrick McCabe (2010), "The Cross Section of Money Market Fund Risks and Financial Crises," Finance and Economics Discussion Series 2010-51 (Washington: Board of Governors of the Federal Reserve System, September). - Prime brokers provide a variety of services for hedge funds and other sophisticated institutional investors. Their services include clearing of trades, financing of long securities positions, and borrowing of securities to facilitate the establishment of short positions. Return to text

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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UBS launches education initiative to mark its 150th anniversary
UBS is marking its 150th anniversary with the launch of a broad-based international education initiative. Its main focus will be the establishment of the UBS International Center of Economics in Society at the University of Zurich. Five additional fields of education will be supported through the funding of projects for different age groups with the goal of strengthening Switzerland's reputation as a location for education and business. Switzerland's economic success is due in large part to its attractive operating environment and its outstanding education system. Education will continue to be Switzerland's most important resource. UBS has decided to mark its 150th anniversary by launching a broad-based international education initiative. This will be made up of six distinct elements and is aimed at primary and high school students, university students, academics, entrepreneurs and people over 50. For UBS, this represents a sustainable, long-term investment in the future of Switzerland as an education and business location. Collaboration with the University of Zurich enables top-flight research The core of the UBS education initiative will be the creation of the UBS International Center of Economics in Society at the University of Zurich, which will be led by Professor Ernst Fehr. UBS will support the establishment of up to five chairs, the first of which _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 30 will be endowed in 2012, at the Department of Economics of the University of Zurich. These chairs will facilitate cutting-edge research into issues related to economics and financial markets, covering a wide range of subjects and promoting interdisciplinary research. The UBS International Center will emphasize the practical application of knowledge by combining world-class research and entrepreneurial thinking. Kaspar Villiger, Chairman of UBS's Board of Directors, commented, "The UBS International Center of Economics in Society is a unique educational project within Switzerland that will have outstanding international reach. We are particularly proud to be working in partnership with Professor Ernst Fehr, one of the most renowned economists of our time, on this project. Under his leadership and guidance, the Department of Economics at the University of Zurich has long been regarded as one of the top European institutions in the field of economics."

Wide range of education projects
In addition to the partnership with the University of Zurich, the education initiative includes projects for the following stages of education:

Primary and high school
Enhanced support for Explore-it, a platform that enables up to 20,000 primary school students to develop a greater interest in various scientific topics. The funds provided by UBS will be used to extend the project nationwide and develop innovative teaching and learning materials. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 31 With this expanded support, UBS will become the main sponsor of Explore-it. Extension of UBS's current partnership with the Young Enterprise Switzerland (YES) organization, which organizes educational projects for young people jointly with businesses, schools and the government. This initiative is designed to teach young people to apply collaborative thinking, demonstrate entrepreneurialism and present themselves as confident and persuasive. With this extended commitment under the education initiative, UBS will become the new main sponsor of YES.

Apprenticeships
Creation of 150 additional apprenticeship positions within Switzerland over the next five years. The annual number of apprentices will increase by about 10%. UBS today employs approximately 900 apprentices making it one of the largest private employers of apprentices in Switzerland.

Internships
Creation of 150 additional internship positions around the world for students over the next three years as part of a special anniversary program. This program targets students at the beginning of their academic career.

Entrepreneurs
Support for Genilem, an independent association that supports innovative businesses during their start-up phase. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 32 Genilem analyzes the business plans of start-up companies and also provides a network of mentors and partners, specialized training for budding entrepreneurs and professional long-term coaching which will last for a three-year period. UBS will also provide its own expert mentors and coaches for this initiative. Support for the non-profit foundation KMU Next, which provides SMEs and micro-enterprises with the tools they need for the successful transfer or acquisition of companies. UBS will become a member of the foundation and a special advisor on succession management topics, an area of particular expertise.

People over 50
Support for the Passerelle 50plus project run by Switzerland's Speranza foundation. The project supports jobseekers over the age of 50 in finding suitable employment in the open job market. UBS has been a donor to the Speranza foundation for some years now. Additional funds from the UBS education initiative will be used to support and promote the activities of Passerelle 50plus across Switzerland.

Support for Zeitmaschine.TV, a project for encouraging inter-generational dialog.
The UBS education initiative will provide support to expand this showcase project and make it available to a larger number of school students. UBS will provide information on these specific educational projects at _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 33 regular intervals and an inaugural symposium will be held at the UBS International Center of Economics in Society this autumn. Lukas Gähwiler, CEO UBS Switzerland, and Markus Diethelm, Group General Counsel, will act as ambassadors for this major commitment, developing the initiative and driving it forward. For Group CEO Sergio P. Ermotti, the education initiative represents a unique opportunity: "Education will become Switzerland's greatest resource as it competes in the global arena, and this is especially true in the service sector. That's why it was important to us to include a wide range of projects in the UBS education initiative which will benefit different age groups as well as showing UBS's commitment to Switzerland to our clients and employees and the general public." For further information on the UBS Education Initiative, visit www.ubs.com/learn

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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18 April 2012

Speech by the Chancellor of the Exchequer, Rt Hon George Osborne MP, at the City of London RMB launch event
I am delighted to be here today to celebrate London as a centre for international Renminbi (RMB) business. This is a significant moment. This morning, we saw the launch of the first RMB bond outside of Chinese sovereign territories. And it happened here in London. This builds on the progress London has already made toward becoming the western hub for RMB. By the end of last year, the volume of RMB deposits in London had already reached 109bn RMB – equivalent to around 11bn pounds, of which 35bn RMB – around 3.5bn pounds - are customer deposits. The annual trading volume in offshore RMB bonds had reached 28 billion RMB – around 3 billion pounds. And London already represents 26% of the global offshore RMB spot forex market – the majority is based in Hong Kong. This is a market which grew by over 80% last year. Let me be clear – London is not in competition with Hong Kong, it is a complement – providing a Western hub for RMB business. These developments are the culmination of a team effort by global banks _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 36 with operations in London and Hong Kong, strongly supported by the UK, mainland Chinese and Hong Kong Authorities. A year ago, when Vice Premier Wang Qishan met with me and my team here in London for the Economic and Financial Dialogue, the British and Chinese Governments set out a joint communiqué welcoming private sector interest in developing the offshore RMB market in London. The Hong Kong Authorities’ announced at the end of the year their intention to extend the operating hours of the Hong Kong RMB payments system, making it easier for RMB transactions to be settled in London. I want to commend the Hong Kong authorities on their pioneering work in developing the international RMB market. In January, at the Asia Financial Forum, Norman Chan, the Chief Executive of the Hong Kong Monetary Authority, and I announced the launch of the London-Hong Kong private-sector forum, to be facilitated by HM Treasury and the Hong Kong Monetary Authority. The growth of its exciting new RMB business is a natural development for this great city of London. London has a long history of global financial inventiveness - from founding the first organised market for insurance for trading around the world hundreds of years ago, to the development of the Eurodollar markets through the 1960s, 70s and 80s, and global foreign equities trading in more recent times. RMB trading is the next step along a 400 year road. And it is natural that when Chinese banks look westwards, they choose London as the hub for RMB in the West, given London’s pre-eminence as a financial centre, and its expertise in areas such as foreign exchange and bond issuance. It’s an important reminder to us in the UK that – while, of course, there _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 37 are vital questions we need to answer about how we protect taxpayers from banks that are too big to fail, and that we need to ensure the British economy has other strings to its bow as well as financial services – we should have the confidence to look not only at the problems, but also celebrate our successes. London is the world’s pre-eminent financial centre, and it’s actually becoming more successful. Only last month, London retained its position at top of the Global Financial Centres competitiveness Index. In fact, we were the only one of the top five financial centres which had increased its competitiveness since the previous year.

Here in London, we are currently undertaking Europe’s largest infrastructure project – Crossrail – which will provide even better transport links to the City.
We’ve taken the difficult but right decision to make our tax system more competitive – cutting corporation tax rates to 24% from this month to among the lowest in the developed world. And we’re taking the controversial but necessary decision to reduce the top rate of income tax from next year. Today’s event emphasises that we are not prepared to let anyone steal a march on us in terms of new products and new markets. We are the natural home in the West for those who want to invest in the Chinese economic success story. The increasing international use of RMB is an important development for China and for the World Economy. The growth of the Chinese economy has been quite remarkable. We all know the statistics. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 38 China has experienced growth of around 10% a year for the last 30 years. In a generation, China’s middle class is forecast to be over three times the size of that of the whole of Western Europe combined. And it is the strength of Asia’s economy which means that despite turbulent times for the world economy, global growth in this decade and the next will be higher than the past 30 years. But this growth has so far not been matched by the increase in the international use of its currency, so it is clear that the substantial expansion of RMB will be one of the major developments in global markets in the coming decades. Extension of the market to the Western time zone is a crucial part of its expansion. It is the ambition of the British Government to make London a Western hub for the sector – with all the benefits that this will bring to our own economy. And what’s so special about today is that not only does it mark the launch of the first RMB bond outside of outside mainland China and Hong Kong. Today, we also mark the official launch of the City of London initiative on London as a centre for RMB business. I want to thank Stuart Fraser, and the City of London Corporation Steering Committee and Expert Advisory Group for their hard work and leadership in getting to this point today. The involvement of companies like Bank of China, Barclays, Deutsche Bank, HSBC and Standard Chartered will provide the depth of experience on technical, infrastructure and regulatory issues that are needed to develop the market. Its first output – the Bourse Consult’s report into London’s capabilities _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 39 as an offshore RMB centre - is a demonstration of this expertise, providing a clear direction for the market’s future development. It’s taken a lot of hard work from people in this room. But today is not the end of the process; it’s the beginning. I hope that other major European banks and corporate will follow today’s lead, and that we will see Chinese institutions and corporations issuing RMB bonds in the London market in the very near future. In the coming decades, it is China that will act as one of the great powerhouses of the world economy. By acting as a bridge between East and West, we can secure London’s position as the leading financial centre in the years to come – securing growth and prosperity for Britain.

Note for (really new) members What is the City of London?
The City of London provides local government and policing services for the financial and commercial heart of Britain, the 'Square Mile'. It is committed to supporting and promoting 'The City' as the world leader in international finance and business services through the policies it pursues and the high standard of services it provides. Its responsibilities extend far beyond the City boundaries in that it also provides a host of additional facilities for the benefit of the nation. These range from open spaces such as Epping Forest and Hampstead Heath to the famous Barbican Arts Centre. The City of London combines its ancient traditions and ceremonial functions with the role of a modern and efficient local authority, looking after the needs of its residents, businesses and over 320,000 people who _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 40 come to work in the 'Square Mile' every day. Among local authorities the City of London is unique; not only is it the oldest in the country but it operates on a non-party political basis through its Lord Mayor, Aldermen and members of the Court of Common Council. The Lord Mayor in particular plays an important diplomatic role with his overseas visits and functions at the historic Guildhall and Mansion House for visiting heads of State. In addition to the usual services provided by a local authority such as housing, refuse collection, education, social services, environmental health and town planning, the City of London performs a number of very special functions. It runs its own police force and the nation's Central Criminal Court, the Old Bailey. It provides five Thames bridges, runs the quarantine station at Heathrow Airport and is the Port Health Authority for the whole of the Thames tidal estuary. Three premier wholesale food markets (Billingsgate, Spitalfields and Smithfield) which supply London and the South East with fresh produce also belong to the City of London. Many of these services are funded from the City of London's own investments at no cost to the public. The City of London is committed to an extensive programme of activities designed to assist its neighbours to combat social deprivation so that they can benefit from the wealth the 'Square Mile' generates. Staff and members of the City of London have, through centuries of careful stewardship, ensured that the 'Square Mile' has continued to thrive. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 41 Today's City of London, through its philosophy of sustainable development, aims to share these benefits with future generations of residents, businesses and workers.

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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Joint Press Release
Board of Governors of the Federal Reserve System Commodity Futures Trading Commission Federal Deposit Insurance Corporation Office of the Comptroller of the Currency Securities and Exchange Commission

April 19, 2012

Volcker Rule Conformance Period Clarified
The Federal Reserve Board announced its approval of a statement clarifying that an entity covered by section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the so-called Volcker Rule, has the full two-year period provided by the statute to fully conform its activities and investments, unless the Board extends the conformance period. Section 619 generally requires banking entities to conform their activities and investments to the prohibitions and restrictions included in the statute on proprietary trading activities and on hedge fund and private equity fund activities and investments. Section 619 required the Board to adopt rules governing the conformance periods for activities and investments restricted by that section, which the Board did on February 9, 2011. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 43 Subsequently, the Board received a number of requests for clarification of the manner in which this conformance period would apply and how the prohibitions will be enforced. The Board is issuing this statement to address this question. The Board’s conformance rule provides entities covered by section 619 of the Dodd-Frank Act a period of two years after the statutory effective date, which would be until July 21, 2014, to fully conform their activities and investments to the requirements of section 619 of the Dodd-Frank Act and any implementing rules adopted in final under that section, unless that period is extended by the Board. The Board, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Securities and Exchange Commission, and the Commodity Futures Trading Commission (the agencies) plan to administer their oversight of banking entities under their respective jurisdictions in accordance with the Board’s conformance rule and the attached statement. The agencies have invited public comment on a proposal to implement the Volcker rule, but have not adopted a final rule. The statement is included in the attached Federal Register notice, publication of which is expected shortly. _______________________________________________________

Statement of Policy Regarding the Conformance Period for Entities Engaged in Prohibited Proprietary Trading or Private Equity Fund or Hedge Fund Activities
On February 9, 2011, the Board issued its final rule to implement the provisions of section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) that grant banking entities and nonbank financial companies supervised by the Board a period of time to conform their activities and investments with the prohibitions and restrictions imposed by that section on proprietary trading activities and on hedge fund and private equity funds activities. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 44 Subsequently, the Board received a number of requests for clarification of the manner in which this conformance period would apply to various activities and investments covered by the requirements of section 619 of the Dodd-Frank Act. The Board is issuing this interpretation to address this question. As more fully explained in this statement, the Board confirms that banking entities by statute have two years from July 21, 2012, to conform all of their activities and investments to section 619, unless that period is extended by the Board. During the conformance period, banking entities should engage in good-faith planning efforts, appropriate for their activities and investments, to enable them to conform their activities and investments to the requirements of section 619 and final implementing rules by no later than the end of the conformance period. This may include complying with reporting or recordkeeping requirements if such elements are included in the final rules implementing section 619 and the agencies determine such actions are required during the conformance period.

Background
Section 619 of the Dodd-Frank Act added a new section 13 to the Bank Holding Company Act (“BHC Act”) that imposes certain prohibitions and requirements on a banking entity and a nonbank financial company supervised by the Board that engages in proprietary trading and has certain interests in, or relationships with, a hedge fund or private equity fund (each a “covered fund”). As required by section 13(b)(2) of the BHC Act, the Board, the Office of the Comptroller of the Currency (“OCC”), Federal Deposit Insurance Corporation (“FDIC”), and Securities and Exchange Commission (“SEC”) in October 2011 invited the public to comment on proposed rules implementing that section’s prohibitions and requirements. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 45 The period for filing public comments on this proposal was extended for an additional 30 days, until February 13, 2012. On January 11, 2012, the CFTC requested comment on a substantially similar proposed rule to implement section 13 of the BHC Act and invited public comment through April 16, 2012. Section 13(c)(6) of the BHC Act required the Board, acting alone, to adopt rules regarding the conformance periods for activities and investments restricted by section 13. The Board issued its final conformance rule (“Conformance Rule”) on February 9, 2011.

Board Guidance
After adoption by the Board of the Conformance Rule, a number of commenters on the interagency proposed rules to implement section 13 requested advice regarding the period of time a banking entity would have to conform its activities and investments to the requirements of section 13 and the implementing rules and whether certain activities would be prohibited prior to the expiration of the conformance period. In particular, commenters sought confirmation that the Conformance Rule would allow a banking entity the full period permitted by statute to conform all of its investments and activities to section 13 and the final implementing rules. In addition, commenters sought confirmation that activities conducted and investments made during the conformance period would not be subjected to the requirements of the implementing rules during the conformance period. Section 13 of the BHC Act generally provides that, unless the period for conformance is extended by the Board, a banking entity must conform its activities and investments to the prohibitions and requirements of that _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 46 section and any final implementing rules no later than 2 years after the statutory effective date of section 13. The effective date of section 13 is July 21, 2012. As noted in the issuing release for the Conformance Rule and the legislative history of section 13, the conformance period for banking entities is intended to give markets and firms an opportunity to adjust to the prohibitions and requirements of that section and any implementing rules adopted by the agencies. Consistent with this purpose and the statute, the Conformance Rule provides each banking entity with a period of 2 years after the effective date of section 13 (i.e., until July 21, 2014) in which to fully conform its activities and investments to the prohibitions and requirements of section 13 and the final implementing rules, unless that period is extended by the Board (the “conformance period”). The Conformance Rule also provides a nonbank financial company supervised by the Board with 2 years after the date the company becomes a nonbank financial company supervised by the Board to comply with any applicable requirements of section 13 of the BHC Act, including any applicable capital requirements or quantitative limitations adopted thereunder, unless that period is extended by the Board. Under the Conformance Rule, all proprietary trading activity conducted by each banking entity must conform to the prohibitions and requirements of section 13 of the BHC Act and any final implementing rules by no later than the end of the conformance period. Similarly, all activities, investments and transactions with or involving a covered fund, including a covered fund organized and offered or sponsored by the banking entity, must conform to section 13 of the BHC Act and final implementing rules by no later than the end of the relevant conformance period. During the conformance period, every banking entity that engages in an activity or holds an investment covered by section 13 is expected to _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 47 engage in good-faith efforts, appropriate for its activities and investments, that will result in the conformance of all of its activities and investments to the requirements of section 13 of the BHC Act by no later than the end of the conformance period. This includes evaluating the extent to which the banking entity is engaged in activities and investments that are covered by section 13 of the BHC Act, as well as developing and implementing a conformance plan that is as specific as possible about how the banking entity will fully conform all of its covered activities and investments with section 13 of the BHC Act and any final implementing rules by July 21, 2014, unless that period is extended by the Board. These good-faith efforts should take account of the statutory provisions in section 13 of the BHC Act as they will apply to the activities and investments of the banking entity at the end of the conformance period as well as any applicable implementing rules adopted in final by the primary financial regulatory agency for the banking entity. Good-faith conformance efforts may also include complying with reporting or recordkeeping requirements if such elements are included in the final rules implementing section 13 of the BHC Act and the agencies determine such actions are required during the conformance period. Nothing in this guidance restricts in any way the authority of any agency to use its supervisory or other authority to limit any activity the agency determines to be unsafe or unsound or otherwise in violation of law.

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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The White House
April 17, 2012

Remarks by the President on Increasing Oversight on Manipulation in Oil Markets
Good morning, everybody. Lately, I’ve been speaking a lot about our need for an all-of-the-above strategy for American energy -- a strategy that produces more oil and gas here at home, but also produces more biofuels and fuel-efficient cars, more solar power and wind power and other sources of clean, renewable energy. This strategy is not just the right thing to do for our long-term economic growth; it’s also the right way for us to reduce our dependence on foreign oil right now. It’s the right way for us to put people to work right now. And ultimately, it’s the right way to stop spikes in gas prices that we’ve put up [with] every single year -- the same kind of increase that we’ve seen over the past couple of months. Obviously rising gas prices means a rough ride for a lot of families. Whether you’re trying to get to school, trying to get to work, do some grocery shopping, you have to be able to fill up that gas tank. And there are families in certain parts of the country that have no choice but to drive 50 or 60 miles to get to the job. So when gas prices go up, it’s like an additional tax that comes right out of your pocket. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 49 That’s one of the reasons we passed a payroll tax cut at the beginning of this year and made sure it extended all the way through this year, so that the average American is getting that extra $40 in every paycheck right now. But I think everybody understands that there are no quick fixes to this problem. There are politicians who say that if we just drilled more then gas prices would come down right away. What they don’t say is that we have been drilling more. Under my administration, America is producing more oil than at any time in the last eight years. We’ve opened up new areas for exploration. We've quadrupled the number of operating rigs to a record high. We've added enough new oil and gas pipeline to circle the Earth and then some. But as I've said repeatedly, the problem is we use more than 20 percent of the world’s oil and we only have 2 percent of the world’s proven oil reserves. Even if we drilled every square inch of this country right now, we’d still have to rely disproportionately on other countries for their oil. That means we pay more at the pump every time there’s instability in the Middle East, or growing demand in countries like China and India. That’s what’s happening right now. It’s those global trends that are affecting gas prices.

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 50 So even as we're tackling issues of supply and demand, even as we're looking at the long-term in terms of how we can structurally make ourselves less reliant on foreign oil, we still need to work extra hard to protect consumers from factors that should not affect the price of a barrel of oil. That includes doing everything we can to ensure that an irresponsible few aren’t able to hurt consumers by illegally manipulating or rigging the energy markets for their own gain. We can't afford a situation where speculators artificially manipulate markets by buying up oil, creating the perception of a shortage, and driving prices higher -- only to flip the oil for a quick profit. We can’t afford a situation where some speculators can reap millions, while millions of American families get the short end of the stick. That’s not the way the market should work. And for anyone who thinks this cannot happen, just think back to how Enron traders manipulated the price of electricity to reap huge profits at everybody else’s expense. Now, the good news is my administration has already taken several actions to step up oversight of oil markets and close dangerous loopholes that were allowing some traders to operate in the shadows. We closed the so-called Enron loophole that let traders evade oversight by using electronic or overseas trading platforms. In the Wall Street reform law, we said for the first time that federal regulators will make sure no single trader can buy such a large position in oil that they could easily manipulate the market on their own. So I’d point out that anybody who’s pledging to roll back Wall Street reform -- Dodd-Frank -- would also roll back this vital consumer protection along with it. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 51 I’ve asked Attorney General Holder to work with Chairman Leibowitz of the Federal Trade Commission, Chairman Gensler of the Commodity Futures Trading Commission, and other enforcement agencies to make sure that acts of manipulation, fraud or other illegal activity are not behind increases in the price that consumers pay at the pump. So today, we’re announcing new steps to strengthen oversight of energy markets. Things that we can do administratively, we are doing. And I call on Congress to pass a package of measures to crack down on illegal activity and hold accountable those who manipulate the market for private gain at the expense of millions of working families. And be specific. First, Congress should provide immediate funding to put more cops on the beat to monitor activity in energy markets. This funding would also upgrade technology so that our surveillance and enforcement officers aren’t hamstrung by older and less sophisticated tools than the ones that traders are using. We should strengthen protections for American consumers, not gut them. And these markets have expanded significantly. Chairman Gensler actually had a good analogy. He said, imagine if the NFL quadrupled the number of teams but didn’t increase the number of refs. You’d end up having havoc on the field, and it would diminish the game. It wouldn’t be fair. That’s part of what’s going on in a lot of these markets. So we have to properly resource enforcement. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 52 Second, Congress should increase the civil and criminal penalties for illegal energy market manipulation and other illegal activities. So my plan would toughen key financial penalties tenfold, and impose these penalties not just per violation, but for every day a violation occurs. Third, Congress should give the agency responsible for overseeing oil markets new authority to protect against volatility and excess speculation by making sure that traders can post appropriate margins, which simply means that they actually have the money to make good on their trades. Congress should do all of this right away. A few weeks ago, Congress had a chance to stand up for families already paying an extra premium at the pump; congressional Republicans voted to keep spending billions of Americans' hard-earned tax dollars on more unnecessary subsidies for big oil companies. So here's a chance to make amends, a chance to actually do something that will protect consumers by increasing oversight of energy markets. That should be something that everybody, no matter their party, should agree with. And I hope Americans will ask their members of Congress to step up. In the meantime, my administration will take new executive actions to better analyze and investigate trading activities in energy markets and more quickly implement the tough consumer protections under Wall Street reform. Let me close by saying none of these steps by themselves will bring gas prices down overnight. But it will prevent market manipulation and make sure we're looking out for American consumers.

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 53 And in the meantime we're going to keep pursuing an all-of-the-above strategy for American energy to break the cycle of price spikes year after year. We are going to keep producing more biofuels; we're going to keep producing more fuel-efficient cars; we are going to keep tapping into every source of American-made energy. And these steps have already helped put America on a path to greater energy independence. Our foreign -- our dependence on foreign oil has actually decreased each year I've been in office -- even as the economy has grown. America now imports less than half of the oil we use for the first time in more than a decade. So we are less vulnerable than we were, but we're still too vulnerable. We've got to continue the hard, sustained work on this issue. And as long as I'm President we're going to keep placing our bets on America's future -- America's workers, America's technology, America's ingenuity, and American-made energy. That's how we're going to solve this problem once and for all. Thank you very much, everybody.

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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Consultation on draft guidelines on the assessment of the suitability of members of the management body and key function holders
18 April 2012 The European Banking Authority (EBA) launches a consultation on the draft guidelines on the assessment of the suitability of members of the management body and key function holders. The proposed Guidelines set out the process, criteria and minimum requirements for assessing the suitability of those persons. Once implemented, the Guidelines will help to ensure the quality of the assessments made. The consultation is open for responses until 18th July and a public hearing will be held on 1st June 2012. The draft Guidelines contain provisions to be followed by both credit institutions and competent authorities when assessing the suitability of persons. They set out the criteria for the assessment and documentation requirements for institutions. They also contain a notification requirement and provide that in cases _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 55 where a member of the management body is not suitable, the credit institution and, if necessary, the competent authority shall take appropriate action. In order to ensure robust governance arrangements and appropriate oversight, the scope of these Guidelines is not limited to members of the management body but extends to the members of the supervisory function and to key function holders. Moreover, as financial and mixed financial holding companies have significant influence on their credit institutions, they are also included in the Guidelines.

Background
Weak governance arrangements - namely inadequate oversight by and challenge from the supervisory function of the management body - are widely acknowledged to have been underlying causes of the financial crisis. For this reason, article 11 of the Directive 2006/48/EC (CRD) asks the EBA to develop guidelines for the assessment of the suitability of the persons who effectively direct the business of a credit institution.

Consultation process
The EBA invites comments on all matters in this paper. All contributions received will be published following the close of the consultation, unless you request otherwise. A public hearing will take place at the EBA premises on 1st June from 9.30 to 12.30.

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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OFFICE OF MINORITY AND WOMEN INCLUSION ANNUAL REPORT
As Required by Section 342(e) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 This is a report prepared by the Staff of the Office of Minority and Women Inclusion of the U.S. Securities and Exchange Commission. The Commission has expressed no view regarding the analysis, findings, or conclusions contained herein.

Introduction
The Office of Minority and Women Inclusion (“OMWI”) of the U.S. Securities and Exchange Commission (the “SEC” or the “Commission”) submits this report pursuant to Section 342(e) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”). Section 342(e) mandates the submission by OMWI to Congress of an annual report that includes the following: 1. A statement of the total amounts paid to contractors during the reporting period; 2. The percentage of the amounts paid to contractors that were paid to minority-owned and women-owned businesses; 3. The successes achieved and challenges faced by the agency in operating minority and women outreach programs;

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 57 4. The challenges the agency may face in hiring qualified minority and women employees and contracting with qualified minority-owned and women-owned businesses; and, 5. Any other information, findings, conclusions, and recommendations for legislative or agency action, as the OMWI Director determines appropriate. Unless otherwise noted, this report covers Section 342-related activities at the SEC from the establishment of OMWI in July 2011 through the fiscal year ended September 30, 2011.

ESTABLISHMENT OF OMWI AT THE SEC
Section 342 of the Dodd-Frank Act (“Section 342”) requires the SEC to establish an Office of Minority and Women Inclusion to be responsible for “all matters of the agency relating to diversity in management, employment, and business activities.” Among many duties, the OMWI Director is responsible for developing standards for equal employment opportunity and diversity of the workforce and senior management of the SEC, the increased participation of minority-owned and women-owned businesses in the SEC’s programs and contracts, and assessing the diversity policies and practices of entities regulated by the SEC. The OMWI Director also is required to advise the Chairman of the Commission on the impact of the SEC’s policies and regulations on minority-owned and women-owned businesses.

IMPLEMENTATION OF SECTION A. Contracting With Minority-Owned and Women-Owned Businesses
Section 342(e)(1) and (2) requires the SEC to report the total amount paid to contractors during the reporting period, as well as the amounts and _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 58 related percentages paid to minority-owned and women-owned businesses. During FY 2011, the SEC awarded $228 million to contractors. Of this $228 million, the SEC awarded $38.38 million (16.8%) to minority-owned businesses and $15.69 million (6.9%) to women-owned businesses. This represents an increase in dollars paid to minority-and women-owned businesses when compared to FY 2010 and FY 2009 data. In 2010, the SEC awarded a total of $223 million dollars to contractors; of that, 10% was paid to minority-owned businesses and 12% was to women-owned businesses. This represented an increase from FY 2009. Section 342(e)(3) also requires the SEC to report the successes achieved and challenges faced in operating minority and women outreach programs. Since the establishment of the OMWI office in July 2011, the SEC has focused on proactively increasing the awareness of the SEC’s contracting needs within the minority-owned and women-owned business communities. Our successes in operating minority and women outreach programs included the following: In FY 2011, the SEC exceeded all U.S. Small Business Administration defined socioeconomic goals for the number of contracts awarded to small businesses, with the exception of the 3% goal for those businesses located in Historically Underutilized Business Zones. OMWI sponsored and attended conferences and participated in business matchmaking sessions to increase the interaction between minority and women suppliers and the SEC, including the national conferences for the following organizations: the Minority Corporate _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 59 Counsel Association, the National Association of Minority and Women-Owned Law Firms, the United States Hispanic Chamber of Commerce, the National Minority Supplier Development Council, and FraserNet Power Networking. OMWI created a dedicated email address, telephone line, and brochure to facilitate communication and outreach to the minority-owned and women-owned business communities. As a result, many minority-owned and women-owned businesses are contacting OMWI directly to learn more about the SEC’s contracting needs. OMWI hosts a monthly “Vendor Outreach Day” at the SEC for small, minority-owned, and women-owned businesses to learn about the SEC’s contracting needs and to present their services to OMWI’s Supplier Diversity Officer and other key SEC personnel. Since August 2011, OMWI has seen over fifty (50) vendors. OMWI is actively involved in the agency’s acquisition review process to advocate for the inclusion of a diversity component in the competitive process. Our challenges in operating minority and women outreach programs included the following: In FY 2011, OMWI had limited staff as the office was newly created, and was unable to provide in-depth technical assistance to minority owned and women - owned businesses. In FY 2012, we are in the process of hiring more staff and will have the resources to provide businesses seeking contracts with the SEC with a comprehensive overview of the contracting process from the proposal phase to the contract award phase, including an overview of the process of bidding on a requirement. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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B. Employment of Minorities and Women at the SEC
Section 342(e)(4) requires the SEC to report on challenges it may face in hiring qualified minority and women employees and contracting with qualified minority-owned and women-owned businesses. The SEC is working toward a unified agency approach to recruitment and hiring that incorporates a comprehensive understanding of the value of workforce diversity. To increase awareness of the agency’s workforce diversity challenges, OMWI began meeting with the leadership and hiring managers of each division and office to review employee demographic data and to discuss methods to enhance the SEC’s recruitment and hiring efforts to include a wider pool of diverse applicants. The OMWI Director continues to convene these meetings in an ongoing effort to improve the agency’s workforce diversity. OMWI actively partnered with the SEC’s Office of Human Resources to enhance the SEC’s diversity recruiting efforts, particularly for the recruitment of attorneys, accountants, managers, and senior officers. In addition, OMWI collaborated with the Office of Human Resources to initiate the development of a system to track candidates that submitted resumes to the agency or agency representatives at outreach events and through referrals. OMWI also worked with the SEC’s Office of Equal Employment Opportunity to host regular meetings in Washington D.C. with the local chapter leaders of many national minority professional organizations, including the Association of Latino Professionals in Finance and Accounting, the National Black MBA Association, and the Hispanic National Bar Association, to disseminate information about SEC employment opportunities to their members and networks. To increase the reach of our recruitment and hiring efforts, OMWI will continue to strategically leverage and expand these partnerships and _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 61 alliances to include more organizations and their local chapter affiliates in our regional office locations. It is too early to assess the impact of these partnerships and alliances as most were initiated during FY 2011. Under the leadership of the recently appointed permanent OMWI Director, the SEC is developing an agency-wide diversity and inclusion strategic plan that incorporates the requirements of Section 342, the August 2011 White House Diversity and Inclusion Executive Order, and the Government-Wide Diversity and Inclusion Strategic Plan. This strategic plan will focus on the recruitment, hiring, mentoring, career development, promotion, and retention of diverse employees. Moreover, the strategic plan will include standards that will allow the SEC to self-assess its ongoing diversity and inclusion efforts. The plan is expected to be completed by May 1, 2012.

C. Other Information, Findings, Conclusions, and Recommendations
Section 342(e)(5) requires the SEC to report any other information, findings, conclusions, and recommendations for legislative or agency action, as the OMWI Director determines appropriate. Beginning in early 2011, the SEC staff, along with the directors and representatives from the other OMWI agencies,7 participated in interagency meetings to develop comprehensive approaches to implementing the requirements of Section 342. These meetings were also used to draft proposed language for the written statement on the fair inclusion of women and minorities in contracting activities and to discuss appropriate standards for assessing the diversity policies and practices of the entities regulated by each agency.

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 62 In addition, several trade groups, regulated entities, and minority professional organizations have requested informal meetings with our OMWI Director. Our OMWI Director meets with representatives of these groups and, to the extent necessary, facilitates their introduction to the other OMWI directors. Given that several OMWI agencies may concurrently regulate certain entities, a primary focus of the interagency group was to avoid the establishment of conflicting diversity standards upon these regulated entities. In early 2012, the OMWI directors held a joint roundtable with financial industry groups and trade organizations to foster a meaningful, informed dialogue regarding the development of standards for assessing the diversity policies and practices of regulated entities. The OMWI directors continue to convene these interagency meetings and roundtables on an as-needed basis.

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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Committee on Payment and Settlement Systems Technical Committee of the International Organization of Securities Commissions

Principles for financial market infrastructures
April 2012 We must start from some interesting abbreviations ACH Automated clearing house BCBS Basel Committee on Banking Supervision CCP Central counterparty CGFS Committee on the Global Financial System CPSIPS Core principles for systemically important payment systems CPSS Committee on Payment and Settlement Systems CSD Central securities depository DNS Deferred net settlement DvD Delivery versus delivery DvP Delivery versus payment FMI Financial market infrastructure FSB Financial Stability Board _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 64 ICSD International central securities depository IOSCO International Organization of Securities Commissions LEI Legal entity identifier LVPS Large-value payment system PS Payment system RCCP Recommendations for central counterparties RSSS Recommendations for securities settlement systems RTGS Real-time gross settlement SSS Securities settlement system TR Trade repository

Interesting Part of the document: Systemic risk
Safe and efficient FMIs mitigate systemic risk. FMIs may themselves face systemic risk, however, because the inability of one or more participants to perform as expected could cause other participants to be unable to meet their obligations when due. In such circumstances, a variety of “knock-on” effects are possible, and an FMI’s inability to complete settlement could have significant adverse effects on the markets it serves and the broader economy. These adverse effects, for example, could arise from unwinding or reversing payments or deliveries; delaying the settlement or close out of guaranteed transactions; or immediately liquidating collateral, margin, or other assets at fire sale prices. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 65 If an FMI were to take such steps, its participants could suddenly be faced with significant and unexpected credit and liquidity exposures that might be extremely difficult to manage at the time. This, in turn, might lead to further disruptions in the financial system and undermine public confidence in the safety, soundness, and reliability of the financial infrastructure. More broadly, FMIs may be linked to or dependent upon one another, may have common participants, and may serve interconnected institutions and markets. Complex interdependencies may be a normal part of an FMI’s structure or operations. In many cases, interdependencies have facilitated significant improvements in the safety and efficiency of FMIs’ activities and processes. Interdependencies, however, can also present an important source of systemic risk. For example, these interdependencies raise the potential for disruptions to spread quickly and widely across markets. If an FMI depends on the smooth functioning of one or more FMIs for its payment, clearing, settlement, and recording processes, a disruption in one FMI can disrupt other FMIs simultaneously. These interdependencies, consequently, can transmit disruptions beyond a specific FMI and its participants and affect the broader economy.

Legal risk
For the purposes of this report, legal risk is the risk of the unexpected application of a law or regulation, usually resulting in a loss. Legal risk can also arise if the application of relevant laws and regulations is uncertain. For example, legal risk encompasses the risk that a counterparty faces from an unexpected application of a law that renders contracts illegal or unenforceable. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 66 Legal risk also includes the risk of loss resulting from a delay in the recovery of financial assets or a freezing of positions resulting from a legal procedure. In cross-border as well as some national contexts, different bodies of law can apply to a single transaction, resulting from the unexpected application of a law, or the application of a law different from that specified in a contract, by a court in a relevant jurisdiction.

Credit risk
FMIs and their participants may face various types of credit risk, which is the risk that a counterparty, whether a participant or other entity, will be unable to meet fully its financial obligations when due, or at any time in the future. FMIs and their participants may face replacement-cost risk (often associated with pre-settlement risk) and principal risk (often associated with settlement risk). Replacement-cost risk is the risk of loss of unrealised gains on unsettled transactions with a counterparty (for example, the unsettled transactions of a CCP). The resulting exposure is the cost of replacing the original transaction at current market prices. Principal risk is the risk that a counterparty will lose the full value involved in a transaction, for example, the risk that a seller of a financial asset will irrevocably deliver the asset but not receive payment. Credit risk can also arise from other sources, such as the failure of settlement banks, custodians, or linked FMIs to meet their financial obligations.

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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Liquidity risk
FMIs and their participants may face liquidity risk, which is the risk that a counterparty, whether a participant or other entity, will have insufficient funds to meet its financial obligations as and when expected, although it may be able to do so in the future. Liquidity risk includes the risk that a seller of an asset will not receive payment when due, and the seller may have to borrow or liquidate assets to complete other payments. It also includes the risk that a buyer of an asset will not receive delivery when due, and the buyer may have to borrow the asset in order to complete its own delivery obligation. Thus, both parties to a financial transaction are potentially exposed to liquidity risk on the settlement date. Liquidity problems have the potential to create systemic problems, particularly if they occur when markets are closed or illiquid or when asset prices are changing rapidly, or if they create concerns about solvency. Liquidity risk can also arise from other sources, such as the failure or the inability of settlement banks, nostro agents, custodian banks, liquidity providers, and linked FMIs to perform as expected.

General business risk
In addition, FMIs face general business risks, which are the risks related to the administration and operation of an FMI as a business enterprise, excluding those related to the default of a participant or another entity, such as a settlement bank, global custodian, or another FMI. General business risk refers to any potential impairment of the financial condition (as a business concern) of an FMI due to declines in its _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 68 revenues or growth in its expenses, resulting in expenses exceeding revenues and a loss that must be charged against capital. Such impairment may be a result of adverse reputational effects, poor execution of business strategy, ineffective response to competition, losses in other business lines of the FMI or its parent, or other business factors. Business-related losses also may arise from risks covered by other principles, for example, legal or operational risk. A failure to manage general business risk could result in a disruption of an FMI’s business operations.

Custody and investment risks
FMIs may also face custody and investment risks on the assets that they own and those they hold on behalf of their participants. Custody risk is the risk of loss on assets held in custody in the event of a custodian’s (or sub-custodian’s) insolvency, negligence, fraud, poor administration, or inadequate recordkeeping. Investment risk is the risk of loss faced by an FMI when it invests its own or its participants’ resources, such as collateral. These risks can be relevant not only to the costs of holding and investing resources but also to the safety and reliability of an FMI’s risk-management systems. The failure of an FMI to properly safeguard its assets could result in credit, liquidity, and reputational problems for the FMI itself.

Operational risk
All FMIs face operational risk, which is the risk that deficiencies in information systems or internal processes, human errors, management _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 69 failures, or disruptions from external events will result in the reduction, deterioration, or breakdown of services provided by an FMI. These operational failures may lead to consequent delays, losses, liquidity problems, and in some cases systemic risks. Operational deficiencies also can reduce the effectiveness of measures that FMIs may take to manage risk, for example, by impairing their ability to complete settlement, or by hampering their ability to monitor and manage their credit exposures. In the case of TRs, operational deficiencies could limit the usefulness of the transaction data maintained by a TR. Possible operational failures include errors or delays in processing, system outages, insufficient capacity, fraud, and data loss and leakage. Operational risk can stem from both internal and external sources. For example, participants can generate operational risk for FMIs and other participants, which could result in liquidity or operational problems within the broader financial system.

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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Supervisory policies and bank deleveraging: a European perspective
Andrea Enria Chairperson European Banking Authority 21st Annual Hyman P. Minsky Conference on the State of the U.S. and World Economies Debt, Deficits and Financial Instability Ladies and gentlemen, This evening I would like to share with you some thoughts on the future landscape of the banking sector and discuss how policy makers could accompany the process of de-risking that banks are undertaking. I will present my assessment of what is currently happening in the EU banking sector and what we expect may happen over the next years. In particular, I will try to address three questions. 1. The first question is whether we are heading towards a significant deleveraging in the EU banking sector. 2. The second one is whether adequate policy measures can ensure that this process occurs without major damage to the real economy. 3. The third question is whether macroprudential supervisory tools can be designed to prevent excessive leverage to be built up again in the future and operated in a smooth fashion when applied to cross-border business.

Do EU banks need to undertake a significant deleveraging process?
The financial crisis has its roots in multiple imbalances at the global level and has been triggered by the fall of asset prices. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 71 How a decline in asset value led to a major crisis at the global level has been vividly illustrated by Olivier Blanchard (2009) First, the underestimation of risks and disaster myopia, something not really new in prolonged periods of benign market conditions. Second, the difficulties to value some categories of assets and new financial products. Third, the interconnections among financial institutions due to the growth of securitisation and globalisation. Finally, the increase of leverage, with financial institutions financing their portfolios “with less and less capital, thus increasing the rate of return of capital”. It is clear that the higher the leverage, the more likely it is that decline in asset values determines the depletion of capital. In fact, extensive research in this respect demonstrates that the procyclicality of leverage acts as amplification mechanism propagating adverse shocks to the real economy. Encouraged by a low-interest rate environment and by regulations lagging behind financial innovation, banks could boost the size of their balance sheets and activities. This process entailed the growth of trading activities and investment banking, but also of retail lending, primarily of residential mortgages. The main drivers of leveraging have been real estate and structured finance and, more generally, trading book activities. For 70 of the largest EU banks, the exposures in the “held for trading” and “available for sale” portfolios increased by 68 per cent between 2005 and 2008, with a sharp 24 per cent decrease in 2009. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 72 The different drivers were deeply interlinked and worked together, with optimism and the underestimation of risk contributing to banks’ excessive leverage. Leveraging up was considered as a legitimate strategy to maximise earnings and, thus, to satisfy the search for yield of market investors. Indeed, until 2007, the banking sector experienced profitability levels well above any other economic sector and banks reported returns on equity exceeding their normalised earnings capacity on a risk-discounted basis. Since 2007, confronted with an unprecedented financial crisis, banks have shifted to liability-driven strategies: obtaining the necessary funding in the form of deposits or of market resources became the paramount strategic goal. Both in the US and the EU, deleveraging was seen as part of a necessary adjustment to remove excess capacity and restructure balance sheets, and to set the basis for a more stable and sound banking sector. Indeed, empirical research suggests that some deleveraging is unavoidable after a crisis: according to the BIS (2010), debt reduction followed 17 out of 20 banking crises that were preceded by a surge in credit. However, the response to the crisis has been diverse on the two sides of the ocean. While US banks have reduced their leverage and reliance on wholesale funding, until recently, European banks remained, on average, more reliant on wholesale funding and leverage levels – while decreasing – remained comparatively high. This makes the EU banking sector more prone to structural and cyclical deleveraging pressures. In the US, deleveraging has been significant. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 73 The figures on the level of leverage should be interpreted with great caution. There are in fact a few explanations for the difference between the US and the EU that are not linked to banks’ behaviour but rather to the local regulations and the characteristics of the financial markets. Let me provide some examples. First of all, off-balance sheet exposures – that are typically excluded from the computation of traditional leverage measures – are of different size across banks, with US investment banks being typically outliers. Moreover, and most importantly, accounting rules may hamper the comparison, as measures of leverage differ to a significant extent under US GAAP and IFRS standards. Finally, after the freeze in the securitisation market, European banks have further developed the practice of funding mortgages through covered bonds. Therefore, European banks keep mortgage exposures in their balance sheets, as opposed to US banks, which can securitize and easily divest their mortgage portfolio, primarily via the Government Sponsored Entities (GSEs). Furthermore, other factors may explain why the change in banks’ leverage has been more pronounced in the US than in the EU. In the US, it is easier for banks to sell assets due to the dis-intermediated structure of the financial sector, where capital markets play a pivotal role. Bank deleveraging is therefore structurally easier, but indebtedness is in fact transferred from banks to other players, often not subject to equally stringent regulations or not regulated at all.

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 74 Also, as the crisis kicked-in, we have been witnessing aggressive reduction in indebtedness levels by both households and businesses in the US, which, so far, has not been the case in the euro zone. This suggests that demand factors also matter and that they are intertwined with the debt level of the private sector at the onset of the crisis. On the last point, the data provides a mixed picture. In the US, households confronted the crisis with higher debt levels than the euro-area ones. In 2007, the debt to disposable income ratio was about 140 per cent against 110 in the euro-area. The divide is even clearer looking at the mortgage to disposable income ratio (about 100 in the US per cent versus 60 in the euro-zone). In 2010, notwithstanding the debt reduction in the US, the ratio was still at 120 per cent. As for the corporate sector, in 2007, the leverage ratio (measured as the ratio of financial debt to financial debt plus capital) was about 30 per cent in the US compared to 37 in the euro-area (35 and 42 per cent respectively in 2010). It is also fair to acknowledge that deleveraging has been prevalent at financial institutions – larger banks and brokers/dealers – that grew their balance sheets aggressively by increasing debt and assets in the upswing, a trend that has been more pronounced in the US. All these arguments point to a complex picture in deleveraging dynamics, but a simple fact still holds true: differently from their US peers, EU banks, until recently, had reduced their leverage almost exclusively through an increase in their capital levels, while the size of their balance sheets had remained almost unchanged – if anything, it had grown further (Charts 1 and 2). _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 75 For the top 10 banks, the tangible common equity ratio (the ratio between tangible equity and tangible assets) increased from 5.7 to 7.8 per cent between 2005 and 2011. In the EU, the same ratio shifted from 3.4 to 4.5 percent for the 70 banks participating in the EBA recapitalisation exercise

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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All this has changed with the bursting of the sovereign debt crisis in the euro area. Strong pressure for deleveraging emerged in Europe during the final quarter of 2011, with the freeze of the markets for medium and long term bank funding. While this has been a source of concern, at this stage, there is no evidence that the deleveraging process has become excessive or disorderly, with disruptive consequences on the real economy. According to the BIS (2012), European banks offered for sale a significant volume of assets, mostly those with higher risk-weights, including low-rated securitised assets, distressed bonds and commercial property. In the last quarter of 2011, credit to non-bank private-sector borrowers in the euro-zone fell by around 0.5 per cent, while exposures towards non-euro-area residents declined by almost 4 per cent. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 77 The home/regional bias in deleveraging is partly the result of banks’ deleveraging pecking order and partly of difficulties in the US dollar funding, which remained more expensive and less readily available than home-currency funding for many European banks due to the reduction of prime money market funds’ exposure to euro area banks. I would suggest some of the rationales for bank deleverage in the EU. Funding shortages have been certainly a key driver. We have all witnessed the dramatic market funding freeze during the second half of last year for EU banks, alleviated some months ago by new regulatory and policy initiatives, primarily the ECB’s 3-year Long Term Refinancing Operations (LTRO), but also state guarantees for new bank bonds. EU banks are now facing longer-term challenges and deleveraging is the way for aligning the business model to markets’ expectations and to the incentives posed by regulatory changes. Unquestionably, there is a need for de-risking, bringing leverage to more conservative levels. Indeed, a number of European banks have not yet completed the clean-up of their balance sheets and shedding of legacy assets. In addition, those banks that received public support are required under EU State aid regulation to dismiss part of their business to minimize competitive distortions. Banks may also need to rethink their involvement in investment banking and related activities as well as attempt to reduce their dependence on less stable sources of funding – such as short-term wholesale financing – as a response to the new rules introduced by Basel 2.5 and 3. Hence, my answer to the first question is that the EU has avoided so far a disordered deleveraging process driven by a massive funding squeeze, thanks in particular to the actions taken by the European Central Bank. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 78 But a downsizing of banks’ balance sheets has started and has to take place, in order to unravel some of the processes that have triggered the financial crisis. This is necessary to bring banks back to sounder and more stable business models. Several estimates have been put forward by analysts on the likely dimension of this deleveraging process. I don’t think regulators should have a view on the overall size of the adjustment, but they should be aware that there is still some way to go and they should keep putting pressure on banks to complete the repair of their balance sheets.

What policy actions to avoid negative repercussions on the real economy?
A recurrent theme in the recent debate has been the claim of the banking industry that the regulatory reforms would have a major adverse impact on growth and employment. Deleveraging has often been characterised as “bad”, as implying reduced flows of lending into the real economy. But deleveraging could be both “bad” and “good”, simply because reducing the size of different components of a bank’s balance sheet can have different impacts. The point is whether we can disentangle possible trajectories for deleveraging and deploy policies that favour an orderly deleveraging process, which does not hurt growth prospects. For example, deleveraging is welcome when it entails dismissing or writing down troubled assets accumulated by banks before the crisis.

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 79 In most post-crises periods, we have witnessed a massive deleveraging process, which often is simply reflecting the cleaning of the banks’ balance sheets. The size of banks’ balance sheets shrinks simply because losses are recognised and accounting values revised downwards. This process has no adverse real impact, as it does not change in any way the amount of loans. On the contrary, there is a good amount of evidence that if residual credit risk is not recognised and dealt with, it is likely that the economy remains in a prolonged period of stagnation associated with a failure to address non-performing assets. Forbearance can be a force for good where a loan has a reasonable prospect of an imminent return to performance. However, it can be pernicious for both the borrower and the lender to maintain non-performing loans on balance sheets for prolonged periods. When a universal bank with extensive activities in both investment and wholesale banking on the one hand, and retail and commercial banking on the other hand, decides to de-risk away from market activities, the investment banking/trading portion of the balance sheet will naturally shrink. This may in fact be a good thing insofar as de-risking is concerned, and indeed some regulators required banks to do that at the height of the crisis. On the other hand, indiscriminately cutting lending to the real economy may lead to an economic slowdown and possibly to a credit crunch. And I include here not only lending to the domestic economy by the parent bank but also real economy lending in other countries where the bank has subsidiaries. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 80 This is a very sensitive issue in the EU where, for instance, subsidiaries of Western EU banks play a major role in Central and Eastern Europe. Disentangling good and bad deleveraging is part of the usual dilemma for policy makers during a crisis. On the one hand, there is the willingness to prevent a sharp contraction in credit supply to firms and households and, in turn, negative repercussion on economic growth. On the other, some adjustments and repairs in banks’ balance sheets are vital to restore the confidence in the financial sector and restart credit markets. And the Japanese experience warns us that forbearance – late recognition of losses, delayed restructuring of balance sheets, deferred capital raising – can produce harmful consequences. Tang and Upper (2010) remind us of this lesson: “fix the banking system first”. It has been noted that “getting rid of the non-strategic assets that

normally hang around after a long merger-wave […] is a responsibility of individual banks and their senior management, but moral persuasion from regulators and governments is also needed. Managers and directors can have a vested interest in preserving the present size, which can make it easier to extract private benefits and pursue rent-seeking behaviour”.
In that respect, we should welcome the fact that the waterfall of deleveraging is also driven by regulation. This leads me to the second question.

What policy actions can be set up to ensure that only good deleverage takes place?
The first element of the policy toolkit should be an incentive-compatible regulation. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 81 If rules are properly designed, the cost in terms of capital and liquidity requirements of holding riskier assets is higher, providing the right incentives to what I called good deleveraging. And I assume there is still agreement on the fact that certain activities have contributed more than others to the build-up of vulnerabilities in banks’ balance sheets. For example, deleveraging trading and investment assets is the consequence of a more demanding regulatory framework – Basel 2.5 and 3 and the Dodd-Frank Act – that affects primarily market risk and trading book exposures. The second element is to put banks in the condition to keep granting credit to the economy. In Europe, the initiatives for restoring market confidence have been incisive. The operations to support liquidity approved by the European Central Bank have alleviated the pressure on bank funding, even though restoring the access to private markets for long term funds remains an important policy objective. While easing funding pressures on banks was essential to avoid a disordered deleveraging process, policies need to be put in place that encourage banks to repair their balance sheet and strengthen their capital position. The EBA required banks to form a capital buffer that will enable them to reach a Core Tier 1 ratio of 9 per cent, after a prudent valuation of the banks’ sovereign exposures. This is a temporary and exceptional buffer to address the systemic risk arising from the sovereign debt crisis. In order to discourage banks from complying with the recommendation by simply curtailing lending, we laid down precise guidelines and asked _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 82 the banks to submit plans for recapitalisation, describing the steps they intend to take in order to reach the required level of capital. Only a limited number of measures to reduce assets are allowed to meet our request: while it will be possible to transfer certain categories of activities to third parties – since this does not reduce the leverage of the system as a whole – reductions in lending will not determine any capital relief for banks, unless they occur within restructuring plans required by the EU and the IMF or per requested by supervisors. The plans submitted by banks – and currently being carried out under the scrutiny of national supervisory authorities and the EBA – are encouraging. The actions that banks intend to put in place for reaching the target capital level focus predominately on direct capital measures – issuance of new capital, retained earnings, conversion of hybrid instruments into common equity. Overall, direct capital measures cover 96 per cent of the shortfall. In a small number of cases reductions in lending into the economy are included in the plans. The majority of these deleveraging activities correspond to conditions laid out in EU State Aid rules or other official programmes to ensure appropriate restructuring and return to long term viability. In practice, less than 1 per cent of the total measures will be represented by decrease in lending. But let me turn to another important point. Over the last months, there has been some dispute on the role that supervisory pressure for strengthening capital levels played in the deleveraging process, particularly in the EU. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 83 In fact, asset deleverage has been primarily driven by a change in strategy and de-risking, reduced credit demand and funding constraints, much less by additional needs on the capital side. In Europe, the deleveraging process began long before the EBA started to consider banks’ recapitalisation needs, and it was closely linked with the difficulties banks had in collecting funds on the market at a reasonable cost. On this, I want to be blunt: I do not believe that high levels of capital are a deterrent to new lending. On the contrary, banks with low capital levels – or perceived by the market as being so – are those that have had problems in increasing lending. They either face major funding difficulties – which, in turn, do not allow them to grant loans – or focus primarily on preserving their meagre capital. Banks with large capital positions, by contrast, are less sensitive to cyclical shocks and more likely to pursue lending growth strategies. Indeed, last September, the IMF warned that “a number of [European]

banks must raise capital to help ensure the confidence on their creditor and depositors.

Without additional capital buffers, problems in accessing funding are likely to create deleveraging pressures at banks, which will force them to cut credit to the real economy” and the European Systemic Risk Board
(ESRB) emphasised the need for coordinated efforts to strengthen EU banks’ capital.

The EBA’s recommendation for temporary capital buffers is consistent with the lessons learnt from previous crises and responds to the IMF and ESRB warnings and meets market expectations for higher capital levels.

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 84 It has pushed a rebalancing of the deleveraging through a major increase in capital (€115bn) and, at the same time, it only allowed for good deleveraging. Going forward, supervisors need to maintain their focus on asset quality, making sure that residual credit risk is properly addressed and losses are fully recognised. This should also help driving market values and book values closer to each other, thus supporting the issuance of new equity. At the same time, supervisors need to work with banks to identify pathways to new and diverse sources of funding, with less reliance on short term wholesale funding than in the past. This rebalancing in the funding models is a necessary component of a process that will lead banks to gradually exit from the extraordinary support measures provided by their central banks. An important component of this strategy could be supporting industry initiatives to re-establish a sound and well controlled market for securitisation. These actions on assets and funding should help banks refocusing their business models so that their activities are sustainable and reflect their areas of comparative advantage.

Which policy tools to prevent boom and bust cycles in integrated financial markets?
The final issue I want to tackle this evening is whether policy makers can reduce the probability of future boom and bust cycles devising effective preventive tools. The Basel 3 framework does envisage instruments that should contribute to smoothing the fluctuations in the financial sector. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 85 At the micro-prudential level, higher requirements in terms of quantity and quality of capital should structurally reduce banks’ risk-taking. In addition, the leverage ratio will set a ceiling to non-risk-weighted exposures in buoyant economic conditions. At the macro-prudential level, the countercyclical buffer regime will require banks to build-up capital cushions in good times – when risk is underestimated – to be deployed for covering losses when the cycle reverts and, thus, supporting the economy when this is most critical. The effectiveness of this toolkit in preventing excessive leveraging and abrupt deleveraging is still debated at the global level and, particularly in the EU, with some jurisdictions claiming that the current steps towards strengthening prudential rules may not be sufficient. In the EU, we are working for completing the implementation of Basel 3 in our legislation as soon as possible. Indeed, we realise that the breadth of the regulatory reform is such that it is producing some degree of uncertainty in the market place. Our priority is thus to reduce this uncertainty and provide an environment in which banks – and investors providing banks with the necessary funds – can again do their planning in a long term perspective. What makes Europe – I believe – an interesting case study is the fact that we are committed to achieving a single rule-book for financial markets, that is a common set of fully harmonised rules that will be binding and directly enforceable in all EU Member States. While the single rule-book remains a shared goal, there is at the same time a call for greater flexibility at the national level, in order to favour the implementation of macroprudential policies. Undoubtedly, there are strong arguments in favour of some flexibility in the use of macroprudential instruments. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 86 First, systemic risk may materialise in different ways and no predetermined rules could address it. Second, since credit and economic cycles are not fully synchronised across EU countries and financial markets are still heterogeneous, Member States may necessitate some room for manoeuvre in the activation of policy measures. Third, the development of macroprudential instruments is still at an early stage and some flexibility may contribute to the learning-by-doing process. At the same time, the establishment of any flexible macroprudential framework in Europe should not jeopardise the Single Market. What happened during the crisis has warned us that the integration of financial and banking markets cannot be considered a permanent accomplishment if it is not underpinned by effective harmonization of the legal framework and its consistent application throughout the Union. We have all witnessed how the Single Market may well prosper when the economic cycle is upward, but it may well implode in downturn cycles if no coordinated responses are developed. We are currently witnessing a major retrenchment of banking business within national borders. Cross-border banking is significantly downsizing. The money market, which was the most integrated market since the introduction of the euro, has virtually disappeared and the limited signs of recovery in interbank transactions that materialised since the ECB’s LTRO are remaining mostly within national borders. The deleveraging process is being driven by the requests of authorities to hold significant capital and liquidity levels in domestic markets and to refinance the local economy. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 87 At the moment, we are facing a high likelihood that the deleveraging process will occur with a segmentation of the Single Market in banking. This might well endanger its ultimate goal: wider and deeper financial markets offering better and more financing opportunities for real economies. This does not imply that no discretion should be left to the national authorities in shaping their macroprudential toolkit, but rather that this should happen under a coordinated approach based on strong ex-ante guidance and credible ex-post reviews of the measures adopted at the national level. The level of flexibility to be left to the macroprudential supervisors is also linked to the objectives that macroprudential policies are expected to achieve. And it is fair to acknowledge that there is no clear agreement on this. According to a first viewpoint, macroprudential policy plays primarily a passive role, complementing traditional microprudential supervision, which neglects the time-dynamics of credit markets, and ensuring that capital resources are adequately allocated across time, building reserves in good times that can be run-down when economic conditions deteriorate. The second perspective regards macroprudential tools as an effective and wide-ranging mechanism for leaning against the wind, i.e. for reducing banks’ incentives to expand credit and leverage in buoyant economic conditions, thus avoiding credit bubbles. While the two perspectives are not necessarily mutually exclusive, they have different consequences in terms of design and use of the policy tools. In the first case, they aim at being neutral and rule-based. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 88 Some discretion may be left to the policy maker, but it is typically residual. In the second case, much more discretion is needed and the policy maker is endowed with a significant degree of freedom in adapting the policies to the specific juncture. In this case, however, it is crucial to preserve consistency in the activation of macroprudential tools and to avoid unintended consequences when they interact with microprudential tools. In a nutshell, greater discretion needs to be balanced with some pre-agreed principles on how discretion can (or cannot) be exercised. The functioning of the countercyclical buffer – a key element of the Basel 3 macroprudential toolbox – is a good example. As currently foreseen, national authorities will be given the possibility to activate additional buffers reflecting the conditions of the credit cycle in their jurisdiction. In Europe, the ex ante guidance, to be issued by the European Systemic Risk Board (ESRB), coupled with an effective ex post peer review process should guarantee that these tools do not alter the level playing field and are compatible with the single rulebook. The approach followed for designing such a tool could be followed also for the introduction of other components of the macroprudential suite. My answer to the initial question is therefore mixed. We have some tools – the leverage ratio and the countercyclical buffers – but we still do not have a well structured suite of macroprudential tools and specific rules of engagement for their employment. In addition, all measures have been focusing so far on the banking sector, while a sizeable share of the leveraging up of the system in the past was driven by other financial institutions. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 89 Looking at the implementation, we are running the risk to open a wide area for discretion in national supervisory implementation, with national policy makers – not only in Europe – potentially able to hide everything under the macroprudential umbrella. In that respect, a constrained discretion regime for macroprudential policies – along with harmonised microprudential rules and homogenous supervisory practices – is the only avenue for ensuring that the same sources of systemic risk are addressed in a consistent way across countries, levelling the playing field and reducing spill-over from less to more conservative jurisdictions. Systemic risk cannot anymore be contained within national borders and requires coordinated policy responses.

Conclusions
Today I tried to argue that a deleveraging process is needed in the banking sector. It has already started, with a different pace in different areas of the global financial system. The first step has been the increase in capital levels, long overdue and one of the cornerstones of the regulatory reforms endorsed by the G20 Leaders. The second step implies a reduction in size of balance sheets, especially by addressing non-performing assets and de-risking in areas such as capital market activities and real estate lending, which grew too much in the run-up to the crisis. The third step entails a refocusing of business models, especially towards more stable funding structures and the gradual exit from the extraordinary support measures put in place by central banks.

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 90 I have seen no compelling evidence supporting the industry’s argument that the regulatory reforms will bring about an unwarranted deleveraging process, badly hurting the real economy. On the contrary, I am convinced that without an ordered deleveraging process, through a significant strengthening of capital and a selective downsizing of asset levels, we would fail addressing the fragilities that are preventing banks from performing their fundamental functions. A point I acknowledge in the industry’s criticism is that in the path to the new equilibrium, authorities need to provide for regulatory certainty and close coordination of actions. Supervisors and central banks have to carefully coordinate their actions to accompany this process and make sure that it occurs in an orderly fashion, without hampering the continued flow of lending into the real economy. In particular, in deploying their armoury of tools, including the new macroprudential instruments, national authorities should avoid policies too narrowly focused on domestic objectives: if the deleveraging process is shaped by policies aimed at maintaining domestic assets while de-risking in foreign jurisdictions, we risk triggering a segmentation of financial markets that may well hamper growth and employment. This is particularly true in the euro area and the EU, but has a more general relevance for global financial markets. Thank you for your attention.

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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1200 G Street NW Suite 800 Washington, DC 20005-6705 USA Tel: 202-449-9750 www.risk-compliance-association.com

International Association of Risk and Compliance Professionals (IARCP)

Top 10 risk and compliance management related news stories and world events that (for better or for worse) shaped the week's agenda, and what is next
George Lekatis President of the IARCP

Dear Member,

Do you know that investor in London are betting on when a particular set of US citizens will die and, if these people live longer than anticipated, the

investment may not function as expected …
… and that the UK Financial Services Authority (FSA) has confirmed guidance that this is a high risk product that should not be promoted to the vast majority of retail investors in the UK? We live in (mad) financial times. These “high risk products” are called Traded Life Policy Investments (TLPIs). Yes, risk management is very important. The risk is that policyholders will not die the day we want them to die. Investors hope to benefit by buying the right to the insurance payouts upon the death of the original policyholder. Well, we speak about London, let’s see the interesting definition of the shadow banking sector from Mr Paul Tucker, Deputy Governor for Financial Stability at the Bank of England, (speaking at the European Commission High Level Conference, Brussels, 27 April 2012). He said that “shadow banking” is not the same as the non-bank financial sector. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

Page |2 For example, the vast majority of hedge funds are not shadow banks, and don’t trade in the credit markets or especially illiquid markets. Also, non-bank intermediation of credit is not a bad thing in itself. Indeed, it can be a very good thing, helping to make financial services more efficient and effective and the system as a whole more resilient. But, as we know from this crisis and from previous ones, true shadow banking can weaken the system. Regulatory arbitrage, which is always with us, can distort and disguise channels of intermediation. Shadow banking comes in lots of shapes and colours. There are degrees to which any particular instance of shadow banking replicates banking. The liquidity offered by some shadow banks relies pretty well entirely, and more or less openly, on committed lines of credit from commercial banks. In these cases, the liquidity insurance offered by the shadow bank is “derivative”; there is a real bank in the shadows. But for other shadow banks, liquidity services are offered without such back-up lines. In those cases, claims on the shadow bank have, in effect, become a monetary asset. Examples probably include money market mutual funds and an element of the prime brokerage services offered by securities dealers to levered funds. Interesting! Welcome to the Top 10 list.

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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Developing a Single Rulebook in banking Andrea Enria, Chairperson European Banking Authority, Central Bank of Ireland – Stakeholder Conference ‘Financial Regulation, Thinking about the future, 27 April 2012

FSA confirms traded life policy investments should not generally be promoted to UK investors 25 Apr 2012 The Financial Services Authority (FSA) has confirmed guidance that traded life policy investments (TLPIs) are high risk products that should not be promoted to the vast majority of retail investors in the UK

Federal Deposit Insurance Corporation U. S. Small Business Administration April 24, 2012 FDIC and SBA Team Up to Offer Financial Education Support for New and Aspiring Entrepreneurs

FSA Japan Press Conference by Shozaburo Jimi, Minister for Financial Services (Excerpt)

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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Securities Lending and Repos: Market Overview and Financial Stability Issues Interim Report of the FSB Workstream on Securities Lending and Repos, 27 April 2012

Shareholder value and stability in banking: Is there a conflict? Speech by Jaime Caruana, General Manager, Bank for International Settlements

Jens Weidmann: Global economic outlook – what is the best policy mix? Speech by Dr Jens Weidmann, President of the Deutsche Bundesbank, Economic Club of New York, New York, 23 April 2012

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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Energy ≠ Heat: DARPA seeks non-thermal approaches to thin-film deposition

Federal Open Market Committee Information received since the Federal Open Market Committee met in March suggests that the economy has been expanding moderately.

FSB Principles for Sound Residential Mortgage Underwriting Practices April 2012

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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Developing a Single Rulebook in banking

Andrea Enria, Chairperson European Banking Authority, Central Bank of Ireland – Stakeholder Conference ‘FINANCIAL REGULATION THINKING ABOUT THE FUTURE’ 27 April 2012 Ladies and Gentlemen, My main topic today will be the Single Rulebook, the main path ahead of us to achieve the objectives of the new European institutional framework established with the endorsement of the recommendations of the de Larosière report. I will primarily focus on owns funds, as this is a key issue for re-establishing the regulatory framework on a sound footing and the EBA is currently running a public consultation on this. I will also briefly touch on another important component of the Single Rulebook: the liquidity requirements. However, before tackling these issues, I would like to give you an overview of the first year of existence of the EBA and especially of the work done to face the challenges posed by the current crisis.

1. The efforts of the EBA in tackling the financial crisis
In the first year of its life, the priorities of the EBA had to be focused on the challenges raised by the deterioration of the financial market _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

Page |7 environment. The stress test exercise we conducted in the first part of 2011 focused on credit and market risks but also, in recognition of the risks that subsequently crystallised, incorporated sensitivity to movements in funding costs. Banks were also required to assess the credit risk in their sovereign portfolios. In many respects, I believe the exercise was successful: in order to achieve the tougher capital threshold, anticipating many aspects of the new Basel standards, banks raised € 50 bn in fresh capital in the first four months of the year; we set up a comprehensive peer review exercise, which ensured consistency of the exercise across the Single Market, notwithstanding the many differences in national regulatory frameworks; the exercise included an unprecedented disclosure of data (more than 3200 data points for each bank), including amongst other things detailed information on sovereign holdings. However, the progress of the stress test was tracked by a significant further deterioration in the external environment. The main objective of restoring confidence in the European banking sector was not achieved, as the sovereign debt crisis extended to more countries, thus reinforcing the pernicious linkage between sovereigns and banks. Most EU banks, especially in countries under stress, experienced significant funding challenges. In this context, the IMF and the European Systemic Risk Board (ESRB) called for coordinated supervisory actions to strengthen the banks’ capital positions. The EBA assessment was that without policy responses, the freeze in bank funding would have led to an abrupt deleveraging process, which _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

Page |8 would have hurt growth prospects and fuelled further concerns on the fiscal position of some sovereigns, in a negative feedback loop. We then called for coordinated action on both the funding and the capitalisation side. While advising the establishment of an EU-wide funding guarantee scheme, the EBA focused its own efforts on those areas where it had control, primarily bank capitalisation. To this end, the Board of Supervisors, comprising the heads of all 27 national supervisory authorities, discussed and agreed that a further recapitalisation effort was required as part of a suite of coordinated EU policy measures. Our Recommendation identified a temporary buffer to address potential concerns over EU sovereign debt holdings and required banks to reach 9% CT1. The total shortfall identified was € 115 bn. The measure was agreed in October and enacted in December 2012. It was swiftly followed by the ECB’s long term refinancing operations (LTROs), arguably the key “game changer” in this context. But the recapitalisation was a necessary complementary measure: while banks needed unlimited liquidity support, to avoid a credit crunch, they had to be asked to accelerate their action to repair balance sheets and strengthen capital positions. These measures have bought time but should not bring complacency. The recapitalisation plan has seen banks make significant efforts to strengthen their capital position without disrupting lending into the real economy. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

Page |9 The EBA’s intensive monitoring of the process shows that 96% of the shortfall identified was met by direct capital actions. Moreover, there has been a strong spirit of cooperation between home and host supervisors in discussing and taking forward these plans through colleges of supervisors, which has acted as a meaningful counterweight to the trend for national concerns to come to the fore in the current environment. Going forward, heightened attention to addressing residual credit risk, making efforts to meet the new CRD IV requirements, setting in place plans to gradually restore access to private funding and exit the extraordinary support of the ECB will be key.

2. The Single Rulebook in banking
As the finalisation of the new legislative framework for capital and liquidity requirements was coming closer, the focus of the EBA work has been increasingly moving to our tasks in the rule-making process. The key task that the reform proposed by the de Larosière report assigns to the EBA is the establishment of a Single Rulebook, ensuring a more robust and uniform regulatory framework in the Single Market and preventing a downward spiral of competitive relaxation of prudential rules. The EBA is asked to draft technical standards that, once endorsed by the Commission, will be adopted as EU Regulations. The standards will therefore be directly applicable to all financial institutions operating in the Single Market, without any need for national implementation or possibility for additional layers of local rules. I see that at the moment, while the negotiations on the capital requirement directive and regulation (CRD4-CRR) are entering the final stages, there is a call for more national flexibility. It is often argued that minimum harmonisation is all that is needed, as the _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 10 decision of a national authority to apply stricter requirements would only penalise financial institutions chartered in that jurisdiction. This argument neglects the fact that we have lived in a world of minimum harmonisation until now, and this has delivered an extremely diverse regulatory environment, prone to regulatory competition. It is a fact that the flexibility left by EU Directives has been a key ingredient in the run-up to the crisis. The Directives left significant flexibility to national authorities in the definition of key prudential elements (e.g., definition of capital, prudential filters for unrealised gains and losses), the determination of risk weights (e.g., for real estate exposures), the approaches to ensure that all the risks are captured by the requirements (e.g., effectiveness of risk transfers). All these elements of flexibility have been used by banks to put pressure on their supervisors, triggering a process that led to excessive leverage and fuelled credit and real estate bubbles. The heterogeneity of the regulatory environment also complicated significantly the effective supervision of cross-border groups, which were at the epicentre of the crisis: supervisors had serious difficulties both building up a firm-wide view of risks and acting in a timely and coordinated fashion. Furthermore, regulatory arbitrage drove business decision. This problem has not been fixed yet. In its first year of activity, the EBA identified a number of differences in regulatory treatment that lead to very material discrepancies in key requirements. For instance, the EBA staff conducted a simple exercise on the data collected for the recapitalisation exercise. The capital requirement for the same bank were calculated using the less _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 11 stringent and the most restrictive approaches in four areas where national rules present important differences – the calculation of the Basel I floors, the application of the prudential filters, the treatment (deduction from capital or inclusion in assets with a 1250% weight) of IRB shortfalls and of securitisations. As a result, the ratio was 300 bps lower when the stricter methodologies were applied, showing that differences can be very material and difficult to spot. In integrated financial markets, these differences can have very disruptive effects. Once risks generated under the curtain of minimum harmonisation materialise, the impact is surely not contained within the jurisdictions that adopted less conservative approaches. Without using exactly the same definition of regulatory aggregates and the same methodologies for the calculation of key requirements, the problem will not be fixed. At the same time, it is absolutely true that the new regulatory framework has to be shaped in such a way to leave a certain degree of national flexibility in the activation of macroprudential tools, as credit and economic cycles are not synchronised across the EU. Also, there could be structural features of financial sectors, or components thereof, which might require tweaking prudential requirements to prevent systemic risk. But the same source of systemic risk should be treated in a broadly consistent manner in different jurisdictions across the Single Market, to avoid an unlevel playing field and less stringent approaches that might subsequently generate spillovers in other countries. The ideal long-term solution for avoiding conflicts between the flexibility needed for macroprudential supervision and the degree of regulatory harmonisation called for by the Single Rulebook is constructing a suite of _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 12 macroprudential instruments along the blueprint of the countercyclical buffer. This provides a significant leeway for tightening standards while the European Systemic Risk Board (ESRB) is entrusted with the task of drafting guidance on the activation of the tool and of conducting ex post reviews. At the same time, reciprocity in the application of the tool allows for cross-border consistency and reduces the room for regulatory arbitrage. So, we may well have a single rule, adopted through an EU Regulation, while this rule provides for flexibility in its application, with a framework that the Basel Committee has labelled as “constrained discretion”.

3. Giving life to the Single Rulebook: the new regulatory framework of bank capital and liquidity
In giving life to the Single Rulebook in banking, the EBA is facing a major challenge. The CRD4-CRR proposal envisages around 200 tasks, more than 100 technical standards - 40 of which will have to be finalised by the end of this year. We will have to ensure standards of high legal quality as they will be immediately binding in all 27 Member States when endorsed by the European Commission. We will have to respect due process, with wide and open consultations and adequate impact assessments. As to the substance of the new regulatory framework, I will focus today on the definition of capital and the quality of own funds, which I consider as one of the cornerstones of the Single Rulebook in banking.

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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3.1. Own funds
The definition of capital has been a major loophole in the run-up to the crisis. As financial innovation brought about increasingly complex hybrid instruments, national authorities have been played against each other by the industry, with the result that the standards for the quality of capital were continuously relaxed. As a consequence, once the crisis hit, a significant amount of capital instruments proved to be of inadequate quality to absorb losses. In several cases, taxpayers’ money was injected while the holders of capital instruments continue to receive regular payments. The Basel Committee has done an outstanding job in significantly strengthening the definition of capital and we must make sure that this is not lost in the implementation of the standards. The EBA already achieved some progress in the use of stringent uniform standards when imposing the use of a common definition of capital for the purpose of the stress test and the recapitalisation exercise. This proves that collective enhancements can be reached when necessary. But what can be done in periods of stress must be perpetuated in normal times. For this purpose, on 4 April, the EBA published a consultation on a first set of regulatory technical standards on own funds. These cover most areas of own funds, fleshing out the features of instruments of different quality (from CET1 to Tier 2 instruments). The consultation will provide appropriate input from interested parties and regular contacts with banks and market participants are already under way. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 14 The standards elaborate on the characteristics of the instruments themselves, as well as on deductions to be operated from own funds. It is indeed crucial to ensure that there is a uniform approach regarding the deduction from own funds of certain items like losses for the current financial year, deferred tax assets that rely on future profitability, defined benefit pension fund assets. It is also necessary to ensure that, where exemptions from and alternatives to deductions are provided, sufficiently prudent requirements are applied. The standards cover also several areas affecting more directly cooperative banks and mutuals, whose particular features have to be taken into adequate account. At the same time, it is necessary to define appropriate limitations to the redemption of the capital instruments by these institutions. The standards will also contribute to increase the permanence of capital instruments more generally by strengthening the features of the latter and by specifying the need for supervisory consent when reducing own funds. Finally, the standards will also increase the loss absorbency features of eligible hybrid instruments, in line with the objective to bring investors closer to shareholders and share losses on a pari passu basis. In order to complete its current work on own funds, the EBA will soon publish a technical standard on disclosure by institutions. The work of the EBA on own funds will not be concluded with the endorsement of the new technical standards. Indeed, although technical standards, like EU Regulations, should not leave room for interpretation, it cannot be excluded that some provisions will not work as they are meant to. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 15 This is the reason why a close review of the application of the standards is necessary to detect potential loopholes and propose changes when needed. A framework should be developed, probably in the form of a Q&A platform, in order to address technical issues that may well emerge in the practical application of the standards. Furthermore, an important task that has been attributed to the EBA is the publication of a list of instruments included in Common Equity Tier 1 (CET1) as well as the monitoring of the quality of capital instruments. I believe the current text of the CRD4-CRR does not go far enough in ensuring a strong control on the instruments that will be included in the capital of higher quality. I understand the decision of the EU institutions to follow an approach that privileges substance over form: the definition of Common Equity Tier 1 will not be restricted to ordinary shares, as there is no harmonised EU-wide definition that could be relied upon. Instead, the legislation will require that only instruments that are in line with all the principles defined by the Basel Committee will qualify. In order for this to ensure a strict control on the quality of these instruments, strong mechanisms should be put in place to make sure that there is no room for watering down the requirements. The “substance” needs to be checked and has to be the same across the Single Market. From my perspective, the list that the EBA will keep should be legally binding. There should be an in-depth scrutiny of the instruments conducted at the EU level by the EBA, in cooperation with national supervisors, to confirm the inclusion in the list. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 16 If an instrument is included in the list, it should be accepted throughout the Single Market. If it is not included in the list, no authority should have the possibility to consider it eligible as CET1. The present text limits the role of the EBA to the publication of an aggregated list only based on the assessment done at national level. This would not bring any added value compared to a situation where Member States would be required to publish by themselves a list of instruments recognised in their jurisdictions. On the contrary, this could be misleading, as it could convey the impression that the instruments have received an EU-wide recognition. In any case, even if the legislative framework does not provide the EBA with the necessary legal tools, we are committed to fully exploiting the draft Regulation’s provisions that require the EBA to monitor the quality of own funds across the Single Market and to notify the Commission in case of evidence of material deterioration in the quality of those instruments. If we consider that some instruments that are not of sufficient quality have been accepted, we also have the possibility to open formal procedures for breach of European law. Having strong enforcement tools is essential: supervisors have lost control of the definition of capital once and we should not allow this to happen again. We are acutely aware that the new rules will trigger a new wave of financial innovation, aimed at limiting the restrictive impact of the reform. Indeed, this is already under way. We already hear that new ways are being devised to smooth the impact of permanent write-downs or to circumvent the prohibition of dividend stoppers for hybrid instruments. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 17 Our monitoring of capital issuances is ongoing. The EBA recently decided to develop a set of benchmarks for hybrid instruments to give more clarity on what are the terms and conditions – in terms of permanence, flexibility of payments, loss absorbency – that make an instrument compliant with applicable rules. The work in this area will begin when the final legislation is in place and a sufficient number of new issuances are available, in order to have a meaningful sample of instruments to assess. In the future, hopefully, this work could move a step further, towards providing common templates, which could lead to the harmonisation of the main contractual provisions of hybrid capital instruments, in line with the objectives of a Single Rulebook. A concrete illustration of these common templates has already been given by the EBA when publishing a common term sheet for the convertible instruments accepted for the purpose of the recapitalisation exercise.

3.2. Liquidity
The new liquidity standards represent a second important area of work for the EBA. The first deliverable is due at the end of 2012, when we will have to provide for uniform reporting formats. The framework is currently under development and is expected to be released for public consultation over the summer. However, we can already foresee that the reporting is likely to be fairly similar to that used by the Basel Committee for the quantitative impact study, which many European banks are already familiar with. But the most important and delicate area of work is the definition of liquid assets and, more generally, the calibration of the new requirements. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 18 We are aware that the banking industry has raised serious concerns on the two liquidity standards defined by the Basel Committee, the liquidity coverage ratio (LCR) and the net stable funding ratio (NSFR). The Basel Committee itself is reviewing the calibration of the ratios, recognising that some underlying assumptions are excessively conservative, even if confronted with the toughest moments of the financial crisis. The key principles underlying the LCR and the NSFR are sound and cannot be given up by regulators: banks need to have sufficient buffers of liquid assets to withstand a shock for some time without the need for public support; maturity transformation needs to be constrained to some extent, so as to prevent banks from adopting fragile business models relying excessively on volatile, short term wholesale funding to support longer term lending. But it is essential to get the calibration right, as funding is and will increasingly be the main driver of the deleveraging process at EU banks. Time is needed to do a proper job: we have to ensure that data of adequate quality is available – hence the need for a uniform reporting provided at the end of 2012 – and to allow for in-depth analyses. The first impact assessments on LCR and the NSFR are due in 2013 and 2015 respectively. The EU has taken the decision to use the monitoring period until 2015 for the LCR and 2018 for the NSFR, before proposing legislation for a final calibration of the liquidity ratios. This monitoring phase exactly mirrors the Basel Committee’s timeline. It is in my view the right choice to allow for this extensive observation period. I would strongly argue that we should avoid making any policy choice before proper evidence on the potential impact of the two ratios. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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Conclusions
Ladies and gentlemen, Today I tried to convey to you a bird’s eye picture on the difficult challenges the EBA is facing. In the first year of activity we have already done a huge effort to strengthen the capital position of EU banks and to restore confidence in their resilience. The work is not over in this area. The liquidity support provided by the ECB avoided an abrupt deleveraging process, but banks are still in the process of repairing and downsizing their balance sheets and of refocusing their core business. We, as supervisors, need to accompany this process and do our utmost to ensure that it occurs in an ordered fashion, without adverse consequences on the financing of the real economy. One way to support the process is the introduction of the reforms on capital and liquidity standards endorsed by the G20. I strongly believe that we need to exploit this opportunity to move to a truly harmonised regulatory framework, a Single Rulebook that ensures that high quality standards are enforced throughout the Single Market. We have to be particularly rigorous on the definition of capital, as this is the basis for most prudential requirements. We cannot afford anymore financial innovation that allows instruments to be accepted as capital, while not respecting the key principles of permanence, flexibility of payments and loss absorbency. The control on eligible capital instruments needs to be very strict and should be performed at the EU level. Ideally, the co-legislators should give the EBA the legal basis to perform this difficult task. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 20 But in any case we will conduct a close monitoring of capital issuances, as we consider our duty to ensure that only the instruments of the best quality are accepted as regulatory capital. As to liquidity standards, I believe that while the principles embodied in the Basel text are absolutely shared, we need to do more work on the calibration of the requirements. We understand the concerns expressed by the industry, but it is important that we collect solid empirical evidence before taking any decision in this delicate area, which will provide a major driver for the needed changes in banks’ business models. Thank you for your attention.

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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FSA confirms traded life policy investments should not generally be promoted to UK investors
25 Apr 2012 The Financial Services Authority (FSA) has confirmed guidance that traded life policy investments (TLPIs) are high risk products that should not be promoted to the vast majority of retail investors in the UK. The guidance is an interim measure – the FSA will shortly be consulting on new rules imposing significant restrictions on the promotion of non-mainstream investments, including TLPIs, to retail investors. TLPIs invest in life insurance policies, typically of US citizens. Investors hope to benefit by buying the right to the insurance payouts upon the death of the original policyholder. Basically, a TLPI investor is betting on when a particular set of US citizens will die and, if these people live longer than anticipated, the investment may not function as expected. The FSA has found evidence of significant problems with the way in which TLPIs are designed, marketed and sold to UK retail investors. Many of these products have failed, causing loss for UK retail investors. Many TLPIs take the form of unregulated collective investment schemes, which cannot lawfully be promoted to retail investors in most cases, but have often been marketed inappropriately to retail customers. Peter Smith, the FSA’s head of investment policy said: _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 22 “The TLPI retail market is worth £1 billion in the UK and we were very concerned that it was likely to grow even more. At the time that we published our guidance over half of existing retail investments were in financial difficulty – even so, we were hearing about the development of new products intended to be sold to UK retail customers. “The threat to new customers was significant and growing: the potential for substantial future detriment was clear. There was a concern that we were witnessing a repeating cycle of unsuitable sales followed by significant customer detriment in the TLPI market. Following publication of the guidance for consultation, this threat has receded. “This is an interim measure – we believe that TLPIs and all unregulated collective investment schemes should not generally be marketed to retail investors in the UK and will be publishing proposals soon to prevent them being promoted except in rare circumstances.”

Traded Life Policy Investments (TLPIs), Key risks associated with TLPIs Longevity risk
An accurate estimation of life expectancy is the most important factor in assessing the price of each underlying life insurance policy in a TLPI. Based on this, the primary risk is that the underlying policies’ lives assured live longer than expected (for example, because of medical advances and the incompatibility of life assurance actuarial models as the basis for investment purposes) so the TLPI needs to continue to fund premiums on the policies for longer than expected. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 23 This could negatively affect the return on investment and liquidity on an ongoing basis.

Liquidity risk
The underlying investments are illiquid due to their specialised nature and there is only a limited secondary market for them. This may mean they are sold at a significantly reduced value if the TLPI needs to raise funds at short notice, which has an impact on the value of the portfolio. Investors may therefore suffer financial loss at the point of redemption.

Parties involved in the TLPI may become insolvent
This risk factor, though not unique to TLPIs, is often overlooked. For example, if an insurance company becomes insolvent and is unable to meet claims upon the deaths of the original policyholders the TLPI could find itself in difficulties given the often large value of the policies it holds.

Governance issues
TLPI product governance has often proven problematic and led to product difficulties. Some common issues are as follows:

Conflicts of interest
Conflicts exist among different participants in the product value chain that lead to high fees being charged and may lead to detriment for investors.

TLPI models/structure
_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 24 In some models, yields are promised to previous investors, which can only be sustained by using new investors’ money, so the model in effect ‘borrows’ from itself.

The underlying assets are located offshore
This means there is an exchange rate risk, both in terms of the costs of meeting ongoing premiums and the final payout for the underlying insurance contracts. Currency hedging instruments may be used by TLPI providers, but these may pose additional risks and involve extra costs.

Many TLPIs sold in the UK are operated by firms based offshore
This means investors may have limited or no recourse to the Financial Services Compensation Scheme (FSCS) if things go wrong and the product fails. They may also not be covered by the Financial Ombudsman Service (FOS) if they have a complaint about the operation of the TLPI. Customers would be able to complain to the FOS if, for example, the advice they have received from UK distributors was unsuitable or if a promotion from a UK provider or distributor was unfair, unclear or misleading.

Awareness of authorisation/compensation arrangements
Many TLPIs are operated by firms based abroad and outside of the FSA’s jurisdiction. There is evidence that providers and advisers have not fully understood or conveyed to investors the risks involved in how or whether the client’s product will be authorised and what compensation arrangements apply. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 25 These factors could result in a significant risk of loss of capital (and any income provided) for customers.

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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Federal Deposit Insurance Corporation U. S. Small Business Administration
April 24, 2012

FDIC and SBA Team Up to Offer Financial Education Support for New and Aspiring Entrepreneurs
The Federal Deposit Insurance Corporation (FDIC) and U.S. Small Business Administration (SBA) announced new resources to support small businesses. FDIC Director for Depositor and Consumer Protection Mark Pearce and SBA’s Deputy Associate Administrator for Entrepreneurial Development Michael Chodos released Money Smart for Small Business, a training curriculum for new and aspiring business owners. Developed in partnership between both agencies, this curriculum is the latest offering in the FDIC’s 10 year old award-winning Money Smart program. Money Smart for Small Business provides an introduction to day-to-day business organization and planning and is written for entrepreneurs with limited or no prior formal business training. It offers practical information that can be applied immediately, while also preparing participants for more advanced training. The curriculum is designed to be delivered to new and aspiring business owners by financial institutions, small business development centers (SBDCs), among others. Director Pearce and SBA Associate Administrator Chodos were joined by Training Alliance partners at the launch of Money Smart for Small _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 27 Business, hosted by the District of Columbia’s Affinity Lab, a small business incubator. “We are proud to launch Money Smart for Small Business,” said Acting Chairman Gruenberg. “Since 2001, Money Smart has helped individuals build a secure financial future for themselves. I am very pleased that small businesses, which play a vital role in supporting our national economy, will now have access to this resource. The FDIC looks forward to working with the SBA and the Money Smart Alliance, to promote financial literacy among small business owners.” “We are excited to join the FDIC in its expansion of the Money Smart curriculum for small business,” said SBA Administrator Karen Mills. “The FDIC is a vital ally in our efforts to help small business owners start, grow and create jobs. Money Smart for Small Business will help to put more information on the business basics of financial management at entrepreneurs’ fingertips and make it easier for them to build their knowledge and skill set.” Each of the ten instructor-led modules in Money Smart for Small Business provides financial and business management for business owners and includes a scripted instructor guide, participant guide and overhead slides. Organizations that use the curriculum to support small businesses through training, technical assistance or mentoring are invited to join the FDIC and SBA’s Training Alliance. The FDIC will host an online “town hall” for potential Training Alliance partners in the months ahead. More than ten years after the original release of the award winning Money Smart adult curriculum, Money Smart for Small _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 28 Business builds on the proven results in financial management for those who complete the curriculum.

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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FSA Japan - Press Conference by Shozaburo Jimi, Minister for Financial Services (Excerpt) [Opening Remarks by Minister Jimi]
This morning, the Minister of Economic and Fiscal Policy, the Minister of Economy, Trade and Industry and the Minister for Financial Services held a meeting, and I will make a statement regarding the policy package for management support for small and medium-size enterprises (SMEs) based on the final extension of the SME Financing Facilitation Act. Recently, the Diet passed and enacted an amendment bill to extend the period of the SME Financing Facilitation Act for one year for the last time and an amendment bill to extend the deadline for the determination of support by the Enterprise Turnaround Initiative Corporation of Japan, over which Minister of Economic and Fiscal Policy Furukawa has jurisdiction, for one year, and the new laws were promulgated and put into force.

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 30 I believe that this year will be very important for creating an environment for vigorously implementing support that truly improves the management of SMEs, namely an exit strategy. From this perspective, the ministers who represent the Cabinet Office, the Financial Services Agency (FSA) and the Small and Medium Enterprise Agency held a meeting and adopted the policy for management support for SMEs. The FSA will seek to facilitate financing for SMEs through measures related to the final extension of the period of the SME Financing Facilitation Act, including this policy package, and will also create an environment favorable for management support for SMEs while maintaining cooperation with relevant ministries and agencies. For details, the FSA staff will later hold a press briefing, so please ask your questions then.

[Questions & Answers] Q. The G-20 meeting started on April 19.
I hear that the expansion of the International Monetary Fund's lending facility, which has been the focus of attention, may be put off, and the market could fall into turmoil again, with the yield on Spanish government bonds rising in Europe. Could you tell me how you view the recent financial market developments?

A. As for the current situation surrounding the European debt problem

that you mentioned now, individual countries' financial and capital markets have generally been recovering for the past several months as a result of efforts made by euro-zone countries and the European Central Bank, as you know.

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 31 On the other hand, concern over the European fiscal problem has not been dispelled, as indicated by unstable market movements caused by concern over Spain's fiscal condition. The euro zone has set forth the path to fiscal consolidation and President Draghi of the European Central Bank (ECB) has taken bold measures, as you know well. Such measures as the ECB's long-term refinancing operation and the strengthening of the firewall have been taken. To ensure that the market will be stabilized and the European debt problem will come to an end, it is important not only that the series of measures adopted by the euro zone is carried out but also that the IMF's financial base is strengthened. From this perspective, Minister of Finance Azumi recently expressed an intention to announce Japanese financial support worth 60 billion dollars for the IMF at the G-20 meeting. I hope that this Japanese action, combined with Europe's own efforts, will help to resolve the European debt problem. As you know, it is unusual for Japan to exercise initiative and announce support for the IMF. Although Japan has various domestic problems, it is the world's third-largest country in terms of GDP. In addition, as I have sometimes mentioned, Japan is the only Asian country that has maintained a liberal economy and a free market since the latter half of the 19th century. Even though Japan lost 65% of its wealth because of World War II, it went on to recover from the loss.

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P a g e | 32 In that sense, it is very important for Japan to exercise initiative, on which the United States eventually showed an understanding from what I have heard informally.

Q. It has been decided that Kazuhiko Shimokobe of the Nuclear Damage
Liability Facility Fund will be appointed as Tokyo Electric Power Company's new chairman.

Tokyo Electric Power's management problem has had some effects on the corporate bond market and also has affecteds SMEs through a hike in electricity rates. What do you think of this appointment?

A. I am aware that Mr. Shimokobe, who is chairman of the Nuclear

Damage Liability Facility Fund's management committee, has accepted the request to serve as Tokyo Electric Power's chairman, but the FSA would like to refrain from commenting on personnel affairs. Formerly, I, together with Mr. Yosano, joined the cabinet task force, which was responsible for determining the scheme for rehabilitating Tokyo Electric Power, in response to the economic damage caused by the nuclear station accident, as additional members, and our efforts led to the enactment of the Act on the Nuclear Damage Liability Facility Fund. I understand that Tokyo Electric Power and the Nuclear Damage Liability Facility Fund are drawing up a comprehensive special business plan. What kind of support Tokyo Electric Power will ask stakeholders to provide and how stakeholders including financial institutions will respond are matters to be discussed at the private-sector level, as I have been saying, so the FSA would like to refrain from making comments for the moment. In any case, regarding Tokyo Electric Power's damage compensation, making damage compensation payments quickly and appropriately and ensuring stable electricity supply are important duties that electric power companies must fulfill. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 33 Therefore, with the fulfillment of those duties as the underlying premise, it is important to prevent unnecessary, unpredictable adverse effects - you mentioned the effects on the corporate bond market earlier - so I will continue to carefully monitor market developments.

Q. On April 19, the Democratic Party of Japan's working team on the

examination of the future status of pension asset management and the AIJ problem adopted an interim report. Could you tell me about the status of the FSA's deliberation on measures to prevent the recurrence of the problem, including when the measures will be worked out?

A. I read about that in a newspaper article.
Regarding problems identified in this case, it is necessary to ensure the effectiveness of countermeasures while taking account of practical financial practices. That report is an interim one, so it stated that various measures will be worked out in the future. I have my own thoughts as the person in charge of the FSA. However, I think that the FSA needs to conduct a study on measures such as strengthening punishment against false reporting and fraudulent solicitation - as you know, false reports were made in this case establishing a mechanism that ensures effective checks by third-parties like companies entrusted with funds, auditing firms and trust banks - the checking function did not work at all in this case - and including in investment reports additional information useful for pension fund associations to judge the reliability of companies managing customers' assets under discretionary investment contracts and the investment performance. In any case, regarding measures to prevent the recurrence of this case, we will quickly conduct deliberation while taking into consideration the results of the Securities and Exchange Surveillance Commission's _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 34 additional investigation and the survey on all companies managing customers' assets under discretionary investment contracts - the second-round survey is underway - as well as the various opinions expressed in the Diet, including the arguments made in the interim report, which was written under Ms. Renho's leadership. We will implement measures one by one after each has been finalized.

Q. Regarding the policy package announced today, several people said in
the Diet that more efforts should be devoted to measures to support SMEs in relation to the extension of the period of support by the Enterprise Turnaround Initiative Corporation of Japan.

In relation to the policy package, do you see any problems with the collaboration that has so far been made with regard to management support for SMEs?

A. Twenty-two years ago, in 1990, I became parliamentary secretary for
international trade and industry, and served in the No. 2 post of the former Ministry of International Trade and Industry for one year and three months under then Minister of International Trade and Industry Eiichi Nakao. At that time, I was in charge of financing for SMEs, such as financing provided by Shoko Chukin Bank, the Japan Finance Corporation for Small and Medium Enterprise, the National Life Finance Corporation and the Small Business Corporation, for one year and three months. Many departments and divisions are involved in the affairs of SMEs. While diversity and nimbleness are important for SMEs, I know from my experiences that they lack human resources and that unlike large companies, it is difficult for them to change business policies quickly in response to tax system changes. The FSA will continue to cooperate with relevant ministries and agencies and relevant organizations, such as the Enterprise Turnaround Initiative _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 35 Corporation of Japan, liaison councils on support for the rehabilitation of SMEs, financial institutions and related organizations, including the Japanese Bankers Association, and commerce and industry groups - there are four traditional associations of SMEs - as well as prefectural credit guarantee associations, which play an important role for the government's policy for SMEs. In addition, the FSA will cooperate with government-affiliated financial institutions and take concrete actions, and I hope that recovery and revitalization of local economies based on the rehabilitation of regional SMEs will lead to the development of the Japanese economy. However, between the three ministers who held a meeting today, the policy toward SMEs tends to lack coordination. In Tokyo, Minister of Economy, Trade and Industry Edano and Minister of Economic and Fiscal Policy Furukawa and I worked together to adopt the policy package. In Japan's 47 prefectures, there are liaison councils on support for rehabilitation of SMEs and there are commerce and industry departments in prefectural and municipal governments, and these organizations will also be involved, so the policy for SMEs is wide-ranging and involves various organizations. Therefore, while we provide management support, these various organizations tend to act without coordination. Today, the three of us held a meeting to exercise central government control, and we will keep close watch on minute details so as to ensure coordination. As I have often mentioned, there are 4.3 million SMEs, which account for 99.7% of all Japanese corporations in Japan, and 28 million people, which translates into one in four Japanese people, are employed by SMEs, so SMEs have large influence on employment. We will maintain close cooperation with relevant organizations. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 36

Q. In relation to the previous question, I understand that the Enterprise
Turnaround Initiative Corporation of Japan has mostly handled cases involving SMEs.

At a board meeting yesterday, it was decided that a former official of a regional bank will be appointed to head the corporation. How do you feel about that?

A. I read a newspaper article about the decision to appoint a former
president of Toho Bank. Toho Bank is the largest regional bank in Fukushima Prefecture, and personally, I am pleased that a very suitable person will be appointed as a new president. Fukushima Prefecture has been stressing that the revival of Japan would be impossible without the revival of Fukushima in relation to the nuclear station accident. In that sense, the selection of the former president of Toho Bank, a fairly large regional bank, who also served as chairman of the Regional Banks Association of Japan, is appropriate. This morning, Minister of Economic and Fiscal Policy Furukawa reported on the selection. I think that a very suitable person has been selected.

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 37

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 38

Securities Lending and Repos: Market Overview and Financial Stability Issues, Interim Report of the FSB Workstream on Securities Lending and Repos, 27 April 2012 Introduction
At the Cannes Summit in November 2011, the G20 Leaders agreed to strengthen the regulation and oversight of the shadow banking system, and endorsed the Financial Stability Board (FSB)’s initial recommendations with a work plan to further develop them in the course of 2012. Five workstreams have been launched under the FSB to develop policy recommendations to strengthen regulation of the shadow banking system, including securities lending and repos (repurchase agreements). The FSB Workstream on Securities Lending and Repos (WS5) under the FSB Shadow Banking Task Force is developing policy recommendations, where necessary, by the end of 2012 to strengthen regulation of securities lending and repos. In order to inform its decision on proposed policy recommendations, the Workstream has reviewed current market practices through discussions with market participants, and existing regulatory frameworks through a survey of regulatory authorities. The Workstream has identified a number of issues that might pose risks to financial stability. These financial stability issues will form the basis for the next stage of its work in developing appropriate policy measures to address risks where necessary. This report documents the Workstream’s progress so far. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 39 Sections 1 and 2 provide an overview of securities lending and repos markets globally, including the main drivers of the markets. Section 3 places securities lending and repo markets in the wider context of the shadow banking system. Section 4 provides an overview of existing regulatory frameworks for securities lending and repos, and section 5 lists a number of financial stability issues posed by these markets. Additional detailed information on the market segments and a survey of relevant literature survey can be found in the annexes.

1. Market Overview: Four market segments
The securities financing markets can be divided into four main, inter-linked segments: (i) a securities lending segment; (ii) a leveraged investment fund financing and securities borrowing segment; (iii) an inter-dealer repo segment; and (iv) a repo financing segment, as described below. The securities lending segment (Exhibit 1) comprises lending of securities by institutional investors (e.g. insurance companies, pension funds, investment funds) to banks and broker-dealers against the collateral of cash (typical in the US and Japanese markets, and comprising a minority share of the European market) or securities. According to one industry estimate, the total securities on loan globally, as of April 2012, are estimated to be about US$1.8 trillion. In general, borrowers may borrow specific securities for covering short positions in their own activities – for example arising from market making activities – or those of their customers; or for use as collateral in repo financing and other transactions. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 40 Lenders (or beneficial owners) may reinvest cash collateral through separate accounts or commingled funds managed by their agent lender or a third party investment manager. Cash collateral is also reinvested through the repo financing segment described later

The leveraged investment fund financing and securities borrowing segment (Exhibit 2) comprises financing of leveraged investment funds’ long positions by banks and broker-dealers using both reverse repo and margin lending secured against assets held with prime brokers, as well as securities lending to hedge funds by prime brokers to cover short positions. This segment is closely linked to the securities lending segment, which is used by prime brokers to borrow securities to on-lend to hedge funds. The cash proceeds of short sales by hedge funds, in turn, may be used by prime brokers as cash collateral for securities borrowing. Hedge funds may give prime brokers permission to re-hypothecate assets, usually up to a proportion of their current net indebtedness to the prime broker (e.g. 140% in the US). _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 41 Re-hypothecated assets may then be given as collateral to borrow cash or securities by prime brokers in the repo financing or securities borrowing segments.

The inter-dealer repo segment (Exhibit 3) comprises primarily government bond repo transactions amongst banks and broker-dealers. These may be used to finance long positions via general collateral (GC) repos (primarily against government securities), or to borrow specific securities via special repos. In the US, Europe and Japan, the inter-dealer repo segment is typically cleared by central counterparties (CCPs). Transactions are predominantly at an overnight maturity. Total repos and reverse repos outstanding (including both the inter-dealer repo segment and the repo financing segment) are estimated around US$2.1-2.6 trillion in the US, US$8 trillion in Europe, and US$2.4 trillion in Japan

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 42

The repo financing segment (Exhibit 4) comprises repo transactions primarily by banks and broker-dealers to borrow cash from “cash-rich” entities, including central banks, retail banks, money market funds (MMFs), securities lenders and increasingly non-financial corporations. As described in the next section, the drivers of this market segment are primarily the short-term financing needs of banks and broker-dealers, as well as the desire of institutional cash managers to hold collateralised, “money-like” investments. Increasingly in the US and Europe, collateral movements and valuation are outsourced to tri-party agents (the so-called “tri-party repo”). Collateral includes government bonds, corporate bonds, structured products, money market instruments and equities. The share of asset-backed securities (ABSs) used as repo collateral has declined sharply since the crisis. Transactions are predominantly short-term but the European market also includes a growing, longer-term element.

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 43

The above 4 market segments can be combined to form a complex network of securities lending and repos as shown in Exhibit 5.

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 44

2. Five key drivers of the securities lending and repo markets
The Workstream has identified the following five key drivers of the securities lending and repo markets that contribute to better understanding of the characteristics and developments of the four market segments described in section 1. These drivers are not ranked in order of importance and may overlap.

2.1 Demand for repo as a near-substitute for central bank and insured bank deposit money
The first key driver, particularly for the repo financing segment, is demand by certain risk-averse institutions for “money-like” instruments to support their primary investment objectives of preserving principal and liquidity. Such institutions may not have access to central bank reserves; may be ineligible for deposit insurance or have cash holdings that exceed deposit insurance limits; and/or find that Treasury bill markets do not have an adequate supply or depth, or do not match their maturity requirements. These repo investors include: (i) MMFs; (ii) entities seeking to reinvest cash collateral from securities lending activities; (iii) official reserves managers; (iv) commercial banks that are required to hold a regulatory liquidity buffer; (v) pension funds, investment funds and insurance companies; (vi) non-financial corporations; _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 45

(vii) other specialist entities, e.g. CCPs and the US Federal Home Loans Banks; (viii) structured finance (e.g. securitisation) vehicles. A key attribute of repo is that it allows banks, broker-dealers and other intermediaries to create “collateralised” short-term liabilities provided they can access underlying collateral securities meeting the credit and regulatory requirements of the cash lenders. The institutional demand for money-like assets has grown significantly over the last twenty years. Pozsar (2011) estimates that the total size of MMFs, cash collateral reinvestment programmes and corporate cash holdings in the US rose from $100 billion in 1990 to a peak of over $2.2 trillion in 2007 and stood at $1.9 trillion in Q4 2010.

2.2 Securities-based financing needs
The second key driver is the financing needs of leveraged intermediaries. Regulated banks and broker-dealers dominate, using these markets both as part of their wider wholesale funding and more particularly for securities dealing. But some unregulated non-bank intermediaries, such as ABCP conduits and CDOs, did make use of repo financing alongside other sources of money market funding such as ABCP issuance before the crisis as part of the shadow banking system. For most large global banks, the inter-dealer repo market has almost replaced unsecured money markets as the marginal source and use of overnight funds. In particular, repo financing markets have become an increasingly important source of borrowing at maturities from overnight to twelve months or even longer. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 46 With access to liquid repo and securities lending markets, broker-dealers can: (i) quote continuous two-way prices in the cash market (i.e. market-making) in a reasonable size without carrying inventory in every security; (ii) prevent a chain of settlement delivery failures from developing; (iii) finance long positions and cover short positions more effectively; and (iv) hedge against their credit or market risk exposures arising from other activities, e.g. government auctions, corporate bond underwriting, and trading in cash instruments and derivatives. Liquid securities financing markets are therefore critical to the functioning of underlying cash, bond, securitisation and derivatives markets. For instance, before the crisis, the acceptability of senior tranches of ABSs as repo collateral contributed significantly to the growth of the securitisation leg of the shadow banking system.

2.3 Leveraged investment fund financing and short-covering needs
The third key driver, primarily of the leveraged investment fund financing and securities borrowing market segment, is facilitation of hedge fund and other investment strategies involving leverage and short selling. Some hedge funds are insufficiently creditworthy to borrow cash unsecured or to borrow securities directly from institutional investors. They therefore rely on prime brokers for financing as well as to locate and borrow the securities they want to sell short. By pooling the supply of lendable securities in the market, prime brokers can also provide hedge funds with stable securities loans allowing them to maintain short positions while providing securities lenders with the _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 47 liquidity to recall securities loans if they wish: for example, in order to sell the underlying holdings (securities on loan) or exercise shareholder voting rights. Short-sale proceeds may be used by hedge funds as cash collateral against borrowed securities. That cash is in turn used by prime brokers to collateralise securities borrowing from securities lenders that reinvest the cash in the separate accounts or commingled funds (e.g., registered MMFs or unregistered cash reinvestment funds), which vehicles may invest in repo. In this way, short selling may have the effect of temporarily re-directing cash intended for investment in equity or bond markets into the money markets, creating additional demand for wholesale “money-like” assets (the first driver described above). In addition, market participants told the Workstream that some pension funds use repos to finance part of their bond holdings. This is notably the case of funds running liability-driven investment (LDI) strategies, with one such strategy consisting of repo-ing out holdings of high-quality long-term assets, usually for term, to raise cash for liquidity management or return enhancement purposes, and by doing so to achieve some degree of leverage.

2.4 Demand for associated “collateral mining” from banks and broker-dealers
The fourth driver of the markets is the increasing need for banks and broker-dealers to gain access to securities for the purpose of optimising the collateralisation of repos, securities loans and derivatives. As mentioned earlier, the creation of money-like repo liabilities requires collateral, and therefore the borrowing capacity of banks and broker-dealers depends on the total amount of non-cash collateral available to them. “Collateral mining” refers to the practice whereby banks and broker-dealers obtain and exchange securities in order to collateralise their other activities. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 48

Increasingly, banks and broker-dealers are seeking to centralise collateral management in order to use collateral in the most efficient and cost-effective way across the firm’s activities. That may include: (i) Ensuring that repo, securities lending and derivatives counterparties are delivered the cheapest collateral acceptable to them, for example, by using tri-party services; (ii) Using the securities lending and collateral swap markets to upgrade lower quality collateral into higher quality collateral that is more acceptable to other counterparties, for example, in the repo financing markets or at CCPs, or which is eligible for regulatory liquidity requirements; (iii) Re-using collateral delivered by other counterparties in repo, securities lending or OTC derivatives transactions; (iv) Taking advantage of opportunities to re-hypothecate client assets from prime brokerage activities; and (v) Taking advantage of the option to deliver from a range of eligible collateral in bilateral agreements (e.g. credit support annexes supporting ISDA derivatives agreements) in order to deliver collateral securities at the lowest cost to the firm, which is typically the securities with the lowest credit quality or highest yielding.

2.5 Demand for return enhancement by securities lenders and agent lenders
The fifth driver, particularly of the securities lending market segment, is seeking of additional returns by institutional investors, such as pension funds, insurance companies, and investment funds.

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 49 Most lend out securities in order to generate additional income on their portfolio holdings at minimal risk, to help offset the cost of maintaining the portfolio, or to generate incremental returns. Agent lenders may take a share of their clients’ lending income (net of borrower rebates paid out) arising from lending fees or cash collateral reinvestment. In general, the loan fees paid by borrowers to the lenders represent what borrowers are prepared to pay for “renting” ownership/use of particular securities, for example, in order to create a short position. Some securities lenders, however, also treat lending against cash collateral as a source of financing for leveraged investment in search of additional returns, making market activity “supply-led”. For example, government bonds can usually be lent to raise cash collateral, which can be reinvested with proceeds split between the securities lender and its agent, net of the fixed "rebate" percentage paid to the party borrowing the securities and posting cash. Securities lenders may thereby run a cash reinvestment business through which they seek higher returns by taking credit and liquidity risk. One major asset manager also told the Workstream that it intended to use securities lending as a means of raising cash collateral for treasury purposes, in particular, to collateralise OTC derivative positions where bank counterparties are no longer willing to take uncollateralised counterparty risk following regulatory changes.

3. Location within the shadow banking system
It is important to note that banks play important roles in these markets and many of the policy issues concern their use of collateral. Arguably, our main focus from a shadow banking perspective should be on four areas: (i) Borrowing through repo financing markets, including against securitised collateral, which creates leverage and facilitates maturity and liquidity transformation. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 50 Repo allows banks as well as non-banks – such as securities broker-dealers, pension funds, and (to a greater extent before the crisis) conduits and investment vehicles – to create short-term, collateralised liabilities. Because repo financing is typically short-term but collateralised with longer-maturity assets, it often has embedded risks associated with maturity transformation. It can also involve liquidity transformation depending on the type of securities used as repo collateral. (ii) The extent to which leveraged investment fund financing leads to maturity transformation and leverage; (iii) The chain of transactions through which the cash proceeds from short sales are used to collateralise securities borrowing and then reinvested by securities lenders, into longer-term assets, including repo financing. This activity can mutate from conservative reinvestment of cash in “safe” collateral into more risky reinvestment of cash collateral in search of greater investment returns (prior to the crisis, AIG was an extreme example of such behaviour). (iv) Collateral swaps (also known as collateral downgrades/upgrades) involving lending of high-quality securities (e.g. government bonds) against the collateral of lower- quality securities (e.g. equities, ABSs), often at longer maturities and with wide collateral haircuts. Banks then use the borrowed securities to obtain repo financing, which can further lengthen transaction chains, or hold them to meet regulatory liquidity requirements.

4. Overview of regulations for securities lending and repos

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 51 The major participants in securities lending and repo markets are generally regulated institutions. By comparison with “financial market intermediaries” such as banks and broker-dealers (securities firms), regulations and activity restrictions on lenders such as investment firms, pension funds and insurance companies vary considerably by jurisdiction and type of entity. In general, these regulations are focused more on investor/policyholder protection than financial stability considerations. As for the channels for disclosure (transparency) related to securities lending and repo activities, they are not significantly different from the general requirements for public disclosures through financial reporting and regulatory reporting. The FSB Workstream on Securities Lending and Repos (WS5), in cooperation with the IOSCO Standing Committee on Risk and Research (SCRR), conducted a survey exercise in autumn 2011 to map the current regulatory frameworks in member jurisdictions. This section provides a high-level summary of the results of the regulatory mapping exercise based on the survey responses from 12 jurisdictions (Australia, Brazil, Canada, France, Germany, Japan, Mexico, the Netherlands, Switzerland, Turkey, UK and US), the European Commission, and the European Central Bank (ECB).

4.1 Requirements for financial intermediaries: banks and broker-dealers
Risk exposures (including counterparty credit risk) arising from securities lending and repo transactions are typically taken into account in the regulatory capital regimes for banks and broker-dealers. Under the Basel capital regime, for example, banks are required to hold capital against any counterparty exposures net of the collateral received on the repo or securities loan, together with an add-on for potential future exposure.

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 52 But netting of the collateral is only permitted if the legal agreement is enforceable under applicable laws. Capital requirements must also continue to be held against lent or repo-ed securities. In addition, banks and securities broker-dealers are subject to other requirements that are designed to enhance investor protection and improve risk management. Unlike regulatory capital requirements that apply consistently across jurisdictions (e.g. Basel III for banks), there is diversity in the tools and the details each jurisdiction has adopted for risks that need to be addressed. For example, a number of jurisdictions have established regulations for the use (re-hypothecation) of customer assets by banks and broker-dealers but the details differ: In Australia and the UK, a bank or broker-dealer is permitted to re-hypothecate (i.e. use for its own account) customer assets transferred for the purpose of securing the client’s obligations where permitted under the terms of the relevant legal agreement (e.g. a prime brokerage agreement with a hedge fund). Once the assets have been re-hypothecated, title transfers to the bank or broker-dealer, and the client’s proprietary interest in the securities is replaced with a contractual claim to redelivery of equivalent securities. In France, re-hypothecation is subject to several caps. The use of re-hypothecation is authorised in a specific framework for a maximum amount of 100% of the contracted loan (from the prime broker to the hedge fund) for ARIA funds and 140% for ARIA EL funds. There is no regulatory cap for contractual funds. In the US, re-hypothecation by a broker-dealer is subject to a 140% cap as proportion of client indebtedness. In the UK, no similar regulatory cap exists but re-hypothecation is only permitted where securities are transferred for the purpose of securing or _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 53 otherwise covering present or future, actual or contingent or prospective obligations. Under UK regulations, prime brokers are required to set out for the client a summary of the key provisions permitting re-hypothecation in the agreement, including the contractual limit (if any) and key risks to the client’s assets, and report to the client daily on the amount of re-hypothecated assets.

4.2 Requirements for investors: investment funds and insurance companies
For institutional investors (e.g. MMFs, other mutual funds, ETFs, pension funds, college endowments, and insurance companies) that act as “investors” in the securities lending and repo markets, risk exposures arising from their involvement in the markets tend to be regulated by the relevant regulatory requirements and/or activity restrictions designed to protect investors.

4.2.1 Counterparty credit risk
Counterparty credit risk arising from securities lending and repo transactions can be mitigated by restrictions on eligible counterparties (e.g. based on credit ratings or domicile) and counterparty concentration limits (e.g. percentage of total capital or net asset value). Some jurisdictions measure counterparty risk on a gross (no collateral benefit) basis; while others measure on a net basis (adjusted by collateral).

4.2.1.1 Restrictions on eligible counterparties
There is a divergence across jurisdictions in the entities that are eligible as counterparties for securities lending and repo transactions. In France, for MMF and UCITS, the eligible counterparties for securities lending transactions are limited to UCITS depositaries; credit institutions headquartered in an OECD country; and investment companies headquartered in an EU member state or in another state in the European _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 54 Economic Area (EEA) Agreement, with minimum capital funds of 3.8 million euros. In Mexico, for mutual funds and pension funds, their counterparties can only be banks and brokerage firms. In the UK, counterparties of regulated funds are generally restricted to European banks, investment firms and insurers, US banks and US broker-dealers. In the US, registered investment company (RIC) lenders are generally required to approve counterparties, and may not lend securities to affiliated counterparties except with express approval of the SEC.

4.2.1.2 Counterparty concentration limits
In addition to restriction on eligible counterparties, some jurisdictions set counterparty concentration limits to mitigate the impact of a large counterparty’s default. A number of jurisdictions measure counterparty risk on a gross (no collateral benefit) basis while others measure it on a net basis (adjusted for the value of the collateral). For example: In the EU, the UCITS Directive allows securities lending (securities borrowing is not allowed) by UCITS funds but limits net counterparty exposure of a fund (i.e. adjusted for collateral received) to 10% of NAV. The directive also includes a reference to repo and securities lending transactions in the context of calculating global exposure, requiring these to be taken into account when they are used to generate additional leverage or exposure to market risk. Future changes to the UCITS Directive are likely to include a range of issues relating to securities lending such as rules on collateralisation and gross limits. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 55 In the US, for MMFs, no counterparty can be greater than 5% of the fund’s total assets unless the repo is fully collateralised by cash or US government securities, in which case the MMF may look to the issuer of the collateral for the purposes of the 5% limit on exposure to a single issuer.

4.2.2 Liquidity risk
Restrictions on the term or maturity of securities loans and repos are used in a few jurisdictions to mitigate liquidity risk arising from securities lending and repo transactions for insurance companies (Australia, Brazil, Mexico, US) and MMFs (Brazil, Canada, Germany, Japan, Mexico, US). The maturity limits range from 30 days to around one year. The requirement to allow securities lending transactions to be terminable at will is relatively common.

4.2.3 Collateral guidelines
Some jurisdictions have introduced collateral guidelines that apply either generally or specifically to securities lending and repos. Such guidelines may include various regulatory tools such as: minimum margins and haircuts; eligibility criteria for collateral; restrictions on re-use of collateral and re-hypothecation; and restrictions on cash collateral reinvestment.

4.2.3.1 Minimum levels of margins and haircuts
A few jurisdictions have imposed minimum levels of haircuts/margins. For example: In Canada, haircut requirements for repos are applied to mutual funds and require collateral with a market value of at least 102% of cash delivered. In the UK, exposures of regulated funds arising from securities financing transactions must be 100% collateralised at all times. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 56 In the US, RICs must maintain at least 100% collateral at all times, regardless of the type of collateral received (but RICs may only accept as collateral cash, securities issued or guaranteed by the US government and its agencies, and eligible bank letters of credit).

4.2.3.2 Eligibility criteria on acceptable collateral (eligible collateral)
Some jurisdictions set criteria for eligible collateral for certain financial institutions to restrict assets acceptable as collateral so as to ensure the quality of collateral. Such criteria are usually based on credit ratings, currency-denomination, market liquidity, instrument types and correlation risk.

4.2.3.3 Restrictions on the re-use of collateral / re-hypothecation
Restrictions on re-use of collateral/re-hypothecation by investment funds and insurance companies have been imposed in a few jurisdictions. These usually take the form of simple ban on such activities, a quantitative cap (based on client indebtedness), or are based on considerations of ownership. For example, in France, pursuant to Article 411-82-1 of the AMF General Regulation28 non-cash collateral cannot be sold, re-invested or pledged.

4.2.3.4 Cash collateral reinvestment
Canada, Germany, the UK and the US have restrictions on cash collateral reinvestment for UCITS and RICs (including MMFs). These restrictions usually take the form of limits on the maturity or currency-denomination of the investments, or are based on asset liquidity considerations.

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P a g e | 57 In Canada, mutual funds can use cash received in a securities lending transaction to purchase qualified securities with a maturity no longer than 90 days, or purchase securities under a reverse repurchase agreement. During the term of a securities lending transaction, a mutual fund must hold all non-cash collateral delivered under the transaction, without reinvesting or disposing of it. For cash received under a repo transaction, the maximum term to maturity of securities in which the cash can be reinvested is 30 days. In Germany, for MMFs and UCITS, deposits may be (re)invested in money market instruments denominated in the respective currency of the deposits; or (re)invested in money market instruments by way of repurchase agreements. In the UK, regulations on UCITS restrict the types of cash collateral reinvestment to a certain set of financial instruments, and require that cash collateral reinvestment be consistent with the fund’s investment objectives and risk profile. In the US, for RICs (including MMFs), cash collateral reinvestment is generally limited to short-term investments which give maximum liquidity to pay back the borrower when the securities are returned.

4.2.4 Transparency (Disclosures)
Disclosure requirements for securities lending and repo activities are not significantly different from the general requirements for public disclosures and regulatory reporting, e.g. disclosure as appropriate in registration statements, financial statements, and other periodic SEC filings for US RICs, and reporting of outstanding positions for banks. One exception is in the case of US regulated insurers involved in securities lending program. They are required to file added disclosure regarding reinvested collateral by specific asset categories and stress testing. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 58 Such disclosures will highlight the duration mismatch and require a statement from the company on how they would deal with an unexpected liquidity demands.

5. Financial stability issues
Based on the results from the market practices survey and regulatory mapping exercise, the Workstream has preliminarily identified the following seven issues that could be considered from a financial stability perspective. These issues are not equally relevant to all market segments. For example, securities financing markets for high-quality government bonds tend to have higher levels of transparency and contribute less to procyclicality of system leverage.

5.1 Lack of transparency
Securities financing markets are complex, rapidly evolving and can be opaque for some market participants and policymakers. Market transparency may also be lacking due to the usually bilateral nature of securities financing transactions. It may be appropriate to consider, from a financial stability perspective, whether transparency could be improved at the following levels: (i) Macro-level market data - Prior to the crisis, some jurisdictions faced difficulties in assessing and monitoring the risks in certain aspects of those markets. Some data is available based on surveys carried out by the authorities or trade associations and from data vendors that collect information from intermediaries for commercial purposes. The lack of transparency is serious especially for bilateral transactions (i.e. not involving tri-party agents, who may publish aggregated data on the transactions they process, or agent lenders, who may report transactions to commercial data vendors) and synthetic transactions, where currently no market data is readily available and authorities have to rely on market intelligence. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 59 (ii) Micro-level market data (transaction data) – Since securities lending and repo are structured in a variety of ways, it can be difficult to understand the real risks individual market participants entail or pose to the system without detailed transaction-level information/data. This is especially so for bilateral transactions. (iii) Corporate disclosure by market participants – In most jurisdictions, cash-versus-securities transactions (e.g. repo, reverse repo, cash-collateralised securities loans) are usually reported on-balance sheet. However, (i) in some limited cases (e.g. repo to maturity or over-collateralised repos), repos can be off-balance sheet depending on the accounting standards used; and (ii) limited disclosure is provided in financial accounts of securities-versus-securities transactions (e.g. securities loans collateralised by other securities), that are typically “looked through” for the purposes of financial reporting. The ability of financial institutions to engage in off-balance sheet transactions without adequate disclosure may contribute to their risk-taking incentives and hence the fragility of the financial system. (iv) Risk reporting by intermediaries to their clients – Prior to the crisis, many prime brokers did not provide sufficient disclosure on re-hypothecation activities to their hedge fund clients. For example, following the collapse of Lehman Brothers International, many hedge funds unexpectedly became unsecured general creditors because they had not realised the extent to which it had been re-hypothecating client securities. In addition, some securities lenders, in particular some less sophisticated ones, have alleged that they were not adequately informed of the counterparty risk and cash collateral reinvestment risk of their securities lending programmes by the agent lenders.

5.2 Procyclicality of system leverage/interconnectedness
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P a g e | 60 Securities financing markets may allow financial institutions (including some non-banks) to obtain leverage in a way that is sensitive to the value of the collateral as well as their own perceived creditworthiness. As a result, these markets can influence the leverage and level of risk-taking within the financial system in a procyclical and potentially destabilising way. This procyclical behaviour of securities financing markets depends, in addition to changes in counterparty credit limits, on three underlying factors: (i) the value of collateral securities available and accepted by market participants; (ii) the haircuts applied on those collateral securities; and (iii) collateral velocity (the rate at which collateral is reused).

5.2.1 The value of collateral securities available and accepted by market participants
The value of collateral that repo counterparties and securities lenders are willing to accept as collateral will fluctuate over time with market values, market volatility and changes in credit ratings. Sudden shifts, however, have tended to follow unexpected common shocks to a large section of the collateral pool, such as the deterioration in the US housing market affecting ABS markets, and doubts about the creditworthiness of some European government issuers affecting government bond and repo markets. These can cause market participants to exclude entire classes of collateral from their transactions, creating a vicious circle as contraction in the securities financing markets damage underlying cash market liquidity, reducing the availability of reliable prices for collateral valuation. Changes in the market value of lent securities (e.g. equities) feed directly into changes in the value of cash collateral required against securities lending and then reinvested in the money market. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 61 This creates a procyclical link between securities market valuations and the availability of funding in the money markets. For example, the value of securities lending cash collateral reinvestment declined sharply in the autumn of 2008, as equity markets fell, according to data from the Risk Management Association (RMA).

5.2.2 Haircuts
Most securities financing transactions are subject to “haircuts” which may further contribute to procyclicality. The importance of changes in haircuts since the crisis seems to have varied across different market segments. Securities lenders and providers of short-term repo financing appear to have kept haircuts relatively stable and mainly adjusted counterparty limits and/or collateral eligibility restrictions. In the bilateral inter-dealer repo market against G7 government bond collateral, market practice often does not require haircuts and CCPs in those markets have also kept haircuts stable. But haircuts on lower quality assets (e.g. ABS) did increase sharply in the inter-dealer repo and leveraged investment fund financing segments. And in the European government bond market, CCPs increased haircuts significantly on repo of government bonds issued by peripheral euro area government as yield differentials between bonds issued by different euro area governments widened. Procyclical variation in haircuts may not simply be driven by over- and under-exuberance. For example, haircuts should reflect the potential decline in the price of the collateral between the final variation margin call prior to a counterparty’s default and the point at which the non-defaulting party can sell the collateral. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 62 That will vary with the volatility and correlation of asset prices and market liquidity, both of which are likely to be procyclical. Nonetheless, some element of the procyclicality of haircuts observed in certain segments of the markets may have reflected over-optimistic haircuts before the crisis that could have been corrected, at least in part, by setting of more conservative haircuts in good times.

5.2.3 Collateral velocity
Collateral re-use (re-hypothecation) and collateral velocity, or the length of collateral re-use chains, can also be procyclical. According to Singh (2011), the length of “re-pledging chains” has shortened significantly since the crisis. Immediately after the failure of Lehman Brothers, some securities lenders withdrew from the market entirely. Market participants told the Workstream that most securities lenders are now lending again. However, many will only accept high-quality government bonds as collateral or cash collateral that they will reinvest at short maturities in high quality government bond repo, Treasury bills and/or in MMFs. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 63

5.3 Other potential financial stability issues associated with collateral re-use
In addition to the potential for heightened procyclicality, there are other financial stability risks associated with collateral re-use, whether arising from repo, securities lending, re-hypothecation of customer assets or margining of OTC derivatives. These include the potential for increased interconnectedness amongst firms and for higher leverage; and whether problems could arise following the default of multiple firms if they had provided the same securities as collateral to their secured creditors as a consequence of collateral re-use.

5.4 Potential risks arising from fire-sale of collateral assets
Securities lending and repo transactions are typically undertaken on the basis that non-defaulting counterparties will sell collateral securities immediately following a default in order to be able to realise cash or buy back lent securities in the market. As seen during the financial crisis, collateral fire sales may lead to market turmoil, and as discussed by Acharya and Öncü (2012), especially when a defaulting party's collateral assets pool is large relative to the market and concentrated in less liquid asset classes. If markets are already under stress, further selling would put downward pressure on the already stressed price of the collateral assets, with contagion to other financial institutions that have used those securities as collateral or hold them in trading portfolios. Individual market participants that establish appropriate risk management requirements or operate under regulatory exposure limitations (e.g. collateral credit quality, counterparty limitations, diversification, and haircuts) can mitigate exposure on their own secured transactions with a particular counterparty, but lack the visibility to assess that counterparty's aggregate transactions and collateral pool across the market and assess the overall market impact of its default. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 64

5.5 Potential risks arising from agent lender practices
Securities lending practices may entail risks for the market participants involved. One of the most important is the risk of shortfall of assets held by financial intermediaries in their capacity as custodians. For example, the EU adopted in 2011 the Alternative Investment Fund Managers Directive which makes the depositary of a hedge fund strictly liable for any loss of assets held in custody bar force majeure. Many agent lenders offer indemnities to their customers against the risk of borrower default. The terms of these indemnities, their scope and any caps applicable vary. There is a need to consider what consequences different market practices in relation to indemnities have for incentives to manage risks and whether this has any implications for market stability. For example, if an agent lender indemnifies a loan against borrower default, this could lead to the lender looking to the agent lender as its effective counterparty, and no longer screen and monitor the borrower.

5.6 Shadow banking through cash collateral reinvestment
By reinvesting cash collateral received from securities lending transactions, any entity with portfolio holdings can effectively perform “bank-like” activities, such as credit and maturity transformation, thereby subjecting its portfolio to credit and liquidity risks. As illustrated by AIG’s behaviour as a securities lender prior to the recent financial crisis, lenders can use securities lending as a means of short term funding for financing leveraged investment in instruments that, while highly rated when purchased, can become illiquid, risky, and lose value quickly. That may give rise to the risk of a “run” if securities borrowers start terminating the securities lending transactions and ask for their cash collateral to be returned. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 65 Discussions with market participants indicate that AIG’s pre-crisis behaviour was quite atypical of broader activity at that time. We have been told by some agent lenders that most cash reinvestment programmes are currently more focused on preservation of capital than they were pre-crisis. But the majority of cash collateral reinvestment programmes are managed by agent lenders, who, like most agents, share in the reinvestment profits but not the losses. Some have argued that this can create potential conflicts of interest. Others have argued that this is not the case because securities lending clients that are part of an agent lender’s programme approve the cash reinvestment guidelines and are responsible for monitoring the agent lender’s compliance with their guidelines. In addition, cash collateral may be reinvested by agent lenders into commingled funds, which offer less control and transparency than separate accounts and may create an incentive for clients to “run” first in the event of any problems. Market participants told the Workstream that an increasing number of clients are moving towards separate accounts and the number of commingled funds has decreased significantly since the crisis. However, many clients still seem to use commingled funds for cash collateral reinvestment.

5.7 Insufficient rigor in collateral valuation and management practices
When the prices of mortgage-backed-securities (MBS) fell during the early stage of the financial crisis, a number of financial institutions did not mark-to-market their holdings of MBS or based decisions on prices generated by overly-optimistic models, and later suffered significant losses when they eventually had to do so. Arguably, the decline in the prices of MBS would have caused less of a major disruption in financial markets should such price changes have _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 66 been reflected in financial institutions’ balance sheets earlier and more gradually through continuous marking-to-market.

Annex 1: Details of the Four Market Segments 1. Securities lending segment 1.1 Market structure
This market segment involves lenders of assets lending their securities to broker-dealers/banks. Lenders typically engage an agent or several agents to manage their securities lending business. In the past, the securities lending agents were custodian banks and they remain the largest players, but today a number of non-custodial agents also act as intermediaries in this business. Securities lending transactions involve the following key steps: (i) The terms for the loan are agreed between the beneficial owner and the borrower. The agent lender, if one is used, usually negotiates the terms on behalf of the beneficial owner. Terms may include issuer and amount of securities to be lent/borrowed, duration of the loan, basis of compensation, eligible collateral, amount of collateral and collateral margins. (ii) The beneficial owner delivers the securities to the borrower and the borrower delivers the collateral, either in the form of cash or securities, as agreed upon, to the beneficial owner. (iii) During the life of the loan, the collateral and the lent securities are valued daily to maintain sufficient levels of collateralisation and the margin required is increased or decreased accordingly. The beneficial owner’s agent lender usually manages this process.

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P a g e | 67 (iv) If the collateral is in the form of cash, it is often reinvested in money market assets, usually through a separate account, or a commingled fund, managed by the agent lender, in which cash collateral of several of the agent lender’s securities lending clients will be commingled and reinvested. Collateral in the form of securities may also be kept in separate or commingled accounts. (v) When the loan is terminated, equivalent securities are returned to the beneficial owner and equivalent collateral is returned to the borrower. In return for lending its securities, the beneficial owner receives a fee from the borrower if the collateral is non-cash. Lending fees can vary greatly depending on the nature, size and duration of the transaction, the demand to borrow the securities, and other factors. Agent lenders are typically compensated for their services through an agreed split of the revenue generated by the lending programme. The size of such splits may vary depending on a number of factors such as the services and protection (i.e. loan indemnification) provided by the agent lender and the type and size of the beneficial owner’s portfolio of assets. In case of cash collateral, the securities lender, typically through its agent lender, will pay the borrower interest on the cash collateral (the “rebate”), usually expressed as a spread below overnight market interest rates unless the lent securities are in very high demand, in which case the borrower will pay the lender a fee (known as a “negative rebate”). The remainder of the cash reinvestment income is typically shared between the beneficial owner and its agent lender, with the beneficial owner typically receiving the lion’s share.

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P a g e | 68 The lending agent may also receive a separate asset-based fee for managing the cash collateral, and in some cases a fixed administrative fee. Securities are usually lent on an open basis with no fixed maturity date. This gives lenders the flexibility to recall their securities at any day (subject to normal settlement timetables) if, for example: they are dissatisfied with the terms of the loan, no longer like the credit risk of the borrower; want to sell the securities; want to exercise voting rights on equities that have been lent out; or for any other reason. Borrowers may also return the security at any time, if, for example, they decide to terminate a short position that utilises the borrowed security. Most securities lending occurs under industry-standard master agreements. Securities lending agreements used outside the US involve transfer of legal title, with the borrower becoming legal owner of the securities on loan and the lender becoming legal owner of the collateral. Except in the US, both the borrower and lender can therefore sell or use assets received under securities lending transactions as collateral in other transactions. The agreement between the parties is designed to return all the economic benefits and risks associated with ownership, such as dividends and coupons, to the original owners. For example, the lender remains exposed to any change in the market value of the lent securities and the borrower is required to make payments to the lender equal to any dividends or coupons received on the lent securities, net of tax at the lender’s tax rate. But the lender’s economic exposure to the lent securities is entirely synthetic arising from its contract with the borrower.

1.2 Key participants
Lenders are typically institutional investors such as public and private pension funds, ERISA plans, insurance companies, registered investment companies (e.g. mutual funds, MMFs, and ETFs), and college endowment funds. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 69 Agent lenders, including custodian banks and third-party specialists, are employed by lenders to lend their securities for them. If the collateral received on the securities loan is cash, the agent lenders often also reinvest the cash on behalf of the lenders through their asset management businesses. Cash reinvestment may either be through separate accounts or through commingled funds that pool the cash collateral received by the agent lender’s clients. Benefits of employing an agent lender include economies of scale, securities lending expertise and systems that the beneficial owner may not have, specialised market knowledge, and better access to borrowers. Most agent lenders also provide indemnification to lenders against the default of the securities’ borrower, but usually not against losses incurred on the reinvestment of cash collateral. Borrowers of securities include market makers and cash/derivatives traders who borrow securities for their own purposes, e.g. market making, hedging, facilitation of trade settlement or short-covering, and principal intermediaries (e.g. prime brokers) that borrow securities in order to lend to client institutions, such as hedge funds.

1.3 Market characteristics
Lenders typically have minimum eligibility requirements for non-cash collateral, for instance only accepting collateral with a credit rating of AAor better. In addition, lenders define their own collateral eligibility schedules, even when they conduct securities lending through an agent lender. Since the crisis, the Workstream understands that the trend has generally been to move away from ratings-based schedules and towards asset class-based schedules.

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P a g e | 70 In addition to cash, many lenders will accept government bonds as collateral but equities are also becoming increasingly accepted in some jurisdictions. Agent lenders told the Workstream that they would only accept non-cash collateral for which current market prices are available, with a number of them referring to a “3-day stale-price policy”, whereby securities for which a market price cannot be obtained after 3 days automatically becomes ineligible. Agent lenders also told the Workstream that generally they and the lenders agree on a list of approved borrowers for their securities, and sometimes tailor acceptable collateral to the borrower in question. Some securities borrowers, such as banks/broker-dealers, may give haircuts/margins, which are privately agreed and in some cases are based on minimum regulations. Margins tended to follow market norms before the crisis (e.g. 102-105%), but have now become more differentiated with respect to asset type and maturity. VaR models and stress tests are increasingly used to test adequacy of haircuts/margins. However, agent lenders said that haircuts tended to be adjusted infrequently, with reductions in the value of outstanding loans being the main tool used in response to any counterparty credit concerns. CCPs are attempting to move into the securities lending market but penetration has been very limited so far. A key problem is the increased financial costs for lenders to use a CCP; market participants are currently considering viable solutions to overcome this problem.

1.4 Collateral swaps
There has been increased demand from banks in the past year to undertake collateral swap transactions (also known as liquidity swaps and “collateral upgrade/downgrade” trades), a type of securities lending transaction that involves borrowing high-quality and liquid securities, _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 71 such as government bonds, in return for pledging relatively less liquid securities, such as RMBS. Banks may use the high-quality securities to meet regulatory liquidity buffer requirements, raise cash in the repo market or as collateral for CCPs or bilateral derivatives transactions.

1.5 Regional variations
Institutional investors in most countries lend securities globally. But typically, lending programmes are run by agent banks located in London, New York, Tokyo or Hong Kong. According to the Risk Management Association (RMA), the total value of US securities on loan globally was around $0.7 trillion as of Q3 2011, of which 26% was against non-cash collateral, 74% was against US$ cash collateral, and less than 0.1% was against euro cash collateral. In comparison, the total value of European securities on loan globally was around $0.2 trillion, of which 59% was against non-cash collateral, 24% was against US$ cash collateral, and 17% was against euro cash collateral. Cash collateral reinvestment had been largely seen as a market centred around US and Japanese lenders. However, non-US institutions lending US securities may also be receiving cash collateral and hence subject to cash collateral reinvestment risk. In Europe, some securities lending programmes are also run by post-trade market infrastructures (International Central Securities Depositories) for the purpose of enhancing securities settlement efficiency. In Japan, the proportion of cash collateral for bond lending was around 97% in 2011 according to JSDA.

1.6 Recent history
During the 2007-2008 financial crisis, AIG experienced substantial losses on the securities lending programme operated by some of its life insurance subsidiaries. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 72 AIG ran the programme primarily as a source of financing for leveraged investment. Cash was pooled and reinvested in relatively long maturity instruments, including ABS, to maximize returns. Meanwhile, the cash reinvestment programmes of a number of large agent lenders suffered from the illiquidity of US money markets, with the estimated secondary market value of reinvestment assets falling below the lender’s obligation to return cash collateral. Where the cash collateral was reinvested in commingled pools, some lending agents restricted the ability of clients to completely redeem their assets from the pools, offered repayment in kind rather than in cash, and/or permitted limited cash redemption, in small monthly percentages (“gates”) or in the case of “ordinary course” redemptions only. These measures were taken in part to address the illiquidity of the reinvestment pools, and to address the incentive of some clients might have to withdraw their cash collateral, which could have further eroded the liquidity of the cash reinvestment pools to the detriment of those remaining in the pools. Agent lenders also provided incentives for borrowers to maintain loans in order to avoid the need to liquidate cash collateral pools, including by raising rebate rates and offering to reinvest new cash in term repo with borrowers. A number of reinvestment programmes also experienced investment losses following defaults of Lehman Brothers and some SIV investments. Some legal actions have been commenced by lenders against agent lenders in relation to losses on cash reinvestment programmes (generally these suits allege breach of contract as to the investment guidelines and breach of fiduciary duties). The Workstream understands generally that, notwithstanding the losses in the value of the securities in which the cash was invested, the securities continued to generate income and during this period lenders continued to receive income, in some cases substantial, from their cash collateral reinvestments. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 73 In 2008, the size of the securities lending market shrank significantly. This was due in large part to sharp falls in the market value of lent securities but also to a lesser extent because some lenders and borrowers withdrew from the market, reflecting a combination of concerns about counterparty creditworthiness and illiquidity in cash reinvestment portfolios, reputational concerns following regulatory bans on short selling, and realisation that they did not sufficiently understand the risks inherent in their securities lending activities. Lehman Brothers had been a significant securities borrower prior to its collapse but its default was managed relatively smoothly by securities lenders, with collateral in most cases being sufficient to avoid losses according to market participants. Since 2008, agent lenders report that the majority of lenders have returned to the market. But the Workstream has been told that lenders have generally tightened their non-cash collateral schedules, moved to less risky cash reinvestment mandates, and required more frequent and detailed reporting from agent lenders. The Workstream has also been told that lenders with larger programmes have also shifted away from pooled reinvestment vehicles towards separate accounts in order to reduce the risk of liquidity runs (which are a risk when using commingled pools for cash collateral reinvestment). In the US, lenders may reinvest cash collateral in rule 2a-7 funds (registered MMFs), or unregistered funds that may follow some but not all of the requirements of rule 2a-7 funds (and/or separate accounts). Lenders reinvesting the cash in commingled funds, and looking to the cash reinvestment as a profit centre may invest the cash in non-2a-7 funds. Meanwhile, lenders reinvesting the cash in commingled funds with capital preservation as the primary goal, are more likely to invest in 2a-7 funds, or short-term repo, or similarly conservative investments.

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2. Leveraged investment fund financing and securities borrowing segment 2.1 Market structure
This market segment covers banks and broker-dealers lending securities and providing financing to leveraged investment funds (most of which are hedge funds) via market-based securities lending and repo transactions, and through margin lending as part of the prime broker relationship. Prime brokers are typically large banks and securities firms that offer a range of services to their clients, most of which are hedge funds. The prime brokerage agreement is based on a pledge over the hedge funds’ total in-custody assets, and is thus very much relationship-based. Hedge funds are able to borrow cash or securities up to this value less a margin, with margins typically calculated on a portfolio basis, drawing on VaR type calculations and stress testing. Financing of long positions can be collateralised with the underlying securities purchased, while securities borrowing to cover short positions can be collateralised with the cash proceeds. Margin requirements are met from net assets. Prime broker margin lending occurs alongside repo and securities lending transactions that the hedge fund may enter into with other banks and broker-dealers. Typically, equity funds rely more on prime broker margin lending whereas larger fixed income funds transact directly across multiple banks/broker-dealers using repo. A key role of a prime broker is to locate securities that hedge funds wish to sell short through the securities lending and other markets and on-lend them to hedge funds. These loans are typically “at call” so that the prime broker is not exposed to a contractual maturity mismatch. The prime broker’s reputation, however, rests on never needing to recall securities from a hedge fund client. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 75 A good prime broker will protect its hedge fund clients from a “short squeeze” in the market to a certain extent through access to multiple securities lenders and other sources of securities. In some cases, prime brokers will pay securities lenders for exclusive access to “hard-to-borrow” portfolios (e.g. emerging market equities) over a defined period. Some lenders have a business model of periodically auctioning these exclusive portfolios to the prime broker prepared to pay the highest fee. Index funds and ETFs are valued by prime brokers because they have stable portfolios and are less subject to the risk of recall because of investment decisions by asset managers. They may therefore command higher lending fees. Prime brokerage agreements usually give the prime broker the right to re-use pledged assets it holds on behalf of the hedge fund up to a proportion of its net indebtedness, a practice known as “re-hypothecation”. This is often separate from securities lending and repo transactions, which typically take place under industry-standard master agreements and involve full temporary transfer of title of the underlying securities and collateral. In the US, the extent to which prime brokers can re-hypothecate client assets is limited by SEC regulations to 140% of the client’s net indebtedness towards the prime broker. No such regulatory cap exists in the UK, another market where prime brokerage is active, but hedge funds typically have contractual limits on re-hypothecation with their prime brokers, which have been converging towards 140% of client indebtedness since the crisis. UK regulation does require regular reporting of re-hypothecation by prime brokers to hedge funds. Prime brokers can sell assets within agreed limits on re-hypothecation or use them as collateral for securities borrowing or repo financing transactions. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 76 Outside these limits, assets must be held in custody for the hedge fund client. Similar to securities lending and repo transactions, the obligation of the prime broker in relation to re-hypothecated assets is to return “equivalent securities” rather than the “exact same” securities. For liquid securities, prime brokers may be confident that they can buy or borrow the securities in the market to return to the hedge fund client without necessarily going back to the counterparty of the original transaction. In the case of illiquid, hard to source securities, prime brokers however told the Workstream that they are careful to ensure that they can return the exact securities re-hypothecated. For example, they said it was not common practice to lend re-hypothecated assets to other hedge funds for short covering. Prime brokers also told the Workstream that re-hypothecation is critical to their business model because it makes the business more “self financing”. Hedge fund cash balances are used to collateralise borrowing from securities lenders for on-lending to hedge funds and, likewise, re-hypothecated securities are used to collateralise repo financing and securities borrowing for on-lending to hedge funds. Before the crisis, prime brokerage activities could generate excess cash and collateral for use elsewhere in a bank’s business. But now prime brokers said that lower limits on re-hypothecation negotiated by hedge funds, higher haircuts by securities lenders and, importantly, additional liquidity buffers required by regulators such as the UK FSA against possible withdrawal of hedge fund cash balances mean that prime brokerage is a net consumer of liquidity from the rest of the bank, rather than a net generator of liquidity.

2.2 Regional variations
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P a g e | 77 The global prime brokerage industry is mainly concentrated in New York and London, and activities elsewhere, if any, are usually dominated by major US and European investment banks, with some exceptions where domestic prime brokers are also active (e.g. Toronto). Prime brokers told the Workstream that most London-based hedge funds now set a limit on re-hypothecation of 140% of client indebtedness, the same as the US regulatory limit, but some are still prepared to allow higher limits up to 200%.

2.3 Recent history
In 2008, after a run from hedge funds, Bear Stearns, a large prime broker, became illiquid and was bought by JP Morgan. Another prime broker, Lehman Brothers, declared bankruptcy later in the year due to large losses on its exposures to subprime mortgages. As a result, haircuts on hedge fund financing increased sharply during the crisis, particularly against ABS collateral, forcing many hedge funds to reduce leverage. Following Lehman Brothers’ collapse, clients of Lehman Brothers’ prime brokerage business experienced delays in recovering client assets and client money held with the firm. In particular, many clients had granted Lehman Brothers unlimited rights to re-hypothecate assets to obtain funding and were therefore unsecured creditors when Lehman Brothers declared bankruptcy. This exposed the risks run by hedge funds in allowing their prime brokers to re-hypothecate assets beyond their net indebtedness position. Since the crisis, hedge funds have responded by diversifying their financing sources via multiple prime brokers, becoming more sensitive to the creditworthiness of their prime brokers, improving collateral monitoring and modifying their contracts to limit re-hypothecation. Some have also made arrangements to transfer any “excess” assets on a regular basis to custody accounts with third party custodian banks or custodian sister companies of the prime broker (e.g. ring-fenced from the prime broker’s lien). _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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3. Inter-dealer repo segment 3.1 Market structure
This segment consists primarily of repo transactions between banks and broker-dealers. At the beginning of a repo transaction, the cash borrower sells securities with a simultaneous agreement to repurchase equivalent securities at a future date for the original value plus a repo rate. During the term of the repo, any divergence between the market value of the securities sold (collateral) and the cash received should be eliminated by margin maintenance, usually on a daily basis, i.e. if the market value of collateral falls, the buyer calls for extra collateral or requests the difference be refunded in cash and vice versa. If, on the contrary, the market value of a collateral rises and exceeds the price at the time of agreeing the repo by an agreed percentage, the difference is called either an initial margin if the collateral is calculated as a premium over the cash value, or a haircut if the cash is calculated as a discount under the collateral value. Transactions are either against “general collateral (GC)”52 or specific securities. GC trades dominate the inter-dealer repo market and are driven by the cash leg of the transaction, with banks looking to lend and borrow cash in a secured way for financing purposes or to take yield curve positions. Repo transactions to borrow specific securities may be to cover short positions for market making, settlement or hedging purposes.

3.2 Key participants
Participants in this market segments are major banks and broker-dealers with an international trend towards central clearing of repo transactions through CCPs. Inter-dealer GC repo trading in US dollar, euro and sterling government bond repo markets is primarily conducted through anonymous electronic trading systems linked to CCPs. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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3.3 Market characteristics
The inter-dealer government bond repo market is of key importance to banks for squaring their positions in the overnight money markets and for hedging short-term interest rate risk. This market is also central to the ability of broker-dealers to manage inventories as well as make markets and provide liquidity to government bond cash markets. Volumes are greatest for overnight transactions. However, unlike the unsecured interbank market, transactions also take place at longer maturities, reflecting the lower credit risk and capital requirements for repos. Bilateral transactions in the short-term inter-dealer government bond repo market do not usually involve haircuts, reflecting the equal credit standing of the two parties, the perception of zero credit risk on the collateral, and the collection of variation margin usually on a daily basis to reflect any change in the value of the underlying collateral. However, this is not necessarily the case in bilateral repo transactions in the US, or for repos conducted against lower quality collateral (e.g. low quality corporate bonds) or with other types of counterparties (e.g. hedge funds). A CCP, acting as the counterparty to both parties, takes margin/haircut from both sides of the trade. The benefits of trading through a CCP rather than bilaterally include (i) reduced counterparty credit risk (and more favourable treatment for regulatory capital purposes) and (ii) balance sheet netting. Unlike the repo financing market – which overwhelmingly involves a one-way flow of cash from “cash-rich entities” to banks and broker-dealers in exchange for securities collateral – the inter-dealer repo market is a two-way market amongst banks and broker-dealers.

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P a g e | 80 Moreover, banks and broker-dealers will often re-use collateral received, so the velocity of collateral in the inter-dealer repo market is relatively high.

3.4 Regional variations
Government bond inter-dealer repo markets exist in most developed countries and are closely linked to debt management and central bank monetary policy operations. This market segment is also usually viewed as a core funding market given its centrality to banks’ funding and its important role in supporting the liquidity in the government cash bond markets. While a considerable proportion of inter-dealer government bond repo trading is already centrally cleared in the US, UK, euro area and Japan, the Australian and the Canadian repo markets are exclusively bilateral, although a CCP has recently been introduced in Canada to clear repo transactions on specific Canadian government securities and is expected to expand over time. The US has the largest inter-dealer market in repos backed by non-government bonds, primarily now in US Agency MBS and debentures.

3.5 Recent history
According to the ICMA repo survey, the size of the European repo market (sum of repo and reverse repos outstanding) fell from a peak of 6.7trillion euros in June 2006 to a bottom of 4.6trillion euros in December 2008, before rebounding back to 6.2trillion euros in December 2011. The European sovereign bond crisis has led to a flight to quality in the euro government bond repo market, with a significant widening of spreads between repo rates on core and periphery sovereign bonds between August and early December 2011, although the spreads narrowed markedly following the ECB’s 3-year long term refinancing operations (LTRO). CCPs initially raised margin requirements on repos of Italian, Irish, Portuguese and Spanish government debt, but subsequently reduced the _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 81 margins as market conditions improved. Repo market participants told the Workstream that the inter-dealer repo market for some periphery sovereign bonds had almost disappeared beyond overnight maturities, although there has been some significant improvement following the ECB 3-year LTROs. In the US, the inter-dealer repo market for private label ABS and CDOs that existed before the crisis largely dried up after 2008. Gorton and Metrick show data on how haircuts in this market widened rapidly from zero before the crisis to up to 100%.

4. Repo financing segment 4.1 Market structure
This segment of the market is used primarily by banks and broker-dealers, and by some other market participants, to finance holdings of securities or for short-term financing. It also provides risk-averse cash investors with a “money-like”, short-term means of lending and investing excess cash in wholesale markets.

4.2 Key participants
The main cash borrowers are investment banks and broker-dealers. Lenders include retail/private banks but also a wide range of non-bank entities, including MMFs (up to one third of the US tri-party repo market), securities lending cash collateral reinvestment funds (up to one quarter of the US tri-party repo market), official reserves managers, non-financial corporations and other bodies such as the US Federal Home Loan Banks and CCPs. In Europe, the Euro Money Market Survey (among credit institutions only) published by the ECB on 30 September 2011 indicates that the repo market is concentrated among a few dominant players with the top 20 reporting institutions from an overall panel of 170 accounting for 81.1% of secured financing market activity in 2011. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 82 With regard to non-bank intermediaries, available data is rather scarce but market intelligence suggests that MMFs and large insurance companies are large lenders. Some large companies have also reportedly begun to use reverse repos instead of bank deposits.

4.3 Market characteristics
Trades can either be conducted on a bilateral or on a tri-party basis. Tri-party agents provide services including: trade matching; collateral allocation and optimisation; settlement; collateral valuation and margining; as well as custody and reporting on behalf of the parties. They are remunerated by the cash borrowers. The main tri-party service providers globally are global custodian banks, with CCPs and CSDs/ICSDs competing in Europe. Cash borrowers usually give haircuts, but there is no market standard and a wide degree of dispersion exists, even for a given category of assets. Tri-party repo developed predominantly as means for broker-dealers to finance their inventory on an ongoing basis (akin to sequential overnight trades), and as a facility to optimise collateral mapping across institutional cash providers. Some repo lenders insist on receiving government bonds only as collateral. Tri-party repos, however, facilitate the acceptance of a wider range of collateral and investment banks are prepared to pay a higher rate and higher haircuts on broader collateral that can be less easily (or more expensively) financed elsewhere, corresponding to the securities they carry on their balance sheets. Prior to the crisis, collateral eligibility was typically defined by credit rating, with ABS commonly used. Now, lenders tend to focus more on asset types, market liquidity and availability of prices for valuation. The proportion of collateral consisting of ABS has declined markedly since the crisis, while equities have become more widely accepted. Unlike the inter-dealer repo market, cash lenders in the repo financing market do not typically re-use collateral as most are not leveraged entities with a need to collateralise borrowing. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 83 This may change in the future however with, for example, demand for collateral against derivatives positions with CCPs. The 2011 ECB survey includes data on activity in the secured market cleared through CCPs (as a subset of the repo market). The share of these transactions in the secured market was revised upward to 51% for the second quarter of 2010 and remained stable at 50% for the second quarter of 2011. The share of tri-party repos reached 12% of the segment, at the expense of the non-CCP cleared bilateral repos which accounted for 38 %

4.4 Regional variations
Repo financing markets are most developed in the US and Europe where tri-party arrangements have a significant and growing market share. Tri-party is less or not at all used in Australia, Canada and Japan where bilateral trading remains typical. Overnight tri-party repo financing remains predominant in the US but in Europe longer-term transactions have grown recently alongside overnight and open maturities. Tri-party collateral in the US market comprises mostly Agency MBS and debentures, and US Treasury bonds, with a smaller share of corporate bonds and equities. In Europe, government bonds also comprise the largest share of tri-party collateral with corporate bonds, equities and covered bonds also comprising material components of the acceptable collateral universe. In Japan, Japanese government bonds account for most of the repo financing segment where broker-dealers borrow cash from trust banks and other institutional investors, with a very small portion of corporate bonds and equities.

4.5 Recent history
Unlike the inter-dealer market, Copeland et al (2011) show that haircuts in the US tri-party repo financing market were generally stable during the _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 84 crisis, with the response to counterparty credit concerns largely taking the form of reduction in lending volumes. In Europe, market participants told the Workstream that tri-party haircuts had been increased during the crisis but in a measured way. Collateral eligibility had also changed, with lenders excluding ABS and adopting criteria based on asset type and liquidity rather than purely ratings.

Annex 2: Data on securities lending and repos Securities lending segment
Data Explorers, SunGard’s Astec Analytics, and the Risk Management Association (RMA), among others, collect, aggregate, and provide data on securities lending to their clients/members. No data is currently available to the public. All collect data on a global basis rather than by geographical location. RMA data below is based on survey returns from 15 large agent lenders. Data Explorers collects data from lenders, agent lenders and broker-dealers. It claims its dataset encompasses more than 90% of global transactions. Table 1 shows “lendable assets” (i.e. securities held within lending programmes) and assets on loan (i.e. securities actually lent at the time of the survey) as a proportion of total outstanding assets by market value. It also shows the proportion lent against cash collateral (based on the RMA survey data). The remainder are lent against the collateral of securities.

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Leveraged investment fund financing and securities borrowing segment
Estimates from public databases show the size of hedge fund assets under management (AUM) globally to be between $1.7 and $2.5 trillion. The UK Financial Services Authority (UK FSA) has been collecting exposure and risk data on a small sample of hedge fund managers based in the UK through its Hedge Fund Survey (HFS), which started in October 2009. The latest HFS for September 2011 captured around 50 hedge fund managers and 100 hedge funds, representing approximately $400bn in assets under management. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 88 For hedge funds in this sample, repos account for roughly 55% of aggregate hedge fund borrowing, followed by synthetic borrowing (29%) and collateralised borrowing under prime brokerage agreements (15%). Since the first survey in October 2009, collateralised borrowing via prime brokers has declined as a proportion of total borrowing, from 24% to 14%, driven mostly by increases in other forms of borrowing. In addition, the UK FSA collects data on UK-based banks and prime brokers’ exposures to hedge funds through its Hedge Fund as Counterparty Survey (HFACS). The latest data for the HFACS for October 2011 estimated total “cash-out” reverse repo financing provided to hedge funds was $390 billion. This survey also showed that over 74% of repo financing between surveyed banks and their hedge fund counterparties comprised G10 government bonds as collateral, which has remained relatively unchanged across recent surveys.

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3 and 4. Interdealer repo segment and repo financing segment
Separate estimates for the interdealer repo segment and the repo financing segment are available only in the US. Therefore only aggregate statistics are presented in this section. Moreover, when calculating the size of the repo market, many studies simply sum up the total amount of repos and reverse repos outstanding on financial institutions’ balance sheets, leading to significant double counting (since one bank’s reverse repo asset may be another bank’s repo liability). The US and euro area have by far the largest repo markets in the world. The Federal Reserve Bank of New York (FRBNY) facilitates the industry’s publication of detailed data on tri-party repos on a monthly basis, whereas the most comprehensive statistics available on the European repo markets (including Sterling and Swiss franc) are the semi-annual surveys conducted by the International Capital Markets Association (ICMA). The total size of the US tri-party repo market was roughly US$1.8 trillion as of March 2012, having reached a peak of over $2.8 trillion in April 2007. Note that statistics on the size of the US repo market are measured by the total amount of collateral held through two tri-party agents (JP Morgan and Bank of New York Mellon) and are not subject to double counting. The distribution of collateral between Treasuries/Agencies/Agency MBS and other assets was 84.5% and 15.5% respectively as of March 2012. In addition, the Fixed Income Clearing Corporation (FICC) also publishes data on GCF (General Collateral Financing) repos, a blind-brokered interdealer market centrally cleared by FICC. Total volume on the GCF platform on 18 April, 2012 was $357 billion (these statistics do not include the interdealer broker trades, which always net to zero by virtue of the broker’s role in the transaction). The US tri-party repo market is predominantly part of the repo-financing segment. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 90 Bilateral (Delivery-versus-Payment, DVP) repos span both the interdealer and repo financing segments. Anecdotal evidence suggests that tri-party repo activity may account for between 65% and 80% of the total US repo market. The total size of the US repo market might therefore be roughly $2.1-2.6 trillion (excluding the interdealer repos that have been netted through a CCP).

The latest ICMA survey (December 2011) covers 59 financial institutions involved in the European repo market, as well as automatic repo trading systems (ATS), tri-party repo agents in Europe, and the London-based Wholesale Market Brokers’ Association (WMBA). The total value of repo contracts (sum of repos and reverse repos) outstanding on the books of the surveyed institutions was 6.2 trillion euros ($8.3 trillion). However this number included double counting of repo transactions between those institutions. Moreover, the time-series trend was affected by changes in the survey participants. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 91 Nonetheless, the survey results provide interesting statistics on the characteristics of the European repo market. For example, the overall share of repos traded on ATS and centrally cleared through a CCP was 32%, up 1.5% from June 2011, comprising predominantly overnight inter-dealer transactions. The share of tri-party repo was 11%, unchanged from June 2011, comprising primarily open trades but with a growing share of long-term (>12 months) transactions. Repos negotiated through voice brokers included a large share of forward-starting transactions. Finally, the top 10 banks accounted for 64% of the total European repo market.

Apart from the US and Europe, other significant repo markets include those against Canadian and Japanese government bonds. According to data from the Office of the Superintendent of Financial Institutions (OSFI), the size of the Canadian repo market was C$213 _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 92 billion ($ 218 billion) as of August 31, 2011, measured by the sum of reserve repo assets and repo liabilities of the six largest Canadian banks. The size of the Japanese repo market was estimated to be JPY 182 trillion ($ 2.4 trillion) as of December 2011 according to the Japan Securities Dealers Association (JSDA), measured by the sum of reverse repos and repos of the members of JSDA. In addition to JSDA’s statistics, the Bank of Japan conducts Tokyo Money Market Survey which covers stocks as well as credit terms (e.g. counterparties, collaterals, maturities and haircuts) of securities lending/repos.

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There are many risk management experts that discuss this interesting speech

Shareholder value and stability in banking: Is there a conflict?

Speech by Jaime Caruana, General Manager, Bank for International Settlements Understandably, the global regulatory response to the global financial crisis has stirred controversy. That response, with Basel III at its core, seeks to strengthen the resilience of the banking system. In doing so, it asks shareholders to give up high leverage as a source of high returns on equity. And it asks bondholders, especially those of systemically important institutions, to take more of a hit in the event of failure. In this light, it is easy enough to imagine that investors would have little reason to hail the new framework. This view, however, tells only part of the story. It assumes that, on balance, bank investors were well served by the pre-crisis system. It also posits a conflict between value for shareholders on the one hand and the public interest in safer banking on the other. In my remarks today I would like to suggest that this supposed conflict of interests is overstated.

Yes, tensions may arise over a short investment horizon.
But over long horizons, they tend to disappear – because, in the long term, the focus necessarily shifts to sustainable profits and returns. This is not just theorising: we’ll take a look at the statistical evidence in a moment. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 94 And unless one believes that markets can be consistently timed – a rare gift at best – it is long horizons that should matter for investors. Let me first outline what we in Basel mean by safer banking and take stock of where we stand in the development and implementation of new standards. This is an issue in which, I am sure, you will have a keen interest. I shall then argue that the concerns of investors and bank supervisors are remarkably well aligned in the long term.

Basel’s vision of safe banking
In the past few years, the Basel Committee on Banking Supervision has conducted a sweeping review of regulatory standards and it has put in place a strengthened framework that incorporates new macroprudential elements. This framework is in several ways a great improvement over the pre-crisis regulatory approach. First of all, it sets a much more conservative minimum ratio for capital that is of far better quality. When the whole Basel III package is implemented, banks’ common equity will need to be at least 7% of risk-weighted assets. This compares to a Basel II level of 2% – and that is before taking account of the changes to definitions and risk weights that make the effective increase in capital all the greater. Among the improvements in capturing risk on the assets side, I would especially point to the improved treatment of risks arising from securitisation and contingent credit lines. Moreover, these risk-based capital requirement measures will be supplemented by a non-risk-based leverage ratio, which will serve as a backstop and limit model risk. This new framework responds to the main lessons from the crisis: banks had leveraged excessively, had understated the riskiness of certain assets (particularly those considered practically risk-free), and had made _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 95 innovations that reduced the loss-absorbing capacity of headline capital ratios. Second, Basel III takes the notion of a “buffer” much more seriously. The 7% figure includes a 2.5% capital conservation buffer, which banks can draw upon in difficult times. Dividends and remuneration will be restricted at times when banks are attempting to conserve capital. Supervisors will have the discretion to apply an additional, countercyclical buffer when risks show signs of building up in good times, most notably in the form of unusually strong credit growth. The goal is to build up buffers in good times that banks can draw down in bad times. Third, the package contains elements to address systemic risk head-on, both by mitigating procyclicality and by cushioning the impact of failures on the entire system. I have already mentioned the countercyclical buffer, which aims to address the procyclical build-up of risk, and the leverage ratio, which will help contain the build-up of excessive leverage in good times. The framework now also recognises explicitly that stresses at the largest, most complex financial institutions can threaten the rest of the system. The Financial Stability Board (FSB) and the Basel Committee envisage that these systemically important financial institutions, or SIFIs, will have greater loss absorbency, more intense supervision, stronger resolution and more robust infrastructure. These aims complement each other, and share a common rationale. Greater loss absorbency – including capital surcharges that range from 1 to 2.5% for those institutions designated as SIFIs – and better supervision should reduce the probability that problems at these big market players disrupt activity throughout the wider financial system. Stronger resolution and better infrastructure should reduce the systemic impact of a SIFI’s closure or restructuring and thereby strengthen market discipline. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 96 In addition, methods to identify globally systemically important insurers are being developed and should be ready for public consultation by the G20 Leaders’ Summit in June 2012. And, work is under way to address the issue of banks that are systemic on a national rather than a global level, as well as to identify other globally systemic non-bank financial institutions. Fourth, liquidity standards have been introduced. These comprise a liquidity coverage ratio, or LCR, and a net stable funding ratio, or NSFR. The standards will ensure that banks have a stable funding structure and a stock of high-quality liquid assets to meet liquidity needs in times of stress. Importantly, the group of governors and heads of supervision that oversees the Basel Committee has confirmed that this liquidity buffer is there to be used. Specifically, banks will be required to meet the 100% LCR threshold in normal times. But, during a period of stress, supervisors would allow banks to draw down their pools of liquid assets and temporarily to fall below the minimum, subject to specific guidance. The Committee will clarify its rules to state this explicitly, and will define the circumstances that would justify use of the pool. Since this is the first time that detailed global liquidity rules have been formulated, we do not have the same experience and high-quality data as we do for capital. A number of areas will require careful potential impact assessment as we implement these rules. The Basel Committee has therefore taken a gradual approach in adopting the standards between 2015 and 2018, and will meanwhile assess the impact during an observation period. At the same time, in order to reduce uncertainty and to allow banks to plan, key aspects of liquidity regulation, such as the pool of high-quality liquid assets, are being reviewed on an accelerated basis. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 97 But any changes will not materially affect the framework’s underlying approach, which is to induce banks to lengthen the term of their funding and to improve their risk profiles, instead of simply holding more liquid assets. Finally, it is time for these new rules and frameworks to be implemented. The Basel Committee is already engaged in the full, consistent and timely implementation of the framework by national jurisdictions. To this end, the Committee has started to conduct both peer and thematic reviews through its Standards Implementation Group. Last October, the Committee published the first regular progress reports on members’ implementation of what they have agreed. Each member will also undergo a more detailed peer review, starting with the EU, Japan and the United States. And the Committee is currently reviewing the measurement of risk-weighted assets in banking and trading books, with an eye to consistency across jurisdictions. The goal of these measures is clear: to have a stronger and safer financial system. This should benefit everyone – the banking industry, users of financial services and taxpayers. But some may question whether shareholders will benefit as well. Has the leveraged business model of the past really served them well? The record, to which I turn next, suggests that it has not.

Shareholder returns and the leveraged business model
Over the long term, banks have turned in a sub-par performance, whether assessed on accounting measures or by return on equity. Historically, the average return on equity in banking has matched that of other sectors (see Table). But unlike in other sectors, these returns have involved the generous use of leverage, either on the balance sheet or, frequently, off it. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 98 We know that banking involves leverage and maturity transformation, but the question is how much is appropriate? There may be no clear answer, but let’s look at the data. Bank equity was on average leveraged more than 18 times in 1995–2010. Equity in non-financial firms was leveraged only three times (see Table). This implies that, compared with other firms, banks have succeeded in delivering only average return on equity over the long term but at the cost of higher volatility and losses in bad times (Graph 1). Turn now to stock returns and the message does not change much. Anyone who at the start of 1990 had invested in a portfolio that was long global banking equities and equally short the broad market indices would today be sitting on a loss (Graph 2, right-hand panel). And, over the long term, risk-adjusted returns have been sub-par. The main exception is Canada, where banks have barely suffered in the recent crisis (Graph 2, left-hand panel). It is high leverage that has contributed to the volatility of bank profits. And it is high leverage that makes banks perform so badly on a rainy day. During periods that comprise the worst 20% of stock market performance, banks do worse than most other sectors (Graph 3, left-hand panel). Clearly, the flip side is that they do very nicely on sunny days (Graph 3, right-hand panel). For investors, this is not a compelling value proposition. To be sure, some may be agile enough to profit from the downside in bank stocks. But most investors inevitably entered the global financial crisis fully invested or overweight in bank stocks. And, historically, market timing has proved an elusive strategy. Not only is the performance of banks over time inconsistent with the notion that shareholders can benefit from high leverage and state support; the evidence across banks actually suggests that the banks that were more strongly capitalised at the outset weathered the crisis better. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 99 The left-hand panel of Graph 4 suggests that no particular relationship existed between Tier 1 capital and the pre-crisis return on equity. Indeed, banks with stronger Tier 1 equity could and did match the returns of less well capitalised peers. When the crisis hit, however, the less well capitalised banks scrambled to raise funds in difficult market conditions, while their stronger competitors could avoid fire sales and distressed fund-raising (centre panel). And it was the banks that had reported high-flying returns before the crisis that were the most likely to resort to fire sales and distressed fund-raising (right-hand panel). The conclusion is that stronger capital makes a difference. A further consideration is that it is easier and probably cheaper to raise capital in good times. Together, these observations suggest that leverage is not the only way to generate returns – and that, when returns don’t depend on leverage, they are more sustainable.

What investors can expect from banks
All this indicates that investors could reach a better understanding with bank managements. The key is sustained profitability through both good and bad times. Recent work at the BIS suggests that, when economic activity moves from peak to trough, the betas on bank stocks, relating percentage changes in their value to that of broad market indices, increase by well over 150 basis points. In effect, banks are generating good returns in good times by writing out-of-the-money puts that come back to haunt them when the market falls. How did we get here? The story of a major UK bank is symptomatic. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 100 Twenty years ago, the head of the bank promised investors that the institution would beat its cost of equity, which he took to be 19%. For a while, the bank was able to achieve this return by closing branches. But ultimately such promises led bank managers to invest their liquidity reserve in asset-backed securities, boosting earnings in effect by writing puts on both credit and liquidity. When it came to the crunch, the bank could not keep its return on equity above 20% during the global financial crisis and had to seek help from the state. Given the trend decline in inflation and government bond yields, 20% in the early 1990s translates to something more like 15% today. Still, bank managements that continue to promise such returns may find themselves again writing puts, effectively making themselves hostage to bad times in order to pump up returns in good times. Accounting norms that treat risk premia in good times as distributable profits do not help. In any case, managements who promise sustained 15% returns in a low-inflation, deleveraging economy may be leading investors astray. Over time, sustained profitability at more reasonable levels should bring bank share prices back to a premium over book values. Past behaviour supports this conclusion. In particular, my colleagues estimate that if leverage decreases from 40 to 20, the required return – the return investors demand – drops by 80 basis points. The intuition is that, when banks increase their equity base (or reduce leverage), they work each unit of equity less – that is, the risk borne by each unit of equity falls—and so does the return investors require. This prospect would characterise a new long-run understanding between shareholders and bank managements that produce sustained profits. But how should banks get there? Here I do not refer to the immediate problem banks face in bringing their assets into line with their capital, leading to considerable deleveraging. Instead, I refer to the longer-term problem. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 101 How should banks generate returns in order to be sustainable? I would argue that such returns can arise from a reconsideration of banks’ business models. In line with the lessons drawn from the crisis by banks, investors and prudential authorities, these models would recognise that our knowledge of systemic risk is incomplete. As a result, bank managers would seek sustainable profit less in risk-taking and maturity transformation and more in operational and cost efficiency. Cost efficiency can powerfully contribute to bank earnings. As a rule of thumb, on average across countries, a 4% reduction in operating expenses translates into roughly a 2 percentage point increase in return on equity. Moreover, experience strongly suggests that determined attempts to clean up balance sheets and cut costs can go hand in hand with a sustained recovery in profits on the back of a stronger capital base. This is precisely the experience of Nordic countries, which suffered serious banking crises in the early 1990s (Graph 5). With costs under control, banks can achieve higher profitability with stronger capital.

Conclusions
Let me pull together the threads of the argument. The banks that fared better in the crisis were those that were more prudently capitalised. Investors as well as regulators want to ensure that this wisdom is written into the rules of the game. The financial reforms that have been agreed will increase the quality and amount of bank capital in the system; they will also promote increases of capital buffers in good times that can be drawn down in bad times. Big, interconnected and hard-to-replace banks will carry extra capital. The authorities are working to ensure that no bank is too complex to be wound down. They are refining new liquidity standards. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 102 And they are taking unprecedented steps to make sure that the new regulations are implemented effectively across countries. The outcome should be a stronger financial system. But regulation is only part of the answer and stronger market discipline will also be necessary to ensure resilience. I have presented the case that, over the long term, there is no conflict between shareholder value and the public interest in safer banking. This proposition is supported by the record of return on equity and bank share price performance – a record that refutes the argument that banks have used leverage to produce sustained shareholder value – and the key word here is “sustained”. Bank returns may have been comparatively high in good times. But those returns have melted away in bad times. And they have come at the cost of greater risk. In the long run, bank business models have produced middling returns with substantial downside risk. This means that in good times banks have overpromised and overestimated their underlying profitability. They have written put options on their liquidity and credit and reported the premia as current income. In effect, they have made distributions out of what should have been treated as expected losses. How can investors help banks move in the right direction? They could encourage sustainable business models based less on risk-taking and more on a careful analysis of competitive advantage and operational efficiencies. And they should be wary of entertaining unrealistic expectations about sustainable rates of return. Only when solid business models and realistic commitments to sustainable returns are rewarded can shareholder value be reconciled with safe banking. Indeed, there is no other way. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 103 ***** As a postscript, and for the sake of completeness, let me outline three other regulatory initiatives. First, the FSB, with the involvement of the IMF, the World Bank and standard-setting bodies, will draft an assessment methodology that provides greater technical detail on the Key Attributes of Effective Resolution Regimes for Financial Institutions. The FSB will use the draft methodology to begin, in the second half of 2012, a peer review evaluating member jurisdictions’ legal and institutional frameworks for resolution regimes (and of any planned changes). And supervisors plan to put in place resolution plans and institution-specific cooperation agreements for all 29 G-SIFIs by end-2012. Second, work continues towards strengthening OTC derivatives markets. This includes meeting the commitments by G20 Leaders to move trading in standardised contracts to exchanges and central counterparties by end-2012. Market supervisors and settlement system experts are close to finalising standards for strengthening CCPs and other financial market infrastructures. Meanwhile, banking supervisors are reviewing the incentives for banks to trade and clear derivatives centrally. Another important initiative here is the establishment of a global, uniform legal entity identifier, for which the FSB, with the support of an industry advisory panel, is developing recommendations to be presented to the next G20 Summit in Mexico in June. Third, potential risks related to the shadow banking system are being addressed. Banking supervisors are examining banks’ interactions with shadow banking, including issues related to consolidation, large exposure limits, risk weights and implicit support, and will propose any needed changes by July 2012. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 104 Market supervisors are looking at the regulation of money market funds and at issues relating to securitisation on the same schedule. Multidisciplinary FSB task forces are examining other shadow banking entities and, separately, securities lending and repo markets, with a view to making policy recommendations later this year

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Jens Weidmann: Global economic outlook – what is the best policy mix?

Speech by Dr Jens Weidmann, President of the Deutsche Bundesbank, at the Economic Club of New York, New York, 23 April 2012.

1. Introduction
Ladies and Gentlemen George Bernard Shaw is said to have made an interesting remark about apples – “If you have an apple and I have an apple and we exchange these apples then you and I will still each have one apple. But if you have an idea and I have an idea and we exchange these ideas, then each of us will have two ideas.” I think those words perfectly encapsulate the intention of the Economic Club of New York and of today’s event. Ideas multiply when you share them and they become better when you discuss them. I am therefore pleased and honoured to be able to share some ideas with such a distinguished audience today. And I look forward to discussing them with you. In a long list of speakers, I am the third Bundesbank President to speak at the Economic Club. The first was Karl Otto Pöhl in 1991, followed by Hans Tietmeyer in 1996. Although only a few years have passed since then, the global economic landscape has completely transformed in the meantime – just think of the spread of globalisation, think of the introduction of the euro, think of the Asian crisis or the dotcom bubble. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 108 All these events and others have constantly shaped and reshaped our world. Most recently, we have experienced a crisis that, once again, will change the world as we know it – economically, politically and intellectually. It is this new unfolding landscape that provides the backdrop to my speech. I shall address two questions: “Where do we stand?” and “Where do we go from here?” Of course, it is the second question that is the tricky one. In answering it, we should be aware that every small step we take now will determine where we stand in the future. Specifically, I shall argue that measures to ward off immediate risks to the recovery are closely interconnected with efforts to overcome the causes of the crisis. They are interconnected much more closely and vitally than proponents of more forceful stabilization efforts usually assume. But, first, let us see where we stand at the present juncture.

2. Where do we stand?
When we look back from where we are standing right now, we see a crisis that has left deep scars. The International Labour Organisation estimates that up to 56 million people lost their jobs in the wake of the crisis. This number equals the combined populations of California and the state of New York. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 109 Or look at government debt: Between 2007 and 2011, gross government debt as a share of GDP increased by more than 20 percentage points in the euro area and by about 35 percentage points in the United States. I think we all agree that the crisis was unprecedented in scale and scope. And the first thing to do was to prevent the recession turning into a depression. Thanks to the efforts of policymakers and central banks across the globe, this has been achieved. Following a slight setback in 2011, the world economy now seems to be recovering. In its latest World Economic Outlook, the IMF confirms that global prospects are gradually strengthening and that the threat of sharp slowdown has receded. Looking ahead, the IMF projects global growth to reach 3.5% in 2012 and 4.1% in 2013. For the same years, inflation in advanced economies is expected to reach 1.9% and 1.7%. Basically, I share the IMF’s view. However, we all are aware that these estimates have to be taken with a grain of salt – probably a large one. Being a central banker, I am not quite as calm about inflation. Taking into account rising energy prices and robust core inflation, prices could rise faster than the IMF expects. We have to be careful that inflation expectations remain well anchored and consistent with price stability. Expectations getting out of line might very well turn out to be a non-linear process. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 110 If this were to happen, it would be difficult and expensive to rein in expectations again. Even though the outlook for growth has improved over the past months, some risks remain – the European sovereign debt crisis being one of them. And this seems to be the one risk that is weighing most heavily on peoples’ minds – not just in Europe but here in the United States, too. The euro-area member states have responded by committing to undertake ambitious reforms and by substantially enlarging their firewalls. This notwithstanding, the sovereign debt crisis has not yet been resolved. The renewed tensions over the past two weeks are a case in point. Thus, we have to keep moving, but each step we take has to be considered very carefully. As I have already said: each small step we take now will determine where we stand in the future.

3. Where do we go from here?
Eventually, three things will have to happen in the euro area. First, structural reforms have to be implemented so that countries such as Greece, Portugal and Spain become more competitive. Second, public debt has to be reduced – a challenge that is not confined to the euro area. Third, the institutional framework of monetary union has to be strengthened or overhauled, and we need more clarity about which direction monetary union is going to take. I think we all agree on this – including the IMF in its latest World Economic Outlook. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 111 However, there is much less agreement on the correct timing. Since the crisis began, the imperatives I have just mentioned have tended to be obscured by short-term considerations. And surprisingly, this tendency seems to be becoming stronger now that the world economy is getting back on track. This view is reflected by something Lawrence Summers wrote in the Financial Times about four weeks ago. Referring to the US, he said that “… the most serious risk to recovery over the next few years […] is that policy will shift too quickly away from its emphasis on maintaining adequate demand, towards a concern with traditional fiscal and monetary prudence.” It is in this spirit that some observers are pushing for policies that eventually boil down to “more of the same”: firewalls and ex ante risk sharing in the euro area should be extended, consolidation of public debt should be postponed or, at least, stretched over time, and monetary policy should play an even bigger role in crisis management. I explicitly do not wish to deny the necessity of containing the crisis. But all that can be gained is the time to address the root problems. The proposed measures would buy us time, but they would not buy us a lasting solution. And five years after the bursting of the subprime bubble and three years after the turmoil in the wake of the Lehman insolvency, we have to ask ourselves: Where will it take us if we apply these measures over and over again – measures which are obviously geared towards alleviating the symptoms of the crisis but which fail to address its underlying causes? In my view, this would take us nowhere. There are two reasons for this. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 112 First, the longer such a strategy is applied, the harder it becomes to change track. More and more people will realise this and they will start to lose confidence. They will lose confidence in policymakers’ ability to bring about a lasting solution to our problems. And we should bear in mind that the crisis is primarily a crisis of confidence: of confidence in the sustainability of public finances, in competitiveness and, to some extent, in the workings of EMU. But there is a second reason why the “more of the same” will not take us anywhere. The analgesic we administer comes with side effects. And the longer we apply it, the greater these side effects will be, and they will come back to haunt us in the future. In the end, it is just not possible to separate the short and the long term. You will be tomorrow what you do today. With these two caveats in mind, let us take a closer look at the suggested policy mix. For the sake of brevity, I shall focus on monetary and fiscal policies.

3.1 An even bigger role for monetary policy?
To contain the crisis, the EMU member states have built a wall of money that recently reached the staggering height of 700 billion euros. As I have already said, ring-fencing is certainly necessary, but again: it is not a lasting solution. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 113 And it is not the sky that’s the limit – the limits are financial and political. In the face of such limits, the Eurosystem is now seen as the “last man standing”. Consequently, some observers are demanding that it play an even bigger role in crisis management. More specifically, such demands include lower interest rates, more liquidity and larger purchases of assets. But does the assumption on which these demands are based hold true when we take a closer look at it? In the end, monetary policy is not a panacea and central bank “firepower” is not unlimited, especially not in monetary union. True, this crisis is exceptional in scale and scope, and extraordinary times do call for extraordinary measures. But the central banks of the Eurosystem have already done a lot to contain crisis. Now we have to make sure that by solving one crisis, we are not preparing the ground for the next one. Take, for example, the side effects of low interest rates. Research has found that risk-taking becomes more aggressive when central banks apply unconditional monetary accommodation in order to counter a correction of financial exaggeration, especially if monetary policy does not react symmetrically to the build-up of financial imbalances. In the end, putting too much weight on countering immediate risks to financial stability will create even greater risks to financial stability and price stability in the future. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 114 The Eurosystem has applied a number of unconventional measures to maintain financial stability. These measures helped to prevent an escalation of the financial turmoil and constitute a virtually unlimited supply of liquidity to banks. But monetary policy cannot substitute for other policies and must not compensate for policy inaction in other areas. If the Eurosystem funds banks that are not financially sound, and does so against inadequate collateral, it redistributes risks among national taxpayers. Such implicit transfers are beyond the mandate of the euro area’s central banks. Rescuing banks using taxpayers’ money is something that should only be decided by national parliaments. Otherwise, monetary policy would nurture the deficit bias that is inherent to a monetary union of sovereign states. In this regard, the situation of the Eurosystem is fundamentally different from that of the Federal Reserve or that of the Bank of England. Moreover, extensive and protracted funding of banks by the Eurosystem replaces or displaces private investors. This breeds the risk that some banks will not reform unviable business models. So far, progress in this regard has been very limited in a number of euroarea countries. And the Eurosystem has also relieved stress in the sovereign bond market. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 115 However, we should not forget that market interest rates are an important signal for governments regarding the state of their finances and that they are an important incentive for reforms. Of course, markets do not always get it right. They may have underestimated sovereign risks for a long time and now they are overestimating it. But past experience taught us that their signal is still the most powerful incentive we have. At any rate, I would not rely on political insight or political rules alone. After all, monetary policy must not lose sight of its primary objective: to maintain price stability in the euro area as a whole. What does this mean? Let us say that monetary policy becomes too expansionary for Germany, for instance. If this happens, Germany has to deal with this using other, national instruments. But by the same token, we could say this: even if we are concerned about the impact on the peripheral countries, monetary policymakers must do what is necessary once upside risks for euro-area inflation increase. Delivering on its primary goal of maintaining price stability is essential for safeguarding the most precious resource a central bank can command: credibility. To sum up: what we do in the short-term has to be consistent with what we are trying to achieve in the long-term – price stability, financial stability and sound public finances. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 116 This implies a delicate balancing act – a balancing act we shall upset if we overburden monetary policy with crisis management.

3.2 Rethinking consolidation and structural reforms?
Now, what about consolidation and structural reforms? Here, too, we have to strike the right balance between the short and the long run. Those who propose putting off consolidation and reforms argue that embarking on ambitious consolidation efforts or far-reaching structural reforms at the present moment would place too great a burden on recovery. They do not deny the necessity of such steps over the medium term, but in the short-run they consider it more important to maintain adequate demand, avoid unsettling people and nurture the recovery. But in the end, the current crisis is, to a large degree, a crisis of confidence. And if already announced consolidation and reforms were to be delayed, would people not lose even more confidence in policymakers’ ability to get to the root of the crisis? We can only win back confidence if we bring down excessive deficits and boost competitiveness. And it is precisely because these things are unpopular that makes it so tempting for politicians to rely instead on monetary accommodation. It is true that consolidation, in particular, might, under normal circumstances, dampen aggregate demand and economic growth. But the question is: are these normal circumstances? _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 117 It is quite obvious that everybody sees public debt as a major threat. The markets do, politicians do, and people on Main Street do. A widespread lack of trust in public finances weighs heavily on growth: there is uncertainty regarding potential future tax increases, while funding costs are rising for private and public creditors alike. In such a situation, consolidation might inspire confidence and actually help the economy to grow. In my view, the risks of frontloading consolidation are being exaggerated. In any case, there is little alternative. In the end, you cannot borrow your way out of debt; cut your way out is the only promising approach.

4. Conclusion
Allow me to conclude by going back to the beginning of my speech where I mentioned the benefits of sharing and discussing ideas. I have stressed that we have to embark on reforms that make the crisis countries more competitive; that we have to reduce public debt and that we have to further improve the institutional framework of monetary union. But the spirit of my argument was expressed succinctly some 20 years ago by Karl Otto Pöhl. In his speech at the Economic Club he said: “The true function of a central bank must be, however, to take a longer-term view.” And after five years of crisis, the long term might catch up with us faster than we expect. We therefore have to think about the future now – and we have to act accordingly as well. Thank you for your attention. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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Andreas Dombret: Towards a more sustainable Europe

Speech by Dr Andreas Dombret, Member of the Executive Board of the Deutsche Bundesbank, at the Euromoney Germany Conference, Berlin, 25 April 2012.
***

1 Introduction
Ladies and Gentlemen I am delighted to have the opportunity to speak to you today at the Euromoney Germany conference. Now in its 8th year, the conference has established itself as a first-class opportunity for policymakers and financial practitioners to exchange views. I firmly believe that this free flow of ideas is of benefit to us all, and I am looking forward to sharing my views with you in the next 20 minutes. We are facing a crisis that is no longer confined to individual countries. Throughout and beyond Europe, it weighs heavily on people’s minds. Some believe, it even challenges the viability of monetary union in its current form. Given the exceptional scale and scope of the crisis, it is hardly surprising that views diverge on how to overcome it. But it is worth recalling that despite intense debates on the best way forward, we share a common vision for the future of our monetary union: a sound currency, sound public finances, competitive economies, and a stable financial system. These are the principles enshrined in the Maastricht Treaty. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 119 With the adoption of the treaty, all euro-area member states committed to a European stability culture. Among those most eager to join were the countries with first-hand experience of the painful consequences of deficits spiralling out of control and of a monetary policy not always fully committed to maintaining price stability.

The unholy “marriage” between Banca d’Italia and the Italian treasury in 1975 is a perfect example.
Banca d’Italia vowed to act as buyer of last resort for government bonds. Up to the “divorce” in 1981, Italian government debt more than tripled while average inflation stood at 17%. After Banca d’Italia was granted greater independence, inflation rates began to fall significantly. The principles of a sound currency, sound public finances and a competitive economy thus remain the cornerstones of a strong and sustainable monetary union. Far from being a specifically German conviction, they serve the well-being of citizens throughout the euro area. And the ongoing validity of these principles is a prerequisite for the public acceptance of monetary union. Thus, any approach that does not respect and comply with these principles will not bring about a lasting solution to the crisis. The current crisis is not a crisis of the euro as our common currency. Since the start of the euro, inflation has been in line with the Eurosystem’s definition of price stability, and the euro continues to be a strong currency – to some, it actually appears to be too strong. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 120 But it is generally accepted that the two central elements of the crisis are large macroeconomic imbalances stemming from diverging competitiveness levels, and unsustainable levels of public debt.

2 The root causes of the crisis: macroeconomic imbalances and over-indebtedness
No lasting solution to the crisis will be achieved unless these root causes are tackled. Firewalls can help some countries to cope better with the effects of sudden shifts in investor sentiment, but, ultimately, all it can do is buy time. As the IMF points out in its recent World Economic Outlook , firewalls by themselves cannot solve the difficult fiscal, competitiveness and growth issues that some countries are now facing.

2.1 Macroeconomic imbalances
There is broad consensus that macroeconomic imbalances, which have built up in recent years, lie at the heart of the crisis. But the best way to correct these imbalances has been the subject of intense debate. Exchange rate movements are usually an important channel through which unsustainable current account positions are corrected – deficit countries eventually see a devaluation, while surplus tend to revalue their currencies. The reactions that this triggers in imports, exports and corresponding capital flows then help to bring the current account back closer to balance. In a monetary union, however, this is obviously no longer an option. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 121 Spain no longer has a peseta to devalue; Germany no longer has a deutsche mark to revalue. Other things must therefore give instead: prices, wages, employment and output. The question now is which countries have to shoulder the adjustment burden. Naturally, this is where opinions start to differ. The German position could be described as follows: the deficit countries must adjust. They must address their structural problems, reduce domestic demand, become more competitive and increase their exports. But this position has not gone uncontested. Indeed, well-known commentators suggest that surplus countries should bear part of the adjustment burden in order to avoid deflation in deficit countries. They also point out that not all countries can act like Germany, in other words, not all countries can run a current account surplus. Hence, they suggest that surplus countries should shoulder at least part of the burden. But this criticism misses the point of what the correction of domestic imbalances actually means: As regards the lingering threat of a protracted deflation, it is rather a one-off reduction of prices and wages that is required, not a lasting deflationary process.

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P a g e | 122 In fact, frontloading reforms and necessary adjustment has proven to be more successful than protracted adjustment, as experience in the Baltic states and Ireland shows. And while not all countries can run a current account surplus, all can become more competitive – higher competitiveness due to productivity increases or lower monopoly rents in, up to now, overregulated sectors is not a zero sum game. Structural reforms can unlock the potential to increase productivity and thus improve competitiveness without inducing deflation. There is no way around the fact that Europe is part of a globalised world. And, at the global level, we are competing with economies such as the United States or China. To succeed, Europe as a whole has to become more dynamic, more inventive and more productive. Once the deficit countries start to become more competitive, surplus countries will adjust automatically. They will become less competitive in relative terms, exporting less and importing more. And we should acknowledge that this process has already been set in motion. Exports of a number of peripheral countries have started to grow, bringing down current account deficits in the process. Correspondingly, German imports from the euro area have grown strongly over the last two years, almost halving the current account surplus between 2007 and 2011. To facilitate the adjustment process, euro area members have committed significant funds within the framework of the EFSF and the ESM. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 123 Germany is contributing the biggest share. This support is based on the high reputation Germany enjoys among investors. We would put this trust in jeopardy if we were to give in to calls for fiscal stimulus in Germany in order to raise demand for imports from the peripheral euro area. But weakening Germany’s fiscal position would lead to higher refinancing costs and, therefore, either reduce the capacity of the firewalls or raise the borrowing costs for programme countries. Moreover, studies by the IMF suggest that positive spill-over effects from an increase in German demand to partner countries in the euro area would be minimal. So, instead of stimulating exports in peripheral euro-area countries, additional fiscal stimulus at a time when Germany’s economy is already running at normal capacity would be of detriment to all parties.

2.2 Fiscal consolidation
Turning to fiscal consolidation, it is often stressed that such measures, together with structural reforms, would be too much of a burden. They would create a vicious circle of decreasing demand and further budget pressure that would eventually bring the economy down. But to the extent that the current output level was fuelled by an unsustainable ballooning of private and public debt, correction as such is unavoidable, and the only question that remains is that of the best timing. However, this crisis is a crisis of confidence. While, under normal circumstances, consolidation might dampen the economy, the lack of trust in public finances and in policymakers” willingness to act is a huge burden for growth. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 124 Thus, frontloaded, and therefore credible, consolidation would instead strengthen confidence, actually help the economy to grow and reduce the danger of the crisis spreading to the financial system. In addition, urgently needed structural reforms and consolidation are often hard to disentangle. For example, a bloated public sector or very generous pension system are both a drag on growth and a burden on the budget. The same applies to inefficient companies that are state-owned or operate in highly regulated sectors. The risks to growth emanating from immediate fiscal consolidation therefore have to be put into perspective. Negative short-term effects cannot be ruled out. But to the extent that consolidation constitutes necessary corrections of an unsustainable development and brings about greater efficiency, the long-term gains do not only vastly exceed potential short-term pain, they also help to alleviate it now by restoring the lost credibility in the ability to tackle the root causes of the crisis.

3 The role of monetary policy
Up to now, the picture has been mixed in this regard. We have seen substantial progress, often initiated by new, more reform-minded governments, but also some setbacks. A much clearer pattern has emerged with respect to the expectations placed on monetary policy. Whenever a new intensification of the crisis looms, the first question seems to be “What can the central banks do about this?” _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 125 To me, this is a worrisome development. Monetary policy has already gone a very long way towards containing the crisis. But we have to be aware that the medicine of a very low interest rate policy, ample provision of liquidity at very favourable conditions and large-scale financial market intervention does not come without side effects – which are all the more severe, the longer the drug is administered. In the course of this crisis, the role of central banks has changed fundamentally. Before the crisis, they provided scarce liquidity; now they increasing serve as a regular source of funding for banks, and this threatens to replace or displace private investors. This may give rise to new financial instability if, as a result of the measures, banks and investors behave carelessly or embark on unsustainable business models, for instance, due to substantial carry trades. But emergency measures will not become the “new normal”. Banks, investors and governments have to be fully aware of this, and central banks cannot tolerate that their well-intentioned emergency measures result in a delay in necessary adjustments in the financial sector or protracted consolidation and reform efforts among governments.

4 Conclusion
Ladies and Gentlemen, In my remarks, I have focused on necessary reforms in the euro area member states. This is not to say that changes to the institutional set-up of monetary union are not important.

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 126 If member states want to retain autonomy with regard to fiscal policy, we need stricter rules to account for the incentives to accumulate debt that exist in a monetary union. The fiscal compact is a promising step forward. Now, it is essential that the rules are applied rigorously. Referring to the motto of this conference “A German Europe or a European Germany”, how should one label the recipe to overcome the crisis that I have just presented? Well, it is, quite obviously, a European solution. And that is because it fully reflects and respects the letter as well as the spirit of the European Treaty and therefore of the principles that I stressed at the beginning. The current crisis is most certainly a defining moment for monetary union. But the crisis and the measures taken to overcome it should not be allowed to redefine implicitly what monetary union actually is. This time we really cannot “let this crisis go to waste”, as the former White House chief of staff, Rahm Emanuel, put it. The crisis has laid bare structural flaws at many levels. It has questioned the way we adhered to the principles of EMU, but did not invalidate the principles themselves, quite the contrary. I am confident that having stared into the abyss, Europe will make the right choices and pave the way for a more prosperous and sustainable future – to the benefit of Germany as well as of the euro area as a whole.

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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ENERGY ≠ HEAT: DARPA SEEKS NON-THERMAL APPROACHES TO THIN-FILM DEPOSITION April 26, 2012
Chemistry and physics researchers wanted to develop new approaches to reactant flux, surface mobility, reaction energy, by-product removal, nucleation and other components of thin-film deposition When the Department of Defense (DoD) wants to build a jet engine, it doesn’t put a team of engineers in a hangar with a block of metal and some chisels. Jet engines are made up of individual components that are carefully assembled into a finished product that possesses the desired performance capabilities. In the case of thin-film deposition—a process in which coatings with special properties are bonded to materials and parts to enhance performance—current science addresses the process as though it is attempting to build a jet engine from a block of metal, focusing on the whole and ignoring the parts. Like a jet engine, the thin-film deposition process could work better if it was addressed at the component level. Thin-film deposition requires high levels of energy to achieve the _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 128 individual chemical steps to deposit a coating on a substrate. Under the current state of practice, that necessary energy is generated by applying very high temperatures—more than 900 degrees Celsius in some cases—at the surface of the substrate as part of a chemical vapor deposition process. The problem with using the thermal energy hammer is that the minimum required processing temperatures exceed the maximum temperatures that many substrates of interest to DoD can withstand. As a result, a wide range of capabilities remain out of reach. DARPA created the Local Control of Materials Synthesis (LoCo) program to overcome the reliance on high thermal energy input by addressing the process of thin-film deposition at the component level in areas such as reactant flux, surface mobility, reaction energy, nucleation and by-product removal, among others. In so doing, LoCo will attempt to create new, low-temperature deposition processes and a new range of coating-substrate pairings for use in DoD technologies. “What really matters in thin-film deposition is energy, not heat,” said Brian Holloway, DARPA program manager. “If we break down the thin-film deposition process into components, we should be able to achieve better results by looking at each piece individually and then merging those solutions into a new low temperature process. It’s going to be researchers in specialties like plasma chemistry, photophysics, surface acoustic spectroscopy and solid-state physics who make it possible. DARPA seeks scientists who can contribute pieces of the puzzle so that the LoCo team can put them together.” _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 129 Breakthroughs in thin-film deposition could enhance performance and enable new capabilities across a range of DoD technologies, impacting areas as diverse as artificial arteries, corrosion-resistant paint and steel combinations, erosion-resistant rotor blades, photovoltaics and long-wavelength infrared missile domes, among others. As a second focus area, the LoCo program seeks performers to evaluate the cost and performance impacts of coating application to existing DoD parts and systems. Through these assessments, DARPA hopes to identify a specific piece of equipment that would benefit from a novel coating to use as a test bed for any new thin-film deposition process. Through this parallel effort, LoCo intends to move from initial research to practical application within three years. To answer questions regarding the LoCo program, DARPA will hold a Proposers’ Day workshop on May 9, 2012. This live workshop and simultaneous webcast will introduce interested communities to the effort, explain the mechanics of a DARPA program and address questions about proposals, participation and eligibility. The meeting is in support of the forthcoming Local Control of Materials Synthesis Broad Agency Announcement (BAA) that will formally solicit proposals. More information on the Proposers’ Day is available at: http://go.usa.gov/y6M. The BAA will be announced on the Federal Business Opportunities website (www.fbo.gov).

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Note:
DARPA’s – or ARPA’s, as it was called at the time – involvement in the creation of the Internet began with a memo.

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P a g e | 132 Dated April 23, 1963, the memo was dictated as its author, Joseph Carl Robnett Licklider, was rushing to catch an airplane. No surprise there: Licklider was spending a lot of his time on airplanes in those days. The previous fall, he had come to the Pentagon to organize the Information Processing Techniques Office (IPTO), ARPA’s first effort to fund research into “command and control” – that is, computing. And he had been crisscrossing the country ever since, energetically assembling a network of principal investigators scattered from the Rand Corporation in Santa Monica, Calif., to MIT in Cambridge, Mass. Licklider’s task might have been easier if he had been pursuing a more conventional line of computing research – improvements in database management, say, or fast-turnaround batch-processing systems. He could have just commissioned work from mainstream companies like IBM, who would have been more than happy to participate. But in fact, with his bosses’ approval, Licklider was pushing a radically different vision of computing . His inspiration had come from Project Lincoln, which had begun back in 1951 when the Air Force commissioned MIT to design a state-of-theart, early-warning network to guard against a Soviet nuclear bomber attack. The idea – radical at the time – was to create a system in which all the radar surveillance, target tracking, and other operations would be coordinated by computers, which in turn would be based on a highly experimental MIT machine known as Whirlwind: the first “real-time” computer capable of responding to events as fast as they occurred. Project Lincoln would eventually result in a continent-spanning system of 23 centers that each housed up to 50 human radar operators, plus two _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 133 redundant real-time computers capable of tracking up to 400 airplanes at once. This Semi-Automatic Ground Environment (SAGE) system would also include the world’s first long-distance network, which allowed the computers to transfer data among the 23 centers over telephone lines. Licklider, who was then a professor of experimental psychology at MIT, had led a team of young psychologists working on the human factors aspects of the SAGE radar operator’s console. And something about it had obviously stirred his imagination. By 1957, he was giving talks about a “Truly SAGE System” that would be focused not on national security, but enhancing the power of the mind. In place of the 23 air-defense centers, he imagined a nationwide network of “thinking centers,” with responsive, real time computers that contained vast libraries covering every subject imaginable. And in place of the radar consoles, he imagined a multitude of interactive terminals, each capable of displaying text, equations, pictures, diagrams, or any other form of information. By 1958, Licklider had begun to talk about this vision as a “symbiosis” of men and machines, each preeminent in its own sphere – rote algorithms for computers, creative heuristics for humans – but together far more powerful than either could be separately. By 1960, in his classic article “Man-Computer Symbiosis,” he had written down these ideas in detail – in effect, laying out a research agenda for how to make his vision a reality. And now, at ARPA, he was using the Pentagon’s money to implement that agenda.

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Press Release Federal Open Market Committee
Information received since the Federal Open Market Committee met in March suggests that the economy has been expanding moderately. Labor market conditions have improved in recent months; the unemployment rate has declined but remains elevated. Household spending and business fixed investment have continued to advance. Despite some signs of improvement, the housing sector remains depressed. Inflation has picked up somewhat, mainly reflecting higher prices of crude oil and gasoline. However, longer-term inflation expectations have remained stable.

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P a g e | 136 Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects economic growth to remain moderate over coming quarters and then to pick up gradually. Consequently, the Committee anticipates that the unemployment rate will decline gradually toward levels that it judges to be consistent with its dual mandate. Strains in global financial markets continue to pose significant downside risks to the economic outlook. The increase in oil and gasoline prices earlier this year is expected to affect inflation only temporarily, and the Committee anticipates that subsequently inflation will run at or below the rate that it judges most consistent with its dual mandate. To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014. The Committee also decided to continue its program to extend the average maturity of its holdings of securities as announced in September. The Committee is maintaining its existing policies of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 137 The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate to promote a stronger economic recovery in a context of price stability. Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Dennis P. Lockhart; Sandra Pianalto; Sarah Bloom Raskin; Daniel K. Tarullo; John C. Williams; and Janet L. Yellen. Voting against the action was Jeffrey M. Lacker, who does not anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate through late 2014.

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Press Release April 25, 2012
The Federal Reserve Board and the Federal Open Market Committee on Wednesday released the attached table and charts summarizing the economic projections and the target federal funds rate projections made by Federal Reserve Board members and Federal Reserve Bank presidents for the April 24-25 meeting of the Committee. The table will be incorporated into a summary of economic projections released with the minutes of the April 24-25 meeting.

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Explanation of Economic Projections Charts
The charts show actual values and projections for three economic variables, based on FOMC participants’ individual assessments of appropriate monetary policy: Change in Real Gross Domestic Product (GDP)—as measured from the fourth quarter of the previous year to the fourth quarter of the year indicated, with values plotted at the end of each year. Unemployment Rate—the average civilian unemployment rate in the fourth quarter of each year, with values plotted at the end of each year. PCE Inflation—as measured by the change in the personal consumption expenditures (PCE) price index from the fourth quarter of the previous year to the fourth quarter of the year indicated, with values plotted at the end of each year. Information for these variables is shown for each year from 2007 to 2014, and for the longer run. The solid line, labeled “Actual,” shows the historical values for each variable. The lightly shaded areas represent the ranges of the projections of policymakers. The bottom of the range for each variable is the lowest of all of the projections for that year or period. Likewise, the top of the range is the highest of all of the projections for that year or period. The dark shaded areas represent the central tendency, which is a narrower version of the range that excludes the three highest and three lowest projections for each variable in each year or period. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 142 The longer-run projections, which are shown on the far right side of the charts, are the rates of growth, unemployment, and inflation to which a policymaker expects the economy to converge over time—maybe in five or six years—in the absence of further shocks and under appropriate monetary policy. Because appropriate monetary policy, by definition, is aimed at achieving the Federal Reserve’s dual mandate of maximum employment and price stability in the longer run, policymakers’ longer-run projections for economic growth and unemployment may be interpreted, respectively, as estimates of the economy’s normal or trend rate of growth and its normal unemployment rate over the longer run. The longer-run projection shown for inflation is the rate of inflation judged to be most consistent with the Federal Reserve’s dual mandate.

Explanation of Policy Path Charts
These charts are based on policymakers’ assessments of the appropriate path for the FOMC’s target federal funds rate. The target funds rate is measured as the level of the target rate at the end of the calendar year or in the longer run. Appropriate monetary policy, by definition, is the future path of policy that each participant deems most likely to foster outcomes for economic activity and inflation that best satisfy his or her interpretation of the Federal Reserve’s dual objectives of maximum employment and stable prices. In the upper panel, the shaded bars represent the number of FOMC participants who judge that the initial increase in the target federal funds rate (from its current range of 0 to ¼ percent) would appropriately occur in the specified calendar year.

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P a g e | 143 In the lower panel, the dots represent individual policymakers’ assessments of the appropriate federal funds rate target at the end of each of the next several years and in the longer run. Each dot in that chart represents one policymaker’s projection. Please note that for purposes of this chart the responses are rounded to the nearest ¼ percent, with the exception that all values below 37.5 basis points are rounded to ¼ percent. These assessments of the timing of the initial increase of the target federal funds rate and the path of the target federal funds rate are the ones that policymakers view as compatible with their individual economic projections.

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FSB Principles for Sound Residential Mortgage Underwriting Practices April 2012 Definitions
Definitions often differ across jurisdictions. For the purposes of these Principles, the following definitions are used: Appraisal: A comprehensive assessment of the property characteristics, which will include determining an opinion of the collateral’s value. In some countries the same process is known as a “valuation” or the terms are used interchangeably. Balloon payment: The remaining amount of principal that becomes due and payable on the final instalment payment for a loan that is not fully amortised. Collateral: The property or property rights upon which the residential mortgage loan is secured. Collateral management: For purposes of these Principles, collateral management concerns all tasks and processes within the mortgage underwriting process where collateral is involved, e.g. appraisal of collateral, the constitution of collateral, review of its legal existence and enforceability and entry of collateral-related data in the lender’s information technology systems. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 145 Debt-to-income (DTI): Annual or monthly total debt servicing requirements, including principal, interest, taxes and insurance, as a percentage of annual or monthly income that is available to repay the debt. Down payment: Up-front payment from the buyer for a portion of the purchase price, which reduces the balance of the loan against the property. Equity: Difference between the appraised value of the property and the total claims held against the property. Loan-to-income (LTI): Annual or monthly mortgage loan servicing requirements as a percentage of annual or monthly income that is available to repay the loan. Loan-to-value (LTV): The ratio of the amount of the loan outstanding to the appraised value of the residential property. Mortgage loan: A loan that is collateralised against a residential property, including purchase, home equity loans, home equity lines of credit (HELOCs) and refinancings. Mortgage insurance: A type of insurance where the lender receives compensation against loss from default on the part of a borrower on a mortgage loan (also known as mortgage default insurance or mortgage guaranty insurance). Variable rate mortgage: A loan in which the interest rate rises and falls possibly based on the movement on an underlying index. The term variable rate mortgage is used interchangeably with adjustable rate mortgage.

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I. Introduction
In March 2011 the Financial Stability Board (FSB) published a thematic review of residential mortgage underwriting and origination practices. Based on the findings of the review, six recommendations were set out, one of which asked the FSB to develop an international principles-based framework for sound underwriting practices. After providing sufficient time for implementation, the FSB will conduct a follow-up review to assess progress made in implementing the framework. Given that the underlying risks can differ across jurisdictions, the Principles are high-level rather than aimed at detailed international standards. As the global crisis demonstrated, the consequences of weak residential mortgage underwriting practices in one country can be transferred globally through securitisation of mortgages underwritten to weak standards. As such, it is important to have sound underwriting practices at the point at which a mortgage loan is originally made. In response to the crisis, a number of FSB members have encouraged stricter underwriting practices so as to limit the risks that mortgage markets pose to financial stability and to better safeguard borrowers and investors. Internationally agreed Principles will help to strengthen residential mortgage underwriting practices and enable supervisors to more effectively monitor and detect the erosion of underwriting practices particularly when the housing market is booming. The FSB Principles are intended to apply to loans to individuals (consumers) that are _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 147 (i) secured either by residential mortgage or by another comparable security commonly used in some jurisdictions on immovable residential property; (ii) secured by a right related to immovable residential property; and (iii) loans for which the purpose is to acquire or retain rights in immovable residential property. However, some or all of the Principles may not necessarily be appropriate or applicable for certain niche forms of finance. Jurisdictions should nonetheless seek to apply all Principles that are relevant. In all instances, a robust and effective assessment of individual affordability must underpin any sustainable lending model. It is important to note that the Principles focus on the credit granting decision rather than wider issues of credit risk management. Jurisdictions should ensure that entities that originate a mortgage, or own the resulting risk, adhere to these FSB Principles, including any entities involved in outsourcing of mortgage underwriting. The Principles span the following areas, some of which proved to be particularly weak during the global financial crisis that started in 2007: (i) effective verification of income and other financial information; (ii) reasonable debt service coverage; (iii) appropriate loan-to-value ratios; (iv) effective collateral management; and (v) prudent use of mortgage insurance. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 148 The report also sets out an implementation framework to promote minimum residential mortgage underwriting standards, and describes tools that could be used to monitor and supervise these standards. In general, the range of residential mortgage underwriting practices reflects the distinct real estate markets, cultural differences and socioeconomic policies that shape each jurisdiction’s mortgage market. Hence, these Principles should be implemented according to national circumstances, and as appropriate to national institutional arrangements, whether through legislative, regulatory or supervisory measures, or through industry practices.

II. Principles
The FSB Principles for Sound Residential Mortgage Underwriting Practices aim to provide a framework for jurisdictions to set minimum acceptable underwriting standards. Jurisdictions should ensure that lenders adopt sound mortgage underwriting standards against which supervisors can monitor and supervise. Lenders may choose to outsource aspects of the activities covered by these Principles, for example to credit intermediaries, credit bureaus and appraisers, but jurisdictions should ensure that lenders retain responsibility for all such tasks. The examples presented in italics provided throughout the Principles should be interpreted as such, and jurisdictions should implement the Principles accordingly. The Principles will assist FSB members in their efforts to improve financial stability and prudential standards. They also refer to consumer protection issues that contribute to these objectives, but the Principles are not intended to be a statement of consumer protection standards. Jurisdictions will want to adopt the consumer protection standards that are appropriate to them. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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1. Effective verification of income and other financial information
A borrower’s underlying income capacity is a key input into effective mortgage underwriting. Jurisdictions should ensure that lenders verify and document each applicant’s current employment status, relevant income history, and other financial information (e.g. credit scores, credit registers) submitted for mortgage qualification. While income verification can help to measure a borrower’s “ability to repay”, other financial information can help to measure or to infer a borrower’s historical “propensity to repay”.

1.1 Jurisdictions should ensure that lenders make reasonable inquiries and take reasonable steps to verify a borrower’s underlying income capacity.
Lenders should obtain sufficient income history on the borrower and make appropriate efforts to capture any variability in the borrower’s income by collecting and analysing sufficient income history. These income reports should be based on authoritative sources. Lenders may require even more extensive history or third-party verification to document income and profit capacity for borrowers who are self-employed, entrepreneurs, or have seasonal or irregular sources of income.

1.2 Jurisdictions should ensure that lenders maintain complete documentation of the information that leads to mortgage approval.
Lenders should document the income history collected for each applicant, including the steps taken to verify income, and maintain this documentation for a number of years after origination of the loan. A proper record with an adequate explanation of the steps taken to verify income capacity should be readily available for supervisors. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 150 For example, the documentation could contain income information disaggregated into wage/salary and the more volatile components such as overtime, commissions, bonuses, equity pay, seasonal and irregular income, where variable pay is a significant part of the total income. In case a lender uses internal scoring methods, information about data and algorithm requirements for scoring borrowers should also be available.

1.3 Jurisdictions should ensure that incentives are aligned with accurate representation of borrowers’ income and other financial information.
The loan documentation requirements should be designed to help identify misrepresentation of information either by the borrower, the lender or the credit intermediary. When fraud is detected, it should be possible to have recourse as appropriate to the jurisdiction’s legal system.

2. Reasonable debt service coverage
One of the most fundamental components of prudent underwriting is an accurate assessment of the borrower’s ability to repay the mortgage. This is important to help ensure prudent mortgage underwriting standards minimise defaults and losses, and thus, promote stability of the financial system. Furthermore, it is an important factor in reducing the likelihood of consumer over-indebtedness and the negative social and economic impact of forced sales.

2.1 Jurisdictions should ensure that lenders, while taking into account data protection rules in their jurisdiction, appropriately assess borrowers’ ability to service and fully repay their loans without causing the borrower undue hardship and over-indebtedness.
Jurisdictions should ensure that lenders _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 151 (i) establish appropriate processes to assess the borrower’s ability to repay the loan; (ii) review these processes at regular intervals; and (iii) maintain up-to-date records of those processes. Jurisdictions should ensure that lenders take into account all relevant factors that could influence the prospect for the loan to be repaid according to its terms and conditions over its lifetime. This should include an appropriate consideration of other servicing obligations, such as the level of other debt (secured and unsecured), the interest rate and outstanding principal on such debt, and evidence of delinquency. Lenders should also include an assessment of whether the loan can be expected to be repaid, including principal, interest, taxes and insurance, within the specified loan amortisation period from the borrowers’ own resources (income and assets) without inducing undue hardship and over-indebtedness. Temporarily high incomes should be suitably discounted. If the loan term extends past normal retirement age, lenders should take appropriate account of the adequacy of the borrower’s likely income and repayment capacity in retirement. The assessment of the borrower’s ability to repay should neither be based on the assumption that the property will appreciate in value (unless the purpose of the loan is to construct or renovate the immovable residential property) nor on an expected significant increase of the borrower’s repayment capacity.

2.2 Jurisdictions should ensure that lenders make reasonable allowances for committed and other non-discretionary expenditures in the assessment of repayment capacity.
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P a g e | 152 This could include establishing the borrowers’ actual obligations, including appropriate substantiation and consideration of normal living expenses. Lenders should also include risk limits in their internal loan policies, such as specifying minimum levels of residual net income after meeting obligations or fixed ratios of repayment to some measure of gross or net income (e.g. debt-to-income ratio, loan-to-income ratio).

2.3 Jurisdictions should ensure lenders make prudent allowances for future negative outcomes.
Lenders should include an increase in benchmark interest rates in the case of variable rate mortgages or an unfavourable change (for a borrower) in the exchange rate in the case of mortgages granted in foreign currencies. As such, repayment capacity calculations should take into account the highest payment currently scheduled to apply during the term of the loan rather than solely utilising the first few payments at the prevailing interest rate or foreign exchange rate. Lenders also should consider the increase in future payments due to negative amortisation, balloon payment, or deferred payments of principal or interest.

2.4 Jurisdictions should ensure that lenders provide borrowers with sufficient information to clearly understand the main elements which are taken into account in order to determine a borrower’s repayment capacity, the main characteristics of the loan including the costs, and risks associated with the loan in order to enable borrowers to assess whether the loan is appropriate to their needs and financial circumstances.
It is important that customer information be clear, concise, reliable, comparable, easily accessible, timely, and comprehensive (i.e. the information should also take into account the effect of variation in interest rates and the combined effect of the loan and any other product linked to _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 153 it). This information should be provided to borrowers without charge and effectively present the total cost of the mortgage during its lifetime, taking into account the loan terms.

3. Appropriate loan-to-value (LTV) ratios
Collateralisation is an important dimension of mortgage underwriting standards. From an historical perspective, high-LTV ratio loans consistently perform worse than those with a high proportion of initial equity. While it is common for individual lenders to apply a cap on LTV ratios, it is not necessary for regulators and supervisors to mandate such a cap if they satisfy themselves that the underwriting standards are sufficiently prudent and are unlikely to be eroded under competitive pressure. However, jurisdictions may consider imposing or incentivising limits on LTV ratios according to specific national circumstances.

3.1 Jurisdictions should ensure that their regulatory and supervisory frameworks appropriately incentivise prudent approaches to the collateralisation of mortgage loans.
However, the LTV ratio should not be relied upon as an alternative to assessing repayment capacity (see Principle 2 for more details).

3.2 Jurisdictions should ensure that lenders adopt prudent LTV ratios with an appropriate level of down payment that is substantially drawn from the borrower’s own resources, not from, for example another provider of finance, to ensure the borrower has an appropriate financial interest in the collateral. 3.3 Where national frameworks specify controls, standards or incentives on LTV ratios, these jurisdictions should ensure that lenders satisfy themselves that the LTV ratio takes into consideration the "real value" of the available equity, which could be calculated on the basis of:
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P a g e | 154 - a robust and prudent approach to property appraisals (see Principle 4); - all loans that are collateralised against the same property or for financing part of the cost of the property. This should include loans provided alongside the main mortgage (e.g. top-up loans, renovation or decoration loans); and - any increase in loan authorisation being subject to a full assessment of the borrower’s repayment capacity and to an appropriate LTV ratio at the point of the new mortgage underwriting, and not rely on the excess equity. Any subsequent refinancing utilising a second charge or lien should lead to the calculation of a new LTV ratio where possible. Particular caution should be exercised about drawing down on the equity in the property if that would raise the current LTV ratio above the level originally agreed.

3.4 Jurisdictions should ensure that lenders refrain from relaxing LTV ratios at the time of a boom in the property market.

4. Effective collateral management
Collateral management and sound appraisal processes are essential to the mortgage business. The property and the appraised property value are of utmost importance for risk limitation and mitigation.

4.1 Jurisdictions should ensure that lenders adopt and adhere to adequate internal risk management and collateral management processes, which include sound appraisal processes.
Proper collateral management should include onsite inspections by lenders or appraisers; but onsite inspections could be exempted if the _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 155 lender or appraiser is able to demonstrate that the risk posed has been adequately assessed through the overall collateral management process. For example, a flat or an apartment in a multi-family building which had recently undergone an on-site inspection could be exempted.

4.2 Jurisdictions should ensure that lenders adopt appraisal standards and methods that lead to realistic and substantiated property appraisals.
Property appraisal reports should be supportable and therefore reflect the current price level and the property’s function as collateral over the entire life of the mortgage. Property appraisal reports should not reflect expected future house price appreciation.

4.3 Jurisdictions should ensure that lenders require all appraisal reports to be prepared with appropriate professional skill and diligence, and that appraisers (whether internal or external) meet certain qualification requirements.
Appraisers, and providers of appraisal systems, should be independent from the lender’s respective mortgage acquisition, loan processing and loan decision process. In addition, they should not have an interest in the result of the appraisal. Coercion, improper compensation schemes and other inappropriate influence on appraisers should be sanctioned.

4.4 Jurisdictions should recognise the importance of sound regulation and oversight of appraisers, either through self-regulation or statutory means. 4.5 Jurisdictions should ensure that lenders maintain adequate appraisal documentation for collateral that is comprehensive and plausible.
It should include an examination of all aspects relevant to the property value. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 156 The scope and extent of the appraisal report should be commensurate with the property value and inherent risks.

4.6 Jurisdictions should ensure that lenders satisfy themselves that the claim on collateral is legally enforceable and can be realised in a reasonable period of time.
This includes that borrowers should have or will have clear title to the property and the characteristics are as they have been represented. The types of property accepted as collateral and the related mortgage underwriting policies should be clearly documented. The property serving as collateral should be appropriately insured against damage.

4.7 Jurisdictions should ensure that lenders deduct significant incentives or benefits offered in the context of buying the property (e.g. vendor financing of down payments, sales and financing concessions) that may inflate the price of the property in the course of the appraisal process.

5. Prudent use of mortgage insurance
Mortgage insurance is used in some jurisdictions as a form of credit support for mortgage loans, and a way to provide additional financing flexibility for lenders and borrowers.

5.1 Jurisdictions should ensure that where mortgage insurance is used, it does not substitute for sound underwriting practices by lenders.
Lenders should conduct their own due diligence including comprehensive and independent assessment of the borrower’s capacity to repay, verification minimum initial equity by borrowers, reasonable debt service coverage, and assessment of the value of the property. In addition, mortgage insurers should have their own prudent underwriting practices consistent with the Principles in this framework. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 157 In summary, mortgage insurance should not be considered as an alternative for due diligence.

5.2 Jurisdictions should ensure that lenders carry out prudent and independent assessments of the risks related to the use of mortgage insurance, such as counterparty risk and the extent and details of the coverage of the mortgage insurance policies.
The effectiveness of mortgage insurance depends on the financial strength of the provider and a clear understanding of the policy coverage, which should be frequently monitored and assessed by the lender.

5.3 Jurisdictions should ensure that all mortgage insurers be subject to appropriate prudential and regulatory oversight and, where used, represent an effective transfer of risks from lenders to insurers.
However, in the case of government entities, comprehensive regulatory oversight may suffice. Through the use of mortgage insurance, credit risks, particularly those for high LTV loans, are transferred from lenders to insurers. Given that credit risks are often concentrated within a smaller number of institutions, jurisdictions should carefully monitor mortgage insurers’ exposure to such risk concentrations.

6. Implementation framework
Underlying the FSB Principles set out above is an understanding that mortgage underwriting standards are multi-dimensional and interrelated. Lending standards should be applied in a coordinated way, leading to a balanced approach that can vary with the national or economic context. Such an approach aims at preventing excessive build-up of risks (e.g. “risk layering”), avoiding one-dimensional policies that could exclude some creditworthy categories from housing finance, and dampening cycles that could arise from neglecting important dimensions, both in overheating phases (undue relaxation) or downturns (procyclical standard tightening). _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 158 The following actions form a basis for addressing underwriting risk, although jurisdictions may employ alternative means to counter the build-up of excessive risk.

6.1 Jurisdictions should ensure that there is an effective framework of mortgage underwriting standards against which regulators and supervisors can monitor and supervise.
This framework could be set centrally by regulators or supervisors, in addition to requiring lenders to have board-approved mortgage underwriting policies. In either case, the framework should meet Principles 1 to 5 and have regard to the interconnectedness of these aspects and the opportunities for arbitrage.

6.2 Jurisdictions should ensure that lenders consider more conservative underwriting criteria to compensate for situations where the underlying risks are higher.
For example, more conservative underwriting standards (e.g. LTV ratios or servicing requirements) could be considered where: - there are considerable risks that an asset price bubble is building up in the property market as a whole or in specific segments or geographical areas; - the loan is in a market segment that, compared with other mortgage loans in that jurisdiction, tends to perform worse than average in a property downturn (depending on the jurisdiction, examples of such a market segment might include luxury apartments, buy-to-let investors, second homes, cash-out refinancers, etc.); - there is a lack of full recourse against borrowers; or - other aspects of the underwriting standards are looser than the typical setting in the jurisdiction. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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6.3 Jurisdictions may want to impose absolute minimum levels of particular dimensions of mortgage underwriting standards below which no mortgage would be deemed acceptable, irrespective of the settings across the other dimensions.
One consideration could be whether a particular product or contract feature is harmful to the borrower’s interests. For example, the supervisor could specify that initial LTV ratios above 100 percent are not acceptable under any circumstances or that stated income, i.e. on a pure declarative basis (see Principle 1) is not acceptable and lenders should always conduct due verification.

6.4 Jurisdictions may want to require appropriate compensatory tightening in one or more dimensions to offset an easing in other dimensions.
For example, prolonged processes to foreclose delinquent loans could be offset by lower LTV ratios or foreign currency denominated loans could be offset by tighter serviceability requirements.

6.5 Jurisdictions may want to articulate the circumstances under which the supervisor would expect a material tightening of mortgage underwriting standards, either at an individual institution or across the whole industry.
For example, a supervisor could articulate that it reserves the right to demand tighter standards at a particular institution that has material weaknesses in its management controls.

7. Effective supervisory tools and powers
Jurisdictions should provide for appropriate monitoring and supervision of mortgage underwriting practices. Supervisors should consider the optionality embedded in the relevant loan terms and conditions, and the information used to verify that the loan meets the standard. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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7.1 Jurisdictions should give supervisors and regulators the authority to monitor, and where applicable to supervise, mortgage standards and practices.
These powers could include: - collecting data on mortgage underwriting standards and other matters necessary to carry out their regulatory functions and ensure compliance with the framework they have articulated as set out in Principle 6, or (subject to necessary confidentiality restrictions) requiring other agencies to collect data for this purpose on their behalf; - specifying the data they will collect to fulfill this requirement; - requiring entities under their prudential and regulatory framework to be capable of tracking portfolios and originations according to the mortgage underwriting standards observed; - aligning other parts of the supervisory framework (e.g. stress-testing, compensation regulations or guidance) with the objective of ensuring prudent lending practices in the mortgage market.

7.2 Jurisdictions should consider subjecting the framework of mortgage underwriting standards described in Principle 6.1 to periodic review.
A forward-looking approach should be developed as much as possible, taking into account the fact that significant delinquencies generally appear some years into the life of a loan. The framework should also be mindful of the phase of the cycle in each jurisdiction, and thus avoid adjustments that enhance the procyclical nature of mortgage markets.

7.3 Jurisdictions may want to give supervisors and regulators the authority to require lenders to identify groups of loans with a higher risk profile and that these loans be underwritten to a set of norms specific to them within the overall framework described in Principle 6.
_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

P a g e | 161 For example, they could require lenders not to process solely through automated systems loans extended to borrowers whose situations make risk assessment complex.

7.4 Jurisdictions should ensure that supervisors or other authorities disclose an assessment of mortgage underwriting practices in their jurisdiction, including the set of entities that are not prudentially regulated, whenever significant changes have been detected.
The authority or authorities responsible for publishing such an assessment should have the powers to collect such data as are required to make that assessment, or to receive those data from the agency that is authorised to collect it. Jurisdictions should specify the relative level of oversight of different types of lenders according to their importance in the financial system and the risks they pose.

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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Certified Risk and Compliance Management Professional (CRCMP) Distance learning and online certification program.
Companies like IBM, Accenture etc. consider the CRCMP a preferred certificate. You may find more if you search (CRCMP preferred certificate) using any search engine. The all-inclusive cost is $297. What is included in the price:

A. The official presentations we use in our instructor-led classes (3285 slides)
The 2309 slides are needed for the exam, as all the questions are based on these slides. The remaining 976 slides are for reference. You can find the course synopsis at: www.risk-compliance-association.com/Certified_Risk_Compliance_Tra ining.htm

B. Up to 3 Online Exams
You have to pass one exam. If you fail, you must study the official presentations and try again, but you do not need to spend money. Up to 3 exams are included in the price. To learn more you may visit: www.risk-compliance-association.com/Questions_About_The_Certifica tion_And_The_Exams_1.pdf www.risk-compliance-association.com/CRCMP_Certification_Steps_1.p df _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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C. Personalized Certificate printed in full color.
Processing, printing, packing and posting to your office or home.

D. The Dodd Frank Act and the new Risk Management Standards (976 slides, included in the 3285 slides)
The US Dodd-Frank Wall Street Reform and Consumer Protection Act is the most significant piece of legislation concerning the financial services industry in about 80 years. What does it mean for risk and compliance management professionals? It means new challenges, new jobs, new careers, and new opportunities. The bill establishes new risk management and corporate governance principles, sets up an early warning system to protect the economy from future threats, and brings more transparency and accountability. It also amends important sections of the Sarbanes Oxley Act. For example, it significantly expands whistleblower protections under the Sarbanes Oxley Act and creates additional anti-retaliation requirements.

You will find more information at:

www.risk-compliance-association.com/Distance_Learning_an d_Certification.htm

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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Visit our Risk and Compliance Management Speakers Bureau
The International Association of Risk and Compliance Professionals (IARCP) has established the Speakers Bureau for firms and organizations that want to access the expertise of Certified Risk and Compliance Management Professionals (CRCPMs) and Certified Information Systems Risk and Compliance Professionals (CISRCPs). The IARCP will be the liaison between our certified professionals and these organizations, at no cost. We strongly believe that this can be a great opportunity for both, our certified professionals and the organizers. To learn more: www.risk-compliance-association.com/Risk_Management_Compliance _Speakers_Bureau.html

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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1200 G Street NW Suite 800 Washington, DC 20005-6705 USA Tel: 202-449-9750 www.risk-compliance-association.com

International Association of Risk and Compliance Professionals (IARCP)

Top 10 risk and compliance management related news stories and world events that (for better or for worse) shaped the week's agenda, and what is next
George Lekatis President of the IARCP

Dear Member,

To celebrate the launch of the Lifetime Membership opportunity, the International Association of Risk and Compliance Professionals (IARCP) is offering $100 discount until Thursday, May 10, 2012. The value of the amazing benefits far exceeds the cost of the lifetime membership. The all-inclusive discounted cost is $373 until Thursday, May 10, 2012 (after May 10 the cost will be $473). This is a one-time fee. Read the amazing benefits at: http://www.risk-compliance-association.com/Lifetime_Membership_L aunch_Discount_USD100.htm Time to go to our Top 10 list I was between flights, when I read the alert:

NSA responsible for the supervision of the banks. What???
_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

Page |2 In my life, NSA stands for Not Such Agency (some say it is about the National Security Agency, home to America's codemakers and codebreakers).

And they are going to supervise banks???
I was dead wrong. It was about the NSA (National Supervisory Authority, another European acronym), not the NSA. Read more in No 6 of our list. Oh, no. It is possible to happen again. What else could NSA mean? After a Google search I found: National Speakers Association National Society of Accountants National Scrabble Association National Sunflower Association National Smokers Alliance National Storytelling Association Nebraska Soybean Association

The moral of the story:
1. If you see an acronym, you cannot be sure you know what they are talking about 2. Don’t study too hard between flights Welcome to the Top 10 list.

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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We have a very interesting paper from the Bank of international Settlements that clarifies issues of the Basel ii / iii frameworks. Fundamental review of the trading book, consultative document, May 2012

FSB enhances its process for ongoing monitoring of compensation practices Good progress has been made in implementing the FSB Principles and Standards on Sound Compensation Practices (“Principles and Standards”), but that more work is necessary to overcome constraints to full implementation by individual national authorities and to address concerns by firms of an uneven playing field.

More Long-term Investing Can Be Severely Distorted by Inaccurate, Short-term Focus Kai Bucher, Associate Director, Inaccurate measurement of investment values, returns, risks and liabilities can create substantial distortions to long-term investment strategies and drive long-term investors to adopt a short-term orientation, according to the Measurement, Governance and Long-term Investing report, released by the World Economic Forum.

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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Basel III – the big issues Speech by Andrew Bailey, Director of UK Banks & Building Socieities at the Seventh City of London Swiss Financial Roundtable

Remarks by Secretary Geithner at the Opening Ceremony of the 2012 Strategic and Economic Dialogue (S&ED)

30 April 2012 Report on the fulfilment of the EBA Recommendation following the 2011 EU-wide stress test

Social Media and Investing – Tips for Seniors The SEC’s Office of Investor Education and Advocacy is issuing this Investor Bulletin to provide seniors who use social media with a few tips to help them do so more safely and to help them avoid investment fraud.

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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A Perspective on the Economic Outlook Presented by Charles I. Plosser, President and Chief Executive Officer, Federal Reserve Bank of Philadelphia, CFA Society of San Diego