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International Association of Risk and Compliance Professionals (IARCP)
1200 G Street N W Suite 800 Washington, DC 20005-6705 USA Tel: 202-449-9750 www.risk-compliance-association.com

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 have some very interesting principles for the supervision of financial conglomerates.

What I really enjoyed:
“Supervisors should require that financial conglomerates not make overly ambitious diversification assumptions or imprudent correlation claims, particularly for capital adequacy and solvency purposes”.

Also:
“While it is possible that the spread of activities within a financial conglomerate may create diversification effects and reduce correlation, it is also true that membership of a financial conglomerate group may create “group risks” in the form of financial contagion, reputational contagion, ratings contagion (where a subsidiary accesses capital through a parent‟s credit rating and then suffers stress following the utilisation of the capital), double /multiple-gearing (use of same capital more than once within a group), excessive leveraging (upgrade in the quality of capital as it moves through a group), and regulatory arbitrage.

Read more at N umber 1

Welcome to the Top 10 list.
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Joint Forum, Principles for the supervision of financial conglomerates Corporate Governance Broadly, corporate governance describes the processes, policies and laws that govern how a company or group is directed, administered or controlled. It defines the set of relationships between a company‟s management, its board, its shareholders, and other recognised stakeholders.

Final Basel I I I Rules in Australia Australian Prudential Regulation Authority (APRA) To: All locally incorporated authorised deposit-taking institutions Basel I I I capital: interim arrangements for Additional Tier 1 and Tier 2 capital instruments

Public Hearings on the draft factual Report of the EU-US Insurance Regulatory Dialogue Project

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Five Questions about the Federal Reserve and Monetary Policy Chairman Ben S. Bernanke, at the Economic Club of

Adoption of Updated EDGAR Filer Manual The Securities and Exchange Commission (the Commission) is adopting revisions to the Electronic Data Gathering, Analysis, and Retrieval System (EDGAR) Filer Manual and related rules to reflect updates to the EDGAR system.

Dealing with financial systemic risk: the contribution of macroprudential policies Panel remarks by Jaime Caruana, General Manager of the Bank for International Settlements, Central Bank of Turkey/ G20 Conference on "Financial systemic risk", I stanbul

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EU to Gabriel Bernardino (EI OPA)

2013 work programme European Securities and Markets Authority ESMA‟s key objectives and priorities in 2013

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Solvency I I – monitoring the ongoing appropriateness of internal models Julian Adams, Director, I nsurance In June 2012 I wrote to all firms in our internal model approval process to share our thinking on the way we will monitor the ongoing appropriateness of internal models after approval.

The UK Corporate Governance Code Important parts The first version of the UK Corporate Governance Code (the Code) was produced in 1992 by the Cadbury Committee. Its paragraph 2.5 is still the classic definition of the context of the Code: “Corporate governance is the system by which companies are directed and controlled. Boards of directors are responsible for the governance of their companies. The shareholders‟ role in governance is to appoint the directors and the auditors and to satisfy themselves that an appropriate governance structure is in place. The responsibilities of the board include setting the company‟s strategic aims, providing the leadership to put them into effect, supervising the management of the business and reporting to shareholders on their stewardship. The board‟s actions are subject to laws, regulations and the shareholders in general meeting.”
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NUMBER 1

Joint Forum, Principles for the supervision of financial conglomerates Corporate Governance
Broadly, corporate governance describes the processes, policies and laws that govern how a company or group is directed, administered or controlled.

It defines the set of relationships between a company‟s management, its board, its shareholders, and other recognised stakeholders.
Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined. Good corporate governance should provide proper incentives for the board and management to pursue objectives that are in the interests of the company and its shareholders and should facilitate effective monitoring. The presence of an effective corporate governance system, within an individual company or group and across an economy as a whole, helps to provide a degree of confidence that is necessary for the proper functioning of a market economy. Financial conglomerates are often complex groups with multiple regulated and unregulated financial and other entities. Given this inherent complexity, corporate governance must carefully consider and balance the combination of interests of recognised stakeholders of the ultimate parent, and the regulated financial and other entities of the group.

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Ensuring that a common strategy supports the desired balance and that regulated entities are compliant with regulation on an individual and on an aggregate basis should be a goal of the governance system.
This governance system is the fiduciary responsibility of the board of directors. When assessing corporate governance across a financial conglomerate, supervisors should apply these principles in a manner that is appropriate to the relevant sectors and the supervisory objectives of those sectors.

This section describes the elements of the governance system most relevant to financial conglomerates, and how they should be assessed by supervisors.

Corporate governance in financial conglomerates
10. Supervisors should seek to ensure that the financial conglomerate establishes a comprehensive and consistent governance framework across the group that addresses the sound governance of the financial conglomerate, including unregulated entities, without prejudice to the governance of individual entities in the group.

Implementation criteria
10(a) Supervisors should require that the corporate governance framework of the financial conglomerate has minimum requirements for good governance of the entities of the financial conglomerate which allow for the prudential and legal obligations of its constituent entities to be effectively met.

The ultimate responsibility for the sound and prudent management of a financial conglomerate rests with the board of the head of the financial conglomerate.
10(b) Supervisors should require that the financial conglomerate emphasises a high degree of integrity in the conduct of its affairs.
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10(c) Supervisors should seek to ensure that the corporate governance framework appropriately balances the diverging interests of constituent entities and the financial conglomerate as a whole.
10(d) Supervisors should require that the governance framework respects the interests of policy holders and depositors (where relevant), and should seek to ensure that it respects the interests of other recognised stakeholders of the financial conglomerate and the financial soundness of entities in the financial conglomerate. 10(e) Supervisors should require that the governance framework includes adequate policies and processes that enable potential intra-group conflicts of interest to be avoided, and actual conflicts of interest to be identified and managed.

Explanatory comments
10.1 The corporate governance framework should address where appropriate: •Alignment to the structure of the financial conglomerate; • Financial soundness of the significant owners; •Suitability of board members, senior management and key persons in control functions including their ability to make reasonable and impartial business judgments; •Fiduciary responsibilities of the boards of directors and senior management of the head company and material subsidiaries; •Management of conflicts of interest, in particular at the intra-group level and remuneration policies and practices within the financial conglomerate; and •Internal control and risk management systems and internal audit and compliance functions for the financial conglomerate.
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2.The group‟s corporate governance framework should notably include a strong risk management framework (refer to the Risk Management section), a robust internal control system, effective internal audit and compliance functions, and ensure that the group conducts its affairs with appropriate independence and a high degree of integrity.
3.Group-wide governance not only involves the governance of the head of the financial conglomerate, but also applies group-wide to all material activities and entities of the financial conglomerate. 4 . I n the event the local corporate governance requirements applicable to any particular material entity in the financial conglomerate are below the group standards, the more stringent group corporate governance standards should apply, except where this would lead to a violation of local law. 5.Supervisors should require that the corporate governance framework of the financial conglomerate includes a code of ethical conduct. 6.Supervisors should require that the financial conglomerate have in place policies focused on identifying and managing potential intra-group conflicts of interest, including those that may result from intra-group transactions, charges, up streaming dividends, and risk-shifting. The policies should be approved by the board of the head of the financial conglomerate and be effectively implemented throughout the group. The policies should recognise the long-term interest of the financial conglomerate as a whole, the long term interest of the significant entities of the financial conglomerate, the stakeholders within the financial conglomerate, and all applicable laws and regulations.

Structure of the financial conglomerate
1 1. Supervisors should seek to ensure that the financial conglomerate has a transparent organisational and managerial structure, which is consistent with its overall strategy and risk profile and is well understood by the board and senior management of the head company.
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Implementation criteria
1 1(a) Supervisors should understand the financial conglomerate‟s group structure and the impact of any proposed changes to this structure. 1 1(b) Supervisors should assess the ownership structure of the financial conglomerate, including the financial soundness and integrity of its significant owners. 1 1(c) Supervisors should seek to ensure that the structure of the financial conglomerate does not impede effective supervision. Supervisors may seek restructuring under appropriate circumstances to achieve this, if necessary. 1 1(d) Supervisors should seek to ensure that the board and senior management of the head of the financial conglomerate are capable of describing and understanding the purpose, structure, strategy, material operations, and material risks of the financial conglomerate, including those of unregulated entities that are part of the financial conglomerate structure.

1 1(e) Supervisors should assess and monitor the financial conglomerate's process for approving and controlling structural changes, including the creation of new legal entities.
1 1(f) Where the financial conglomerate is part of a wider group, supervisors should require that the board and senior management of the head of the financial conglomerate have governance arrangements that enable material risks stemming from the wider group structure to be identified and appropriately assessed by relevant supervisory authorities. 1 1(g) Supervisors should seek to ensure that there is a framework governing information flows within the financial conglomerate and between the financial conglomerate and entities of the wider group (eg reporting procedures).

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Explanatory comments
1.A financial conglomerate may freely set its functional, hierarchical, business and/ or regional organisation, provided all entities within the financial conglomerate comply with their relevant sectoral and legal frameworks. 2.Elements to be considered for assessing the significant ownership structure of the financial conglomerate may include the identification of significant owners, including the ultimate beneficial owners, the transparency of their ownership structure, their financial information, and the sources of their initial capital and all other requirements of national authorities. At a minimum, the necessary qualities of significant owners relate to the integrity demonstrated in personal behaviour and business conduct, as well as to the ability to provide additional support when needed. 3.Supervisors should seek to ensure that a financial conglomerate has an organisational and managerial structure that promotes and enables prudent management, and if necessary, orderly resolution aligned with corresponding sectoral requirements. Reporting lines within the financial conglomerate should be clear and should facilitate information flows within the financial conglomerate, both bottom-up and top-down. 4.Supervisors should be satisfied that the board and senior management of the head of the financial conglomerate understand and influence the evolution of an appropriate group legal structure in alignment with the approved business strategy and risk profile of the financial conglomerate, and understand how the various elements of the structure relate to one another. Where a financial conglomerate creates many legal entities, their number and, particularly, the interconnections and transactions between them, may pose challenges for the design of effective corporate governance arrangements.
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This risk should be recognised and managed. This is particularly the case where the organisational and managerial structure of the financial conglomerate deviates from the legal entity structure of the financial conglomerate. 1 1.5 Supervisors should assess changes to the group structure and how these changes impact its soundness, especially where such changes cause the financial conglomerate to engage in activities and/ or operate in jurisdictions that impede transparency or do not meet international standards stemming from sectoral regulation.

Suitability of board members, senior managers and key persons in control functions
12. Supervisors should seek to ensure that the board members, senior managers and key persons in control functions in the various entities in a financial conglomerate possess integrity , competence, experience and qualifications to fulfil their role and exercise sound objective judgment.

Implementation criteria
12(a) Supervisors should be satisfied of the suitability of board members, senior managers and key persons in control functions. 12(b) Supervisors should require financial conglomerates to have satisfactory processes for periodically assessing suitability. 12(c) Supervisors should require that the members of the boards of the head of the financial conglomerate and of its significant subsidiaries act independently of parties and interests external to the wider group; and that the board of the head of the financial conglomerate include a number of members acting independently of the wider group (including owners, board members, executives, and staff of the wider group). 12(d) Supervisors should communicate with the supervisors of other regulated entities within the conglomerate when board members, senior
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management and key persons in control functions are deemed not to meet their suitability tests.

Explanatory comments
1.Board members, senior managers and key persons in control functions need to have appropriate skills, experience and knowledge, and act with care, honesty and integrity, in order to to make reasonable and impartial business judgments and strengthen the protection afforded to recognised stakeholders. To this end, institutions need to prudently manage the risk that persons in positions of responsibility may not be suitable. Suitability criteria may vary depending on the degree of influence on or the responsibilities for the financial conglomerate. 2.Supervisors of regulated entities of the financial conglomerate are subject to statutory and other requirements in applying suitability tests to these entities in their jurisdiction.

The organisational and managerial structure of financial conglomerates adds elements of complexity for supervisors seeking to ensure the suitability of persons.
For instance, the management of regulated entities within the financial conglomerate can be extensively influenced by persons who are not directly responsible for such functions. A group-wide perspective regarding suitability of persons is intended to close any loopholes in this respect. Supervisors may rely on assessments made by other relevant supervisors in this area regarding suitability. Alternatively they may decide on concerted supervisory actions regarding suitability if required.
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3 . I n order to meet suitability requirements, board members, senior managers and key persons in control functions, both individually and collectively, should have and demonstrate the ability to perform the duties or to carry out the responsibilities required in their position.
Competence can generally be judged from the level of professionalism (eg pertinent experience within financial industries or other businesses) and/ or formal qualifications. 4.Serving as a board member or senior manager of a company (from the wider group) that competes or does business with the regulated entities in the financial conglomerate can compromise independent judgment and create conflicts of interest, as can cross-membership on boards. A board‟s ability to exercise objective judgment independent of the views of executives and of inappropriate political or personal interests can be enhanced by recruiting members from a sufficiently broad population of candidates. The key characteristic of independence is the ability to exercise objective, independent judgment after fair consideration of all relevant information and views without undue influence from executives or from inappropriate external parties and interests and while taking into account the requirements of applicable law.

Responsibility of the board of the head of the financial conglomerate
13. Supervisors should require that the board of the head of the financial conglomerate appropriately defines the strategy and risk appetite of the financial conglomerate, and ensures this strategy is implemented and executed in the various entities, both regulated and unregulated.

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Implementation criteria
13(a) Supervisors should require that the board of the head of the financial conglomerate has in place a framework for monitoring compliance with the strategy and risk appetite across the financial conglomerate. 13(b) Supervisors should require that the board of the head of the financial conglomerate regularly assesses the strategy and risk appetite of the financial conglomerate to ensure it remains appropriate as the conglomerate evolved. 13(c) Where the financial conglomerate is part of a wider group, supervisors should assess whether the head is managing its relationship with the wider group and ultimate parent in a manner that is consistent with the governance framework of the financial conglomerate. 13(d) Supervisors should require that a framework is in place which seeks to ensure resources are available across the financial conglomerate for constituent entities to meet both the group and their own entity‟s governance standards.

Explanatory comments
13.1 Supervisors should assess if the board of directors exercises adequate oversight over the management of the head of the financial conglomerate. This includes assessing the actions taken by the board of the head to define the strategy for the financial conglomerate and ensure the consistency of the operations of the various entities in the financial conglomerate with such strategy. To this end, the head company should set up an adequate corporate governance framework in line with the structure, business and risks of the financial conglomerate and its entities and applicable laws. This framework should ensure that the strategy is implemented and monitored throughout the financial conglomerate and reviewed on a
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regular basis and following material change including due to growth, increased complexity, geographic expansion, etc.
2.The head company should exercise adequate oversight of subsidiaries, both regulated and unregulated, while respecting independent legal and governance responsibilities. Supervisors should satisfy themselves that entities within a financial conglomerate adhere to the same group-wide corporate governance principles or at least apply policies that remain consistent with these principles. The board of a regulated subsidiary of a financial conglomerate will retain and set its own corporate governance responsibilities and practices in line with its own legal requirements or in proportion to its size or business. These should not, however, conflict with the broader financial conglomerate corporate governance framework. Appropriate governance arrangements will address arrangements such that legal or regulatory provisions or prudential rules of regulated subsidiaries will be known and taken into account by the head company. 3.Where the financial conglomerate is part of a wider group structure, the head of the financial conglomerate is responsible for managing the relationship with its wider group. This includes ensuring there are appropriate arrangements for capital and liquidity management, assessing any material risk impact that may come from decisions made at its ownership level, service level agreements, reporting lines and regular top-level consultations with related companies in the wider group and the ultimate parent. 4.For smaller institutions within a larger conglomerate, it may be unnecessary to duplicate systems and controls. Such smaller institutions can rely on the systems and controls of the head if they have assessed that this is suitable to address group risks.
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13.5 Supervisors should be satisfied with the amount and quality of information they receive from the head company of the financial conglomerate on its strategy, risk appetite and corporate governance framework.

Remuneration in a financial conglomerate
14. Supervisors should require that the financial conglomerate has and implements an appropriate remuneration policy that is consistent with its risk profile. The policy should take into account the material risks that organisation is exposed to, including those from its employees‟ activities.

Implementation criteria
14(a) Supervisors should require that an appropriate remuneration policy consistent with established international standards is in place and observed at all levels and across jurisdictions in the financial conglomerate. An appropriate policy aligns risk-takers‟ variable remuneration with prudent risk taking, promotes sound and effective risk management, and takes into account any other appropriate factors. The overarching objective of the policy should be consistent across the group but can allow for reasonable differences based on the nature of the constituent entities/ units and local legal requirements. 14 (b) Supervisors should require that ultimate oversight of the remuneration policy rest with the financial conglomerate‟s head company.

14(c) Supervisors should require that the remuneration of board members, senior managers and key persons in control functions be determined in a manner that does not incentivise them to disregard the obligations they owe to the financial conglomerate or any of its entities, nor to otherwise act in a manner contrary to any legal or regulatory obligations.

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14(d) Supervisors should require that the risks associated with remuneration are reflected in the financial conglomerate‟s broader risk management framework.
For example, staff engaged in financial and risk control at the group-wide level should be compensated in a manner that is consistent with their control role and should be involved in designing incentive arrangements, and assessing whether such arrangements encourage imprudent risk-taking. 14(e) Supervisors should require that the variable remuneration received by risk management and control personnel is not based substantially on the financial performance of the business units that they review but rather on the achievement of the objectives of their functions (eg adherence to internal controls).

Explanatory comments
1.Remuneration is a key aspect of any governance framework and needs to be properly considered in order to mitigate the risks that may arise from poorly designed remuneration arrangements. The risks associated with remuneration should be reflected in the financial conglomerate‟s broader risk management framework. 2.Remuneration may serve important objectives, including attracting skilled staff, promoting better organisation-wide and employee performance, promoting retention, providing retirement security and allowing personnel costs to vary with revenues. It is also clear, however, that ill-designed compensation arrangements can provide incentives to take risks that are not consistent with the long term health of the organisation. Such risks and misaligned incentives are of particular supervisory interest. 3.Ultimately a financial conglomerate‟s remuneration policy should aim to ensure effective governance of remuneration, alignment of
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remuneration with prudent risk-taking, and engagement of recognised stakeholders.
4.Supervisors should ensure that the governance system identifies and closes loopholes that allow the circumvention of conglomerate, sectoral or entity-level remuneration requirements. 5.Board members, senior managers and key persons in control functions should be measured against performance criteria tied not only to the short-term, but also to the long-term interest of the financial conglomerate as a whole.

V. Risk Management
Since financial conglomerates are in the business of risk-taking, good risk management is a crucial focus of supervision. This section provides principles for the sound and comprehensive supervision of risk management frameworks in financial conglomerates. It covers factors ranging from risk culture and tolerance, to the use of stress and scenario testing and the monitoring of risk concentrations.

Risk management framework
21. Supervisors should require that an independent, comprehensive and effective risk management framework, accompanied by a robust system of internal controls, effective internal audit and compliance functions, is in place for the financial conglomerate.

Implementation criteria
21(a) Supervisors should ensure that the risk management framework is comprehensive, consistent across entities supervised in all sectors and covers the risk management function, risk management processes and governance, and systems and controls.

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Risk management function
21(b) Supervisors should require that the risk management function is independent from the business units and has a sufficient level of authority and adequately skilled resources to carry out its functions. 21(c) Supervisors should require that the risk management function generally has a direct reporting line to the board and senior management of the financial conglomerate. 21(d) Supervisors should, where they consider it appropriate, require that a separate risk management committee at the board of directors level is established by the financial conglomerate.

Risk management governance
21(e) Supervisors should require that the board of the head of the financial conglomerate has overall responsibility for the financial conglomerate‟s group-wide risk management, internal control mechanism, internal audit and compliance functions to ensure that the group conducts its affairs with a high degree of integrity. 21(f) Supervisors should require that the financial conglomerate has an established enterprise-wide risk management process for, among others, periodically reviewing the effectiveness of the group-wide risk management framework and for ensuring appropriate aggregation of risks. 21(g) Supervisors should require that the risk management process cover identification, measurement, monitoring and controlling of risk types (eg credit risk, operational risk, strategic risk, liquidity risk) and these be linked where appropriate to specific capital requirements.

Systems and controls
21(h) Supervisors should require that financial conglomerates have in place adequate, sound and effective risk management processes and internal control mechanisms at the level of the financial conglomerate,
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including sound administrative and accounting procedures.
21(i) Supervisors should require that risk management processes and internal control mechanisms of a financial conglomerate are appropriately documented and, at a minimum, take into account the: •nature, scale and complexity of its business; • diversity of its operations, including geographical reach ; • volume, frequency and size of its transactions; • degree of risk associated with each area of its operation; •interconnectedness of the entities within the financial conglomerate (using intra-group transactions and exposures reporting as one measure); and • sophistication and functionality of information and reporting systems.

Explanatory comments
1.Financial conglomerates, irrespective of their particular mix of business lines or financial sectors, are in the business of risk taking. Therefore, strong risk management is of paramount importance. 2.The comprehensive risk management framework and process should include board and senior management oversight. 3.In identifying, evaluating, monitoring, controlling and mitigating material risks (from regulated and unregulated activities), financial conglomerates should consider the prospect for these to change over time and prepare themselves accordingly. 4.The risk management processes and internal control mechanisms of a financial conglomerate should include clear arrangements for delegating authority and responsibility; segregation of the functions that involve committing the financial conglomerate‟s funds and accounting
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for assets and liabilities; reconciliation of these processes; safeguarding of the financial conglomerate‟s assets; and appropriate independent internal audit and compliance functions to test adherence to these controls as well as applicable laws and regulations.

Risk tolerance levels and risk appetite policy
23.Supervisors should require that the financial conglomerate establishes appropriate board approved, group-wide risk tolerance levels and a risk appetite policy.

Implementation criteria
23(a) Supervisors should require that key staff, senior management and the board of the head of the financial conglomerate be aware of and understand the financial conglomerate‟s risk tolerance levels and risk appetite policy. 23(b) Supervisors should require that the financial conglomerate identify and measure against risk tolerance limits (and in line with its risk appetite policy) the risk exposure of the financial conglomerate on an on-going basis in order to identify potential risks as early as possible. This may include looking at risks by territory, by line of business, or by financial sector.

Explanatory comments
1.Financial conglomerates should establish risk tolerance levels and a risk appetite policy which set the tone for acceptable and unacceptable risk taking.

This should be aligned with the financial conglomerate‟s business strategy, risk profile and capital plan.
2.A financial conglomerate‟s risk tolerance should be kept under periodic review so as to ensure that it remains relevant and takes account of the changing dynamics of the financial conglomerate.
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The financial conglomerate‟s risk appetite policy is re-assessed regularly with respect to new business opportunities, changes in risk capacity and tolerance, and operating environment.

New business
24.Supervisors should require that the financial conglomerate carries out a robust risk assessment when entering into new business areas.

Implementation criteria
24(a) Supervisors should, where they consider it appropriate, review the risk assessment carried out by a financial conglomerate in the context of entering into new business. 24(b) Supervisors should require that financial conglomerates not expand into new products unless they have put in place adequate processes, controls and systems (such as I T) to manage them. 24(c) Supervisors should make sure that a financial conglomerate carries out the ongoing risk assessment after entering into new business areas.

Explanatory comments
1.At the time of assessing whether or not to enter into a new business area or product line, it is imperative that financial conglomerates undertake risk assessments and analyses to identify potential risks inherent in the new activity. 2.They should seek to understand the potential interaction between the risks of the new activity and the existing risk profile of the financial conglomerate. This should include a consideration of whether the new activity could adversely affect the risk appetite or risk tolerance of the financial conglomerate.
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Outsourcing
25.Supervisors should require that, when considering whether to outsource a particular function, the financial conglomerate carries out an assessment of the risks of outsourcing, including the appropriateness of outsourcing a particular function.

Implementation criteria
25(a) Supervisors should require that financial conglomerates have processes and criteria in place to review decisions to outsource a function in order to ensure that such outsourcing does not imply delegation of responsibility for that function. 25(b) Supervisors should be satisfied that the decision to outsource a function does not impede effective group-wide supervision of the financial conglomerate.

Explanatory comments
1 . I t is important that supervisors be satisfied that, when considering whether to outsource a particular function, financial conglomerates have considered the risks involved and the appropriateness of outsourcing a particular function. This includes considering the appropriateness of outsourcing to a particular provider and the cumulative risks of all outsourced functions. The supervisor should require the financial conglomerate to review the provider in advance to ensure it is in a position to provide the services, comply with the contractual terms, and observe all applicable laws and regulations. 2.Supervisors should periodically assess the outsourced function with regard to policy compliance, risk management measures and control procedures.

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25.3 Outsourcing should never result in a delegation of responsibility for a given function.
There may be certain functions within financial conglomerates which should not be outsourced under any circumstances, while there may be some that may only be outsourced if certain safeguards are put in place.

Stress and scenario testing
26. Supervisors should require, where appropriate, that the financial conglomerate periodically carries out group-wide stress tests and scenario analyses for its major sources of risk.

Implementation criteria
26(a) Supervisors should require that stress tests are sufficiently severe, forward looking and flexible. They should cover an appropriate set of business activities and include a variety of different types of tests such as sensitivity analyses, scenario analyses and reverse stress testing. 26(b) Supervisors should require the financial conglomerate to document its stress and scenario tests, including reverse stress tests. Stress tests should be conducted under a robust governance framework that encompasses policies, procedures, and adequate documentation of procedures as well as validation of results. 26(c) Supervisors should require that the group-wide stress tests and scenario analyses conducted by the financial conglomerate are appropriate to the nature, scale and complexity of those major sources of risk and to the nature, scale and complexity of the financial conglomerate‟s business. 26(d) Supervisors should require that group-wide stress tests and scenario analyses include a group-wide approach (which takes account of the
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interaction between different parts of the group and different risk types) and consider the results of sectoral stress tests.
26(e) Supervisors should require that, when carrying out reverse stress tests, a financial conglomerate identifies a range of adverse circumstances which would cause its business to fail and assess the likelihood of such events crystallising.

Explanatory comments
1.A financial conglomerate should have a good understanding of correlation between its respective sectors and the heterogeneity of such risks when conducting its stress tests. Stress tests should be robust and should consider sufficiently adverse circumstances. The group-wide stress test analysis should measure and evaluate the potential impact on individual entities. 2.Attention should be paid to covering all risks, including off-balance sheet items. For example, a financial conglomerate‟s stress tests and scenario analyses should take into account the risk that the financial conglomerate may have to bring back on to its consolidated balance sheet the assets and liabilities of off-balance sheet entities as a result of reputational contagion, notwithstanding the appearance of legal risk transfer. 3.Where reverse stress tests reveal a risk of business failure that is unacceptably high relative to the financial conglomerate‟s risk appetite or risk tolerance, the financial conglomerate should evaluate and adopt, where appropriate, effective arrangements, processes, systems or other measures to prevent or mitigate that risk.

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Risk aggregation
27.Supervisors should require that the financial conglomerate aggregate the risks to which it is exposed in a prudent manner.

Implementation criteria
27(a) Supervisors should require that financial conglomerates ***not make overly ambitious diversification assumptions*** or imprudent correlation claims, particularly for capital adequacy and solvency purposes. 27(b) Supervisors should require financial conglomerates to have adequate resources and systems (including I T) for the purpose of aggregating risks.

Explanatory comments
1.Risk aggregation should include a clear understanding of assumptions and be robust enough to support a comprehensive assessment of risk. 2.While it is possible that the spread of activities within a financial conglomerate may create diversification effects and reduce correlation, it is also true that membership of a financial conglomerate group may create “group risks” in the form of financial contagion, reputational contagion, ratings contagion (where a subsidiary accesses capital through a parent‟s credit rating and then suffers stress following the utilisation of the capital), double /multiple-gearing (use of same capital more than once within a group), excessive leveraging (upgrade in the quality of capital as it moves through a group), and regulatory arbitrage (it is important that risks are assessed at the financial conglomerate level as well as at the level of its constituent parts).

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Risk concentrations and intra-group transactions and exposures
28.Supervisors should require that the financial conglomerate has in place effective systems and processes to manage and report group-wide risk concentrations and intra-group transactions and exposures.

Implementation criteria
28(a) Supervisors should require that the financial conglomerate has in place effective systems and processes to identify, assess and report group-wide risk concentrations (including for the purposes of monitoring and controlling those concentrations). 28(b) Supervisors should require that the financial conglomerate has in place effective systems and processes to identify, assess and report significant intra-group transactions and exposures. 28(c) Supervisors should require the financial conglomerate to report significant risk concentrations and intra-group transactions and exposures at the level of the financial conglomerate on a regular basis.

28(d) Supervisors should consider setting quantitative limits and adequate reporting requirements.

Explanatory comments
1.Supervisors should ensure that financial conglomerates are managing their risk concentrations and intra-group transactions and exposures satisfactorily. 2.Supervisors should encourage adequate public disclosure of risk concentrations and intra-group transactions and exposures. 3.Supervisors should liaise closely with one another to ascertain each other‟s concerns and coordinate as deemed appropriate any supervisory action relative to risk concentrations and intra-group transactions and exposures within the financial conglomerate.
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28.4 Supervisors should deal effectively with material risk concentrations and intra-group transactions and exposures that are considered to have a detrimental effect on the regulated entities or the financial conglomerate as a whole.

Off-balance sheet activities
29.Supervisors should require that off-balance sheet activities, including special purpose entities, are brought within the scope of group-wide supervision of the financial conglomerate, where appropriate.

Implementation criteria
29(a) Supervisors should require that there is a process for determining whether the nature of the relationship between the financial conglomerate and a special purpose entity (SPE) requires the SPE to be fully or proportionally consolidated into the financial conglomerate for regulatory purposes.
29(b) Supervisors should require that the financial conglomerate‟s stress tests and scenario analyses take into account the risk associated with off balance sheet activities. 29(c) Supervisors should require that the overall nature of the relationship between the financial conglomerate and the SPE is considered including the risk of contagion from the SPE. This assessment should go beyond traditional control and influence relationships.

Explanatory comments
1.A financial conglomerate‟s risk management framework and processes should cover the full spectrum of risks to the financial conglomerate. This includes risks from regulated and unregulated entities, including SPEs and off-balance sheet activities. 2.The fact that a financial conglomerate does not own or control the SPE in the traditional sense should not mean that it should not be consolidated. Other channels of contagion should be considered, such as the provision of (actual or contingent) liquidity support, reputational risk, and whether

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the assets of the SPE previously belonged to the financial conglomerate or were third-party assets.
3.It is important that financial conglomerates assess all economic risks and business purposes of an SPE throughout the life of a transaction, distinguishing between risk transfer and risk transformation. Financial conglomerates should be particularly aware that, over time, the nature of these risks can change. Supervisors should require such assessment to be ongoing and that management has sufficient understanding of the risks. 4.Financial conglomerates should have the capability to aggregate, assess and report all their SPE exposure risks in conjunction with all other firmwide risks. 5.Supervisors should regularly oversee and monitor the use of all SPE activity and assess the implications for the financial conglomerate of the activities of SPEs, in order to identify developments that can lead to systemic weakness and contagion or that can exacerbate pro-cyclicality.

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NUMBER 2

Final Basel I I I Rules in Australia
Australian Prudential Regulation Authority (APRA) To: All locally incorporated authorised deposit-taking institutions Basel I I I capital: interim arrangements for Additional Tier 1 and Tier 2 capital instruments APRA has released final prudential standards implementing the Basel I I I measures to raise the quality, consistency and transparency of the capital base, including Prudential Standard APS 1 1 1 Capital Adequacy: Measurement of Capital (APS 1 1 1). This letter sets out APRA‟s treatment of new Additional Tier 1 and Tier 2 capital instruments issued before the new standard comes into effect on + To be eligible for inclusion in regulatory capital, all capital instruments that have not been submitted to APRA for review before close of business today must comply with the final version of APS 1 1 1 issued today. Instruments that have been submitted to APRA up to and including today‟s date and that were intended to be issued under the current transitional arrangements (including APRA‟s letters to industry dated 27 May 2011 and 30 March 2012), will be assessed against these criteria. To be counted as eligible regulatory capital, instruments approved by APRA under these criteria must be issued before close of business on 31 December 2012. Any questions in relation to this letter should in the first instance be directed to your Responsible Supervisor. Yours sincerely Charles Littrell Executive General Manager
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Notes
In December 2010, the Basel Committee on Banking Supervision (Basel Committee) released a package of reforms to raise the level and quality of regulatory capital in the global banking system (Basel I I I). APRA is a member of the Basel Committee and fully supports the implementation of these reforms. In September 2011, APRA released a discussion paper outlining its proposals to implement these Basel I I I capital reforms in Australia. APRA subsequently released, in March and June 2012, draft prudential and reporting standards on which submissions were invited. In June 2012, APRA also invited submissions on its proposal that certain capital instruments be subject to Australian law and on its proposed regulatory capital treatment of joint arrangements. Fifteen submissions were received on the March and June 2012 consultation packages.

APRA‟s capital adequacy prudential and reporting standards
Submissions were broadly supportive of the content of the draft prudential and reporting standards and mostly sought clarification of particular provisions. In response, APRA has: •clarified its expectations for an ADI ‟s I nternal Capital Adequacy Assessment Process (ICAAP), which are included in the draft Prudential Practice Guide CPG 1 10 Internal Capital Adequacy Assessment Process and supervisory review (CPG 1 10) recently released for public consultation; •revised its proposed treatment of an ADI ‟s funding of purchases of its own capital instruments, including margin loans;
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•removed the „profits test‟ from Additional Tier 1 and Tier 2 Capital instruments; • clarified the operation of the countercyclical capital buffer; •simplified transitional arrangements for capital issued by consolidated subsidiaries and held by third parties; and

•made minor changes to the prudential and reporting standards to improve ease of use.
Submissions raised concerns about APRA‟s proposal that certain capital instruments should be subject to Australian law. APRA acknowledges these concerns. In response, it has clarified areas of uncertainty about the loss absorption and non-viability requirements and has refined its approach to the question of governing law for capital instruments, such that only those provisions of capital instrument documentation dealing with loss absorption and non-viability must be governed by Australian law. In June 2012, the Basel Committee finalised its proposals to improve consistency and ease of use of disclosures on capital positions and capital composition. These measures, which are to come into effect for reporting periods ending on or after 30 June 2013, include a common template and disclosure provisions that, if implemented, would facilitate comparison between the capital position of banking institutions across jurisdictions. APRA will consult in early 2013 on these requirements.

Consultation with industry and other interested stakeholders

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The Basel I I I reforms also implement measures relating to external credit assessment institutions (ECAIs) and to minimise cliff effects arising from guarantees and derivatives.

Objectives and key requirements of this Prudential Standard
This Prudential Standard requires an authorised deposit-taking institution (ADI) to maintain adequate capital, on both a Level 1 and Level 2 basis, to act as a buffer against the risk associated with its activities.

The ultimate responsibility for the prudent management of capital of an ADI rests with its Board of directors.
The Board must ensure the ADI maintains an appropriate level and quality of capital commensurate with the type, amount and concentration of risks to which the ADI is exposed. The key requirements of this Prudential Standard are that an ADI and any Level 2 group must: - have an Internal Capital Adequacy Assessment Process; - maintain required levels of regulatory capital; - operate a capital conservation buffer and, if required, a countercyclical capital buffer; - inform APRA of any adverse change in actual or anticipated capital adequacy; and
-

seek APRA‟s approval for any planned capital reductions.

Interesting:

An ADI that is part of a group may rely on the ICAAP of the group provided that the Board of the ADI is satisfied that the group ICAAP meets the criteria in respect of the ADI.
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Group risk management
8.Paragraphs 9 to 13 of this Prudential Standard apply to an ADI that heads a conglomerate group. Where an ADI is part of a conglomerate group headed by an authorised non-operating holding company (authorised NOHC), the requirements set out in paragraphs 9 to 13 of this Prudential Standard apply to the ADI and its subsidiaries. 9.For conglomerate groups headed by an ADI , the Board of the ADI is responsible for ensuring that comprehensive policies and procedures are in place to measure, manage, monitor and report overall risk at a group level. To ensure that existing Board-approved policies and the relevant controls remain adequate and appropriate for managing and monitoring overall group risk, the Board or a board committee must review them regularly (at least annually) to take account of changing risk profiles of group entities.

Any material changes to group risk management policies must be approved by the Board.
10.The Board of an ADI must ensure that the ADI establishes appropriate policies, systems and procedures to monitor compliance with APRA‟s prudential requirements on a group basis. To facilitate conglomerate group supervision by APRA, an ADI must: (a) provide APRA with the following group information:

(i) details of group members (e.g. name, place of incorporation, board composition, nature of business and any other additional information required by APRA for a better understanding of the risk profiles of individual group members);

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(ii)management structure of the group (including key risk management reporting lines);
(iii)intra-group support arrangements (e.g. a specific guarantee of the obligations of an entity in the group); (iv) intra-group exposures; and (v)other information as required by APRA from time to time for the effective supervision of the group;

(b)notify APRA in accordance with section 62A of the Banking Act of any breach of a requirement in a prudential standard or a condition of a banking authority (whether by an ADI in the group or by the group) and of any circumstances that might reasonably be seen as having a material impact and potentially adverse consequences for an ADI in the group or for the overall group;
(c)advise APRA in advance of any proposed changes to the composition or operations of the group with the potential to materially alter the group‟s overall risk profile (this must include any proposed changes to the ADI‟s stand-alone operations); and (d)obtain APRA‟s prior written approval for the establishment or acquisition of a regulated presence domestically or overseas. 11.An ADI must provide APRA with descriptions of its group risk management policies and the procedures used to measure and control overall group risk (including any material changes thereto). The ADI should, as best practice, disclose in the group‟s full published annual report each year an outline of its group risk management policies, including the policies governing dealings between the ADI and other group members. 12.An ADI must submit a declaration signed by its chief executive officer, approved by the Board, covering the Level 2 group's risk management systems within three months of the ADI's annual balance date in
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accordance with the declaration requirements in Prudential Standard APS 310 Audit and Related Matters (APS 310).
13. I f an ADI qualifies the declaration in paragraph 12, the ADI must explain the reasons for the qualifications in accordance with the requirements in APS 310 and provide plans for corrective action.

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NUMBER 3

16 October 2012 - Public Hearings on the draft factual Report of the EU-US Insurance Regulatory Dialogue Project
The EU-US I nsurance Regulatory Dialogue Project organises two public hearings on the draft factual Report based on the results of the Project‟s seven technical committees (TC). The public hearings will take place: In the USA: on 12 October 2012 at 14.00 – 17.00 hrs EDT in the Grand Hyatt, Washington DC; In Belgium: on 16 October 2012 at 10.00 – 13.00 hrs CET in the Centre de Conférences Albert Borschette, Brussels. Requests to provide oral statements during the public hearings should be sent by 10 October 2012 to the following email addresses: tom.finnell{at}treasury.gov (Washington Hearing) and Manuela.Zweimueller{at}eiopa.europa.eu (Brussels H earing).

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The EU-US Dialogue Project
The EU-US Dialogue Project started in early 2012, when the European Commission (EC), E IOPA, the US National Association of I nsurance Commissioners (NAIC) and the Federal Insurance Office of the US Department of the Treasury (FIO) agreed to participate in dialogue and a related project (Project) to contribute to an increased mutual understanding and enhanced cooperation between the European Union and the United States to promote business opportunity, consumer protection and effective supervision. The objective of the Project, which builds on more than a decade of EUUS regulatory dialogue, is to deepen insight into the overall design, function and objectives of the key aspects of the insurance supervisory regimes in the EU and the U.S, and to identify important characteristics of both regimes.

Request for the EU-U.S. Dialogue Project for Public Comment on the Technical Committee Reports
Comparing Certain Aspects of the Insurance Supervisory and Regulatory Regimes in the European Union and the United States
To I nterested Parties: The Steering Committee of the EU-U.S. Dialogue Project invites public comment on the reports of seven technical committees comparing certain aspects of the insurance supervisory regimes in the European Union and the United States.

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Introduction to the EU-U.S. Dialogue Project
In the EU, the European Parliament, the Council of the European Union and the European Commission (EC), technically supported by the European I nsurance and Occupational Pensions Authority (EIOPA), are modernizin g th e EU‟s insu rance regu latory an d sup erviso ry regime through the Solvency I I Directive (Directive 2009 /138 /EC), in place since 2009. This so-called Framework Directive was the culmination of work begun in the 1990s to update existing solvency standards in the EU. Current work aims to further specify the Framework Directive with technical rules and guidelines, which are necessary for a consistent application by insurers and supervisors of the framework. In the United States, the states are the primary regulators of the insurance industry. State insurance regulators are members of the National Association of Insurance Commissioners (N AIC), a standard-setting and regulatory support organization created and governed by the chief insurance regulators from the 50 states, the District of Columbia and five U.S. territories. As part of an evolutionary process, through the NAIC, state insurance regulators in the U.S. are currently in the process of enhancing their solvency framework through the Solvency Modernization I nitiative (SMI). SMI is an assessment of the U.S. insurance solvency regulation framework and includes a review of international developments regarding insurance supervision, banking supervision, and international accounting standards and their potential use in U.S. insurance regulation. In early 2012, the EC, EIOPA, the NAIC and the Federal Insurance Office of the U.S. Department of the Treasury (FIO) agreed to participate in dialogue and a related project (Project) to contribute to an increased
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mutual understanding and enhanced cooperation between the EU and the U.S. to promote business opportunity, consumer protection and effective supervision.
The project is considered to be part of and builds on the on-going EU-US Dialogue which has been in place for over 10 years. The work is carried out in collaboration with EIOPA and competent authorities in the EU Member States, and with state insurance regulators and the NAIC in the United States.

The objective of the Project is to deepen insight into the overall design, function and objectives of the key aspects the two regimes, and to identify important characteristics of both regimes.
Project Governance and Process: The Project is led by a six-member Steering Committee comprised of three EU and three U.S. officials, as follows: •Gabriel Bernardino – Chairman of E IOPA

•Edward Forshaw – Manager in the Prudential Policy division, UK Financial Services Authority, and E IOPA Equivalence Committee Chair
•Karel Van H ulle – Head of Unit for Insurance and Pensions, Directorate-General Internal Market and Services, EC •Kevin M. McCarty– Commissioner, Office of I nsurance Regulation, State of Florida, and current President of the NAIC •Michael McRaith – Director, FIO, United States Department of the Treasury

•Therese M. (Terri) Vaughan – Chief Executive Officer, NAIC
Since the Project began, the Steering Committee has held several face-to-face meetings in Basel, Washington DC and Frankfurt, as well as numerous conference calls.
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In a first step, the topics to be discussed were agreed upon and a process for information exchange under confidentiality obligations was established.
The Steering Committee agreed upon seven topics fundamentally important to a sound regulatory regime and to the protection of policyholders and financial stability. The seven topics are: • Professional secrecy/confidentiality; • Group supervision; • Solvency and capital requirements; • Reinsurance and collateral requirements; • Supervisory reporting, data collection and analysis; • Supervisory peer reviews; and • I ndependent third party review and supervisory on-site inspections. A separate Technical Committee (TC) was assembled to address each topic.

Each TC was comprised of experienced professionals from both the European Union as well as the United States, specifically, from FIO, the EC, the N AIC and EIOPA, as well as representatives from state insurance regulatory agencies in the United States and competent authorities of EU Member States.
The various professionals who comprised the technical committees were selected because of their qualifications and experience with respect to the subject matter of each topic, including insurance regulators and supervisors, attorneys, accountants, examiners, and other specialists.

The teams worked jointly to develop objective, fact-based reports intended to summarize the key commonalities and differences between the Solvency I I regime in the EU, and the state-based insurance regulatory regime in the United States.

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Supporting documentation, e.g., regulations, directives, and supervisory guidance, was exchanged as requested by either side.
The accompanying seven technical committee reports have been jointly drafted and reflect the consensus views of each respective technical committee‟s members. No action has been taken by the governing bodies of the organizations represented on the Steering Committee to formally adopt the draft factual reports and thus this document should not be considered to express official views or positions of any organization. The reports represent the culmination of the initial work from the first phase of the Project. The reports are being exposed for interested party analysis and comment and will inform discussions and conclusions reached by the Steering Committee on each topic during the second phase of the Project. It is envisaged that the second phase of the Project will involve discussions of the Steering Committee about the key commonalities and differences between the two regimes and will lead to policy decisions by their respective organizations regarding whether and how to achieve further harmonization in regulation and supervision. The project is scheduled to come to a conclusion by December 31, 2012.

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The Contributing Parties
The Federal Insurance Office, U.S. Department of the Treasury
The Federal I nsurance Office (FIO) of the U.S. Department of the Treasury was established by the Dodd-Frank Wall Street Reform and Consumer Protection Act. The FIO monitors all aspects of the insurance industry, including identifying issues or gaps in the regulation of insurers that could contribute to a systemic crisis in the insurance industry or the United States financial system. The FIO serves on the U.S. Financial Stability Oversight Council. The FIO coordinates and develops U.S. Federal policy on prudential aspects of international insurance matters, including representing the United States, as appropriate, in the I nternational Association of Insurance Supervisors. The FIO assists the Secretary in negotiating certain international agreements, and serves as the primary source for insurance sector expertise within the Federal government. The FIO monitors access to affordable insurance by traditionally underserved communities and consumers, minorities, and low- and moderate-income persons. The FIO also assists the Secretary in administering the Terrorism Risk Insurance Program.

The European Commission
The European Commission (EC) is one of the main institutions of the European Union.

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It represents and upholds the interests of the EU as a whole. The EC is the executive branch of the EU and is responsible for proposing new European laws to Parliament and the Council.
The EC oversees and implements EU policies by enforcing EU law (together with the Court of Justice), and represents the EU internationally, for example, by negotiating international trade agreements between the EU and other countries. It also manages the EU's budget and allocates funding.

The 27 Commissioners, one from each EU country, provide the Commission‟s political leadership during their 5-year term.

The National Association of Insurance Commissioners
The National Association of I nsurance Commissioners (NAI C) is the standard-setting and regulatory support organization created and governed by the chief insurance regulators from the 50 states, the District of Columbia and five U.S. territories.

Through the NAIC, state insurance regulators establish standards and best practices, conduct peer review, and coordinate their regulatory oversight that is exercised at the state level.
NAIC staff supports these efforts and represents the collective views of state regulators domestically and internationally. NAIC members, together with the central resources of the N AIC, form the national regime of state-based insurance regulation in the United States.

European I nsurance and Occupational Pensions Authority
The European I nsurance and Occupational Pensions Authority (EIOPA) was established as a result of the reforms to the structure of supervision of the financial sector in the European Union.
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The reform was initiated by the EC, following the recommendations of a Committee of Wise Men, chaired by Mr. de Larosière, and supported by the European Council and Parliament.
EIOPA technically supports the EC, amongst others, in the modernization of the EU‟s insurance regulatory and supervisory regime. Current work aims to further specify the Solvency I I Framework Directive with technical rules and guidelines, which is necessary for a consistent application by insurers and supervisors of the framework. In cross-border situations, EIOPA also has a legally binding mediation role to resolve disputes between competent authorities and may make supervisory decisions directly applicable to the institution concerned. EIOPA is part of the European System of Financial Supervision consisting of three European supervisory authorities, the others being the national supervisory authorities and the European Systemic Risk Board. EIOPA is an independent advisory body to the EC, the European Parliament and the Council of the European Union. EIOPA‟s core responsibilities are to support the stability of the financial system, transparency of markets and financial products as well as the protection of insurance policyholders, pension scheme members and beneficiaries.

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NUMBER 4

Five Questions about the Federal Reserve and Monetary Policy
Chairman Ben S. Bernanke, at the Economic Club of Indiana, I ndianapolis, Indiana Good afternoon. I am pleased to be able to join the Economic Club of Indiana for lunch today. I note that the mission of the club is "to promote an interest in, and enlighten its membership on, important governmental, economic and social issues." I hope my remarks today will meet that standard. Before diving in, I 'd like to thank my former colleague at the White House, Al Hubbard, for helping to make this event possible. As the head of the N ational Economic Council under President Bush, Al had the difficult task of making sure that diverse perspectives on economic policy issues were given a fair hearing before recommendations went to the President.

Al had to be a combination of economist, political guru, diplomat, and traffic cop, and he handled it with great skill.
My topic today is "Five Questions about the Federal Reserve and Monetary Policy." I have used a question-and-answer format in talks before, and I know from much experience that people are eager to know more about the Federal Reserve, what we do, and why we do it. And that interest is even broader than one might think.

I'm a baseball fan, and I was excited to be invited to a recent batting practice of the playoff-bound Washington Nationals.
I was introduced to one of the team's star players, but before I could press my questions on some fine points of baseball strategy, he asked, "So, what's the scoop on quantitative easing? "
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So, for that player, for club members and guests here today, and for anyone else curious about the Federal Reserve and monetary policy, I will ask and answer these five questions:
What are the Fed's objectives, and how is it trying to meet them? What's the relationship between the Fed's monetary policy and the fiscal decisions of the Administration and the Congress? What is the risk that the Fed's accommodative monetary policy will lead to inflation?

How does the Fed's monetary policy affect savers and investors?
How is the Federal Reserve held accountable in our democratic society?

What Are the Fed's Objectives, and How Is It Trying to Meet Them?
The first question on my list concerns the Federal Reserve's objectives and the tools it has to try to meet them. As the nation's central bank, the Federal Reserve is charged with promoting a healthy economy--broadly speaking, an economy with low unemployment, low and stable inflation, and a financial system that meets the economy's needs for credit and other services and that is not itself a source of instability. We pursue these goals through a variety of means. Together with other federal supervisory agencies, we oversee banks and other financial institutions. We monitor the financial system as a whole for possible risks to its stability. We encourage financial and economic literacy, promote equal access to credit, and advance local economic development by working with communities, nonprofit organizations, and others around the country. We also provide some basic services to the financial sector--for example, by processing payments and distributing currency and coin to banks.

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But today I want to focus on a role that is particularly identified with the Federal Reserve--the making of monetary policy.
The goals of monetary policy--maximum employment and price stability--are given to us by the Congress. These goals mean, basically, that we would like to see as many Americans as possible who want jobs to have jobs, and that we aim to keep the rate of increase in consumer prices low and stable. In normal circumstances, the Federal Reserve implements monetary policy through its influence on short-term interest rates, which in turn affect other interest rates and asset prices. Generally, if economic weakness is the primary concern, the Fed acts to reduce interest rates, which supports the economy by inducing businesses to invest more in new capital goods and by leading households to spend more on houses, autos, and other goods and services. Likewise, if the economy is overheating, the Fed can raise interest rates to help cool total demand and constrain inflationary pressures. Following this standard approach, the Fed cut short-term interest rates rapidly during the financial crisis, reducing them to nearly zero by the end of 2008--a time when the economy was contracting sharply. At that point, however, we faced a real challenge: Once at zero, the shortterm interest rate could not be cut further, so our traditional policy tool for dealing with economic weakness was no longer available. Yet, with unemployment soaring, the economy and job market clearly needed more support. Central banks around the world found themselves in a similar predicament. We asked ourselves, "What do we do now?" To answer this question, we could draw on the experience of Japan, where short-term interest rates have been near zero for many years, as well as a good deal of academic work.
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Unable to reduce short-term interest rates further, we looked instead for ways to influence longer-term interest rates, which remained well above zero.
We reasoned that, as with traditional monetary policy, bringing down longer-term rates should support economic growth and employment by lowering the cost of borrowing to buy homes and cars or to finance capital investments. Since 2008, we've used two types of less-traditional monetary policy tools to bring down longer-term rates.

The first of these less-traditional tools involves the Fed purchasing longer-term securities on the open market--principally Treasury securities and mortgage-backed securities guaranteed by government-sponsored enterprises such as Fannie Mae and Freddie Mac.
The Fed's purchases reduce the amount of longer-term securities held by investors and put downward pressure on the interest rates on those securities. That downward pressure transmits to a wide range of interest rates that individuals and businesses pay. For example, when the Fed first announced purchases of mortgage-backed securities in late 2008, 30-year mortgage interest rates averaged a little above 6percent; today they average about 3-1/2 percent. Lower mortgage rates are one reason for the improvement we have been seeing in the housing market, which in turn is benefiting the economy more broadly. Other important interest rates, such as corporate bond rates and rates on auto loans, have also come down.

Lower interest rates also put upward pressure on the prices of assets, such as stocks and homes, providing further impetus to household and business spending.
The second monetary policy tool we have been using involves communicating our expectations for how long the short-term interest rate will remain exceptionally low.
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Because the yield on, say, a five-year security embeds market expectations for the course of short-term rates over the next five years, convincing investors that we will keep the short-term rate low for a longer time can help to pull down market-determined longer-term rates.
In sum, the Fed's basic strategy for strengthening the economy--reducing interest rates and easing financial conditions more generally--is the same as it has always been. The difference is that, with the short-term interest rate nearly at zero, we have shifted to tools aimed at reducing longer-term interest rates more directly. Last month, my colleagues and I used both tools--securities purchases and communications about our future actions--in a coordinated way to further support the recovery and the job market. Why did we act? Though the economy has been growing since mid-2009 and we expect it to continue to expand, it simply has not been growing fast enough recently to make significant progress in bringing down unemployment. At 8.1 percent, the unemployment rate is nearly unchanged since the beginning of the year and is well above normal levels. While unemployment has been stubbornly high, our economy has enjoyed broad price stability for some time, and we expect inflation to remain low for the foreseeable future. So the case seemed clear to most of my colleagues that we could do more to assist economic growth and the job market without compromising our goal of price stability. Specifically, what did we do? On securities purchases, we announced that we would buy mortgage-backed securities guaranteed by the governmentsponsored enterprises at a rate of $40 billion per month. Those purchases, along with the continuation of a previous program involving Treasury securities, mean we are buying $85 billion of longer-term securities per month through the end of the year.

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We expect these purchases to put further downward pressure on longer-term interest rates, including mortgage rates.
To underline the Federal Reserve's commitment to fostering a sustainable economic recovery, we said that we would continue securities purchases and employ other policy tools until the outlook for the job market improves substantially in a context of price stability. In the category of communications policy, we also extended our estimate of how long we expect to keep the short-term interest rate at exceptionally low levels to at least mid-2015. That doesn't mean that we expect the economy to be weak through 2015. Rather, our message was that, so long as price stability is preserved, we will take care not to raise rates prematurely. Specifically, we expect that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economy strengthens. We hope that, by clarifying our expectations about future policy, we can provide individuals, families, businesses, and financial markets greater confidence about the Federal Reserve's commitment to promoting a sustainable recovery and that, as a result, they will become more willing to invest, hire and spend. Now, as I have said many times, monetary policy is no panacea. It can be used to support stronger economic growth in situations in which, as today, the economy is not making full use of its resources, and it can foster a healthier economy in the longer term by maintaining low and stable inflation. However, many other steps could be taken to strengthen our economy over time, such as putting the federal budget on a sustainable path, reforming the tax code, improving our educational system, supporting technological innovation, and expanding international trade. Although monetary policy cannot cure the economy's ills, particularly in today's challenging circumstances, we do think it can provide meaningful help.
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So we at the Federal Reserve are going to do what we can do and trust that others, in both the public and private sectors, will do what they can as well.

What's the Relationship between Monetary Policy and Fiscal Policy?
That brings me to the second question: What's the relationship between monetary policy and fiscal policy? To answer this question, it may help to begin with the more basic question of how monetary and fiscal policy differ. In short, monetary policy and fiscal policy involve quite different sets of actors, decisions, and tools. Fiscal policy involves decisions about how much the government should spend, how much it should tax, and how much it should borrow. At the federal level, those decisions are made by the Administration and the Congress. Fiscal policy determines the size of the federal budget deficit, which is the difference between federal spending and revenues in a year. Borrowing to finance budget deficits increases the government's total outstanding debt. As I have discussed, monetary policy is the responsibility of the Federal Reserve--or, more specifically, the Federal Open Market Committee, which includes members of the Federal Reserve's Board of Governors and presidents of Federal Reserve Banks. Unlike fiscal policy, monetary policy does not involve any taxation, transfer payments, or purchases of goods and services. I nstead, as I mentioned, monetary policy mainly involves the purchase and sale of securities. The securities that the Fed purchases in the conduct of monetary policy are held in our portfolio and earn interest.

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The great bulk of these interest earnings is sent to the Treasury, thereby helping reduce the government deficit.
In the past three years, the Fed remitted $200 billion to the federal government. Ultimately, the securities held by the Fed will mature or will be sold back into the market. So the odds are high that the purchase programs that the Fed has undertaken in support of the recovery will end up reducing, not increasing, the federal debt, both through the interest earnings we send the Treasury and because a stronger economy tends to lead to higher tax revenues and reduced government spending (on unemployment benefits, for example). Even though our activities are likely to result in a lower national debt over the long term, I sometimes hear the complaint that the Federal Reserve is enabling bad fiscal policy by keeping interest rates very low and thereby making it cheaper for the federal government to borrow. I find this argument unpersuasive. The responsibility for fiscal policy lies squarely with the Administration and the Congress. At the Federal Reserve, we implement policy to promote maximum employment and price stability, as the law under which we operate requires. Using monetary policy to try to influence the political debate on the budget would be highly inappropriate. For what it's worth, I think the strategy would also likely be ineffective: Suppose, notwithstanding our legal mandate, the Federal Reserve were to raise interest rates for the purpose of making it more expensive for the government to borrow. Such an action would substantially increase the deficit, not only because of higher interest rates, but also because the weaker recovery that would result from premature monetary tightening would further widen the gap between spending and revenues.

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Would such a step lead to better fiscal outcomes? I t seems likely that a significant widening of the deficit--which would make the needed fiscal actions even more difficult and painful--would worsen rather than improve the prospects for a comprehensive fiscal solution.
I certainly don't underestimate the challenges that fiscal policymakers face. They must find ways to put the federal budget on a sustainable path, but not so abruptly as to endanger the economic recovery in the near term. In particular, the Congress and the Administration will soon have to address the so-called fiscal cliff, a combination of sharply higher taxes and reduced spending that is set to happen at the beginning of the year. According to the Congressional Budget Office and virtually all other experts, if that were allowed to occur, it would likely throw the economy back into recession. The Congress and the Administration will also have to raise the debt ceiling to prevent the Treasury from defaulting on its obligations, an outcome that would have extremely negative consequences for the country for years to come. Achieving these fiscal goals would be even more difficult if monetary policy were not helping support the economic recovery.

What Is the Risk that the Federal Reserve's Monetary Policy Will Lead to I nflation?
A third question, and an important one, is whether the Federal Reserve's monetary policy will lead to higher inflation down the road. In response, I will start by pointing out that the Federal Reserve's price stability record is excellent, and we are fully committed to maintaining it. Inflation has averaged close to 2 percent per year for several decades, and that's about where it is today. In particular, the low interest rate policies the Fed has been following for about five years now have not led to increased inflation.

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Moreover, according to a variety of measures, the public's expectations of inflation over the long run remain quite stable within the range that they have been for many years.
With monetary policy being so accommodative now, though, it is not unreasonable to ask whether we are sowing the seeds of future inflation. A related question I sometimes hear--which bears also on the relationship between monetary and fiscal policy, is this: By buying securities, are you "monetizing the debt"--printing money for the government to use--and will that inevitably lead to higher inflation?

No, that's not what is happening, and that will not happen.
Monetizing the debt means using money creation as a permanent source of financing for government spending. In contrast, we are acquiring Treasury securities on the open market and only on a temporary basis, with the goal of supporting the economic recovery through lower interest rates. At the appropriate time, the Federal Reserve will gradually sell these securities or let them mature, as needed, to return its balance sheet to a more normal size. Moreover, the way the Fed finances its securities purchases is by creating reserves in the banking system. Increased bank reserves held at the Fed don't necessarily translate into more money or cash in circulation, and, indeed, broad measures of the supply of money have not grown especially quickly, on balance, over the past few years. For controlling inflation, the key question is whether the Federal Reserve has the policy tools to tighten monetary conditions at the appropriate time so as to prevent the emergence of inflationary pressures down the road. I'm confident that we have the necessary tools to withdraw policy accommodation when needed, and that we can do so in a way that allows us to shrink our balance sheet in a deliberate and orderly way.

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For example, the Fed can tighten policy, even if our balance sheet remains large, by increasing the interest rate we pay banks on reserve balances they deposit at the Fed.
Because banks will not lend at rates lower than what they can earn at the Fed, such an action should serve to raise rates and tighten credit conditions more generally, preventing any tendency toward overheating in the economy. Of course, having effective tools is one thing; using them in a timely way, neither too early nor too late, is another.

Determining precisely the right time to "take away the punch bowl" is always a challenge for central bankers, but that is true whether they are using traditional or nontraditional policy tools.
I can assure you that my colleagues and I will carefully consider how best to foster both of our mandated objectives, maximum employment and price stability, when the time comes to make these decisions.

How Does the Fed's Monetary Policy Affect Savers and Investors?
The concern about possible inflation is a concern about the future. One concern in the here and now is about the effect of low interest rates on savers and investors.
My colleagues and I know that people who rely on investments that pay a fixed interest rate, such as certificates of deposit, are receiving very low returns, a situation that has involved significant hardship for some. However, I would encourage you to remember that the current low levels of interest rates, while in the first instance a reflection of the Federal Reserve's monetary policy, are in a larger sense the result of the recent financial crisis, the worst shock to this nation's financial system since the 1930s. Interest rates are low throughout the developed world, except in countries experiencing fiscal crises, as central banks and other policymakers try to cope with continuing financial strains and weak economic conditions.

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A second observation is that savers often wear many economic hats. Many savers are also homeowners; indeed, a family's home may be its most important financial asset. Many savers are working, or would like to be. Some savers own businesses, and--through pension funds and 401(k) accounts--they often own stocks and other assets. The crisis and recession have led to very low interest rates, it is true, but these events have also destroyed jobs, hamstrung economic growth, and led to sharp declines in the values of many homes and businesses. What can be done to address all of these concerns simultaneously? The best and most comprehensive solution is to find ways to a stronger economy. Only a strong economy can create higher asset values and sustainably good returns for savers. And only a strong economy will allow people who need jobs to find them. Without a job, it is difficult to save for retirement or to buy a home or to pay for an education, irrespective of the current level of interest rates. The way for the Fed to support a return to a strong economy is by maintaining monetary accommodation, which requires low interest rates for a time. If, in contrast, the Fed were to raise rates now, before the economic recovery is fully entrenched, house prices might resume declines, the values of businesses large and small would drop, and, critically, unemployment would likely start to rise again. Such outcomes would ultimately not be good for savers or anyone else.

How Is the Federal Reserve Held Accountable in a Democratic Society?
I will turn, finally, to the question of how the Federal Reserve is held accountable in a democratic society.

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The Federal Reserve was created by the Congress, now almost a century ago.
In the Federal Reserve Act and subsequent legislation, the Congress laid out the central bank's goals and powers, and the Fed is responsible to the Congress for meeting its mandated objectives, including fostering maximum employment and price stability. At the same time, the Congress wisely designed the Federal Reserve to be insulated from short-term political pressures. For example, members of the Federal Reserve Board are appointed to staggered, 14-year terms, with the result that some members may serve through several Administrations. Research and practical experience have established that freeing the central bank from short-term political pressures leads to better monetary policy because it allows policymakers to focus on what is best for the economy in the longer run, independently of near-term electoral or partisan concerns. All of the members of the Federal Open Market Committee take this principle very seriously and strive always to make monetary policy decisions based solely on factual evidence and careful analysis. It is important to keep politics out of monetary policy decisions, but it is equally important, in a democracy, for those decisions--and, indeed, all of the Federal Reserve's decisions and actions--to be undertaken in a strong framework of accountability and transparency. The American people have a right to know how the Federal Reserve is carrying out its responsibilities and how we are using taxpayer resources. One of my principal objectives as Chairman has been to make monetary policy at the Federal Reserve as transparent as possible. We promote policy transparency in many ways. For example, the Federal Open Market Committee explains the reasons for its policy decisions in a statement released after each regularly scheduled meeting, and three weeks later we publish minutes with a detailed summary of the meeting discussion.
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The Committee also publishes quarterly economic projections with information about where we anticipate both policy and the economy will be headed over the next several years.
I hold news conferences four times a year and testify often before congressional committees, including twice-yearly appearances that are specifically designated for the purpose of my presenting a comprehensive monetary policy report to the Congress. My colleagues and I frequently deliver speeches, such as this one, in towns and cities across the country. The Federal Reserve is also very open about its finances and operations. The Federal Reserve Act requires the Federal Reserve to report annually on its operations and to publish its balance sheet weekly. Similarly, under the financial reform law enacted after the financial crisis, we publicly report in detail on our lending programs and securities purchases, including the identities of borrowers and counterparties, amounts lent or purchased, and other information, such as collateral accepted. In late 2010, we posted detailed information on our public website about more than 21,000 individual credit and other transactions conducted to stabilize markets during the financial crisis. And, just last Friday , we posted the first in an ongoing series of quarterly reports providing a great deal of information on individual discount window loans and securities transactions. The Federal Reserve's financial statement is audited by an independent, outside accounting firm, and an independent I nspector General has wide powers to review actions taken by the Board. Importantly, the Government Accountability Office (GAO) has the ability to--and does--oversee the efficiency and integrity of all of our operations, including our financial controls and governance. While the GAO has access to all aspects of the Fed's operations and is free to criticize or make recommendations, there is one important exception: monetary policymaking.
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In the 1970s, the Congress deliberately excluded monetary policy deliberations, decisions, and actions from the scope of GAO reviews.
In doing so, the Congress carefully balanced the need for democratic accountability with the benefits that flow from keeping monetary policy free from short-term political pressures. However, there have been recent proposals to expand the authority of the GAO over the Federal Reserve to include reviews of monetary policy decisions. Because the GAO is the investigative arm of the Congress and GAO reviews may be initiated at the request of members of the Congress, these reviews (or the prospect of reviews) of individual policy decisions could be seen, with good reason, as efforts to bring political pressure to bear on monetary policymakers. A perceived politicization of monetary policy would reduce public confidence in the ability of the Federal Reserve to make its policy decisions based strictly on what is good for the economy in the longer term. Balancing the need for accountability against the goal of insulating monetary policy from short-term political pressure is very important, and I believe that the Congress had it right in the 1970s when it explicitly chose to protect monetary policy decisionmaking from the possibility of politically motivated reviews.

Conclusion
In conclusion, I will simply note that these past few years have been a difficult time for the nation and the economy. For its part, the Federal Reserve has also been tested by unprecedented challenges. As we approach next year's 100th anniversary of the signing of the Federal Reserve Act, however, I have great confidence in the institution. In particular, I would like to recognize the skill, professionalism, and dedication of the employees of the Federal Reserve System.
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They work tirelessly to serve the public interest and to promote prosperity for people and businesses across America.
The Fed's policy choices can always be debated, but the quality and commitment of the Federal Reserve as a public institution is second to none, and I am proud to lead it. Now that I 've answered questions that I've posed to myself, I 'd be happy to respond to yours.

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NUMBER 5

Adoption of Updated EDGAR Filer Manual
Final Rule. The Securities and Exchange Commission (the Commission) is adopting revisions to the Electronic Data Gathering, Analysis, and Retrieval System (EDGAR) Filer Manual and related rules to reflect updates to the EDGAR system. The revisions are being made primarily to support submission of Confidential Registration Statements; require Form I D authentication documents in PDF format; automate LTID generation for Large Trader registrations; support minor updates to Form D; remove superseded XBRL Taxonomies; remove the OMB expiration date from Form TA-1, TA-2, TA-W, 25-NSE; and request of unused funds. The EDGAR system is scheduled to be upgraded to support this functionality on July 2, 2012.

Important Information About EDGAR
EDGAR, the Electronic Data Gathering, Analysis, and Retrieval system, performs automated collection, validation, indexing, acceptance, and forwarding of submissions by companies and others who are required by law to file forms with the U.S. Securities and Exchange Commission (SEC). Its primary purpose is to increase the efficiency and fairness of the securities market for the benefit of investors, corporations, and the economy by accelerating the receipt, acceptance, dissemination, and analysis of time-sensitive corporate information filed with the agency. Not all documents filed with the Commission by public companies will be available on EDGAR. Companies were phased in to EDGAR filing over a three-year period, ending May 6, 1996. As of that date, all public domestic companies were required to make their filings on EDGAR, except for filings made in paper because of a
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hardship exemption. Third-party filings with respect to these companies, such as tender offers and Schedules 13D, are also filed on EDGAR.
However, some documents are not yet permitted to be filed electronically, and consequently will not be available on EDGAR. Other documents may be filed on EDGAR voluntarily, and consequently may or may not be available on EDGAR. For example: Form 144 (notice of proposed sale of securities) may be filed on EDGAR at the option of the filer. Forms 3, 4, and 5 (security ownership and transaction reports filed by corporate insiders) filed before June 30, 2003 may be filed on EDGAR at the option of the filer, but those filed on or after that date must be filed on EDGAR. Filings by foreign companies and foreign governments before November 4, 2002 either could be made on EDGAR at the option of the filer, or were not permitted to be filed electronically, but from that date on, these filings must be made on EDGAR. It should also be noted that the actual annual report to shareholders (except in the case of investment companies) need not be submitted on EDGAR, although some companies do so voluntarily. However, the annual report on Form 10-K or 10-KSB, which contains much of the same information, is required to be filed on EDGAR. Filers may choose to accompany their official filings with a copy in PDF. In order to read a PDF document, you need an Adobe Acrobat reader. Please note the following information about unofficial PDF copies on our web site: Only documents submitted to the EDGAR system in either plain text or H TML are official filings. PDF documents are unofficial copies of filings. Filers may not use the unofficial PDF copies instead of plain text or H TML documents to meet filing requirements.

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Our rules require that an unofficial PDF copy of a document be substantively equivalent to the official filing of which it is the copy.
That is, the PDF document must be the same in all respects except that the PDF document may be formatted differently and may contain graphics. It is the filer's responsibility to make sure of this. The EDGAR system cannot check to make sure the two documents are the same.

You should look at the official filing if you need to see what has been filed with the SEC.
Unofficial PDF copies are not subject to certain liabilities under the federal securities laws that are imposed only on filings. They are, however, subject to most of the civil liability and anti-fraud provisions. In addition, PDF copies that are prospectuses retain prospectus liability under Section 12 of the Securities Act.

Some filers are required to submit documents in I nteractive Data format using the eXtensible Business Reporting Language (XBRL), which accompany certain official filings.
Interactive Data documents can be opened using many common I nternet browsers; however, to better view the contents of the I nteractive Data documents, you will need an XBRL-specific software application. As a computer language, XBRL was designed to be machine-readable, and so therefore to be human-readable it needs to be rendered into a more familiar and recognizable format.

The SEC has provided a software application called a Viewer that automatically renders the XBRL into a human-readable format when the Interactive Data documents are accessed on the EDGAR public website, found at http:/ / www.sec.gov/ edgar/searchedgar/webusers.htm.
In regards to I nteractive Data documents:
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Our rules establish guidelines for the content and format, including which data may be provided as part of an Interactive Data document, and the relationship to the related official filing.
While the EDGAR system does run various XBRL validation criteria, it does not automatically check to ensure complete compliance; it is the filer's responsibility to comply with these guidelines. Only documents submitted to the EDGAR system in either plain text or H TML are official filings. All I nteractive Data documents are submitted as an Exhibit 101, and for an initial two year period (based on a phase-in approach when they are first required to be submitted) are considered furnished, not filed. This temporary provision expires completely on October 31, 2014. Registrants may not use the I nteractive Data documents instead of plain text or H TML documents to meet filing requirements. For an initial two year period after being phased-in, I nteractive Data documents are not subject to certain liabilities under the federal securities laws that are imposed only on filings. At the end of the two year period, the I nteractive Data documents are subject to the same liability provisions as the related official filing, with temporary provisions expiring no later than October 31, 2014.

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NUMBER 6

Dealing with financial systemic risk: the contribution of macroprudential policies
Panel remarks by Jaime Caruana, General Manager of the Bank for International Settlements, Central Bank of Turkey/ G20 Conference on "Financial systemic risk", Istanbul

Abstract
There are important two-way interactions between macroprudential policy and other areas of public policy. These interactions put a premium on cooperative institutional frameworks that recognise the complementarities between policy actions.

This means that, within a single jurisdiction, macroprudential authorities should be independent and should focus primarily on mitigating systemic risk while recognising that other policies will have an impact on the same objective.
Cooperation between macroprudential policies across national borders starts from the high level set by various international regulatory standards and is improving with the explicit macroprudential frameworks recently introduced for countercyclical capital buffers and the higher loss absorbency requirements for systemically important banks.

Greater cooperation, however, does not mean that we should disregard that individual policies have specific objectives and that some hierarchy of action is necessary.

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Full speech
Let me thank the Central Bank of the Republic of Turkey and the G20 presidency of Mexico for having invited me to attend such an interesting conference addressing the topic of financial systemic risk. In my remarks today, I would like to explain how macroprudential policies can greatly contribute to dealing with systemic risk and fostering financial stability. I will highlight a few key issues that we should focus on in order to make this effective.

1. Trend towards strengthening the macroprudential orientation of policy
The term "macroprudential" has gained currency in policy discussions during the past four years. Indeed, the recent financial crisis has given rise to a general trend towards strengthening the macroprudential orientation of policy in countries with very diverse institutional frameworks and financial structures. This is very welcome: recent experience has taught us that we need to be more focused on addressing system-wide risk, and this is precisely what macroprudential policy is all about. Macroprudential frameworks may be new, but mainly in the sense of becoming explicit. Many countries have been using prudential instruments to address system-wide vulnerabilities without making reference to macroprudential policies. For example, variable ceilings for loan-to-value (LTV) ratios have been used repeatedly in Hong Kong and other Asian economies to slow down frothy mortgage lending and ensure that banks do not overexpose themselves to property risk. Nevertheless, the more recent introduction of formal structures brings to the fore issues of definition, delineation of responsibilities and governance.
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In my remarks today, I would like to underscore a critical aspect of macroprudential policy and to offer a word of caution.
The critical aspect I am referring to is the strong two-way interactions between macroprudential policy and other areas of public policy. These interactions put a premium on cooperative institutional frameworks that recognise the complementarities between policy actions, both within and across jurisdictions. This is a particularly important issue at the national level; but cooperative frameworks are also essential at the international level, requiring both sufficient information-sharing and reciprocity. The word of caution is that we should be mindful that individual policies have specific primary objectives and that some hierarchy of action is necessary. Let me explain.

2. Macroprudential policy is not the only area of policy that influences systemic risk
Many other policies can affect the resilience of the financial system and its ability to provide valuable services to the economy. Quite apart from microprudential policy, the influence of monetary, fiscal and tax policies, of financial reporting standards and of legal frameworks is also very strong. For instance, prolonged periods of low policy rates affect leverage, encourage financial market participants to take on risks and may at times fuel asset price bubbles. Conversely, instruments and actions aimed at mitigating and managing systemic risk can have very important effects on the macroeconomy and thus impinge on the objective of other policies. For example, tightening capital requirements to protect banks from the build-up of systemic risk during a credit boom can also cool down credit expansion and, by extension, aggregate demand.
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To be sure, a more stable, more resilient and less procyclical financial system will improve the effectiveness of monetary and other policies.
So there are externalities in the interaction of different policies: there can be positive complementarities when the policies are mutually reinforcing, but also negative spillovers when one policy weakens the effectiveness of another. Hence, there is a need for coordination. This is true both within a given jurisdiction and across borders.

3. The need for coordination within a single jurisdiction
Let me talk first about coordination within a single jurisdiction. The interactions between policies suggest a few principles for instrument design and deployment. One such principle is that macroprudential policy instruments should be in the hands of an independent authority with the explicit objective of maintaining financial stability. This is important, for two reasons: the lack of precise measurement to quantify this objective, and policymakers' inevitable reliance on judgment in pursuing it. Measurement presents a serious challenge for the design, governance and accountability of macroprudential policy. There are no readily available and widely accepted metrics of systemic risk to help calibrate instruments or gauge policy performance, even ex post, with much precision. And it is notoriously difficult to answer the counterfactual question of how things would have evolved had an alternative action plan been adopted. As a result, more than ever, policy needs to rely on a significant degree of judgment. One telling example relates to anticyclical policies.
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All anticyclical policies have to work with real-time information that is incomplete and imprecise.
Decisions rely on judgment to interpret the multitude of inputs. This is not unique to macroprudential policy, but it is particularly evident in this case: current technology provides far less in the way of robust quantitative models to guide macroprudential policy in addressing both the time and the cross-sectional dimensions of systemic risk. As regards the time dimension, only recently have researchers been attempting to be specific about what the financial cycle is and how to characterise it. A few features are worth mentioning: It is possible to identify a well defined financial cycle that is best characterised by the co-movement of medium-term cycles in credit and property prices. Such financial cycles are longer and more severe than business cycles. The duration and amplitude of the financial cycle has increased since the mid-1980s: financial cycles last, on average, around 16 years; but when considering only cycles that peaked after 1998, the average duration is nearly 20 years, compared with 1 1 for previous ones. Peaks in the financial cycle are closely associated with systemic banking crises (henceforth "financial crises" for short). Finally, the financial cycle and the business cycle are different phenomena, but they are related. Recessions associated with financial disruptions tend to be longer and deeper.

As regards the cross-sectional dimension of systemic risk, we are also uncertain about how best to map the systemic importance of financial institutions onto their size, the extent and density of their links to others, and the uniqueness of their economic function.

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The need for judgment, combined with the need to resist powerful political economy pressures, puts a premium on operational independence.
Pressures may be high because the future rewards of macroprudential policy actions tend to be uncertain, difficult to quantify and distant in the future, whereas the costs are immediate and can be easily exaggerated. Operational independence is easier to achieve if the relevant authority has a clear mandate. And it has to go hand in hand with accountability and clarity of communication. Policymakers need to be transparent about how policy decisions relate to their mandate and to their economic assessments. This helps anchor the public's expectations and the holding of the authorities to account. From this perspective, it is key to ensure the adequate involvement of the central bank. One may even argue that it is preferable for the central bank to be the macroprudential authority. A second principle is that the control over instruments should be commensurate with the objective of managing systemic risk. Not many tools are purely macroprudential. The vast majority are simply prudential tools tailored for use from a macroprudential perspective through adjustments to their design and calibration. Capital requirements are a key tool but are not sufficient. They need to be complemented with other instruments and more intrusive supervision. Given that we have to deal with human behaviour that is imperfectly understood, combining instruments is more promising than relying on a single one.
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Liquidity requirements and instruments such as loan-to-value ratios or limits on exposures have all been used and proven effective.
In addition, explicit resolution plans are also important: they address the source of the problem, as they reduce the costs of (disorderly) failure. More generally, all tools are inadequate in the absence of effective and at times intrusive supervision: the incentives for regulatory arbitrage are simply too powerful. This means that there is a need for coordination in the use of various instruments, through both the sharing of information and the communication of assessments. Moreover, this should be supported by a framework that allocates responsibilities and accountability clearly.

4. The international dimension
Let me now turn to the international dimension. As long as we have open financial systems, risks in one country can affect others. Similarly, macroprudential policy can have spillovers across borders. To what extent does this call for formal coordination? Countries are developing their own policy frameworks to deal with the cross-sectional and the time dimensions of systemic risk. They are introducing arrangements to assess the banks that are systemically important from a domestic perspective. They are also introducing policy measures linked to rough indicators of banks' systemic significance. I would argue that, despite being the new kid on the block, macroprudential policy is one of the economic policy areas in which international coordination has gone furthest. To be sure, we started from a very good basis, namely the existing international regulatory framework for markets and institutions.
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A number of independent international committees have proposed, and countries around the globe have adopted, minimum prudential standards for banks and market infrastructures.
And, importantly, more recently there have been concerted efforts to promote consistent implementation across jurisdictions. The Basel Committee on Banking Supervision has conducted significant work in this area under the leadership of Stefan I ngves. For my part, I would simply like to highlight two examples of coordination in the macroprudential area: as regards its time dimension, the design of the countercyclical capital buffers; and, as regards the cross-sectional dimension, the imposition of capital surcharges for systemically important banks. The countercyclical buffer is intended to counterbalance the procyclical behaviour of banks by building up buffers in good times that can absorb losses in times of stress. It is a prudential instrument calibrated to achieve a macroprudential objective. Critically, the level of the buffer depends on the state of the financial cycle in a given jurisdiction. The framework allows for a large degree of judgment and tailoring to local circumstances - there is no one-size-fits-all solution. It also provides for international reciprocity: supervisors of foreign banks should apply the same surcharge on these banks' exposures as the supervisor in the host jurisdiction demands of the local banks. This levels the playing field and addresses regulatory arbitrage. A similar degree of coordination applies to the treatment of systemically important banks. The Basel Committee and the Financial Stability Board have developed a framework to assess the banks that are globally systemically important (G-SIBs).

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By necessity, the assessment of capital surcharges and their application to those banks comprise a joint decision at the international level, since the relevant system is global.
Furthermore, the proposed framework to deal with the banks that are systemically important from a domestic perspective (these are more numerous than the G-SIBs) sets out principles that govern the interaction between the assessment and actions of a bank's host supervisor and those of its home supervisor. Cooperation is built into the framework. Macroprudential policy may be a recent addition to the toolbox of policymakers, but it already embeds international cooperation. I believe that this approach to international cooperation is a good one. It fully recognises international spillovers while preserving national room for manoeuvre in applying agreed principles. Coordination is advanced through information-sharing, common minimum standards and reciprocity.

5. The hierarchy of action
Let me now close by offering a cautionary remark concerning the interaction between macroprudential policy and other policies. As I noted earlier, macroprudential policy may have macroeconomic effects. Attempts to mitigate the financial cycle are likely to influence the business cycle. Prudential tools may affect credit and asset price dynamics and, by extension, aggregate demand. Because of that, it is essential to ensure that the hierarchy of policy tools is clarified. Macroeconomic management should first rely on macroeconomic tools (monetary and fiscal policies) before asking for help from macroprudential policy.

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Financial stability is already a large enough job for macroprudential policy.
It should remain focused on its main objective rather than trying to smooth the business cycle. The temptation to bend prudential tools away from their primary objective of financial stability to tackle shorter-term macroeconomic fluctuations can be quite strong. Given measurement uncertainties, the case for doing so is less compelling than it appears. It is in situations like these that the independence and accountability of macroprudential frameworks are particularly valuable. Moreover, financial stability is too big a burden to rest exclusively on prudential and macroprudential policies; it needs the cooperation of other policies: a more symmetrical monetary policy across the financial cycle, fiscal policies that create additional space in financial booms, etc. Finally, let me finish on a positive note. Despite our limited knowledge about the impact of macroprudential policies, there is significant room for effective action - for at least three reasons: First, potential policy conflicts are usually exaggerated. It seems likely that, in most circumstances, macroprudential policy and monetary policy will be complementary, tending to support each other instead of conflicting. It is important to realise that the financial cycles that matter for prudential policy are of a much lower frequency than business cycles.

This suggests that, most of the time, monetary policy should be able to treat macroprudential policy developments as a relatively slow-moving background.

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However, it also requires monetary policy to keep an eye on developments over longer horizons in order to take into account the effects of the gradual build-up and unwinding of financial imbalances.
This longer horizon diffuses some of the possible tensions between monetary policy and macroprudential decisions. Second, there is already a growing body of research and experience that has led to significant progress being made both conceptually and operationally, for instance in the design and calibration of macroprudential tools.

Third, some tools and indicators seem to produce reasonable results certainly better than doing nothing.
In particular, the credit gap indicator embedded in the Basel I I I countercyclical capital buffer seems to provide good guidance for action. Simulations indicate that following this indicator would help to produce meaningful action (eg raising capital) at an early stage, before the beginning of a financial crisis. For example, the United States and the United Kingdom would have started setting aside more capital in 1999, and the 2.5% buffers would have been completed by 2002 and 2006 respectively, ie well before the financial crisis. Spain would have started even earlier, in 1997 (with the 2.5% buffer completed in 1999). Of course, the indicator would not have worked so well in some other countries. For instance, in the case of the N etherlands, it would have peaked too early compared to the evolution of the financial cycle; nonetheless, healthy buffers would have been built. Also, the credit gap indicator has proved to be noisy for some large emerging market economies such as Brazil and Turkey. To be sure, this indicator can be supplemented with the information coming from the analysis of other indicators.
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These are just a few examples of the possibilities of one of the instruments of macroprudential policies.
They illustrate the potential but also the need to continue to work on how the macroprudential approach can be formalised and applied to different institutional frameworks in a way that strengthens other policies and mitigates systemic risk.

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NUMBER 7

EU to Gabriel Bernardino (EI OPA)

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NUMBER 8

2013 work programme European Securities and Markets Authority ESMA‟s key objectives and priorities in 2013
This work programme describes the goals and deliverables planned for ESMA in its third year of operation. 2013 will be marked by a major increase of the work of ESMA, given a number of new responsibilities that are in the process or have been given to the organisation by the co-legislators. 2013 objectives and priorities are based on three key elements:

1 . N ew and revised legislation
The introduction of new and the overhaul of existing legislation will be a key challenge for ESMA. 2013 will see the continuation of the revision of the Markets in Financial Instruments Directive (which will be superseded by a revised directive and a new regulation, MiFID 2 and MiFIR), and of the revision of the Market Abuse Directive (a new regulation - MAR - and a new directive MAD 2). These new legislative texts form part of the key deliverables initiated by the EU Institutions in response to the financial crisis. Other key texts are also planned for: - A new Credit Rating Agencies Regulation (CRA I I I ); - The revision of the Transparency Directive and;

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- The Regulations on Venture Capital (VC) and Social Entrepreneurship Funds (SEFs).
- CSD Regulation In order to build a single rulebook for Europe, ESMA will develop technical standards, guidelines and advice. ESMA‟s focus goes beyond establishing new regulation though. At the same time, ESMA will promote supervisory convergence. In 2013 it is expected that ESMA will fully exercise all its powers to drive greater convergence of national supervisory activity and implementation of EU regulation on the ground. Following several years of crisis, E SMA‟s work will aim to support the restoration of confidence in Europe‟s financial markets.

2. Supervisory Role – CRAs and Trade Repositories
2013 will be the second year in which ESMA will exercise its supervisory duties for CRAs. ESMA will focus on implementing its new multi-dimensional supervision approach, incorporating horizontal thematic and vertical firm-specific supervisory work. ESMA will also begin supervising Trade Repositories, under the terms of the European Market I nfrastructure Regulation (EMIR), and coordinate supervisory colleges for Central Counterparties.

3. Coordination, monitoring and analysis of financial markets
As in 2011 and 2012, in response to the situation in European financial markets, ESMA will continue to actively monitor developments in
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financial markets and drive and coor-dinate appropriate responses (by NCAs and other EU authorities).
A substantial part of ESMA‟s resources will be allocated to monitoring and providing analyses of develop-ments in financial markets to support financial stability and protection of financial con-sumers. In order to enable ESMA to deliver its 2013 work programme, it will need to increase its staffing and budget accordingly. In 2013 staff numbers are expected to grow from 101 to 160 and the budget from €20.2 million to approximately €28 million. ESMA will continue to be funded by the European Commission (Commission), the National Competent Authorities and fees from Credit Rating Agencies. For the first time, in 2013, funding will also be generated from Trade Repositories fee contributions which will cover E SMA‟s costs of the relevant supervision.

The division of ESMA‟s work
ESMA has structured the different work streams it will undertake according to its key responsibilities and objectives. Therefore this document presents the planned activities for 2013 under the following headings: Single Rulebook; Supervision; Financial consumer protection; Contribution to Financial Stability; Convergence; and ESMA as an organisation. The document also contains four annexes, detailing: the planned human resources and organisational structure of ESMA; the draft 2013 budget (pending approval from the EU institutions); and
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The list of key work streams and on-going activities.

ESMA‟s key objectives and priorities in 2013-2015
The multi-annual work programme describes the goals and deliverables ESMA aims to achieve in the period 2013-15. Following an initial two-year period establishing the Authority, during which ESMA already met its key objectives, 2013-15 will be when ESMA consolidates its position as a key part of the EU‟s system of financial supervision. In order to meet this objective, ESMA will focus on the following key strategic directions.

Strategic directions 2013-2015
Develop the technical standards and guidelines required following the revision of existing, or the introduction of new legislations: o Markets in Financial Instruments Directive (MiFID) and Market Abuse Directive (MAD); o Credit Rating Agencies Regulation (CRA I I I ); o Transparency and Prospectus Directives (TD and PD); o Undertakings for Collective I nvestment in Transferable Securities (UCITS); o European Market Infrastructure Regulation (EM IR), CSD Regulation/ Directive and Securities Law legislation; o Short Selling; o Audit Regulation;

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o Alternative I nvestment Funds Management Directive (AIFMD), Venture Capital (VC) and Social Entrepreneurship Funds (SEFs); and
o Other possible areas where future legislation might be proposed, e.g. shadow banking, reference rates (Euribor) and possibly resolution for CCPs. Implement a new multi-disciplinary supervisory approach, including in-depth reviews, action plans, guidance and enforcement measures; Develop supervisory manuals and internal guidelines setting out ESMA‟s supervisory approach and ensure effective pre-screening of supervised entities‟ business development plans in order to facilitate the identification of potential new risk areas; Further develop tools for financial consumer protection and extend the analysis of consumer risks and trends to respond to potential risks to consumer protection; Actively monitor developments in financial markets and drive and coordinate appropriate responses; Achieve greater convergence of national supervisory activity and implementation of EU regulations using ESMA‟s powers; Develop the infrastructure and operational processes required to support new legislative developments, e.g. major IT projects, when required.

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NUMBER 9

Solvency I I – monitoring the ongoing appropriateness of internal models
Julian Adams, Director, I nsurance In June 2012 I wrote to all firms in our internal model approval process to share our thinking on the way we will monitor the ongoing appropriateness of internal models after approval.

This letter gives an update on the development of early warning indicators and reiterates the purpose and intended use of the indicators.
Our underlying concern is that, if not adequately monitored and updated, the solvency standard delivered by internal models can deteriorate over time. The implementation of internal models inherently rests on a great number of judgements and assumptions, both explicit and implicit. Our experience suggests that, over time, if models are not appropriately updated, these assumptions and judgements can become less appropriate, leading to an overall reduction in solvency standards. We therefore continue to develop early warning indicators to ensure that the Solvency Capital Requirement (SCR) will meet the Solvency I I calibration on an ongoing basis. To achieve this objective, we believe that early warning indicators: a.should be based on metrics that are independent from the internal model calculations, i.e. not based on the firm‟s modelled SCR; b.should be simple in their construction, calibration and application, avoiding complexity; and

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c. will, if breached, trigger an immediate supervisory response; a capital add-on is, in all but exceptional cases, likely to be the most effective way to restore compliance with the Solvency I I calibration requirement (i.e. 99.5% over a one-year period).
We consider that the use of early warning indicators is consistent with the supervisory powers set out in the Solvency I I Directive and as such will form part of the supervisory review process for internal model firms. The early warning indicators would supplement information collected from firms during the supervisory review process, including in particular the results of model validation as well as any approval of changes to the model. Further, the calibration of the indicators will aim to identify significant deviations in firm risk profile with respect to the assumptions underlying the calculation of the SCR.

Industry responses
We received ten responses to our June 2012 letter. Overall, they focussed on how we will monitor the ongoing appropriateness of an internal model at the individual firm level. These are useful suggestions which we will take into account as part of our supervisory review process. We also received some suggestions of an alternative indicator to the proposed ratio between the pre-corridor Minimum Capital Requirement (pMCR) and modelled SCR and we are investigating credible alternatives.

We did not receive any comments on the proposed industry sub-sector segmentation set out in the letter.
Some respondents noted that the construction should also allow for the capture of the underwriting cycle, and be mindful of the potential for
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pro-cyclicality and we will take this feedback into consideration in further work.
A number of respondents expressed support for a European approach and we have shared our thinking with E IOPA. I would like to confirm that we do not intend to use a multiple of the pMCR indicator, or any other early warning indicator, as a condition to the approval of a firm‟s use of an internal model. Our work with firms in the run up to implementation will inform the calibration for the indicators at day one. As I said in my letter in June, we expect that, in the vast majority of cases, firms submitting a model that properly reflects the firm‟s risk profile to the standard required by the Solvency I I Directive, and which is approved by us, will fall within the ratio or range of the indicator. So this should not be an issue for approved models on day one. Fundamentally, the purpose of the indicator is to limit subsequent downward SCR drift relative to risk profile. We have set out our intention to review the indicators periodically, both from our experience of their use and their calibration. In response to comments received that the early warning indicators would not allow for the reflection of the nature of and risks run by individual insurers - we will not be providing calibration for indicators at an individual firm level as this runs counter to the policy approach to have a simple, easy-to-apply indicator.

Next steps
There is still an opportunity for further engagement from the industry by cob Friday 26 October on early warning indicators that deliver the policy approach set out above.
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We also welcome suggestions for the segmentation set out in the June letter.
You can send your response to your usual supervisory contact or to me directly. In the meantime we will be using data from firms to inform the development and calibration of early warning indicators. Yours sincerely

Julian Adams Director, I nsurance 18 June 2012

Solvency I I : monitoring the ongoing appropriateness of internal models
As part of our commitment to share developments in our approach to the implementation of the Solvency I I Directive, we wanted to set out our thinking on the way in which we would monitor the ongoing appropriateness of internal models after approval.

Model approval and beyond
As required by the Solvency I I Directive, we will only approve an internal model for the calculation of the Solvency Capital Requirement (SCR) if we are satisfied that the systems for identifying, measuring, monitoring, managing and reporting risks are adequate and in particular if the model fulfils the tests and standards set out in the Solvency I I framework.

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While our focus is on the work we need to do to be able to give firms a decision on their internal model application in time for the first day of the regime, we are also looking ahead to how we use our knowledge and learning to monitor the ongoing appropriateness of a firm‟s internal model in the new regime.
Following approval, firms are responsible for ensuring the ongoing appropriateness of the internal model, by ensuring that the internal model meets the tests and standards and reflects the firm‟s risk profile. Firms should also ensure that the SCR is calibrated and corresponds to the value at risk of their basic own funds of the firm, subject to a confidence level of 99.5% over a one-year period. This means that we need to be assured that firms have put in place systems which ensure that the internal model operates properly on a continuous basis. We also need to be confident that the controls put in place are adequate and effective at all times, including stressed market conditions or crises.

At a market level, we will monitor the movement of insurance sector capital over time.
Our experience of internal models to date tells us that significant effort is put into an approval process, without adequate attention given to ongoing appropriateness. This leads to a risk that standards of solvency deteriorate over time. Based on the requirements of the Solvency I I Directive, it is our expectation that models will be monitored and updated regularly to reflect the firm‟s risk profile and to ensure compliance with model requirements.

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Early warning indicators
To this end, we are developing a number of early warning indicators aimed at helping us and firms ensure that, after approval, internal models and the SCR calculation remain appropriate on an ongoing basis, at both firm and system level and that firms‟ internal models continue to deliver outputs that are consistent with the requirements of Solvency I I. We will use the information provided by firms in their Solvency I I regulatory reporting to assess their position relative to these indicators (which may take the form of ratios or ranges) and so, the development of these indicators will not in itself create an additional reporting requirement. However, firms will be required to notify us immediately in the event their position falls outside these pre-determined ranges. In all but exceptional cases, we will take immediate supervisory action. This could include seeking a revision of the parameters and/ or imposing a capital add-on. The aim of this action will be to increase the SCR so as to bring it once again above the indicator level with a view to ensuring that it complies with the Solvency I I calibration requirement (i.e. 99.5% over a one-year period). In the meantime (and in any event), the firm and the FSA will work together to understand the issues better, which may result in improvements to the firm‟s model. We propose to use a number of early warning indicators to assist us with our monitoring of capital on a firm-specific and industry-wide basis. The indicators will be tailored to specific sectors of the insurance market. We will periodically review the indicators, both from our experience of their use and their calibration.
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Ratio between the pMCR and modelled SCR
One of the indicators that we are currently developing is a ratio between the pre-corridor minimum capital requirement (pMCR) and the modelled SCR. Separate pMCR indicators would be set at the level of an industry sub-sector to give us a high degree of assurance that the model is delivering a calibration at 99.5% over a one-year period. We intend to have indicators for firms which undertake: • life business, excluding with-profits business; • with-profits business; • general insurance business, excluding London market business; and • London market business. Our preliminary analysis indicates that the pMCR indicator could range between: • 175-200% for life business; and • 175-200% for general insurance business. We have used data from the fifth quantitative impact study, and applied it to the latest version of the MCR specification set out in the November 2011 draft Level 2 text to derive these preliminary ranges. However, to refine the calibration we will need information from UK firms and we will issue a template and instructions in September 2012. Our intention is to calibrate the indicator so that, in the vast majority of cases, firms submitting a model which properly reflects the firm‟s risk profile to the standard required by the Solvency I I Directive and which is
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approved by us will fall within the ratio or range of the indicator and so this should not be an issue for approved models on day one.
Fundamentally, the purpose of the indicator is to limit subsequent downward SCR drift relative to risk profile. Since there is no MCR for groups, the ratio set out in this letter would apply to the UK solo entities.

Next steps
In addition to the request for data to refine the calibrations in September 2012, we will also provide an update on the other early warning indicators we are considering to prompt supervisory intervention, including the use of stress tests and scenarios for economy-wide variables for with-profits business and groups. Yours sincerely

Julian Adams Director, I nsurance

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NUMBER 10

The UK Corporate Governance Code Important parts
The first version of the UK Corporate Governance Code (the Code) was produced in 1992 by the Cadbury Committee. Its paragraph 2.5 is still the classic definition of the context of the Code:

“Corporate governance is the system by which companies are directed and controlled. Boards of directors are responsible for the governance of their companies.
The shareholders‟ role in governance is to appoint the directors and the auditors and to satisfy themselves that an appropriate governance structure is in place. The responsibilities of the board include setting the company‟s strategic aims, providing the leadership to put them into effect, supervising the management of the business and reporting to shareholders on their stewardship. The board‟s actions are subject to laws, regulations and the shareholders in general meeting.” Corporate governance is therefore about what the board of a company does and how it sets the values of the company, and is to be distinguished from the day to day operational management of the company by full-time executives. The Code is a guide to a number of key components of effective board practice. It is based on the underlying principles of all good governance: accountability, transparency, probity and focus on the sustainable success of an entity over the longer term.
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The Code has been enduring, but it is not immutable.
Its fitness for purpose in a permanently changing economic and social business environment requires its evaluation at appropriate intervals. The new Code applies to accounting periods beginning on or after 1 October 2012 and applies to all companies with a Premium listing of equity shares regardless of whether they are incorporated in the UK or elsewhere.

Comply or Explain
The “comply or explain” approach is the trademark of corporate governance in the UK. It has been in operation since the Code‟s beginnings and is the foundation of the Code‟s flexibility. It is strongly supported by both companies and shareholders and has been widely admired and imitated internationally. The Code is not a rigid set of rules. It consists of principles (main and supporting) and provisions. The Listing Rules require companies to apply the Main Principles and report to shareholders on how they have done so. The principles are the core of the Code and the way in which they are applied should be the central question for a board as it determines how it is to operate according to the Code.

It is recognised that an alternative to following a provision may be justified in particular circumstances if good governance can be achieved by other means.
A condition of doing so is that the reasons for it should be explained clearly and carefully to shareholders1, who may wish to discuss the
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position with the company and whose voting intentions may be influenced as a result.
In providing an explanation, the company should aim to illustrate how its actual practices are consistent with the principle to which the particular provision relates, contribute to good governance and promote delivery of business objectives. It should set out the background, provide a clear rationale for the action it is taking, and describe any mitigating actions taken to address any additional risk and maintain conformity with the relevant principle. Where deviation from a particular provision is intended to be limited in time, the explanation should indicate when the company expects to conform with the provision. In their responses to explanations, shareholders should pay due regard to companies‟ individual circumstances and bear in mind in particular the size and complexity of the company and the nature of the risks and challenges it faces. Whilst shareholders have every right to challenge companies‟ explanations if they are unconvincing, they should not be evaluated in a mechanistic way and departures from the Code should not be automatically treated as breaches. Shareholders should be careful to respond to the statements from companies in a manner that supports the “comply or explain” process and bearing in mind the purpose of good corporate governance. They should put their views to the company and both parties should be prepared to discuss the position. Smaller listed companies, in particular those new to listing, may judge that some of the provisions are disproportionate or less relevant in their case. Some of the provisions do not apply to companies below the FTSE 350.
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Such companies may nonetheless consider that it would be appropriate to adopt the approach in the Code and they are encouraged to do so.
Externally managed investment companies typically have a different board structure which may affect the relevance of particular provisions; the Association of I nvestment Companies‟ Corporate Governance Code and Guide can assist them in meeting their obligations under the Code. Satisfactory engagement between company boards and investors is crucial to the health of the UK‟s corporate governance regime. Companies and shareholders both have responsibility for ensuring that “comply or explain” remains an effective alternative to a rules-based system. There are practical and administrative obstacles to improved interaction between boards and shareholders. But certainly there is also scope for an increase in trust which could generate a virtuous upward spiral in attitudes to the Code and in its constructive use.

The Main Principles of the Code Section A: Leadership
Every company should be headed by an effective board which is collectively responsible for the long-term success of the company. There should be a clear division of responsibilities at the head of the company between the running of the board and the executive responsibility for the running of the company‟s business. No one individual should have unfettered powers of decision. The chairman is responsible for leadership of the board and ensuring its effectiveness on all aspects of its role.
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As part of their role as members of a unitary board, non-executive directors should constructively challenge and help develop proposals on strategy.

Section B: Effectiveness
The board and its committees should have the appropriate balance of skills, experience, independence and knowledge of the company to enable them to discharge their respective duties and responsibilities effectively. There should be a formal, rigorous and transparent procedure for the appointment of new directors to the board. All directors should be able to allocate sufficient time to the company to discharge their responsibilities effectively. All directors should receive induction on joining the board and should regularly update and refresh their skills and knowledge. The board should be supplied in a timely manner with information in a form and of a quality appropriate to enable it to discharge its duties. The board should undertake a formal and rigorous annual evaluation of its own performance and that of its committees and individual directors. All directors should be submitted for re-election at regular intervals, subject to continued satisfactory performance.

Section C: Accountability
The board should present a fair, balanced and understandable assessment of the company‟s position and prospects.
The board is responsible for determining the nature and extent of the significant risks it is willing to take in achieving its strategic objectives. The board should maintain sound risk management and internal control
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systems.
The board should establish formal and transparent arrangements for considering how they should apply the corporate reporting, risk management and internal control principles and for maintaining an appropriate relationship with the company‟s auditors.

Section D: Remuneration
Levels of remuneration should be sufficient to attract, retain and motivate directors of the quality required to run the company successfully, but a company should avoid paying more than is necessary for this purpose. A significant proportion of executive directors‟ remuneration should be structured so as to link rewards to corporate and individual performance. There should be a formal and transparent procedure for developing policy on executive remuneration and for fixing the remuneration packages of individual directors. No director should be involved in deciding his or her own remuneration.

Section E: Relations With Shareholders
There should be a dialogue with shareholders based on the mutual understanding of objectives. The board as a whole has responsibility for ensuring that a satisfactory dialogue with shareholders takes place. The board should use the AGM to communicate with investors and to encourage their participation.

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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

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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_and_Certific ation.htm

I nternational Association of Risk and Compliance Professionals (I ARCP) www.risk-compliance-association.com