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P a g e | 1 International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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

P a g e | 1 International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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International Association of Risk and Compliance Professionals (IARCP)

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

USA Tel: 202-449-9750 www.risk-compliance-association.com Top 120 risk and compliance management related news stories

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

Dear Member,

George Lekatis President of the IARCP

is next Dear Member, George Lekatis President of the IARCP If you plan to continue to

If you plan to continue to work as a risk and compliance management expert, officer or director throughout the rest of your career, it makes perfect sense to become a Life Member of the Association, and continue your journey without interruption and without renewal worries.

You will get a lifetime of benefits as well. You can check the amazing benefits that include:

1. 50% discount for the CRCMP and CISRCP distance learning and

online certification programs

2. Two of our web pages dedicated to you

(www.risk-compliance-association.com/Your_Name.htm)

To learn more:

Enjoy the convenience of making a single payment for your entire tenure as a member, and get all the benefits.

Welcome to the Top 120 list.

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Top 120 list. International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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In the States, President Obama signed the Jumpstart Our Business Startups (JOBS) Act, a bipartisan bill that encourages startups and support small businesses.

In the world, we will have interesting changes in risk management and corporate governance, as the Financial Stability Board finds that the global financial crisis highlighted a number of corporate governance failures and weaknesses in financial institutions, including inappropriate Board structures and processes, weak risk governance systems, and unduly complex or opaque firm organisational structures and activities.

In Europe, we have a very important development. The impact of the new Basel III framework is monitored semi-annually by both the Basel Committee at a global level and the European Banking Authority (EBA, formerly CEBS) at the European level, using data provided by participating banks on a voluntary and confidential basis.

Well, in Europe, the aggregate Group 1 and Group 2 shortfall of liquid assets is at approx. €1.2 trillion which represents 3.7% of the approx. €31 trillion total assets of the aggregate sample.

[Group 1 banks are those with Tier 1 capital in excess of €3 bn and internationally active. All other banks are categorized as Group 2 banks]

A total of 158 banks submitted data for this exercise, consisting of 48 Group 1 banks and 110 Group 2 banks.

For the banks in the sample, monitoring results show a shortfall of liquid assets of €1.15 trillion (which represents 3.7% of the €31 trillion total assets of the aggregate sample) as of 30 June 2011, if banks were to make no changes whatsoever to their liquidity risk profile.

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

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

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Table of Contents

Monday, April 2, 2012

Page 5

Monday, April 9, 2012

Page 99

Monday, April 16, 2012

Page 209

Monday, April 23, 2012

Page 377

Monday, April 30, 2012

Page 471

Monday, May 7, 2012

Page 636

Monday, May 14, 2012

Page 789

Monday, May 21, 2012

Page 903

Monday, May 28, 2012

Page 1069

Monday, June 4, 2012

Page 1182

Monday, June 11, 2012

Page 1302

Monday, June 18, 2012

Page 1416

Monday, June 25, 2012

Page 1747

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Page 1747 International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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International Association of Risk and Compliance Professionals (IARCP)

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

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

Dear Members,

George Lekatis President of the IARCP

is next Dear Members, George Lekatis President of the IARCP I want to thank you very

I want to thank you very much. We have received some emails with so polite words! I am really moved.

We have also received some suggestions, how to make this weekly newsletter better. Some of you asked for page numbers (how in the world could we forget it?) and a table of contents (how in the world could we forget it too?). Fixed!

contents (how in the world could we forget it too?). Fixed! This week we have made

This week we have made this newsletter better, because of your recommendations.

Thank you very much.

Have you downloaded the 120 Developments in Risk Management and Compliance (in January, February, March 2012 - 691 pages)?

It is a great reference e-book. Download it now:

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

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Welcome to the Top 10 list.

Number 1 (Page 4) Surprise, surprise… The Cayman Islands Monetary Authority (CIMA) and the United States Securities and Exchange Commission (SEC) have entered into a memorandum of understanding (MOU)

(SEC) have entered into a memorandum of understanding (MOU) Number 2 (Page 7) Very interesting speeches

Number 2 (Page 7) Very interesting speeches by Mario Draghi, President of the European Central Bank, Charles I Plosser, President and Chief Executive Officer of the Federal Reserve Bank of Philadelphia and Christian Noyer, Governor of the Bank of France and Chairman of the Board of Directors of the BIS

Number 3 (Page 35) More Solvency II and Occupational Retirement Provision headaches we will understand better where we are, in the interview with Gabriel Bernardino, Chairman of EIOPA conducted by Anke Dembowski, Institutional Money (Germany)

conducted by Anke Dembowski, Institutional Money (Germany) Number 4 (Page 45) We have such interesting risks…
conducted by Anke Dembowski, Institutional Money (Germany) Number 4 (Page 45) We have such interesting risks…
conducted by Anke Dembowski, Institutional Money (Germany) Number 4 (Page 45) We have such interesting risks…

Number 4 (Page 45)

We have such interesting risks… like bribery and corruption risk (is the risk of the firm or anyone acting on the firm’s behalf, engaging in bribery and corruption). FSA review into anti-bribery and corruption systems and controls in investment banks and proposed new guidance for all firms

Number 5 (Page 51) Financial risk management - Opening remarks by Ewart S Williams, Governor of the Central Bank of Trinidad and Tobago, at the Caribbean Centre for Money and Finance Conference, Port-of-Spain.

Centre for Money and Finance Conference, Port-of-Spain. International Association of Risk and Compliance

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

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Number 6 (Page 58) The Dodd-Frank Act requires the CFPB to share consumer complaint information with the Federal Trade Commission (“FTC”) and other state and federal agencies. Consumer response now sharing complaints with FTC Consumer Sentinel.

response now sharing complaints with FTC Consumer Sentinel. Number 7 (Page 60) What about short selling

Number 7 (Page 60) What about short selling in Europe? You must read Regulation (EU) No 236/2012 of the European Parliament and of the Council on short selling and certain aspects of credit default swaps

on short selling and certain aspects of credit default swaps Number 8 (Page 74) Atomic clocks

Number 8 (Page 74) Atomic clocks are the most accurate frequency standard and timing devices in the world. Their range of uses include being the international standard for timekeeping, managing broadcasts and satellite positioning, navigation and timing (PNT). DARPA Chip-Scale Atomic Clocks Aboard International Space Station

Chip-Scale Atomic Clocks Aboard International Space Station Number 9 (Page 77) Unlike in banking, there is
Chip-Scale Atomic Clocks Aboard International Space Station Number 9 (Page 77) Unlike in banking, there is

Number 9 (Page 77) Unlike in banking, there is no common global capital standard for insurance companies. Address by Mr Lee Boon Ngiap, Assistant Managing Director, Monetary Authority of Singapore

Number 10 (Page 85) Oil and Gas… it is quite a challenge to regulate the sector. Remarks by the US President on Oil and Gas Subsidies

Remarks by the US President on Oil and Gas Subsidies International Association of Risk and Compliance

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

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

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NUMBER 1

P a g e | 4 NUMBER 1 The Cayman Islands Monetary Authority (CIMA) and the

The Cayman Islands Monetary Authority (CIMA) and the United States Securities and Exchange Commission (SEC) have entered into a memorandum of understanding (MOU)

The agreement concerns consultation, cooperation and information exchange related to the supervision and oversight of regulated entities that operate on a cross-border basis in the USA and the Cayman Islands.

The MOU supplements the International Organisation of Securities Commissions (IOSCO) multilateral MOU on cooperation in securities regulation, to which both the SEC and CIMA are signatories and which focuses more on cooperation on enforcement matters between the parties.

The Cayman Islands Premier and Minister responsible for Finance, the Hon. McKeeva Bush, OBE, JP, congratulated CIMA on the agreement.

He commented:

“Through this MOU, CIMA has demonstrated its commitment to continuing to work with the SEC to fulfill their respective regulatory mandates.

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

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It shows, too, the commitment of the Cayman Islands to providing the highest quality domicile for financial services.

The signing of this MOU adds to the growing list of international regulatory and supervisory bodies with which the Cayman Islands has entered agreements and is a key endorsement of our financial services regime.

We are convinced that this is not only good for ensuring stability and integrity of the global financial system, but is good for business for this jurisdiction.”

Mrs. Scotland explained that the process of negotiating the latest agreement was enhanced by the solid ties that the two authorities have established over time:

“CIMA and the SEC have had a strong working relationship for many years. This has enabled us to collaborate on several levels.

For example, we have been able to obtain information from, and provide information to, the SEC that has been valuable in both regulators’ routine supervisory activities as well as, on occasion, in criminal investigations that have resulted in convictions.

We have conducted joint on-site inspections of Cayman-regulated funds and securities entities, and have worked together to provide training for Cayman and regional regulators. ”

The CIMA-SEC MOU is the 23rd cooperation and information exchange agreement that CIMA has effected with overseas regulatory authorities since 1998.

CIMA’s Chairman, Mr. George McCarthy, OBE, JP, said: “the Monetary Authority is committed to collaboration and cooperation with financial services authorities in all the jurisdictions with which Cayman-regulated entities do business.

In addition to the agreements that CIMA already has in place, we actively

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

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seek to formalise cooperation with other regulators. This MOU with the SEC is particularly important as Cayman is a major domicile for hedge funds and securities in which US institutions and persons of high net worth invest. It will enable more effective supervision on both sides.”

The MOU details the scope of consultation, cooperation and information exchange between CIMA and the SEC; the procedures for carrying out on-site inspections and for the execution of requests for assistance; the permissible uses of information provided; the confidentiality of information, and the process for onward sharing of information in certain circumstances.

for onward sharing of information in certain circumstances. International Association of Risk and Compliance
for onward sharing of information in certain circumstances. International Association of Risk and Compliance

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

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

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NUMBER 2

Mario Draghi:

Remarks at the Annual Reception of the Association of German Banks

Speech by Mr Mario Draghi, President of the European Central Bank, at the Annual Reception of the Association of German Banks, Berlin, 26 March 2012

Ladies and Gentlemen,

of German Banks, Berlin, 26 March 2012 Ladies and Gentlemen, I would like to take this

I would like to take this opportunity to provide you with my assessment of the current situation in the euro area and shed light on recent signs of improvements in the overall outlook.

I would particularly like to draw your attention to the effectiveness of the policy measures implemented by the Eurosystem, the EU institutions and national authorities.

And to remind you of the measures that we all must continue to pursue over the coming months and years with great diligence in order to continue on this path of stabilisation.

The current economic situation

As this audience knows very well, in November last year, the prospects for the euro area financial sector were very bleak.

Banks were experiencing a period of heightened stress.

The inter-bank market was closed except to the strongest institutions in the safest countries, and funding markets were impaired.

Unable to raise funds beyond short maturities, many banks were reducing medium term lending to the real economy.

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

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At the same time came the requirement to increase capital ratios to 9%. This increased the risks of substantial deleveraging, including the risk of banks cutting back on loans, notably those to small and medium-sized enterprises.

We could see the intensity of the deleveraging pressures in bank lending surveys and other data.

In the fourth quarter of 2011, there was a significant tightening of credit standards on loans to both companies and households.

There was no doubt that the euro area was on the brink of a major credit crunch, with potentially adverse consequences for the economy and employment.

At that time, many observers had little confidence in the capacity of the euro area to reverse the situation.

Yet today, only four months on, the picture looks different.

There are signs of stabilisation in both financial markets and overall economic activity albeit still at low levels.

Conditions in bank funding markets have improved.

For example, euro area banks have already issued about 70 billion euro in senior unsecured debt so far this year, which is well above the amount they issued in the whole second half of 2011.

Banks are meeting their new capital requirements. The capital plans submitted to the European Banking Authority (EBA) indicate an intention to exceed the benchmarks by more than 20%.

EBA has also confirmed that there will be no stress test this year.

Bank lending is also stabilising. Banks are starting to assess their financial situation more positively and in many cases their willingness to make loans is increasing.

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

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How has the picture changed so clearly in only four months? There are two parts to the answer.

First, the doomsday predictions were always exaggerated. Not because the situation last November was not very serious.

But because the willingness of euro area authorities to take the measures necessary to restore stability was greater than many commentators realised.

Second, euro area authorities have proved their commitment to safeguarding financial stability through a number of important policy measures.

The Eurosystem, the EU institutions and national authorities have all played a role in constructing a comprehensive and coherent response to the economic, financial and fiscal challenges that we face.

Let me now explain the key elements of this response in more detail.

The policy response of the Eurosystem

The primary explanation for the improvement in sentiment over the last few months has been the measures taken by the Eurosystem that is, we at the European Central Bank (ECB) and our colleagues at the national central banks of the 17 countries that share the euro.

As you know, since December last year the Eurosystem has launched two long-term refinancing operations LTROs with a maturity of three years.

While the total liquidity requested by banks in these operations amounted to around 1 trillion euro, the net liquidity injection by the Eurosystem has been around half a trillion euro because the other half has been shifted over from other operations.

Let me be clear about why we implemented the three-year LTROs. It was not to support sovereign debt markets.

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

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It was also not to bolster bank profits.

The LTROs were specifically designed to prevent a credit crunch that could compromise the maintenance of price stability in the euro area.

With funding markets closed, banks needed liquidity assurance over the medium term to avoid pre-emptive deleveraging and to continue lending.

To understand why these operations were necessary requires a euro area wide perspective.

It would be misleading to judge the urgency for action or the necessary responses based on the situation in any one country or groups of countries.

The Eurosystem acts in the interests of the euro area as a whole with 330 million citizens. This is the perspective that always informs our decisions.

Some observers have raised questions about these operations.

The questions tend to fall into three categories and since they touch on fundamental issues, I would like to spend a moment responding to them.

First, some wonder whether there is really any transmission from the LTROs to the real economy.

The argument goes that banks are simply taking cheap liquidity and setting up carry trades or putting the liquidity back into our deposit facility.

The facts show that this is an incomplete view.

Over 800 banks participated in the February LTRO, compared with around 500 in December. This number included 460 banks from Germany, most of them literally hundreds being smaller banks.

I cannot tell you names of the towns and villages in which these banks are located because often they are the only bank in town and could be easily

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

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identified. But I can tell you this: that the money is now closer to small and medium-sized enterprises than it was before.

We cannot say that this money will necessarily go to these smaller enterprises but it is certainly very close to them.

We have this in mind because nearly three quarters of corporate employment in the euro area is in the small and medium-sized business sector.

The banks I am talking about are ones whose main business is lending to the Mittelstand and thereby supporting the real economy.

It is also not accurate to claim that banks are returning the liquidity straight back to the Eurosystem.

We know that banks using the deposit facility are not identical to those borrowing from the Eurosystem.

This implies that even though the bulk of the liquidity is returned eventually, it is being directed within the banking system as intended.

The second category of question involves concerns that some have expressed that the Eurosystem is exposing itself to excessive risks.

Critics point in particular to the differentiated collateral framework adopted by some national central banks to allow banks to participate in the three-year LTROs.

Let me underscore that high haircuts are applied to the additional credit claims so as to ensure risk equivalence between this collateral and the regular framework.

Moreover, the main elements of the risk management framework applied are common: the eligibility criteria and risk control measures were approved by the Governing Council, and the Council will monitor the effectiveness of the risk control framework on an ongoing basis. Hence, there is only limited national discretion.

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

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I should also emphasise that the Eurosystem has a long experience in the acceptance of credit claims in its collateral framework.

Moreover, the Eurosystem is being very careful to manage any risks that may ensue from our current operations.

We employ a conservative risk management framework.

On the additional collateral presented so far, the average haircut is 53%.

This means that on a nominal value of 100 euro we provide 47 euro of liquidity.

This shows you how prudently such collateral is accepted.

If over time the market value or quality of the collateral posted were to decline, counterparties would have to provide additional collateral or return part of the liquidity.

This too serves to protect the financial soundness of the Eurosystem as a whole.

The third kind of question comes from some observers who worry that the liquidity created by the LTRO will lead to inflation or asset price distortions.

Here it is important to distinguish between different concepts of liquidity.

We would expect an impact on inflation and asset prices only following a sustained and strong increase in money and credit not following an increase in central bank liquidity per se.

The tentative signs we are seeing of a stabilisation in money and credit growth do not signal increasing inflationary pressures over the medium term. For example, growth in monetary aggregates remains at low levels, with M3 increasing by 2.5% in January 2012, well below the average growth rate of M3 in monetary union so far, which was 5.9%.

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was 5.9%. International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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The same is true of the counterparts of M3 loans to the euro area private sector increased by only 1.5% in January, compared with an average of 6.8% since the start of the euro.

Market indicators of inflation expectations overall show no signs of inflation above our medium-term objective.

Investors overall assume a break-even inflation rate in five years of around

1.7%.

Looking further out at the inflation expectations between five years and ten years also shows that, adjusted for the usual risk premia, market expectations of long-term inflation are fully consistent with our definition of medium-term price stability.

Moreover, the Eurosystem has a range of tools at its disposal to absorb excess liquidity if that is deemed necessary in the future.

Available tools include increases in reserve requirements and the conduct of liquidity absorbing operations including not only short-term but also longer-term deposits.

Hence, there are tools and the Governing Council can use them as needed.

Moreover, our balance sheet has grown and shrunk in the past without creating inflation for example, this was evident over the course of both 2009 and 2010.

In other words, we are constantly alert to threats to medium-term price stability.

Euro area citizens can be certain that our objective is delivering price stability over the medium term and that we have all the necessary tools to achieve it.

The consistent strong anchoring of inflation expectations confirms that our commitment is credible.

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

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Let me address one final issue, and this concerns the debate in this country about Target2 balances.

It is important that this debate is framed correctly in particular, by distinguishing between symptoms and causes.

Target2 is a payment system that reflects the flow of funds within the euro area.

Imbalances within Target2 are a symptom of real and financial imbalances between euro area countries.

Restoring normality within Target2 requires not that we address the symptom the payment system but that we address the cause: the underlying imbalances.

This is not the task of monetary policy. It is the task of the national authorities and EU institutions that are responsible for fiscal, economic and financial policies.

Important progress has been made in recent months to strengthen the credibility of these policies and this has been recognised by financial markets.

This is the second explanation for the overall stabilisation we have witnessed since November and it is something to which I will now turn briefly.

Policy responses at the national and EU level

The signature at the last European Council of the International Treaty, including the fiscal compact, is an important signal of commitment to reducing deficit and debt levels.

Enshrining balanced budget rules in national legislation creates a new “first line of defence” against fiscal imbalances.

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

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Like the Schuldenbremse in this country, this legislation shifts the onus for enforcement away from Brussels and onto national institutions.

Prevention is better than cure and that is the spirit of the compact.

Member States have also taken important steps to strengthen euro area and global firewalls.

The entry into force of the European Stability Mechanism has been advanced and the paying-in of capital will be accelerated to reach full lending capacity sooner than originally planned.

On top of this, euro area countries have committed to providing an additional 150 billion euro to the IMF.

Seen together, these measures represent a coherent strategy to strengthen euro area economic governance.

The focus is not, as some commentators claim, skewed towards fiscal consolidation.

Stronger fiscal rules are one albeit essential element in a larger package that addresses real and financial imbalances and provides a safety net for countries in financial difficulties.

But stronger governance cannot be effective without individual Member States also fulfilling their responsibilities.

Here too we have witnessed a number of positive developments in recent months.

The new governments in Spain and Italy have shown determination to address their twin challenges of fiscal and macroeconomic imbalances.

The government of Spain remains committed to bringing its deficit below 3% by 2013 and taking the necessary measures to ensure a rapid and secure transition to this target from the high deficit in 2011.

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in 2011. International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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The latest review missions confirm that the Irish and Portuguese programmes are on track with authorities in both countries strongly committed to meeting their targets and with a solid track record.

It is important that observers recognise that these reforms at the national level will take time.

They are addressing deep-rooted obstacles to competitiveness and growth, and the positive effects may not be visible immediately.

But once realised, they will put employment and growth on a new and more sustainable track.

The example of Germany shows the need for patience. The structural reforms passed many years ago did not immediately feed through into higher growth and employment.

But now they have, and Germany is reaping the benefits and leading the way in Europe.

With a new governance framework in place and strong commitments from national governments, there are solid grounds for trusting that reforms will be implemented across the euro area as a whole.

Conclusion

Let me conclude. The turnaround we have witnessed since November is the result of every institution of the euro area fulfilling its responsibilities.

No single institution can carry the burden of addressing a set of challenges that are simultaneously economic, financial and fiscal. Everyone has played their part.

But let me emphasise that the current stabilisation should not make us pause in our responses to these challenges.

Indeed, this is a time for continued action.

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

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The present situation provides a window of opportunity for governments to accelerate efforts to consolidate budgets, to boost employment and to enhance competitiveness and to do so with confidence.

It also creates a benign environment for banks to strengthen their resilience further including by retaining earnings and cutting dividends and bonuses.

Decisive policy measures brought about the stabilisation since last November.

Now, further decisive policy measures are required to strengthen fiscal positions and competitiveness.

These measures will lay the foundations for future sustainable and balanced growth in the euro area. Thank you.

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

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

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Charles I Plosser: Restoring central banks after the crisis

Speech by Mr Charles I Plosser, President and Chief Executive Officer of the Federal Reserve Bank of Philadelphia, at the conference of the Global Interdependence Center / Bank of France, Paris, 26 March 2012.

* * *

The views expressed today are my own and not necessarily those of the Federal Reserve System or the FOMC.

Introduction

of the Federal Reserve System or the FOMC. Introduction I am delighted to be here today

I am delighted to be here today in this beautiful city and to have the honor to serve on such a distinguished panel with friends and colleagues.

David Kotok has been the guiding force behind the GIC conferences over the past several years. He and his team at the GIC never fail to gather an interesting and knowledgeable group of people to discuss important topics on truly global issues. So, I want to thank him and the GIC for their efforts and contributions. I also want to thank our hosts, Christian Noyer and the Banque de France.

I am going to take a little different tack on the subject matter of this gathering.

Rather than focus on what new orthodoxy we should take away from the financial crisis, I want to argue that we need to restore some of the old orthodoxy.

David did suggest that he wanted to have a conversation on important issues, so I intend to be somewhat provocative in an effort to stimulate such conversation.

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

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As usual, I want to stress that my views are my own and not necessarily those of my colleagues in the Federal Reserve System.

I will focus my remarks on two related topics that have emerged as a consequence of the crisis.

The first is the relation between monetary policy and fiscal policy.

The second topic involves the role of a central bank’s balance sheet as a policy tool.

These are issues that I believe are of fundamental importance to the role of central banks in our economies.

The relationship between monetary and fiscal policies

Let me begin by sharing some thoughts on the appropriate relationship between monetary and fiscal policies.

In the wake of the financial crisis and the ensuing recession, many countries around the world responded with a significant increase in government spending.

Some of this increase came about through what economists call automatic stabilizers.

But there has also been a dramatic expansion in budget deficits attributable to deliberate efforts to apply fiscal stimulus to improve economic outcomes.

This expansion in government spending has been very significant in the U.S., but it has also occurred in other countries.

So what does this have to do with monetary policy?

Well, it turns out, a great deal.

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

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It is widely understood that governments can finance expenditures through taxation, debt that is, future taxes or printing money.

In this sense, monetary policy and fiscal policy are intertwined through the government budget constraint.

For good reasons, though, societies have converged toward arrangements that provide a fair degree of separation between the functions of central banks and those of their fiscal authorities.

For example, in a world of fiat currency, central banks are generally assigned the responsibility for establishing and maintaining the value or purchasing power of the nation’s unit of account.

Yet, that task can be undermined, or completely subverted, if fiscal authorities set their budgets in a manner that ultimately requires the central bank to finance government expenditures with significant amounts of seigniorage in lieu of current or future tax revenue.

The ability of a central bank to maintain price stability can also be undermined when the central bank itself ventures into the realm of fiscal policy.

History teaches us that unless governments are constrained institutionally or constitutionally, they often resort to the printing press to try to escape what appear to be intractable budget problems.

And the budget problems faced by many governments today are, indeed, challenging.

But history also teaches us that resorting to the printing press in lieu of making tough fiscal choices is a recipe for creating substantial inflation and, in some cases, hyperinflation.

Awareness of these long-term consequences of excessive money creation is the reason that over the past 60 years, country after country has moved to establish and maintain independent central banks that is, central

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banks that have the ability to make monetary policy decisions free from short-run political interference.

Without the protections afforded by independence, the temptation of governments to exploit the printing press to avoid fiscal discipline is often just too great.

Thus, it is simply good governance and wise economic policy to maintain a healthy separation between those responsible for tax and spending policy and those responsible for money creation.

It is equally important for central banks that have been granted independence to be constrained from using their own authority to engage in activities that more appropriately belong to the fiscal authorities or the private sector.

In other words, with independence comes responsibility and accountability.

Central banks that breach their boundaries risk their legitimacy, credibility, and ultimately, their independence.

Given the benefits of central bank independence, that could prove costly to society in the long run.

There are a number of approaches to placing limits on independent central banks so that the boundaries between monetary policy and fiscal policy remain clear.

First, the central bank can be given a narrow mandate, such as price stability. In fact, this has been a prominent trend during the last 25 years.

Many major central banks now have price stability as their sole or primary mandate.

Second, the central bank can be restricted as to the type of assets it can hold on its balance sheet.

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

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This limits its ability to engage in credit policies or resource allocations that rightfully belong under the purview of the fiscal authorities or the private marketplace.

And third, the central bank can conduct monetary policy in a systematic or rule-like manner, which limits the scope of discretionary actions that might cross the boundaries between monetary and fiscal policies.

Milton Friedman’s famous k-percent money growth rule is one example, as are Taylor-type rules for the setting of the interest rate instrument.

Unfortunately, over the past few years, the combination of a financial crisis and sustained fiscal imbalances has led to a breakdown in the institutional framework and the previously accepted barriers between monetary and fiscal policies.

The pressure has come from both sides. Governments are pushing central banks to exceed their monetary boundaries, and central banks are stepping into areas not previously viewed as appropriate for an independent central bank.

Let me offer a couple of examples to illustrate these pressures.

First, despite the well-known benefits of price stability, there are calls in many countries to abandon this commitment and create higher inflation to devalue outstanding nominal government and private debt.

That is, some suggest that we should attempt to use inflation to solve the debt overhang problem.

Such policies are intended to redistribute losses on nominal debt from the borrowers to the lenders.

Using inflation as a backdoor to such fiscal choices is bad policy, in my view.

Pressure on central banks is also showing up through other channels. In some circles, it has become fashionable to invoke lender-of-last-resort

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arguments as a rationale for central banks to lend to “insolvent” organizations, either failing businesses or, in some cases, failing governments.

Such arguments go beyond the well-accepted principles established by Walter Bagehot, who wrote in his 1873 classic Lombard Street that central bankers could limit systemic risk in a banking crisis by “lending freely at a penalty rate against good collateral”.

Central bankers have abandoned this basic Bagehot principle in the last few years but have not replaced it with a clear alternative.

Indeed, actions were often confusing and unpredictable and lacked a coherent framework.

I believe that central banks need to think hard about how and when they exercise this important role.

We need to have a well-articulated and systematic approach to such actions.

Otherwise, our actions will exacerbate moral hazard and encourage excessive risk-taking, thus sowing the seeds for the next crisis.

Unfortunately, neither financial reform nor central banks have adequately addressed this dilemma.

Breaching the boundaries is not confined to the fiscal authorities asking central banks to do their heavy lifting.

The Fed and other central banks have undertaken other actions that have blurred the distinction between monetary policy and fiscal policy, such as adopting credit policies that favor some industries or asset classes relative to others.

Such steps were taken with the sincere belief that they were absolutely necessary to address the challenges posed by the financial crisis.

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The clearest examples can be seen when the Federal Reserve established credit facilities to support markets for commercial paper and asset-backed securities.

Most notable has been the effort by the Fed to support the housing market through its purchases of mortgage backed securities.

These credit allocations have not only breached the traditional boundaries between fiscal and monetary policy, they have generated pointed public criticisms of the Fed.

Once a central bank ventures into fiscal policy, it is likely to find itself under increasing pressure from the private sector, financial markets, or the government to use its balance sheet to substitute for other fiscal decisions.

Such actions by a central bank can create their own form of moral hazard, as markets and governments come to see central banks as instruments of fiscal policy, thus undermining incentives for fiscal discipline.

This pressure can threaten the central bank’s independence in conducting monetary policy and thereby undermine monetary policy’s effectiveness in achieving its mandate.

In my view, this blurring of the boundaries between monetary and fiscal policies is fraught with risks.

As I said, these boundaries arose for good reason, and we ignore their breach at our peril. I believe we must seek ways to restore the boundaries.

The central bank’s balance-sheet policy

Another related issue facing central banks arises from the degree to which central banks have expanded their balance sheets.

There are two dimensions to this issue.

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One is the composition of the balance sheet.

In the U.S., for example, the balance sheet of the Federal Reserve has changed from one made up almost entirely of short-term U.S. Treasury securities to one that is mostly long-term Treasuries, plus significant quantities of long-term mortgage-backed securities.

This concentration of housing-related securities is problematic because it is a form of credit allocation and thus violates the monetary/fiscal policy boundaries I just mentioned.

The second aspect is the overall size of the balance sheet.

Many central banks expanded their balance sheets in an effort to ease monetary policy after their usual policy instrument an interest rate had reached the zero lower bound.

Do central bankers anticipate that their balance sheets will shrink to more normal levels as they move away from the zero lower bound?

Is it desirable to do so? Or should monetary policy now be seen as having another tool, even in normal times?

Some have suggested that central banks adopt a regime in which the monetary policy rate is the interest rate on reserves rather than a market interest rate, such as the federal funds rate.

This would then permit the central bank to manage its balance sheet separately from its monetary instrument, freeing it to respond to liquidity demands of the financial system without altering the stance of monetary policy.

In principle, this would take pressure off central banks to shrink their balance sheets from the current high levels and simply rely on raising the interest rate on reserves to tighten monetary policy.

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

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The alternative is to return to a more traditional operating regime in which the central bank sets a target for a market interest rate, such as the federal funds rate in the U.S., above the interest rate on reserves.

Implementing this regime would require a smaller balance sheet.

I am very skeptical of an operating regime that gives central banks a new tool without boundaries or constraints.

Without an understanding, or even a theory, as to how the balance sheet should or can be manipulated, we open the door to giving vast new discretionary abilities to our central banks.

This violates the principle of drawing clear boundaries between monetary policy and fiscal policy.

When markets or governments come to believe that a central bank can freely expand its balance sheet without directly impacting the stance of monetary policy, I believe that various political and private interests will come forward with a long list of good causes, or rescues, for which such funds could or should be used.

Economic theory and practice teach us that monetary policy works best when it is clear about its objectives and systematic in its approach to achieving those objectives.

Granting vast amounts of discretion to our central banks in the expectation that they can cure our economic ills or substitute for our lack of fiscal discipline is a dangerous road to follow.

In June, the Federal Reserve’s Open Market Committee outlined some principles that would guide its exit from this period of extraordinary monetary accommodation.

In my view, those principles represented an important first step in the FOMC’s attempt to restore the boundaries between monetary and fiscal policies.

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In particular, the FOMC clearly stated its desire to return to an operating environment in which the federal funds rate is the primary instrument of monetary policy.

To achieve that objective, the Fed will have to shrink its balance sheet to a more normal level.

I interpret this as saying that our balance sheet should not be viewed as a new independent instrument of monetary policy in normal times.

The exit principles also indicated the Committee’s desire to return the Fed’s balance sheet to an all-Treasuries portfolio.

This re-establishes the idea that the Fed should not use its balance sheet to actively engage in credit allocations.

In other speeches, I have outlined a framework that I have termed a “new accord” between the Federal Reserve and the Treasury.

It would enable the central bank to act in emergencies when requested by the Treasury or the fiscal authorities, but it would be clear up front that any non-Treasury assets that accrued on the central bank’s balance sheet would be swapped for government securities within a specified period of time.

This would ensure that fiscal policy decisions remain under the purview of the fiscal authorities, not the central bank.

Summary

To summarize, it is important for governments to maintain independent central banks so that they are better able to achieve their mandates.

It is also sound policy to limit the discretionary ability of central banks to engage in policies that fundamentally belong to fiscal authorities or private markets.

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

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Establishing and maintaining clear boundaries between monetary and fiscal policies protects the independence of the central bank and its ability to carry out its core mandate maintaining price stability.

Clear boundaries and resisting the use of the balance sheet as a new policy tool would also improve fiscal discipline by making it more difficult for the fiscal authorities to resort to the printing press as a solution to unsustainable budget policies.

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

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Christian Noyer: Re-examining central bank orthodoxy for un-orthodox times

Re-examining central bank orthodoxy for un-orthodox times Speech by Mr Christian Noyer, Governor of the Bank

Speech by Mr Christian Noyer, Governor of the Bank of France and Chairman of the Board of Directors of the Bank for International Settlements, at the conference of the Global Interdependence Center/Bank of France, Paris, 26 March 2012.

The unconventional policies implemented during the crisis have transformed the face of central banking.

But will these changes prove permanent and will “the unconventional become the new normal?”

There is not yet definitive answer to this question.

We may not, as easily as we would like, be able to revert exactly to the status quo ante.

However, I strongly believe we must make sure that the gains from the pre-crisis period, in terms of monetary and price stability, are not compromised in the process.

Prior to the crisis, a description of central banks would have centred on four characteristics:

- They were focused with price stability being their primary or key objective, and no responsibility was sought or given for financial stability;

- They were of limited size with very small balance sheets and interest rates as their only policy instrument;

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- They were independent, a condition recognised as necessary to anchor inflation expectations, and embodied in very strong institutional frameworks;

- And they were successful: the “Great moderation”, a period of exceptional low volatility in output and inflation, was widely seen as a product of efficient and wise monetary policies.

There was a happy feeling that, at last, a perennial monetary regime had been found, well-tailored to the characteristics of a modern market economy.

Financial markets were efficient and the zero lower bound and liquidity trap appeared to be no more than historical curiosities.

With hindsight, of course, we can see now that this “ideal” economy may never have existed.

The Great Moderation was as much a product of “good luck” (brought by disinflationary effects of globalisation) than good policy.

Monetary stability is a necessary but not a sufficient condition of financial stability, because capital markets are not always and necessarily efficient.

And downward financial spirals may quickly bring our economies to the point where interest rates can no longer be used as effective tools.

Therefore, as the crisis unfolded, central banks responded by taking unprecedented measures and, in the process, underwent three major changes

A diversification of their interventions. In order to both:

- Unclog financial markets (both private and public). This involved exceptional liquidity provision to banks as well as temporary purchases of assets, both private and public.

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

As a consequence, central banks’ balance sheets expanded by a factor of

three, dramatically increasing their role in financial intermediation and sometimes raising concerns, at least in some quarters, about the possible inflationary impact

Together, this diversification and the increase in size have created more complex interactions with fiscal policies.

Specifically, asset purchases are sometimes seen as “quasi fiscal policies” both on the asset side (due to the potential risks attached) and the liability side (when they contribute significantly to meeting the funding needs of the sovereigns).

At the time they were decided, those exceptional interventions were absolutely necessary.

Although it had been forgotten, central banks were initially created to protect the economy from excessive financial disturbances.

This was, historically, their “raison d’être”.

As ultimate and unique providers of liquidity, they cannot escape this responsibility and let the financial system and the economy collapse.

At the same time, by doing so, central banks have exposed themselves to a number of risks

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

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

Second, they run the risk of blurring the lines between fiscal and

monetary responsibilities. A dynamic use of their balance sheets by

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central banks has effects on the allocation and distribution of resources in the economy.

They may favour or penalise some types of collateral or certain borrowers.

If central banks take on additional responsibilities in the area of financial stability, they will have to do so in close cooperation with fiscal authorities, thus exposing themselves to possible interferences with monetary policy.

The major risk, however, is the risk of confusion. A multiplicity of interventions could be interpreted as a relative dilution of objectives.

There is a tendency by market participants and some policymakers to consider central banks to be “universal problem solvers” whose balance sheets can be used, without cost, for all purposes.

There is also a doubt, at least an ambiguity, in the minds of some analysts, about the true purpose of government bond purchases.

Central banks’ activism may create doubts as to their ability to stick to their core mandate price stability in the face of increasing pressures and constraints.

Overall, the euro area is well protected against all of these risks thanks to the robustness of its institutional framework

Price stability is unambiguously the priority objective of monetary policy

Monetary financing of governments is strictly prohibited

The Eurosystem (the ECB and National Central Banks) is extremely well capitalised, which protects its independence.

This has allowed the Eurosystem to implement nonstandard measures on a large scale without endangering its credibility.

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Of course, we do not control fiscal policy. We will never accept a situation where fiscalimbalances could constrain monetary policy.

It is very important, therefore, that credible fiscal consolidation takes place across the euro area.

This will make it easier for the Eurosystem to be active in protecting financial stability.

On the contrary, doubts over governments’ resolve to ensure the sustainability of public finances would make us powerless to fight instability and expose the euro area to great dangers.

Now for the more normative aspects. We may have to live with nonstandard measures for a long time.

Indeed, some central banks have adopted interest rate guidance announcements covering the next two years.

It is likely that monetary policy will, for some time, make use of a diversity of instruments.

Macro-prudential measures will interact with monetary policies in a complex way.

In that context, it is therefore all the more important to keep clarity of purpose and stick to two crucial features inherited from the pre-crisis consensus: the focus on price stability and, its corollary, central bank independence.

There should be no ambiguity about what central banks are trying to achieve.

The more non-conventional their actions, the less obscurity there should be as to their ultimate purpose.

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

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Non-conventional measures, like any others, can only achieve their objectives if inflation expectations are solidly and clearly anchored.

From that point of view, calls by some economists and market participants for a temporary relaxation of price stability objectives are, in my view, totally misguided.

I find it significant, on the contrary, that two major central banks have recently decided to quantify their price stability objectives and enhance their communication accordingly.

objectives and enhance their communication accordingly. International Association of Risk and Compliance

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

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NUMBER 3

March 29

Interview with Gabriel Bernardino, Chairman of EIOPA

conducted by Anke Dembowski, Institutional Money (Germany)

1. Insurance companies vs. Occupational Retirement Provision (IORPs)

EIOPA has submitted its advice for the Occupational Retirement Provision (IORP)'directive on 15th of February 2012.

What is EIOPA's standpoint in this advice?

The intention is not to have a copy - paste exercise between Solvency II and the pensions directive.

exercise between Solvency II and the pensions directive. The intention is to find out the elements

The intention is to find out the elements that in terms of risk are similar between those two.

If risks are similar, you should treat them in a consistent way.

And if risks are different, you should treat them in a different way. That’s what we advocate in this advice.

Which are the main differences between pensions and the insurance system?

One of the differences is the type of involvement the sponsor company, i.e. the employer has in the pension fund.

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If there is a need for more capital within an insurance company, the shareholders are often subject to a limited liability regime.

This is different in the pension fund area.

Here, you don't have a transfer of the risk to the pension fund.

The fund is only a vehicle to finance the responsibilities of the employer. Consequently, if there is a need for capital, the employer may be required by social and labour law to put the money in.

You want to introduce a holistic balance sheet. How does that look like?

At the regulation level, we need to take these differences into account.

That's why we are trying to develop the concept of a holistic balance sheet, where we integrate not only the market value of the assets, but also the economic value of the liabilities.

In addition, we are integrating other elements that take account of the specificities of the pension area.

And there are different elements in each country.

For example, the Dutch system, where you have the possibility to cut back the pension benefits retroactively.

Or take the systems where you can reduce the indexations of the pensions for the future, et cetera.

These specifications have an effect on the value of the liabilities, and you need to take it into account for the holistic balance sheet.

And which similarities do you see between pensions and insurance companies?

For example, all the elements about governance, risk management and transparency.

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We firmly believe that the sound principles of Solvency II can also be applied in a context of pension funds - provided of course, that you take into account the necessary proportionality.

We are aware that there are many pension schemes that are quite small and that we cannot fully apply in a mechanistic way all the good principles of governance, risk management and control to them.

What is the timeframe for the Solvency II and the pension directive?

Solvency II has already been discussed for many years and we are now in the last phases of implementing measures.

We intend to have the Solvency II framework implemented in 2014.

On the IORP side, the process is still at an early stage.

As you have mentioned in the beginning, the European Commission has asked us a long list of questions in a call for advice and we have answered them, on 15th of February.

We believe that several tests need to be made, especially on the calculation of the technical provisions and of the solvency requirements.

So we want to run the first quantitative impact study (QIS) on the pension side soon.

Will those QIS'studies be similar to the ones that you have done on the insurance side?

Again, there are some elements that are common, but some different elements will be coming from the holistic balance sheet approach.

And also the process in itself is going to be different.

In the insurance QIS we tried to capture most of the insurance market in Europe.

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But it is not the case for pensions, because the pensions market is so diverse across the 27 EU member countries.

Therefore, we are going to conduct the first QIS study only in those seven countries where defined benefit plans are more relevant: Germany, UK, Ireland, the Netherlands, Portugal, Sweden, and Belgium.

We are working on the common technical specifications to be applied in the test and will discuss the timeline with the European Commission.

The Commission intends to have a first schedule for proposal on the revised IORP Directive by the end of this year.

And what qualitative measures are necessary for pension funds?

Also pension funds need to have a liquidity assessment and a management of their liquidity needs.

This is part of the qualitative pillar II requirements.

But making an analysis of ones liquidity needs is part of common good management rules anyway.

Of course, a pension fund needs to know the pensions it has to pay in the years to come and what its revenues from the assets will be.

Only then the fund can try to match those two and try to avoid surprises.

2. Investment issues for insurance companies

Insurance companies have been refinancing banks in the past, and we cannot see banks isolated from insurance companies. Basel III regulation is now forcing banks to hold higher equity ratios. Will insurance companies under Solvency II be able to refinance banks as they used to in the past?

Well, it is not the purpose of insurance companies to finance banks.

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

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The purpose of insurance companies is to have good products for their customers and to provide long term security for their customers.

Solvency II will not force insurance companies to only buy one type of assets.

But it is clear: The more stability you have in the banking sector, the better it will be from the risk perspective to invest into banks.

It is normal that when banks are in a stress situation, or when there are doubts about their capital capacity, investors - not only insurance companies - refrain from investing long term into banks.

With the elements that have been introduced about recapitalizing the banking sector, I believe that in the future, insurers will come back to finance banks.

So EIOPA's intention is not to disconnect the insurance and the banking sector in order to reduce cyclical ties?

No, with Solvency II or any kind of regulatory regime we are not trying to intervene in that sense.

But what we want to do is to introduce a risk based system.

We say that the more risk an insurance company has, the better capitalized it must be.

We do not say 'don't invest into risky assets' or 'only invest into sovereign bonds' - that is not up to the supervisors.

We only say that the capital has to commensurate with the risk.

An insurance company can have a bigger risk appetite, but then on the other side, it needs to provide more capital.

That is a fundamental element in the whole financial system.

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

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Will Solvency II have an effect on the products that insurance companies will offer?

I believe that with Solvency II consumers will continue to have choice between different products, with different types of guarantees and liquidity characteristics.

If an insurance company creates liabilities which attract more risk - for example if it wants to offer products with a guaranteed interest rate for 20, 30 or 40 years, it can do that, because consumers value those products.

But the risk involved needs to be priced correctly.

We must not bring risk into the system without pricing it well. I think that this is the lesson we clearly learned from the financial crisis.

What exactly was the lesson the insurance sector learned from the financial crisis?

In the banking sector we have seen that there was poor underwriting on the subprime business, where risks were brought into the system without being priced correctly.

We have also seen that if you bring risk into the system, it will never disappear, no matter how much packaging and re-selling you do with it.

The risk remains there and you need to manage it.

If it is not well priced, someone will pay in the end, either the companies, the consumers or the taxpayer.

Does the regulation intend to reduce the risk to a minimum?

No!

When the financial system is risk averse, the economy will not work.

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will not work. International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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Look what the insurers are doing for us as individuals: We transfer our risks to them.

Insurers by definition cannot be risk averse, because dealing with risk and managing is their core business.

As regulators, our duty for the society is to have a good balance between security and growth.

If you want to have a system with 100 Percent security, it will be unaffordable.

So I am not advocating that we have capital requirements that are bulletproof.

In Solvency II, we are building a system based on a with a 99.5 percent confidence level.

But in an extreme situation, an insurance company can become insolvent.

What we want to assure is that insurers will have excellent risk management systems that will help them to manage prudently their risks.

Looking at the low interest environment: Do you think that life insurance companies will need to change their business models, for example to avoid the long guarantees that stretch over the lifetime of a man?

Yes, we will probably see some changes in the products.

But it is not because we are applying Solvency II, that long lasting guarantees are problematic - the products exist already.

What Solvency II brings, is more market consistent pricing of risk, so that we can see clearer where the difficulties could lie when going forward.

Some of the risks of long lasting guarantees need to be better assessed, and probably some of these products will cost a bit more in the future.

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

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What happens if an insurance company falls below the solvency capital requirement?

Then the supervisor and the insurance company will need to maintain a close dialogue, and together they analyze the reasons behind it.

The company will have to present a plan how it intends to recover its capital or reduce its risk.

So this approach is anti-cyclical.

The company does not immediately need to reinforce capital, as this would have a procyclical effect on the market.

However, if things continue to go wrong and the capital falls below the minimum capital requirement, the supervisor has the duty to close the business and in drastic situations even to close the company, because then the policy holders' rights are at stake.

The system is designed in a way that it is not a safe heaven, it’s not a zero failure system, but it has different levels of protection.

How does transparency help investors?

From the investor's perspective, Solvency II is a system that gives far better information to decide on an investment.

That is the biggest added value a regulatory regime can have.

The worst thing would be to give an incentive to hide the risk.

In the current system, the solvency figures in the insurance sector are completely stable, as they are not based on the market value of the assets.

But we all know that markets are volatile, so investors feel that something is wrong. Under Solvency II, the solvency capital requirements will be more volatile.

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

Is more transparency always better?

Under the Solvency II regime, insurance companies will be disclosing more information, and the information given will be much more linked to the reality of the risks and the markets.

At first sight, it will seem that figures are more volatile, but this is due to the higher transparency we will have, not because the insurance company has intrinsically a more volatile business.

We as supervisors know this, and we hope that analysts and investors will understand this as well and will not penalize insurance companies by higher cost of capital.

Under the current Solvency II ' regime, government bonds from OECD countries do not have any capital requirements at all.

This seems a bit odd, considering the problems that some European countries are currently facing.

What is the reason why capital requirements for government bonds are not pegged to their rating, like it is the case for corporate bonds? And are there plans that this policy will be changed in the future or is that a very political issue?

Before the euro area debt crisis government bonds were widely considered as risk free instruments that is why there was no need to peg capital requirements for government bonds to their rating.

Naturally in this area as in others the perception of risk is constantly evolving and so I believe that in the future we need to explore ways to deal more properly with the risks of sovereign exposures and find a suitable way to integrate them in the overall risk-based framework.

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

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Should the insurance supervision be directive or pre'emptive?

We want to have a supervisory system where we capture things in advance.

We do not want to be like firemen that arrive when there is already a fire.

We want to see things in advance and to avoid the fires. This is preventive supervision.

What gives you sleepless nights at the moment?

I think that the overall market situation certainly worries all of us because it definitely has an impact on the whole financial system.

Insurers basically need two things: Stability of the markets and a well functioning economy.

This also includes a certain level of interest rates, so that insurance companies can fulfil their role of providing long term guarantees.

Having the low interest rates we are seeing now, is of course a difficult situation for insurance companies.

But … I am still sleeping well.

for insurance companies. But … I am still sleeping well. International Association of Risk and Compliance

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

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NUMBER 4

P a g e | 45 NUMBER 4 FSA review into anti-bribery and corruption systems and

FSA review into anti-bribery and corruption systems and controls in investment banks and proposed new guidance for all firms

29 Mar 2012

The Financial Services Authority (FSA) published the findings of its thematic review into anti-bribery and corruption (ABC) systems and controls in investment banks.

In response to those findings, the FSA will consult on proposed amendments to the FSA’s regulatory guidance, ‘Financial crime: a guide for firms’.

This proposed new guidance applies to all firms within scope of our financial crime rules, not just investment banks.

From August 2011, the FSA visited 15 firms, including eight major global investment banks and a number of smaller operations, to examine how firms mitigate bribery and corruption risk.

Bribery and corruption risk is the risk of the firm, or anyone acting on the firm’s behalf, engaging in bribery and corruption.

The FSA found that, despite a long-standing regulatory requirement to mitigate financial crime risk, the majority of firms in our sample had more work to do to implement effective anti-bribery and corruption systems and controls.

In particular, we found the following common weaknesses:

- Most firms had not properly taken account of our rules covering bribery and corruption, either before the implementation of the Bribery Act 2010 or after;

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- Nearly half the firms in our sample did not have an adequate ABC risk assessment;

- Management information on ABC was poor, making it difficult for us to see how firms’ senior management could provide effective oversight;

- Only two firms had either started or carried out specific ABC internal audits;

- There were significant issues in firms’ dealings with third parties used to win or retain business;

- Though many firms had recently tightened up their gifts, hospitality and expenses policies, few had processes to ensure gifts and expenses in relation to particular clients/projects were reasonable on a cumulative basis.

Although firms in our sample had been slow and reactive in managing bribery and corruption risk, our visits and the introduction of the Bribery Act had acted as a trigger for firms to focus on ABC issues.

The FSA is considering whether further regulatory action is required in relation to certain firms in its review.

Tracey McDermott, acting director of enforcement and financial crime, said:

“It is imperative that firms have adequate arrangements to control the risks of financial crime.

We have seen examples of good practice and some examples of poor practice.

Overall, despite the high profile of the issue, the investment banking sector has been too slow and too reactive in managing bribery and corruption risks.

Firms across all sectors must have appropriate controls to manage their financial crime risks, whether related to bribery and corruption or otherwise.

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

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

Notes for editors

The FSA requires firms to establish and maintain effective systems and controls to mitigate financial crime risk.

Financial crime risk includes the risk of bribery and corruption.

In addition to these regulatory requirements, bribery, whether committed in the UK or abroad, is a criminal offence under the Bribery Act 2010, which has consolidated and replaced previous anti-bribery and corruption legislation in the UK.

The FSA does not enforce, or give guidance on, the Bribery Act.

FSA Principles require FSMA authorised firms to conduct their business with integrity and with due skill, care and diligence; and to take reasonable care to organise and control their affairs responsibly and effectively with adequate risk management systems.

The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000:

1. Maintaining market confidence;

2. Securing the appropriate degree of protection for consumers;

3. Fighting financial crime; and

4. Contributing to the protection and enhancement of the stability of the

UK financial system.

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

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SEC Charges Medical Device Company Biomet with Foreign Bribery

Washington, D.C., March 26, 2012 The Securities and Exchange Commission today charged Warsaw, Ind.-based medical device company Biomet Inc. with violating the Foreign Corrupt Practices Act (FCPA) when its subsidiaries and agents bribed public doctors in Argentina, Brazil, and China for nearly a decade to win business.

Biomet, which primarily sells products used by orthopedic surgeons, agreed to pay more than $22 million to settle the SEC’s charges as well as parallel criminal charges announced by the U.S. Department of Justice today.

The charges arise from the SEC and DOJ’s ongoing proactive global investigation into medical device companies bribing publicly-employed physicians.

The SEC alleges that Biomet and its four subsidiaries paid bribes from 2000 to August 2008, and employees and managers at all levels of the parent company and the subsidiaries were involved along with the distributors who sold Biomet’s products.

Biomet’s compliance and internal audit functions failed to stop the payments to doctors even after learning about the illegal practices.

“Biomet’s misconduct came to light because of the government’s proactive investigation of bribery within the medical device industry,” said Kara Novaco Brockmeyer, Chief of the Enforcement Division’s Foreign Corrupt Practices Act Unit. “A company’s compliance and internal audit should be the first line of defense against corruption, not part of the problem.”

According to the SEC’s complaint filed in federal court in Washington D.C., employees of Biomet Argentina SA paid kickbacks as high as 15 to 20 percent of each sale to publicly-employed doctors in Argentina.

of each sale to publicly-employed doctors in Argentina. International Association of Risk and Compliance

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Phony invoices were used to justify the payments, and the bribes were falsely recorded as “consulting fees” or “commissions” in Biomet’s books and records.

Executives and internal auditors at Biomet’s Indiana headquarters were aware of the payments as early as 2000, but failed to stop it.

The SEC alleges that Biomet’s U.S. subsidiary Biomet International used a distributor to bribe publicly-employed doctors in Brazil by paying them as much as 10 to 20 percent of the value of their medical device purchases.

Payments were openly discussed in communications between the distributor, Biomet International employees, and Biomet’s executives and internal auditors in the U.S. For example, a February 2002 internal Biomet memorandum about a limited audit of the distributor’s books stated:

Brazilian Distributor makes payments to surgeons that may be considered as a kickback.

These payments are made in cash that allows the surgeon to receive income tax free. …The accounting entry is to increase a prepaid expense account.

In the consolidated financials sent to Biomet, these payments were reclassified to expense in the income statement.

According to the SEC’s complaint, two additional subsidiaries – Biomet China and Scandimed AB sold medical devices through a distributor in China who provided publicly-employed doctors with money and travel in exchange for their purchases of Biomet products.

Beginning as early as 2001, the distributor exchanged e-mails with Biomet employees that explicitly described the bribes he was arranging on the company’s behalf.

For example, one e-mail stated:

[Doctor] is the department head of [public hospital]. [Doctor] uses about 10 hips and knees a month and it’s on an uptrend, as he told us over dinner a week ago. …Many key surgeons in Shanghai are buddies of his.

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A kind word on Biomet from him goes a long way for us. Dinner has been set for the evening of the 24th. It will be nice. But dinner aside, I’ve got to send him to Switzerland to visit his daughter.

The SEC alleges that some e-mails described the way that vendors would deliver cash to surgeons upon completion of surgery, and others discussed the amount of payments.

The distributor explained in one e-mail that 25 percent in cash would be delivered to a surgeon upon completion of surgery.

Biomet sponsored travel for 20 Chinese surgeons in 2007 to Spain, where a substantial part of the trip was devoted to sightseeing and other entertainment.

Biomet consented to the entry of a court order requiring payment of $4,432,998 in disgorgement and $1,142,733 in prejudgment interest.

Biomet also is ordered to retain an independent compliance consultant for 18 months to review its FCPA compliance program, and is permanently enjoined from future violations of Sections 30A, 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of 1934.

Biomet agreed to pay a $17.28 million fine to settle the criminal charges.

The SEC’s investigation was conducted by Brent S. Mitchell with Tracy L. Price of the Enforcement Division’s FCPA Unit and Reid A. Muoio.

The SEC acknowledges the assistance of the U.S. Department of Justice’s Fraud Section and the Federal Bureau of Investigation. The investigation into bribery in the medical device industry is continuing.

into bribery in the medical device industry is continuing. International Association of Risk and Compliance

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

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NUMBER 5

P a g e | 51 NUMBER 5 Financial risk management Opening remarks by Mr Ewart

Financial risk management

Opening remarks by Mr Ewart S Williams, Governor of the Central Bank of Trinidad and Tobago, at the Caribbean Centre for Money and Finance Conference, Port-of-Spain, 26 March 2012.

Good Morning Ladies and Gentlemen

Let me add my own words of welcome to all our participants of this very timely seminar on Financial Risk Management.

As you know, the seminar forms part of a wider project involvingthe central banks in the Caribbean/CARICOM region.

The project is being funded mainly by the Inter-American Development Bank (IDB) that has partnered with the University of the West Indies (UWI) and Caribbean Centre for Money and Finance (CCMF) to make this initiative possible.

I would like to say a special word of welcome to former President of the Caribbean Development Bank and now acting Executive Director of the CCMF, Dr. Compton Bourne and Mrs. Michelle Cross-Fenty, Country Representative of the IADB, which is a major sponsor of this Project.

Welcome also to all our distinguished participants from our regional Central Banks and regulatory bodies and from the international and regional financial institutions.

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I also thank the media for their presence.

It is no secret, ladies and gentlemen, that our financial systems have been severely tested in the last few years by the outbreak of the global financial crisis whose powerful shock waves have not only rattled financial markets the world over, but also triggered a deep recession with which many countries are still grappling.

For the most part, regional financial systems displayed remarkable resilience to the global financial crisis, even though our economies were buffeted by the global recession that ensued.

Regional financial systems, however, faced their own challenges arising from the collapse of the Stanford Bank and more notably, from the demise of the largest regional conglomerate, CL Financial.

The stresses faced by CL’s financial subsidiaries (Clico Insurance, Clico Investment Bank (CIB), British American and BAICO) tested the foundations of the regional financial system, which even so, proved to be resilient.

Two aspects of what has become to be known as the “Clico crisis” are worth mentioning.

The first is its regional reach: it entrapped in its net, not only Trinidad and Tobago, but also Barbados, Guyana and Suriname (that had Clico subsidiaries) as well as the OECS and the Bahamas, which housed BAICO insurance companies, all CLF subsidiaries.

The second aspect that stands out is its tremendous cost.

The bill is still accumulating but for the region as a whole, the cost could be somewhere in the vicinity of 1015 per cent of regional GDP.

For all its negatives, the Clico crisis served as an important wake-up call to the region.

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Coming on the heels of the global financial turmoil, it was a clear reminder of the need to strengthen our financial and regulatory systems, so that they could withstand exogenous shocks and it underscored the idea that a co-ordinated regional approach was needed.

It was against this background that the CARICOM Heads’ of Government, at their July 2009 meeting requested regional central banks and other stakeholders to put in place a framework for regional financial stability to increase our resilience both to exogenous shocks and to intra-regional stresses.

It is worth noting, ladies and gentlemen, that the objective characteristics of our region make a strong case for the regional approach to financial stability.

We are small economies, with extensive economic links, with high vulnerability indices, compared with other regional groups (like, for example, the EU).

Moreover our islands are dominated by a short list of over-lapping financial institutions.

On the downside, however, we currently have no regional regulatory institutions.

Specifically, we have nothing like the European Systemic Risk Board which has some regulatory authority.

The closest we come to a regional regulatory authority is the ECCB, which covers only the OECS.

What’s more, given the current state of the regional movement, I am not sure of the chances for a pan-caribbean regulatory authority.

Putting aside this issue for the time being, I would like to address the question, “What should be the main elements of a new regional financial stability infra-structure for the Caribbean region?”

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And, I would like to propose the following:

- First the region needs strengthened financial sector legislation, in the first round covering the banking system, the insurance and the credit union sectors;

- Second we need to substantially upgrade financial sector supervision;

- Third all countries should have deposit insurance;

- Fourth all countries should have national crisis management plans; and

- Fifth building on these national plans, we need to formulate a regional crisis management plan.

Permit me to say a few words about each of these elements.

In many countries in the region, including my own, financial sector legislation is grossly deficient when compared to what obtains in advanced or emerging market countries.

We, in Trinidad and Tobago, recently introduced a modern Financial Institutions Act to cover the banking system and new insurance legislation is currently in Parliament.

Some countries in the region have been upgrading their banking legislation but the situation is not as promising with regard to insurance legislation, which remains woefully outdated in the entire region.

This must be seen against the background that both the Jamaican financial crisis of the late 1990s and the Clico/BAICO regional crisis originated in the insurance sector.

In principle, strengthened, harmonized legislation would be the ideal to forestall regulatory arbitrage. However, the obstacles faced by the CARICOM Model Financial Institutions Bill clearly demonstrated the

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potential challenges likely to face any kind of harmonized financial legislation.

Countries in the region also need to upgrade financial sector supervision, including the introduction of consolidated supervision.

I am told that a first attempt is currently underway to conduct a supervisory exercise on a systemically important institution, with cross-border operations, involving supervisory teams from different jurisdictions.

This is an important initiative and I hope that over time these kinds of exercises could become routine examples of regional regulatory cooperation.

More and more countries are adding stress-testing and the use of financial stability reports to their supervisory tool kit.

Properly used, these could provide early warning signals and improve the assessment of threats to the financial system.

I know that the preparation of financial stability reports is an important component of the IDB-financed project, and I would like to return to this topic later.

Deposit insurance schemes could contribute significantly to the maintenance of regional financial stability, as they protect lower-income depositors and prevent bank-runs.

A harmonized regional deposit insurance scheme would be ideal but the obstacles would be formidable.

National schemes should still be regarded as an important part of the regional stability infrastructure.

Because financial instability can sometimes arise without adequate warning, all countries should have a national crisis management plan, to

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be able to move quickly and to contain the potential cost of a national financial crisis.

Such a plan invariably requires close coordination between the various national regulatory bodies, the Government and other stakeholders, and should constitute a kind of road map to the process of crisis-resolution.

The element of certainty that such plans bring, bolsters consumer confidence and facilitates quick crisis resolution.

A regional crisis management plan is another indispensable part of a

regional financial stability, but it is the element that is likely to present the greatest challenges.

The critical pre-requisites to such regional plan are:

(i) Agreement on what constitutes a systemic threat to the regional financial system;

(ii) The existence of information sharing protocols among regional

jurisdictions;

(iii) Agreement on the strategies to be considered in the resolution process and on the guiding principles for cost-sharing in the event that public intervention is deemed necessary.

A crisis management plan for our region is likely to face several

challenges, among which are differences in legislation or supervisory approaches across the region; competing national priorities or differences in resource availability among the regional governments.

The implementation of a regional crisis management plan requires a high level regional council with the authority to make binding decisions as to the use of resources.

This could be another challenge in our current circumstances.

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I would like to make a few comments on one of the critical components of the IDB-financed project the preparation of comparable regional Financial Stability Reports (FSR).

We need to remember that these reports are designed to serve as early warning signals by pointing out to policy makers the key risks and vulnerabilities faced by policy makers.

Most financial stability reports do this by reporting the latest level of key financial soundness ratios.

There is a new body of research that suggests the assessment value of these reports could be enhanced by including at least a qualitative discussion of the near term outlook for these ratios based on various policy assumptions.

I fully recognize, of course, that the preparation of these FSRs is resource intensive and particularly challenging for smaller central banks.

Thus, conferences and seminars, like this one, where we bring our ideas and experiences together, are an invaluable learning opportunity. We need to leverage off each other if we are to do this exercise successfully.

As all of you know all too well, the range of dis-aggregated commercial bank information that central banks in developed countries take for granted is sometimes difficult to collect in our region where the culture of disclosure is not deeply rooted.

This makes our effort to develop FSRs all the more challenging but at the same time all the more necessary. Let me end by wishing you all two days of very stimulating discussions.

by wishing you all two days of very stimulating discussions. International Association of Risk and Compliance

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

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NUMBER 6

P a g e | 58 NUMBER 6 Consumer response now sharing complaints with FTC Consumer

Consumer response now sharing complaints with FTC Consumer Sentinel - By Sartaj Alag

The Dodd-Frank Act requires the CFPB to share consumer complaint information with the Federal Trade Commission (“FTC”) and other state and federal agencies.

Last August, the Bureau took the first step towards fulfilling this mandate by signing an agreement with the FTC that allows the CFPB to access consumer complaints in the FTC’s Consumer Sentinel system.

Consumer Sentinel is an online database of consumer complaints maintained by the FTC that helps law enforcement track and respond to consumer complaints.

Recently, the Bureau started sharing its complaints with Consumer Sentinel.

The database is accessible only to law enforcement, and adding the CFPB’s complaint data to the database will increase its effectiveness as a law enforcement tool.

Many entities, both government and non-government, already share complaints with Consumer Sentinel.

Among the government entities are several state Attorneys General (including Idaho, Michigan, Mississippi, North Carolina, Ohio, Oregon, Tennessee, and Washington State), the U.S. Postal Inspection Service, and the FBI’s Internet Crime Complaint Center.

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Our goal in sharing complaints with the FTC is to remove artificial barriers that stand in the way of efficient, transparent, and effective governance.

By removing these barriers, we are encouraging agencies to work together to better protect American consumers.

We are excited about our collaboration with the FTC, and we look forward to maintaining a close and fruitful partnership.

forward to maintaining a close and fruitful partnership. International Association of Risk and Compliance

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

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NUMBER 7

P a g e | 60 NUMBER 7 30/03/2012 Regulation (EU) No 236/2012 of the European

30/03/2012

Regulation (EU) No 236/2012 of the European Parliament and of the Council of 14 March on short selling and certain aspects of credit default swaps (the Regulation)

requires ESMA to develop draft regulatory (RTS) and implementing technical standards (ITS) in relation to several provisions contained in Articles 9, 11, 12 and 16 of the Regulation.

The draft RTS and ITS published today will be submitted to the European Commission by 31 March 2012. The Commission has three months to decide whether to endorse ESMAs draft technical standards.

A further regulatory technical standard, on the method of calculation of the fall in value of a financial instrument required under Article 24(8) of the Regulation will be submitted together with the technical advice in the course of April 2012.

Final report

Draft technical standards on the Regulation (EU) No 236/2012 of the European Parliament and of the Council on short selling and certain aspects of credit default swaps.

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I. Executive Summary Reasons for publication

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

ESMA has consulted market participants on the proposed draft RTS and ITS through a public consultation launched on 24 January 2012 (Consultation Paper; ESMA/2012/30).

The Securities and Markets Stakeholder Group (SMSG) established under the Regulation (EU) No 1095/2010 establishing the European Supervisory Authority (ESMA Regulation) was also requested to provide an opinion in accordance with Articles 10 and 15 of that regulation.

Contents

ESMA has considered the feedback it received to the consultation in drafting these RTS and ITS in accordance with Articles 10 and 15 of the ESMA Regulation.

This document sets out a summary of the responses received by ESMA and describes any material changes to the proposed technical standards.

It also includes in the Annex II a cost-benefit analysis on which ESMA was not able to consult as explained in the consultation paper

(ESMA/2012/30).

Finally, it contains the final draft RTS and ITS to be submitted to the European Commission.

Next steps

The draft RTS and ITS will be submitted to the European Commission by 31 March 2012.

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The Commission has three months to decide whether to endorse ESMAs draft technical standards.

A further regulatory technical standard, on the method of calculation of the fall in value of a financial instrument required under Article 24(8) of the Regulation will be submitted together with the technical advice in the course of April 2012.

II. Background

1. According to the Regulation, ESMA has to submit its technical standards to the Commission by 31 March 2012.

Further to this, ESMA received a letter from the Commission on 24 November 2011 requesting to also provide an advice on all the delegated acts contained in the Regulation by the same deadline 31 March 2012.

2. Taking into account the amount of work, complexity of the issues and the very tight deadlines, the process of preparing technical standards and drafting the advice on all delegated acts has been significantly compressed compared to normal ESMA practices.

The most important differences compared to normal practices were the absence of a previous call for evidence (used normally to gather early views to help shape the legal proposals), the length of the consultation period (reduced to 3 weeks) and the absence of a cost-benefit analysis incorporated in the consultation paper on the draft technical standards.

Nevertheless, it was possible to organise a roundtable with European and international associations representing the various stakeholders at the beginning of December in order to collect views on the approach to be taken in the main technical standards and delegated acts foreseen in the Regulation.

Although the formal consultation period had closed, there was also a subsequent opportunity for interested parties to make comments on

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ESMA’s proposals for draft technical standards at an open hearing held on 29 February.

3. The Regulation (EU) No 1095/2010 establishing the European

Supervisory Authority (ESMA Regulation) empowered ESMA to develop draft regulatory and implementing technical standards where the European Parliament and the Council delegate power to the Commission to adopt regulatory standards by means of delegated acts under Article 290 TFEU or implementing acts under Article 291 TFEU.

4. Articles 10(1) and 15(1) of the ESMA Regulation state that before

submitting draft technical standards to the Commission, ESMA shall conduct open public consultations on draft regulatory technical standards and analyse the potential related costs and benefits, unless such consultations and analyses are disproportionate in relation to the scope and impact of the draft technical standards concerned or in relation to the particular urgency of the matter.

5. The legislative mandate for ESMA to develop draft regulatory and

implementing technical standards is provided in Annex I.

6. This document does not include the draft RTS on the method of

calculation of the fall in value of a financial instrument required under Article 24(8) of the Regulation.

Considering the interdependence with the provisions of a future Commission’s delegated act on the definition of what is a significant fall in value of financial instruments other than liquid shares, these draft RTS will be delivered upon finalisation of the ESMA technical advice on delegated acts.

7. The following sections describe the changes made to the final draft

RTS and ITS after considering comments received from the different interested parties.

The final version of the draft technical standards is set out in Annexes III and IV.

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

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III. Feedback from market participants and changes to the draft technical standards

8. Having considered the responses to the public consultation, ESMA clarifies below certain common issues raised by market participants.

In this section ESMA also provides reasons for the changes made to the proposed draft technical standards after considering the comments and proposals and explains why certain market participants’ suggestions were not followed.

9. ESMA wishes to clarify that the scope of the legislative mandate for drafting technical standards does not encompass the provisions relating to Buy-in procedures (Article 15 of the Regulation).

10. In addition, some comments or requests for changes received could not have been dealt with by ESMA in these technical standards as they relate directly to the scope of or the wording used in provisions of the Regulation itself.

This is notably the case in relation to the scope of application of the reasonable expectation test for sovereign debt under Article 13 of the Regulation.

On the agreements, arrangements and measures that adequately ensure that the share or the sovereign debt will be available for settlement.

11. Many respondents to the consultation questioned ESMA’s approach of seeking to draw up exhaustive lists of these types of agreements, arrangements and measures.

However, given that the technical standards to be drafted in relation to the restrictions on uncovered short sales in shares or in sovereign debt (Articles 12 and 13 of the Regulation) are implementing (not regulatory) technical standards , ESMA has little flexibility as to the approach to adopt for specifying the types of agreements to borrow or other

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enforceable claims and the type of arrangements and measures that ensure that settlement can be effected when it is due as well as the third parties to these arrangements.

Nevertheless, even though the exhaustive list approach is followed with the objective to specify an appropriate and stable framework through the ITS, ESMA has tried to provide sufficient flexibility to allow for innovation and the development of future arrangements provided that they meet specified conditions or to preclude entities from acting as third parties unless they fulfil specific criteria. This is the purpose of the revised articles 5(1)(f) and 8(1)(f) and (g) of the draft ITS.

In addition, it should be noted that ESMA can keep the situation under review and, when needed, propose amendments to the technical standards.

12. There were also comments that securities lending and prime brokerage agreements had been missed out from the list.

In fact, ESMA considers that these agreements are certainly contemplated to fall under the permissible borrowing agreements provided they meet the conditions set out in the draft technical standards, notably under letter f) of Article 5 of the draft ITS, which is designed in such a way to be future proof.

In any case, it has to be highlighted, for the sake of maximum clarity, that a master lending agreement, typically covering the standard conditions applicable for a long timeframe and a wide range of possible securities, will hardly meet by itself the conditions of Article 5 letter f) unless it is complemented for each short sale with a specific confirmation or term sheet under that master agreement containing a specific number of a specific security and a specific execution or delivery date, meeting the conditions required by Article 5 letter f).

13. ESMA has amended the drafting of Article 6 of the ITS on arrangements and measures in relation to shares so as to clearly and unambiguously indicate the two-step nature of the process.

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In all cases here a locate confirmation is required before a short sale of shares can be undertaken.

For liquid shares and for intra-day short selling, provided that an additional confirmation is obtained that a share is easy to borrow or to purchase; the shares need not be put on hold before the short sale.

However, where this confirmation cannot be provided and for all cases where the short sale concerns an illiquid share and the short selling will be for longer than an intra-day period, the shares must at least be put on hold.

14. With respect to the “Liquid Shares Locate Arrangements and Measures”, ESMA remains mindful to provide clarity and certainty across Europe on the scope of the shares concerned, without creating additional complexity for investors through a new definition of liquid shares based on each individual third party assessment.

Nevertheless, ESMA takes note that the MiFID definition of liquid shares might be too limited and therefore widens the scope to other shares under certain conditions to be fulfilled (constituent of a main national index and underlying of a derivative contract admitted to trading on a trading venue).

15. As regards the arrangements with third parties to be taken in relation to sovereign debt, various respondents to the consultation questioned whether the correct interpretation of Article 13. 1 (c) of the Regulation was that such an arrangement was necessary in order to provide a reasonable expectation that settlement can be effected when it is due.

They considered that the reasonable expectation needed to be on the part of the short seller. However, this is another issue related to the interpretation of the Level 1 text rather than the drafting of the ITS themselves and as such not a matter for ESMA.

Nevertheless, ESMA considers that the list of measures which would provide a reasonable expectation of timely settlement provided for in

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Article 7 of the draft ITS could be usefully complemented with additional situations brought to its attention by some responses to the consultation.

16. Some respondents proposed that the list of third parties provided in

Article 8 of the draft ITS should explicitly refer to other types of entities.

ESMA considers it is legitimate to refer specifically to investment firms, including retail services providers where relevant, as a specific type of third party with whom arrangements can be made given the activities they carry out.

ESMA considers that it is not necessary to make specific references to other entities such as insurances companies, credit institutions or pension funds since their activities are not necessarily primarily related to securities business.

However, ESMA emphasises that, even though not mentioned by name, such entities would fall under the category of third party defined under Article 8(1)(f) of the ITS provided they fulfil the criteria specified in that article. In relation to central securities depositories (CSDs) and International CSDs, ESMA confirms that it considers that both types of entities are within the scope of Article 8(1)(c) of the ITS as they are covered by the Settlement Finality Directive for their European activities

17. In relation to entities from third countries, ESMA has amended the

draft ITS to clarify the conditions which they need to fulfil to fall under an

eligible type of third party listed in the ITS.

18. Finally, many respondents expressed concerns about the fact that

third party should be a distinct legal entity from the entity entering into

the short sale.

They argued that this would run counter to current practices, causing practical problems and entailing additional costs notably for the investors, and even increase the potential risks of settlement fails. However, while ESMA notes these comments, it considers that this issue is a matter of legal interpretation of the provision enshrined in the Regulation itself rather than one which can be resolved through the ITS.

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On the details of the information on net short positions and the means for disclosure

19. ESMA notes that the transparency regime for net short positions set

out in the Regulation foresees a notification requirement to the relevant

competent authority both in relation to issuers of shares and sovereign issuers when the relevant thresholds are reached or exceeded or are crossed downward.

The initial and incremental thresholds in relation to the issued share capital are defined in the Regulation whereas the initial and incremental thresholds for sovereign issuers will be defined in a delegated act to be adopted by the Commission and shall be expressed in Euro nominal amounts.

20. The disclosure to the public however applies only to net short

positions relating to an issuer of shares.

These disclosure thresholds are already defined in the Regulation.

The drafting of Article 2 of the ITS has been amended in order to avoid misinterpretation of the net short positions on an issuer posted on the central website operated or supervised by the relevant competent authority that is available when accessing that website.

Thus, ESMA has clarified that the information displayed should cover not only net short positions exceeding the publication thresholds but also those that reach them.

In addition, ESMA believes it is not necessary to prescribe a specific file format for this information; the machine readable requirement set out in Article 2(d) of the ITS is sufficiently generic to cater for the use of existing and new technologies.

21. Some of the comments raised in the responses relate to topics that are

of relevance for the technical advice on delegated acts ESMA should submit to the Commission rather than to these draft technical standards.

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The treatment of index ETFs with synthetic replication and the issue of currency conversion or whether notifications of net short position in sovereign debt issuers would be required when thresholds are crossed due to movements in exchanges rates are topics to be dealt in the advice on the method of calculation of net short positions.

The concerns raised on who shall report and what positions are expected in relation to fund management and investment managers relate to the delegated act regarding specification of the method of calculating positions when different entities in a group have long or short positions or for fund management activities related to separate funds.

22. In relation to the details of the information to be provided in the net short position notification forms, some respondents questioned the need to include the field “date of previous notification”.

ESMA considers that this field, that actually refers to the date of the last valid position reported (not a cancelled position), is necessary as it will be of assistance for supervisory purposes as well as for traceability of the reporting.

In addition, ESMA considers that under the Regulation the duty to notify or disclose the net short position lies on the position holder.

Therefore, all the information required for the notification should be provided by the position holder to the reporting entity when the position holder is not reporting directly to the competent authority.

23. For the information required on the identity of the position holder and, if relevant, of the reporting entity, ESMA recalls that they are not meant for authentication purposes.

According to the Regulation, authentication is a matter for national competent authorities which may have their own specific requirements in that respect.

The technical standards mandate prescribes only the details of the information to be provided in the notifications.

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The level of details set out in the draft RTS, including the contact details, notably the fax number, is considered necessary by ESMA for the competent authorities to be able to manage the errors in particular notifications or questions arising for supervisory purposes.

When competent authorities have in place secure identification systems (that can be, among others, dedicated IT systems to submit regulated information in a secure manner to the competent authority) that allow these competent authorities to identify precisely the sender of a notification and the full identity and contact details of the position holder, ESMA considers that it is not necessary to repeat all the information on the identity of the position holder, its contact details and the reporting person in each notification, provided this information can be obtained in full from the authentication systems in place.

24. For the sake of proper transparency to both the competent authorities

and the public and in line with the disclosure of major shareholdings under the Transparency Directive, ESMA confirms that it is appropriate to use a 2 decimal points format for expressing the size of a net short position as a percentage of the issued share capital.

25. The use of the ISIN code for identifying in the notification form the

issuer in relation to which the relevant position is held was widely supported.

However, most respondents expressed a preference for the ISIN code of the main class of shares (usually ordinary shares) rather than for the one of the share class first admitted to trading which was argued to be potentially misleading and difficult and onerous to keep track of.

ESMA has therefore modified the technical standard accordingly.

26. In relation to the identification of the issuers, responses frequently

included a request to ESMA to publish and update regularly, if not daily, the full list of the issuers covered by the short selling regime, including the amount of the issued share capital or the outstanding debt of sovereign issuers and the relevant competent authority for notification purposes.

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ESMA would like to recall that the Regulation only requires ESMA to publish the list of exempted shares.

In addition, the list of sovereign issuers will be made available to the public further to the requirement for ESMA to publish on its website the relevant notification threshold for each sovereign issuer according to Article 7(2) of the Regulation.

For shares admitted to trading on a Regulated Market, ESMA notes that the information on the relevant competent authority for the purposes of the Regulation is already available in the MiFID database published on its website as, according to Article 2(1)(j)(v) of the Regulation, the definition of such an authority coincides with the definition of the relevant competent authority for a share under MiFID.

Finally, under Article 15 of the Transparency Directive, issuers of shares are required to monthly update the information they disclose on their issued share capital.

ESMA would expect that given the increased importance of the disclosure of the issued share capital, particular for the Regulation, national competent authorities will enhance their monitoring of the compliance with the issuers’ disclosure requirements.

27. Finally, without questioning the proposed approach to use common

formats for notification and cancellation of reported net short positions

that has been widely supported by the respondents, the structure of the formats specified in Annex II and III of the RTS have been reorganised to facilitate their usability.

On the determination of the principal trading venue for the exemption pursuant to Article 16 of the Regulation

28. ESMA would like to recall that the turnover calculation for the

determination of the principal venue applies on a per trading venue basis for a specific share and not on the overall turnover for that share

irrespective of where it is traded.

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29. ESMA welcomes the willingness expressed by operators of regulated

markets to assist in the performance of the calculations for the

determination of the principal venue.

However, defining whether an agreement on compensation should be established to cover for the costs of performing such calculations is a matter for individual competent authorities and is not in the scope of these technical standards.

30. Some respondents to the consultation commented that the occurrence

of a merger or acquisition could be added as a situation warranting an update of the list of exempted shares within the 2-year period.

However, ESMA believes that there is no need to explicitly mention this situation as such scenarios are already covered in points a) and b) of Article 13(1) of the draft ITS.

On the information to be provided to ESMA by competent authorities

31. Further to some comments, the wording of Article 4(2) has been

aligned with the one of Article 3(2) of the ITS, as ESMA intends to establish a system that would allow for exchanging the information to be provided by competent authorities both periodically and upon request.

32. Finally, to ensure alignment with the content of Article 4 of the RTS on

the details of the information to be provided on a quarterly basis as specified in the Regulation to ESMA by competent authorities, Annex II of the ITS describing their format has been amended and now includes

the “End of quarter aggregated net short position on other shares”.

To read more:

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Acronyms

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

of April 2004) SMSG Securities and Markets Stakeholder Group International Association of Risk and Compliance

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

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NUMBER 8

P a g e | 74 NUMBER 8 DARPA Chip-Scale Atomic Clocks Aboard International Space Station

DARPA Chip-Scale Atomic Clocks Aboard International Space Station

March 27, 2012

Atomic clocks are the most accurate frequency standard and timing devices in the world.

Their range of uses include being the international standard for timekeeping, managing broadcasts and satellite positioning, navigation and timing (PNT).

Traditional atomic clocks are too large to be placed on board small satellites so a downlink with Earth is needed for the accurate PNT required for space operations.

Chip-scale atomic clocks (CSAC) were first developed by DARPA and the National Institute of Standards and Technology (NIST) in 2004.

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These devices are smaller than traditional atomic clocks by a factor of 100 (down to about the size of a computer chip) and are more power-efficient by a factor of 10.

Although CSACs are now commercially available, they have not yet been applied to space technologies.

On October 27, 2011, Progress 40 launched from Baikonur Cosmodrome carrying two DARPA CSACs, the first ever into space.

The CSACs will soon be tested on board the International Space Station (ISS) in support of DARPA’s Micro-PNT program.

The chips will be inserted into bowling-ball sized satellites on the ISS called Synchronized Position, Hold, Engage and Reorient Experimental Satellites (SPHERES).

Once the chips have been validated as operational, the SPHERES will perform a synchronized maneuver through the ISS cabin.

After the experiment, the chips containing the CSACs will be removed and tested against the atomic clock onboard the ISS.

“DARPA hopes that testing confirms that chip-scale atomic clocks can operate in orbit with the level of accuracy for which they were designed,” explained Andrei Shkel, DARPA program manager.

“A successful test after transportation, launching and space operations will mean that CSACs are one step closer to being integrated into future space platforms. Such integration should allow various space platforms more autonomy in positioning, navigation and timing.”

Note:

The Defense Advanced Research Projects Agency (DARPA) was established in 1958 to prevent strategic surprise from negatively impacting U.S. national security and create strategic surprise for U.S.

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adversaries by maintaining the technological superiority of the U.S. military.

To fulfill its mission, the Agency relies on diverse performers to apply multi-disciplinary approaches to both advance knowledge through basic research and create innovative technologies that address current practical problems through applied research.

DARPA’s scientific investigations span the gamut from laboratory efforts to the creation of full-scale technology demonstrations in the fields of biology, medicine, computer science, chemistry, physics, engineering, mathematics, material sciences, social sciences, neurosciences and more.

As the DoD’s primary innovation engine, DARPA undertakes projects that are finite in duration but that create lasting revolutionary change.

in duration but that create lasting revolutionary change. International Association of Risk and Compliance
in duration but that create lasting revolutionary change. International Association of Risk and Compliance

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NUMBER 9

P a g e | 77 NUMBER 9 Address by Mr Lee Boon Ngiap, Assistant Managing

Address by Mr Lee Boon Ngiap, Assistant Managing Director, Monetary Authority of Singapore,

General Insurance Association of Singapore Annual General Meeting Luncheon, 27 March 2012, Intercontinental Hotel, Singapore

GIA President, Mr Derek Teo, Distinguished Guests, Ladies and Gentlemen,

1 Thank you for inviting me to your Annual General Meeting

Luncheon. May I congratulate Mr Derek Teo on your re-election as President of GIA, as well as the other newly-elected management committee members.

I would also like to thank them for agreeing to take up the challenge of leading the industry over the next year.

2 This afternoon, I will start off by recapping some of the major

achievements of GIA, before outlining some of the immediate challenges

facing the general insurance industry.

GIA’s Contributions

3 Under the leadership of its management committee, GIA has accomplished much in the past few years.

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4 I would like to commend GIA for its pro-active approach in

strengthening the self-regulatory framework for general insurance agents.

GIA’s Agents’ Registration Board has put in much efforts to improve the standards of general insurance agents through initiatives such as the Trade Specific Agent Schemes.

An industry working group formed by the GIA is now finalising a Telemarketing Code of Practice for general insurers.

These initiatives will continue to raise the competency and professional standards of the general insurance industry, and provide consumers with better quality advice and higher service standards.

These augur well for the development of the industry.

5 Over the past year, GIA has been active in educating consumers on general insurance products.

One example is the travel insurance seminar jointly organized by GIA with the National Association of Travel Agents Singapore and the Consumers Association of Singapore.

The seminar provided a useful platform for the industry to share insights and knowledge on how consumers can purchase the right type of travel insurance for their needs.

GIA was also involved in the revamp of the Moneysense website, and had made contributions to the publications on the website.

I am glad to note that GIA will continue such efforts to educate consumers on the specific risks and considerations when buying general insurance products.

6 GIA has also made active contributions to an industry-led working

group that is looking to enhance reinsurance contract certainty practices in Singapore.

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Together with the Singapore Reinsurance Association, Reinsurance Brokers Association, Lloyd’s and Insurance Law Association of Singapore, the working group is finalising guidelines and best practices to secure contract certainty.

The guidelines will highlight the need for reinsurers and brokers to provide cedants with their signed copy of the contract.

It will also require both parties to ensure that there is no ambiguity in the terms and conditions of the contract prior to risk inception.

This will minimise potential disputes over claims and coverage.

MAS views this as a very important initiative and will work with the industry on a smooth implementation of these new guidelines and best practices.

7 On the talent development front, GIA, with the Regional

Development Committee, have contributed significantly through its Global Internship Program (GIP).

According to Lloyd’s Risk Index 2011, “talent and skills shortage” was identified as one of the top three risks facing the insurance industry in the Asia Pacific region. GIA’s efforts in helping to build the talent pipeline is crucial.

I would like to encourage GIA to continue to explore talent initiatives to support the industry’s needs in more specialised risk areas as well as actuarial and leadership development.

MAS will continue to work with GIA to explore the possibility of expanding the depth and breadth of the GIP to better cater to the growing needs of the industry.

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Challenges Ahead

8 GIA should be proud of these achievements, which has contributed

much to the development of the general insurance industry in Singapore. There is much more work in the years ahead as the industry faces important challenges in a riskier and more difficult market. Allow me to share my thoughts on two of these immediate challenges.

9 First, let me congratulate the industry for reporting underwriting profits in all lines of domestic business last year.

In particular, the motor business registered its first underwriting profit in six years.

The last time the industry managed to turn a profit in the highly competitive motor business was in 2004 and 2005, after more than a decade of losses.

But stiff competition set in immediately and many insurers started compromising on underwriting and pricing discipline in pursuit of market share.

Problems with fraudulent and inflated claims also started to plague the motor insurance business.

This resulted in the industry reporting record underwriting losses of $168 million in 2008, with losses in each subsequent year until last year.

10 GIA, through its introduction of the Motor Claims Framework in

2008, and active participation in the Motor Insurance Task Force, has

contributed to measures to minimise fraudulent and inflated claims.

These efforts are commendable and MAS is committed to working together with GIA and other relevant stakeholders to combat this problem.

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But such measures alone will not sustain the profitability of the motor business if insurers do not exercise underwriting and pricing discipline.

11 While competitive premium rates may benefit consumers, they are

not sustainable if they are achieved without regard to sound underwriting

and pricing.

Eventually, insurers will suffer losses which become too great to bear and some will exit the business, leaving consumers with fewer choices.

Those that remain will be forced to raise premium rates sharply, and complaints from unhappy motorists can be expected to follow.

Ultimately, this is detrimental to consumers and the insurance industry.

We have seen this episode played out before in the domestic motor insurance market.

The challenge for the industry therefore is to take heed of the lessons learnt and maintain your underwriting and pricing discipline this time round.

It is in the interest of both consumers and insurers that all of you only pursue business strategies that are sustainable and not sacrifice prudence for potential short-term gains.

12 The second challenge for the industry that I would like to touch on

is the need to keep pace with global regulatory reforms.

Much has been said and written about the weaknesses in regulations and business practices that caused the global financial crisis.

The insurance business model enabled the majority of insurers to withstand the financial crisis better than other financial institutions.

Nevertheless, there are corporate governance, capital adequacy and risk management lessons from the crisis that are applicable to the insurance

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industry. Let me share the regulatory initiatives in these areas that MAS is focusing on this year.

13 First, one lesson from the crisis is that good corporate governance

matters.

The failure by Boards to exercise effective risk management oversight had damaging consequences for many institutions.

To raise the corporate governance standards of the insurance industry, MAS recently issued a consultation paper proposing to extend the Insurance Corporate Governance Regulations to all locally-incorporated insurers.

We intend to make it mandatory for all locally-incorporated general insurers to meet minimum corporate governance requirements, which will be calibrated to take into account the significance of an insurer’s operations.

Insurers’ compliance with the Corporate Governance Regulations will be assessed as part of MAS’ ongoing supervisory programme.

14 Second, MAS will shortly issue a consultation paper to propose

enhancements to our capital framework for insurance companies. Singapore was among the first in Asia to introduce a risk-based capital (RBC) framework for insurance companies back in 2005.

Our proposed enhancement aims to improve the comprehensiveness of risk-coverage and the risk-sensitivity of the framework, while ensuring that the proposals are practical and takes into account market realities.

Unlike in banking, there is no common global capital standard for insurance companies.

So a review of our RBC framework is a major undertaking requiring both a fundamental analysis of the appropriateness of our existing framework as well as a comparative study of the insurance capital frameworks in other jurisdictions.