IARCP Weekly Newsletter Top Risk Stories

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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

George Lekatis
President of the IARCP

Dear Members,

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

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

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

Thank you very much.

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

It is a great reference e-book. Download
it now:
http://www.risk-compliance-association.com/120_Developments_Risk_
Management_Compliance_January_to_March_2012.html
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
www.risk-compliance-association.com

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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)

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

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

Number 4 (Page 45)
We have such interesting risks… like bribery and corruption
risk … (is the risk of the firm or anyone acting on the firm’s
behalf, engaging in bribery and corruption).
FSA review into anti-bribery and corruption systems and controls in
investment banks and proposed new guidance for all firms

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

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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.

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

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

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

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

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NUMBER 1

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

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

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

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

He commented:

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

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

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

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NUMBER 2

Mario Draghi:

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

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

Banks were experiencing a period of heightened stress.

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

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

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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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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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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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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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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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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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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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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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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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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.

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

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

Introduction

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

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

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

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

David did suggest that he wanted to have a conversation on important
issues, so I intend to be somewhat provocative in an effort to stimulate
such conversation.
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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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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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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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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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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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Christian Noyer: Re-examining
central bank orthodoxy for
un-orthodox times

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

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

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

There is not yet definitive answer to this question.

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

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

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

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

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

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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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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.

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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.

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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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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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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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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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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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.

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NUMBER 4

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

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P a g e | 46

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

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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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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.

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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.

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NUMBER 5

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

Good Morning Ladies and Gentlemen

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

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

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

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

Welcome also to all our distinguished participants from our regional
Central Banks and regulatory bodies and from the international and
regional financial institutions.
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P a g e | 52

I also thank the media for their presence.

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

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

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

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

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

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

The second aspect that stands out is its tremendous cost.

The bill is still accumulating but for the region as a whole, the cost could
be somewhere in the vicinity of 10–15 per cent of regional GDP.

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

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P a g e | 53

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

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

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

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

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

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

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

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

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

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

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P a g e | 54

And, I would like to propose the following:

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

- Second – we need to substantially upgrade financial sector
supervision;

- Third – all countries should have deposit insurance;

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

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

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

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

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

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

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

In principle, strengthened, harmonized legislation would be the ideal to
forestall regulatory arbitrage. However, the obstacles faced by the
CARICOM Model Financial Institutions Bill clearly demonstrated the
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P a g e | 55

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

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

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

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

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

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

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

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

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

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

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

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P a g e | 56

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

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

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

A regional crisis management plan is another indispensable part of a
regional financial stability, but it is the element that is likely to present the
greatest challenges.

The critical pre-requisites to such regional plan are:

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

(ii) The existence of information sharing protocols among regional
jurisdictions;

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

A crisis management plan for our region is likely to face several
challenges, among which are differences in legislation or supervisory
approaches across the region; competing national priorities or differences
in resource availability among the regional governments.

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

This could be another challenge in our current circumstances.

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P a g e | 57

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

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

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

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

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

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

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

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

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P a g e | 58

NUMBER 6

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

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

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

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

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

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

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

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

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P a g e | 59

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

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

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

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P a g e | 60

NUMBER 7

30/03/2012

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

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

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

Final report

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

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P a g e | 61

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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